Is the Coronavirus the next Black Swan Event?

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The definition of a black swan event is an unexpected event with major negative consequences, and the key word in that description is “unexpected.” If you had asked me at the beginning of 2020 (and many people did) to guess what would cause the next stock market crash, I would have said the US-China trade war, or maybe Brexit, or at very least something to do with Trump and the upcoming US election. A coronavirus pandemic? No way in a million years would I have guessed that.

The coronavirus known as COVID-19 has dominated the news coverage in a way I haven’t seen in a long time. For months now, it has seemingly occupied a permanent spot at the top of every news site. There are live streaming news blogs about it that update every 10 minutes, with a live running tally of the number of people infected beamed to people’s phones. And now, the coronavirus has spread from Asia into every continent (except Antartica) and turned it into a truly global pandemic.

And oh yeah, the stock market noticed, didn’t it? 

Volatility is Back!

On Feb 27, the Dow suffered it’s worst one-day point drop in its entire history.

The Dow dropped 1,191 points, or 4.4% in its worst one-day point drop in history. The index has fallen more than 10% below its most-recent peak, putting it in correction.

~~ Dow falls 1,191 points — the most in history, CNN

This was quickly followed by the best one-day point increase in its entire history.

US stocks rebounded sharply on Monday, with the Dow logging its biggest point gain in history.

~~ Dow rallies 1,294 points, most in its history

The last few weeks have seen straight daily swings of over 100 points points, and the odd thing is it’s not all in one direction. The stock market is yoyo-ing like crazy, a sign that traders can’t seem to agree on what the news about the coronavirus even means.

I actually haven’t seen this kind of volatility since 2008/2009, and even back then 1000+ moves in the Dow Jones would make front page headlines. Now, that kind of price movement is happening so frequently that not every zig zag up or down is reported anymore.

These are, to put it mildly, very unusual times.

Is The Coronavirus Outbreak Another 2008?

Let’s pretend for a minute that I was in the financial predictions game (which I am emphatically not), and I told you that my mathematical models/technical analysis/crystal ball told you definitively that yes, this is a repeat of 2008.

What would you actually do?

While 2008 was actually happening everybody was panicking and screaming the sky was falling, but today, in 2020, we have the benefit of hindsight. We know what eventually happened. The stock markets plummeted like crazy for 6 to 12 months, then rebounded sharply in 2009. What then followed was over a decade of an almost uninterrupted bull market.

What seemed like an economic collapse at the time turned out to be the biggest buying opportunity for the stock market in decades. People who had the intestinal fortitude to resist the urge to dump everything and move into cash and instead buy into the storm (like us) ended up recovering all their money in about a year, and then went on to enjoy the rampaging stock market performance that saw their wealth grow like never before. Some (like us) even managed to retire.

So if you knew for certain that this coronavirus panic was the beginning of a 2008-style stock market meltdown, the only rational thing to do would be to treat this as a massive buying opportunity and pick up as many index ETF units as you can while they’re on sale.

Now the big question is: How many people do you know would actually do this?

I’ve said before that the stock market is only in one of two states:

  1. Stocks are too expensive. You’d be an idiot to buy now.
  2. Everything is on fire and collapsing! You’d be an idiot to buy now.

For the longest time, stocks have been in Situation #1: Too expensive. Just a few weeks ago I met up with a reader who I later learned was sitting on over a million dollars in cash. He had sold his business and wanted to invest like we did, but stocks were just too expensive. If only he had gotten in when P/E ratios looked more reasonable, he wouldn’t have gotten priced out of the market.

Well, as they say, be careful what you wish for.

A truism in the stock market is that the swing from Situation #1 to Situation #2 is never gradual. Everything is fine until it isn’t, at which point panic and fear set in, which causes people to react emotionally and sell, which just exacerbates the crash, and onwards and onwards in a powerful fear-cycle.

That’s what happened here. The COVID outbreak started in mid January, and even while it was spreading out of control in Asia, the stock market still marched higher for a while. And then something mysterious flipped and now everybody is in extreme panic. How long and deep this volatility lasts nobody knows, but however long it does last it’s going to feel scary. It always does.

Should you dump everything into the stock market?

So what should you do? Am I saying that now is the time to take all that cash you were sitting on and dump it all into the stock market?

No! I would never say that, because that would be market timing.

If you’ve been following our Investment Workshop but waiting for a good time to start investing, here’s what you do. Take the cash you intend to invest, divide it up into 24 equal amounts, and invest each portion twice a month, once at the beginning, and again on the 15th. This is called Dollar Cost Averaging.

The reason why we do this is to manage your emotions. Stock market crashes are scary, and investing during a stock market crash is even scarier. If you’re sitting on a large pile of cash and you’re trying to hit the exact bottom in one lump-sump transactions, you’re going to freak out. Most likely, you’ll freeze, never invest, and miss your opportunity.

Dollar cost averaging is how you invest during a downturn because it spreads out your bets over a longer period of time. Remember that during the 2008 crisis, the S&P 500 took about 10 months to plummet from peak to trough. By using dollar cost averaging to get into the markets, you’ll be sure that at least some of your money will get in at the bottom and you won’t miss out on the best deals.


I don’t know if this is the start of a 2008 style meltdown, but I don’t think this market carnage is going to go away anytime soon. For early retirees like me, I’m sitting here getting a $8 foot massage, and counting the money coming in from my Yield Shield. I could care less about the day to day stock market fluctuations.

But for the vast majority of people out there who are still in the accumulation phase of their retirement, and messaging me daily complaining about how markets have been too expensive? Well, here’s your chance. If you want to achieve FIRE, you’re going to have to invest when others are fearful, and right now boy are others fearful.

Time to put on your big boy/girl pants and put your money where your mouth is.

Do you think that the coronavirus is the black swan event we’ve all been waiting for? Is this the start of a global recession? Let’s hear it in the comments below!

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67 thoughts on “Is the Coronavirus the next Black Swan Event?”

  1. Is it a “Crash” I feel doubtful. Panic yes, everyone depends on human for Cheap labor so the world is feeling the pain of single source supply chain.

    Right now the market trains on computers algorithms and that’s triggers huge sell offs instead of people deciding if this is simply a shorter term problem.

    Selling in a panic is never the solution. My bet is people still want to make money and the recovery will happen.

    I’m not an optimist, I trust people’s nature to always want to make money. That will never go away.

  2. You are spot on in your statement on the markets. They have been overvalued for some time now, and I have been waiting with some cash on the sidelines (while still investing via a 401K). You can’t wait to buy until valuations are low, while avoiding the panic selling and perhaps even a bear market. I have been moving my money into stocks recently. The market may still go lower, but when else do you buy? When things have recovered and are looking good… and valuations are high again?

  3. While Japan’s still been waiting for more than 30 years to recover from their crash. 2008 isn’t the only crash to learn from and they certainly don’t all come quickly roaring back. Equities is a long game, and sometimes even longer than you planned for. The bull market has lulled this generation of investors to a false sense of security.

    1. I am in 100% agreement with you, Roger Rabbit also, please consider the following “What happened to stock markets during previous pandemics (and epidemics)” put forth by Fidelity International:

      Yes, the S&P 500 will return all of the losses incurred during the past few weeks as a result of this present international health crisis, history dictates this as inevitable however; for how long do we have to endure these losses?

      Ah….Market timing….Of course no one can say exactly when confidence will return to international manufacturing, consumer spending hence, the stock markets.

      Everyone’s savings situation is different and our ages vary. I’m already retired and was reaping substantial gains in the market place (100% S&P 500 Index Fund) for years however; up until yesterday (Friday) I placed an order to sell all of it, to take effect at the close of trading.

      Fortunately the index fund I “was” invested in bounced back returning 9.31% this past Friday which reduced my total losses sustained over the last 2.5 weeks to “only” 12.5%.

      I moved everything over into a money market fund as I cannot afford to take any additional hits to my golden egg. As humanity travels more and has access to information (facts, opinions, nonsense, error) and manufactures/imports-exports perhaps now more than ever before in history therefore, I’m not sure we can predict when (how) the U.S. stock market will bounce back by utilizing previous histories (incl. the link I’ve posted).

      I’ve confidence the S&P 500 Index will return all of it’s losses incurred and post respectable gains in time. Perhaps if one has reliable, steady income, are some years (maybe 4-10) from retiring and it’s properly allocated to take advantage of these reasonable/low prices to acquire more and more of the S&P 500 Mutual Index Fund of their choosing then perhaps they’ll elect to do so…or not.

      With all of that said, I do have one question related these very unusual times we are presently in and that has to do the portion of “Quit Like a Millionaire” which speaks to traveling the world. No one could have predicted the timing of this pandemic but its effect on ones mobility in terms of international travel in and out of certain “low-cost”, stable nations that are still “safe” and accepting foreign travelers appears a bit limited unless you are prepared to (and permitted by that gov’t) stay in that nation for months if need be until the markets return gains lost and/or other bargain nations open up to travelers in the mean time, otherwise, what are the travel options at present?

  4. What’s different about this is that people’s emotions (and legitimate health prevention measures) are actually changing the fundamentals. My company has instituted a global ban on non essential travel. They’ve canceled SXSW. Canceled the Indian Wells tennis tournament. Likely to cancel other events including March Madness soon.

    The impact of this is that the fundamental values and actual profits are going down as well. Which could lead to massive layoffs. Which could… and on and on.

    Not to mention the oil war between Russia and Saudi could cause many energy companies to go under. And we haven’t even mentioned supply chain issues and shortages. Hold on to your hat Sparky, we’re in for a bumpy ride.

    1. Agree! According to the science, this thing is going to be with us for awhile. There are many significant fundamentals changing, including government intervention. The truth is no one knows to what extent fundamentals will be impacted. I believe that is why the markets can’t decide which way to go. Too much uncertainty equals increased volitility.

      What needs to be remembered are the words of JL Collins. The market is a combination of beer (fundamentals) and foam (speculation/emotion). One thing that is crystal clear to me is that this event already consists and will continue to consist of a substantial amount of foam.

      I’ve currently been a few days out of the office, which has made me especially envious of Kristy’s wealth protection phase. Conversely, I am very much in my wealth accumulation phase. Stocks are on sale. I’m buying.


  5. Yeap, this is it. It’s just one of many events that will happen in 2020. Once the world economy starts slowing down, other problems will come up. Now, the oil price is crashing due to low demand and the price war. Who knows what’s next? Bernie might get elected and the US stock market will drop more. Investors have been hoping for the best-case scenario and we’re not going to get it.

    Anyway, I agree about investing. Keep buying especially if you’re young and have income. However, if you’re retired, I hope you already had some alternative investment like bonds. If you’re 100% stock and have no income, you can’t take advantage of the down market.

  6. This was apparent to anyone following the world news (not US centric main stream media) for the last 2 months so it should not have come as a surprise. 2008 was a surprise though. Hopefully everyone was positioned accordingly.

    1. 2008 was not a surprise. If you followed the housing and mortgage derivatives market, there were clear signals it was going to be a problem.

  7. In addition to your strategy, I found that the following works well in dips:

    Set up limit orders with Vanguard, which allows you to determine what price to invest at. For example, if you invest in the VTI you can set up limit orders that last 60 days at any price ($140.00, $135.00, etc). Once the VTI decreases to $140.00 and $135.00 it will invest the specified amount of shares/money.

    Set up 5 or so investment levels (examples: $140.00, $135.00, $130.00, $125.00, $120.00) and add a new investment level every time one is fulfilled (example: $115.00 once $140.00 is fulfilled) that way you don’t hold onto your money too long and miss the dip, but you still have the potential of spreading out your dollars to invest at the trough.

  8. Probably being pedantic here but this virus is not a Black Swan event.
    Many companies model impact of pandemics on their business including possible impacts on the stock market.

    What is new is the impact of news coverage. This is, possibly, the first world event in the new media age with Global 24/7 coverage including hourly updates of the latest numbers from every corner of the world. There is such a thing as too much information.

    Whilst I am being grumpy I am also not necessarily a fan of pound cost averaging for lump sums. Imagine you had $1m 24 months ago and invested 1/24th each month for two years because you were told the wonders of dollar cost averaging. You would be pretty pissed right now! Dollar cost averaging is great for regular payments from your monthly salary – but not so much for lump sums.

    1. So you’re blaming the media for China locking down cities and shutting down factories? They control their own media so I’d say they think it’s a pretty big deal.

      Public health experts have different views about what the most likely scenario is this time, but they mostly agreed that another 1918 is the worst case scenario — and that we should prepare for it.

      Bill Gates says: “COVID-19 has started to behave a lot like the once-in-a-century pathogen we’ve been worried about. I hope it’s not that bad, but we should assume that it will be until we know otherwise.”

    2. Agree with you on the dollar cost averaging. I follow the same regarding lump sums and regular investing.

      However, I’m going to have to respectfully disagree with you regarding the Black Swan event. We are totally aligned that the media is having a field day with this and unnecessarily freaking people out. But the science is very serious on this one, and governments and the economy are being impacting in a very real sense.


  9. I read your book when it first came out and realized I was already FI. It took me another 6 months to convince myself that the math was correct and I just retired on Jan 1, 2020 (age 48). This is everything I was nervous about in the first five years of retirement and it’s happening in the first 3 months. Well, not this, more like what’s likely still to come. My Yield Shield is in place and I’m sticking to the plan. Thanks for the update!

  10. As I write this, My portfolio is at -5.28% YTD including the distributions (dividends, interest payments, etc.). S&P 500 is about -18.50% YTD, maybe -18% when you consider the distributions. It’s not too bad although I’d prefer a positive return. Who wouldn’t?

    On the bright side: it will eventually be a good time to do some tax loss harvesting by switching from the ETF(s) you’re in and moving it into the equivalent ETF(s) without losing your the asset allocations for your portfolio. That is, if you have losses to show for. I imagine that will apply to a good 95% of those currently invested.

    1. Hey @Dave can you detail this more? I’m not exactly sure what you mean by this. Moving from the same ETF? or do you mean same ETF from another place- ex- from Vanguard to Schwab ETF (not moving between accounts, just selling VTI and picking up Schwab’s equivalent)

  11. Thank you for the insightful article. Thank you for the data and statistics of past market downturns. For a less experienced investor like me, it’s comforting to hear your reminder to buy low, sell high, and invest via dollar cost averaging. Above all, to not panic as the S&P 500 has dropped by 18% since 2/20/20.
    I have been lucky to sell some shares of an index fund and 2 individual stocks before the plunge. The reason was that before the plunge, my stock position was too heavy as the market soared. So I had to sell to rebalance my portfolio. My asset allocation is more conservative in the boom (55% stock, 45% bond) and less conservative in the bust (65% stock, 35% bond). I’m at 61% stock and 39% bond now, and still have room to increase my stock position.
    Overall, I think the coronavirus infection will resolve in 1 to 3 months. It would not be the 2008-style market meltdown. However, the market may still suffer from the reduced productivity and earnings in the first 2 quarters. Also the market may remain unstable due to the US presidential election this year.
    Lastly, I enjoy your book Quit Like a Millionaire and finished reading it in 2 days. The book is well-organized, clear, informative, and insightful. You must work extremely hard to keep all the numbers up-to-date at the time of publishing, e.g. tax brackets, tax rates, etc. I admire you. Therefore, I have recommended the book as a must-read to my friends and family. I wish your book would become a recommended reading for high school, college and university students in financial planning and investment classes. You may want to market your book to this academic group, so as to boost sale and help young Americans and Canadians strive for financial independence.

  12. ‘While 2008 was actually happening everybody was panicking and screaming the sky was falling, but today, in 2020, we have the benefit of hindsight. We know what eventually happened. The stock markets plummeted like crazy for 6 to 12 months, then rebounded sharply in 2009. What then followed was over a decade of an almost uninterrupted bull market.’

    except you have no idea how long this recovery will take- may take double the 2008…ya dont know. And the next recovery may only last 6 yrs. Dont let recency bias get the best of ya!

    1. All very true. On the other hand, life goes on and you hope that things work out ok. You can’t live life always wondering “but what about this?” or “but what about that?”. You invest, rebalance occasionally and cross your fingers. That’s all. Anything more and you’re wasting your precious life on things outside your control. What’s in your control? Investing your money. The rest, fuck it.

    2. The risk of the stock market is the basis for it providing a return in the first place. As Kristy pointed out in this very article, and I am paraphrasing, you are either an idiot because it’s too high or an idiot because it’s too low. You could post a very similar comment about 2019 being too high. We who pursue FIRE must be courageous enough to invest.

      To quote JL Collins, “the stock market is the single best wealth building tool that exists”. You gotta pay to play. It isn’t feasible to squirrel money away, inflation destroying its value.

      Moreover, Kristy has provided a tool for folks to use to continue FIRE during a downturn, the Yield Shield.

      To quote the godfather again, “the stock market always goes up”. “It is self cleansing”. Whenever I doubt this, I’m reminded that all the thousands of companies that make it up are stacked with MBAs like me, all on a mission to produce value. On a long enough timeline, economics succeeds.

  13. I converted some stock index fund shares from IRA to Roth, using the chaos to reduce my tax bill. No need to sell and then convert, you can do it in one step if you simply move shares from one account to another.

    1. That’s called a ROTH Conversion and you will need to pay taxes on the money you moved out of the IRA as if it was regular income. Just saying…

  14. Checked my account this morning and saw I’m down nearly 6% over night. So I transferred from my line of credit because I can’t wait for my cheque to reach my account later this week. I solemnly swear to DCA though.

    Sending love from behind a mask and fingers lubed up with alcohol sanitizer from China!

    Colby @ That Charles Life

  15. Thanks for the article. Needed to hear this.

    Considering I’m going to retire in 8 years with a teacher pension that will cover 100% of my expenses and my 403b & Roth will be the icing on the cake… do you think I need to worry about a yield shield?

    Or should I just concentrate on growing my investment as much as I can?

    Thanks again for any input people could give.

    1. All this yield shield does is delay you waking up to the bad news. it doesn’t delay the impact of the crash – it just postpones you being aware of it, which is perhaps even worse.

      if you want true protection in market crash, you find the right proportion to allocate in investment grade/sovereign bonds, NOT dividend stocks, REITS or high yield junk bonds as they’ve done (which are all just as risky as equity positions, and why their portfolio “surprisingly” to them moves much more like an 80/20 position than a 60/40 one)

    2. In your case, you don’t need the Yield Shield because your pension will cover your monthly expenses without dipping into your savings when the markets are roiled. For those of us who will be living on our portfolio, we need a plan for times when the markets are down, to avoid ruining the returns we are depending on. The yield shield is one approach, CD ladders is another, and some folks plan to use bonds when the market is down. But someone with a strong pension income, already has their monthly expenses covered.

  16. Hello! complete noob here. I literally just started going through the workshop 2 weeks ago and now this happens, but i am actually quite excited due to the possibilities. Heres my question (which might be answered down the road in the workshop, i dont know…) should i stick to index etfs all the way as per your book, or should i split some of the cash and go and buy other stocks such as airlines and take a gamble?

    1. Duuuuude. Appreciate you joining the convo.

      Be reminded of the words of the godfather, JL Collins, “only 10% of professional money managers beat the market on a given year”. Professionals! 10%!

      Agree with JC Webber III. Resist the urge to pick winners. Your friends might start bragging about some great returns doing it. Keep in mind gamblers never talk about losses. In the long run the math supports ETFs.

      And yes, I’m practicing what I preach right now.

      VTI – Total US Equity Market
      VXUS – Total Int’l Equity Market Ex USA
      BND – Total US Bond Market
      BNDX- Total Int’l Bond Market Ex USA

      All you need.

  17. This Yield Shield stuff is all wrong in how you see it as a protection from market crashes. You know your stock falls by the same amount as your dividend pays out right? i.e. stock worth $10/share paying $2 dividend now has it’s stock price fall to $8.

    So you are effectively still “selling” when the market falls as you’re still reducing stock position for cash. The yield shield isn’t magically protecting you from anything other than being an artificial psychological barrier you’ve set up to postpone looking at bad news (i.e you’ll wake up to it when your dividend stock prices have cratered and now can no longer pay the same cash you want).

    That’s fine if it works for you but it’s not responsible spreading that type of irrationality of sticking your head in the sand as sound investment advice

    1. The point of the yield shield is to have it in place when you retire, before the market falls, so you’re not selling shares when the market is down (unless to rebalance your portfolio). Moreover, the dividends will cover most expenses during good times and mitigate sequence of return risks; and during bad times the cash cushion is a safety net so you can reinvest your dividends into the lower market prices.

      1. I understand the idea they’re pushing. what’s lost on people here and with the authors is there fundamentally is no difference between selling shares in a down market or receiving dividends in a down market. in both scenarios you are reducing your overall stock position for cash but just done by a different form.

        for people who claim to love “mathing shit up”, they should be able to see the equivalence. yes, selling shares for cash means you have less shares going fwd. BUT receiving a dividend in a crash ain’t any fundamentally any different. sure you will have the same amount of shares by receiving a div, but now those shares are worth less because your stocks have fallen by the same amount of cash it paid out.

        in both scenarios, the VALUE of the stocks is the same (if trying to generate the same amount of cash through stock sale) even though share quantity is different. number of shares is just an arbitrary number anyway when all you care about is how much $$$ those stocks are worth

        true protection from market crashes comes from less volatile assets. not by receiving dividends that simply allow you to cover your eyes from market carnage for a little while longer. you would wake up to the crash when the same dividend yield of 4% applied to the now much lower stock price is much less cash than you expected to receive

        1. You really don’t understand investing, do you? Don’t worry, I’m not going to explain the As, Bs, and Cs of it. I have a suspicion it would be a waste of my precious time.

          1. I apologize for glossing over the point and going over your head. I give credit to the authors for doing a great job at getting people to consider alternative lifestyle choices. but a couple bad ideas may very well work for them but passing it around as solid investment advice to the uninitiated is imo setting many ppl up for an eyeopener

            even for themselves, they were shocked when their “conservative” 60/40 portfolio moved double digits in 2019 when it was only supposed to be single digit moved. that’s because the fixed income side was filled with volatile assets by trying to chase high yield assets like div stocks, reits, high yield bonds for this impenetrable yield shield

            1) a dividend is effectively a “forced sale” of stock. there is no difference between selling shares or receiving a dividend other than the fact in one case you choose how much money to reduce your stock position by in choosing number of shares to sell whereas in the other, the company chooses it for you by choosing how much less each share will be worth in setting their dividend to pay out. same ends by different means: reducing stock position for cash

            2) holding risky assets like dividend stocks,
            REITS and high yield junk bonds in fixed income allocation meant for portfolio stability is counterproductive even though yes, they provide income. chasing yields in fixed income allocation means you’re taking on the same risk as equity anyway and your portfolio is nowhere near as “conservative” as you think it is

          2. And with respect, I’m an early retired ex-investment banker, so I’m really not bothered about trading barbs online about “understanding investing”. Just want people here to step outside the yield shield nonchalance echo chamber a bit to see risks that they may be overlooking, including the authors. Knowing where your risks are is probably the most important part of investing. The authors pride themselves on thinking outside the box and being critical about accepted norms, so let’s try not to parrot the same concepts without scrutiny here either.

            1. You’re 100% right. Stock dividend distribution is just a forced sale. You explain it better than me. It took me a long time to wrap my head around this because the psychology behind this is so compelling and people fall for it. Total return is the way to go.

              1. Interesting topic. I am not convinced. Here is my logic – please show me where I am wrong.

                Pre crash I have a stock with the following characteristics:
                Stock Value = 100
                Cash = 40. Equity = 60.
                It pays a dividend of 2 from cash meaning that
                Stock Value = 98
                Cash = 38. Equity = 60.

                Now let’s assume that the market crashed by 50% just before the dividend was paid. So that:
                Stock Value = 50 . (100 *.5)
                Cash = 40 . – No cash was lost
                Equity = 10 . (60 pre crash-50 equity lost in crash)
                We still pay a dividend of 2 so now we have
                Stock value = 48
                Cash = 38
                Equity =10.

                In both cases – pre and post crash – the dividend of 2 reduces the value of the stock by 2.
                Why is it relevant whether the stock crashed or not?

                1. Let me try to break this down

                  Here’s a comparison of two portfolios, each made up of a single stock, for a simple example. One stock pays dividend of 4% for your yield shield allowing you to not sell in a market crash. The other doesn’t and you have to sell.

                  For both we have a Portfolio value of $1,000,000 and you need $40k a year for expenses.

                  Portfolio 1

                  1. Consists of one stock that does not pay dividends, Stock A which trades at $100/share and you own 10,000 shares for a portfolio value of $1,000,000.
                  2. Market plunges 40%, Stock A drops from $100 to $60/share. Unfortunately, you still need to sell stock even though it’s crashed to generate $40k cash for your expenses
                  3. You sell 667 shares at the now tanked price of $60/share for 40k cash
                  4. Your portfolio now consists of 9333 shares of Stock A (10,000-667) worth $560k roughly (9333 shares x $60/share)

                  Portfolio 1 Result: You are left with 40k cash in hand from stock sale and a portfolio of 9333 shares Stock A, worth 560k

                  Portfolio 2

                  1. It holds one stock, Stock B that pays 4% dividend which acts as your yield shield. It also trades at $100/share, you again hold 10,000 shares for a $1,000,000 portfolio
                  2. Stock B declares it will pay $4/share dividend as expected which gives you the 40k you need for expenses.
                  3. Market crashes 40%, stock price falls to $60/share. Being a yield shield investor, you’re not worried about having to sell as you have the $4/share dividend coming to pay for expenses. You keep chillin’ at the pool while the rest of the world burns.
                  4. Stock pays out it’s $4 dividend and (here’s the kicker) the share price always automatically falls by the same amount it pays out: Stock price on ex-dividend date falls from $60 to $56/share.

                  So now you receive the dividend needed to cover your 40k expenses and are quite smug that you didn’t have to sell anything on the downturn, keeping your original 10,000 shares intact waiting for the recovery to sell them.. Except those shares are now worth $56/share for portfolio value of 560k

                  Portfolio 2 Result: You are left with 40k cash in hand from the dividend and a portfolio of 10,000 shares Stock B, worth 560k (10,000 x $56/share)

                  This is EXACTLY THE SAME outcome as Portfolio 1. Both portfolios have a post market crash portfolio worth 560k and you have taken 40k cash from them. Even though Portfolio 1 sold during the crash and has less shares and Portfolio 2 is “protected” by the yield shield. Point being, number of shares is an arbitrary figure and what’s important ultimately is how much are those shares WORTH.

                  To be clear, it’s definitely good advice not to panic sell in a market downturn. What’s lost on most people is that the dividend is really just a “forced sale” of stock since the stock price falls by the same amount it paid out (even if you didn’t have to press “sell” on your brokerage app). Even more, the company decided for you how much to reduce your stock position by in choosing the dividend amount, not you. Seen like this, it’s just mental gymnastics to think about it this way.

                  As for the yield shield simply postponing investors from realising the impact of a market crash? While you got your 40k this year to live off, it’s prob unlikely that the post-crash $560k portfolio of Stock B can keep paying out 40k/year in dividends like it could when it was worth $1,000,000 and next year’s dividend will likely be reduced leaving you pinched for cash.

                  A last major problem of the yield shield approach then is filling up your fixed income allocation with volatile assets, chasing for higher yields in dividend stocks and REITS as good old boring investment grade bonds (not the high yield junk kind) don’t pay out enough for your liking.

                  Hope this helps some people see it differently and spark some thought/discussion.

                  1. I think we are agreeing with each other. The outcome is unchanged whether the market crashes or not.

                    If a company does not change its dividend policy and you were going to take the cash anyway to live on then the fact the market crashed is irrelevant.

                    There is an implicit assumption in FIRE generally that the market always recovers so the dividend will be maintained (or at least soon recovered.) . Whilst this has been the history of US markets this has not always happened elsewhere. Japan is always held up as the poster boy for this but in the UK too the FTSE100 is well below the level it was in 2000.

                    1. Right … you’ll likely get your expected dividend still for this year, but that’s what I mean about postponing the impact from the crash.

                      And a key point I’m making is they think it’s so different that they’re not “selling” in downturn when in fact, their outcome and position is exactly the same as someone who would’ve had to sell shares in the downturn. It’s all jedi mindtricks to look away from the crash thinking you held the same shares through the storm when the math does not bear that distinction out.

                    2. All this to say, true protection from market volatility is not dividends for a yield shield but rather boring investment grade bonds that don’t bear such capital risk, albeit at the expense of taking on lower yield. Chasing yield invariably makes your fixed income allocation act more and more like an equity one

  18. Over the long-term, “dumping everything in the market” beats dollar cost averaging. If you believe in the long-term viability of the stock market, you should have already put “everything in the market.” Over the long-term, it is “time in the market” that beats “timing the market.” Today is a better day to go all-in then tomorrow which is a better day to go all-in then the day after tomorrow which is a better day to go all-in then two days after tomorrow, etc.

    The reason to hold cash is not to wait for a better buying opportunity. The reasons are because you need the cash for some reason or you want to reduce the volatility/risk associated with your portfolio.

    1. Yep, Time in the market is better than timing the market even if you lump summed at the wrong time because you just don’t know.

      I get irritated when some tout index investing and long term and then get scared and talk about timing the market when things are bleak.

  19. These are some great advices for your readers! To give some perspective, we do check our portfolio on the first day of the month to keep a tab on our overall investment (we like updating spreadsheets) and we (virtually) lost ~$100K USD in February. We won’t be surprised if we lose as much (if not more) during our next review. That being said, we have passive income through our Yield Shield and some real estate that won’t let us break a sweat. At this point, we are still plenty more money than where we pull the trigger in 2018 so it is definitely not the time to panic for us. Lastly we decided to keep some cash on hands and we might considering redeploying it slowly the stock market gets back to a better level (aka 2018 :D).

    As for CoV-19 though, we did have to update our itinerary as we were planning to visit both Japan and Italy in a few months. But since we live a nomadic lifestyle we have the great flexibility to travel wherever we want so the only thing that we need to do is to spend a few hours to find a different place to visit and update our plans accordingly. We are sharing more details on this if you are interested: Though life, right? 🙂

  20. Not a black swan…..only for the fact that many(most?) people have been predicting a black swan for a year plus. If one is predicting a black swan, then when it finally occurs it’s not a black swan because we’ve been expecting it.

    I’m now so incredibly cynical that the only thing I would put in the “black swan” category is something like an alien invasion, the Rapture, or some similar supernatural phenomenon causing upset to the markets.

  21. Hi,

    I am new this year to DIY investing, I have tough been investing for over 15 years. I have a question if anyone could help me.
    I have been watching the market closely and from day one that it started to yoyo up and down I have been working extra hours and trying to save everywhere I can to invest even more. I normally invest twice a month, on the 3rd and 17th, but since have started to to put money every week. I don’t really time the market but I have placed myself a budget for every week and have place money in when it seems to be low.

    My partner is American but has PR and is in the process of getting his Canadian citizenship. He has made himself a Questrade account but was waiting to get his citizenship to fund the account as he doesn’t want it to be under his American SIN. Has he has also been watching the market he is getting frustrated as he would like to start investing but probably wont be able to for another month or so as a Canadian. Is there a way for me to invest for him without it affecting my taxes? could I invest for him in my account TFSA and when he finally opens up his account transfer it over or something? I am aware we would have to keep track of the price and units we bought but is it possible without affecting my accounts if I still have space?

    1. Hi Mel,

      Just remember that if your partner has more than $10,000 in any of his account he has to mention that in his US taxes. Plus when he files FBAR with his taxes he has to mention all the account under his name.

  22. Today has been one of those moments where you look at the drop in your portfolio and second guess whether this thing will ever recover. We all know that it has to… right?

    1. Of course it will. It always does. Billions of people are on a life’s mission to drive economies up on a daily basis. The whole of humanity will work tirelessly to ensure that it recovers. Keep the faith.

  23. Hi, i am planning on investing as usual every 2 weeks. But my portfolio is out of balance now. Should i sell to rebalance or just buy in my most needed category? Generally the amount i invest every 2 weeks is enough to keep my portfolio in balance, but not right now.


    1. No. Rebalancing is valuable in part because it forces you to buy low and sell high. Things are too volatile now. I’m out of balance too, and was even before this madness. I am working towards balancing through my weekly contributions. I have intentionally bought only equities during the downturn so far.

  24. Basketcase, prompted by your account, I’ve just read about the dividend fallacy and you make very interesting points. I’m a little embarrassed that I studied Finance and didn’t fully understand the psychological accounting of this. In my defense I never worked in finance and I’ve been out of school for almost 13 years (and have a poor memory. See also my website below).

    Question for you, what is the relationship between the immediate drop in the stock for an individual dividend payout and the fact that the future stream of dividends is also part of the stocks value? I’m guessing that the present value of the future dividends theoretically become equal to the value of the dividend when the payout date arrives. Are there any other considerations that impact the theoretical dollar for dollar trade off between stock value and dividend value.

    1. Discounting present value of future dividends to get to present day stock price really boils down to a growth projection on the company and valuations.

      The drop in stock price of the same amount as the dividend paid is a much simpler accounting reality. If you gave away 100k to charity your net worth would be 100k less. It’s an obvious reality that for some reason we don’t naturally apply to companies when they also “give away” cash. Here, the company paid out cash, so the book value of assets the company owns has decreased by the same amount. You being a shareholder and owner means each stake you had in the company is also now worth proportionally less. Thankfully you’re also the recipient of the cash, so no net gain or loss. But it’s a lot of mental gymnastics to consider it in the yield shield way imo.

    2. To be clear too, there are many factors that of course go into stock price on any given day. Earnings reports, coronavirus news, ceo accounting scandal, etc. The drop in company assets value from dividend payout is but one of those in the mix that determines the share price so it’s likely you won’t see it just fall by it’s dividend price with all these other variables at play too. But if you had a perfect bubble that’s able to shield stock price from all other factors affecting it, then yes, it would simply drop perfectly by the amount of the dividend paid.

  25. Hi all,

    The dividend investment approach gives one the peace of mind regardless of the market condition. If one is not comfortable with the generated dividend being able to cover the annual expense, he/she can take the following actions:

    a) Reduce the expense.
    b) Get a part-time employment to cover the gap between the expense and generated dividend.

    The above actions do not require one to be under the mercy of the corporate overlord. I think that it is also good for one to have some side gig if he/she desires to do so.

    My two cents worth of views.


  26. I feel bad for those who either just retired and haven’t transitioned out of stocks yet, or those who were close to retiring and are having to reassess. With that being said, the market was hugely overdue for a correction.

  27. yikes, i guess this experiment of FIRE has been humbled


    real estate, brick and mortar…walls to live in , tired and tested and looking real good now, yet again

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