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Has the news been freaking you out lately? Has the war in Ukraine been making you seriously question your portfolio choices? Have you been thinking of pumping the brakes on investing, or moving everything to cash?
You are not alone.
I’m not sure how this happened, but our inbox has become an interesting sample of broad investing sentiment. When times are going great, our inbox fills up with emails asking “Stocks are too expensive, what do I do?” When times are going not so great, our inbox fills up with emails asking “Stocks are falling! What should I do?”
These days? Our inbox is full of emails asking “OH GOD, THE WORLD IS ON FIRE, I’M PANICKING, WHAT DO I DO?”
I’m not going to pretend I have a crystal ball and can predict how this war will end. The best I can do is tell you what FIRECracker and I are doing to protect our investments in this era of destruction and uncertainty.
Accumulators Need to Control Their Fear
But before I do, let me address the largest slice of our readers: the accumulators.
The vast majority of our readership are in this group. The accumulators are the people who are still working, saving, and investing towards Financial Independence. And the toughest part of your job as an accumulator is controlling your fear and staying the course when the arrows all start flashing red.
Accumulators are investing with a 10+ year time horizon in mind, and in that amount of time, one way or the other, this war will end. Maybe Russia will make Ukraine into a Soviet state, maybe Ukraine will, against all odds, fight off their attacker, but either way, this war will eventually end. And when it does, global equity markets will fluctuate, then consolidate, and then start marching higher again as businesses continue doing what they do best: make money.
So in that scenario, the only rational thing to do is to continue buying as stocks crash.
That might seem insane, but that’s also what it felt like when we were buying stocks during the 2008 Great Financial Crisis. Every fibre of our being screamed at us to do the opposite, to cash out what we had already invested in order to avoid losing more money.
But here’s the thing about big scary calamities like this.
They always feel like the end of the world. Always.
During 2008, when banks were falling over and the media was predicting the fall of the American economy, I came to a realization that I think is eerily relevant now. And that realization is:
You don’t know what country will come out on top, so bet on every country.
A globally diversified portfolio is the only way to hedge yourself out of any country-specific risk. I don’t have a crystal ball that can predict where a war will break out. Nor do I have a crystal ball that can predict which side will win.
Unlike houses, which by their very nature are relegated to a physical location, a globally diversified portfolio cannot be destroyed by a missile. A globally diversified portfolio cannot be destroyed by an army.
Buying the dip is an oft-repeated mantra of investors everywhere, and while it seems simple and easy when everything’s fine, it’s a very different feeling when those dips actually happen. Dips only happen when the world is on fire, and during those times, every fibre of your being will be screaming at you to move to cash and never come back.
What separates the people who eventually become millionaires from those that don’t is that the eventual millionaires are the ones who are able to tame their emotions and do the right thing even when everyone around them is doing the opposite.
Again, it’s not easy, but as a wise man once said…
Courage is being scared to death – but saddling up anyway.John Wayne
Retirees Need to Protect Their Income
For those that are retired and relying on their portfolios to fund their living expenses (like us), the challenge is completely different. Generally, we can’t just buy the dip because all our money is already invested.
The challenge for this group is to hold what we have and resist being forced to sell. Again, stock markets eventually recover once the calamity has passed, but if you sell when markets are depressed, you lock in your losses and won’t be able to participate in the eventual rebound.
That’s why we designed a cash management system that we call the Yield Shield. The details can be found in our book and in this series of articles we wrote on this topic, but the high level summary is that once you retire, you pivot your holdings to higher yielding assets like corporate bonds, preferred shares, real estate investment trusts (REITs), etc.
These higher yielding assets boost your overall portfolio’s dividend/interest income, so it generates income on its own without having to sell anything. This, combined with keeping a small(ish) amount of cash in reserve called the Cash Cushion means that you can survive multiple bad years without having to sell anything and can wait patiently for the inevitable rebound.
This system is, admittedly, more complicated than blindly following the 4% rule as other FIRE bloggers advocate, but you know what? It works.
The 4% rule, in its purest form, depends at least partially on capital gains in retirement. And we know that capital gains don’t happen reliably like clockwork year after year after year. So the 4% rule implicitly states that even in years where something terrible happens in the world (like right now) and stocks take a dive, you should go ahead and sell anyway because statistically, 95% of the time, stocks will rebound in time to save you from going bankrupt.
Here’s a short list of people who aren’t OK with that: FIRECracker. And me.
The truth is, if you rely on the 4% rule in it’s purest form, you’re not going to feel great about selling during a downturn when it inevitably happens. Which means you’re going to be forced to slash your spending. And depending on how you’ve structured your spending, that could mean some pretty painful cuts.
But we here are Millennial Revolution are not just a 4% rule cheerleading fan club. We can do better and add some additional strategies to the FIRE community, and the Yield Shield/Cash Cushion strategy is something I’m quite proud, because…it works!
We just got out of a global pandemic, and we were then thrown directly from that into an unforeseen and heartbreaking war waged by Russia against Ukraine. This decade is shaping up to be…not so great so far. 0/5 stars. Would not 2020 again.
But, because we structured our finances in the way that we have, at no point did we have to cut our spending. Our living expenses are completely paid for, and will continue to be paid for regardless of how the stock market gyrates in response to the daily drum beat of news coming out of Ukraine.
My heart aches for the people of Ukraine, and the humanitarian disaster that Russia is perpetuating on their peaceful neighbour needs to stop right the hell now.
But I haven’t lost a second of sleep over our finances. And that’s all because of the Yield Shield. With a projected yearly expense of $43,000 this year and a yield of $44,000, our expenses are covered by our Yield Shield without needing to sell any ETFs.
There’s a Hebrew saying I rely on during times like this. Gam Zeh Ya’avor. This too shall pass.
This. This war, this fear, it’s all temporary. Humanity has been here many times before. World War I, World War II, the Korean War, the Vietnam War, the Cold War, 9/11, the Afghanistan War, the Iraq War, the War on Terror, ISIS, a global pandemic, and now…this.
Humanity will survive. Humanity always survives.
This too shall pass.
Position your portfolio accordingly.
And oh yeah, Slava Ukraini.
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