Retire Early Lifestyle
Retirement; like your parents, but way cooler

In 1991 Billy and Akaisha Kaderli retired at the age of 38. Now, into their 4th decade of this financially independent lifestyle, they invite you to take advantage of their wisdom and experience.

The Fear of Market Downturns

Billy and Akaisha Kaderli

Courtesy Kiplinger

Visiting an island in the Yucatan  

On our latest adventure, we were on the beach in Isla Mujeres, Mexico when a lady recognized us from our website RetireEarlyLifestyle.com. After some pleasantries, she asked if we could address the fears of the market declining and how to handle it.

We appreciated that input from one of our Readers.

Previous market declines

Since the surviving of the 1987 crash when the Dow Jones Industrial Average fell over 20% in one day, there have been other downturns including the recent ones of 2007-2008 and the Covid meltdown in March of 2021. We have learned from each of them.

They can be trying on one’s patience and confidence, so how is it best to handle them?

Noise, corrections and bears

First, let’s define these meltdowns.

Between a 5-10% decline in the averages is called noise and can happen at any time.

Many individual issues have these gyrations which is why we own the Indexes. They are more stable.

Over a 10% drop is called a correction, meaning it is wringing the excesses out of the markets. The markets are constantly being over-extended and under-extended and these 10% moves correct for those times.

If the averages drop 20% or more, it is considered to be a bear market and we tend to have these every 56 months.

On average, bear markets last 289 days or 9.6 months with an average loss of 36.34%. These can be painful for one's financial health - or an opportunity - depending on where you are in the investment cycle.

A number of events can lead to a bear market including higher interest rates, rising inflation, a sputtering economy, and a military conflict or geopolitical crisis. Seems we have all of these presently.

If you are in the accumulation phase and buying more shares at cheaper prices, this can be a bonus for you. However, if you are now retired and living off your investments with your account values dropping, that can be difficult to swallow.  

How to calm your nerves to prevent panic selling

It’s important to note the difference between trading and investing.

Traders drive the day-to-day activity, booking profits and hopefully taking losses quickly. We investors take a longer view to ride out these cross currents of the markets knowing that - over the long run - we will be fine.

We suggest that before you live off your investments that you track your spending. In this way, you know what your outflow is per year. We also suggest that you have two to three years of living expenses in cash.

We know cash or money market funds are not paying much, but having it available is a huge mental comfort. This way when the averages fall as they most certainly will at some point in your investment life span, you are not forced out of the market at lower prices.

The latest drop is not a problem with the financial markets. The markets are functioning properly. However, traders are moving from risk assets - which were fueled by the recent boom from the FED and government stimulus - to security, including cash.

Conclusion

No one can predict when these downturns will happen and no one can predict when they will end. It is best to be prepared knowing that you will be able to ride them through.

You might consider investing into a dividend ETF (exchange traded fund) like DVY which continues to pump out the over-3% yield, thus creating cash flow for one’s portfolio so that the need to sell is lessened.

Retire Early Lifestyle appeals to a different kind of person – the person who prizes their independence, values their time, and who doesn’t want to mindlessly follow the crowd.

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