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:
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?!?
Not too long ago, I posted this amazing chart by Michael Batnick:
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:
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:
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!
About Banker On Fire
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Banker On FIRE is an 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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