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. This 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 (broad market) has been a great 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 if their timing is really bad (ie new investors and the market starts to fall…..).
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…(not inflations adjusted though).
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 (too much) 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 (nor anybody else) 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 advantages 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 losses, 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. An important note here is that one can not only look at the price of a stock and say that it is cheap because it has fallen significantly! If the underlying business is performing worse, the valuation should of course be lower so everything is not “on sale” which some seem to proclamate as soon as the markets are falling! Be aware!
A few things you still have to consider!
You might want to adjust your investement allocation if you believe we are heading in to a outright depression which might last a couple of decades of poor market performance (Japan scenario). This of course means you have to have clear view of where the market will be going and that you expect it to be a prolonged journey down.
An update now (late feb 2020) as this was written more than a year ago and as of today, the market has fallen around 15% over one week! Worst down turn, and fastest in a very very long time! Most medias are talking about the Corona virus and its potential impact.
The question then is, what consequences might this have on the business cycle and the businesses you invest in? If production and stores are closed for a prolonged time, this will for sure have a very negative impact on their revenues and profits. Some companies, most likely smaller ones and those with poor cashflow will likely go under, hence valuations should come down!
If one believes in a V-shaped recovery then maybe now is a good time to buy but one would also have to expect that we go back to the streched valuations we have had over the last couple of years. If not, then prices are likely to be lower…
The other (scary) thing we are seeing now is that more or less all assets are going down (correlated)! Even the ones that are supposed to act as a hedge in a portfolio, like gold…..This indicates that large investors are really conserned as they do not want to hold any risky, they are being sold and only cash and treasuires seems to be in favour!
Though, if you have a very long investment horizon, invest consistently and if you do not believe in another crisis (worse than 2006-2010 and more like the 1930s), I would still argue that consistent and continous investments is a good idea! Especially if you believe that the market over time will do what it has done historically, average around 8% per year.
As always these are no recommendations but just my thoughts on how one could think when striving for FIRE…
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