Personal Risk Analysis

[Guesl982374]

I thought this might be useful to share as it's helped DW and I wrap our heads around what a potential pull back might look like financially:

Example (not my actual numbers):

-Stocks/401K/etc.: $200K
-House: $500K with $300K left on the mortgage

30% pull back in the stock market = $200K * 30% = $60K decline
20% pull back in the RE market = $500K * 20% = $100K decline

NW currently: $400K
NW post pullback: $240K

Obviously everyone's situation will look different and you can model different decline %. Does anyone else do similar estimates like this to mentally prepare for what a recession might look like on your finances?

Disclaimer - We're not selling, we're not calling 'Top is in', its just a quick analysis so we aren't surprised by the number if there's an overall recession / depression / pull back in the economy

[Schaefer Light]

I've never put the numbers down, but I do this kind of thing in my head all the time.  Probably more so than is healthy, to be honest.  I also think about how long I could survive without any income in the event of a stock market crash and job loss happening at the same time.

[RWD]

Because of the rate of our savings/contributions a 30% stock market pullback would result in our net worth staying flat for about a year. Not too scary yet.

[inline five]

The biggest risk with the market is a sustained period of zero gains. IMO.

[wageslave23]

Leverage in RE can be scary.   Its almost the same as buying stocks on margin.  I have mortgages on several rental properties so my exposure is very high compared to the stock market.  So yeah I run doomsday scenarios frequently ;)

[dude]

I done this often for my portfolio, but not home value. Home value is meaningless to me. Sure, I COULD sell it, but have no plans to, so our home equity is a nice number and that's it. Because I'm currently less than one year from retirement and I feel this market is way overvalued, I'm 50/50 right now, so when I run 20% drop scenarios, it ends up being a 10% drop in my overall portfolio. When/if that drop occurs, I will increase my equity allocation.

[terran]

Negative visualization is a great way to prepare yourself psychologically so you don't break during tough times because you've already thought about what you'll do and what it will be like. It's a classic stoic technique.

[aceyou]

I like what your doing, because I think it's beneficial any time you prepare ahead of time mentally for possible negative outcomes in the future.  You are applying the stoic idea of negative visualization to your financial life. 

Here's an example of how I've applied negative visualization to investing. 

I try to visualize VTSAX as a stock chart.  I'll say something like...ok, suppose it's at $68 right now.  And I want to retire in 13 years.  Now, suppose that in 13 years it's at $160.  And suppose I  put 50% of my paychecks towards VTSAX for the next 13 years (which we've been actually doing for a few years now)

Alright, good.  Now for visualizing a few scenarios:

Situation #1: I'll draw a straight line in my mind from $68 to $150.  If it went completely steady upwards from 68 to 160, Obviously that would be just fine by me. 

Situation #2: Now I'll draw a mound in my head from 68 to 150.  So lets say over the next 10 years it goes up to 200, then pulls back to 150.  I this situation I would be super pumped as it rose to 200, but I'd actually have a smaller net worth at retirement then scenario 1.  Why well because I'd have bought fewer total shares each month back when they were super expensive.  Even though I was even more excited for the majority of the time in this scenario, I weirdly end up with a lower net worth. 

Situation #3: Now I'll draw a valley from 68 to 150.  Suppose for the next 7 years it stagnates or goes down to let's say 60, then in the last 6 years it just goes on a tear to 150.  Although this cause me to have a lower net worth for most of those 13 years, I'd be buying way more shares than either scenario above.  And by retirement I would have a higher net worth than either situation above. 

Conclusion: Any month the market goes down, I celebrate that it causes me to buy more shares today, which will cause me to be worth more US dollars later.  When the market goes up, I can celebrate that all the shares I bought years ago are worth more US dollars today.  So I have reason to be happy either way, but the more and more I visualize it, I am rooting more and more for my stock chart to take the shape of a valley.