Some time back, I wrote a post on Defending your position.
The idea is, I feel that after a certain point, it becomes important to defend the position instead of keep pushing for more returns.
Now, different people have different takes on how to manage finances and there's no one size fits all.
Some people can retire on less, some people can sleep with great volatility, some people... some people... whatever...
Financial planning or retirement planning is different for everyone.
And everyone will have to decide for themselves what is suitable for themselves.
Some people have been able to make good income on short term trading/investing.
Some people like to buy and hold for long periods.
Some people rebalance regularly.
Some people invest in dividend stocks/REITs...
Different people, different styles.
FIRE, or the idea of early retirement has only picked up in the last 10-20 years.
It wasn't so prevalent in our parents generation.
How many who are planning FIRE, have been through multiple boom and bust cycles?
How many have sat on 40-50% losses for extended periods of time with poor economic environment?
I don't think there are many people who have been through this.
FIRE people are usually folks who are under 40 years old.
And probably someone who has lived through decades of boom and busts need to be at least 60 years old.
It's easy to look back and say, it's worked for the past 50 years. It must work the same way now.
And yet, when you are 60 years old, living in the situation, holding on to 50% losses, for 2 years... are you sure you will still have that faith / confidence?
The latest generation of investors, got a quick rebound in the past 6 months and it's easy to pat themselves on the back and say "Well done, SEE I told you to just hold and it will recover."
Many of these young FIRE proponents are still working with a regular income.
The mentality of someone with a regular income, with youth on their hands, grants one a certain level of confidence that they have time on their hands. And they do.
They have income and time on their hands. Many of them aim for FIRE, most still have at least 5 years before they execute, IF they even execute. Cos I know there are many who wanted to FIRE, but eventually just continued to work to pad up their AUM.
BUT... The thing is... let's look at it from the perspective of a 65 year old retiree.
He may have a $1 million portfolio. He may already have been retired for 10 years.
So he doesn't have a career which he could return to.
And now, the question becomes... Would it be prudent for him to invest his whole $1 million in stocks and/or bonds?
Both stocks and bonds gets smashed in bad times. It's not like what is learnt in finance. Bonds just gets smashed less.
If this retiree gets hit by a 40% loss. That's $400k. Leaving him with only $600k.
Still a good amount but I'm pretty sure he would have a lot less confidence about his retirement.
Don't forget, this guy has ZERO income.
Then we compare this with a young FIRE proponent.
Maybe he's 35 years old. He may have $250,000 AUM. He may be earning $60k per annum
A 40% drop for this guy would be $100k. He doesn't feel it. Cos he's still working. He still uses his working income to fund his lifestyle.
The feeling of security is very different for someone with a working income.
They have options. They have the option to delay retirement. They have the option to keep working and "wait" for their investments to recover.
So the thing is, we have to realize/understand that the mentality, financial situation, sense of security, etc for someone at 35 years old, talking about FIRE and long term passive investing, is very different from someone who's at 65 years old, retired for 10 years and been exposed to numerous boom and bust cycles of which, they also know that some downturns last much longer than what happened in the past 6 months.
Will markets recover? YES. Most likely they will.
HOWEVER, when you're 65 years old, retired, without a job, you really don't want to be potentially sitting on 40% losses for years. IF it takes years for his investments to recover.
Which is why, I believe that it would be prudent, or suitable for some folks to look into defending their position. The "cost" of a loss, is more "expensive" than the potential benefit of a gain.
For the retiree to increase his portfolio by 50% from $1 million to $1.5 million, isn't really attractive when he has to consider 40% losses.
A young FIRE just starting out or halfway through his plans, can still easily talk about holding on to his mortgage of under 2.5% interest and using the excess liquidity to invest in the markets for the long term.
Whereas a retiree might find that too risky due to his circumstances.
It would probably be more prudent for the retiree to have fully paid off his mortgage and live on his $1 million. Trying to earn more at this point in life just might not be worth the risk anymore.
At that age, I would think a retiree would want to just live out his life and enjoy himself and not bother about too much volatility in his portfolio.
Why do I talk about this?
Well, cos "been there, done that".
When I was younger and working, I would think about... all these things.
Don't pay off mortgage early, hold on to less than 2.5% interest rate. Invest the rest. Theoretically, that's correct.
Don't put money into CPF, cos it's easy to beat 2.5% or even 4%.
It still IS easy to beat those returns.
HOWEVER... now that I haven't worked for around 4-5 years, the mental state is different.
There's NO NEED to take more risks. Capital preservation is probably more important to me than the idea of making more returns.
There is REAL concern of losing capital. Making more returns at this point in my life wouldn't impact my lifestyle much, whereas I would really feel a significant drop in my AUM, in terms of mental security.
For example, the idea of buying into the S&P 500 at near it's all time high is really not attractive to me, considering the current state of the global economy.
As I/we grow older, our circumstances change. Mentality changes. How we perceive risks change.
For me, I just want my life to remain somewhat stable.
When I return to Singapore, I want to continue staying in a fair sized HDB, have food to eat, clothes to wear, don't need to be concerned about my finances.
I really don't want to think about a big drop in my assets.
So yea... I'm not saying don't invest. I, myself, am also looking at various investments.
But for me, stability of the companies are more important than their potential returns.
I rather buy undervalued (in my opinion) shares and aim for their recovery during this period, as compared to buying a growth company and hoping that they continue growing through this downturn. Although growth companies may show greater returns in the long run.
And so, as our circumstances change, I think it's important to look at defending our position as compared to just looking at returns and always staying invested.
Holding cash, itself, is a strategy, when one doesn't have confidence in what is going to happen next.
Think about it in terms of soccer. The team you support has already scored 2 goals and are in the lead 2-0, it makes sense to just defend and waste time and hold on to the lead until the match is over.
IF there is a chance, ie, the opposing team makes a mistake and there is an opportunity to score another goal, then make use of that opportunity. Else, is there really a need to open up the defenses and try to score a 3rd goal?
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The idea is, I feel that after a certain point, it becomes important to defend the position instead of keep pushing for more returns.
Now, different people have different takes on how to manage finances and there's no one size fits all.
Some people can retire on less, some people can sleep with great volatility, some people... some people... whatever...
Financial planning or retirement planning is different for everyone.
And everyone will have to decide for themselves what is suitable for themselves.
Some people have been able to make good income on short term trading/investing.
Some people like to buy and hold for long periods.
Some people rebalance regularly.
Some people invest in dividend stocks/REITs...
Different people, different styles.
FIRE, or the idea of early retirement has only picked up in the last 10-20 years.
It wasn't so prevalent in our parents generation.
How many who are planning FIRE, have been through multiple boom and bust cycles?
How many have sat on 40-50% losses for extended periods of time with poor economic environment?
I don't think there are many people who have been through this.
FIRE people are usually folks who are under 40 years old.
And probably someone who has lived through decades of boom and busts need to be at least 60 years old.
It's easy to look back and say, it's worked for the past 50 years. It must work the same way now.
And yet, when you are 60 years old, living in the situation, holding on to 50% losses, for 2 years... are you sure you will still have that faith / confidence?
The latest generation of investors, got a quick rebound in the past 6 months and it's easy to pat themselves on the back and say "Well done, SEE I told you to just hold and it will recover."
Many of these young FIRE proponents are still working with a regular income.
The mentality of someone with a regular income, with youth on their hands, grants one a certain level of confidence that they have time on their hands. And they do.
They have income and time on their hands. Many of them aim for FIRE, most still have at least 5 years before they execute, IF they even execute. Cos I know there are many who wanted to FIRE, but eventually just continued to work to pad up their AUM.
BUT... The thing is... let's look at it from the perspective of a 65 year old retiree.
He may have a $1 million portfolio. He may already have been retired for 10 years.
So he doesn't have a career which he could return to.
And now, the question becomes... Would it be prudent for him to invest his whole $1 million in stocks and/or bonds?
Both stocks and bonds gets smashed in bad times. It's not like what is learnt in finance. Bonds just gets smashed less.
If this retiree gets hit by a 40% loss. That's $400k. Leaving him with only $600k.
Still a good amount but I'm pretty sure he would have a lot less confidence about his retirement.
Don't forget, this guy has ZERO income.
Then we compare this with a young FIRE proponent.
Maybe he's 35 years old. He may have $250,000 AUM. He may be earning $60k per annum
A 40% drop for this guy would be $100k. He doesn't feel it. Cos he's still working. He still uses his working income to fund his lifestyle.
The feeling of security is very different for someone with a working income.
They have options. They have the option to delay retirement. They have the option to keep working and "wait" for their investments to recover.
So the thing is, we have to realize/understand that the mentality, financial situation, sense of security, etc for someone at 35 years old, talking about FIRE and long term passive investing, is very different from someone who's at 65 years old, retired for 10 years and been exposed to numerous boom and bust cycles of which, they also know that some downturns last much longer than what happened in the past 6 months.
Will markets recover? YES. Most likely they will.
HOWEVER, when you're 65 years old, retired, without a job, you really don't want to be potentially sitting on 40% losses for years. IF it takes years for his investments to recover.
Which is why, I believe that it would be prudent, or suitable for some folks to look into defending their position. The "cost" of a loss, is more "expensive" than the potential benefit of a gain.
For the retiree to increase his portfolio by 50% from $1 million to $1.5 million, isn't really attractive when he has to consider 40% losses.
A young FIRE just starting out or halfway through his plans, can still easily talk about holding on to his mortgage of under 2.5% interest and using the excess liquidity to invest in the markets for the long term.
Whereas a retiree might find that too risky due to his circumstances.
It would probably be more prudent for the retiree to have fully paid off his mortgage and live on his $1 million. Trying to earn more at this point in life just might not be worth the risk anymore.
At that age, I would think a retiree would want to just live out his life and enjoy himself and not bother about too much volatility in his portfolio.
Why do I talk about this?
Well, cos "been there, done that".
When I was younger and working, I would think about... all these things.
Don't pay off mortgage early, hold on to less than 2.5% interest rate. Invest the rest. Theoretically, that's correct.
Don't put money into CPF, cos it's easy to beat 2.5% or even 4%.
It still IS easy to beat those returns.
HOWEVER... now that I haven't worked for around 4-5 years, the mental state is different.
There's NO NEED to take more risks. Capital preservation is probably more important to me than the idea of making more returns.
There is REAL concern of losing capital. Making more returns at this point in my life wouldn't impact my lifestyle much, whereas I would really feel a significant drop in my AUM, in terms of mental security.
For example, the idea of buying into the S&P 500 at near it's all time high is really not attractive to me, considering the current state of the global economy.
As I/we grow older, our circumstances change. Mentality changes. How we perceive risks change.
For me, I just want my life to remain somewhat stable.
When I return to Singapore, I want to continue staying in a fair sized HDB, have food to eat, clothes to wear, don't need to be concerned about my finances.
I really don't want to think about a big drop in my assets.
So yea... I'm not saying don't invest. I, myself, am also looking at various investments.
But for me, stability of the companies are more important than their potential returns.
I rather buy undervalued (in my opinion) shares and aim for their recovery during this period, as compared to buying a growth company and hoping that they continue growing through this downturn. Although growth companies may show greater returns in the long run.
And so, as our circumstances change, I think it's important to look at defending our position as compared to just looking at returns and always staying invested.
Holding cash, itself, is a strategy, when one doesn't have confidence in what is going to happen next.
Think about it in terms of soccer. The team you support has already scored 2 goals and are in the lead 2-0, it makes sense to just defend and waste time and hold on to the lead until the match is over.
IF there is a chance, ie, the opposing team makes a mistake and there is an opportunity to score another goal, then make use of that opportunity. Else, is there really a need to open up the defenses and try to score a 3rd goal?
<<PREVIOUS POST // NEXT POST>>
Did you like this post? If so, could you "blanjah" me 1/4 cup of my morning coffee pls.
You may also consider subscribing to receive the articles in your email, link in the column on the right.
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