How to Invest When the World is on Fire

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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.

Conclusion

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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39 thoughts on “How to Invest When the World is on Fire”

  1. Great post and nice to get your updates even when things are hard. You might however, want to get more sophisticated in your understanding of this war. Ukraine is not a peaceful neighbor, there has been war and death in Donbas for 8 long years of infighting and violence and a long history of corrupt leadership. That doesn’t justify the invasion but the situation is much more complex than you allude to. For instance, there are no Soviet states anymore so that outcome isn’t possible. Neither is the version where Ukraine wins. It’s all so upsetting, and I just want to urge people to learn more about what is actually happening and what happened that led to this before making sweeping generalizations.

    1. There has been a war for years on Ukrainian territory because Russia invaded and annexed Crimea and then set up a proxy war in the Donbass. This situation isn’t “complex” at all. Putin wants to reestablish the Russian empire and is drunk on his own propaganda. Would you have described Hitler’s 1939 takeover over of Czechoslovakia as “complex” as well? Thanks, Mr. Chamberlain.

    2. Oh absolutely, I’m not an expert on the politics of Eastern European by any means and I’m learning about Ukraine and Russia’s history from the news just like everyone else. But what I do know is that one side is literally trying to start World War III, and I am 100% against that.

    3. The eight years of infighting are the result of Russia funding separatist movements in the Donbas region after Ukrainians overthrew his corrupt puppet leader (who clamped down on dissent so hard that he outlawed all protesting). This war is just the culmination of all Putin’s attempts to bring Ukraine and his other neighbors under his boot heel. He gave a ten minute fascist “blood and soil” speech justifying his war as Ukrainians actually being Russians.

      I agree, people need to learn about this war before making sweeping generalizations about one side.

      Sincerely,
      ARB—Angry Retail Banker

  2. Investing is so emotional, especially during difficult times. I’m an accumulator with a longer investing horizon and love to exercise the simple/layman’s approach to buying during downturns – 1) login to Vanguard 2) COVER THE BALANCES WITH YOUR HAND/SQUINT YOUR EYES SO EVERYTHING IS HAZY 3) Go to the fund you’d like to purchase and hit ‘BUY’ (and continue covering the balances on the SUBMIT page!) 4) Submit transaction and try not to pay attention to the noise of the down markets!

    Out of sight, out of mind.

    1. Too funny, i do the same to try to not see the balances. Would be cool if they came out with a feature to opt to not see the balance. Ignorance is bliss!

    2. That would be funny if Vanguard implemented a “blind buy” view to prevent you from seeing your balance and panic selling. I’m sure the regulators would object though.

  3. I’m quite similar. Like you, I also have some income coming in. (Something it is important to admit when talking about financial independence, especially the psychological elements, I think.) We are actually practicing a “zero percent rule” if you think about it.

    Just wish I had more cash to be dollar cost averaging in over the course of the volatility.

    And, Slava Ukraini.

  4. Great post, i like how you addressed both the accumulators (me) and the preservers (hopefully future me). Thanks!

  5. I’m with interactive brokers, mostly invested in index funds. I live on 280k a year and never pay taxes. Instead of selling a portion of my portfolio every year to live on, I just borrow against my index funds. I only pay 0.833% interest rate with interactive brokers. If I had sold a portion of my index funds I would pay ~21% tax right now then I would be out of the market which makes more than 0.833% per year on average. So thats one way to live on your investments especially during a market down turn. Even though I live on 280k a year on paper I have no income and therefore don’t pay income tax so I would qualify for OAS and the GIS. So my withdraw strategy: Invest Borrow Die and never pay tax again!

    1. I’m not sure I understand this. You borrow 280k per year? Pay interest on it. To pay off borrowed amount wouldn’t you need to sell a portion of your portfolio? Sincerely interested in tax saving strategies. What we currently do is live off of dividends $100,000 a year Canadian eligible dividends. No tax. I’m not with interactive brokers at the moment but thinking of making a switch.

      1. Never have to pay it back…. As long as your loan to index fund value stays under 70%. It just sites in your account as a line item. No payments required. With the 100k Canadian dividends it’s grossed up 15% and counted as income so you will not qualify for OAS and the GIS FYI.

      2. I believe Matt has a very large margin account at Interactive Brokers and is borrowing on margin. A 0.833% interest requires a balance in the mid to high 8 figures. As long as he is within the maintenance margin amount then he can continue to increase the amount on margin loan. It’s an interesting strategy to use leverage for retirement cashflow. Most people would use TFSA withdrawals or Canadian eligible dividends to get to non taxable/no or low income cashflow. Margin loan is another way.

        1. Oh ok, that makes sense. I’m not in the 8 figure catagory yet. But my dividends will likely be much higher than 100,000 this year so interested in making sure I am taking advantage of any tax strategies I can.

      3. I believe Matt is doing the equivalent of the CHIP Reverse Mortgage on his margin investment account. In other words, he hopes to croak before his margin eventually gets called. Good luck to him with that. I wouldn’t touch this way of pulling funds from my account with a 10 foot pole. If he actually has a 0.833% interest rate, interest rates are rising and these type of strategies have a tendency to implode on themselves.

        Also, the average person doing FIRE will not have an 8 figure investment portfolio to do this. Therefore, completely useless strategy for the vast majority of people.

        1. Point taken on risk.

          But this is not a useless strategy. If another person lives on 28k vs 280k, the account size for the same margin requirement drops into regular/low-end FIRE portfolio sizes. And the interest rate (prior to future BoC prime rate increases) is still quite low.

  6. I don’t want death and destruction, but as an early retiree I’m really wanting a real honest to goodness market crash. The Spring 2020 crash didn’t count because markets immediately rebounded. I want a crash so that I can “stress test” my investments to see how sound they are. I like to think that I’ll be just fine, but if my investments go to sh*t, I’m still young enough where I can re-enter the workforce for a little while, as horrifying as that prospect may seem.

    I’m basically in the same situation as Wanderer and the FIRECracker… highly diversified and living off dividends/yield… no intention of ever having to actually sell (except for possible rebalancing someday).

  7. Is anybody who’s using a different strategy than Wanderer and Firecracker willing to go into more detail? I’m an accumulator trying to learn.

    1. No. That’s exactly what you have to do.

      Step #1 – Save as much as you can.
      Step #2 – Buy the best investments as you can.
      Step #3 – Repeat steps #1 and #2 until FI.

    2. You link your TFSA with questrade to a questrade margin power account. If you have a 100k TFSA you will then have ~200k margin room in your margin account…. Then you sell SPY puts 8% out of the money with 2-3 week until the put expires. This will generate 15-20k a year in extra income. So you effectively will get 15%-20% return in the margin plus about an average of 8% return in the TFSA if invested in index funds for a total return of 23-28% compounded return on the original 100k. It’s called the wheel strategy using SPY (s and p 500) as the underlying index fund. Much lower risk then holding the index and you make money in up down and sideways markets. There you go!

      1. Can you explain investing in Margin a bit more? I did not have a plan however I found myself in taking margin loans and investing. The interest rate is keeping increasing. I have around 100k in TFSA (current value) and my margin loan stands at 130k (i.e. I used to invest ) at prime 1.25%. Little bit of a mess. Need to play safe. I may have additional at least 200k available for margin (additional)

    3. We fired quite a few years ago by living off of rental income from numerous properties. We sold all but two of them recently and invested in dividend paying etfs. We are new to this strategy so can only comment on its performance since September. We are getting 10%(annualized) return from dividend payouts which we withdraw each month. So far our account value has also increased 2.45% since Jan 1.
      We went with this method since we preferred the buy and hold strategy. Market goes up and down so account value does as well, but we get our dividends payed out each month. Some tickers to look at. Hyld, hdiv, hdif, txf, Zph zpay, ens, gdv, Eit.un, ethy, btcy, svol, cgxf, Nxf, rs, qyld, Ryld, Clm.

  8. can you advise which etfs you are using for the yield?

    and , given you’re Canadian, which vehicles do you have said vehicles in ? ie., xzy in TFSA..etc

    and how do you draw? from tfsa? from rrsp?

    thanks!

    (is the above outlined in your book?)

  9. There is also a third category: people who are ready to step out into FI in March let say. And then a question is: am I doing it in the mids of crisis or should I think about ‘one more year’ or one more month?

    1. ..This was basically me. My plan was to give notice back in March 2020. Literally the day I planned on handing in resignation, the covid situation went crisis mode and California, where I live, initiated the “shelter in place” directive. I decided to play it safe and delay retiring by one year. I’m sad for those who suffered and died, but it really really really sucked having to work that extra year !!

      1. Yes, I did the same and telecommute in 2020 because I could do it from home, then I took a sabbatical for half a year to test my FI, and now – ready to go, really ready. But since it seems like in the mid of crisis – I am giving it another thoughts. I know I will, but it just feels weird 😉

  10. I am in the preserver camp, although I am still accumulating ? 😐

    I’ve not done much since the start of the year. My portfolio has reacted pretty well even if some parts of my portfolio have been destroyed. I’m still up +1.5% so far this year…

    The only transaction I have done in 2022 is buying Alibaba when the price reached ridiculously low levels last week. But it was a very small transaction. Only around 0.3% of my total portfolio.

    That leads me to highlight one positive element of market corrections : you can really get unbelievable deals during those times.

    Paradoxically, if you sell parts of your portfolio that performed better (for example : bonds, gold, oil) to buy stocks (or ETF) that were beaten down -30%, -40% or more you can end up with a better portfolio (in number of shares) even if your portfolio value is down. Something to think about …

    That’s the advantages of diversification and rebalancing.

  11. Thanks for all the information you share! It’s reassuring to get the reminders to keep to the investment plan and not panic in times of chaos.

  12. I think you guys, like most of your readers need to turn off the media, or better, US propaganda machine, and live on your lives. Stop worrying about this war. Yeah it’s bad but it was called for so let them figure it out themselves. Move on and ignore the social media, or better, do yourself a favor and delete all your accounts !!!

  13. Commodities are doing a short term zoom over the past year … oil and gas …
    Is it too late? 4 oil and gas ETFs???? Short term plays to research? A general commodities play would be to buy a Canada or maybe an Australian total market ETF like from Vanguard or something like that … but GAS and OIL etc … 😮
    CANADIAN Oil and Gas
    TSX:HUC
    TSX:HXE
    AMERICAN Oil and Gas
    FCG
    IEO

  14. Hello Wanderer, this is a nice timely post. I believe you wrote some posts ago that you were giving up some of your yield shields and focusing more on pure equity etfs. How is that going especially in the face of the new reality?

  15. When the world is on fire and the market panics, there’s also bargains to be had. While the situation in the world is chaotic due to COVID and the potential of war, things always get better over time.

    Ultimately, a lot of these macro events don’t affect the underlying business value of many companies, so their pessimistic price action is unjustified. I think during this sort of panic, there’s tons of opportunities to be had when looking close enough.

    One downside is if you’re fairly invested already, it presents an opportunity cost since you need to wait for your stocks to increase before you can recapture the cash to reinvest. Though I think like the post says, cashflow (and opportunity cost) protection arises from doing the Yield Shield.

    Alternatively, one can use hedging (getting a security that moves in the opposite direction of a long-term security you’re holding so that if it dips, you are able to sell it and recapture cash) in conjunction to chasing yield in order to protect cash flow so that even if you’re fairly invested, you can buy good bargains (i.e. minimize opp cost).

  16. Quick question. I’m a Chinese working for a big tech in California for the past 5 years and in two year my visa expires and I’ll move back to China (can’t wait).
    My question to you is: Should I keep maxing out my 401k knowing I won’t be able to tap it until 59/5 (I’m 37) and I’ll be living in China, which means I’ll have to pay income tax there on any dollar withdraw from my 401k/IRAs here (or worse, will be under sanction judging by the way things are going in the west)? Thoughts?

  17. Which FIRE bloggers are blindly recommending the 4% rule? This certainly isn’t the sentiment on Bogleheads, which I consider the gold standard of personal finance resources. In actual practice, very few people are going to keep their spending the same when their portfolio has just dropped 30%.

    1. This one is. I also think it’s crazy they blindly calculating everything based on the 25x annual expenses. It’s just WAY TOO RISKY !!! Unfortunately the FIRE bloggers are becoming too entitled to hear any criticism, just ask Big Ern .

  18. I would love to hear an updated reassurance that you guys are still very anti-real estate. I’m watching friends write begging letters to realtors (Calgary) so they can pay more than the listing price for a house. But I have to believe that this is not going to last.

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