Bikerdude said:
I guess that's fine if you know you are in a 1966-1982 situation rather than a normal down trend that will ultimately turn up as seen in FireCalc simulations.
What's scary is how do you tell the difference and take action? Remember this is based upon a heavy equity weighting in your portfolio.
That's the whole point-- you can't tell the difference. I don't have the returns memorized but I bet that 17 years was full of bull-market head fakes followed by nasty downturns like 1973-4 and 1979's "The Death Of Stocks" articles. There were plenty of other economic distractions to focus on, too.
I've read that 1966-82 returns data was much higher when dividends were included. So part of our portfolio has dividend-paying stocks. We'd take payouts in cash (not reinvested) and spend those before selling stocks. Our "active" funds have managers with value tilts who play defense extremely well. So hopefully they cope (or at least until we liquidate their funds from our portfolio). Our ETFs also have an international and a value tilt, which again hopefully provides some margin of safety. Maybe even our small-cap ETF will handle the downturn better-- after all, the small-cap premium implies that they lose less than the large caps.
Personally, our pensions have COLAs and spouse can seek additional Reserve duty. I have considerable handyman skills and we'd do for ourselves what we've paid others to do for us. We have landlord experience so we'd be shopping for rental properties that could cashflow. I remember a tremendous amount of bartering in my 1970s neighborhood. We have dormant frugal skills that would make Shaolin monks hire us as consultants. We grow a lot of our own citrus and starting a garden would be a big frugal help. All of these personal considerations went into the decision to go with a high-equity portfolio which may not be appropriate for many.
But let's take this thought experiment to its depressing conclusion. What if it started tomorrow? What if it's already started?
Year 1: Blissfully spend the cash.
2: Raise an eyebrow, break the CDs, and spend them too.
3: Purse our lips and decide to liquidate portions of Tweedy, Browne as needed for spending cash. It's full of cap gains and we want to get out of it anyway.
4: Clench our jaws, note that we're not having fun anymore, and elect to forego some expenses like major home improvements, Mainland/Asia vacations, the second cruise, or (*choke*) more longboards.
5-8: As Tweedy Browne runs out (or maybe it's long gone, whatever year that happens) then rebalance the remaining portfolio into that year's spending cash. (We'd be selling more winners than losers, especially whatever had a big up year.) Consider tax-loss selling of big losers to reduce the tax bite (minor concern) and to help hold on to winners longer. Since the market's equities fire sale would be well underway by now, start screening for cheap ETFs & dividend-paying individual stocks to see what survivors would do well in the years ahead. Consider liquidating Tweedy, Browne for those investments.
9-12: Keep rebalancing portfolio for spending cash. Major frugal effort. We don't have much margin here because we already have a beach-bum lifestyle, but there would be significant reductions in the irrigation bill, gas expenses, and dining out. We'd stop paying for tae kwon do and take a hard look at the cable & DSL bills. All necessary personal property purchases would be from Goodwill & garage sales (they pretty much already are, but store shopping would cease). We'd be bartering our fruit for other foods, shopping farmer's markets, and eating lots of beans & rice. Resell on Craigslist & eBay from the truly desperate who are practically giving things away to raise cash. Consider part-time work.
13-17: Hang on. By now we're well into liquidation (no more cap gains!) and may have sold off some of the portfolio for dividend stocks or a down payment on a cashflow rental property. Keep an eye on the portfolio's "years remaining" graph and start part-time work. Keep screening for single-digit-P/E value stocks and consider buying at the bottom. As previous tactics hit their equilibrium or diminishing returns, start working part time (self-employed).
Looking at the above list, I think our family's reductions in spending would hit equilibrium around year five of series of bad bear markets/recessions, and around year nine of a depression. At some point our value portfolio would lose less and start to gain more from whatever economic recovery came along.
