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One of the nice things about being sequestered away in Greece for two weeks was our rather serene and much appreciated seperation from the daily news cycle. For two weeks, we were completely sheltered from the day-to-day shootings, terrorist attacks, and whatever the Hell Trump said/did/Twittered that day, and I gotta say, it was awesome.
So it was a with a great deal of trepidition that I returned back to the real world last week and turned on my phone again. And as I feared, I got inundated with emails like this.
“OMG, are you seeing what’s happening in the stock market?!?”
“I’ve been reading your Investment Workshop, but is this still a good time to invest? Everything seems so unstable right now!”
“I’m so scared right now. Should I sell everything?”
So still smelling like Ouzo (it was such a CRAZY two weeks, you guys), I frantically pulled up my news feeds to figure out what everyone was panicking about. And as soon as I did, the headlines blared out at me in big black-and-white typeface.
Worldwide Stock Markets Drop 10%!!!
My reaction?
YAWN.
Seriously, people. Yawn.
A 10% correction is not something to panic about. Especially one in which the US jobless rate is at a record low, the economy is expanding, and the Fed is raising interest rates because they’re afraid of the economy expanding too fast.
I know everybody wants a simple rulebook for what to do in a time of crisis, and most of the time a simple rulebook doesn’t exist. But in the narrow case of investing, and specifically investing in low-cost Index ETFs, there is actually a simple rulebook.
When stock market crashes happen:
- The WORST thing to do is SELL.
- The OK thing to do is HOLD.
- The BEST thing to do is BUY.
Why? Because the Index can never go to zero. It’s an aggregate of all successful companies in the stock market, and even if an individual company goes bankrupt, the Index never does. Because the Index is market-cap weighted, as companies shrink into oblivion, they get sold and pushed out. And as other companies expand and grow to take their place, they get bought and brought in. The only way the Index goes to zero is if all companies in the US go to zero. And if that ever happens, your retirement portfolio will be the least of your worries, because the aliens will have invaded, as depicted in the documentary below.
But, I’m Scared!
OK, let’s take a moment to deal with something we all feel at some point in our lives: Fear.
Don’t get me wrong. Fear is healthy. Fear is good. Fear keeps us from running into traffic or confronting angry grizzly bears. But sometimes, fear holds us back.
Every successful investor has had a moment of pants-shitting terror. Of seeing their hard-earned money lit on fire, and then flushed down the toilet. Every investor has had a moment in which their finger is hovering over the “SELL ALL” button, every instinct telling them to take what was left of their money and run.
We should know. We were those people.
During the years of 2008/2009, in depths of the Great Financial Crisis, we were faced with that exact dilemna. We had money in the stock market (or at least, in a 60/40 split of the stock market). Our savings were evaporating, and we were panicking. During that time, I distinctly remember putting $1000 into our investment accounts, and then having the stock market drop so much that the next day that $1000 had vanished. It was like that South Park cartoon. You put in money, aaaaand it’s gone.
And during that time, the news was crazy. Lehman Brothers had just declared Chapter 11. Entire countries like Iceland were going bankrupt. Capitalism, as a concept, was on the verge of collapse.
And yet we didn’t hit that “SELL ALL” button.
Why? Were we brave? Were we courageous? Were we smarter than everyone else?
Hell No!
We were just as scared shitless as everyone else!
So why didn’t we hit that “SELL ALL” button? I distinctly remembered every cell of my body screaming at me to do it.
Because we realized two things:
- If this crisis is literally the end of the world, it doesn’t matter what we do. Again, who cares about our retirement portfolio in a post-apocalyptic Mad-Maxian world?
- But if this crisis is just temporary, then we should buy. Because then we’re buying stocks at the greatest discount anyone has ever seen.
After a few tense minutes of finger-hovering, I moved my mouse cursor from the “SELL ALL” button and towards the “BUY MORE” button. After a few deep breaths, I clicked. And two weeks after that when we got our next pay-checks, I clicked it again. And two weeks after, I clicked it again.
We continuously bought into the falling, cascading disaster that was the stock market in 2008/2009, and as a result of that, we ended up making all my money back just a year after the Great Financial Crisis started. We didn’t lose any money during 2008/2009. I don’t think most of Wall Street can make that claim.
The Test
So what does this story have to do with you, the reader staring at their 401K dropping like a stone every day?
Simple.
Here’s the truth.
Investing in the stock market using low-cost Index ETFs is simple, but it’s not easy. I mean, when stock markets are just rising every day it’s easy. But when it’s plummeting, that’s when you figure out if you have what it takes to do this.
Index investing requires you to lower your fees, buy ETFs that track the various indexes, and rebalance periodically.
That last part is super important. Rebalancing periodically means that when stock markets rise, you sell some of it to buy bonds. And when stock markets plop like they’re doing now, you sell some bonds to buy equities.
It’s also incredibly hard to do, and completely counter-intuitive.
People rush to buy things that are going up without end, because they fear being priced out forever so they’d better buy now or buy never. That’s what’s been happening in Canada’s housing market.
People also rush for the exits when things go down in price, because they fear that all their money is going to go up in smoke. That’s what’s happening on the stock market right now.
Those people in both camps, by the way, will never become rich. They chase things that are expensive and shun things that are cheap.
Becoming a successful investor requires you to do the opposite. Buy things are are cheap, and sell things that are expensive. Buy low, sell high.
In fact, if you’re still in your accumulation phase you should be jumping up and down from joy because now you’ll be able to pick up stocks that are on sale.
And if you’re retired like us, you should have your Yield Shield ready to go and your Cash Cushion fully funded so you won’t be forced to sell assets to fund your living expenses, and you should be ready to pack up and take advantage of Geographic Arbitrage to reduce your living expenses by moving to a low-cost locale like SE Asia, Mexico, Portugal, or Eastern Europe.
Like we always say, “If shit hits the fan, we’re going to Thailand.”
So to all the people asking me whether the recent stock market correction scares me, the answer is of course not. We’ve been much worse than this before, and we still made it out alive. We know what worked last time, so we know exactly what to do.
The question is, do you have what it takes to do it too?
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Another great post! I love that I can hear your actual voice now… 🙂 Let me know when you’re back in Europe.
Hey Reina! They are awesome aren’t they! Alan
We’re going to be in Europe for the rest of the year. And it’s so great that I can hear YOUR voice too 🙂
Miss you already!
I just came back from Georgia (the country) and it is great and so cheap, you should visit.
Mmmmm….
suddenly I hear voices in my head….
Ha Ha! Hopefully that’s a good thing… 😉
I hit the “SELL ALL” button.
On VBTLX.
And it all went right into VTSAX.
(•_•)
( •_•)>⌐■-■
(⌐■_■)
YEEEEEAAAAAAH
Aaahahaha it took me a few minutes to figure out what you were drawing with that ASCII art but now that I figured out it’s a David Caruso from CSI:Miami it’s my new favourite thing in the world.
YEEEEEAAAAAAAH!
Yeap, wake me up when it’s down 20%. A 10% drop is nothing. If you can’t stomach a 10% drop, then you really need to reassess your risk tolerance. It’s okay to rebalance to a lower stock/bond mix.
I went through the Great Recession and the Dot Com bubble. These 2 drops conditioned me to invest more when the market drops. That’s why everyone needs to invest as early as possible. So you learn how to deal with the drops.
Yeah when you have a 3.4 million dollar balance a 10% drop is a lot of money!!!!!…. might not be able to buy my Tesla now so pissed with this market crash….and I have to start cutting back on eating out…. I hate being this poor
I can’t tell whether you’re actually panicking or being sarcastic.
I’d have troubles sleeping if my balance was as low as $3.4 million too. Anything under a deca would get me putting my nose to the grind stone again.
82, 89, Dot Com, 2009, and 2012… Joe, I got you beat… the problem is people live in this microcosm, called NOW… Can somebody please tell them, “It doesn’t keep going up forever, and never has, corrections happen, and you need to be prepared for them…”
That is why i have rebalanced all my accounts, even the long term Retirement Portfolio to about 60/40, and short term “cash cushions” to even less than that. I do still have some Nasdaq I want to convert to decrease risk, but perfectly ok with the state of the Market.
spaceman
Maybe my money was harder to get than your guys because honestly I was just reading rootofgood saying he lost 200 THOUSAND dollars last month. This is more than I can save in a decade !
I think investing is definitely not for me. I would kill myself if I had lost 200 grand in a month !
I don’t think you should look at the absolute number but rather the percentage! I think it would be tough if you fixated on the loses. We just ignore it and then at the end of the year it is nearly always up
Absolutely. See, Alan gets it 🙂
MISS YOU GUYS.
Oh I hear that. Now that we’re millionaires a 1% move in the market is 10 THOUSAND dollars! And those kinds of moves happen regularly.
It’s kind of a rite of passage in joining the millionaire club. If you can stomach those kinds of fluctuations, you’ll make it. But if you can’t, you won’t. There were people at Chautauqua saying they had just lost $100k that week, and then laughed and poured themselves another drink.
Balls of steel, man.
Ryanolds: RootofGood didn’t lose anything. Their portfolio value just temporarily dipped by $200k.
It’s like being on a rollercoaster except that at the end of the ride you are at a higher point than when you started, but boy, were there some stomach churning dips along the way.
the mistake i see is not raising cash/rebalancing when the market is roaring up. people get greedy and undisciplined. substitute bond or preferred for cash in that sentence if you like. you can rebalance manually within a percentage range and it’s not too hard. i can also remember deploying all available cash on the first 10% drop and watching the market go down another 40% in 2008. oops. that really wasn’t rebalancing on my part back then. that’s also why i’m a fan of funding retirement accounts steadily when working vs. the lump sum approach in january every year.
You know what, me too. I’m glad I had a steady paycheck during that crash in 2008/2009, because it forced me not to time the market. If I was sitting on $100k trying to call the bottom, I’d have freaked the fuck out.
I rebalance the same way I invest, with a Dollar cost average approach, and like you Freddy I adopted this when the dot com hit, and I bought down… bad mistake. its like this…
You rebalance from time to time, and now have a nice cash cushion. Mr Market drops… you don’t panic you wait… you look at the 3 and 6 month average… if and only if they are both even, do you Start to rebalance back into equity. Set your amounts, usually divide your cash by 6 equal payments, one every 2 months… Your buy up, you buy down, and usually within the year, Mr Market is stable again…
does this make sense?
spaceman
I actually sold up my investment assets a few months ago and invested my $100k on Firecracker’s advice a little every month in ETFs while keeping rest in bonds/cash. Therefore my losses are minimal at this point. Waiting for at least 20% correction before I start increasing my equities stake.
Yeah, when markets go haywire we always advise people DCA in for exactly the reason you’re seeing. Good for you! Keep it going!
I’m with you. A 10% drops is piddly-cakes. I barely get interested when food is 10% off at the store, so it’s hard to get too excited when the other market has a price drop of 10%.
So right now I’m cheering for an even bigger drop!
With over $600k in cash and cash equivalents, we sleep pretty well at night.
You have $600k in cash? What was the methodology you used to decide how much to keep in dry powder?
Just checking. If you’re about to FIRE, your template is a 60% equity, 40% bond portfolio with a separate 3 years in cash, right?
e.g. If you need 40K/year, you FIRE with a $1 million portfolio at a 4% withdrawal rate, plus (40K-dividends)*3 in some sort of savings account.
It’s not fun FIRE-ing into a sequence of returns risk, even if you know that’s part of the deal.
You got it.
And no, it’s not fun. But it is part of the process.
?? Wanderer, you crack me up…I think if you still smell like ouzo, I must smell like wine and dessert! Party in 204! In all seriousness, we keep telling our friends to relax and buy more! We’re done accumulating, but we won’t panic, because “Two somebodies” I recall recently told us “Uh you guys can do whatever the hell you want.” ?
Oh God, I still can’t get the smell of black licorice out of my clothes.
And you guys can do whatever the hell you want. I stand by my assessment.
Spot on, Wanderer! If a 10% correction has folks running for the exits, they need another “hobby.” I maxed out my 401K during the great recession. Buying during that fire sale allowed me to retire about five years earlier than planned. 🙂
Even though retired, IRA withdrawals are purely discretionary (mostly used for bigger, one-time buys and larger travel events). We have cash and cash equivalents until we file for SS later (and then, if we’re around long enough, we’ll have to take those pesky RMD’s). 🙁
As Jim “The Godfather” Collins would say, a big-ass 401K and RMD’s is a problem, but it’s a pretty awesome problem to have 🙂
Well, somebody has to pay for those aircraft carriers. 😉
yeah im real happy they are crashing! good grief
if we get a 2008 i assure you NO ONE will be happy
This is going to take every ounce of resistance against my learned behavior. But it’s got to be done. Genius is the opposite of expectation as said by the founder of TED.
That’s an interesting quote. I’ll have to use it sometime.
This is perfect timing for me. Almost, at least. I’m about to be in a position where I can restart regular after-tax investments into the market (meaning actual deposits of new money rather than just dividend reinvestment).
I just hope the market can hold off crashing for, like, a month or two. Gimme a moment to get ready, Wall Street!
Sincerely,
ARB–Angry Retail Banker
So…is the stock market going to go back up or is it going to continue down? I mean, is this a good time to get in or should I wait?
LOL JK. I’m buying no matter what.
*stock market crash five* You’re getting some good deals, my friend 🙂
I get very mad at these comments about tax-deferred accounts that we Nonresident aliens can’t have. As usual we’re behind of americans in terms of returns!! !!! uhhhh!!
Don’t you have similar accounts in your home country?
I think I remember reading that you guys didn’t like auto rebalancing ETFs, like vanguard growth 80/20 stock/bond.
Which takes the emotion about making sure we rebalance portfolio.
I don’t like paying for something I can do for free in 5 minutes.
I must confess I giggle when you guys call yourselves “millionaires”. Not that you are not. You are. When I grew up a million dollars made you wealthy but not nowadays. The irony of a “millionaire” pinching pennies all over the world makes giggle every time.
I have seen other bloggers in real estate call themselves “millionaires” too when half their “million” is mortgage debt. That I don’t find funny. It’s more akin to fraud.
Yes, sitting on beaches and going to spas all over the world is pretty hard. So much deprivation.
Continue doing what you’re doing though. I’m sure being stuck in a cubical prison is MUCH better.
Are the market really crashing? I just got my paycheck and the S&P500 index is more or less at the same price level than past July. Very disappoiting.
That’s good perspective to have. It just FEELS like it’s crashing because of the recent -10% peak-to-trough movement in price, but yeah you’re right from a longer-term perspective it’s just a blip on an upward trend.
One of the best things that has ever happened to my personal finance life is finding your blog 3 months ago. I started following your investment workshop shortly after, and when someone posted in a FI FB group I’m in that there was a 10% correction recently, my first reaction was literally “Alright! A sale!!!”, and I have literally upped my savings rate from 60 to 70% since the dip, just so I can buy more.
So, I guess I want to say THANK YOU for being so generous with the info you freely share in this blog. I couldn’t have gotten the courage to take the reins from my overprized big bank mutual fund financial adviser.
Thank you!
Cindy
P.S.: It is a rabbit hole though, and once I found you guys, I found all the others in this very generous FIRE community – the blogs, the books, the podcasts, you name it, I’m hooked. It’s all I can do not to talk about the path to FI endlessly, and my head hurts a little honestly. Every day, I learn a little bit more…
A great reminder; one I could have used about a week earlier when my indexes were down 10% and weed 40%.
But I threw on a YouTube clip of monks hymning, closed my eyes for 5 minutes and regained my senses. Threw more money in to Questrade to take advantages of the sale prices and am now smiling today at the rebound and trusting the system.
I gotta know, how does it feel to return to retirement from a vacation? (哈哈)
Hi Colby! Nice to hear from you! How’s South Korea treatin’ ya? And yes, it’s awesome to return to retirement 🙂 It’s a hard knock life, I know.
I’m actually in China now. Saving 2-3x as much as Korea per year (~80% of salary) and have 2-3 months vacation. So this is the long term play FIRE set for 2030. Would love to do a follow up guest post if you’re interested. Cheers! 再见!
I really like your analyses of the role of fear and how sometimes it is useful but other times it is detrimental.
In the book “The Rock Warriors Way”, author Arno Ilgner talks about there being two kinds of fear: Rational fear and irrational fear. Learning to distinguish between the two, and to respect the rational while consciously building your tolerance to the irrational fear can greatly boost your performance. His book is about rock climbing, not investing, but I think the concept applies here too.
Cheers!
I think part of the fear is that each major crash is different. The 2008 crash was basically swept under the carpet by QE and near ZIRP, but what about the next one? Many think that it will be too big to be dealt with in the same way and may lead to things like capital controls like we saw in Greece or, heaven forbid, currency collapse. These things may sound a bit OTT, but I don’t think they’re beyond the realm of possibility given the amount of debt that’s built up in the system. In my humble opinion, it pays to be remain optimistic, but cautiously so.
Great post. Emotion is such a strong thing, and it overpowers logic all too often. That’s why when my wife and I began investing, I insisted we write up a short list of guardrails for ourselves. This was a list of affirmations and instructions for ourselves. It’s easy to make a verbal agreement with yourself and back out of it later. Writing it down makes it more real, and looking at it reminds frantic you that cool-calm-and-collected you had your back and made rules for exactly this occasion.
Making and keeping money is counter intuitive.
Be fearful when others are greedy and greedy when others are fearful- Warren Buffet
Markets crashing are music to the ears of those with cash on hand.
10% isn’t a huge discount, however. That’s not getting people out early to shop Black Friday.
I’m happy if we dip more and I get to buy on the cheap, but also if we take the stairs up a while.