Dear Reader, I’ve bored regaled you with many, many a few stories on this here blog about how I’m . . . not so bright. Of course, there’s other stuff that makes me me, too.
For example, I have a staggeringly awful sense of direction. And a head-scratchingly intense interest in weather. And let’s just say that I’m not winning any beauty contests anytime soon.
But also, I’m a history buff. And I love documentaries. And I entirely share the sentiment of something Mel Brooks once said about himself: “I’m not very religious, but I’m very Jewish.”
Paranoidal activity
So, several years ago, when I stumbled upon a documentary by a historian I’d never heard of named Simon Schama called “The Story of the Jews,” I was all in on watching it. Long story short, the documentary is fantastic (as are Schama’s other documentaries, which I highly recommend).
There’s a line from a scene early in the first episode of the documentary that’s particularly stuck with me over the years. The setting is a Passover seder held at Schama’s home. Around the table are about a dozen people, who I think are Schama’s family members and friends. Schama asks the group: “Is Jewish culture always expecting the worst?” One attendee responds: “The Jewish imagination is paranoia confirmed by history.”
The response is brilliant. And true.
I’ve thought about this line not only in the context of Jewish history, but in other contexts as well. No more so than as to my personal finance history.
A bit of clarification. I’ve always been a knee-jerk pessimist. Part of that surely is nature-based. But there’s no doubt a nurture element. It stems in part from my parents/upbringing and also from my own personal experience in the world.
For the better part of my life until about the mid-aughts, my financial situation bounced around from above water but precarious to above water and able to take small breaths of air. That is, periods of slight calm and less calm. What’s more, the foundation upon which these events occurred was a financially fraught childhood, which I detailed in my Money, Man! series of posts.
From the mid-aughts on, things got easier for me and The Family financially. Not a breeze, but far easier to be sure. But my sense of paranoia about the next less calm period coming never left me. There just was too much precedent for it being confirmed by history.
Returns to sender
Fast forward to my learning about FIRE, by which time our financial situation was more solid than ever. In the course of my education, I learned about sequence of return risks. Given my paranoia and actual experience, you can bet that subject caught my attention.
In early 2021, I decided to FIRE at the end of the year. Equity markets (in which we hold much of our investments) were enjoying an epic bull run, with no obvious reason for it to end. Things looked promising.
As it turned out, 2021 was so good for us financially that when I FIREd, we’d shot past our FIRE number and had a cushion to absorb a more-than-slight downturn. That delighted me. As did the seemingly clear investing skies, which gave me hope that our cushion would grow yet further before any market correction. The result being, I hoped, that even at the peak of any correction, our nut would be no lower than our minimum FIRE number.
Notwithstanding the positive situation and what I still believe was hope based on reason, ever present in my mind was that fear of sequence of return risks. Most of all I feared a worst-case scenario: an entire economic regime change, accompanied by a three- (or more) year market slide like that from 2000–2003.
Five-alarm FIRE
Our investments started sliding on day two of the 2022 investing year. Rational or not, alarm bells started going off in my head. First softly. Then increasingly louder as the slide intensified.
By October, things had gotten bear-market nasty. Worse, there was little shelter. Equities got hammered. Bonds got hammered. Property was no bargain. My paranoia being justified by history.
I personally sensed early on in 2022 that we were undergoing an economic regime change. At first, it was just that, a sense that things were changing. Partially because I’d long believed that the bull market was well past its expiration date and that the United States had long since strayed far from several economic fundamentals. But also because of my innate paranoia and it being confirmed so often by history.
I expected the investing community to swiftly come to the same conclusion I had about an economic regime change taking place.
It did no such thing.
In a welcome development, 2023 started far more promisingly than 2022. I became cautiously optimistic but remained on high alert if for no other reason than that the investing community inexplicably still didn’t seem to have fully accepted the fact of the sea change.
By the third quarter of the year, the economic regime change narrative started becoming conventional wisdom. The investing community still seemed to be throwing its denial tantrum, but in smaller numbers.
As someone who’d much rather endure significant pain for a short period than lesser pain for longer, I’d hoped that if there was a savage market correction that’d brutalize or wipe out dumb and/or short-term investors to come, that it’d come now and deliver its punishment mercilessly and swiftly.
That, most definitely, didn’t happen. So, it’s been a slow burn. Too slow for me.
Preparation I
As I write this, investors seem to mostly and finally have started freaking out woken up to the fact that an economic regime change is afoot. I’m cautiously optimistic.
That said, I’m nowhere near breathing easy. Not all market fundamentals have returned to normal. For example, equities still are considered by many to be expensive. But the thwacking that I’ve long hoped would be delivered to the investing community finally seems to be happening. Or at least it seems ever closer.
I hope I’m right. But I’m paranoid and experienced humble enough to know that I may not be.
First, I’m usually prepared for the worst. Cuz’ for better or worse, I’m still a cockeyed pessimist, notwithstanding the overwhelming actuality of my incredibly good fortune. So, while equities as of this writing still are up for 2023, I’m prepared for them to end the year down. Also, I have no hope this year for our other investments ending the year up from last year, much less 2021. Rather, it’s a question of how much pain ultimately will be delivered by the end of the year.
I won’t like a vicious beatdown, but I’m prepared for it.
And second, my paranoia and experience doesn’t paralyze me with fear as it might others. Rather, it spurs me to mitigate the damage. My actions to date have been incremental. But they’ve been decisive and taken without remorse.
Containment policy
First, recognizing early on the unfolding adverse sequence of return scenario, I took a part-time job in 2022 and did some gig work, all of which continues to this day. This income covered some of our expenses and lowered the need to withdraw from our investments. Other far more lucrative part-time work I’ve done from time to time this and last year helped yet further.
In combination with greater frugality than we otherwise might’ve practiced since the end of 2021 this has enabled us to be conservative in our investment decumulation amount. In 2022, I withdrew a nominal sum. I’ve withdrawn much more this year, but it’ll end up being far less than 4%.
As it’ll turn out, we’ll have weathered the storm of 2022 and 2023 very well, even if it’s been an eyebrow-furrowingly annoying ride. I’m also prepared for 2024 being another bad year for investing. And, tho I’d be highly surprised if 2025 is yet another bad year for investors, I’m prepared for it to suck, too. A mindset of paranoia confirmed by history has its advantages.
And in the end . . .
This all said, I do sense (and this is just a sense) that if the worst isn’t over, we’re at least at or very close to the peak of the downturn. What I hope this means is that our investments and FIRE strategy will be fully battle tested and that sequence of returns risk will no longer be an issue for us.
Regardless, whenever a bull market comes, we’ll be even closer to significant income streams outside of our investable assets. I have good reason to believe that once those start kicking in, I’ll for the first time in my life feel near complete financial security.
What I’ll do with my paranoia at that point, I just don’t know. Maybe sing a song?
For all the market gnashing of teeth in the last month it still hasn’t seem real yet. With the S&P only 4 to 5 percent down from the peak of the year it just seem like we have wrung anything out of the market yet.
It seems like 2 to 3 points down is more serious than it use to be. It’s like we have got use to a very tight range. And the minute it steps out of that range it seems more important.
I fall on the pessimist side. To be honest I am shocked it is holding up the way it is. I thought we would be testing 4000 or lower by now
You may be right. I’d anticipated the other shoe dropping even harder this year, too. But even if it does, I’m hopeful that in terms of where we are in the cycle, we’re far closer in time to the tipping point than we were even a full year into the downturn.
In seeking out the explanation for the economy’s resiliance, I’ve read about how people are expensively YOLOing with funds that they’d otherwise have been saving for/spending on big-ticket items such as a home (in no small part because as the housing market largely is frozen, there are few homes even on offer). Wages/income/savings are up over the last few years, to be sure. But pandemic savings have been exhausted and if the American consumer knows how to do anything, it’s how to make poor financial decisions leading to unsustainable debt.