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David1961 · 08-01-2007, 05:51 AM

Hello everyone!

I am 45 and expect to FIRE within 5 years. One concern I have about RE is how I would handle the market volatility. The past week or so has seen stocks fall sharply. Since I'm working and have a paycheck coming in, I can tell myself that I'm still making money at my job and the market will rebound anyway, so I don't really worry about market swings. I'm concerned that when I retire, I'll have a tendency to micromanage my portfolio and over-react to market swings. Knowing that I have money coming in gives me a certain sense of security. And when you RE, all your eggs are in one basket, so the speak. If the market goes down , say 10%, that's 10% less I have to live on. Even though I know intellectually that the market will rebound, it might be hard not to overreact. Have others had this problem?

REWahoo · 08-01-2007, 06:19 AM

Quote:

Originally Posted by David1961

And when you RE, all your eggs are in one basket, so the speak. If the market goes down , say 10%, that's 10% less I have to live on.

David, your statement above implies your portfolio is in lock step with the market. In my case (FIREd, living off my nest egg) when the market goes down 10% my portfolio doesn't also decline 10% due to how my assets are allocated.

Find your risk tolerance, allocate your funds accordingly, keep a few year's living expenses in cash to ride out typical market downturns, have a glass of wine and enjoy life.

militaryman · 08-01-2007, 07:29 AM

Yeah, Normally the closer you get to retirement the more conservative your investments become to avoid volatility. "Full-in" market startegies are generally for those who are in the accumulation stage and have lots of time to recover from any downturns -- and also dollar cost average into the downturn (putting new money in when the market is low)

Rich_by_the_Bay · 08-01-2007, 07:45 AM

David, welcome.

To expand on REWahoo's sound advice, you might find Lucia's Buckets of Money to be an interesting read. It has its adherents and opponents here, but I have found its principles to be very sound and reassuring.

As an addendum, pegging your assets to the total market is not necessarily a bad thing, as along as you spread it among stocks, bonds and cash according to your personal tolerance. Authors like Solin and Bogle have strongly advocated exactly that approach and have explained their positions in respective books. The idea is that you need to give it time, like 15 years. In the end, few actively managed funds will beat the market index.

Lots of ways to approach it, so read up and post any questions you might have.

wildcat · 08-01-2007, 08:25 AM

Hey David. Just to add to what Rich suggested and to potentially give you a jumping point:

http://www.early-retirement.org/foru...ney-16531.html

A thread covering the Ray Lucia "Bucket Theory". Some love it and some don't see it as a breakthough theory. But just in case you are interested, you can browse through. Maybe mathjak will chime in about his thoughts as he seems to practice it.

Sam · 08-01-2007, 08:59 AM

Quote:

Originally Posted by REWahoo

David, your statement above implies your portfolio is in lock step with the market. In my case (FIREd, living off my nest egg) when the market goes down 10% my portfolio doesn't also decline 10% due to how my assets are allocated.

True statement. But don't ignore the other side of the coin. When the market goes up 10%, the portfolio doesn't not increase by 10% either. That's the price one pays for stability.

SteveR · 08-01-2007, 09:20 AM

David,
Welcome to the board. I see you have already gotten involved in one of the major topics frequently discussed here; how to deal with your nest egg.

As the others have already stated, the key is really balancing your allocations into a variety of financial instruments. Usually, equities, cash and bonds. Index funds of these instruments will keep the volitility even less. The key is to NOT put all your eggs in the same basket. 100% equities is a very bold portfolio and only for those willing and able to not sweat market down swings. Most of us have variations of the basic buckets of equities, bonds and cash. As you approach retirement the mix of these could change somewhat to rebalance as you enter retirement but with the knowledge that your nest egg has to continue to grow through your retirement or you could run out of $ before you die. The hard questions to answer are how much and where to put it.

All markets will swing over time. Cash interest rates will swing, equity values will swing and bond rates will swing. You just don't want them all to swing the same direction at the same time.

Good luck and welcome to the board.

REWahoo · 08-01-2007, 10:09 AM

Quote:

Originally Posted by Sam

When the market goes up 10%, the portfolio doesn't not increase by 10% either. That's the price one pays for stability.

Yep. But it sure beats having to pay for all those Lunesta prescriptions...

Sam · 08-01-2007, 10:11 AM

You mean you can't sleep when your portfolio increase by 10%?

REWahoo · 08-01-2007, 10:13 AM

Quote:

Originally Posted by Sam

You mean you can't sleep when your portfolio increase by 10%?

Yep. Weird, isn't it?

kcowan · 08-01-2007, 10:43 AM

The other thing you should do is look at the market performance of stocks and funds that are doing relatively well right now. Having these in your portfolio can make you less dependent on market swings.