You Can’t be On FIRE if You Can’t Stand the Heat

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“The markets are crashing, this whole FIRE thing isn’t going to work!”

“The world is going to end! 2008 is happening again, we’re all going to be screwed!”

“A recession is coming! Should I sell everything in my IRA?”

These are just some of the comments, messages, and e-mails we’ve been getting lately. With the S&P 500 down 11% since the the beginning of the year and 18% from the peak, I can see why readers who haven’t been through a market crash would be spooked.

But here’s the thing about becoming FIRE.

You can’t be on FIRE if you can’t stand the heat.

Stock market corrections are perfectly normal and something you need to experience in order to become Financially Independent.

As Warren Buffett says “Be fearful when others are greedy and greedy when others are fearful.” While everyone else was panic selling and running for the hills in 2008, he calmly bought. As a result, he ended up making $10 billion during the financial crisis.

So before you panic, sell everything, and dive under your bed to hide from the upcoming apocalypse, know this:

P/E Ratios:

Back in the beginning of 2018, with the S&P 500 P/E ratios at a high of 25, investors were complaining stocks were way too over-valued, and it wasn’t a good time to buy. Now, with the ratio at 15 as of Dec 21, evaluations are inline with the historical mean of 16, we’re returning to healthy evaluations and investors are getting a deal.

Tax loss harvesting:

One reason the markets could be falling during a time when traditionally the “Santa Claus Rally” happens is tax loss harvesting. Investors are taking advantage of the market correction to offset their capital gains and save money on taxes. As a result, there’s a spike in sell-offs, which isn’t indicative of an upcoming recession, but a tax play.


The unemployment rate in the U.S. is holding steady at 3.7%, the lowest it has been in almost 50 years. And since it’s been adding jobs steadily for the past 8 years, a strong job market and economy is why the Fed plans on raising interest rates next year. This is the exact opposite of a recession.

Now, I can’t predict what’s going to happen next year (no one can), but I can tell you what helps us sleep at night:

The Yield Shield

With our Yield Shield paying us around $35,000/year, we can almost live off the yield completely without withdrawing from our portfolio. So as we explained in previous posts, this is exactly why you need it in retirement to help you sleep at night.

Cash Cushion

With a cash cushion that supports our living expenses for the next 3 years, we don’t have to worry about depleting our portfolio during a market correction. Another reason why we can sleep soundly at night.

For those of you who are still working, realize that this is a great opportunity to buy into the storm (which is exactly what we did in 2008 to come out unscathed).

Those who’ve just retired and are worried about sequence-of-returns risk, take a look at what we did in 2015.

It’s a scary ass world out there, but we’re sleeping soundly because we know what we’re doing. And stay tuned to this blog next year, where we’ll tell you exactly how our portfolio performed in 2018, how much we spent, and the general health of our retirement in January.

Now, step back from your Vanguard/Questrade account, take your finger off the sell button and go spend some time with your families!

And those of you who want further assurance that the world isn’t going to end, read this post from The Godfather of FI himself, JLCollins:

Happy Holidays! and a bit on Mr. Market


We’ll be taking a break from this blog for the rest of the year (though we’ll still be answering comments). Happy holidays and see you next year!


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60 thoughts on “You Can’t be On FIRE if You Can’t Stand the Heat”

  1. I’m bummed. I front loaded my 401k and maxed it out Nov 1. Now I don’t have any room left for buying on sale. 🙁

    As problems go, this one’s first world AF, as I imagine the kids say these days. On the bright side I’m doing the same for 2019, and that’s only a week or two away…

    Stay warm and enjoy the holidays!

    1. “As problems go, this one’s first world AF”

      Ha ha! Cheers to first world problems! I slept too hard the other day and pulled a back muscle–does that count? #FirstWorldProblems

      I’m sure we’ll have lots of good deals in 2019 too 🙂 Definitely an advantage of having cash to deploy when you’re working.

  2. I agree, but jeez, seeing my dividend investment portfolio value drop by 20% in the past three months is stomach churning to say the least. During the last big decline, it took nearly a year for the DJI to fall from its all-time high in April 2008 to rock bottom in March 2009. When the current downward trend will stop and start trending upward again is anybody’s guess. My dividend income hasn’t been negatively affected by the market’s turmoil so far, but that will probably change next quarter.

      1. Nope. Okay, looks like this question has been asked by several readers now. We’ll explain how dividends yields are calculated in an upcoming post.

    1. It’s definitely been a rollercoaster ride, but on the plus side, great opportunity for those who have money to deploy. Having dividend income definitely helps in soothing the nerves–but yeah, it’s scary, I get it. The ones who can tough it out will come out unscathed on the other side (like we did), the one who can’t will realize that investing isn’t for them.

      1. When you say you came out unscathed, were you referring to this most recent turbulence or a past event like the financial crisis? We’re still in the midst of the current (minor so far) correction, but if your portfolio is unscathed (down 0%??) doesn’t that mean you aren’t invested in the stock market? Or perhaps timed the decline. Or perhaps had a collar on the index. Or do you just mean it isn’t illiciting an emotional response from you… Just curious what unscathed means and how you achieved it. It might be helpful for when/if the market goes down an additional 30-40%. Thanks

    2. My Mantra in a nutshell: We have had the longest Bull Market in History, its time to face reality, its not going to keep going up forever. I started telling people a year ago to start a dollar cost average style rebalance, and have been doing just that.

      1. All new investments equally distributed across, T-bill/Bond/Cash, for the last year I have been building the Spousal to match my RRSP.

      2. Extra payments on Mortgage – sure, I have a low interest rate (below 3%) but that will reset eventually, and I am comfortable with a gain of 3% savings of interest.

      3. Selling of High Volatile ETF’s and stocks to rebalance to about 60/40

      I used this strategy coming into 2009, and it has worked well for me. Also, I don’t believe we are in a resession yet… time will tell. And if we are, I have cash to redeploy into Equities.

  3. Guys – thanks for all the great articles this year. You have challenged a bunch of my preconceptions on finance which I have really appreciated.

    I retired earlier this year and for a number of reasons I took out a cash cushion much larger than the theoretical number. You now have me wondering whether to invest some of it!

    1. Hi PJ,

      I think that it will be more appropriate to focus less on the theoretical number. I believe that you would have your plan on why you catered for such cash cushion. Stick to your plan and all will be fine.


    2. Congrats on your retirement! As for the cash cushion, it depends on your comfort level. If you choose to invest it, DCA into the market. If you choose to keep it in cash to help you sleep at night, that’s fine too.

  4. Confused, you state P/E is currently 15, down from 25 at the beginning of 2018. When I click on your link I see P/E of 19 as of December 21st, with a forward looking estimate of 15, which would suggest further decline in the S&P over the next 12 months. Am I reading your link right, or am I missing something? Regardless, obviously no need to sell!

    1. I know, it’s confusing. When the the forward P/E ratio is lower than the current P/E ratio, analysts are actually expecting earnings to increase. You can use the current P/E ratio instead if you prefer, but in any case, it’s an indication that the market is more fairly priced now than it was at the beginning of the year.

  5. when we assume % of returns, well, shit happens. Retirement targets adjusting after 2018, needless to say. 2018 was a reality check. We were way way overdue for a 20-30% decline, 2008 was our last major market correction. What is amazing is that NO ONE saw it coming, just like 2008

    could get a lot worse folks. SPY aint even down 20% yet. Not enough fear in the streets, so me thinks we aint near the bottom. Capitulation hasnt hit us, yet

    1. We’ve been talking about a downturn and Financial Samurai since the end of 2017.

      Although most of my community and my portfolio has been pretty defensive, we still lost money which is too bad.

      But I do admire FIRE folks who are continuously optimistic despite a 20% decline in their portfolios.

      As an early retirement with the family to support, I’m much more cautious than the typical FIRE person. I’m willing to give up upside to protect some downside.


      1. Coming from someone who invests in venture capital, FANG stocks, leveraged real estate in what was one of the hottest real estate markets in the world, unproven crowdfunding businesses, etc. 😉

        I’m in all the same investments, I’m just saying they aren’t the most conservative in the world… 😀

        1. True. About 30% of my net worth is really suffering from the downturn. I should have been even more defensive, but I got greedy.

          Are you doing OK? You mentioned multiple times on my site how your investments swing $100K on a daily basis. That’s too much volatility for me to handle.

          1. I’m doing OK, but definitely am impacted by the downturn. I “lost” over 3M due to market volatility the past few months. Not a heck of a lot I can do about it other than try to protect with options (which I didn’t do), since my net worth is almost entirely capital gains – if I sell, I’d lose 38% to taxes, so I space out sales each tax year. I do have a huge cash position equivalent to almost 20 years of expenses which I built up during this bull run, may start deploying if market goes down 30%.

            I guess you aren’t categorizing leveraged SF real estate as a risk asset. I feel like if the stock market continues downward for a period of time, SF real estate will definitely be impacted. It just hasn’t shown up in property values yet.

            I’m considering DIRE for 2019!

      2. Hi Sam,

        Difference circumstance varies in respect of different individual. You have a point in taking a cautious approach in midst of current circumstance. Some people may prefer a riskier approach.

        There is no perfect solution to all circumstance. One should choose the option in which he/she is comfortable with.

        To each of our own.


        1. Absolutely. Everybody has their own situation.

          One of the thing that gives me hope is that almost everybody I meet on the internet is doing fine financially, no matter how bad the downturn. Almost everybody has a contingency plan or is well positioned.

          I’ve personally foreseeing more of a DIRE approach to the FIRE movement. But I’m generally more cautious than normal after experiencing the dotcom burst in 2000.


          1. Everyone is doing fine so far coz this downturn is just a blip so far. The return was so high in 2017, we aren’t even back to Jan 2017 levels yet. Pain level will increase if market goes down 30-40%.

          2. I had to go take a look and see what DIRE stands for (Delay, Inherit, Retire, Expire). Not sure I understand the panic except for those invested in crypto and equivalent reckless things.This is why you have a fixed income component in your portfolio of which a good portion is short term or an aggregate bond component. If equities continue to drop, just rebalance and wait for the eventual rise. This DIRE thing sounds like a croc of shit made up by those outside the FIRE movement as a “told you so”. Delay retirement till 70 and then croak? LOL.


            Actually, I’ve been waiting for a 30-40% drop to occur to see how resilient my portfolio will be. So far, I’m down about 8% for the year. Not fun but it’s only the equivalent of a 1 year delay for me at this time.

            I say everyone breath and wait to pick up the bargains. This is the equivalent of Black Friday and Cyber Monday combined for equities.

            On the other hand, for those who don’t have balanced portfolios, my condolences.

            1. For sure. Whoever came up with the DIRE Movement must be a little loco! Must be some bitter old fool. Clearly all is still pretty good in the world.

              Down 8% is nothing for one year and losing one year of work. Let’s just hope the selling doesn’t accelerate to be something worse.


    2. Can’t predict the market so I’m not even gonna try. But one thing is for sure, market downturns tell you whether investing is for you or not. Those who can’t stand the heat, shouldn’t be investing.

  6. The Fed gave me notice to go to cash months ago when they stated they’re offloading their huge debt balance sheet and decided to raise rates at the same time.

    This 10 year market rally has been fueled by QE,not economic fundamentals!

    The QE punch bowl has been removed until the next crisis arrives.

    1. Can’t predict the future, so I’m not going to bother timing the market. If you think you’re the part of the tiny 5% who can actually beat the index, it’s your prerogative.

  7. Your article advocates for a 4% dividend yield, rather than selling 4% of the portfolio yearly. Similar but not the same. The latter wouldn’t let you sleep at night.

    1. Okay, I see where your confusion is coming from. 4% is used to calculate your FI number. The yield + cash cushion is used to mitigate the sequence-of-returns risk during the first 3-5 years of retirement, as part of our withdrawal strategy. Once you’re out of that period, you go back to 4% withdrawal. We explained the strategy in detail here:

  8. This is an excellent time to test whether one is ready for FIRE. I am of view that it is the matter of “peace of mind” mindset which will play a part in the route to great FIRE.


    1. Yup. It’s only during the downturns that you find out whether index investing is right for you. When everything’s going up, it’s easy to say you won’t panic. But you have to actually feel it to know whether you can handle it.

  9. Agree this that is probably more of a pullback rather than the apocalypse. 2008 looked much closer to the real deal from hazy recollection.

    Like the idea of a yield shield, working on building my own.

    Enjoy the break


  10. Just curious, where are you finding current P/E ratios? All I can find are outdated annual ones. Google has not been my friend on this one.

  11. This still is 2008. The FED moved all that toxic paper to their balance sheet to keep the economy from going into depression ( a brilliant move) and now the chickens are coming home to roost as they sell off that paper. Nobody knows the market and pricing for that stuff yet so things are volatile. Also the FED kept the training wheels on banks by putting them in idle mode for 10 years while they repaired their balance sheets trading bad paper for good. They pulled the training wheels off the banks so it’s risk on and the 30 year bond bull market is over. This is all regression to the mean stuff but if you grew up since 2008 you’re used to stocks being the only game in town. Don’t just assume we are living in buy the dip land anymore. I’ll take a 3.5% bond over a 3.5% S&P 500 any day much less a -11% S&P 500. In a broader market where debt is an actual participant instead of being choked to death by the FED and you can actually get some interest on money, stocks are extremely risky compared to other asset classes.

    1. If you’re going to have emotional rants, than you definitely should not be in the market. And we never advocated 100% equities, our portfolio is 40% bonds. Equities do have the advantage of hedging against inflation, bonds don’t, and equities are also more tax efficient.

      But of course, people with emotional reactions to the stock market, should not be investing. Stick with bonds in your case. Investing isn’t for you.

  12. It’s against my spiritual newfound way of striving to living life rightfully. In addition to uncertain markets, I’m so glad that stock market investing is not the only way to long-term wealth creation. Yes, one can get rich in the stock market. If that is, they have the investing education and make moves at certain times. Stock market investing is not for me but I do watch the news from time to time. I prefer going through the entrepreneurial trenches and the uncertainties life has to build my wealth because I don’t want to invest and then get mad at the world when and if I lose money.

    1. If being an entrepreneur works for you, more power to you! If investing isn’t for you, it’s definitely good to know that. Know yourself and your comfort level.

  13. FIRECracker: At what point does one start pulling from the Cash Cushion instead of selling ETFs?

    For example, say you follow the 4% rule and every January you sell a portion of your equity ETFs to cover the year’s living expenses, but like the tail-end of 2018 portfolio values went down. What is the trigger point someone should pull from their cash reserves (-10%, -20%) instead? This particular scenario assumes that dividend and interest income just isn’t enough to cover the full year’s bills.

    1. Yep; this my philosophy… There’s a silver lining… Plus the economy is still moving along nicely and everyone’s still in their jobs …

  14. it’s hard to believe that anyone who has read your investment workshop and other blog posts on this subject could be freaking out about this stuff. I tend to worry and stress out about a lot of things but the recent state of the stock market isn’t one of them and I didn’t know anything about investing until I found your blog in 2016. It helps though, that I have a somewhat recession proof job that I still work part time and can cover all of our expenses with on 20 hours a week so I don’t need to worry about yield shields or cash cushions (but also, we couldn’t afford to fully retire just on what we have saved now so I have to work to cover our expenses anyway, we just don’t withdraw and reinvest the yield). If the stock market does indeed crash though I will certainly be taking Warren Buffet’s (and your) advice! Happy Holidays! 🙂

  15. I hope everyone is doing well through this drop and no one is panic selling. There is no such thing as a loss until it’s realized, so if you’re index investing, just don’t allow it to become real! Plan your path then work your plan.

    1. Well, actually, a loss is loss whether you want to realize it or not. Might as well tax loss harvest that loss for future advantage. I hear all the cool kids do it. ?

      1. Dave, as I’m sure you’re aware, there’s no such thing as tax loss harvesting in tax advantaged funds. As few people even max out their available tax advantaged funds they are incapable of taking advantage of this maneuver. My advice was primarily aimed at the vast majority of folks like this, as even though they can’t tax loss harvest, so many people panic and dump then hold cash and don’t buy back in until the market is well on its way back up. That’s pretty much the saddest investment scenario there is but it plays out time and time again.

        FYI, for my TLH, I let Wealthfront’s computers take care of it all for me. They’re so good I obtained a nice amount of it in 2017 when the markets were flying high. Nothing like robo-investing for certain things.

  16. Thank you for this post.
    I’ve been reading this blog and trying to learn as much as I can, but seem to be stuck on figuring out investing.
    Would you recommend any Robo investing options? For example
    Are there benefits to RoboInvesting for a beginner? I feel overwhelmed with the idea of ‘re balancing’ on my own.
    Thank you 🙂

    1. We haven’t ever used a robo-advisor before so don’t have one to recommend. I would highly recommend learning how to invest from the ground up first, before using an advisor to automate the work for you. That one you will know exactly what’s going on in the backend. My concern about robo-advisors is that too many people just turn their brain off and expect the tool to figure everything out.

  17. I FIRE’d back in September right before the downturn to travel. Should have been freaking out about sequence of return risk but have been following you guys so had plenty of cash cushion. Not working and traveling does wonders to the soul…no longer have fears regarding the gyrations of the market!! Happy travels!

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