Retiring at the top in 2007

[erutio]

If someone retired at the peak in 2007, say around October, would their portfolio have survived?

Lets say x = annual spend and they had exactly 25x saved, and spent exactly $X per year.  Assuming portfolio was 75% stocks, 20 bonds, 5 cash.

Can someone smarter than me simulate it out from 2007 to now?

[dandarc]

Obviously we don't know yet, but it doesn't look too bad on CFireSim - try the "single simulation cycle", you can try a 2019-2029 retirement and put 2007 as the "start year" for the simulation.

Looks rough at the very beginning, but the portfolio is currently up about 20% over the start.

Good returns since the crash and low inflation have helped.

[DadJokes]

S&P high was ~1,549 in October 2007. Low was ~735 in February 2009.

I just ran the monthly numbers on a $1 million portfolio for someone who retired on October 1, 2007, and withdrew $3,333/month, increasing the withdrawal by 0.1667% every month (2% per year).

The lowest point for the portfolio was just shy of $440k in February 2009. While the market recovered by March 2013, the principal balance of the portfolio has not yet reached $1 million again. However, it looks pretty safe. I feel a lot more confident about the 4% rule after running out those numbers than I did before. Maybe I won't wait until I'm at 3.5%.

Edit: added 2% inflation

[dandarc]

S&P high was ~1,549 in October 2007. Low was ~735 in February 2009.

I just ran the monthly numbers on a $1 million portfolio for someone who retired on October 1, 2007, and withdrew $3,333/month ($40k/yr) but did not adjust for inflation.

The lowest point for the portfolio was just shy of $440k in February 2009. While the market recovered by March 2013, the principle balance of the portfolio would not reach $1 million again until January 2018. That's without ever increasing withdrawals for inflation (simply because that math would have taken a little longer), but inflation has been pretty negligible over the last decade.

Which is why you have some bonds in your portfolio - not quite so bad for the 80/75/5 portfolio suggested.

[EvenSteven]

S&P high was ~1,549 in October 2007. Low was ~735 in February 2009.

I just ran the monthly numbers on a $1 million portfolio for someone who retired on October 1, 2007, and withdrew $3,333/month ($40k/yr) but did not adjust for inflation.

The lowest point for the portfolio was just shy of $440k in February 2009. While the market recovered by March 2013, the principle balance of the portfolio would not reach $1 million again until January 2018. That's without ever increasing withdrawals for inflation (simply because that math would have taken a little longer), but inflation has been pretty negligible over the last decade.

Which is why you have some bonds in your portfolio - not quite so bad for the 80/75/5 portfolio suggested.

60% leverage?

[DadJokes]

S&P high was ~1,549 in October 2007. Low was ~735 in February 2009.

I just ran the monthly numbers on a $1 million portfolio for someone who retired on October 1, 2007, and withdrew $3,333/month ($40k/yr) but did not adjust for inflation.

The lowest point for the portfolio was just shy of $440k in February 2009. While the market recovered by March 2013, the principle balance of the portfolio would not reach $1 million again until January 2018. That's without ever increasing withdrawals for inflation (simply because that math would have taken a little longer), but inflation has been pretty negligible over the last decade.

Which is why you have some bonds in your portfolio - not quite so bad for the 80/75/5 portfolio suggested.

I edited to add 2% inflation, but even 100% stock has survived, though I'd be pretty terrified to see my portfolio halved after less than two years. I do like the idea of a glide path for the last couple years before retirement and the first few years after. That is the window that most indicates the success of a cohort. Ramping up to 20% bonds during that window, then shifting back to 100% stocks looks like a great way to ensure a long and safe retirement.

[dandarc]

S&P high was ~1,549 in October 2007. Low was ~735 in February 2009.

I just ran the monthly numbers on a $1 million portfolio for someone who retired on October 1, 2007, and withdrew $3,333/month ($40k/yr) but did not adjust for inflation.

The lowest point for the portfolio was just shy of $440k in February 2009. While the market recovered by March 2013, the principle balance of the portfolio would not reach $1 million again until January 2018. That's without ever increasing withdrawals for inflation (simply because that math would have taken a little longer), but inflation has been pretty negligible over the last decade.

Which is why you have some bonds in your portfolio - not quite so bad for the 80/75/5 portfolio suggested.

60% leverage?

Oops. 75/20/5. Typed far too quickly.

[erutio]

Thanks guys, makes me feel better about 4%.

[elaine amj]

I really really hope I can stand firm in the face of losing half. I am FIREd now but looking at these numbers really makes me wonder lol. But very comforting to see the recovery.

Sent from my VCE-AL00 using Tapatalk

[vand]

Yes. I FIREd shortly before the Great Recession and saw my NW (house and investments) drop 50%.  I had paid off my house before quitting, no debt and had extremely low basic expenses and enough in a safe EF (bonds and laddered CDs) to last me without having to touch investments. I did a bit of belt tightening but not much, and I had other options such as getting a roommate or 2 or going back to work (the HORROR!) if I needed more money. I didn't need to do either of those and just rode it out by not spending much. Eventually it all righted itself and I even came out ahead in the NW dept.

Your example shows that 4% or whatever static withdrawal model you want to choose doesn't happen that often in the real world. Expenditures tend to fluctutate up and down with an individual's net wealth, whether they are still accumulating or in the distribution phase.

[Linea_Norway]

Yes. I FIREd shortly before the Great Recession and saw my NW (house and investments) drop 50%.  I had paid off my house before quitting, no debt and had extremely low basic expenses and enough in a safe EF (bonds and laddered CDs) to last me without having to touch investments. I did a bit of belt tightening but not much, and I had other options such as getting a roommate or 2 or going back to work (the HORROR!) if I needed more money. I didn't need to do either of those and just rode it out by not spending much. Eventually it all righted itself and I even came out ahead in the NW dept.

That was my thought. Instead of having all your savings in stocks, you might want to have some other source of income. In your case renting out a room. But it could also be a cash cushion in a savings account. The idea would be to not have to sell your stocks when they are at -50% of their purchase price.

[Linea_Norway]

The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?

[UnleashHell]

The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?

maybe not just be invested in a small market thats just climbed 400% in 5 years and rely on that to retire on???

[CoffeeR]

The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?

maybe not just be invested in a small market thats just climbed 400% in 5 years and rely on that to retire on???

I predict that if the US market climbs 400% in 5 years, Mustachians and Bogleheads will tell you to "stay the course". They will, of course, present a lot of data to support their argument and claim that doing anything else is just market timing.

[UnleashHell]

The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?

maybe not just be invested in a small market thats just climbed 400% in 5 years and rely on that to retire on???

I predict that if the US market climbs 400% in 5 years, Mustachians and Bogleheads will tell you to "stay the course". They will, of course, present a lot of data to support their argument and claim that doing anything else is just market timing.

yawn.

of course you skip the "small market piece"
whatever. japan is a bullshit comparison anyway.

[DadJokes]

The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?

maybe not just be invested in a small market thats just climbed 400% in 5 years and rely on that to retire on???

I predict that if the US market climbs 400% in 5 years, Mustachians and Bogleheads will tell you to "stay the course". They will, of course, present a lot of data to support their argument and claim that doing anything else is just market timing.

If that were the case, then Mustachians and Bogleheads would tell you that you'll never see a recession again, since we haven't had one over the last 5 years.

We're using a century of data to make predictions about the future, not 5 years.

[fattest_foot]

The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?

This is the fallacy of only looking at market peaks. Surely this hypothetical investor didn't invest everything as soon as the Nikkei topped out and then liquidated everything?

Their market had a pretty steep run up prior to the fall. Not only that, but the normal volatility in that "lost decade" period still provided plenty of opportunity for market gains.

[PathtoFIRE]

Surely this hypothetical investor didn't invest everything as soon as the Nikkei topped out and then liquidated everything?

True, but I think the hypothetical is about someone who hits their "number" at what turns out to be a peak, and retires based on that number only to see their portfolio subsequently tank. Like, I have $250k, my number is $1M, and over the next 5 years the market returns 300%, so I hit $1M and FIRE, only to see it drop to $500k and level off (to give an example somewhat similar to Japan in the late 80s into 1990).

I think it's wise to at least be aware of the preceding market conditions before you FIRE. Maybe look back a little and ask to what degree your recent returns might be unusual. With that said, it's hard to look at the Nikkei in 1990 and not think that you've got a solid 40 years of a relatively consistent trend line to back you up (although maybe something in your head should ask whether 10-fold increases every 20 years are sustainable).

SP500 versus Nikkei 225, log scale

[DeniseNJ]

The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?

maybe not just be invested in a small market thats just climbed 400% in 5 years and rely on that to retire on???

I predict that if the US market climbs 400% in 5 years, Mustachians and Bogleheads will tell you to "stay the course". They will, of course, present a lot of data to support their argument and claim that doing anything else is just market timing.

If that were the case, then Mustachians and Bogleheads would tell you that you'll never see a recession again, since we haven't had one over the last 5 years.

We're using a century of data to make predictions about the future, not 5 years.

You also don't invest based on the market being high or low.  It should be more on when you need the money.  Money that you NEEEEED shouldn't be in the market, even if you miss out on big gains.  You start slowly moving money to safer investments as your RE draws near.  If the market tanks the day after RE it shouldn't devastate you bc all your dough is not in the market at that point.

[TomTX]

spartana is my hero.

[Radagast]

The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?

That happened, and we should expect something like this to happen again somewhere in our lives. However, there are a few points about how to avoid it.
-Valuations matter at least a little, price/earnings were over 90 at the peak of the Japanese market, which is absurd compared to nearly any other stock market event in history. Using a 1/CAPE10 withdrawal rate as a savings goal would do a lot to help prevent these things.
-The "reverse glide path" concept would be very effective at avoiding this as well.
-Diversification would have worked. Using the Bill Bernstein "No-Brainer" portfolio of 25% Japan Large Cap Stocks, 25% Japan small cap value stocks, 25% foreign to Japan stocks, 25% Japan intermediate-term government bonds would have given a 40-year safe withdrawal rate of 3.2%, which is not great, but not terrible, especially with one of the above mitigation strategies or others discussed. Similar to his "If You Can" portfolio of 33% Japan, 33% Foreign, 33% Bond, 1% cash portfolio. We are very fortunate to have https://portfoliocharts.com/portfolio/withdrawal-rates/ where we can now backtest Japan scenarios.

[Ladychips]

spartana is my hero.

+1

[UnleashHell]

The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?

That happened, and we should expect something like this to happen again somewhere in our lives. However, there are a few points about how to avoid it.
-Valuations matter at least a little, price/earnings were over 90 at the peak of the Japanese market, which is absurd compared to nearly any other stock market event in history. Using a 1/CAPE10 withdrawal rate as a savings goal would do a lot to help prevent these things.
-The "reverse glide path" concept would be very effective at avoiding this as well.
-Diversification would have worked. Using the Bill Bernstein "No-Brainer" portfolio of 25% Japan Large Cap Stocks, 25% Japan small cap value stocks, 25% foreign to Japan stocks, 25% Japan intermediate-term government bonds would have given a 40-year safe withdrawal rate of 3.2%, which is not great, but not terrible, especially with one of the above mitigation strategies or others discussed. Similar to his "If You Can" portfolio of 33% Japan, 33% Foreign, 33% Bond, 1% cash portfolio. We are very fortunate to have https://portfoliocharts.com/portfolio/withdrawal-rates/ where we can now backtest Japan scenarios.

additionally mortgage rates were very low in Japan. holding a mortgage and investing the funds in the market would have produced a reasonable return over the long term.

[Miss Piggy]

S&P high was ~1,549 in October 2007. Low was ~735 in February 2009.

I just ran the monthly numbers on a $1 million portfolio for someone who retired on October 1, 2007, and withdrew $3,333/month, increasing the withdrawal by 0.1667% every month (2% per year).

The lowest point for the portfolio was just shy of $440k in February 2009. While the market recovered by March 2013, the principal balance of the portfolio has not yet reached $1 million again. However, it looks pretty safe. I feel a lot more confident about the 4% rule after running out those numbers than I did before. Maybe I won't wait until I'm at 3.5%.

Edit: added 2% inflation

I feel really stupid for having to ask this question, but it's been nagging at me for several days (since I first read this thread): Can someone explain why the bolded part above is true? How is that even possible? Is it because in this scenario the investor continued to pull money out each year (presumably 4%ish) rather than going back to some kind of work and leaving the portfolio intact to grow back with the market? (I hope I'm making sense here.)

Seriously, this post is scaring the shit out of me.

[TomTX]

S&P high was ~1,549 in October 2007. Low was ~735 in February 2009.

I just ran the monthly numbers on a $1 million portfolio for someone who retired on October 1, 2007, and withdrew $3,333/month, increasing the withdrawal by 0.1667% every month (2% per year).

The lowest point for the portfolio was just shy of $440k in February 2009. While the market recovered by March 2013, the principal balance of the portfolio has not yet reached $1 million again. However, it looks pretty safe. I feel a lot more confident about the 4% rule after running out those numbers than I did before. Maybe I won't wait until I'm at 3.5%.

Edit: added 2% inflation

I feel really stupid for having to ask this question, but it's been nagging at me for several days (since I first read this thread): Can someone explain why the bolded part above is true? How is that even possible? Is it because in this scenario the investor continued to pull money out each year (presumably 4%ish) rather than going back to some kind of work and leaving the portfolio intact to grow back with the market? (I hope I'm making sense here.)

Seriously, this post is scaring the shit out of me.

Of course the investor kept withdrawing 4% throughout the drop. They retired. That's literally the premise of this thread.

Despite starting at the very top of the market at the start of the Great Recession - the portfolio sustained the retiree/investor just fine, and has almost recovered the starting value - without ever having an dollar of added income, or cutting a dollar from their 4% spending.

[SwordGuy]

S&P high was ~1,549 in October 2007. Low was ~735 in February 2009.

I just ran the monthly numbers on a $1 million portfolio for someone who retired on October 1, 2007, and withdrew $3,333/month, increasing the withdrawal by 0.1667% every month (2% per year).

The lowest point for the portfolio was just shy of $440k in February 2009. While the market recovered by March 2013, the principal balance of the portfolio has not yet reached $1 million again. However, it looks pretty safe. I feel a lot more confident about the 4% rule after running out those numbers than I did before. Maybe I won't wait until I'm at 3.5%.

Edit: added 2% inflation

I feel really stupid for having to ask this question, but it's been nagging at me for several days (since I first read this thread): Can someone explain why the bolded part above is true? How is that even possible? Is it because in this scenario the investor continued to pull money out each year (presumably 4%ish) rather than going back to some kind of work and leaving the portfolio intact to grow back with the market? (I hope I'm making sense here.)

Seriously, this post is scaring the shit out of me.

Yes, that's how the 4% "rule" study worked.   The retiree is an automaton that mindlessly spends their 4% each year (plus inflation) no matter what.    You focused on "the principal balance of the portfolio has not yet reached $1 million again" and apparently ignored "However, it looks pretty safe."

And, of course, unlike the Trinity study, you're allowed to be smart about things, cut back on your spending, find extra income sources, etc.

So why the fear?

[Miss Piggy]

Yes, that's how the 4% "rule" study worked.   The retiree is an automaton that mindlessly spends their 4% each year (plus inflation) no matter what.    You focused on "the principal balance of the portfolio has not yet reached $1 million again" and apparently ignored "However, it looks pretty safe."

And, of course, unlike the Trinity study, you're allowed to be smart about things, cut back on your spending, find extra income sources, etc.

So why the fear?

It just didn't fit with my understanding of how the market recovery would/should work. But yeah, if the retiree is mindlessly continuing to spend 4%, then it makes more sense. Thanks for restoring my (apparently fragile) hope.

[erutio]

If anything, this thread should encouraging instead of scaring you.

2007-2008 was a historically bad recession, and yet, given the assumptions, following the 4% guideline would have still worked.

Here are the assumptions:
1 - You retired at the peak of the market in 2007. 
2 - You had not earned a single cent since then. 
3 - You have robotically spent your 4% annual spend, without cutting back.

You would have been retired for 12 years, and now have more money in your stash than when you started.  Any little bit of side hustling or cutting back costs, especially in the early years, would have resulted in even more money in your stash.

[vand]

Part 6 of ERN's safe withdrawal series deals with 2000-2016 case study.

short answer is that your portfolio would now be anywhere between 30-70% down. Surviving the next 11-12 years is likely to be touch and go.

https://earlyretirementnow.com/2017/01/18/the-ultimate-guide-to-safe-withdrawal-rates-part-6-a-2000-2016-case-study/

[SwordGuy]

Yes, that's how the 4% "rule" study worked.   The retiree is an automaton that mindlessly spends their 4% each year (plus inflation) no matter what.    You focused on "the principal balance of the portfolio has not yet reached $1 million again" and apparently ignored "However, it looks pretty safe."

And, of course, unlike the Trinity study, you're allowed to be smart about things, cut back on your spending, find extra income sources, etc.

So why the fear?

It just didn't fit with my understanding of how the market recovery would/should work. But yeah, if the retiree is mindlessly continuing to spend 4%, then it makes more sense. Thanks for restoring my (apparently fragile) hope.

Good!

We retired with plenty of buffer in our annual expenditures.  That way, it would be relatively easy to cut back and, if times were really bad, even very poorly paid work would make a big difference.   We also chose to have multiple sources of passive income so we weren't totally tied to the stock market.   It reduces our sequence of returns risk and adds other diversity of income protections, too.

Some folks figure out their mandatory expenses to the penny and quit when their stash is exactly 25 times that.   They don't have any wiggle room in their budget.    If they are already been super frugal their stash can be quite small.     To me, that's asking for trouble.   Other people shrug it off and choose to deal with it if things go wrong.     

To each his own.   I prefer multiple safety features in our FIRE plan. :)

[Scandium]

The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?

Which stocks? Do you have 100% of your funds in your home market? (in your case norway?!). I always think this Japan example/scare-story is silly.
With a global weighted portfolio that person in Japan would see a portion of their stock portfolio drop 50% (how large a portion I don't know. It's 17% today, but I don't know what that was at the crash). Regardless, if the home market is a tiny country with a fragile, focused economy it seems ludicrous to me to have more than 30, maybe 50% in that market! Especially since any hit to the economy is likely to cost you your job at the same time. Why would you do that? Ok, so there's a crash, and half your portfolio drops 50%, you're down 25%. Meh..

[ChpBstrd]

I’ve not heard a convincing rationale for all this talk about how a Japan scenario could not possibly happen in the US. If anything, Japan revealed that a stock crash followed by decades of economic stagnation wasn’t only something that happened in poor countries, as many believed at the time. Yes, valuations for stocks and real estate were insane but if you think you would have spotted the bubble in advance and diversified before the drop, I hope you are not currently overweight US stocks with the S&P 500’s PE ratio 40.6% above its average, and I hope you have insulated your portfolio from real estate in an environment where the median priced home is unaffordable in 74% of US counties. Yes, the details are always different; how could they not be? But FWIW, the percentage of the US population over 65 years old just surpassed Japan’s rate in the late 80s.

I don’t claim to know the future, but saying “We’re different. Our market always bounces back.” sounds a whole lot like “this time is different.” I heard people whistling past the graveyard in 1999 and 2007 too.

https://www.housingwire.com/articles/median-priced-homes-arent-affordable-in-74-of-u-s-housing-markets/

[ChpBstrd]

Here’s the real mind-bender: It’s 2007 and you are OMY away from retirement with a $950k portfolio (spending is $40k). One year later, you have contributed the remaining $50k, but your diversified portfolio has dropped 30% to only $700k. Can you still retire as planned, or do you have to work several more years?

Following the 4% rule would have required you to work maybe 3-4 more years, but as the example above demonstrates in hindsight, your late 2008 retirement at a 5.7% WR was actually secure and all those years of life in a cubicle or in an industrial shop were unnecessary. Had you retired a year earlier, you would have taken the plunge oblivious to the coming crash, but because you were already retired you would probably have spent the recession jobless, and then halted the job search as the portfolio rebounded. Ironically, you would have worked 3-4 fewer years if you retired at the worst possible time compared to if you waited to retire when your portfolio’s market value was $1M.

This paradox is another reason I calculate my portfolio’s ability to support me in retirement based on the sum of my earnings per share and interest, rather than my portfolio’s constantly fluctuating market value. If we apply the lessons of A Random Walk Down Wall Street when it comes to holding our shares through a downturn, why should we then make the decision to retire based on market prices? If you are on the way to your boss’s office to hand in your resignation, do you check your phone and turn around if the market is down 0.5% since you hit your FIRE number this morning?

[jrbrokerr]

Here’s the real mind-bender: It’s 2007 and you are OMY away from retirement with a $950k portfolio (spending is $40k). One year later, you have contributed the remaining $50k, but your diversified portfolio has dropped 30% to only $700k. Can you still retire as planned, or do you have to work several more years?

Following the 4% rule would have required you to work maybe 3-4 more years, but as the example above demonstrates in hindsight, your late 2008 retirement at a 5.7% WR was actually secure and all those years of life in a cubicle or in an industrial shop were unnecessary. Had you retired a year earlier, you would have taken the plunge oblivious to the coming crash, but because you were already retired you would probably have spent the recession jobless, and then halted the job search as the portfolio rebounded. Ironically, you would have worked 3-4 fewer years if you retired at the worst possible time compared to if you waited to retire when your portfolio’s market value was $1M.

This paradox is another reason I calculate my portfolio’s ability to support me in retirement based on the sum of my earnings per share and interest, rather than my portfolio’s constantly fluctuating market value. If we apply the lessons of A Random Walk Down Wall Street when it comes to holding our shares through a downturn, why should we then make the decision to retire based on market prices? If you are on the way to your boss’s office to hand in your resignation, do you check your phone and turn around if the market is down 0.5% since you hit your FIRE number this morning?

+1

Nobody knows which market will be the next Japan and when it will be the next Japan, so every investor must be prepared for any kind of scenario.

[theoverlook]

I heard people whistling past the graveyard in 1999 and 2007 too.

But, as is being covered here, things turned out fine for FIREd folks after both of those crashes, so it's not exactly the stirring indictment of the strategy that you seem to present it as..

[DeniseNJ]

If someone retired at the peak in 2007, say around October, would their portfolio have survived?

Lets say x = annual spend and they had exactly 25x saved, and spent exactly $X per year.  Assuming portfolio was 75% stocks, 20 bonds, 5 cash.

Can someone smarter than me simulate it out from 2007 to now?

Answer: https://www.gocurrycracker.com/how-are-the-2000-and-2008-retirees-doing-4-percent-rule/

[AdrianC]

If someone retired at the peak in 2007, say around October, would their portfolio have survived?

Lets say x = annual spend and they had exactly 25x saved, and spent exactly $X per year.  Assuming portfolio was 75% stocks, 20 bonds, 5 cash.

Can someone smarter than me simulate it out from 2007 to now?

You can test for yourself in Portfolio Visualizer:

https://www.portfoliovisualizer.com/backtest-portfolio

Use VTI for US Stocks, BND for US bonds, CASHX for cash. Start with $1M September 2007. Pull out an inflation adjusted $40K/year.

Final balance $1,114,321 inflation adjusted ($1,413,261 without adjusting for inflation.)

The last withdrawal was $48,333

[chasesfish]

I'm going to throw this one out there...go check out the guy who writes at Early Retirement Dude.

He's been interviewed a few times and talks about this exact thing, I think he pulled the plug with $1.6mil in 2006 and had to be talked out of selling it all at the bottom.   

[dmc]

I retired in May of 2007.  My net worth is much higher.  But I didn’t exactly follow the 4% rule.  When the market took the big drop, we just pulled money from the money market account and didn’t make any big purchases.

We are also spending much more now than back when I was working.  I have some expensive hobbies and we moved to a more expensive area.  And I bought a plane.

[bwall]

I’ve not heard a convincing rationale for all this talk about how a Japan scenario could not possibly happen in the US. If anything, Japan revealed that a stock crash followed by decades of economic stagnation wasn’t only something that happened in poor countries, as many believed at the time. Yes, valuations for stocks and real estate were insane but if you think you would have spotted the bubble in advance and diversified before the drop, I hope you are not currently overweight US stocks with the S&P 500’s PE ratio 40.6% above its average, and I hope you have insulated your portfolio from real estate in an environment where the median priced home is unaffordable in 74% of US counties. Yes, the details are always different; how could they not be? But FWIW, the percentage of the US population over 65 years old just surpassed Japan’s rate in the late 80s.

I don’t claim to know the future, but saying “We’re different. Our market always bounces back.” sounds a whole lot like “this time is different.” I heard people whistling past the graveyard in 1999 and 2007 too.

https://www.housingwire.com/articles/median-priced-homes-arent-affordable-in-74-of-u-s-housing-markets/

Allow me to try and give a convincing rationale for why there will be no repeat of the Japanese stock market experience in the USA.

The stock market is a reflection of the economy--everyone (should) know this. But, what exactly does it reflect? In the USA you have new small companies coming onto the stock market all the time. These new companies then grow into larger companies. Most of us could easily name many large cap US stocks (over $100 billion market cap) that did not exist or were very very tiny 20-25 years ago (aapl, goog, amzn, nvda, to name a few.)   The growth of these companies is then reflected in the growth of the stock market index over time. If your country (or stock market) cannot produce these world class companies, then your stock market will not show much growth over time. Since Japan's stock market crashed in 1989 and hasn't risen again, I can comfortably surmise that Japan has produced no world class companies in the past 30 years. Please prove me wrong. 

But, perhaps a biotech CEO could illustrate the point better than I can. It's a bit of a dry talk, but the important part is less than five minutes long, beginning just before the 7 minute mark.  https://www.youtube.com/watch?v=XFK-B1xJzGc
In these five minutes, the CEO of CRSP, a biotech company with technology that will change the world as we know it, explains how the Europeans who discovered this technology moved their headquarters from London to Basel, Switzerland although none of them were Swiss. Airplanes from London can fly in any direction, but they chose Switzerland. Why not Germany? Or Sweden? Or Luxembourg? Or Austria? Or Turkey? Or Greece? Or Russia? Or even simplest of all, stay put in London! But, then discovered that they couldn't access enough talent or capital in Switzerland or all of Europe. So, they opened shop in the USA and listed on the nasdaq. Japan wasn't even on their radar screen, btw. The benefits of the growth of this company will flow to investors in the US stock market. Not the European or Japanese stock market. To hear the speaker in the link say it, an important part of the US market is researchers who will accept stock in a company in exchange for salary. In Europe (and Japan?) the average person is wary of the stock market and not willing to accept stock in exchange for salary. Again, in these five minutes the European born CEO of a cutting edge technology company explains why the USA is the best place in the world to work and invest.

There are dozens of biotech companies in the USA that are working on curing cancer with 'smart drugs' that target only the cancerous cells. They will be able to sell their products worldwide. But, only investors in the US stock market will reap the benefits as that is where they're listed. Not all the companies will succeed, but some of these will grow into behemoths in the next 10-20 years. Even if the USA cannot or does not produce the researchers or the technology these companies still choose to list in the USA with the benefits flowing to those who invest in the US stock index.

Japan has nothing like this. Ditto Europe.

[talltexan]

I'm not saying anyone on here would be like this.

But I talked to a lot of older, retirement-age people in 2009-2011 who didn't believe the government's inflation statistics. They believed that the massive budget deficits and low interest rates--and these will come up in response to any significant downturn--meant that inflation had to be higher than it was.

Additionally, these retirees feared that the Affordable Care Act would bankrupt them, because...

These people could have held the self-control to not sell stocks during the initial bear market, but through other irrational beliefs may have failed to hold their expenses or health-related planning in the proper range to survive like your models here suggest.

[dandarc]

I'm not saying anyone on here would be like this.

But I talked to a lot of older, retirement-age people in 2009-2011 who didn't believe the government's inflation statistics. They believed that the massive budget deficits and low interest rates--and these will come up in response to any significant downturn--meant that inflation had to be higher than it was.

Additionally, these retirees feared that the Affordable Care Act would bankrupt them, because...

These people could have held the self-control to not sell stocks during the initial bear market, but through other irrational beliefs may have failed to hold their expenses or health-related planning in the proper range to survive like your models here suggest.

So don't be an idiot, or more gently, stop watching the news if you're prone to these types of beliefs.

Although there is a grain of truth in there - while personally I believe the government inflation figures are accurate, what matters for me is my own personal inflation which can be very different from the average of the whole country. Of course these folks probably are not doing the math to figure that out either. For now I'm figuring I'm close enough to average - pretty far away from FIRE still, so seems like a wasted effort to try to figure out what inflation might be for our individual situation in retirement.

The ACA was a big shock price-wise for young healthy people who had to buy their own insurance. Retirees are either on medicare or very close to it. Should have been easy for these folks to see past that one.

[ChpBstrd]

I’ve not heard a convincing rationale for all this talk about how a Japan scenario could not possibly happen in the US. If anything, Japan revealed that a stock crash followed by decades of economic stagnation wasn’t only something that happened in poor countries, as many believed at the time. Yes, valuations for stocks and real estate were insane but if you think you would have spotted the bubble in advance and diversified before the drop, I hope you are not currently overweight US stocks with the S&P 500’s PE ratio 40.6% above its average, and I hope you have insulated your portfolio from real estate in an environment where the median priced home is unaffordable in 74% of US counties. Yes, the details are always different; how could they not be? But FWIW, the percentage of the US population over 65 years old just surpassed Japan’s rate in the late 80s.

I don’t claim to know the future, but saying “We’re different. Our market always bounces back.” sounds a whole lot like “this time is different.” I heard people whistling past the graveyard in 1999 and 2007 too.

https://www.housingwire.com/articles/median-priced-homes-arent-affordable-in-74-of-u-s-housing-markets/

Allow me to try and give a convincing rationale for why there will be no repeat of the Japanese stock market experience in the USA.

The stock market is a reflection of the economy--everyone (should) know this. But, what exactly does it reflect? In the USA you have new small companies coming onto the stock market all the time. These new companies then grow into larger companies. Most of us could easily name many large cap US stocks (over $100 billion market cap) that did not exist or were very very tiny 20-25 years ago (aapl, goog, amzn, nvda, to name a few.)   The growth of these companies is then reflected in the growth of the stock market index over time. If your country (or stock market) cannot produce these world class companies, then your stock market will not show much growth over time. Since Japan's stock market crashed in 1989 and hasn't risen again, I can comfortably surmise that Japan has produced no world class companies in the past 30 years. Please prove me wrong. 

But, perhaps a biotech CEO could illustrate the point better than I can. It's a bit of a dry talk, but the important part is less than five minutes long, beginning just before the 7 minute mark.  https://www.youtube.com/watch?v=XFK-B1xJzGc
In these five minutes, the CEO of CRSP, a biotech company with technology that will change the world as we know it, explains how the Europeans who discovered this technology moved their headquarters from London to Basel, Switzerland although none of them were Swiss. Airplanes from London can fly in any direction, but they chose Switzerland. Why not Germany? Or Sweden? Or Luxembourg? Or Austria? Or Turkey? Or Greece? Or Russia? Or even simplest of all, stay put in London! But, then discovered that they couldn't access enough talent or capital in Switzerland or all of Europe. So, they opened shop in the USA and listed on the nasdaq. Japan wasn't even on their radar screen, btw. The benefits of the growth of this company will flow to investors in the US stock market. Not the European or Japanese stock market. To hear the speaker in the link say it, an important part of the US market is researchers who will accept stock in a company in exchange for salary. In Europe (and Japan?) the average person is wary of the stock market and not willing to accept stock in exchange for salary. Again, in these five minutes the European born CEO of a cutting edge technology company explains why the USA is the best place in the world to work and invest.

There are dozens of biotech companies in the USA that are working on curing cancer with 'smart drugs' that target only the cancerous cells. They will be able to sell their products worldwide. But, only investors in the US stock market will reap the benefits as that is where they're listed. Not all the companies will succeed, but some of these will grow into behemoths in the next 10-20 years. Even if the USA cannot or does not produce the researchers or the technology these companies still choose to list in the USA with the benefits flowing to those who invest in the US stock index.

Japan has nothing like this. Ditto Europe.

I don’t believe the explanation that the US is the only or best place to find talented or skilled workers. The US ranks 27th in the world in terms of educational quality. FWIW other disadvantages of setting up shop in the US include some of the highest crime in the developed world, some of the highest wage expenses, and a healthcare system that is largely employer funded at a cost 3x that of other developed countries plus administrative costs to deal with the bizarre tangle of laws around healthcare.

The explanation that workers in other countries won’t accept stock options as compensation is an assumption that deserves to be proven. If it cannot be proven, this reminds me of the 1980’s anxieties about how the Japanese might, due to their culture, have a superior work ethic and cooperative tendency that allow them to run better factories and dominate the auto and electronics industries. That narrative was disposed of and forgotten after the market crash, and no lessons were learned about the dangers of using cultural stereotypes as economic predictions. Now, with the US economy riding high, we tell a narrative about ourselves to explain and justify our success.

Why hasn’t Japan produced as many worldwide brands as they once did? Competition from corporate zombies is part of the answer, but I think demographic graying is the other.

https://www.businessinsider.com/us-ranks-27th-for-healthcare-and-education-2018-9

[chasesfish]

Wow, this thread got off topic.

Japan got old.  Isolated country with no natural resources, aging population, then limited immigration.  That's low growth

[Alchemisst]

I don't think 2007 is a typical example, the market bounced back extremely quickly to new highs, so you only really needed to wait 2-3 years or 2-3 years of cash, other market drops may have been more challenging or even when the market was just flat for 10yrs+ in the past.

[shinn497]

Portfolio 1 is Betterment's, which I have my portfolio in.
Portfolio 2 is a boglehead's 3 funds
Portfolio 3 is Ray Dalio's All weather
And the Green Benchmark is the SP500

All portfolios started on Nov 2007. I think it is Nov 1st. The exact worst time to get in.

Reupload since I forgot to post the images The first time

Nominal


Real



I started with 1000000 and took out 3333 every month for a 4% Safe Withdrawal rate, increasing with inflation.

The SP500 and all weather portfolio retained their balances before after inflation. The Bogleheads and Betterment portfolio did not.
HOWEVER, any slight deviation from the start time significantly increased the final portfolios. You had to have really bad timing to get these results.

My take is that the US stock market has done really well in the past but I question its future viability, especially given these valuations. One thing about the Betterment and Bogle portfolios is they are more diversified. Which is good, since they have a more reliable outcome. But hey, despite their lower returns, they still made it.

SO TLDR. Even when highly diversified. The 4% rule WORKS. If you really want to be secure go with 3.5% and internationally diversify. Don't be dismayed by this recent bull run. Diversification gives you greater certainty of results.

[Alchemisst]

I think you'll find 2007 was not a worst case scenario as within only a few years you were back in positive returns, have a look at what would happen if you retired in the early 70's or end of the 90's for e.g

[concealed stache]

The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?

maybe not just be invested in a small market thats just climbed 400% in 5 years and rely on that to retire on???

I predict that if the US market climbs 400% in 5 years, Mustachians and Bogleheads will tell you to "stay the course". They will, of course, present a lot of data to support their argument and claim that doing anything else is just market timing.

yawn.

of course you skip the "small market piece"
whatever. japan is a bullshit comparison anyway.

A pointlessly late reply, I know.

But if you check with the world bank, you will find that Japan's stock market was the same size as the US at the peak of the bubble.

https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?locations=JP-US

Those are using current dollars, so you need to correct for 1990 dollars when the yen was much weaker, but basically they were the same size. So there's one less reason to consider this a "bullshit" scenario.

[concealed stache]

I’ve not heard a convincing rationale for all this talk about how a Japan scenario could not possibly happen in the US. If anything, Japan revealed that a stock crash followed by decades of economic stagnation wasn’t only something that happened in poor countries, as many believed at the time. Yes, valuations for stocks and real estate were insane but if you think you would have spotted the bubble in advance and diversified before the drop, I hope you are not currently overweight US stocks with the S&P 500’s PE ratio 40.6% above its average, and I hope you have insulated your portfolio from real estate in an environment where the median priced home is unaffordable in 74% of US counties. Yes, the details are always different; how could they not be? But FWIW, the percentage of the US population over 65 years old just surpassed Japan’s rate in the late 80s.

I don’t claim to know the future, but saying “We’re different. Our market always bounces back.” sounds a whole lot like “this time is different.” I heard people whistling past the graveyard in 1999 and 2007 too.

https://www.housingwire.com/articles/median-priced-homes-arent-affordable-in-74-of-u-s-housing-markets/

Allow me to try and give a convincing rationale for why there will be no repeat of the Japanese stock market experience in the USA.

The stock market is a reflection of the economy--everyone (should) know this. But, what exactly does it reflect? In the USA you have new small companies coming onto the stock market all the time. These new companies then grow into larger companies. Most of us could easily name many large cap US stocks (over $100 billion market cap) that did not exist or were very very tiny 20-25 years ago (aapl, goog, amzn, nvda, to name a few.)   The growth of these companies is then reflected in the growth of the stock market index over time. If your country (or stock market) cannot produce these world class companies, then your stock market will not show much growth over time. Since Japan's stock market crashed in 1989 and hasn't risen again, I can comfortably surmise that Japan has produced no world class companies in the past 30 years. Please prove me wrong. 

But, perhaps a biotech CEO could illustrate the point better than I can. It's a bit of a dry talk, but the important part is less than five minutes long, beginning just before the 7 minute mark.  https://www.youtube.com/watch?v=XFK-B1xJzGc
In these five minutes, the CEO of CRSP, a biotech company with technology that will change the world as we know it, explains how the Europeans who discovered this technology moved their headquarters from London to Basel, Switzerland although none of them were Swiss. Airplanes from London can fly in any direction, but they chose Switzerland. Why not Germany? Or Sweden? Or Luxembourg? Or Austria? Or Turkey? Or Greece? Or Russia? Or even simplest of all, stay put in London! But, then discovered that they couldn't access enough talent or capital in Switzerland or all of Europe. So, they opened shop in the USA and listed on the nasdaq. Japan wasn't even on their radar screen, btw. The benefits of the growth of this company will flow to investors in the US stock market. Not the European or Japanese stock market. To hear the speaker in the link say it, an important part of the US market is researchers who will accept stock in a company in exchange for salary. In Europe (and Japan?) the average person is wary of the stock market and not willing to accept stock in exchange for salary. Again, in these five minutes the European born CEO of a cutting edge technology company explains why the USA is the best place in the world to work and invest.

There are dozens of biotech companies in the USA that are working on curing cancer with 'smart drugs' that target only the cancerous cells. They will be able to sell their products worldwide. But, only investors in the US stock market will reap the benefits as that is where they're listed. Not all the companies will succeed, but some of these will grow into behemoths in the next 10-20 years. Even if the USA cannot or does not produce the researchers or the technology these companies still choose to list in the USA with the benefits flowing to those who invest in the US stock index.

Japan has nothing like this. Ditto Europe.

This is agonizingly myopic. Imagine the view from someone living in 1990 (in fact you don't have to - George Soros's "Alchemy of Finance", aside from being an interesting read in its own right, includes the realtime diary of an investor living through those times). It seems that the only country delivering on innovation is Japan - heavy industry, autos, electronics, chemicals, you name it. Completely unknown companies dominating established industries at a terrifying pace, or creating entirely new markets. Of course, we all know how that turned out.

If anything, your argument is weirdly reminiscent of the kind of statements that were made about Japan at the height of its success. Now, that in no way means that the US is fated to mirror Japan's path in other ways. The world is full of coincidences that in the end have little significance. But the rationale presented is the opposite of convincing.

[habanero]

Which stocks? Do you have 100% of your funds in your home market? (in your case norway?!). I always think this Japan example/scare-story is silly.

At the peak in 1990, the Japanse Market accounted for 40% of the MSCI World index if I remember correctly. So a globally diversified stock only investor would still have 40% in Japanse equities. So it's debatable how silly it was/would be to have at least a very large allocation to it. The US market today accounts for ~60% of the index for comparison.