The Financial Crisis -- The Aftermath

[chinaco]

I think many of us are acting on faith that markets and our economy will correct itself like previous bear markets and recessions that we have lived through. But our hope and faith is based on our personal experiences in the last 20 or 30 years.

This is different.

This crisis is far worse than any of us can imagine. We all hope that in 2, 3 or 5 years this is a distant memory and we are looking back on it with our personal portfolios erasing the loses we are seeing today. Our loses may be permanent or for all practical matters permanent if it takes a decade or more to recover.

I am facing the sober reality that I may have permanently lost 1/2 or more of our wealth. What do I mean by permanent? My main motivation for saving and investing was ER (financial independence)... otherwise I would have just spent it along the way and enjoyed the fruits of my labor. If it takes 10 or 15 years to recover then I am seriously impaired as far as retirement goes. If I have to wait 10 or 15 years... I am at or past normal retirement age.

I still have a job and think I will not lose it... but that could just be wishful thinking. In reality, I have nothing to base that on.

For many of us (our portfolios)... the market took 7 years to recover from the tech bubble that burst.

Sorry for the pessimism. But as I learn more and begin to understand the enormity of what happened... I am beginning to realize that we could be really scr3wed.

What will it mean to you if takes 10 to 15 years to just get back to where your were in 2007 with your portfolio.

 

[2B]

Life's a bitch and then you die.

I've had the crap kicked out of me before but what hurts the most now is that I'm getting close to 60 and I expect to lose my j*b if the economy tanks. If I'm out, I see little chance in getting anything even close to my current salary.

I'm almost speechless over the rate of decline and the amount of phantom wealth that disappeared just this month. I will say I'm fortunate to have gone from 90% to 60% cash/CD last August, if only I had gone further.....

I made my move because I was getting "close." The 40% cash/CD amount represents a "minimum" retirement financing. That will still let us maintain a decent standard of living but the "exotic" travel will not happen.

I'm still on plan. I can manage on the cash reserve if necessary but I won't be too happy about it.

 

[uncledrz]

chinaco
This downturn took a far more rapid path than I anticipated. It looked to me that we would be on a slow slide downward over a number of years rather than fall off a cliff as it appears we have.
At the same time, I do not see us living in caves. People will still feed, clothe and shelter themselves and their families, and that will result in economic activity. Could it take 7 years to recover to October 07 levels?, sure, in fact stock market levels may not recover for far longer than that. Some business will fail, others prosper. Figure out where to be and get there. We've had times much, much harder than right now and come through very well indeed. We will again.

uncledrz

 

[chinaco]

I move money to fixed a couple years ago to prep for retirement. Most is not in cash... it is in govt and high grad bonds. That fixed represented about 32% of our portfolio.

Of course looking back on it, I wish I would have moved more to fixed.

uncledrz - I agree. I do not think this is the end of western civilization... but I am realizing that it could be the end of my ER dream.

I have enough fixed to retire at 55 to cover expenses till 62... perhaps 65. But I would be hoping that the equities come back.


All I can do is wait and see. I am factoring in that I may have to work longer.

It might be that I will have to work till 59 instead of 55. Hopefully I will have a job!

It bothers me that I have tried to do all of the right things (in a fairly conservative way) only to find the system has been rigged against me and the results of others have cost me dearly.

I am probably in better shape than most Americans. But as I survey the devastation.. it looks dismal.

 

[putty]

Could you explain how you have lost half your wealth? Are you including your dropping home price? Because I am 24 with 90% stocks and I have lost around 50% from the top, but you should have been nowhere near that in stocks. I see you mentioned you had a third in government bonds so that leaves 66% presumably in stocks. Half of that is "only" 33%.

I really feel for those retiring or hoping to retire soon. I see these 3 or 4% declines (and sometimes gains) and they are relatively small for me, but for those in or near retirement those are yearly expenses. Sort of breathtaking for me. But then again, look on the bright side. If you are retiring soon you are pretty much guaranteed Social Security.

 

[frayne]

What will it mean to you if takes 10 to 15 years to just get back to where your were in 2007 with your portfolio ?

I may seriously have to consider gainful employment. But unlike you I have a little more faith in the system rebounding in a more timely matter. But on the upside I think this current debacle may make people think about what is important in their lives instead of accumulating things they don't need and can't afford.

 

[REWahoo]

But as I survey the devastation.. it looks dismal.

Human beans have a tendancy to see things in the extreme. I have a friend who says of the ups and downs of life: "Things rarely turn out as good as you hope or as bad as you fear."

I'm holding him to his word.

 

[donheff]

Human beans have a tendancy to see things in the extreme. I have a friend who says of the ups and downs of life: "Things rarely turn out as good as you hope or as bad as you fear."

I'm holding him to his word.

+1. Keep in mind, when we ran those Firecalc estimates we were factoring in the Great Depression and the stagflation years - not just our own experience over 20-30 years. This downturn may or may not turn out to be far worse than those periods. If it is far worse we will all have problems. If not we will be breathing a sigh of relief in a few years.

 

[al_bundy]

these secular bear markets are a fact of life of investing. you can either hold through them or find a newsletter that predicts the tops or close to the tops and cash out and stay in cash for years

 

[donheff]

Human beans

Is that what we have come to REW?

 

[REWahoo]

Is that what we have come to REW?

Hey, if this market meltdown doesn't stop soon I may end up in a 'vegetative state'.

On the positive side, maybe I'll finally avoid the chiggers, fire ants, scorpions...

 

[DayDreaming]

The record gains and losses, sometimes so close together, seem to me to be a side effect of how fast news travels today as opposed to 40 years ago. My hope is that the upswing, when it comes, is as dramatic as the downturn. I don't have a lot of faith that we'll get back to 2007 levels anytime soon, but I can hope for some big gains sometime soon, so maybe my ER dream won't look so far away.

 

[HFWR]

Ok, so my portfolio is in the dumper. I still have a nice, albeit smaller, chunk o' change. And though I'm sucking hind tit compared to many on this board, I'm well ahead of most people, in that my only debt is a mortggage, and I'm a cheap bastard...

Mi vida loca, c'est la vie, blah blah blah...

 

[Rich_by_the_Bay]

My favorite news magazine is called The Week. They quoted a holocaust survivor in one of their "notable quotes" columns.

It went loosely something like, "No matter what happens to you that you have no choice over, there is always one final decision that can never be taken away: your reaction and attitude toward your situation."

Good advice these days.

 

[Freeatlast47]

I have seen a 50% loss in paper value since 07, in September 08 I took out just enough cash to cover basic expenses for the next five years. I am now thinking that I should have taken out enough for 10 years ... I am not working and my job was outsourced two years ago. Going back to work is not an option in my field because employers consider me too old. The only way I could work again is start my own business My dad seems the recovery is going to take a long time because of the world banking situation and he is 72. Right now I have 50% cash on hand the other 50% in stocks. I am hoping that it will turn around in 5 years

I have 15 more years until I qualify for SS ....

 

[REWahoo]

The only way I could work again is start my own business...

In your chosen career field, perhaps. But what about a part-time job in something totally unrelated? Even a small income can be a big help in buying some time for our portfolios to recover.

 

[Nords]

This is different.

Oh, so this time it really is different!

This crisis is far worse than any of us can imagine. We all hope that in 2, 3 or 5 years this is a distant memory and we are looking back on it with our personal portfolios erasing the loses we are seeing today. Our loses may be permanent or for all practical matters permanent if it takes a decade or more to recover.
I am facing the sober reality that I may have permanently lost 1/2 or more of our wealth. What do I mean by permanent? My main motivation for saving and investing was ER (financial independence)... otherwise I would have just spent it along the way and enjoyed the fruits of my labor. If it takes 10 or 15 years to recover then I am seriously impaired as far as retirement goes. If I have to wait 10 or 15 years... I am at or past normal retirement age.

What American conditions existed the last time it took 10-15 years for the markets to recover? The Great Depression? ~1966-~82? ((It's an expression, not a mathematical equation.) Do you really consider this year's volatility to be equivalent to those events?

What part of your portfolio do you need to spend in the next two years? Five years? We've been seeing this as the mother of all rebalancing & reinvesting opportunities.

If this is a feeling that's going to ruin your sleep, Chinaco, then it might also be a hint to reconsider volatility tolerance & asset allocation. Going to cash & I bonds last Oct might seem smart in hindsight, but the other side of that sort of volatility aversion is inflation erosion.

I think that the American finance situation is nowhere near as bad as the 1980s S&L crisis, let alone the graft & corruption of the Japanese system in the 1990s. It's interesting to note that when things got really crappy this month, the first place the rest of the world fled to was American dollars.

A few final ER planning points. This year is one of those events that Bernstein says FIRECalc is worthless at analyzing with anything higher than an 80% success ratio. Some might legitimately claim that it's even part of the failures of a 95% success ratio. What success ratios were you using before 2008, and what ratio are you going to use in your subsequent planning? And while portfolio withdrawal rates during 2000-2002 soared pretty high, how do they compare to what would be your SWR for 2008? I'm not suggesting that you value your portfolio at today's low... but at some more long-term average like the last six months.

In other words, this has been a test of everyone's ER plans. If your ER portfolio would have failed this test, then perhaps it's not sufficiently capitalized or diversified. And as you've pointed out, at least you're not ER'd and confronting Plan Bs.

 

[dex]

In other words, this has been a test of everyone's ER plans. If your ER portfolio would have failed this test, then perhaps it's not sufficiently capitalized or diversified. And as you've pointed out, at least you're not ER'd and confronting Plan Bs.

Good points Nords,
This might sound a bit insensitive but, I'm getting tired of several points being made in several threads - basically because it appears people are ignoring the good advise given from several posters in the past.

1. Comparing paper looses from highs instead of purchase price (possibly plus a nominal rate of return)
2. Not taking into account cash flow into expense budget needs & determining the % you need to withdraw from your investments
3. It is worse/different now (the other side of the coin before the 2000 crash)
4. Thinking you can sell now and buy latter when prices are lower

Of these the worst might be number 1.

What I would suggest is preparing a spread sheet computes your purchase price of your investments plus a nominal rate of return per year - 4.5%(?) as your base; then compute your net worth with today's prices - you might be surprised.

 

[FinanceDude]

In other words, this has been a test of everyone's ER plans. If your ER portfolio would have failed this test, then perhaps it's not sufficiently capitalized or diversified. And as you've pointed out, at least you're not ER'd and confronting Plan Bs.

Thanks for the positive message..........

 

[ladelfina]

Nords, please don't keep bringing "diversification" into this and singing that same old song. All sectors, all countries seem to be down roughly the same amount. Even gold is down. The crisis is just beginning. The dollar and Treasuries may well be challenged next:

Ryan Says Treasury Faces `Unprecedented' Financing Needs in '09
By Rebecca Christie

Oct. 28 (Bloomberg) -- The U.S. Treasury faces historic demands to fund a growing budget deficit and raise money for a $700 billion Wall Street rescue program the department's top domestic finance official said today.

``This year's financing needs will be unprecedented,'' said Anthony Ryan, the Treasury's acting undersecretary for domestic finance, at a Securities Industry and Financial Markets Association conference in New York, where he was a last-minute substitution for Treasury Secretary Henry Paulson.
...[etc.]

We have seen estimates that next year the US will have to finance a $2 Trillion annual deficit. They may be able to push it forward into the next Administration by the forbearance of the world, but not by much.

It should be obvious to anyone that we are approaching the apogee of the Treasury bubble, with the credit bubble having broken already.

When the Treasury says they are facing unprecedented challenges in financing the US public debt next year that is an understatement.

Once the deleveraging of the markets subsides, the dollar and Treasuries will drop, perhaps with some momentum, as the rest of the world realizes that the US has no choice but to default. This can be resolved in several ways, including continued subsidies from foreign sources in the form of virtual debt forgiveness, devaluation of the dollar, raising of taxes, and higher interest rates on debt.

The problem now is that the US has breached the point where it can service its debt out of real cash flows, and turning this around will require a severe devaluation of the US dollar.

Devaluation and selective default are the only foreseeable systemic alternatives. There are other exogenous paths of a more political nature such as consolidation and war that may color the default a slightly different color, but a selective default it remains.

This is the fundamental situation. Everything else is speculation and commentary.

Jesse's Café Américain: In 2009 the US Will Be Forced to Selectively Default and Devalue Its Debt

Comments welcome, even and especially in contradiction of the above.

 

[Moemg]

.

In other words, this has been a test of everyone's ER plans. If your ER portfolio would have failed this test, then perhaps it's not sufficiently capitalized or diversified. And as you've pointed out, at least you're not ER'd and confronting Plan Bs.

Good advice !

 

[dmpi]

The market will recover. But the question is when and in which markets. My (wild) guess is that we'll see the international markets recover first, and then the US markets will follow. I've been buying CDs out to five years, so that should tell you how quick I think this will all happen. The name of the game here is just to hunker down & wait this thing out.

 

[HFWR]

Welcome to Jesse's Café Américain - These are personal observations about the economy and the markets. In providing information, we hope this allows you to make your own decisions in an informed manner, even if it is from learning by our mistakes, which are many.

...speculation and commentary...

...

 

[ladelfina]

"It's tough to make predictions, especially about the future"!

 

[audreyh1]

My favorite news magazine is called The Week. They quoted a holocaust survivor in one of their "notable quotes" columns.

It went loosely something like, "No matter what happens to you that you have no choice over, there is always one final decision that can never be taken away: your reaction and attitude toward your situation."

Good advice these days.

FWIW that was famous Holocaust survivor and psychoanalyst Viktor Frankl who explores this concept for victim survival in his book "Man's Search for Meaning". A short book - incredibly powerful and well worth reading.
Viktor Frankl - Holocaust Survivor and Famous Author/Psychoanalyst

Audrey