There is nothing pleasant about seeing the balance of your investment portfolio drop by 20-40% during early retirement during a market crisis. You’ve worked hard for years and saved and now you feel as though your retirement decision was a bad one.
Even though your timing may not have been ideal, the good news is that an early retiree is in a totally different situation than a traditional retiree. Not only do we have more options and more flexibility but we also have a longer time horizon and likely able to tolerate a little more risk.
1. Don’t Forget About your Cash
All that talk about emergency funds gets so repetitive when the market is in a steady incline. It’s when you’re retired and the market takes a nosedive when you realize how valuable cash can be.
Sure, it’s painful seeing your cash lingering around idly while it could be invested and earning you dividends. However, think of your cash as a way to prevent you from having to sell your securities when the market is low. Your emergency fund will allow you to ride the massive market crisis wave until things return back to normal.
In retirement your cash holdings essentially secures the value of your investments. It’s worth keeping about a year’s worth of basic expenses in cash. During bad times you tap into this and during good times you top it up.
2. You Are Allowed To Earn An Income
You’re an early retiree which means that you’re young. You haven’t worked for 30-40 years to the point of burning out. As a healthcare professional you can earn a little side-income by moonlighting in your field.
And if medicine doesn’t do it for you then you can always sell your homebrew on the side. You can get a job at the local shared woodworking space. Be a barista if you’ve always dreamt of being one.
The extra money you earn can be enough for you to ride out a market crisis without needing to sell your depreciated investments. You can make use of your cash savings, your budgeting techniques, and the side-income to get you through the crisis.
3. Don’t Dip Into Poorly Performing Investments
Each market crisis has its own flavor.
We’ve seen the housing markets get hit in 2008.
We saw the effects of inflation in the late 70’s.
The tech bubble burst in the 2001-2.
In the future we’ll see bonds get affected, then maybe equities, then possibly peer-to-peer lending, and so on.
If you see that your portfolio of stocks is doing really poorly then avoid dipping into it. Don’t withdraw the dividends unless you have to and certainly avoid selling at the lows of the market.
You own a ‘share’ of company when you own securities. This share can go in any direction in the future based on the company and the economy. Only when you sell your share will you have locked down a profit or a loss. So choose wisely.
4. Your Investments Represent A Very Small Slice Of The Economy
Your securities investments represent only a small slice of the global economy. There is manufacturing, health, shipping, sales, labor, R&D, and many other sectors which are likely still going strong even though a particular sector of the economy forced your portfolio to dip down.
Keep this in mind should you encounter a few anxious moments. The economy is made of many moving parts for which the demand won’t change even during a market crisis.
5. The Markets Will Soon Recover
When you see that huge drop in your portfolio balance, it’s like a punch to the gut. You know exactly what it means; you can translate that loss to the number of months/years you worked.
However, the market will eventually recover and move forward as it always has. Why? Because consumers demand it. In order to live in this society we need services and products. We are willing to trade our time for money which we use to barter for these amenities.
During a market crisis 1) use up your cash savings, 2) lower your overhead, 3) earn a little side-income, and your mind will be preoccupied enough that the next time you look up, you’ll see that your investments have recovered.
Everything seems easier to me in early retirement. There is more free time to plan things. One has the ability to move to a cheaper location. A healthcare professional has the ability and energy to earn income if needed. And when a market crisis occurs, it might even be an opportunity to increase one’s position in an optimally priced investment.
With fewer work obligations a person can leverage their time to cut back on expenses. Cancelling gym memberships, cooking at home, and avoiding unnecessary transportation expenses are just a few examples.