I recently heard a meditation/ reflection session by J.L. Collins. The whole idea is to calm people down during a bear market in stocks, or an expected bear market. The idea is to prevent you from freaking out and selling your stocks when they are down or heading down.
Of course, it isn’t a good idea to sell your stocks when they are down, unless they are going to go further down. The best idea would have been to sell them before they went down and then buy them back when they are at the bottom. Since we can’t predict the future and don’t know when stocks will hit highs and lows, it is best to have a strategy to deal with the volatility.
I follow the FIRE (Financial Independence, Retire Early) movement in the sense that I listen to podcasts, read articles, and connect with others. I am more about the “FI” part of the FIRE movement. I don’t really want to retire early so much as just having more choices in life.
One of the common held beliefs in the FIRE movement is that stocks always go up in the long run. When most people say this, I think they are talking about U.S. stocks.
There is no clear definition of “the long run”, but I don’t think a hundred year time span would be appropriate. If we are talking about FIRE, then the long run has to be within a somewhat reasonable period of time. Is 30 years the long run? Even that seems too long. If you get a 10% total return on your investments after 30 years, good luck with that formula. And that isn’t even factoring inflation.
In the context of FIRE or FI, I think 20 years is an appropriate measure to be considered “the long run”. Anything longer than this, and you are only going to hit FI by saving your money without any return on your investment.
In other words, let’s say you start your march towards FI when you are 30 years old. You invest everything in stocks. After 20 years, your investments are worth the same amount as what you have contributed over the years. Is this considered the long run? You are now 50 years old, and you probably haven’t achieved FI, unless your savings rate has been incredible.
FIRE Credibility
J.L. Collins is part of the FIRE movement. I listen to the ChooseFI podcast. I also listen to Paula Pant on the Afford Anything Podcast. All of these people are advocates of buying low-cost index funds. I believe they all generally advocate investing 100% of your portfolio in stocks after you have an emergency fund, at least for younger people. This does not include real estate investments. And to be fair, I believe they would advocate moving a portion to more conservative investments as you approach retirement, or if you are going to need some of the money in the near future.
These are all very smart people. I listen to them for a reason. There is a lot of financial wisdom to be learned.
I disagree with them on investing. I do not advocate anything close to a 100% stock portfolio. I recommend the permanent portfolio for diversification. It is for wealth preservation and growth. It is designed to hold up in virtually any economic environment.
I am not saying that the permanent portfolio is the ultimate solution for everyone. But I think a 100% stock portfolio is highly risky, even for “the long run”. I can understand if someone young without a lot of money takes this path, but it really isn’t appropriate for most people.
As warned by the SEC, past performance does not necessarily indicate future results.
My fear is that we are going to have a severe and prolonged bear market in stocks. People who followed the advice of pouring everything into stock mutual funds are going to get hammered. It is going to alter their life plans. They are going to then ignore the people who gave them this advice. Worse, they will be resentful.
To be sure, there are many who follow the FIRE movement who do not advocate the stock investing advice. Some people prefer more diversification. Some people prefer paying down their mortgage and keeping a big cash fund. Some people prefer most of their money going into cash-flowing real estate. (Paula Pant is a big advocate of real estate investing, aside from stock investing.)
Again, J.L. Collins and the other leaders of the FIRE movement are intelligent people. They offer mostly good advice. I think the advice on heavily investing in stocks is wrong. It is a major component, but it is just one component. I have learned a lot from these people, and I don’t want to see their reputations suffer because of this one component.
The Long Run in Japan
In 1989, the Nikkei (the Japanese stock market) hit almost 39,000. It topped out at an intra-day high of 38,957 in December 1989. As I write this, the index is just over 22,000.
If someone had invested $500,000 (or the equivalent in yen) at the top of the market, they would now have about $275,000 almost 30 years later. If this isn’t the long run, then I don’t know what is. The market would still have to nearly double from here just to get back to even. I hope nobody dumped a bunch of money in 3 decades ago thinking they would be living off the dividends and capital gains today.
And Japan is a first-world country. It has had its economic struggles to be sure. But in comparison to the rest of the world, it is a relatively wealthy country.
To be fair, most people aren’t going to invest all of their money at one time. And most aren’t going to do it right at the peak of the market. Still, I think the point stands. Even if someone had just started investing at the peak and contributed to an index fund on a monthly basis, it would still be a disaster. At best, they might be even after 30 years in Japan.
Imagine it is the year 2049 (30 years from now). The Dow is at 15,000. This already happened in Japan.
It doesn’t mean it will happen here. I don’t think it will happen here, but I also think we will have higher price inflation here than what Japan has seen over the last 3 decades. In real (inflation-adjusted) terms, I can’t discount the possibility that the overall stock market in the U.S. will be flat or down in 30 years from now.
This is not a prediction. Stating that something is a real possibility is not the same as a prediction. We don’t expect bad things to happen to us, but we still get insurance.
I think we are going to see a severe bear market in stocks in the U.S. I have no idea how long it will last. Maybe it won’t last long at all if the Fed resorts to massive inflation. But then we will have other problems to deal with, as our dollars won’t go very far.
I wholeheartedly endorse the FI movement. It is good to save money. It is good to look to the future. It is good to give yourself choices that come with having money.
I don’t think heavy stock investing is an element of FI, but it is something that many in the FI/ FIRE movement advocate. I do not endorse this one aspect. With that said, someone pursuing FI who is heavily invested in stocks will still be in better shape financially after a bear market than the average person who isn’t pursuing FI.