It’s been just over four years since I handed in my notice to the MegaCorp where I spent my entire professional career. April 19th, 2023 will mark four years since I took that last ride down the elevator and out of the parking garage. I decided to ask Twitter what people wanted me to write about reflecting back on four years of freedom.
I received so many good questions, I decided to answer some of them individually instead of trying to cover them all in one “wrap up” post that could sit in my drafts for years. This question comes from Rich & Regular (and Julien happens to be my favorite chef in the financial independence space)
This is a great question and the core of the question is financial, however some of the answers are non-financial.
What do I value four years into Financial Independence?
Four years into FIRE I value a peaceful and low lifestyle. What does this look like? We moved to a quiet beach town. I get to spend a couple hours every morning doing whatever I want before the day starts. I have a (silly) internal rule to not have more than one appointment a day. I am extremely protective of my time and control of my time. I think Kevin Dahlstrom had a great quote that said something like “I have two rates, free or $10,000/hr”. I feel the same way when people ask for my time. I’m happy to answer questions for free to friends and strangers, provided they’re easy to respond to, I enjoy the topic, and it doesn’t involve scheduled time. I’ve found a lucrative freelance gig and have needed to be very careful about the amount I take on to honor the low stress lifestyle.
The #1 risk for us is something that disrupts our ability to have this low stress lifestyle.
Occasionally Elon will disrupt our peace with a launch
Financial Risks: Before and After
Prior to quitting the corporate job, maximizing our net worth was the top goal. The larger the net worth, the more flexibility I had to quit the stressful job. Asset allocation wise, this meant being close to 100% equities. A large portion of our equities was inside retirement accounts and invested in a total market index fund. We also had a taxable brokerage account that I played around with. At times I would beat the market and at times I would not. The stress of the day job kept us from investing directly in rental real estate or keeping prior residences as rentals, which in hindsight was a financial mistake.
Occasionally I would use margin in the brokerage account, especially if a “buy the dip” opportunity showed up in advance of a bonus. The 2015 oil crash and the late 2018 bear market were both nice wins doing this.
Shortly after retiring, we went to a stock / bond allocations and leaned away from the technology sector because of its high valuations and / or overall lack of profitability. The March 2020 crash hit and I followed the pattern I had before and started moving the bond portfolio back in stocks, but did this far too early. This meant I didn’t see some of the equity increase in 2019 because those funds were in bonds then bought too early, amplifying this loss. To complicate it further, I still was hesitant on the technology sector and more focused on value, which did not recover at the same pace. One of my long term holdings that I never trimmed for tax reasons lost half its value with no prospects of recovering.
I gave an interview in the middle of this crash for the FI Show
After this experience, my views on financial risk were permanently changed. I was no longer willing to risk money we have and need for returns we don’t need. Fortunately the portfolio was mostly recovered by the end of 2020 and we eeked out a 1.7% gain, which was far less than the large cap technology weighted S&P 500 at the time.
What do the changes look like?
A wise man once said the three biggest investing mistakes people make are 1) individual stock picking 2) market timing, and 3) chasing hot mutual fund managers. Unfortunately the allure of all of these things is so appealing that everyone does it.
I am slowly moving away from some of my individual stock positions. I’m specifically not letting capital gain taxes prevent me from selling winners. I’ve been hurt by this a number of times and will not let it happen again. I’ve also remained focused on valuations and strategies inside index funds instead of being lured in by the mistakes above. I’m okay earning a few percent less in total return over a decade if the exchange is a much smaller loss in principal. The valuations on the total market index became astronomically high by the second half of 2021 and I moved more towards the Small Cap Value Index (VBR) and the Dividend Growth Index (VIG). That avoided 1/3rd of the loss in the market in 2022.
What are the other costs?
For me, the biggest challenge is passing up obvious investing opportunities because the risk is too high. The SPAC / IPO boom presented some of the most obvious shorts of the last twenty years. Businesses like Lemonade Insurance and Oatly were outright stealing money from retail investors crazed for new names. I may not know how technology companies work, but I understand both the insurance and the food and beverage business from my days as a lender. These companies were valued 10x or more of what they should have been and the stock sales were borderline criminal.
However, the risk of taking a short position in these is I could have been “meme’d” out of my money. The Wall Street Bets crowd broke large hedge funds by overvaluing zombie companies like AMC and GameStop. Was the risk / reward worth it? Unfortunately not. Managing the FOMO related to this is painful.
I’m writing this as of April of 2023 and we’re going through something similar right now with the banks. I worked in banking, I know how banks work, and there are some incredibly mispriced stocks and preferred stocks out there right now. I’m playing around with this some, but in the range of 1-2% of our net worth. If I were not as risk adverse or still had the large corporate job, I would be making some $100,000 size investments because I think the risk / return is wildly mispriced.
However….I am no longer to risk money we have and need for returns we don’t. The reality is making $300,000 doesn’t change our life, but taking the risk of losing $300,000 presents more risk than I want.
Other Thoughts About Risk: Tail Risk
If you’ve never read this article, stop here and go read Morgan Housel’s heart wrenching story about the three sides of risk.
I have a theory that by the time someone reaches middle age, they’ve experienced or witnessed enough events or personal challenges in their life to be more conscious of risk. Financially, the events of March 2020 and government reaction created two tail risks I never saw coming.
Individual Stocks: One of my long term positions was a real estate investment trust concentrated on properties that relied on public gatherings and movies. Who would have thought that a respiratory virus that statistically is only slightly more dangerous than the flu, especially to those under the age of 55, would cause these industries to operate at 30% or less capacity for two years? That caused a permanent loss of capital.
Housing My post-college housing experience involved three years of euphoria, followed by a crash, followed by a slow 1-3% increase per year. Rents and prices grew slowly but barely above the rate of inflation. I never expected the response to a respiratory virus to become the following stimulus:
- Forty million student loan borrowers have loans paused, including physicians and lawyers earning six figures foregoing thousands of dollars a month in payments, which is still on-going after three years.
- Mortgage rates were subsidized down to 3% and kept there through March of 2022.
Those changes distorted the housing market, with the number of (mostly vacant) 2nd homes increasing rapidly and short term rentals expanding. Every busybody middle manager suddenly wanted to become a landlord with their spare time. This has delivered us 20% overall inflation by the census data. That’s not the entire story though, as two groups have vastly different housing experiences: Those who owned before 2020 and refinanced below 3% later experienced housing deflation while those who are currently renting or bought in the last year experienced 40% inflation. The people who moved from renting to owning between those years are somewhere in between.
Unfortunately for the “crash bros”, I think this housing inflation will be pretty sticky. Most homeowners in the United States either own their home free and clear or have it financed below 3%. It will be difficult for people to sell these houses, even if they lose their job, because the cost of staying in the house will be cheaper than renting a small apartment. In 2008, the cost of renting was substantially cheaper than owning. Today, it’s likely cheaper to stay.
I got caught in this mess when my landlord had money problems and gave us 45 days notice to vacate this past summer. We decided to buy a house outright late last year, even if prices may have been high, to remove this risk from our life.
The Non-Financial Tail Risks: Health, Family, and Life Experiences
None of us are guaranteed health, all we can do is take every step to improve the probability of outcomes. There are young and relatively healthy people that experience terrible events. My wife experienced a 1 in 100,000 injury that happened during a workout. It cost us more than two years of a “normal” life between diagnosis, treatment, and recovery, and occasional challenges still showing up. However, we still do everything we can to improve the probability of health outcomes; a reasonable diet, exercise, and getting enough sleep.
We aren’t guaranteed more time. This famous post from Tim Urban, Wait But Why illustrates this perfectly. How many more winters do you have? How many more super bowls? How many more birthdays for your parents? How many more holidays? How many summer vacations at the beach? Opportunities to go skiing in the winter?
Before financial independence, the question is how many of these activities do you miss or get delayed from because of work. After FIRE, how many things do you miss because you’re being too conservative with money?
Once you reach financial independence and get past the risk of running out of money, then what? There’s really only three financial choices that remain:
- Using money to improve your life experience
- Generational wealth planning
This brings to me to the final risk: The FIREy person being too conservative to do any of the three above. We’re mostly savers out of scarcity and “there’s always another boogeyman around the corner”. Market returns, healthcare costs, inflation, ect. There’s plenty of fear out there if you seek it out. This can leave you hoarding money even though it’s mathematically impossible to run out. I see this in people that work one more year and I see this in early retirees still spending far less than 4% of their net worth per year.
When you are financially independent, the risk (and certainty) of running out of time far outweighs the risk of ever running out of money. When the question comes up about how I’ve changed my view of risk over the past four years, the final and on-going change is finding the appropriate balance between being conservative enough with spending to ensure we never run out of money, while being loose enough with spending to ensure we maximize all our life experience while we can enjoy it.