I retired in August of 1999!
And believe you me, it was OBVIOUS that the markets were way overvalued. Today they are not nearly so!
But even if the markets were overvalued in 1999, you couldn't assume that the madness wouldn't continue a few years. The problem with bubbles is that they can last longer than anyone expects. I knew that, so I couldn't just wait it out. Remember I had no crystal ball. I had no idea that things would crash and burn starting in 2000. I had no idea I was facing a 3 year bear market - virtually unheard of at the time.
I knew I had to have an investment strategy that could weather storms, and I knew that I couldn't time things. I'd already learned that lesson well from the past. I also knew it was important to have an investment strategy that required minimum maintenance (keep it simple) so I didn't have to be tweaking all the time. Managing one's investments can become a full time J-O-B if you let it. I wanted to enjoy my retirement, not spend lots of time/energy tracking investments and making decisions.
Was I nervous? Yes! So I deliberately set up a strategy to manage that nervousness.
1. As part of planning for retirement we set aside a "travel budget" - a two year "splurge" on travel so that we could enjoy the first two years doing some dream travel we'd put off for a very long time (due to demanding careers) without concern about market situation right after retirement. This turned out to be a very good idea. We sold some assets - some land, some high-flying tech stocks, and the proceeds went into this pot. As extravagant as it seemed at the time, we were so glad we did, because we were able to go out and enjoy ourselves as not worry about the bear market. Our travel budget ended up lasting us through 2002.
2. I had 2 years of living expenses (sans travel) set aside in a money market fund. This meant I didn't have to worry about drawing down from the retirement portfolio over the next two years. This ended up helping us so much mentally - truly shielding us from market vagaries - that it has now become a standard part of our strategy. I usually have 2 to 3 years of expenses set aside in a cash account separate from the retirement portfolio. It really helps with the short term "feel good".
3. I knew that the most prudent investment strategy was to have an asset allocation that should survive many decades and to rebalance as market conditions changed. I developed one that met my needs. From studies, etc. I concluded that for long term survival, 55% to 60% equities was necessary. This was daunting in 1999, but I knew that inflation would eat away our nest egg otherwise.
4. Since ER was for us possible because we sold a large chunk of company stock, I had a large lump sum to invest into the broader market. Due to the extreme nature of market valuations, I decided to average this into the market over a 2 year period rather than the 1 year usually recommended. This turned out to be the life and sanity saver. In fact as things continued to get progressively worse in late 2001 I extended the averaging in period another 6 months. Oct of 2002 was the last of my averaging in investments - scary yes, but my strategy required that I do it! So I did. I was amply rewarded for the many scary investment times by the huge turnaround in 2003! By the end of 2003 I was probably about 20% ahead of my original investment. According to my records by the end of 2004 I was 31% ahead pre-tax.
Note that if I hadn't had the lump sum to invest but had already had a diversified portfolio, I would have just shifted the asset allocation to what was appropriate to my new retired situation and kept that, rebalancing as needed. Presumably the several year run up before the 2000-2002 disaster would have allowed me to take plenty of profits and move them to bonds, conservative investments, etc. But if I had received a lump sum pension, I would have probably done the same approach as what I did.
So there you have it. A few strategies to manage the potential pitfalls in early retirement plus an asset allocation that should survive many decades. The nice thing about the AA approach is that even when many asset classes are getting clobbered, some other asset class is usually doing well, so you almost always have at least one winner! LOL! For me that helps.
FWIW - if I had it to do all over again I probably would have averaged my retirement fund into a balanced, high-quality, low-cost fund like DODBX. The mindless simplicity of that approach is well worth it. IMO it's probably not worth what little optimization you might achieve by being a little more diversified. I had selected DODBX as a benchmark for my asset allocation and bought chunks of it at the same time I was averaging into my allocated set of mutual funds. DODBX has matched or beaten my asset allocation performance every year since 2000. Of course that's because mid-cap and value stocks dominated over those years plus intermediate bonds did best. This year 2007 is the first time my asset allocation portfolio is trouncing DODBX. Finally! So you can see why I feel that the effort of maintaining one's own allocation may not be worth it not matter how much "better" it might seem on paper.
Hope this helps.
Audrey
