The Big Wobble

The Big Wobble

I started my investing journey well before the financial crisis.

That being said, my equities portfolio wasn’t particularly large at the time.  In addition, I had a pretty cushy corporate job and no family to support.

All of which is to say that I was pretty insulated from the Great Recession – and the associated market meltdown.

Instead, my first real experience with market volatility came three years later, in August 2011.

I was an intern at a large investment bank in London.  The market was doing well and I was getting some good vibes from HR about the prospects of a full-time offer.

Feeling positive about the future, I maxed out my student loans, set aside just enough money to take me through to the end of the MBA program – and invested the rest in an S&P 500 tracker.

Just two weeks later, this happened:

2011 US Debt Downgrade

For the first time ever, the S&P rating agency decided to downgrade the creditworthiness of the US government.

The index promptly crashed by about 17%, wiping out a fifth of my investment overnight.

The senior bankers around me started to look worried.  All of a sudden, HR wasn’t so bullish anymore.

Was I worried?  Not really.

I still had enough money to take me through my MBA program.  I was also quite confident that I could line up some kind of a job at the end, even if it wasn’t in banking.

But I did feel silly.  Why or why didn’t I wait just another few weeks?!?

Easy Street

Not too long ago, I posted this amazing chart by Michael Batnick:

Reasons To Sell

Source: The Irrelevant Investor

If you squint hard enough, you’ll just about see that August 2011 selloff all the way on the left.

What felt like a Greek tragedy at the time turned out to be nothing but a rounding error.

As an aside, that money I invested 11 years ago has more than tripled in value since – and became the cornerstone of my equity portfolio.

But that’s not the point.

What is really striking about the chart above is that all these reasons to sell came against the backdrop of one of the easiest investing environments EVER.

And if the equity selloff over the past week has had you worried, or checking your portfolio one too many times, or perhaps even re-considering your investment strategy, it’s probably worth doing some proper soul searching.

I don’t know what the future holds.

What I do know is that leaving the short-lived Covid crash of 2020 aside, what we’ve seen in the markets over the past 10+ years isn’t even close to the pain you will likely experience as a long-term equity investor.

The real pain is the Nasdaq declining by about 70% between March 2000 and November 2002 – with multiple “fake rallies” along the way:

Nasdaq

It took a whole SIXTEEN YEARS for the Nasdaq to hit a new all-time high…

The real pain is the S&P 500 basically going nowhere for ten years in a row:

Stock market lost decade

It’s watching personal finance bloggers capitulate – because somehow the “buy the index and hold” song wears a bit thin after a decade of underperformance.

It’s people pulling their kids out of private schools because they can no longer afford it and early retirees going back to work because the 4% SWR didn’t pan out.

Now, I don’t mean to depress you here.  But I am a strong believer in planning for the best and preparing for the worst.

So here are a few thoughts to help frame your approach to long-term equity investing.

Volatility As A Friend

It’s nauseating and gut-wrenching.

And it’s also your best ally when it comes to building wealth and retiring early – because it’s the ultimate source of the safe withdrawal rate.

If markets weren’t volatile, investors wouldn’t demand an 8-10% annualized return to play the game.

Instead, they would settle for a bond-like return of somewhere around 2-3%, nominal.

Good luck drawing down 3-4% from a portfolio that only grows 2-3% a year!

In other words, learn to love volatility.

Every time the market wobbles, it sends a whole bunch of folks packing.  Those who hold on get to reap the rewards.

Surviving vs Thriving

When the times are good, it’s easy to get carried away.

For example, over the past year, I’ve seen many folks question the wisdom of a cash emergency fund.  Why not put it to work in the stock market instead?

I get it.

A $10k cash emergency fund costs you about $500-$700 a year at current levels of inflation – and this is before the mad gainz you could realize if you invested it.

It’s a tough pill to swallow – but also the worst possible way to look at it.

The real return on your emergency fund is not the paltry 0.01% nominal interest you get in your “high interest” savings acount.

Rather, it’s not having to liquidate your equities at a 40% discount.

It’s not having your house foreclosed on.

And, quite frankly, it’s the ability to sleep well at night – which is precisely why I carry a cash balance well into six figures.

Your ultimate success as an investor boils down to your ability to stay in the game for as long as possible.  And you simply cannot do that without an emergency fund.

Net Worth vs Self Worth

When you are focused on financial independence, it’s easy to get carried away by the number in the spreadsheet.

But, of course, the value of your portfolio has absolutely nothing to do with your value as a human being.

Focus on hitting your savings target, not on what the market does with your savings.

I am writing this post on a Tuesday evening.

For all I know, by the time it goes up on Wednesday morning, the market could recover a big chunk of the losses – or take yet another massive plunge.

But it doesn’t really matter – because the only thing you’ve got to do is put your money to work – and get on with living your life.

Leave it long enough, and magic will happen.  Guaranteed.

As always, thank you for reading – and happy investing!


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Banker On FIRE is a London-based M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.

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18 thoughts on “The Big Wobble”

  1. Always learning

    Thanks Damien. I really enjoy your posts and always get a lot out of them. They are always thought provoking. The thinking you share will go on to help me and my wife in later life, and my children and hopefully grandchildren when they come along. This one includes very wise words. Your articles, and some other articles/podcasts like Maven Money, Meaningful Money, the Escape Artist and ChooseFI have got me to a place where I am very relaxed about stock market jitters. I’m even thing of investing more on a monthly basis as the market is dropping. I haven’t always been like that and there were times I was paranoid about getting the market timing wrong or investing in the wrong fund so keep reasonable amounts of money in cash instead. Just as investments compound, so also your advice compounds, not just to the people like me who read it and put it into practise, but it will also have an indirect postive affect on people in my circle of influence as well the circles of influence of all the other followers of your blog. This ends up meaning that by doing what you are doing you are having a positive impact on a large number of people.

    1. Thanks a lot for the kind words, means a lot (especially as I was quite exhausted finishing up the post on Tuesday night!)

      You are spot on. It’s all about compounding, and that goes for non-financial things. Every time you make the right decision (i.e. not to sell in a downturn), you are essentially voting for the kind of person you will become one day (or, in your case, the kind of person you have already become)

      Cheers
      Damian

    1. Thanks Genghis. Felt was a good time for it after a long stretch of peaceful markets!

      Haven’t spent any time on VCTs… recall being intrigued but only so many hours in the day.

  2. Another re-assuring post BOF and a great reminder to ignore the “noise”.

    It has also been a good test for my stomach in a downturn (albeit fairly minor one) as to how I would react. I have only starting taking note of my investments since Covid first hit so this was my first correction in 100% equities via index funds.

    I’ve not even been tempted to sell at all, and I am confident when the next bigger crash arrives again, my confidence won’t be shaken!

    As good as it is being able to check the latest investments on your phone.. Deleting the apps I think is worthwhile if there is any temptation of selling during a downturn. By making it hard to access the accounts at a push of a button to sell is a good thing I think!

    Thanks,
    Dan

    1. Somehow I’ve never been tempted to sell in a downturn… perhaps I am getting too emotionally attached to my investments?

      Agree with you it’s all about designing a system where you minimize your ability to check / sell investments. Us humans only have so much willpower!

  3. Interesting and thought provoking as always. I’ve shared that graph from Michael Batnick with several people lately!
    I’ve experienced the 2008 myself too (was not heavily invested at the time), and the more you experience these kind of drops, the more you’re able to see it as an opportunity to buy more of your favorite assets.
    I’m curious though, how you deploy your cash in times like these? Do you add a little extra, or do you keep that emergency stash for emergencies only? And also, I know you have a lot of RE also, and I’m heavy in RE too, and often contemplate to exit the stock market completely in favor of RE. I don’t need the liquidity basically, and the volatility is simply the price you pay for liquidity (as I see it).
    Thoughts?

    1. So sadly my day job keeps me so busy that I don’t have time to take advantage of short-lived market movements. That being said, when the corrections last a bit longer I do put more cash to work, subject to availability (I don’t touch my emergency fund and am pretty fully invested otherwise)

      Have been grappling with the RE vs stock market point for a while. Ideally I’d like to be 50-50 across both asset classes. Love RE for the cash flow and capital appreciation, love the stock market for how low touch it is!

  4. Very nice article and very true. It is ironic to say but probably the easiest times in the market are actually the times that the market is down. Because you are sure that you should not do sell.

    1. I never had the temptation to be honest. But a lot of people just waver and liquidate at the worst possible moment.

  5. gettingminted.com

    As at Friday my portfolio was down only 1.23% for the year so far, and about 0.22% of that was drawdown spending. A 1.01% fall is like one bad day so nothing to get too excited about for me and my portfolio.

    1. I have yet to run our numbers this year.

      For all I know, the market might recoup the losses by the time I get around to it!

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