After a lot of years of consistently up-up-and-away stock markets, the last few months have delivered a different kind of consistency: consistent volatility. Big swing up one day, big swing down the next, dramatic month-to-month changes and some losses that appear to be sticking, wiping out the last year of gains.
Of course, if you’re investing for early retirement, you’re a long-term investor with very little interest in what the stock market is doing on any given day, or even in any given month. You’re investing whether the markets are good or bad, paycheck after paycheck, focusing on slow-playing the long game.
Of course, that can be a lot easier said than done.
Just as important as investing consistently is learning to get good at the mental aspect of it all: learning not to let the markets affect you. Which means both not letting the markets change your investing approach, for example by convincing you not to put money in for a while, because the markets seem too high (that’s timing the markets, and it rarely goes well), and not letting the markets stress you out, which is every bit as important.
Today we’ll talk about how to build up that skill.
But a quick note first… Work Optional: Retire Early the Non-Penny-Pinching Way comes out next week! (Picture me dancing frantically over here.) So this is your last chance to get in on the pre-order incentive: everyone who pre-orders the book by midnight Pacific time on February 11, 2019, (and sends proof of purchase to workoptionalpreorder [at] gmail dot com) will get the Values-Based Budget Planner next week, and you’ll be entered to win one of four Skype sessions with me, or with me and Mark (your choice), to discuss your early retirement plan, life planning or anything you want! And pre-orders are now available for the downloadable audiobook version via the link above, or directly with Audible. Here’s a detailed review of the book from Harlan Landes of the Plutus Foundation.
And stay tuned for a little surprise next week in celebration of the release!
How I Learned to Stop Worrying and Love the Markets
As I wrote in MarketWatch last October, when the markets get volatile, the first thing you want to do is… nothing. The worst thing you can do as an investor or an early retiree is focus on the markets too much, because knowing what they’re up to leads to making emotional decisions, and research tells us those decisions tend to be bad. Those who follow the markets too closely tend to buy high and sell low, the opposite of what you should be doing as a long-term investor.
But of course if you’re feeling anxious about the markets, it’s harder to follow that perennial advice, even if you know it’s correct. So how do you avoid feeling anxious, or avoid indulging that compulsion to check your account balances?
No one is born being good at knowing that their money is going up and down in value, but if you know how to practice, it’s pretty easy to build the skill. Here’s how:
Invest over a long period — When you’re itching to reach financial independence or whatever your big goal is, the last thing you’re thinking is, “Sweet! This journey taking several years is going to be so good for me!” But it turns out that it is. Saving over several years should expose you to some up periods, some down periods and some volatile up-and-down periods. (Folks who only invested post-2009 through last year somehow were an anomaly.) But all those different types of markets are ultimately good for you, because they prove that it’s always ultimately okay. Sometimes it takes quite a while to make back “losses” (in quotes because they are only real losses if you sell and lock them in), especially when you factor in inflation, but over every 10-year period, the markets have always been up even when counting inflation.
Decrease the frequency of checking your balances — Once upon a time, I updated our spreadsheets nearly every day. It was not good, and it did not help me chillax about market movements. Now, I only check our investments once a month to update our master spreadsheets, and even then, the bigger numbers don’t totally register. Getting from every day to once a month was a journey, but I’ve definitely seen that the less I check our investment accounts, the less I am bothered by the markets. So if you currently feel anxious about market volatility, ask yourself how often you’re currently checking balances, and try to check half as often for a while. Then halve it again, and if possible, again, until you’re barely checking in on the markets at all.
Build a cash cushion into your plan — On a practical level, the best thing you can do to remove worry about the markets is to eliminate your need to sell shares. Not that you’ll never sell shares, but you give yourself the flexibility that you won’t have to sell shares when the markets are tanking. That’s what your cash cushion is for. It’s up to you how much you keep in cash, but most retirement experts recommend having two to three years of expenses in cash when you retire. We started with slightly more than three years’ cash. You might find that you need less to sleep well at night, though do factor in sequence of returns risk. And make the cash cushion the last thing you pile up, because you want all the money you save earlier to work harder for you than cash in savings accounts can, by getting market gains, and not paltry sub-inflation gains.
Related post: Protect Your Early Retirement From Sequence of Returns Risk
Know how low you can go with your spending — How much are you currently spending in a year? How much do you expect to spend in a year in retirement? And what’s the least you could spend in a year in retirement if you had to? Make sure you know all three of those numbers, and ideally, the final one should be much lower than the second one. The hope is never to need to cut all the way back to your absolute minimum budget, but it’s good for peace of mind to know that you could whack spending way back if you had to. That takes a lot of pressure off your portfolio because it lowers your withdrawal rate.
Related post: The Fundamental Problem with the 4% Rule Isn’t the 4% Rule
Know how you’d earn more if you had to — Likewise, besides knowing how you’d cut your spending, know how you’d boost your earnings if it came to that. But be super realistic here. Don’t assume you could get your old job back in a hot second. Assume lots of people are out of work. How could you quickly hustle for a few thousand dollars or more?
Related post: Our Biggest Lesson from the Financial Crisis // Don’t Bank on Going Back to Work
Build a conservative financial plan — All of this ultimately adds up to one thing: creating a plan with built-in flexibility, but also with a big margin of safety. The bigger your safety net, the less you’ll freak out when the markets go sideways. The smaller your safety net, the more you might find yourself stressing about money. Some ways to build a conservative plan: withdraw less than 4% of your portfolio each year, have multiple contingencies built into it, save more for a traditional retirement than you do for early retirement and maybe just oversave a bit generally. Investing in the markets is a big reminder that we can’t control or optimize everything, but you absolutely can increase your chances of always staying secure by putting more insulation against risk into your plan.
How do you cope with market volatility?
Chime in with your thoughts in the comments! Do you stress about the markets? What stresses you out the most, and what do you think you could do to get more comfortable with the up and down? Do you not stress about the markets? What helped you get to that point? What’s your long-term approach to staying Zen about it all? All of these questions are fair game, along with anything else you feel like sharing.
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Categories: we've learned
Great reminder… Getting over the mental hurdles is absolutely key.
Thank you. I needed to hear this today. It is hard to watch things go down, ugh.
Somehow I had a massive mind shift after I retired. I was like you and checking balances almost daily – sometimes more than once a day (which is so silly now that I think about it). I don’t check in or pay attention to the markets though I’m trying to do a quarterly update just to force myself to at least look. I structured my income so that I wouldn’t have to sell shares to meet cash flow needs and since it’s working, I have been ignoring it. I do need to do my annual re-balancing, but going to do that after I figure out how much I can contribute to Roth IRAs, which will be after I receive all those tax documents and finish up those pesky taxes. Except let’s be honest, I’m a money nerd and I don’t find doing my taxes pesky at all.
I just don’t check my balance. I know I have another 25-30 years for things to even back out, so I try not to worry beyond that. It’s not easy, mind you, but the less you check the less you want to check. So you slowly calm down.
We “invest” in other ways, as homesteaders. We invest in our farm, our land, our garden and our animals, all of which provide food and some days, entertainment. While having a big ol’ portfolio is nice, we know that if everything falls out the bottom, we’ll see be able to trudge on with the skills we’ve learned over the past few years.
Great comment. If and when the markets tank your skills set will still be there.
Hi Tanja, very good ideas. Right, the market is not that great anymore. When it goes up to record high, I love to check my balances. But when the market goes down, I just don’t bother to look at my investment, as it’s so depressing. You are right, investing over a long period of time is good. We may not see the benefits right away, but it will make a big difference 5 or 10 years down the road.
“Do you not stress about the markets? What helped you get to that point? What’s your long-term approach to staying Zen about it all?”
I’m not sure how I will feel when I’m in retirement but when I was in my 20s, I just laughed because I had time and reading the financial news in 2001 just cracked me up. I didn’t laugh at people’s misfortunes as they sold when it was low or had fully invested in Enron, but I did laugh at the bad news coverage trying to figure out what was going on. Then 08-09 happens and it’s the same thing. I just chuckle at how crazy people were getting. I felt really bad when people were bailing at that point since it was such a huge drop. By the end of 2010 we were up over double from our low (easy when you’re still contributing funds.)
My strategy has been to read financial news about people playing the short game. And the “reasons” as to why the market went up or down that day (and the best is when it flips during the day and they have to try to figure out why for the story even if it’s not obvious.) Do this every day and I just got desensitized to it going up and down. I usually just look at the 1 or 5 year returns on the markets and am like, “Yeah, I’m fine.” It’s a twisted form of entertainment but I enjoy it.
As FinancialSamurai puts it, have a big nut. If the nut allows for crazy low withdrawals, maybe I can be out of equities. Likely I’ll still have tons of stocks with about three years of cash; hoping that will all work out in the end. While the money grows, I remember to stay flexible with retirement timing. As long as I can flex on time, I can rest easy going for the stock gains.
I think the recent popularity of online portfolio trackers that provide instant access to your portfolio balance is a really bad thing for investors. Like you, I track through manual spreadsheet, but only once a quarter. The idea that anyone should check their balance every day or even every week is bound to tempt them into making a poor investment decisions. It’s just human nature. And one of the most important things that any investor can do is ignore their human instincts, because they’re bound to work against you. Delete those apps people!
I feel like just embracing the inevitability of a drop helped, as well as thinking about how I would feel I lost 50%. Anticipating the feeling makes it feel a lot less scary when it drops by 10%. I still check Personal Capital often although hopefully I quit that habit soon, but I don’t feel any stress or worry at all– it’s probably because of the hefty emergency fund. I can imagine that others with a lot riding on the stock market with high risk and less buffer feel more stressed.
Like Financial Mechanic, I was embracing the inevitability of the drop specifically to make myself get over it. I was freaking out a whole lot about the idea of the recession because of my last experience with it and a prolonged job loss.
I had to force myself to think of it in a light that I normally wouldn’t see it in: that a drop would be a “buying opportunity” to make up for all those months I’ve been buying high. It helped force some balance into my perspective and alleviate my overall anxiety. I’m doing better at maintaining that balance, and I only pay attention to the market prices when I’m buying. Then I tell myself to click the button to execute the buy and move on with my day. It helps me reposition my mentality to “make the most of whatever happens” instead of “fruitlessly and endlessly worrying about all the worst case scenarios”.
That doesn’t mean I don’t check our accounts almost daily but that has more to do with my money management style than market volatility concerns.
Our plan mostly involves real estate. We have invested in a market that is getting hotter and currently more than half of our monthly spending comes from that. It’s coming without us needing to sell an asset, and it’s doversigies a lot.
We are just staring into our market investment portion of retirement plan, and it’s rough. It’s definitely more emotional than I thought and even my husband who is super rational is trying to time the market which I know he should not… so we have a bulk of cash sitting waiting to be invested.
Slow moving process…
Could not agree more with not checking your balances daily but even more so having cash and bonds! Most financial bloggers are too aggressive (eg 100% VTSAX) and that’s not good for the average investor due to the volatility and being prone to human emotions. I think most investors are too aggressive…I say have plenty of cash and bonds available to help you whether the storm. Some may say 30% cash and bonds may be too conservative for a young investor but 70% equities is still pretty darn good especially if they can sleep better at night and avoid making poor decisions during volatility!
I have a real problem with this and it is soooo hard for me to invest in stock based funds given that every impulse is screaming that the market is oversold, overpriced, and generally looney tunes. Ruuuun awaaayy! My solution, though probably less optimal, is to purchase treasuries and sleep well at night.
So here is a good way not to let the market stress you out. Diversify your investments so that you are not dependent on any one source to keep you going upon retirement. This can be done by anyone if you start early. I retired in my mid-50s with this method. For example, I have my retirement account and a separate taxable account in the stock market but have a diversity of stocks, preferred stocks and ETFs. I purchased a number of rental houses over the years and worked to get them paid off before retirement so this is income generating plus the real estate tends to go up in value over time. I slowly accumulated silver coins and occasional gold coins over the years as an insurance policy. If the Sh*t hits the fan, these will be good to have and can spike in value during tough times. If you want to retire early, avoid the expensive cars and invest in assets that appreciate each year rather than depreciate. The goal should be to get to a point where you can live off the income generated from your investments without diminishing your net worth. This makes for a very comfortable retirement free of financial stress.
Over the past 21 years I’ve seen lots of ups and downs, both for the whole market and our accounts. Over the years there’s been times that I’ve used margin, used options (straight calls, covered calls, and various spreads), and had virtually everything in one stock. And that resulted in a couple margin calls and 3 times where our portfolio dropped around 85%.
That’s a hell of a peak to trough, but has made anything else look like childs-play. While we still borrow a lot by most people’s opinion (though less than our real estate value), and have a concentrated portfolio, we have been retired for over 6 years and live a good life off of less than half of our dividend income in our taxable accounts.
There always will be ups and downs, but it’s like earthquakes in CA. If you’ve been through a bad one, or a few of them, most others will be minor in comparison, and you’ll be more prepared if a big one hits. In finances, in general it will be pretty unlikely to hit a Great Recession sized crash in the next 50 years, unless there’s a huge run-up in multiple asset classes on that huge of scale again. But those that had that in their investment timeline, especially if they were also invested in 2000, are likely to be prepared for anything the market, US Economy, or even Global Economy can throw at them during their lifetime.
There were times where I spent 40+ hrs/week watching our investments, reading everything I could. But with over 2 decades of learning and practicing RE fundamentals, I was on the LTBH route for most investments, so I wasn’t letting the crazy market moves and articles affect our investments. These days I spend drastically less time caring about the market or articles, and the ideal scenario is when I get in a ski day even as a major investment announces products or earnings. I read a couple articles when on the lift, and enjoy the rest of the day. Bonus points if it’s snowing.
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