The “Silver Lining” for Investors After a Historic Week for Stocks| Life After FIRE

We’re coming off one of the wildestHello, hello, hello my dear listeners, as you may or may not know, my husband Carl and I have a YouTube series on the BiggerPockets money YouTube channel called Life After Fire. As a very special bonus, we are going to be airing episodes here on Wednesdays. Without further ado, let’s get into it. Hi there, I’m Mindy Jensen. AndI’m Carl Jensen.And this is the MindyAnd CarlOn Life After Fire Show, where we talk about what happens after you reach financial independence.Why do we call this show Life After Fire?Because we’re talking about and talking to people who are living their best life after reaching financial independence. Today we are speaking with Emma Von Wey, who is A CFP, but not your CFP. However, we can still ask her questions because she has a lot of knowledge. I am so happy to welcome back Emma to the Life After Fire podcast. Emma, thanks for joining us.Thank you. On this very, very fun market volatility week.Yeah, so tell me about this. It’s been a fun couple of days at the office thing.Yeah, I mean it’s really just we’re taking it one day at a time. I don’t really check the markets, but at the bottom of my computer and I can’t get it to go away. It always kind of tells me what’s happening and so I mean it’s been going down for the past couple of days and then we’re now recording this on April 10th yesterday President Trump announced that he’s pausing the tariffs for 90 days and I saw my computer, it shot up like five, 6%. We were all like, what the heck is happening? Check the news. Okay, more volatility.Yeah, it is crazy. And now today we’re recording this, what today? Thursday it is back down to use a professional market term. Yesterday was a dead cat bounce and the cat is falling back down today. Ew. Have you not heard that term before?I have. And every time I hear it, it’s such a gross term.I don’t know if it’s really a dead cat balance. This is all short-term thinking, which is not the right way to think about any of this. But I’m curious, I always think of people like you when these things happen and I see you, I’m picturing you in your office and the phones are ringing off the hook like you’re grabbing 10 phones and you become a psychotherapist at that time because freaking out. Is that what actually happens or tell me what actually goes on at your office when these market fluctuations at Dead Cat bounces happen?Yeah, I think for some advisors that’s definitely what’s happening, but for us we have really close personal relationships with our clients and we keep them very well trained. So every time someone comes in and at the end of their meeting we show ’em their statements real quick and we point to the number and we say, Hey, at any given point, this number could fall in half your $4 million could be two, and you just have to sit there and shrug your shoulders and say you don’t care. Because that’s what investing is. There is always volatility. And for our clients, I think the last time I was on, we talked about our cash buckets and so for each client that’s in distribution mode, we have about two years of cash or cash equivalence for ’em. And so we can weather any down market for at least two years if not more just by using those buckets. And so if we see a sharp correction or the market goes down for a while, we’re just turning off their distributions, we’re not selling and we’re taking their distributions from cash and so they’re all okay, maybe a couple panicked emails here and there, but most people just want to know that it’s okay and they know what we’re going to say, but they send us a message anyway just to hear it again.One comment and then one follow-up question. I love your 50% drop. Charlie Munger was probably my favorite money person of all time and he has some quote that said, if you can’t sustain a 50% drop in your portfolio, you’re probably going to lose a lot of money over the long term. And I love that. That’s just how the markets work. Things go up most of the time, but they also go down too. And I think there perhaps there’s data to back this up that you could comment on. I have a feeling that the way up is probably gradual and then when we have drops, sometimes there violent we’ve seen lately. So things don’t go up in the same way they don’t go down. But the thing I was going to ask you about is I really like the two years of cash and distribution mode because if you’ve got two years cash and the market drops 50%, who cares? You’re living off your cash that mitigates the risk for at least two years. Do you find that works for most people? What percentage of clients in distribution mode are on that two years cash plan?Almost all of them. And if we don’t have the cash outside of their portfolio, we have it in within their IRA, we’ll set a cash limit to we want at least a hundred thousand dollars of cash if that’s their expenses for the year. So even if they don’t have it outside the portfolio, we’ve created it inside and it works really, really well. If anything from a behavioral standpoint, it’s probably not going to make them the most money over time. It does help with that sequence of return risk where if you’re pulling money out and down markets, that just kind of compounds and impacts you much longer down the road. I mean, and we talked about this on the last episode, it’s so behavioral. They just feel so much safer when the market goes down and then they’re not, I hear all the time the market goes down, you tighten your belt and you spend less money. Well, I don’t want people to spend less money, especially if they’re in distribution mode. They’re probably the healthiest they’re ever going to be. I want you to go take that trip to Portugal. I want you to help your kids with what they need. And it just really helps that mental barrier of now they don’t have to sell when they’re down, they have the money available and they can do with it what they want.Emma, do your clients ever push back on having so much in cashEvery once in a while? Yes, they do because they’re like, well, it’s especially the past couple years when the market’s been doing really well, a lot of them have, I mean they have recency bias. I feel like we all do to an extent. When the market’s been doing really well, you get a little greedy. You want your money to be doing that. Well, why would I have my money? Especially now that high yield savings account rates are going down a little bit. You have your 4% in your high yield savings account, but if the market did 20% last year, I mean you’re like, well, why am I getting four? But then things like this come around and they’re like, oh yeah, that’s why we have the cash and then they’re happy again. Do youPark this cash someplace? You mentioned a high-yield savings account. Is it literally just cash in a savings account or is it in some sort of money market or something that yields a little bit higher?So one year we do in cash, and that would be, we all make sure it’s all in a high yield savings account. So that’s getting about 4%. And then the other year we will do some kind of bonds where our goal there is to just slightly beat inflation. I mean bonds over time, they do a little bit better than the cash does, and so we just pick up a little bit there. So it’s not all in cash, but a good chunk of it is.Emma, that’s really interesting that you bring up the B word bonds. I saw an article this morning that said bond yields are spiking. And Carl, you were trying to talk to me a little bit about this. Yields going up sounds like a good thing. So why is this bad?We don’t own any bonds, but bonds behave in an inverse way where the more demand there is for bonds, the lower the yield is. So if yields are going up, that means people are selling off bonds, which is pretty weird because usually if people are selling off the stock market, people are buying bonds or vice versa. So yields going up and stocks going down doesn’t seem like a good thing. So then the question becomes who is selling these bonds? And in tough times, you want yields to be low, that’s going to determine interest rates. So the more people who buy bonds, I think the 10 year is most closely tied to mortgage rates. Emma, please step in and correct me if I’m wrong about any of this. I’m probably wrong about most of it, but you want yields to be down when you want interest rates to be low. I know there’s various ways to do that, but it was weird that those yields spiked at the same time we were having to sell off and I think every people were speculating and up in arms and going crazy about that. Have you been following any of this, Emma?I mean a little bit. There’s just so much happening, especially in the last couple of days that it’s a little hard to follow. I jokingly, I went in my trader’s office earlier this morning and I said, do you know what’s happening with the bond market? I was like, give it to me in five minutes or less and he just looked at me and said, no.So again, Carl, you’re saying that yields are going up because people are selling and your explanation made sense, but that still makes it sound like getting into bonds would be a good thing right now because the yields are going up, are they going to then turn around and go down or the fact that they work inversely is really messing me up.This is past my circle of competence. I don’t have any further information on this. Do you have anything else, Emma?It’s so volatile right now. I would not make any decisions based off the current prices. I would, again, like we always say, you go back to your investment policy statement. What is your plan? How much bonds do you want in your portfolio? How much stocks do you want in your portfolio? And you make sure that you’re allocated to that plan based off your goals. I wouldn’t make any decisions right now based off what the bond market’s doing or what the stock market’s doing.Yeah, I absolutely agree with that. And I want to go a little bit further and say to anybody who is really freaking out about this, the way that the market is handling itself right now, I would encourage you to write down your feelings. What exactly is making you freak out? I mean, I know it’s the stock market, but what about this? Are you afraid that you’re going to lose money? Are you retired and you are afraid that you’re going to have to pull money out before the stock market goes back up? Write down all your feelings because I want you to have an investment plan and if you don’t have an investment plan, now is the worst time to make it, but now is the best time to understand how you’re feeling when it’s dropping. So write that down and then when the market calms down, you can revisit this and say, wow, this really made me feel terrible.
I need to adjust my asset allocation not for the good days but for the bad days. So that my good days like, Hey, the stock market’s up awesome. Nobody’s ever like, wow, that stinks. They’re always hooray. The market’s up, but when the stock market goes down, some people are like, oh, well that’s just a normal part of the cycle. And other people are like, oh my goodness, the sky is falling. I need to sell everything before I lose more money. You actually don’t lose money until you sell, so don’t sell. I mean that’s an oversimplification, butNo, that’s exactly right.My dear listeners, we are so excited to announce that we now have a BiggerPockets money newsletter. If you want to subscribe to the newsletter, you can go to biggerpockets.com/money newsletter while we take a quick break. Welcome back to the show. There’s just so much going on. Like you said, Emma, it’sHard toKeep up.We keep coming back to, okay, what’s our worst case scenario, right? In the history of time, the stock market has been volatile, but it’s always trended up and that doesn’t mean that it’s going to continue trending up, but what happens if it doesn’t? What’s our biggest fear? A lot of people are like, what if it goes to zero, right? Well, if it goes to zero, then target’s out of business. Amazon’s out of business. You don’t have an iPhone anymore because apple’s out of business. And so if that’s the case, then it’s the apocalypse and all that matters is that you have spam and maybe you’ve taken some jujitsu classes because that’s all that’s going to save you. Your gold bars aren’t going to do it. The crypto means nothing. It’s not going to save you. So we just have to keep invested and keep that big picture, that long view because things are volatile right now.
And it always feels scary when you’re in it, but then you always zoom out and if you look at the history of time of the s and p 500, my favorite chart is where it’s plotted and it’s like here’s the 2008 economic crisis. Here was the Vietnam War and it plots all these major history events, the pandemic where we were like, we don’t know what the future of the world’s going to look like. And those are all just blips now. And so based off that information, we have to assume that this is going to be a blip at some point in the future.People always say scary comments when these things happen. I remember when covid happened, someone said something to me that struck tear in my heart, aside from all the economic and the fact that there was a pandemic coming, I remember I was talking to someone and Costco had removed samples. I don’t know if you have a Costco membership, Emma, but they have samples there. And someone was like, yeah, samples are gone and they might never come back. I’m like, I don’t want to live in a world without Costco samples. But then they came back and life moved on. So I think perhaps one of the themes of this whole conversation is just to think like you said, Emma, you can’t react. You can’t do things in the midst of the storm going to make bad decisions, and they’re not going to be based on data. They’re going to be based on emotion, which is never ever a good thing. I’m curious, maybe we should transition into what you should be doing and that is having the plan or the investment policy statement. And like I just said, you don’t want to create this in the middle of the storm. You want to do it when the skies are blue, when your thoughts are rational and when things are going okay, how would you advise someone to start thinking about creating a plan or this investment policy statement?It’s going to be different for every person, but it’s going to be based off your goals. We don’t take market risk with short-term cash needs. So if you’re going to have a big purchase coming up, that should not go in the market. I know a lot of times when the market’s down, people are like, oh, I’m going to buy the dip. But if you need that cash for other things, you should not subject it to the market. And so that’s step one is kind of creating your emergency funds, figuring out what expenses are coming up and all that money is not going to be invested. And then you can look at the next step, okay, what’s going to be my midterm money and then what’s going to be my long-term money? And if you have a really long time, then you can have more money in stocks than bonds and cash. But the shorter your time horizon is the less time you have before you retire, your portfolio would get a little bit more conservative. And I wouldn’t say completely conservative. I think people can end up putting too much bonds in their portfolio, but it does. You do want to add a little bit more in when you’re in that distribution mode, but it’s really just based off of where you’re at, how much time you have moving forward and what your cash needs are going to be.And also, this is a pretty extreme situation, but he’s our friend and neighbor and he retired in his, I think early fifties and he put his entire portfolio into cash and he’s smart, super smart guy, made a lot of money, but he’s like, I just want to be ultra conservative and I’ve adjusted for inflation and I’m going to make sure if my wife lives to be 120, she will still have money. And the thing you have to do if you have this is to save up a whole lot more money, then you don’t have that money working for you. I’ve thought about this a lot and one of my favorite quotes too is there’s a lot of risk to not taking risk. He didn’t take any risk, but this particular person has left a ton of money on the table. We’ve just had a spectacular bear market maybe one of the best of all time, and he’s missed out on that whole thing. And that’s what happens if you don’t take any risk and keep it all in bonds or cash.We have this chart that we’ve been showing clients lately and it’s illustrating if you miss one of the best days of the market and it’s from 1980 to 2021 and it’s if you invested a thousand dollars in the market 40 years later, it’d be worth about $132,000. And if you missed the single best day of the market in that 40 year period one day and 40 years, you’d have it was like $118,000. And then if you miss the five best days, you’d have about $80,000, which is a little more than half of the 132 where you started. But at the end of the chart it shows if you had everything invested in treasuries and that was you would have $5,000, it’s just not growing. So we have to be subject to that market volatility to an extent, but we just have to be careful about how that volatility impacts us and making sure that we’re not selling when it’s down because then we could miss that best day. And usually that best day occurs within two weeks of the worst day. And so if you get scared and pull out, just like a lot of people probably did in the last week, they’re like, it’s impending doom, tariffs, all the prices are going up, people are pulling out, they are getting scared. And then you would’ve missed yesterday where it shot back up and then today it’s back down again. But again, we don’t know when that’s going to happen and you can’t guess.And all this flies in the face of human psychology because humans want to optimize and have the best solution. So Emma, you just said, we hold our investments over the long term just to capture those few days that do really, really good. And there’s another example of this and that is holding an index fund, which is probably the best idea for most people. I’m not a CFB Emma is, but it probably is the best idea for most people. That’s what Mindy and I do. And you don’t hold the index fund to capture a thousand stocks that are performing well. You hold it to capture those very few that severely outperform the rest, which is super interesting. So I’m sure there’s a similar chart, Emma, where if you hold the entire stock market but you didn’t hold like Apple, Google or whatever the top five stocks are, I think Monster Energy drink might be the biggest one. If you didn’t hold those, you would have poor returns. So all those flies on the face of how humid want to think about life in general.Yeah,Exactly.Emma, you just said a moment ago, people can end up putting too much in bonds in their portfolio. Bill Bankin recommends a 60 40 stock bond portfolio for the 4% rule and the safe withdrawal rate. What did you mean by too much bonds?I mean I think this is really common when people are working with advisors, but also just when people are doing it themselves, you hear bonds are safety and that’s the way the media portrays it. That’s the way even target date funds are set up more and more and more in bonds as you get older. And so people kind of think, okay, well then as I get older I need to add in a lot more bonds. And so I think 60 40, 70 30, and again, it’s different for every person, but in general, 60 40, 70 30 is probably the sweet spot because any more than that and your money’s just not going to grow. And even if you’re 60 years old, your time horizon could be 30 years and also your portfolio is probably going to be passed down to your kids. So then that turns your time horizon from 30 years to 60, 70, 80, a hundred years because that portfolio is going to outlive you.
And just having too much bonds, like Carl said, your money’s just not going to grow. And so finding that balance between growth and safety and I mean we want some bonds in the portfolio again because it evens that write out especially in distribution mode because if it’s all in stocks and say the market’s down for more than two years and we’ve run out of cash, we want to be able to have some bonds in the portfolio that are more steady that we can sell from there as well. But too much and your money’s not growing and your money has to grow. Inflation is real and it impacts your living expenses. And so your living expenses, it is kind of crazy to see some people’s, were looking at their long-term projections, their couple hundred thousand dollars of living expenses now can turn into double that or triple that in 40 to 50 years just because of inflation. And so you’re going to need a larger portfolio to support those larger expenses. And so you have to have that growth, otherwise your portfolio is just not going to keep up with inflation.Okay, I love that answer. I was googling once, how much bonds should I have or something like that. And Kevin O’Leary said, the amount of bonds in your portfolio should equal your age. If you’re 52, your portfolio should be 52% bonds. And I was like, I don’t think I’m going to take that advice from you. You’re a billionaire and I’m not yet, but I just can’t imagine that that’s the right answer. That’s certainly not the right answer for me. So I’m very glad to hear you say that you do need some, but you don’t need that many because I mean even 60 40, 40 seems like so much. Carl and I are currently 0% in bondsAnd that is fine for you guys if that’s what you want to do. I do think having a little bit in distribution mode does help smooth the ride. And I mean studies show you can do a slightly higher safe withdrawal rate if you have a little bit more in bonds. They’re just not the safety hail Mary that people think they are.We have one more final ad break and we’ll be right back after this. Thanks for sticking with us way back on episode 120 of the BiggerPockets Money podcast, we interviewed Michael Kitsis and this interview actually was recorded right as the markets started to drop during covid right in March. And we asked him about dollar cost averaging and lump sum investing and all of that. And that’s not relevant to this conversation, but he said the odds on mathematical answer at the end of the day is on average markets go up more than they go down. So if you don’t actually have a functioning crystal ball, best odds are just to put the money in as soon as you can because it goes up more often than it goes down. And I think that’s really important for people to note. I love that chart that you shared with us just a moment ago.
If you zoom in on any small space on that historical returns on the s and p 500, you’ll see ups and downs and ups and downs in one day. It’s up and down and up and down and up and down. And at the end of the day, maybe it started a little bit higher than it ended up or it started a little bit lower than it ended up and that’s when the market is up or down. But if you zoom out and you’ve got some ups and downs in the very beginning it goes up again until August of 1929. It goes down until June of 1932. And then it is essentially an upward trend. Yes, there’s some big humps in there, but overall it’s an upward trend. So the market does go up more than it goes down. And when you get out, like you said, that was so brilliant, you were down for three or four days in a row. If you had sold, you missed yesterday’s right back up. I mean, how much did yesterday come up? Did it erase all of the losses?Not completely. I think it was somewhere between five and 7%Of that’s not a day that I want to miss in the market. So famously, Scott Trench sold 40% of his index holdings in January of this year. So he missed all of those down days, but he also missed the up day of yesterday. So he looks like a genius for selling in January now. And he did take the money and he put it into real estate. He’s the head of BiggerPockets. He knows real estate, he put it into cash flowing Denver real estate, which is what he really knows well, he made an educated guess informed decision. He didn’t just hear it from somebody and be like, oh, I better sell. He sold based on not wanting to, he thought the PE was too high in the market, so he sold so that he didn’t have to watch his portfolio drop in half. I want to encourage people to make intelligent informed decisions, not panicked decisions. And this goes back to that investment policy strategy or investment policy statement. This is something that you should have written down if you’re working with a financial planner, work with them to craft this for you and revisit it on these days where you’re like, wow, the market’s down 6%. I don’t love that. So Emma is now a good time to start looking into tax loss harvesting?Everyone’s portfolio is different, but I think when the markets are down, there are things we can do to take advantage of it. I always say the markets are up, we’re happy, we’re making money. If the market’s down, things are on sale and we get to tax loss harvest. So there is kind of a bright side on both ends. And so what tax loss harvesting is is that if the market’s down, you have your index fund, your V-T-S-A-X, say V-T-S-A-X falls, you can sell it. Now, we don’t sell when things are down, so what we’re going to do is we’re going to buy something that’s very, very, very similar to V-T-S-A-X but not the exact same because then you run into wash sale rules, but your index fund comes down, you sell it at the bottom, you buy something similar and it comes back up and then you have tax losses at the bottom that you get to write off against gains.
And so this can really be good if you are expecting really high gains this year, say you’re selling an investment property and the market falls, well then you can capture those losses and use them against the gain of your investment property. Or if you have really highly appreciated stock in your portfolio that you want to get rid of or diversify, but it has high gains, the market falls, you can take advantage of that. You get your tax losses and then you can sell some of the stuff with higher gains and offset that a little bit. So it is kind of a little on the bright side of when markets are down, we do have this little thing that we can take advantage of.I like that a lot. I think Carla and I going to have a conversation after we stop recording.I’m so good at investing though. I don’t think we have any losses.Oh man.Well, and it’s interesting, anytime the market’s down, I know the market’s down first because I’m getting emails that my traders are tax loss harvesting. I don’t know it by checking the market, I know because I’m getting emails about the tax loss harvesting, but in the last couple days I haven’t gotten one email about it, but why the markets have been down. But it’s because they were so up in the last couple years that very few people actually have losses in their portfolio because the last 2024 and 2023 were so good. But if you invested a good chunk at the end of 23, then you probably will have some decent losses that you can look at.And that is the real reason why we don’t have any losses, not my trading expertise.Yeah, we are long-term holders. Alright, Emma, this was so much fun talking to you today. I always appreciate when you’re able to come back on and chat with us. Do you have any last words of advice or soothing to people who are starting to look at the market and say, oh my goodness, should I stay in?I love JL Collins’s stock market crash video. Sometimes I’ll just send that out to people. He’s just super zen and he’s like, the market is falling, it’s going down, but you will be okay. It will come back up eventually. Or it’s the apocalypse and you need spam and jujitsu, but really everybody will be okay at some point or another we will overcome this. We always have, as humans, we spend a lot of time stressing about things and then once we’re faced with the problem, another door opens and we find the way out. We’re really, really good at that. And so I can’t guarantee anything, but if I had to guess, we will be. Okay.Is this the one that’s called a guided meditation for when the stock market is dropping?Yes.I love that one. And we will include that in the show notes below. Alright, Emma, where can people find you online?I’m not on the internet as much as I probably should be. I’m on Facebook sometimes in a couple groups. My LinkedIn probably is where most people would want to connect with me, but I don’t have a big presence or anything. I’m not cool like you Mindy.My kids would disagree. They think you’re way cooler than me. Alright, well if you want to get in touch with Emma, you can email [email protected] and I will forward it along. Okay, Emma, thank you so much for your time today and we’ll talk to you soon. Thank you for watching. If you like this video, please click the thumbs up and don’t forget to subscribe to this channel for more fire information just like Emma provided. This is Mindy Jensen signing off.