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Before I dive in, I want to say how very appreciative we are of all the first line responders during the COVID-19 pandemic. We have multiple family members in medical fields putting themselves in harm’s way to help their communities everyday. We have friends who have had COVID-19 and recovered, and at least one friend who did not survive this terrible virus. We encourage everyone to stay home, stay safe, stay healthy, and know that you’re not only doing it for yourself you’re also doing it for your neighbors and everyone’s grandparents and family members as well.
Battling Human Nature
Don’t touch a hot stove.
Don’t eat the last cookie.
Don’t have a third glass of wine.
Don’t stay up too late.
Don’t look at the car wreck.
Don’t sell in a down market.
Don’t go outside.
It’s human nature to want to do the things folks tell us aren’t good for us. It’s human nature to want to get out and run around and not just sit still for too long. But what do you do when there’s a worldwide pandemic that requires you to stay inside AND simultaneously the stock market experiences one of its most dramatic Black Swan events in history?
Well, if you are a nomad like us, once you have determined you are in a safe location where you can stay for a while and you have a safe way to get food and any other supplies you need, it’s time for a little self comforting. For me that means revisiting our Personal Money Statement (PMS).
Always Plan Ahead
When we were planning to FIRE in 2018, along with making plans to travel full time, we built out a PMS document to help develop our goals surrounding our money. Consider a PMS as your personal instruction manual for your money, to be opened when it’s time to rebalance your portfolio or file taxes. Getting our original PMS statement written was a major endeavor for us, and knowing it exists is extremely reassuring for me today. Since we manage our money ourselves, we wanted to discuss every element of our finances with each other and be clear headed about our intentions and future plans, even if we can’t control what will actually happen around us. I opened our PMS again last year because we wanted to consider tax loss harvesting and Roth conversions when we started looking at our final tax bill and current cash flow needs at the end of 2019. I opened our PMS back up again this time because I wanted to revisit our goals and be aware of what we should do in case of a BIG market downturn like this one we are currently experiencing.
Maybe it’s because this is a leap year, or maybe it was just time for the previous bull run to come to an end, but on February 28 after one of the worst weeks in market history I opened our PMS and a few things leapt out at me.
- Our cash has a job! We will always maintain an emergency fund.
- We set aside 5 years living expenses in 2018 to protect us from sequence of return risk. And we still have 4 years of living expenses available now. Those funds are held in CDs, money market funds, and cash.
- We will not take unnecessary risks with our money and we are willing to forgo outsized gains in favor of longterm growth and near-term income generation.
- We will not panic as a result of the ups and downs of the market.
- We will not sell securities in response to large downward market corrections.
Yes, yes, that’s all fine and good but what should I be doing??? I’m anxious to be doing something. But when I read our PMS, it is clear that I should be doing NOTHING right now!
What if there’s a BIG Downturn in the Market?
We’re there now! When I read our PMS I realized how different some of those details sound now compared to when we first wrote out our PMS document in 2017. A lot of that sounds different even compared to just six months ago. It was easy enough to plan for a market downturn. But living in one, and living in this particular one, is not the same thing. In reading our PMS I was intrigued by “Section 3. Market Investment Philosophy” and especially about my thoughts on what to do in the case of a BIG downturn in the market. Lately I’ve realized that doing NOTHING is still doing something. In our case it’s the right thing to do. And in updating our living PMS document I was able to add much more detail about “how to do nothing” in a down market. Because let’s be honest, we have learned a ton about ourselves, our portfolio, and the market through the global pandemic Black Swan market event we are currently experiencing. So here’s what I’ve changed, or not changed, in our own PMS document about a BIG downturn in the market…
Cash is Critical
Our cash has a job, and it’s a serious one. Its first job is to serve as an emergency fund. Our cash also has to protect us from sequence of return risk so we don’t have to sell down equities during these early years of our retirement to cover our expenses. We are only about a year and a half into retirement so far. So as for our cash and what to do with it – we will stick to the plan. We will not use our cash for new investments as a reaction to market downturns. We will start each year with 100% of the cash we need in a savings account that automatically deposits our budget allowance into our checking account every month.
Roth Conversions Are Part of the Plan
In-Kind Roth Conversions: The amount of taxes we pay on Roth conversions is actually something we can control. In any given year I can choose to convert $1k or $10k or $60k from our IRAs to our Roths. And I can choose which Ordinary Income tax bracket to fill up with that income. Since the conversions we make are in-kind stock transfers, when the market is down we can transfer over more shares for the same target conversion dollar total. So Roth conversions are one of the few things we can actually do, and benefit from, during a down market.
Affordable Care Act: We have a global medical plan since we are full time travelers. Since we aren’t looking to join the ACA in the next two years, the ACA income threshold is not something we need to focus on right now. But if and when we decide to return to living full time in the US, staying under the ACA income threshold of 4x the poverty rate will be very important for us. Qualifying for subsidies will be a major factor to the amount of Roth conversions we make leading up to our decision to stop traveling full time. We will likely need to minimize or even stop Roth conversions before we apply for the ACA in order to make the puzzle pieces fit together. Being able to transfer a higher number of shares in a down market while still being able to qualify for ACA subsidies would be a very tough balancing act so that’s a topic I will keep researching.
Annual Portfolio Rebalancing
The old plan was to rebalance our portfolio once a year in May. Today I’m thinking about the idea of rebalancing quarterly because of ongoing volatility in the market. I haven’t decided yet, but I’m leaning towards rebalancing as often as quarterly this year in order to take advantage of buying opportunities. I think it makes sense for us to give ourselves permission to rebalance more than once this year. However, we would stick to our rule that our allocation ratio must be at least +/- 5% out of target in order to do any rebalancing since any moves in our portfolio are intended as corrections to our equity to bond ratio, not just an opportunity to try and play the market.
If we receive new or extra cash (such as dividends, stimulus checks, side hustle money, or inheritance) we will review our overall investment objectives and determine the best place for that cash given our overall goals. We would consider whether we need to top up our cash reserves for expense purposes. We would also consider whether we should invest in our brokerage account and if so, decide whether we want to invest a lump sum or dollar cost average. And lastly, we would consider other investment options for that cash such as real estate or starting a business.
Within all of the many ups and downs so far this year the market briefly dipped to around 35% at one point. With that in mind we added an additional note in our PMS for situations where the market drops 35% or more. In that scenario we would consider moving funds from bonds to equities in our Roth or IRA accounts, as long as we have no intention of accessing those accounts for more than five years.
Stay Calm and Stick to the Plan
We will keep a holistic viewpoint of our portfolio. Our goal is to recalculate the overall equity to bond allocation across all of our accounts to maintain the predetermined market risk exposure rate we are comfortable with for our portfolio.
Most importantly, we will not sell any down equities. Period. We will be consistent, especially when the market is volatile. And if I’m feeling extremely nervous about the market I will go for a walk or meditate with JL Collins.
Doing Nothing on Multiple Fronts is Really Hard
I want to acknowledge that doing nothing this time around has been extra hard for me. I think that’s because we’ve also had to stop traveling and cancel a ton of our plans for 2020 due to all of the international border closures around the world. It’s also because we keep hearing that if we do go back to the US, we really shouldn’t go see our families and that’s something we are still struggling with. The only reason we do go back to the US is to see our families at this point in our nomad lives! Talk about doing nothing. Frankly, the market downturn has been easier for me to deal with than finding out we can’t travel with my 81 year old mom this year as planned. Accepting the very real possibility that I can’t visit my mom, let alone travel with her has been very difficult for me so I’m still debating that concept with myself everyday.
The response to the pandemic in any given country and across the world is 100% unpredictable. I was really looking forward to seeing Ireland for the first time with my mom this summer, and to having American Thanksgiving in Portugal with some of our FIRE friends. Those things are not going to happen this year. We can’t even rely on those types of things happening next year and that has been a big adjustment for us. Being cornered into spontaneous flexibility regarding our travel plans is unsettling! And that’s why I’d rather focus on the market.
Become a Fan of the Market
I’ve said many times before that the best way to pay attention to the market is to become a fan, just like you would do with any other team sport. And don’t just be a fair weather fan! Thanks to my dad I’m a great fan of college football, even though I have no interest in playing myself. But I look forward to watching a few college football games during the season. I feel the same way about a few other sports, and also about the market. I watch the market enough to know the trends and directions it takes, and I enjoy tracking the statistics the way I’m fascinated by how long and far a ball gets kicked. But I don’t try calling day by day plays in the market or trying to anticipate the results of market volatility. As a fan of the market what I love best is knowing we have set our own financial plans and rules for playing in our PMS document, and we are sticking with it. So far, so good.