The bear (market) has arrived and over the last few weeks, financial markets have dropped with more than 20% which is the definition of a bear market (falling stock prices). Does that mean your FIRE (Financially Independence Retire Early) plan is in jeopardy?!
I will try to give you my take on the market in the light of the Corona virus (COVID-19) and why I feel being a FIRE aspirant or member has never been more valuable EVER!
What has happened?
To keep it simple, the market has since the 20th of February dropped around 25%, which is a faster drop than what we experienced in the financial crisis during 2007-2009! There are many factors involved but the major reason why this has happened is because of the Corona virus which WHO recently announced to be a pandemic.
In “normal” market situations, the market goes up and down and on average and over time it increases. Every decade or so we enter into a bear market and a slowing business cycle. This often happens in stages and at a slower pace than what we are currently experiencing.
BUT when we on a global level hear governments closing schools, public events, work places, cancelling flights etc. and lowering central banks interest rate, then we really have a problem! The problem is “not only” concerning those being infected with the virus (with absolute no intention of downtalking the devastating effect it might have!) but the unknown consequences this will bring to companies and that is what most investors are concerned about.
So we are in a situation were we don’t know what will happen, nor what long-term consequences it will have on our lives and the businesses around us. If flights are cancelled for a couple of weeks, just imagine the impact it will have on spending alone and it will for sure not recover in an instant either when then ban is over. Do you think corporates will want to send their staff travelling prior to any assessments and risks have become very, very clear? I for sure don’t.
When we also see central banks reacting by lowering interest rates (and they for sure have much better information than we do), it is already bad and they are expecting it to become much worse than what we are seeing. This is also saying something about what is to come. I clearly remember this from the financial crisis as I had the same thoughts when the FED (US central bank) lowered their rate by 50 basis points without following the normal procedure on when to make the decisions. To me, that meant the situation was really bad and this time I have the same feeling as this is what they did on the 4th of March 2020.
The other scary part of this downturn is that almost all asset classes are falling so diversification is not really helping the way one would expect. It is basically risk off and the only thing investors want to hold seems to be treasuries or cash regardless of the low yield (record low).
What can we expect?
The only thing I know is that I don’t know! History might repeat itself over the long run but the question is for how long? Currently it is extremely hard to assess the situations and the possible consequenses and what number of defaults we are going to experience. When something like this happens, every player is getting conservative which means loans and credits are getting more expensive and we live in a very, very leveraged world. Corporates have been borrowing like there is no tomorrow with super low interest rates.
What happens when revenues are lower due to production being down, shops being closed etc.? Lots of the costs will still be there like rent, salaries, equipment etc. At the same time the credit market gets very restrictive and more and more attention will be put on the high leverage many companies operate with = more expensive if they can even get any financing in the first place.
The number one reason why companies default = liquidity issues!
I have no idea how long this “string” is but I have a hard time seeing this as a “small blip” as it might unveal the true status of companies who have had access to very cheap funding just because of the excess liquidity in the system (QE). When they fold, more will follow which means unemployment going up, production down, spending down etc…
I personally see more risk to the down-side than the upside at this point in time. Time in the market is better than timing the market but it also depends on what you expect. If you have no view on the market and a very long horizon, I for sure hope this will still be true. But what if, just if, this is the start of something resembling the depression during the 1930’s?
With the global interconnectedness, super low interest rates and high leverage at private level, corporate level and even government level how much room is there to navigate this “perfect storm”?
Again, I have for sure no way of knowing but expecting a V-shaped recovery is to me very far fetched. On a good day, it will be U-shaped but before we know the extent of these implications, the market could possibly be down 50-70% from its peak. This is because of the unknown! Investors hate unknows and the ripple effects on the economy is currenly extremely hard to estimate as the Corona cases are increasing by the minute. On top of that, there seems to be a lag of 5-12 days before we even know if someone is infected or not so it could still be the top of an iceberg!
How to think?
This for sure is a good time to contemplate how you feel about your positions and what has happened. It is one thing to logically reason in a bullmarket but when shit hits the fan, that’s when you know who you really are as an investor.
Now is a time to find out if you feel your allocation is one that is suitable to your risk tolerance. I honestly have been spending time on this too and I have been investing in the stock market since 1994! I even thought I had a rather diversified portfolio but mine is screaming red too! Maybe in a “normal” downturn mine would have faired better but in panic mode, almost all assets seem to correlate!
Instead of panicing one should be looking at ones total finances, ie all assets and then look at how much one has “lost” since the peak. That is asset allocation, not only looking at your stock portfolio.
So if your stock portfolio is down 25% but that is only 50% of your assets, then try to focus on the fact that your overall portfolio is “only” down 12,5%. If you are ok with that and depending on your view of the market going forward, you might even want to allocate more money towards stocks now. This of course completely depends on your personal situation and your view of the future!
Just remember, this is not a sale! As you don’t know (no one does) how much this will hurt companies’ revenues and profits. So if the PE-ratios were 30 one month ago and are now standing at 15, is that a bargain?
How could you know?! Well, if the revenues and profits of a company turn out to be down 75% it is still expensive!! Just because something has fallen in value, it for sure does not mean it is on sale. Something is on sale when thes price is lower in relaton to its value. But if the value is down, so should the price be!
If you are a long term investor, which I belive most of you are then I would (and I personally will) continue to invest and especially if I have more than a 10 year horizon. On the other hand, if I expect something along the lines of 1930’s, then I would still be very very catious.
FIRE in jeopardy or not?
If you just reached FIRE by using the 4% – “rule”, then you might be in trouble if you are now withdrawing from your investments. So let’s say you had 800,000 USD a month ago and you were going to use 4% every year, that’s 32,000 USD. The problem now is that your portfolio is currently worth 600,000 USD so if you use 32k per year, that now equals a 5,33% withdrawal rate (32000/600000)!
Conclusion: If you just reached FIRE and are solely relying on a portfolio and the 4% – “rule”, you might have to cut back on your expenses or eventually generate new cash-flows in one way or another. Still this is the cool thing about FIRE, you can always make more money but you can never make more time! So if you have retired and realise that you might have to work a bit extra to compensate for an “unlucky” start, so what! You are free to do whatever you want and can then find something you enjoy doing. The pay might be less than what you made before but this time you are also doing it because you enjoy it! In the end we all want to do something we enjoy when we reach FI and many of us will get paid doing so!
If you have not yet reached FIRE and you are still in the accumulation phase, this market crash might be brilliant for you (check out my post FIRE aspirants – winners in falling markets). If you don’t believe in a “depression like” situation and you just keep on investing at lower levels, it could mean that you will become a winner! Not only do you get more shares for your money now but you also have time on your side as you might have X-years left of your journey to FIRE.
FIRE will never be in jeopardy
Because we as a FIRE community have created superskills! We know we can have great lifestyles on less money than most and we enjoy JOMO! We understand the money language and investing. We want our money to work for us and we love to find new ways of generating cash-flow.
Creativity is a super skill no one can ever take from us and the same thing goes for understanding how to get the most out of your money and being flexible and adaptive to changing circumstances.
If there is a big crisis, you will find opportunities and you will be able to act on them as you are flexible and most likely have a low cost base. You can use your creativity to excel and add value to others which means you will continue your journey towards FIRE. It might be extended a bit if you are close to FIRE but if you have some years to go, a crisis might actually be the best opportunity you could ever get as it levels the playing field!
FIRE is for you to define and whether or not you let it go up in flames is up to you! I sincerely hope you continue to use your creativity to make progress towards FIRE and if (just if) you have been solely relying on the stockmaket, then this might be a wake-up call to the effect of risk concentration to one asset class – stocks. This might be a great learning opportunity to find other types of assets which can help you reach FIRE and a journey which might mean leass volatility than the stock market is now delivering.
If there is a will, there is a way! There will always be opportunities and I am sure you can get to FIRE if you really want to, you just might slightly have to change the path you take.
Remember to also enjoy the journey even when it feels like a roller coaster which certainly is the case today as the (bear) market by the end of this post is down with more than 8% (12 march 2020)!!
Actions to take:
- Take some time to look at the bigger picture
- Maybe reassess how you invest your money
- Use your flexibility to take advantage of a situation when everyone else is in panic mode!