In Sept 2007, I was talking to a friend out California way and she asked me “what about this market” in a “how ’bout them Cubs” kind of way. That question crystallized my trepidation that had been growing over what I saw as a looming debt crisis. I was long the market quietly trying to recover from the dot.com bust and rebuild my portfolio, By 2007 I had a pretty balanced portfolio in things like S&P 500 & S&P 400 and VOO and cash and bonds. I had studied modern portfolio theory and was on board. It was before all the calculators came online so my portfolio was kind of guesstimated but it wasn’t horrible like my portfolio was in 1999. I told my friend I was scared to death. The debt bubble was obvious, and the coming crash was obvious, I just didn’t know how to play that. I had read some books based in the “men are men and the sheep run scared” mentality of never sell and take your lumps, you chicken shit. I see that bravado on display today in the FIRE community. All I can say is whip it out someone gonna cut it off.
Soon enough I had lost my second million dollars in 8 years playing the stand tough game. I recovered the lost million by dollar cost averaging into the market. after selling the debacle in 2000. In 2000 many things actually went to zero or nearly zero. In other words some of my holding never could or would recover. An example is GE. It peaked around 70 I sold at 20 and today it’s 8. So I managed to have some cash left to reinvest. In 2003 we were headed into war with Iraq and the market had bottomed. I asked my self do you bet with or against the US? Being a Navy Vet I decided WITH and plowed 1M into the market at it’s lowest point in 2003. This paid off and due to the credit bubble. I had made back my lost million plus some.
History was about to repeat in 2008. I could see the crisis on the horizon, it was obvious. You can’t own 2 new cars a boat a McMansion on a cabbies salary, default was a comin’. But I still stood pat and lost another million. This time I didn’t have to sell because companies did not go to zero. The fed stepped in and did some fancy footwork and made what should have been a flat out depression into a multi year recession. It took 7 years for the market to reach the 2007 peak. I made back my million plus a lot more because I had some risk management on-board in 2008. By then I was on the efficient frontier so my loss was muted because my risk was managed, and I was made whole in 2011, 2 years earlier than the 2013 recovery of the stock mavens. I was already compounding when they were just getting even, so my period of compounding for this expansion has bee from 2011-2019 not 2013 – 2019. I have 2 years more compounding.
In the mean time I’ve retired. Being retired requires even better risk management because you are not adding more W2 money to the pile anymore. You instead are spending portfolio money to stay alive. I’ve been listening to videos by some damn smart finance people and not one of them is bullish. They are either neutral aka don’t have a clear conviction or they are all the way to 100% we are headed toward OR ARE ALREADY IN a recession. Dalio thinks we are replaying 1929 . 2008 was the once in a lifetime event just as 1929 was the once in a lifetime event of that century. What followed ’29 was ’37. He thinks were are headed to our version of ’37. Every expert I listened to was either about collapsing risk to the long side (reducing equity exposure) or actually getting ready to short equities (increasing risk to the down side).
In 2007 there weren’t really good ways to buy downside risk against credit swaps, at least I didn’t know how to short that, but today there are plenty of short and levered short ETF’s available so you can trade a crash, but I’m not doing that because I have no W2 to take up the slack if I’m wrong.
Neither am I stupid enough to just stand there and take it because I no longer have a W2 as a backup. So what I did was sell some equities at the top of the longest economic expansion in history. In my case I was able to sell tax free since I have tax efficiency built into my portfolio. Given the impending corporate debt crisis and pension debt crisis and the baby boom underfunded retirement picture and the fact the rest of the world is already in recession I bought long bonds. Germany just today issued 30 years with a negative interest rate. World wide banks have PE’s of about 8. US banks are at 12. That difference has to arbitrage and if Germany is issuing negative debt on all their paper all the way to the 30 year Bund, German banks are sunk and can’t rally, meaning US banks must fall. The FED must therefore cut rates or increase QE or both forcing US 30 years lower, so my 30’s will appreciate. If the US goes negative my 30’s will appreciate a lot. I also bought GLD which tends to rally when it hits the fan. Selling stocks reduces my risk. I sold enough to reduce my risk by 12% and with the other moves may see no change or even positive in my return. My other advantage is I’m living off cash so even though I changed the risk profile the portfolio is closed to SORR, I improved my sequence risk with no SORR risk at least till my cash runs out. SS kicks in 2.5 years from now further improving my cash flow.
What did I give up? The market will probably rally some in the short term and become more volatile. I’ll miss out on some of that rally but also more of the volatility. I calculated my loss of return:loss of volatility ratio to be 0.4:1 meaning for every 10 bucks I lose if the market crashes I only lose 4 bucks of return since my return is not strictly dependent on the market but diversified. If the diversity was a good bet I may loose nothing in return as the alternatives (30 yr and GLD) pay off. It’s very non bogglehead approach, to sell some but I did not cash out only managed my AA to a lower risk. I moved to a AA I can afford to hold for the long term which is a bit different than market timing risk on risk off. I own cash but I didn’t add to cash so my portfolio is still risked, just less risked. I have enough money and a short enough retirement horizon and a small enough WR, I can easily afford to live with less risk.