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.
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?
Practice.
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.