As your Chestnuts are Roasting, (Or not), on the Fire, or Green Shoots, err, Maybe not..
The people around here in the "tony" areas -- and I've heard reports elsewhere as well -- are all freaking out.
Especially older people who should have learned something from 2008, because they all lived through it as earning-years adults. This is of course not necessarily true for those younger than 30; many of those people were children and while they may remember it, they weren't immersed in it as a working-age person with investments.
There's an old chestnut that your percentage of stock market-exposed assets as a percentage should be roughly 100 less your age in years. This more-or-less follows one of the other common chestnuts that when you get to 50 your total "assets at risk" in market-based things should be roughly half of your total with the rest in something that cannot lose value.
2008 and the following years turned all this on its ear mostly because the government's response to '08 was to wildly suppress interest rates and ridiculously spike government handout spending, thus any sort of "fixed income" investment earned nothing. The intent was to force funds into the markets, and that effect it did have but the lesson it imparted was both unwise and false.
It is absolutely true that over time that thus far in the modern world negative price moves in the market always recover. But as I've repeatedly observed in this column the problem is that you cannot control the timing of such dives and recoveries, nor can you synchronize them with your life's experiences and needs for said funds.
As an example let's assume you have a $1 million portfolio. You've figured that at 65 you can spend $100,000 a year from this, and this will "work" because you have experienced a 15% growth rate in price over the previous 15 years and engrained it in you mind that this is what will happen.
Given these assumptions you are not only at no risk of running out of money 25 years hence you will have over $10 million in that account without adding a cent to it! In fact you can spend $150,000 from that account and wind up even; any lesser amount and the account grows.
So let's say you start doing this at a "conservative" $125,000. You are five years into doing it and your account is up over $120,000 from where you started. All is well, right?
Uh, wrong.
What happens if there is a 50% market decline in year 6?
If you keep spending at your former rate in year 15 you're broke even if the 15% increase in stock prices immediately resumes.
To stop that you must cut the draw rate to almost half, or roughly $70,000 immediately and permanently and the upward 15% price increase in your stocks must resume and continue unabated.
The basic problem with this is mathematics; if a stock or index drops in price by 50% it must double from there to get back to where it was. There is nothing you or anyone else can do to change mathematics.
May I remind you that there have been several 60% or greater declines through modern history, and not just in 1929. In 2008 we went from SPX 1576 to SPX 666. In 2000 the Nasdaq got creamed. Further, in the 1970s and early 80s there was a more-modest decline but much worse for many the market effectively flat-lined for years. 1929 was especially nasty for anyone who thought it would come back -- because while it did, it was into the 1950s before the former levels were recovered.
Obviously in such a market if you have to draw on that asset base you're in very serious trouble because if the asset price has dropped by half then effectively every dollar you spend from it is more than $2 because the compound growth, when it resumes, will do so from the lower level. The more you take from such a price-depressed pool the worse you make the situation and every dollar of such spending from the pool during that period of time results in compounded damage and thus it is permanent.
Obviously that which happened before can happen again so to believe it can't and to structure your life around that is rather foolish, don't you think?
Now think about this in a different light. Let's say you had half that million in short-term Treasuries which, today, are returning about 4%. If Treasury can't pay, that is, those Treasuries are worth either less or nothing, you will not care about money. There will be no civil order, there will be no law, there will be nothing of what we currently enjoy as "modern life" because every single government check will stop coming, including EBT, Social Security, Medicare, Medicaid, VA benefits and everything else.
Therefore we ignore this "tail risk" because it is so small of a risk as to be unworthy of consideration unless you're a billionaire in which case you might have six houses and property in six nations complete with six passports, "just in case." But 99.99% of us do not have the resources to be willing or able to throw 80% of them away and be ok, and its far more likely that one of those other countries will have that happen (zeroing anything you hold there) than it will happen here in America.
The other problem is that the above "rule of thumb", which was and remains very sound, assumes you have no debt by the time you retire. That is, your home is paid for; yes, you still must pay property taxes, insurance, utilities and upkeep but no mortgage. This means if you decide to move somewhere else you mostly don't care about a housing price crash or bubble because if you sell or buy an asset in a bubbled or crashed market and must replace it with another asset of like kind somewhere else the same thing will have happened in the other place so net-net its a zero from a standpoint of asset value in real terms (in this case a place to shower, sleep, shave and, well, you know) for money spent.
But today there are a huge number of people in their 70s carrying back mortgages and high levels of other debt, including variable-rate credit cards. That's ridiculously unsafe because if there is a housing market crash you now are upside down and can't sell. Worse, your portfolio likely got it in the face in the market at the same time (it sure did in 2008, right?) and yet you have to make that mortgage payment on an asset that's not worth what's owed on it and if you don't you will be in the street and, if you've refinanced (you didn't do that in the 2020-2023 timeframe, right?) its a recourse loan and the lender can and will come after everything else you have, including your portfolio, if you don't pay. Further, the first missed payment will decimate your credit score and foreclose any attempt to refinance or shift money around.
What is perhaps even worse than all of the above is what this pattern of behavior has done to the demand curve in consumer goods. By making unsound decisions and spending at levels that presume nothing will ever go wrong you add demand to the fundamental supply and demand picture within the economy. This drives up prices for everyone and thus people start to believe that $100,000 trucks are "reasonable" because, well, you can spend it -- even though doing so is extremely dangerous to your financial health. The more people in the economy who adopt this sort of idea the worse the problem gets and the "keep up with the Joneses" pressure builds -- socially if not physically.
Remember always that any amount you have in an "asset" that is not guaranteed as to price is not "money." It does count in "net worth" today but there is no guarantee that any amount greater than zero will be there tomorrow. Only assets that are guaranteed as to price, in your local currency, can be counted as actual money and you can go to sleep tonight knowing that tomorrow morning the same amount will be there.
Right now you can be in such an asset which is returning about 4% a year in interest income. The last year's average was close to 5% in the same asset -- short-term Treasuries. The yield will change and yes, all of that income is taxable, but not only is it nearly-certain you will not wake up to find part or all of that gone if it happens the last thing you'll be concerned about is money.
Yes, I understand that if you have assets in a taxable account and sell them to move to something else you will have to pay taxes on the gains. This is a further inertial point for many people but it is how you get clobbered; at all times you must consider any asset that is subject to capital gains tax as having its present value whatever it is minus the tax because eventually, unless you leave that asset to an heir when you die, you will have to pay that tax! Its similar to the alleged "gains" of owning a bubbled house: The only way you can actually "profit" from a housing bubble if you own a house, given that you must have a place to live, is to die -- and then its your heirs that profit, not you! In all other circumstances if you sell into said bubble you will almost-certainly buy into the same bubble and as such while you will get an unreasonably-rich price when you sell you will also pay an unreasonably-rich price for the replacement.
If you have dug yourself a deep hole with debt over the last decade, and believed this was all ok because the market would never let you down, we may or may not be at the start of something much more-serious when it comes to asset price declines. The question to ask is whether or not you're ok with the risk of that decline becoming not the 10 or 15% that has already happened but 60% or more over the next year or two when the alternative is to earn 4% safely and sleep every night knowing what you went to bed with will be there in the morning.
Could that 4% go back down like the government forced it to in 2009 and 2020? Yes, it might. But even if that happens the principal will still be there in the morning and you can always move it to something else.
Does this force you to recalibrate what you can reasonably spend both today and forward on a durable basis? You bet it does. But that question becomes one of safety from a financial perspective. The risk of being wiped out when you're 28 is likely not all that severe; you have decades to recover and if you're young and healthy that sort of risk is reasonable for that precise reason. You can work two jobs, you can sharpen your nose on the grindstone, and even go entirely bankrupt and recover completely from it.
The same event at 60 is the stuff night terrors are made of, and at 70 you are very likely to be beyond any capacity to recover from it at all no matter what you do, simply because there's not enough time remaining for you and the odds of you being in good-enough physical condition to withstand working double shifts without your body giving up on you is not good.
im not trying to start anything here or be political but like... What if this "crash" is just temporary which nobody can say it won't be. Its still been crazy to me that the stock market was at record highs last year when the election was a very clear angry and total repudiation of everyone in power. It didn't help them at all anywhere. Just makes you wonder... even if today is a bad day again that's a total of three days... maybe we should just take a deep breath and wait and see
