Re: How do you deal with a down market day like to
Dante,
Some lines of thought/inquiry which might be helpful to you:
a) Meditate on risk -- all the risks you face and your portfolio faces. Risk averse on a given day? We've all been through it but you can come to see it as meaningless when you start to understand your true long term risks. For instance, inflation is a huge silent gnawing presence, which in 20 years, even at 3%, will erode nearly half (about 46%) of the real value of your assets. That is the real risk I am guarding against when I buy equities.
b) Make sure you have properly diversified. I now have a portfolio that looks like Bernstein's "Gap" portfolio (Page 82, Intelligent Asset Allocator) and have run some tests on it. Backtested 15 years, it produced 9% annual returns with, and this is important, 7% standard deviation. Compare that to the S&P which over the same period had a smaller return (8.5% cagr) and nearly 16% standard deviation. The SD is your only accurate measure of volatility -- risk -- and by diversifying in this way, I have more than halved the volatility while giving up nothing in expected (or more accurately, historical) return. My portfolio day-to-day moves only vaguely in step with the S&P500 -- it has been up and down approx 3% this year so far, so it moves, but it doesn't move fast. This helps me a lot to deal with a 'down day' -- I have no particular expectation of how a bad day for Nasdaq will actually affect my portfolio because I am in everything from foreign bonds and REITs to emerging mkts value, private equity and commodities. (oh yeah, and large and small US stocks, always with a value tilt)
You might love cash, but it is safely and reliably destroying the value of your portfolio (after inflation and taxes, to say nothing of withdrawals).
No you can't trust SWRs completely -- the future is unknowable -- but you can give it an 80% confidence. Life is full of all sorts of risks besides your portfolio dropping one day. My way of mitigating the other risks are to pay a lot of attention to my marriage, my health, my kids, my community and to keep some sort of part-time income flow in case things go crazy. A part time gig that pays you 20k a year is like having an extra 500k of assets with a 4% SWR. Something to ponder. (you have to like it enough to do it over the long term, perhaps into your social security years, to make the comparison apt).
You might also like to consider owning rental real estate, private equity or oil and gas partnerships or the like: to varying degrees, these illiquid investments can lock up capital at known rates of return that are generous compared to cash, and have the added benefit of not being marked to market, so you don't really have to think about how much they went up or down today. They are not wthout risk, however.
This brings me to my final opinion about risk: basically we cannot ER without taking on some risk. In the current market environment and indeed over the long run, you simply cannot take a withdrawal without some risk of reducing your capital in real terms. And you cannot have a completely safe return (US Treasuries) that bucks the tide of inflation and taxes and still leaves a meaningful something left over to live off. You could take a 2% real-yield TIPS fund, but you'd pay taxes on the annual principal adjustments, and the remainder would be your SWR, with no hope of outperforming (asset appreciation) on the upside.
You could buy an annuity, and your real return would be about the same as TIPS, but you would have given up your principal, and you'd need to worry about the long term creditworthiness of the annuity issuer.
If you find a way out of this box, let us all know. In short, I don't believe there is any way out, so you are stuck dealing with risk and volatility to fund a portfolio that will support you over the long term.
All you can do is learn to manage the risk, learn to win the 'head game' inside, adopt low-fee, index-like funds, portfolio rebalance on a regular system so you have a prayer of buying low and selling high, convince yourself of the trustworthiness of the long term models, implement some sort of conservative asset allocation stragegy for yourself, and when all else fails, ignore your portfolio fluctuations and go outside and play frisbee or walk on the beach or take up a new hobby or help some kids -- anything to help get through the mental anguish.
We've all been there, we know exactly what you're talking about, and there is no easy way out, but you've still got to go through it. Then one day, you come out the other side with enough scars in enough places and it will all feel easy.
bon courage...
ESRBob
