Bear and bull markets are coming and going.
Everyone feels great during a bull market. Just until it is it's last day. And then the mood changes.
We save our hard earned money and put most of it into some financial vehicles, dependant on each person risk tolerance and knowledge level.
As soon as you touch an "investment" the risk level and uncertainty increase substantially compared to cash.
With cash there is mostly only one uncertainty - with which inflation rate it will devalue over time.
With investments uncertainties are many of all different kinds.
The values will fluctuate all the time.
During the market dips or bear markets your account may show a fat red minus and that will make you nauseated.
But overall with all the fluctuations the market will move higher thanks to the drift which is probably related to inflation.
The biggest risk is that a particular stock or fund may lose value and never recover. And that can happen during a bear marked or a bull market.
After watching the markets for awhile and seeing the constant fluctuations I realize that there will always be uncertainty.
Uncertainty brings anxiety and that is not a pleasant feeling. I want to minimize it.
By this logic, if I minimize uncertainty, I will minimize anxiety.
When you minimize uncertainty it can go both ways: you will find out something positive or something negative. But even if you find out something negative, the anxiety should decrease due to decreased uncertainty.
How to decrease the uncertainty in this case?
That could work trough information gathering.
The main question I need to answer is: What will happen to the markets?
That is actually a substitute question for this one: If I plan to retire and my retirement financing depends on the savings I invest in the market, I am basically asking if there will be enough money for me to finance my retirement.
Here I already have done some information gathering: I calculated and estimated that with 3% of inflation I will need $3,000,000 at the retirement start point to be fine if I live to 100 or a bit longer.
I probably will not use all of that money because the chances are high that I will die before I hit 100. If I have unused money left will not matter much. It is more important to have enough until that final point in life because I don't want to be under pressure to die in time to make sure the money doesn't run out.
I am making some progress getting to this number and I still have 20 years to go till I am 65. If I keep the same savings rate I should definitely reach this number.
But since I am not there yet, every time the market has a hiccup, it makes me feel uneasy.
And I don't like this feeling.
Most things in nature have cycles or at lest some king of a wave pattern. For example the blood pressure has a wave pattern. Many hormones have their circadian rhythms. Oceans have their rhythmic ebbs and flows.
Wind also don't blow with the same speed at all times.
It feels like markets are a part of nature even they are man-made. They have their natural fluctuations.
After comparing the markets to the things of nature it just makes no sense to complain about market's fluctuations. It is like complaining about the weather. The complaints will not change it.
Like with the weather, complaining is useless. All you can do is adjust and use it as well as you can.
If you don't like the cold, move to a warmer place. If it rains too often, have an umbrella ready.
The same with the markets: If individual stocks are to much work and too much risk for you, move to indexes. If that is still too much, go into treasury bonds.
If you know that there will be periods of downturns, have your umbrella ready in form of a strategy.
You can look at indicators such as unemployment rates, consumer confidence or the yield curve.
By those indicators we are much closer to a recession than 2-3 years ago.
At some point the downturn is inevitable. We will have just to live with that. But how much can it go down and how much can it impact me on my way to my target of $3,000,000.
Would it make sense to look at what happened historically?
Below is the image of the S&P500 for a very long period.
The large dip on the left side is the Great Depression of 1928. That is the most significant downturn. It took the market up to 1950ies to get back to the same heights.
If you are still working and keep adding to the investments it will probably take you only half that time. So instead of 20 years you will get back in 10. The remaining market dips are not a s bad.
I will assume the worst and look at two scenarios: one is when I am still working and can add to savings and the second where I can't add to savings anymore (due to job loss or retirement).
The data in the graph is not inflation adjusted. I chose it because I already did inflation adjustments on my final necessary number to retire.
1. I still need 20 years to retirement. If that large 1928-like deep happens now, I will need approximately 10 years to get back to the same numbers I have today and then have 10 more years of growth. My estimate show that in this case I will reach my numbers before retirement.
2. The dip happens just after I retire and my numbers go down to half. I might have to go down on expenses for a while as circumstances dictate to let the funds recover. If the value will go down in half, I will have to cut the expenses in half. If I cut my expenses in half, my live will not be as comfortable and I might will live less long. Or not. I realize that it is "complaining on a high level", because I know a lot of people who already retired on much much less, and they live quite OK. But I like and always liked to have a very high safety margin.
I realize that even taking in account the the largest known market downturn, I will very likely still come out OK, and I now have to take a step back from all the worries.
The market can do what it wants with all its fluctuations. Just like the weather, I can't influence it. All I can do, is keep practicing to recognize the upcoming clouds and get my umbrella ready in time. I need to become more efficient with my umbrella.
Working on my umbrella means working my skills in stock selection and timing. There is definitely space for optimization.
No comments:
Post a Comment