FIRE aspirants will always be winners in falling markets, as long as the market performs over time. This is because they are in the accumulation phase towards FI!
The key thing is to be consistent with the strategy for reaching FI and that the strategy chosen feels like the right one for you.
Below I will show a couple of charts as a reminder of history which might help you with your decisions, especially if you are going for FIRE and investing by the 4% rule for the long-term.
Losing money on your investments?
Lesson 1.0 in investing is that your investments can go both up and down in value. In the current market situation with large movements (on the downside) it is easy to get emotional and anxious but remember that you are not alone. The majority of investors have seen the value of their accounts go down in falling markets and I am also one of them.
This happens every now and then and it is a natural process. Now is a good time to figure out if you have made your investments based on your own risk and investment profile or if you have just followed someone else’s advise without thinking about whether or not they are right for you.
Numerous studies have shown that over time and historically, owning stocks has been a good investment. That is not the same as saying owning stocks only is the right investment for you. You as an investor have to feel comfortable with your investments and your strategy so that you stick with it, not only when markets are going up.
A study by JP Morgan showed that trying to “time the market” is very tricky. If we just missed out on the 10 best trading days during a 20 year period (1995-2014), our annual return would drop massively from 9.85% to 6.10%. This is absolutely insane! It really speaks volumes about the importance of not trying to time the market and instead being a long-term investor, as often cited by Warren Buffett.
Still, the key thing is that you have an investment profile and strategy which you are comfortable with and one that means you can sleep like a baby at night, even throughout falling markets.
Can we learn from history?
Below is a chart (available here) showing the performance of different investments between 2000 – 2018. After years of great performance, more and more investors come into the market, just buying anything as everything seems to be going up. Those who do not have a strategy about their investments might not have the emotional capacity to handle a significant downturn when it comes and it will always come.
By just looking at the below graph, you can see that those who have invested in these assets would have had quite different returns but also volatility.
The biggest challenge will be for those who are new to investing and their timing is really bad…
What if you panicked during the financial crisis 2008?
The below chart (available here) is the same as the above, but here I want to highlight the potential consequences of selling at the worst possible time and potentially not getting back in again at the bottom of falling markets (which very few manage to do…).
Imagine you invested all your money in late 2007 because everyone was talking about all the money they were making on micro cap stocks (red line in the chart). Let’s say you invested 500,000 USD including all your pension money.
You probably could not sleep much the following 1,5 years and in mid 2009 you were not able to stand it any longer so you sold off all your investments and put the money in a savings account. You would have lost around 60% of your money so you would have around 200,000 USD left!
If you then decided to never ever invest in stocks again and your money stayed in a bank account, you would probably have around 205,000 USD a decade later (as interest went to almost zero..).
Had you chosen to stay with your investments, your 500,000 USD would now have been worth around 1,000,000 USD instead of 205,000 USD…
I am not saying that history will repeat itself, I am just saying that one has to make investments that one is comfortable with, both over the short- and the long-term as you don’t want to lose sleep over your investment portfolio!
So what to do now??
The markets have just started to be more volatile and it is very hard to predict if we will bounce back up to higher levels or if we will fall further.
Now is a great time to think about how you feel about your investments and how you might want to adjust them for the future based on your view.
If you are a FIRE aspirant, just starting out. Think about the fact that you are in the accumulation phase which means you are building your portfolio and most likely you won’t be able to time the market. By constantly purchasing when markets are falling, you are getting your average price of your investments down so when and if the market turns, you will have accumulated more holdings than you currently have now.
If you are FI, you should of course focus more on wealth preservation and you might want to adjust your allocation so that you are comfortable with it. Unless of course you are very comfortable with some volatility and believe that markets again, over the long-term, will provide outstanding returns.
The most important thing is to know yourself and being able to handle your emotions and if you are clear enough about your risk profile, your investment strategy and your overall goal, I am sure you won’t have a problem sticking with your strategy.
FIRE aspirants will be the winners!
By being a FIRE aspirant and hence in the wealth accumulation phase, you will become a winner over time. You will learn from the market movements, both about yourself and about the financial markets and investments.
The main advantage of being a FIRE aspirant might actually be that we are very flexible, creative and willing to learn and adapt so even if we were to incur paper losses (you have not lost until you have sold your investments), we know how to make the most of our money as well as how to make more money! Our creativity will take us to FI so much faster than the average person who panics about falling markets and stays in the “rat race” out of fear. We know what we want and volatile markets won’t change our Burning Desire to get there fast and we will use multiple ways of getting there!
Falling markets might be the absolute best opportunity to use our high savings rates to buy cheap assets, whether they are financial securities or other tangible assets or businesses doesn’t matter.
I just say, FIRE away!
Actions to take:
- Check out our FIRE Section
- The 4% rule to FIRE
- Playing with FIRE?
- The Language of Money – a language for life
- The 10 Key Questions I Ask Before Making An Investment
- Why you should always spread your risks!
- How to make the most out of your money – Savings Section