Playing with FIRE is Playing with RISK

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The holidays are a time for roaring fires and cozy Christmas dreams. Yet, the last few weeks have been far from that in the investment world as Wall Street grapples with big drops in S&P 500 value, a bond yield inversion, and global economic uncertainty.  While I’d rather be writing about a ‘Santa Claus Rally’ – instead we are closing out the year in negative territory.

As this publishes on Monday morning (10 Dec 2018), year-to-date S&P 500 performance has dropped -2%, bonds have dropped -3%, and international stocks are down a whopping -14%.  Most indices were holding in pretty well until 60 days ago, but October, November, and December have been particularly rough.  Worse for me, the MegaCorp I am a retiree of has seen their stock a whopping -34% this year.  That’s twice as bad as any year in the company’s last 30+ years.

That’s why I thought this quote about risk from Teddy Roosevelt was particularly apropos right now.  Investments, particularly over the short term are very risky and have a way of biting you in the butt at an inopportune time.  Yet, over the long-term, the risk can provide handsome returns and you are short-changing yourself if you take no risk at all.

I try to keep regular track of the risk balance within our investment bets and not get too extended in one way or another.  I wrote earlier this year about our mix of equities, bonds, real estate, and MegaCorp stock options (which continue to be deflated).  Once a year I make ‘rebalancing’ adjustments – usually sometime after New Year’s.

We also carry a good chunk of cash in money market accounts so that we can sit on the sidelines when the market has a touch spell.  Most personal finance advisors suggest a 18-24 month cushion of cash, but we went into the year with 36 months.  That gives us flexibility to weather storms that come through.

As I’ve noted before, outside of company stock options which I sell via a dollar-cost-averaging strategy, I keep speculative investments to a minimum.  The angel investing and cryptocurrency (also having a tough run) investments I’ve made are less than 2% of our total portfolio mix.

Our thought process is ‘backed up’ with the help of our financial advisor, who we meet with at least once a year for an in depth look at where we are at.  He keeps his advice to us pretty conservative with the caution that protecting our nest egg is a priority to growing it rapidly.  They have a proprietary Monte Carlo calculator (similar to FIREcalc) that we can access online and play with assumptions as well.  The more you run sensitivities, the better you can tease out the risk factors.

I’m not sure what 2019 will bring for investment performance (or even the next week), but we’ll continue to keep our portfolio mix as sensible as possible and keep our assets bucketed by time horizon.  We can’t control the markets, but we can benefit from them if we keep objective about how we are balancing our bets.

Image Credit: Pixabay

10 thoughts on “Playing with FIRE is Playing with RISK

    1. Oops … thanks for pointing out! Market hasn’t done much since Monday, down only a little bit- which is good news, I guess!

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  1. It’s been a tough year in the markets for sure. Risk comes with any type of investing, and more so for those of us who FIRE. Fortunately, most of us are really good at managing risks and planning with lots of contingencies. We (likewise) rebalance annually (or as needed, should a large swing occur during the year). We FIREd nearly two years ago relying primarily on real estate returns, so we still have 7-8 more years before our more “typical” retirement funds (401k’s, IRAs, etc) start to kick in. Our time horizon gives us plenty of time to continue to grow those other nest eggs and manage the current ups and downs. Our approach will eventually be to also draw (gains only) from safe zone buckets (1-3yrs, 4-10yrs, +10yrs) for those “more typical” funds, but real estate will continue to be our firewall, and can cover our needs (and most of our wants) regardless of the other funds. As J.L. Collins says it best, stay the course…the market always rises over extended periods.

    Here’s to a strong 2019!

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    1. We have minimal real estate assets, so we are heavily exposed to bonds & equities. I need to find a good way to explore real estate, but don’t really want to become a landlord. I talked to someone recently who has been investing in real estate trusts. That sounded interesting, but I’m not sure how you get into it or assess the trustworthiness of your partners.

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      1. It’s not easy. I’ve done all kinds of different RE investments, including private hard money loans and apartment building rentals, crowdfunding, and landlording. Landlording payout was/is by far the best, and while there is some hassle factor you are also totally in control of decisions. Crowdfunding was the worst – RealtyShares. Private group investing was OK, but I’ve been working with the same group for 12+ years so can trust them, but even then our interests are not always aligned (e.g. they wanted to sell a property while I wanted to hold, I ended up with a huge tax bill since it was a high income year for me). I haven’t tried commercial yet.

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      2. I’ve have a friend who thinks commercial warehouses are much better/easier to manage than residential.

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    1. Really tough. The value of my MegaCorp Options has dropped dramatically. I’ve been selling them in the last 24 months of their exercise window, but MegaCorp is down -35% this year. They are really in an existential crisis with investors right now. Overall, I’m probably down about -10%.

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      1. 10% is manageable, but it’s uncanny how stable the stock was until this year.
        My ex-employer stock is down 50% from the peak, but I’ve stopped selling. If it drops 70% I might consider buying some back…
        Do you sell regardless of where the price is at?

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      2. I mean to be disciplined and sell regularly, but when it’s low, I’ve held off. The rub is because they are stock options, I can’t hold off forever. ‘MegaCorp’ is General Mills (GIS). If you look it up, you’ll see how awful it’s been (for a blue chip, defensive stock).

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