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On Thursday, March 12, the US stock market entered a bear market.
A bear market, which is defined as a 20% drop in the stock market, officially brings to an end the longest bull market the world has ever seen. And it was caused by this.
President Donald Trump said Wednesday he was sharply restricting travel to the United States from more than two dozen European countries, a drastic step he framed as an attempt to contain a spreading public health crisis that has engulfed his presidency.
Donald Trump’s sudden announcement that he was unilaterally banning all flights from Europe sparked a massive 2353 points drop in the Dow. This was the single largest point drop in the Dow’s history, easily eclipsing the previous record of 1464, set only two days previously.
Thursday was also, more importantly, the single largest percentage drop in the US stock market since Black Monday in 1987. It did rebound the next day, but that doesn’t change the fact that the bull market we’ve all been enjoying in the stock market is officially over.
So here we are, in a technical bear market. One of the longest running and most persistent criticisms of the FIRE movement is that the only reason all of us have been able to retire is because we’ve been in an almost endless bull market for the past decade. So were they right? Is our retirement screwed? Before we answer that, let’s delve first into how we got here.
Why You Should Worry
In short, COVID is now a global pandemic, and that’s a big scary thing. The ease of international air travel means that diseases can spread across the world in a manner of days, and once one person has it, local person-to-person transmissions means that local outbreaks start quickly. If the case isn’t quickly caught and quarantined, one case becomes two, then two becomes four, and pretty soon it starts to spread out of control.
Of particular concern are those of us with underlying health conditions, or those of us who have elderly parents. All of us should be practicing frequent hand washing, practice proper sneezing techniques (into your elbow, not on your hands), and avoiding large gatherings. But if you’re in a higher risk group, or your parents are in a higher risk group, you have to be even more vigilant.
Luckily, children have mostly been spared. And for those of you who are struggling to keep you kiddos occupied at home due to school closures, here’s a helpful article from our friend, Jennifer Miller, a WorldSchooling mom.
Why You Shouldn’t Worry
So with that being said, is this a potentially world-ending event that will bring about the apocalypse and the end of civilization as we know it?
In short, no. Not even close.
I must admit it’s a little strange seeing how the US and European governments are reacting to this virus. We’ve been travelling in Asia since the beginning of the year, and reading the news from Western media outlets feels a little like being in a time machine. Because everything the West is feeling now, all the fear and all the panic, that was what it was like being in Asia two months ago.
Back in January, when this coronavirus was some remote and distant problem for the West, we were watching as the virus spread right to our doorstep, and the panic back then was so thick we could feel it all around us.
The biggest shock to me watching all of this, however, is in the fact that despite the US and Europe having a full 2 months heads-up to prepare, those governments still got caught by surprise. No test kits or masks were stock piled, no contingency plans were drawn up. In fact, as of right now in the US and the UK, there’s massive confusion about who can get tested and whether test kits are even available. The situation is identical to what was going on in Wuhan in early February.
However, that comparison is the biggest reason why you shouldn’t worry about the world ending. Because in Asia, the coronavirus has been brought under control.
In China, the government made a huge mistake when they suppressed early reports about the disease, but you might be surprised to hear that life in China has mostly returned to normal. Quarantines have been lifted, business have been reopened, and people are (cautiously) returning back to work. New cases in China have dropped to about a dozen a day, and are pounced on right away to keep the disease from returning.
Other countries in Asia like Thailand and Vietnam are also dealing with it rather well. And Singapore’s response was so effective that it’s being hailed as the gold standard for other countries to replicate.
The most interesting data point in Asia is in South Korea. South Korea got hit hard by the coronavirus in February, and their government responded by ramping up their testing game big time. Out of all the Asian countries that have dealt with this, South Korea tested the most people per day than any other, even going so far as setting up drive-through testing stations where people could go get tested on their own and have results back in minutes.
Because of this, South Korea has the most accurate mortality data on this disease out of everybody. And what they found was that the actual mortality rate is not 10%, or even 2-3%. In fact, it’s less than 1%. If you’re below the age of 50, it’s somewhere between 0.1% and 0.4%. Oddly enough, if you’re below the age of 10, the mortality rate is 0%.
So while COVID feels like a big scary thing right now to readers in the West, what we now know in the East is that it can be contained. If Western governments simply copy what worked in Asia (and especially South Korea and Singapore), this will all be over in 1-2 months.
Does FIRE Still Work in a Bear Market?
So going back to original question: Does FIRE work if you’re in a bear market?
In short, yes. But it isn’t going to be fun.
CNN has a gauge of investor sentiment on their money page that oscillates between “Extreme Greed” and “Extreme Fear.” Right now, it’s pushed all the way to the left indicating “Extreme Fear.” But my own personal fear level? Close to zero.
Our Yield Shield is in place, and churning out dividends and interest exactly as it was designed to. We have our 3-bucket Cash Cushion strategy (which we describe in our book Quit Like a Millionaire) full to the brim and ready to provide us with years of buffer. And despite all the craziness with the travel industry right now, we will always have Geographic Arbitrage, which we can use to reduce our living expenses without sacrificing a thing whenever we need.
I recently put our portfolio and forecasted spending into FIRECalc, and it spit back a success rate of 100%. I rather like those odds. So we are good to go, and ready to weather this financial storm however long it lasts.
And to people who are still building their retirement portfolio, this is gut check time for you.
Our friend and mentor J.L. “The Godfather” Collins has this quote that I absolutely love, which is that you don’t know what kind of investor you are until you’ve lived through your first market crash. I’m going to add to that sentiment and state that you don’t know if you have what it takes to pull off FIRE until you’ve lived through your first bear market.
FIRE has been gaining a lot of attention in the news lately, and as a result a lot of people have heard about it and want to do it. But the truth is, most of them won’t be able to. Because right now most of them are freaking out because of the news and pulling their retirement savings into cash.
I get that it’s scary. As we wrote in our book, the experience of investing during a market downturn is positively terrifying. Hitting the buy button when everyone was screaming the sky was falling in 2008/2009 was the scariest thing we’ve ever had to do. But we did, and it worked. That’s why now when I log into my account and see that my balance just dropped by over $100,000 in a single day, I don’t freak out. Instead, I open up my spreadsheets and try to find cash to deploy.
Millionaires are made during bear markets. Because if you can ignore the screaming news chatter and calmly buy into the storm, you’re going to become a millionaire when the next bull market returns.
Do you have what it takes to achieve FIRE? Well, thanks to this coronavirus, you’re about to find out.
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