These are interesting times. As of the afternoon of March 11th, we have officially entered a bear market: The 20% drop in the total market index. These are things I thought about and planned for time and time again before leaving a six figure job for a life of leisure. Now I’m sitting here one week shy of the one year anniversary from giving my notice and the bear market happened. So now what? Will I have to go back to work?
Question #1: Do we need to make changes?
Not really. There shouldn’t be a *need* for a contingency plan or flexibility. We tested this over and over again, had a 30% bond allocation going into this drop, and our expenses are less than 4% of our assets. We went into this with more than the bare bones needed. I worked an additional year for security. However, it’s our programming to value money as security, freedom, and investment capital. We’ve jokingly referred to our money as “little green ninjas”, silently fighting for us every day to earn more money. Well, occasionally they lose and it’s been a tough three week losing streak. They usually earn more but occasionally lose a battle.
Question #2: Will we make changes?
Absolutely: This comes to the flexibility and contingency plans: What should a frugal early retiree like me do when I see a 20% drop in the market? What are our contingency plans if we need to execute this over a prolonged recession? Mrs Shirts and I talked about this quite a bit over the past few days. Now our portfolio is closer to a regular FI number floating roughly 25x expenses. We’re reducing spending some because it means both safety and that dollar is far more valuable as capital in today’s environment. I’m seeing what I perceive as fairly safe streams of cash flow selling for 2008-2009 style prices. That’s a big deal for an early retiree like me only needing a 3.5% to 4% withdrawal rate. I’ll talk about some moves I’ve already made in the next quarterly portfolio update, but hopefully we acquired assets that’ll perform well over the next three decades.
In the interim, it is time to flex our frugality muscles. What changes can/will we make both today and if this continues?
Immediate expense adjustments:
- No cash paid travel. There’s already a damper on travel with the health risks, but if we can’t use points or drive and stay with a friend, we probably aren’t going. That dollar saved/invested may be worth $2-$3 in a few years. They must keep working for us.
- No eating out: We aren’t 16th century royalty with a burning desire to say “come hither peasant and bring me thy food”. I don’t need to spend 3-4x for what is usually marginally better quality. Special exceptions may be carved out for gatherings with friends.
- No Discretionary Expenses. I’ve been eying the potential release of the iPhone SE2 and that’s going to be put on hold. I can use my cracked screen to keep putting my money to work. One of the skills built up to achieve financial independence is that of delayed gratification.
- Transportation/Gas: Guess what got cheaper? Oil. We also own two bikes we bought last year, it’s time to saddle up and use them more to get around.
- Free Recreation: We live near the beach and a bunch of rivers. We already own a kayak and a surfboard. That’s pretty cheap entertainment! We’re paying a paradise tax to live where we do, it’s time to enjoy it.
Longer Term Expense Adjustments:
- Housing. Rents have started to come down a little and we have a lot of flexibility if we’re willing to move. We also rented at the peak of the summer in a better economy, so we agreed to $2,300/mo. I think we can get that to $1,700 to $1,900 with minimal sacrifice in property type and go as low as $1,300 with some more trade offs. We can take $5,000 to $6,000 per year off of our housing expense between the market adjustments and moving to something smaller.
- Home Purchase/ Future Rental: We are likely to see a real recession that could drive prices to 2010-2013 levels (or at least those levels relative to rent). This means a credible borrower could be able to find properties that rent for 1% of their purchase price and borrow money at 3% for 30 years. We would likely buy something with those kind of numbers, move into it, then look to repeat the process each year and until we own 3-4 properties.
Income: I need to figure out the level of hustle I’m willing to have. Am I willing to make the sacrifice? I am not yet interested in working full time. I have one side gig that is essentially two or three projects that I’m mostly through. This will support 40% of our spending for 2020. I’m not sure how long this one will last, so I am debating how much more I’d want to do. Some of my ideas are:
- Do I reach out to my professional network and start to kick the tires on distressed debt work? We are going to see funds formed to buy distressed assets and that would be a good use of my professional skills. Can I do some work in this space without it being an all consuming job? I don’t know if I want to do this yet, but it is tempting to reach out and start asking.
- Credit Card/Bank Account Bonuses: I currently have $700 in progress here and need to comb through Doctor of Credit some more and look for the next opportunity. We have one credit card going and can pick this up again in March. Maybe I should target earning $3,000/year on just bank account bonuses. A couple of them require debit cards, which adds to the annoyance factor and I’ve started with the largest bonuses currently.
- Do we try any gig economy work? I’d specifically be interested in Instacart or Rover, we’re pretty good at grocery shopping and like dogs. Every dollar earned is a dollar less of capital that we have to use for living expenses. My only experience here is in JobSpotter, which has its limitations.
We don’t know what will happen next, but that is the ongoing challenge with investing. Nobody really knows what tomorrow, next week, next month, or next year will be like. We can only make decisions based on information and probabilities, while building in some flexibility in case something goes wrong. Staying calm and being diversified has worked over the last three generations and I’m making the bet it will continue to in the future.
With that, I’ll leave you with this way too early comedic relief through all the chaos:
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