Is Coronavirus a Disaster For My Imminent Retirement?
Updated: Jan 13
Today is the 2nd March 2020 and Coronavirus (now known as COVID-19) is steadily spreading across the world after an outbreak began in China in December 2019. Tragically over 3,000 people have now died from the virus and the number of known infections continues to increase each day. Financial markets have seen a 7 day losing streak resulting in one of the fastest stock market corrections in history.
Whilst our primary concern should always be the health of ourselves, our loved ones and the population at large, this is a personal finance blog and as someone who is about to retire from a well paid job in 60 days and live off his investments, the almost 13% drop in the stock market in the last week has focused the mind on the potential after effects.
It's pretty clear that one of the biggest risks to pressing the button on financial independence and retiring early is an unexpected stock market crash shortly after you've stopped getting a regular income (I must have been just born lucky!). Two main reasons drive that hypothesis:
The investments you made in the months (or even years) running up to your retirement could be now running at a loss and you don't have the income to invest in the market whilst it's cheap to bring down your average costs to get back on track quickly.
You now need to take money from your investments to live and because you're now selling at a loss to do that, your overall nest-egg is reducing instead of you living off some of the income and maintaining your overall investment amount.
I am currently contemplating both of these disasters in real-time and wondering what (if anything) I should do?
Everyone who has an interest in personal finance and in particular the FIRE community knows what the best advice is; "Don't Panic! Don't Sell! Weather the storm and try to minimise expenses as long as possible until the stock market recovers." The worst thing you can do is sell as you'll probably sell at the bottom and lock in the losses forever. Then you'll need to buy back in and you'll probably do it after the market has started to recover so you'll lose money again when you miss the initial upside of recovery.
I know all of this, I do, and I always promised myself I would be strong no matter what when the time came (and it will for all of us investors at some time).
However, I failed....spectacularly
In the middle of the last week when the market had already dropped almost 10%, I moved a fair chunk (around R500,000 or $33,000 or 25,000 GBP) out of S&P500 index funds and into the safety of a Bond Unit Trust.
I'm pretty mad at myself for doing that.
It's not a huge amount in comparison to my overall investments of around R13m / $950k / 700k GBP, it's around 4% of my investments or around the same value of what I'll spend in my first year. It now means that whatever happens, I won't need to draw down anything from my investments for the next 12 months. But I'm super angry at myself.
I do believe this is a short term problem and governments around the world will get the virus under control within the next few months. The stock market will return to normal steadily growing my retirement fund. And if I'm wrong, there'll be more to worry about than my savings. The problem is I folded at the first test and whilst it's not going to be earth shattering for my future, if I do that when the nest major correction comes, I have to grow a pair and not fold so quickly.
This has been a real lesson for me in understanding the stress of the hold & buy approach to investing when the proverbial poo-poo hits the fan. Every piece of statistical evidence says you are best to hold your nerve and look for the buying opportunity but don't sell, but the human brain is strong willed and in the heat of battle the thought of standing on the sideline is a force of human nature to be reckoned with.
Every fibre of my being was screaming "Sell, Sell it now or it will all be gone! If you get out now you'll be able to buy back in later if the world doesn't end! You're going to have to work until you're 100 if you don't do something now!"
I know I was wrong and I know I was weak but It's time to stop the pity party and take the lesson that I'm not quite as "In control" of my actions as I thought I was. For all the investors out there going through this turbulent time in the markets, I wonder if my actions (and likely the same actions of millions of others) are exactly what causes the crash in the first place. It is, I'm one of the sheep (last bit of pity, promise).
At time of writing the stock market is officially in correction (a 10% drop) territory and it's been the fastest correction for a long time apparently I'm pretty confident markets will go up again tomorrow but I'm not going to follow the herd and jump back in to correct my mistake as that would be just following the wrong instinct again. I'm going to use simple logic:
Coronavirus is still spreading across the world, in the short term at least that means that naturally there will be a drain on the global economy due to the cost of dealing with it, the loss of productivity through illness and the resulting reduction in output, exports and the like. Not to mention the massive impact on international travel.
It's not going to take days to get it under control, it's going to take weeks and then the economic impact won't be felt for months. This is not a short term problem.
I'm going to keep the small percentage of my wealth in a bond linked unit trust which in South Africa pays a healthy 7-8% interest anyway (not forgetting we have a 4.5% inflation rate) so it's not like I'm not preserving it. Now I've created the problem of having my money out of the market, I'll wait a little to see how things pan out and either look for a good opportunity to buy back in when Coronavirus becomes Corona-who? or if things go deeply south, pick a reasonable moment to buy back in when I've achieved a decent discount to the price I got out at.
However, I still haven't adressed the title of this post. Is Coronavirus a Disaster For My Imminent Retirement?
The answer has to be "I don't know yet". All I can do is deal with the facts until we know more about the long term effect on the market and that means:
I've got 60 more days until I stop getting a regular income (It's going to be the longest 2 months of my life)
That means two more salary payments to either bolster the "out of market" savings or make a couple of investments at sale prices to bring my cost average down just a little.
I've got a years worth of living expenses sitting outside the market now that I realistically only took about a 5% loss on so I should be able to leave the rest of the investments alone until at least a year from now.
I should tighten the belt even further to minimse spending.
It's definitely going to be an interesting few months to see what happens to the markets. I feel like I should be OK and don't think I should be asking for my job back just yet,
I'm also a great believer in the "When life throws you lemons, make lemonade" approach to living so although Coronavirus is and is likely to continue to be a tragic natural disaster, there may be some way of turning it's aftermath into an opportunity to improve my future.
So the life lessons I take away from this are I'm not as brave as I thought I was and that I'm still pretty sure doing nothing would probably have been the right thing to do. I am also going to need to start thinking about a few what-if scenarios of how I'm going to not draw-down too much of my investment if this is a long term issue.
I think I'm going to treat this like a fire-drill, a practice for a real full-blown stock market crash and observe my behavior and learn for the next few months.
Until next time, cheers.