20% stock market plunge

[Gone4Good]

Hmmm. A 20% stock market drop on a 65/35 portfolio is only a 13% hit.

If I'm starting from a 3% WR, as planned, that 13% decline brings my prospective withdrawal rate all the way up to 3.45%!!!!

After I run the numbers carefully, I cheerfully board a plane to continue my world travel.

 

[Nords]

Just curious to know how you'd deal with a 20% stock market drop that lasted 12 months. Would your lifestyle/spending change? Would you change your asset allocation or wait it out? Assuming you're ER/FI, would you go back to work PT/FT. Would you freak out and sell at the bottom and buy all MM and CD's.

We wouldn't change a thing. Dividends are being reinvested and it'd be interesting to watch Warren Buffett & his new protegés unleashed. In fact I think every Young Dreamer on the board should be praying nightly for a 20% drop that lasts at least until a couple years before their ER.

I'd be extremely tempted to go from two years' spending cash to about two month's worth. But I'm older now and I have the experience to resist that temptation.

I remember October 1987. That happened in a day. I was buying stocks the next day.

Same here. We skipped school for a day looking for change under our sofa cushions to make sure we could throw every bit of cash into the market.

It helped a lot to have those DINK paychecks direct-deposited every two weeks, and back then we didn't appreciate the lessons of 1966-82.

 

[dmpi]

I remember October 1987. That happened in a day. I was buying stocks the next day.

The good news: I too put all my extra money into the market after the crash.
The bad news: I didn't have any extra money because it WAS already in the market.

 

[mathjak107]

dont worry about it just plan right and allow for the bumps. my pre-retirement plan now is so different than i was years ago at 80% to even 100% at times. its now about having a goal in percent that matches the risk and daily swings that im comfortable with.

as my portfolio grew we had swings in a day with funds not even individual stocks of 20,000 dollars. im no longer interested in reaping big gains, im interested in meeting my goals which need a 7-8% average return. now the swings are managable and like i said i can go 14 years without selling a single fund. of course the plan is when im up ,every year to sell a little stock and re-fill my income buckets but a long streach dosnt alter not a single thing

 

[unclemick]

I think that it is decreed by the 'flying fickle finger of fate' that every ER's pucker be tested:

I believe(without going back to look it up) I was about 16.5% down one quarter in 2002/3 plus down in my individual stocks - ballpark a 1/4 mil - or more than I retired with in 93(mine not adding hers).

Truth told - I did check the supply of clean underwear.

I am increasingly 'heroic' with the passage of time. Able to - 'press on regardless', stay the course', 'hurry up just stand there'.

Now I have a few years extra supply of clean white underwear and can say Boglehead with a steely eye - sort of.

heh heh heh

 

[JPatrick]

I can see two possible senarios for a 20% plunge.
1. Almost all at once due to a 9/11 type event--There's no preparing for that one, just keep opportunity cash on hand and get ready to buy low and soon.
2. A massive bubble. In this situation I cannot believe that the warning signs would not be everywhere giving the dirty market timer prudent investor time to move into cash. Then--same deal, buy low. Biggest risk here is buying the first dip and not waiting it out.
Ain't life simple?

 

[SteveR]

I too bought a day or two after the Oct. 1987 "correction". Still have the stocks I bought then.

If the market were to turn for a year or more:

My portfolio is structured with a number of buckets for cash that we could draw on to avoid selling equities for a while.

We would also cut a bunch of "excessive" expense items and hunker down for a while to see if we needed to cut more. We could cut quite a bit from our current budget and stretch the cash. We have about 4 years of expenses at our projected budget level of spending. If we went into 'possium mode, we would stretch it to 10 years before we had to start selling off stocks or other equities. If it went longer than 10 years then we would be far from alone in the "bargin basement" market.

 

[mathjak107]

im good out 15 years since you would be hard pressed to ever find a 15 yr period where the s&p wasnt up. there may be 1 or so in history but statistically that happening today is so remote i wouldnt ever base a plan on it. but 14 years works well for me.

 

[megacorp-firee]

2000-2003 I kept on contributing full blast to my 401K... keep loading up on Large, mid-cap and int'l, gritted my teeth .... year after long year ... Now that I am 42 days and a wake up to FIRE I am glad I did.

shame on all of you fair weather AA buy and holders...

Although I do agree with the 'common sense' approach to this... I just am not smart enough to recognize (summer of 2002?, ...when?) when it is a real bad plunge.

You all have convinced me after reading all of your posts that AA buy and hold is the way to go ... then when we get to 'nose bleed' areas or worse, a real plunge you all start waffling ... this is humorous to say the least ...

 

[kumquat]

We hold 4 years spending in near cash. I might want to put a bit of that in the market assuming it would eventually turn positive.
In the ulimate senario, total society breakdown, I suppose we could move to DW's 300 acre (currently rented) farm, buy some guns and bullets, and maybe have enough to eat.
FWIW, I imagine if we stick to our AA plans, we'll survive as well as society as a whole. If society as a whole collapses, time to put gun to head.

 

[megacorp-firee]

We hold 4 years spending in near cash. I might want to put a bit of that in the market assuming it would eventually turn positive.
In the ulimate senario, total society breakdown, I suppose we could move to DW's 300 acre (currently rented) farm, buy some guns and bullets, and maybe have enough to eat.
FWIW, I imagine if we stick to our AA plans, we'll survive as well as society as a whole. If society as a whole collapses, time to put gun to head.

Was with you until the 'gun to head' part ... my philosphy is make the other guy pay 1st.... can we join you on DW 300 acre's? I can help with the chores ... and we don't eat much ...

 

[megacorp-firee]

We hold 4 years spending in near cash. I might want to put a bit of that in the market assuming it would eventually turn positive.
In the ulimate senario, total society breakdown, I suppose we could move to DW's 300 acre (currently rented) farm, buy some guns and bullets, and maybe have enough to eat.
FWIW, I imagine if we stick to our AA plans, we'll survive as well as society as a whole. If society as a whole collapses, time to put gun to head.

 

[Bikerdude]

With some of the concern I saw on this board when the market corrected less than 5% in February, I would say this will be a great place for entertainment come a 20% decline.

 

[unclemick]

With some of the concern I saw on this board when the market corrected less than 5% in February, I would say this will be a great place for entertainment come a 20% decline.

Or have an underwear sale.

:

 

[dmpi]

With some of the concern I saw on this board when the market corrected less than 5% in February, I would say this will be a great place for entertainment come a 20% decline.

I didn't want to say it... but I sure do agree with you on that one.

 

[kumquat]

Was with you until the 'gun to head' part ... my philosphy is make the other guy pay 1st.... can we join you on DW 300 acre's? I can help with the chores ... and we don't eat much ...

No problem (I think), can you brew good dark beer?

 

[megacorp-firee]

No problem (I think), can you brew good dark beer?

if it gets to that point .. I'll learn... bock ok?

 

[audreyh1]

I'd do what I did in Oct of 2002 - I'd rebalance my portfolio, which would mean buying more equities at depressed prices and letting go of some bonds and cash. This move was very handsomely repaid with the 2003 recovery.

I also managed to "trade up" in mutual fund quality during 2002 - selling some funds that I wasn't that happy with to purchase better quality funds with lower expense ratios. The depressed values of the funds (in some cases sold at a loss), helped minimize the tax impact of exchanging to the better funds.

I tend to keep 1 to 3 years of cash in a separate "short term" account that I use for day-to-day living expenses. With this kind of buffer, a bad market year doesn't cause me to immediately tighten the belt. If the short term cash account drops under 1 year's worth of funds and the markets were still down, I might start to cut back on discretionary expenses.

Audrey

 

[loosechickens]

Well, we keep about two years of normal expenses in a high interest cash account, so like the previous poster, we probably wouldn't even conserve until one year had gone by.

Also, we don't spend anywhere near the dividends and interest that our brokerage account earns, so unless interest and dividends fell to less than 50% of their former level, we would hardly notice.

We don't anticipate invasion of principal in our lifetime unless both of us would be confined to nursing homes for long periods, and we don't do a lot of trading of stocks anyway, so the chances are that we would just maintain our asset balance, pick up bargains as available, and continue to rest easy. We tend to look at stock market downturns as opportunities, rather than a calamity.

It helps that we, by nature, live pretty frugally and have few consumer desires. If there's a lot of money, as there has been in the last few years, we notice that we just don't tend to spend it, and the reverse would be true as well.

Let's just put it this way....we don't expend any worries over the market. We are well diversified, live way below our means.....why should we worry? If it all fell apart, we'd sure be in better shape than most.

LooseChickens

 

[W2R]

With some of the concern I saw on this board when the market corrected less than 5% in February, I would say this will be a great place for entertainment come a 20% decline.

Oh, believe me, we'd provide you with all the entertainment you can imagine and more! I get seriously nervous during these declines, and really appreciate all the hand-holding that steadier forum contributers provided back in February.

 

[2B]

Oh, believe me, we'd provide you with all the entertainment you can imagine and more! I get seriously nervous during these declines, and really appreciate all the hand-holding that steadier forum contributers provided back in February.

February was small potatoes (in honour of Dan Quayle). At the final yearly low I was just barely negative for the year. Wait until you've watched the last 3 years of gains melt away.

I started investing around 1966. I got baptized real fast. I lost almost 50% of my investments by 1974.

 

[unclemick]

I started investing around 1966. I got baptized real fast. I lost almost 50% of my investments by 1974.

Me too - about the same amount. Also took some 'legend in my own mind' money off the table in 1968 rented a penthouse, bought a 68 Datsun 2000 roadster and frittered some $ ratting around Seattle. Lucky I was working in those days.

Very educational. Bogle/Vanguard and Psst Wellesley came later in the 70's.

heh heh heh 8)

 

[2B]

I started investing in high school with a friend who had a custodial account his father let him do what he wanted with. We went in half and half until I turned 18 in 1969 and started my own brokerage account within the week. I poured all of my income into it and bought high flying trash with it that mostly tanked. I learned a lot but not enough. I didn't discover indexing until the late 90's.

I paid $50 of my own money to go to the UW for 4 years -- I had to pay the application fee. I had scholarships and grants to cover everything. I had great jobs both at school and over the summer which never impacted my scholarships. I graduated with over $6000 which was a minor fortune for a college kid in 1973.

 

[gnorris51]

20% drop in the market - change nothing - am I crazy?

I don't think I would do anything - I am 55 / my husband is 57 - both retired - fully invested in a very diversified stock portfolio which has returned about 16% per year for the last several building a nice nest egg about 1/3 investment and 2/3 retirement. I have no bonds, about 30K in my cash account and get $4500 monthly in a pension (after paying my part of health insurance and federal taxes) . I figure I don't need to buy the safe stuff because my pension is worth well over a million so Its like having a million in bonds - is this faulty reasoning or am I on the right track? I also have no mortgage on my home and no debt.

Thoughts? Thanks.

 

[old woman]

So far I never sell anything but I still work. When I lose money I think that is another year I need to work. I don't think I will panic after retirement I don't plan to be desperate. I will have a home with low expenses so I can basically live on SS and my roommate income. I probably won't have a mortgage and I will have a newer vehicle so not need another until I have been retired 10 years. I will probably be between 60-63 when I retire since I am already 59 so SS isn't that long to wait to collect. Other than medical insurance I think I could live on 10K per year without a house payment and would get 14K SS and 8K roommate income so investment income won't be crititical. I have over 400K invested so that will be my home repair, new vehicle and other expense fund as well as my medical fund. If I wait 3 years to retire it could be up another 100K or more. As long as my annual cost of living is kept very low doing things like heating with a woodstove and catching fish and gardening maybe raising some chickens or rabbits to keep food bills low I can stand a pretty long down turn and if I get a 10% return on 500K for 4-5 years my portfolio could double before I am 70.
As a back up plan my roommate will have SS and 3 pensions, I could raise his rent. My mom is 80 and getting to poor health so I could inherit something in the next 10-15 years.