I Lost $70k in One Month – Should I Give Up On FIRE?

Person reading flaming newspaper

Unless you live under a rock, you have likely heard the news: a global pandemic is sweeping the nation, filling up hospital beds and taking down the economy. In fact, if you do live under a rock I would advise you to stay there— come back up when this is over.

We just experienced the longest bull run in history since the 2008 recession. Every year a new financial ‘expert’ prophesied the next market meltdown, but we reached record highs instead. However, it looks like it’s finally time for the market to hunker down as restaurants shut their doors, the travel industry takes a break, and millions of Americans find themselves jobless (a record 3.3 million at the time of writing). 

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The S&P 500 from February 2007 to the close on March 20, 2020 from Clipping Chains

No one is unaffected by the far-reaching consequences of this pandemic. It has already affected each member of my family. Mr. Mechanic heads to work at the hospital every day, bracing for impact as more people arrive with symptoms from the virus. Meanwhile, my dad filed for unemployment the same week that my sibling booked an emergency flight home from the UK. The health and safety of our loved ones remains top-of-mind as we start socially isolating. Amid all of this, the virus has also infected our economy.

Mechanic’s First Market Crash

I must admit that the scramble of our last recession in 2008 is just a vague memory to me. You have to understand, I’m a 20-something whippersnapper whose recollections of 2008 are mostly by word-of-mouth, recounted like scary stories over a campfire. I was more preoccupied with my calculus exams than Mad Money’s Jim Cramer gesticulating wildly as the DOW marched downward. 

NYT - Front Page (Sept. 30, 2008)
I was busy reading textbooks, not newspaper headlines like this one from September 30, 2008.

Now, times are different.  This is the first time I’m experiencing a market crash with some skin in the game. In one month, my net worth dropped by $70k. A couple of days later, I was down another $10k. Media outlets are publishing articles asking if this is the end of the FIRE movement.

Critics wonder if FIRE is just a pipe dream built on the back of a bullish market by people (like me) who haven’t really experienced economic turmoil. With my portfolio bruised and bloody, is this the time for me to tap out? The answer, of course, is no. I’m confident because I have implemented the 4 P’s of Investing: portfolio allocation, preparation, perspective, and self-preservation. (Also the quiet P of privilege, given the fact that I have a stable job, a sizable nest egg, and the money to invest in the first place.)

Portfolio dropping $70k in one month with markers of pandemic timelines
My investment portfolio dropped $70k in the course of one month.

P #1: Portfolio Allocation: It’s Time To Take Stock

This is the ideal time to take stock (puns always intended) of your portfolio’s allocation and make sure it is still aligned with your long-term goals. My target allocation was 90% stocks and 10% bonds. My retirement date is still far enough in the future to allow for lots of flexibility and more risk. Now the question is: do I feel comfortable with that level of risk, and have I stayed true to my allocation?

My favorite money tracking tool Personal Capital has a sweet portfolio analyzer. However, my old 401(k) has a bunch of funds PC doesn’t recognize, so I haven’t been as careful about staying up-to-date with my allocation.

screenshot of personal capital portfolio analyzer
This portfolio analyzer is more helpful if you don’t have ‘unclassified’ funds

I did the math to get my true portfolio allocation:

We are moving this year, so last year I started saving more cash. I figured it would be best to have a decent emergency fund for unexpected expenses, and also wanted to have the cash available in case we decided to put a downpayment on a property. 

We have since decided not to buy in Santa Barbara, where starter homes range from $800k to a cool $1M. By the time COVID-19 hit, I had about 2 and a half years of expenses saved in my emergency fund. It’s certainly a boon to have this large of a buffer as companies start laying off employees.

I’m a bit of an outlier, though. 65% of millennials ages 18 to 24 can’t cover six months’ worth of living expenses, and 60% of older millennials ages 25 to 34 can’t either. Students who graduate into a recession experience long-term career effects, and generally have lower salaries because they are starting in entry-level positions. This is a terrifying position to be in, and my tips might not be as helpful for someone struggling to get by living paycheck to paycheck. Still, it’s best to start with the basics: make saving an emergency fund a priority no matter what your financial situation looks like.

P #2: Preparation: Stock Market Winter Is Coming

One way to feel calm when markets are volatile is to prepare yourself in advance. Investors know that the market is cyclical: sometimes there are massive stretches of growth, and other times productivity stalls and the markets constrict.

If you understand that recessions are inevitable aspects of our economy, you can plan and be ready when they come. This means saving for an emergency fund in case you are laid off, rack up medical expenses, or have any other unexpected costs pop up. The general advice is to save 6 months to 1 year of expenses, but choose an amount that would get you through an extended period of time without any income. 

Warren Buffett has a saying about the stock market and investing in general:

“Be fearful when others are greedy and greedy when others are fearful.”Click To Tweet

When the markets are doing swimmingly, people take more risks rather than save for a rainy day. On the other hand, when everyone seems to be losing their jobs, that’s when people will feel the need for an emergency fund. Yet if you follow Buffett’s logic, folks should put their paycheck into the market when the economy is at its shakiest. 

When times are good, that’s when its best to save for an emergency fund (the second best time is now!) to prepare for the worst. While many struggled during the 2008 financial crisis, others were able to buy property at rock-bottom prices and be ‘greedy’ because they had prepared beforehand. Be the squirrel stocking up for the stock market winter, so you will be flush with nuts when the blizzards roll in. Brace yourself; a crash will come.

P #3: Perspective: Understanding Your Investments

It is important to have perspective on the long-term pattern of the market. While performance in the past does not guarantee the same in the future, we can take a look at previous bear markets and see how they have been followed by prolonged period of growth.

Chart from Invesco

People claim during every bear market that “it’s different this time!” Yet historically we continually see that the nation overcomes tough times and booms in productivity the following years. Understanding these market patterns with a broader view can help you the next time it feels like money is vanishing from your retirement funds.

Another way to find comfort is to understand what it means when you invest in the first place.

In his book Enough, Jack Bogle explains:

“Investing is all about the long-term ownership of businesses. Business focuses on the gradual accumulation of intrinsic value.”Click To Tweet

When you buy stock, you’re betting that the intrinsic value of businesses will increase. I feel comfortable making that bet because it has always increased in the history of the world. Humans are driven to continuously improve, build, and produce things of value. While it may take time for the numbers to reflect it, over time the stocks will fall into line with the growing value of the businesses you invest in.

Another key word in Bogle’s quote is long-term. Many people try to beat the market by selling their shares when the price is high and buying when they are low again. While this might seem like a simple, smart strategy, all this extra effort rarely pays off. Evidence suggests that buy-and-hold investors actually do better in the long run. That’s great news for those of us who weren’t planning on studying up on market psychology, interest rates, inflation, GDP, and macroeconomics in addition to our day jobs. (And we get to gloat when our investments do better than those managed by people who actually did study those things.)

P #4: Preservation: Don’t Look Now

Even if you carefully curated your portfolio, prepared for bad times, and have the proper perspective on long-term market behavior, it can still be painful to watch your net worth plummet. You would think that after gaining $500 in the stock market, losing $500 would put us back at neutral. However, behavioral economists have found that we tend to feel a loss about twice as severely as we experience a gain.

Person reading flaming newspaper
Negative news can make it feel like the world is on fire.

Similarly, our brains have a nasty habit of obsessing over bad news and ignoring the good. This is called negativity bias. Studies have shown that we tend to make decisions based on negative news more than positive. This tends to result in people panic-selling when stocks are declining. Even with all of the logic backing up your investment strategy, emotions can be hard to ignore. There is a simple solution: If the rollercoaster ride makes you feel queasy, don’t look. 

I knew the sirens were sounding a market crash, but I felt confident in my portfolio and my long-term investing horizon. However, because I wanted to avoid negativity bias, I deleted the bookmark on my browser and put it out of my mind until it was time to write this post. When I started writing this article I pulled up my money tracking account on Personal Capital, but before it loaded I prepared myself. I closed my eyes to visualize a couple of possibilities. How would I feel if my portfolio dropped by 30%? What about 50%?

Contemplate how you would feel to see a drop in your net worth.

My net worth peaked a couple of days before the crash at $397k, so let’s round up to $400k. If I lost half, that would be $200k gone in the maw of the market! On the other hand, that would mean I would still have around $200k left, which is a lot of money. It’s more than enough to cushion any disasters, and certainly I would still be able to be happy, find meaning, and continue working with purpose.

More importantly, that loss is called a “paper loss.” The markets could rebound the next day and show no losses at all. The important thing is not to sell when the value is low, that’s called “locking in your losses.” So when Personal Capital shows a drop in $70k, I haven’t actually lost that amount of money unless I sold it! If I can wait to sell until retirement or at least when the economy recovers, the prices of the shares will likely rise to higher peaks.

Next I pictured a more realistic drop of 30%. That would leave me with about $280k, nice! Anything above $200k now would feel like a great gift. When I logged on, I braced for the worst. My net worth showed $318k, or a loss of about $80k since I last looked.

Even though I felt calm looking at that number, in general it’s best to practice self-preservation and don’t look.

A Pandemic and the 4 P’s of Investing: Portfolio Allocation, Preparation, Perspective, and Preservation

We couldn’t have anticipated an outbreak on this scale (oh wait, Bill Gates totally did). However, a market crash is always on the horizon. Even if we can anticipate it, a market crash is usually a symptom of an even bigger disease (in this case a real, literal disease). It can be a huge shock to our personal lives when businesses close, we are laid off, our family-members are drafted into the army, or our health is at risk. COVID-19 is wrecking havoc in serious ways that extend way beyond peoples’ investment portfolios. However, the lesson is the same: we need to do our best to prepare for the worst when times are good.

Financial independence is built on understanding the 4 P’s. They can help investors in times of marked uncertainty to hold steady— a solid investment portfolio built to endure, an emergency fund to prepare for the worst, perspective on previous market cycles, and the will to stop looking at red stock tickers in self-preservation. Make a plan when times are good to be ready to weather the rough waves of a diving market. The 4 P’s will be your life vest when uncertainty goes viral.

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19 Comments

  1. “…when uncertainty goes viral.” I see what you did there!

    Having those other Ps in order affords you the Patience to wait until things are back on track.

    Sounds like you are in a great position yourself, especially making peace with any potential paper losses before you saw the actual figure. I could learn a thing or two about not looking at my portfolio right now!

    1. Oh nice, a 5th P! It definitely helped to consider how I would feel if 50% of my portfolio vanished. It helps if you aren’t retired yet and have a few working years ahead of you for sure.

  2. I remember losing $400K in 2000-2002. About half my net worth at the time I think. It was slightly disappointing but no big deal since I was 100% stocks and not planning on retiring soon. When I retired slightly early four years ago I transitioned my accounts into something less than 50% stocks/index funds because I simply did not need a return anymore, just needed not to lose a lot. So while this downturn has me down around $500K it is not a significant loss to my assets. It will come back some day and if it doesn’t that’s no big deal either. Money is like a lot of other things, when you don’t have enough it seems very important but when you pass the point of knowing that another dollar or another million will have no impact on your life at all then it becomes one of the very least concerns you have. And that I think is the best part of financial independence, instead of focusing on something as trivial as money you can use that focus for things more important.

    1. It’s definitely a blessing to be able to focus on other things rather than money. A huge perk of financial independence for sure.

  3. Hang in there. Everyone is a hero when the market is raging along, but now is the true test. One helpful aspect for us is NOT having Personal Capital (or similar). We actually have to go and manually track each different investment account, which we do monthly. I think it would be more psychologically challenging to have quick access to my net worth figures at all times. I know I’m a rare bird in that sense, but I’m glad I can’t easily look at see losses (or gains, for that matter). Nothing against using PC or Mint etc, but my advice is to set limits on checking it. Delete the app or whatever (if there is an app?).

  4. we are all largely trained and conditioned to buy more when the markets are down, especially like in this latest 30% plunge. i would say this: your cash position has a dual purpose. first and foremost it is emergency money to spend on living your life in case you lose your income. secondly, it is “dry powder” to buy a big dip and that might be tempting to shoot all your bullets right away. if anyone asked me i would say to do so cautiously. you certainly don’t want to quit doing your usual market buying but conserving some cash isn’t likely to wreck your life either. so what if you miss a few percentage points of gains if you slept better at night with your big fluffy cash pillow.

    1. Thank you for this perspective. I certainly enjoy a nice big fluffy cash pillow! I am putting some slowly into the market, but I’m planning on keeping at least a year’s worth of a buffer. I’m not in a rush to shed this security blanket.

    2. For your unclassified investments in Personal Capital if you go on their website (not through the mobile application) you can add proxies for your unclassified investments. Go to Investing/Allocation and there is a “Manual Classification” button at the top of the page.

      As others I have mentioned, 2008 was a bloodbath as we were also near 100% equities and our net worth dropped in half. But it came back, it always does.

  5. We had a nice cash cushion too for a similar reason – after selling last year we were still deciding if/where to buy our next place. It’s certainly helped us feel more secure, and see lighter losses during the downturn. We just did our quarterly review and our net worth hadn’t dipped as much as expected either – partly because of that cash, and partly because we’ve continued to put a significant amount in every month.

    We’ve been through previous recessions, but with much less invested. It’s been a good test of our plan and so far we feel okay about how it’s going. Sounds like you’re holding up well!

    1. I’m happy for you! I definitely expected my portfolio to be down more, but that cash cushion definitely helps. Good point that every recession can be different even if you’ve been through one before because many variables change. I’m glad you’re feeling secure going through this!

  6. What a great post! I love all of this and especially the mental exercise you did before looking at your number.

    The “preparedness” P really resonates with me. Being on the path to FIRE has given us a rather unique position to help reduce some of the anxiety and fear surrounding various impact from the pandemic.

    I feel like this global event will fuel even more desire to prepare for bad times and the pursuit of FI will simply be a natural consequence of this for many.

    1. Thank you! I completely agree. I hope that the silver lining of hard times like these is that more people will be motivated to be prepared. It’s not easy, but it is essential.

  7. Nice job with your cash cushion. 2 years is plenty of time to ride out this market crash.
    We lost a large amount of paper money too, but I’ve been through this twice already so I’m hanging in there. Our cash cushion is only about 3 months, but my wife’s job is very secure. I’m not worried right now. We’ll see how it goes over the next few months. Good luck!

    1. Thanks Joe! I’m glad you’re hanging in there, even though you have your wife and son at home now to contend with 😉
      Very glad your wife’s job is secure in times like these!

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