Understanding the Great Recession Impact

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bironology
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Understanding the Great Recession Impact

Post by bironology » Mon Jan 15, 2018 5:10 am

I lived through the Great Recession as a thirty-something who, at that time, didn't pay much attention to my portfolio. Luckily, I left 401k contributions on auto-pilot (thanks to my employer who advised we all do that. Thank you SO MUCH for that advice!). So bad stuff happened, I kept working and living, the bad stuff then passed.

I understand how being a retiree and living on your retirement savings at that time could have been a scary proposition, however assuming you had enough living expenses saved for a good 5-10 years, even a market drop of -40% or more doesn't "wipe out your savings". I mean your savings would have to be less than, say, $300,000 for two year of a recession to completely deflate your nest egg forever.

With this in mind, I'm trying to understand some quotes in articles like this one:

https://www.marketwatch.com/story/many- ... 2017-11-06

A fascinating story, but I want to highlight this quote:
I talked to one couple, Barb and Chuck. He had been head of product development at McDonald’s MCD, +0.10% before he retired. He lost his nest egg in the 2008 crash and Barb did, too.
I am having a hard time understanding how the recession could truly wipe out the savings of a couple like this. This just is not resolving for me. Could this be B.S.? Head of Product Dev at MCD (I assume that is the function of menu selection, improving the recipes, etc. for a place like McD) should be a multi-millionaire by retirement. Way beyond a few million. How could a 2-year downturn and a 40% drop in equity markets wipe this couple out? WTF?


What am I missing? This bothers me because I can't aggressively defend against such scenarios for myself unless I fully understand what happened. Are we sufficiently defended against this eventuality by adhering to Boglehead practices?


Thoughts?

AlohaJoe
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Re: Understanding the Great Recession Impact

Post by AlohaJoe » Mon Jan 15, 2018 5:39 am

bironology wrote:
Mon Jan 15, 2018 5:10 am
I talked to one couple, Barb and Chuck. He had been head of product development at McDonald’s MCD, +0.10% before he retired. He lost his nest egg in the 2008 crash and Barb did, too.
I am having a hard time understanding how the recession could truly wipe out the savings of a couple like this.
His nest egg was $250,000. His financial advisor at Wells Fargo convinced him to put the nest egg into something was supposed to guarantee 19% annual returns for life; instead that went to $0. He wasn't the head of product development, he was simply "on the team". (Another article described him as a "director", which probably just means he had a few people reporting to him, i.e. was a middle manager; this article made the jump that "director" meant "head of product development".) He didn't stay there for long and told his bosses he didn't like corporate culture and asked for a transfer "back to the field". His first wife died of cancer in 2002, shortly after he retired.

david
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Re: Understanding the Great Recession Impact

Post by david » Mon Jan 15, 2018 5:51 am

You make some assumptions. The first is what the savings rate and salary of the couple. Who knows what they saved, what the nest egg was worth at its height. Second is that they were in a portfolio of diversified index funds and stayed the course.

If they were not invested in such a portfolio, and for instance, were invested in companies that went under--their money could be gone. If they panic sold at the bottom, lets say a 50% loss and then stayed in cash their lets say 1M, turned into 500k. If they were attempting to take 40k a year--without inflation (i.e. withdrawing 4% of the million), they'd run out of the 500k in 12.5 years. So, 10 years later, their nest egg would be down to 100k. A very scary prospect. But, if their withdrawal rate was more than 4%, lets say 5% (i.e., withdrawing 50k per year on the million), they'd be down to 50k right about 0.

If their major asset was their home. Saw that losing value and downsized at the bottom of the market and started renting, that could be a huge asset hit.

Remember, people thought in 2008 that this was different. This was the big one. Everything is going to go down forever. There was plenty of fear. And it took a good plan and/or nerves of steel to stay the course.

If you followed the advice of this forum, and you retired at the height of 2008, you should have recovered by now. That means diversified portfolio of low cost index funds, re-balancing into your target asset allocation, and a safe withdrawal rate of 4% or lower, you'd be in good shape. However, that was the 2008 recession, not the next recession that hits. This is a backward looking view not forward looking. Huge systemic issues, like those that occurred in Japan for the past almost 30 years, would be more of a problem.

bironology
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Re: Understanding the Great Recession Impact

Post by bironology » Mon Jan 15, 2018 5:52 am

Thanks AlohaJoe. As expected, there were details conveniently dropped from the article (maybe even the book, or did you get this info from the book?) in order to allow the author to make a point.

Without judging and in the spirit of analysis so we can avoid these eventualities for ourselves, it seems like Chuck and Barb's situation was really a result of insufficient savings coupled with misguided investment choices. The recession impacted the couple because of those flaws, which I'd argue were the real cause of their hardship.

bironology
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Re: Understanding the Great Recession Impact

Post by bironology » Mon Jan 15, 2018 5:56 am

david wrote:
Mon Jan 15, 2018 5:51 am
If they were not invested in such a portfolio, and for instance, were invested in companies that went under--their money could be gone. If they panic sold at the bottom, lets say a 50% loss and then stayed in cash their lets say 1M, turned into 500k. If they were attempting to take 40k a year--without inflation (i.e. withdrawing 4% of the million), they'd run out of the 500k in 12.5 years. So, 10 years later, their nest egg would be down to 100k. A very scary prospect. But, if their withdrawal rate was more than 4%, lets say 5% (i.e., withdrawing 50k per year on the million), they'd be down to 50k right about 0.
That makes sense. If the recession hammered them down to a decade's worth of expenses which they put into cash, then a decade later they are penniless.

I hope I can summon the steel nerves when the next recession happens.

david
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Re: Understanding the Great Recession Impact

Post by david » Mon Jan 15, 2018 5:57 am

AlohaJoe wrote:
Mon Jan 15, 2018 5:39 am
bironology wrote:
Mon Jan 15, 2018 5:10 am
I talked to one couple, Barb and Chuck. He had been head of product development at McDonald’s MCD, +0.10% before he retired. He lost his nest egg in the 2008 crash and Barb did, too.
I am having a hard time understanding how the recession could truly wipe out the savings of a couple like this.
His nest egg was $250,000. His financial advisor at Wells Fargo convinced him to put the nest egg into something was supposed to guarantee 19% annual returns for life; instead that went to $0. He wasn't the head of product development, he was simply "on the team". (Another article described him as a "director", which probably just means he had a few people reporting to him, i.e. was a middle manager; this article made the jump that "director" meant "head of product development".) He didn't stay there for long and told his bosses he didn't like corporate culture and asked for a transfer "back to the field". His first wife died of cancer in 2002, shortly after he retired.
Ok, I looked them up. Apparently Chuck and Barb make the rounds. Here's another article to backup what bironology posted:
https://www.wired.com/story/meet-camper ... iree-army/

So, they were attempting to "withdraw" 19ish percent a year. Unsurprisingly, that failed. But, he seems like one hell of a guy:
When two planes hit the World Trade Center in 2001, he was 57 and running his own McDonald’s franchise in Columbia, Pennsylvania. He rushed to Manhattan, where for three days he loaded up Egg McMuffins, hash browns, and coffee, first onto a luggage trolley, then a golf cart, and hauled them down to the debris pit to feed rescuers. The experience felt like the capstone of Chuck’s more than 40 years with the company. It was, he believed, the most worthwhile thing he’d ever done.

wabbott
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Re: Understanding the Great Recession Impact

Post by wabbott » Mon Jan 15, 2018 6:03 am

You've already passed your first test: You didn't panic and bail in the 2008-2009 crash. We've been long-term investors since the late 70's and have been through the 87 mini-crash, the 2000 dot-com bust, and 08-09. We didn't panic either, and it served us well. We're both retired, and our plans are working as designed.

One suggestion that might help. Next time there's a market downturn - and there will be one - turn off the TV, and stop reading The Wall Street Journal. Keep putting your money into your retirement as planned. Buying during dips is what makes dollar cost averaging work.

bironology
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Re: Understanding the Great Recession Impact

Post by bironology » Mon Jan 15, 2018 6:15 am

wabbott wrote:
Mon Jan 15, 2018 6:03 am
You've already passed your first test: You didn't panic and bail in the 2008-2009 crash. ...
Next time there's a market downturn - and there will be one - turn off the TV, and stop reading The Wall Street Journal. Keep putting your money into your retirement as planned. Buying during dips is what makes dollar cost averaging work.
I wish I could claim victory on that period of my life, but if I'm honest, at that time I didn't have substantial enough of a savings nut to have cared all that much. I was busy building my professional career and didn't look up to worry about the cratering savings, instead more focused on succeeding in the marketplace with my company (hard enough that was!) and growing my personal earnings, paying the mortgage and building my family.

10 years later I have detailed plans, substantial savings, and I enjoy watching my net worth grow, but I have tried to cultivate a psychology that enjoys seeing "green days" and just ignores "red days". I hope I can do that in the next recession - perhaps this forum will serve as a critical support system.

bironology
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Re: Understanding the Great Recession Impact

Post by bironology » Mon Jan 15, 2018 6:32 am

david wrote:
Mon Jan 15, 2018 5:57 am

Ok, I looked them up. Apparently Chuck and Barb make the rounds. Here's another article to backup what bironology posted:
https://www.wired.com/story/meet-camper ... iree-army/
I really do empathize for these people. I really do. But again, with no judgement but just objective analysis, there is a key psychological element that may be critical here.

I've noticed that among my family and friends, I'm quite different with respect to money. At the core, it isn't about spending habits, miserliness, or anything like that. Since the day my son was born, I promised my wife I'd always take care of them. We were very poor, had to put groceries on credit cards which got maxed out, and I vowed to myself I'd never, ever let my family down. I woke up every day with that promise in mind for the last 20 years. That compulsion drove me to finish my education, excel in my job, and then later obsess over retirement planning. I'm 45 now, but I have a plan for exactly where every penny of my income will come from when I'm 65, and 75, and 85, and beyond. Long term pro forma projections decades out. I use these models to plan what our current spend and savings rates should be, modulating between lifestyle now and lifestyle later. I know what my mortgage balance, retirement balance, taxable brokerage balances will be. Of course, I don't "know", but I make reasonable estimates or ROI, interest rates, inflation, etc., and adjust the plan as I go.

the important thing is having a plan - and a vision in your head of what life would be like if your plan succeeds, and an anti-vision of what it looks like if you fail to have a plan.

To quote Eminem, "Success is my only m*********ing option, failure's not!".

Most people live by the seats of their pants and ignore the future. Respectfully, Chuck, retiring on $250k of savings was foolish. 10 minutes with Excel could have shown that. He needed another zero at the end of that balance.

Stormbringer
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Re: Understanding the Great Recession Impact

Post by Stormbringer » Mon Jan 15, 2018 8:11 am

bironology wrote:
Mon Jan 15, 2018 5:10 am
What am I missing?
When people say something like "we lost half our retirement savings" in the recession, that often indicates a fundamental misunderstanding of investing -- they confuse market prices of assets with actual cash.

If you have 10,000 shares of XYZ which is currently trading at $100 per share, you don't have a million dollars. You have 10,000 shares of XYZ. You only have a million dollars if you sell it right then and there at that price.

If XYZ sells for $100 in 2007, $50 in 2009, and now $150 in 2018, you never lost a thing. You had, and still have, 10,000 shares of XYZ. However, if you opened your statement in 2009 you might have thought you lost half your money. If you had panicked and sold, you would have.
"Compound interest is the most powerful force in the universe." - Albert Einstein

Call_Me_Op
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Re: Understanding the Great Recession Impact

Post by Call_Me_Op » Mon Jan 15, 2018 8:29 am

bironology wrote:
Mon Jan 15, 2018 5:56 am
I hope I can summon the steel nerves when the next recession happens.
The 2008 recession was really unusual. It really did seem like the economy was crumbling. I hope not to see another such situation in my lifetime.

But to your question, diversification is key. In particular, holding a sufficient supply of high-quality fixed-income is critical. People who say that bonds are as risky as stocks are omitting important details. There ain't nothin' risky about a T-bill.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

bironology
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Re: Understanding the Great Recession Impact

Post by bironology » Mon Jan 15, 2018 8:46 am

Call_Me_Op wrote:
Mon Jan 15, 2018 8:29 am
holding a sufficient supply of high-quality fixed-income is critical. People who say that bonds are as risky as stocks are omitting important details. There ain't nothin' risky about a T-bill.
For sure. You know, the discussion about allocation between stocks, bonds and cash is always around % of portfolio. Could another perspective be to use absolute dollars to weather a downturn.

For example, regardless of portfolio balances, one might consider that living expenses in retirement are $X per year. The average recession is Y years, so one should ensure that at least $X*Y in cash, CDs or other fairly liquid and low-risk equivalents.

I personally haven't seen such a calculus in recommended allocation approaches, but I'm not as widely read on the subject as many of you on this forum. Is this approach reasonable?

livesoft
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Re: Understanding the Great Recession Impact

Post by livesoft » Mon Jan 15, 2018 8:48 am

Nomadic living has been around for thousands of years.
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investingdad
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Re: Understanding the Great Recession Impact

Post by investingdad » Mon Jan 15, 2018 9:02 am

The devil is always in the details.

Clicking the link to the Wired articles does mention the Wells Fargo investment that "guaranteed" 19% a year that ran out of money.

I recall an Engineering manager where I worked in 2001 that told everyone after the 911 market collapse he was going to 100% bonds. I can only imagine where he's at today and what he missed.

The folks that tell you Wall Street took their savings always seem to have similar stories and similar lack of understanding.

Call_Me_Op
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Re: Understanding the Great Recession Impact

Post by Call_Me_Op » Mon Jan 15, 2018 9:04 am

bironology wrote:
Mon Jan 15, 2018 8:46 am
Call_Me_Op wrote:
Mon Jan 15, 2018 8:29 am
holding a sufficient supply of high-quality fixed-income is critical. People who say that bonds are as risky as stocks are omitting important details. There ain't nothin' risky about a T-bill.
For sure. You know, the discussion about allocation between stocks, bonds and cash is always around % of portfolio. Could another perspective be to use absolute dollars to weather a downturn.

For example, regardless of portfolio balances, one might consider that living expenses in retirement are $X per year. The average recession is Y years, so one should ensure that at least $X*Y in cash, CDs or other fairly liquid and low-risk equivalents.

I personally haven't seen such a calculus in recommended allocation approaches, but I'm not as widely read on the subject as many of you on this forum. Is this approach reasonable?
Perfectly reasonable and in fact widely recommended. Some use X=5 but others actually endeavor to hold many years in safe investments. Personally, I would not retire with less than 5 years (of living expenses) in safe investments, but would prefer more.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

thx1138
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Re: Understanding the Great Recession Impact

Post by thx1138 » Mon Jan 15, 2018 9:07 am

bironology wrote:
Mon Jan 15, 2018 8:46 am
Call_Me_Op wrote:
Mon Jan 15, 2018 8:29 am
holding a sufficient supply of high-quality fixed-income is critical. People who say that bonds are as risky as stocks are omitting important details. There ain't nothin' risky about a T-bill.
For sure. You know, the discussion about allocation between stocks, bonds and cash is always around % of portfolio. Could another perspective be to use absolute dollars to weather a downturn.

For example, regardless of portfolio balances, one might consider that living expenses in retirement are $X per year. The average recession is Y years, so one should ensure that at least $X*Y in cash, CDs or other fairly liquid and low-risk equivalents.

I personally haven't seen such a calculus in recommended allocation approaches, but I'm not as widely read on the subject as many of you on this forum. Is this approach reasonable?
That's basically a partial "liability matched portfolio". It is a fairly common technique. You often see a LMP described in the context of an entire portfolio or nearly such with say a 30 year ladder of TIPS or a collection of fixed life annuities. While good in theory they require a huge nest egg to implement - especially at current interest rates. Many folks though do essentially what you recommend by having a near term portion of their portfolio "liability matched" for a period of some years so they can weather a downturn without selling equities.

thx1138
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Re: Understanding the Great Recession Impact

Post by thx1138 » Mon Jan 15, 2018 9:26 am

It sounds like with the additional details dug up this particular couple's problem is easy to understand if still quite sad.

As to the experience of actually having significant skin in the game during the downturn and the extreme psychological headwind against staying the course this thread is worth a read:

viewtopic.php?f=10&t=25126

Personally we had quite a bit of retirement savings then with essentially a 100/0 allocation because we had a long time to retirement. Was the first time we got to experience a six figure paper loss. Fortunately we were just recently out of the housing market and both our jobs were closely tied to federal government spending so our near term didn't feel particularly threatened. Because we had just left the housing market with a slight profit we had a deep emergency fund sitting at the ready as well. Having watched the panic after the 1987 crash as a kid and the dot-com explosion as an early investor certainly helped keep us safely on course. Didn't sell anything, continued our 401k and IRA contributions fully into equities.

What if we still owned a too big house with a relatively large payment in a market that went down by 30% in the years following our sale? We would also not have had the profits from the sale as a large emergency fund. What if my wife's career cycle was just a year or two later and she was forced to apply for her first "permanent" job in academia in the depths of the disaster (job listings in her field went from 7-10 per year down to literally zero one year and two the next with application ratios of over 100:1).

Yeah we "stayed the course" just fine but we really weren't tested that hard because of lucky timing with the non-retirement parts of our financial life. I'd like to think we'd have handled any situation well but hard to know until it happens to you.

sciencenerd
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Re: Understanding the Great Recession Impact

Post by sciencenerd » Mon Jan 15, 2018 9:39 am

Call_Me_Op wrote:
Mon Jan 15, 2018 8:29 am
bironology wrote:
Mon Jan 15, 2018 5:56 am
I hope I can summon the steel nerves when the next recession happens.
The 2008 recession was really unusual. It really did seem like the economy was crumbling. I hope not to see another such situation in my lifetime.

But to your question, diversification is key. In particular, holding a sufficient supply of high-quality fixed-income is critical. People who say that bonds are as risky as stocks are omitting important details. There ain't nothin' risky about a T-bill.
Yes, the 2008 recession was unusual. I didn't have a large enough stock nest egg to really care, and thanks to this site, I bought some more one the way down.

However, I also feel that the 2008 recession was unusual in that the stock market bounced back very quickly. It took only 6 years to get back to the previous maximum (and then some). In my view, this is a major reason why many people didn't see the great recession as such a big hit on the portfolio, because the hit was very short-lived.

I think if the market gains had been sluggish since 2008, say we would have still not recovered to the previous maximum, people (even buy and holders on here) would sing a very different tune.

In a sense, I think this makes investors more at risk regarding the next recession. They think it will be easy to weather, because of recency bias it will play out the same as the 2008 recession. Therefore, many may be taking on risk that they really can't stomach.
Last edited by sciencenerd on Mon Jan 15, 2018 10:23 am, edited 1 time in total.

bironology
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Re: Understanding the Great Recession Impact

Post by bironology » Mon Jan 15, 2018 9:42 am

thx1138 wrote:
Mon Jan 15, 2018 9:26 am
As to the experience of actually having significant skin in the game during the downturn and the extreme psychological headwind against staying the course this thread is worth a read:

viewtopic.php?f=10&t=25126
In 2001 I was 27, a professional software engineer, and had the sense to get out of the dotcom craziness earlier. I worked at a boring pension management LOB, although the software tech was groundbreaking. I had the good fortune to have a stable job while others were getting laid off.

In 2008 I was chief architect of a small software firm, and we had the fortune to be offering a product that reduced expenses of Fortune 500 companies, so our business - and my personal earnings - crew during the recession.

Very lucky, but I was unprepared.

For next time I'm not counting on luck - I'm counting on preparedness. I bookmarked that thread you shared, thx1138. I plan on rereading it quarterly to remind myself why we diversify and to feel the uncertainty that others felt in 2008.

Fail to plan? Plan to fail.

Shallowpockets
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Re: Understanding the Great Recession Impact

Post by Shallowpockets » Mon Jan 15, 2018 9:54 am

A 37% drop. Use that for your future analysis of what you might need or feel comfortable with.
Now the market is back and then some.
The big takeaway here. That the BHs were right. All their complacency of staying the course worked. And, if you subscribed to the other tenents of BHism, frugality and living below your means, all was OK and you came out OK.
Another takeaway is the view of the stock market and their money by those who were not of the BH lifestyle. That is, they came out of the markets. It is only now, NOW, that the talk is that the retail investor may be ready to get back in. Usually it is too late and precedes a subsequent correction.
Kind of like the bitcoin people jumping in now that the price is way up there.
Seek to buffer any future falls by thinking of going for +20% in your projections of what you need overall. That seems a reasonable stretch to make.
Otherwise, stay the course.

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F150HD
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Re: Understanding the Great Recession Impact

Post by F150HD » Mon Jan 15, 2018 10:02 am

that article was published last year, I recall reading it.

dbr
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Re: Understanding the Great Recession Impact

Post by dbr » Mon Jan 15, 2018 10:09 am

Stories about people "losing all their money" are a whole different thing from how a retirement is impacted by a stock market drop.

Probably the broker who had Chuck in that investment should be in jail. We don't know what Barb was invested in, only that her investment also was totally lost.

bironology
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Re: Understanding the Great Recession Impact

Post by bironology » Mon Jan 15, 2018 10:16 am

dbr wrote:
Mon Jan 15, 2018 10:09 am
Stories about people "losing all their money" are a whole different thing from how a retirement is impacted by a stock market drop.

Probably the broker who had Chuck in that investment should be in jail. We don't know what Barb was invested in, only that her investment also was totally lost.
yes, the idea that a $250k investment annuity will throw off $4,000 per month ad infinitum is like snake oil selling. Sad how many folks lack a sanity-meter.

Even sadder that he thought it was cool to retire with a $250k nut in the first place. Also he was pretty young. I'm all for the early retirement idea but I don't think I'd be ready to just play golf all day at age 58. My older peers in my workplace are at their peak potency in their professions at that age. I suppose we are lucky to be doing things we enjoy and are passionate about.

annielouise
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Re: Understanding the Great Recession Impact

Post by annielouise » Mon Jan 15, 2018 10:17 am

Here is my attempt to sum up why people "lose all their money" in downturns (or over multiple downturns).

They don't understand that investments are a thing you own, not an account full of money like a savings account.

They watch/read news sources (or even worse get their news from friends, family, co-workers,
and social media) that go into full panic mode during downturns. Panic = Ratings!

Therefore, they sell when prices are low and go to cash, thus locking in their loss.

It takes them a long time to get back into the market, generally closer to the next top.

Rinse, repeat.

In addition to this cycle, downturns are often accompanied by job losses, so people without adequate emergency funds end up having to dip into investments/retirement funds (selling low) just to stay afloat.

bironology
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Re: Understanding the Great Recession Impact

Post by bironology » Mon Jan 15, 2018 10:21 am

Shallowpockets wrote:
Mon Jan 15, 2018 9:54 am

Kind of like the bitcoin people jumping in now that the price is way up there.
Seek to buffer any future falls by thinking of going for +20% in your projections of what you need overall. That seems a reasonable stretch to make.
Otherwise, stay the course.
I'm sure there are plenty of threads on here regarding bitcoin, I'll just say again that we all need a sanity meter. It just...doesn't... add... up. There are so many opportunities to invest in things that do make sense, I feel no need to get into things that don't logically resolve for me.

It's FOMO.https://www.marketwatch.com/story/heed- ... 2017-12-26

aristotelian
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Re: Understanding the Great Recession Impact

Post by aristotelian » Mon Jan 15, 2018 10:21 am

Most people at the time had most of their wealth in real estate, including their personal residence. Millions of people went underwater and then lost their job at the same time. They were truly wiped out.

I was fortunate to have been a renter most of my life up to that point with wealth in equities. Yes, the market dropped 50% but it bounced back. Meanwhile I was lucky to have been employed the whole time, so I was able to keep buying through the dip.

dbr
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Re: Understanding the Great Recession Impact

Post by dbr » Mon Jan 15, 2018 10:22 am

annielouise wrote:
Mon Jan 15, 2018 10:17 am
Here is my attempt to sum up why people "lose all their money" in downturns (or over multiple downturns).

They don't understand that investments are a thing you own, not an account full of money like a savings account.

They watch/read news sources (or even worse get their news from friends, family, co-workers,
and social media) that go into full panic mode during downturns. Panic = Ratings!

Therefore, they sell when prices are low and go to cash, thus locking in their loss.

It takes them a long time to get back into the market, generally closer to the next top.

Rinse, repeat.

In addition to this cycle, downturns are often accompanied by job losses, so people without adequate emergency funds end up having to dip into investments/retirement funds (selling low) just to stay afloat.
But Chuck and Barb didn't trade their way down or withdraw their way down. The story suggests their investment simply went bust. Of course the story does lack some detail. Maybe they were all in GM, so it is possible. Enron worse than bankrupted some people.

livesoft
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Re: Understanding the Great Recession Impact

Post by livesoft » Mon Jan 15, 2018 10:26 am

I take the $250,000 and $200,000 starting numbers for this couple's investments with a huge grain of salt. I don't see any evidence of fact-checking by the book author.

But the story is actually quite inspirational and uplifting to me. One can apparently lose it all and still continue on with life.
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annielouise
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Re: Understanding the Great Recession Impact

Post by annielouise » Mon Jan 15, 2018 10:32 am

dbr wrote:
Mon Jan 15, 2018 10:22 am
annielouise wrote:
Mon Jan 15, 2018 10:17 am
Here is my attempt to sum up why people "lose all their money" in downturns (or over multiple downturns).

They don't understand that investments are a thing you own, not an account full of money like a savings account.

They watch/read news sources (or even worse get their news from friends, family, co-workers,
and social media) that go into full panic mode during downturns. Panic = Ratings!

Therefore, they sell when prices are low and go to cash, thus locking in their loss.

It takes them a long time to get back into the market, generally closer to the next top.

Rinse, repeat.

In addition to this cycle, downturns are often accompanied by job losses, so people without adequate emergency funds end up having to dip into investments/retirement funds (selling low) just to stay afloat.
But Chuck and Barb didn't trade their way down or withdraw their way down. The story suggests their investment simply went bust. Of course the story does lack some detail. Maybe they were all in GM, so it is possible. Enron worse than bankrupted some people.
Good point.

Originally in my head, I had a step about not diversifying, but missed it when I started typing. However, I interpreted the original question to be more general than just that particular example.

dbr
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Re: Understanding the Great Recession Impact

Post by dbr » Mon Jan 15, 2018 10:32 am

livesoft wrote:
Mon Jan 15, 2018 10:26 am
I take the $250,000 and $200,000 starting numbers for this couple's investments with a huge grain of salt. I don't see any evidence of fact-checking by the book author.

But the story is actually quite inspirational and uplifting to me. One can apparently lose it all and still continue on with life.
Right, not different from the many, many people who never had anything at all in savings.

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bottlecap
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Re: Understanding the Great Recession Impact

Post by bottlecap » Mon Jan 15, 2018 10:57 am

Don’t worry yourself. The book and the article are a semi-political fluff pieces. Writers have to make a living somehow and to do that, sometimes they ignore facts to manufacture fear and outrage. It got you reading, didn’t it!

If you are diversified, the real worry is not getting wiped out, it’s a downturn followed by a prolonged period of low returns.

JT

MnD
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Re: Understanding the Great Recession Impact

Post by MnD » Mon Jan 15, 2018 11:19 am

It was the age of debt and LBYM (living beyond your means).

My neighbor on one side refinanced his huge house with cash out 4 times leading up to the great recession. Put the cash into the house along with cars, trucks, and his small but booming construction business. Then all construction business went away and he was left with a massive debt he couldn't pay on or refinance. Sold the cars and trucks and when the game was totally over (bank foreclosure) drove away in the middle of the night in a beat up truck with bald tires with his wife and kids to her parents house in the Ozarks. House has more than doubled since foreclosure.

My neighbor on the other side had inherited a family fortune which bankrolled most of their lifestyle - he was a small church pastor and she worked admin in a dentists office. 4000 SF house and 4 high-end vehicles and many toys. In 2000 they lost a lot of money in the stock market (tech stocks) and did the usual bad timing things after the crash. After that they swore never to be reliant on risky stocks for their remaining nest egg so diversified into a mix of "blue chip" stocks (like banks and industrials) and speculative local real estate like raw land. They aged about 10 years in 2008-09 but were able to sell the big house and most of the cars and buy for cash a small condo which they could survive in on pastor and dental office wages. At their huge garage sale the wife said their condo was 900 SF and only additional storage was a small chicken wire cage in the building basement so they were selling about 95% of their possessions. The house they sold in 2010 had doubled in price since the sale.

Prior to these and many of my other neighbors "crashing" I couldn't understand what I was doing wrong with a good job, steady savings and investing, paying down mortgage debt and i just didn't seem to have nearly the cash for living large like many of my neighbors. But in 2008 and for several years following I figured it out.

delamer
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Re: Understanding the Great Recession Impact

Post by delamer » Mon Jan 15, 2018 10:39 pm

bironology wrote:
Mon Jan 15, 2018 8:46 am
Call_Me_Op wrote:
Mon Jan 15, 2018 8:29 am
holding a sufficient supply of high-quality fixed-income is critical. People who say that bonds are as risky as stocks are omitting important details. There ain't nothin' risky about a T-bill.
For sure. You know, the discussion about allocation between stocks, bonds and cash is always around % of portfolio. Could another perspective be to use absolute dollars to weather a downturn.

For example, regardless of portfolio balances, one might consider that living expenses in retirement are $X per year. The average recession is Y years, so one should ensure that at least $X*Y in cash, CDs or other fairly liquid and low-risk equivalents.

I personally haven't seen such a calculus in recommended allocation approaches, but I'm not as widely read on the subject as many of you on this forum. Is this approach reasonable?
Do an internet search on the Bucket Method of investing in retirement. It is the type of approach that you are interested in.

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arcticpineapplecorp.
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Re: Understanding the Great Recession Impact

Post by arcticpineapplecorp. » Mon Jan 15, 2018 11:11 pm

bironology, I think the most important thing you've done is to think critically, ask questions, be skeptical and have a need to see the actual numbers. If more people did this, we'd have less people being taken to the cleaners. All to often people say things that just aren't true. I don't mean to suggest people lie (some do) but rather many don't pay very good attention to details and they certainly don't dig down into the numbers.

Case in point was the Beardstown Ladies Investment Club. They published a book in which they showed how easy it was to beat the market. Only problem was the editor/publisher, etc. didn't do a very good job fact checking. The ladies were not intentionally lying to sell books, but they weren't good at computing internal rate of return (IRR) on their investments. So they weren't subtracting out their contributions when figuring their return which made the returns look much better than they actually were.
In 1998, an article in Chicago magazine asserted that the group's stated returns had included the new investments made by its members, and that when computed in conventional fashion, their annual rate of return for 1984–1993 was actually 9.1%, considerably less than the 14.9% return on the S&P 500 during the same period.[1] Outside auditor Price Waterhouse, hired by the club, confirmed the sub-par 9.1% annual rate for 1984–1993. The auditor also discovered the Beardstown Ladies' annualized return was 15.3% when all of 1983–1997 was included; this was better than the average stock fund at the time, but still worse than the S&P 500 return of 17.2% for the same period.[2]

This revelation led to a class action lawsuit against their publisher (Hyperion, a division of Disney), which settled the case by offering to swap the books for other Hyperion books.[1]

As of 2006, the club still existed and was still investing.[1]
source: https://en.wikipedia.org/wiki/Beardstown_Ladies
This happens a lot. More than it should. I'm reading a great book by Larry Swedroe called "Rational Investing in Irrational Times" and he gives so many interesting examples of mutual fund companies giving misleading information for a variety of reasons (like survivorship bias, or large cap mutual funds buying shares in small caps to drive up returns for the fund family's small cap funds, etc.). There's so much duplicity out there it's wise to be dubious. Trust but verify as the saying goes. Nothing wrong with that. It's smart to critique especially when so many play fast and loose with the numbers.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

delamer
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Re: Understanding the Great Recession Impact

Post by delamer » Mon Jan 15, 2018 11:33 pm

Someone starting Social Security in 2002 (the year Chuck retired) received a benefit of about $1000 per month if s/he had average earnings and began collecting between age 62 and 65. Chuck was getting about $1200 by 2013, according to the Wired article.

So best guess is that he had no more than average earnings.

I am surprised that he has no McDonald’s pension. He was obviously ill-served by his investment guy, and not well-informed financially either. But maybe his first wife’s illness generated lots of medical bills.

I wonder what the story is in the three kids that he and Barb each have? Not all kids are in a postion to help, but you’d think at least one of the six could.

But arcticpineapple’s point is well taken; people need to be more skeptical. And many are too optimistic and were not prepared for the triple whammy of the Great Recession — housing price collapse, stock market collapse, and job loss.

bironology
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Re: Understanding the Great Recession Impact

Post by bironology » Tue Jan 16, 2018 5:57 am

delamer wrote:
Mon Jan 15, 2018 10:39 pm

Do an internet search on the Bucket Method of investing in retirement. It is the type of approach that you are interested in.
Aha! Thanks delamer, I this is intuitive to me. https://www.forbes.com/sites/investor/2 ... 8191e2eaed

While I'm not near retirement, I do have a portion of my savings earmarked for major purchases like home improvement and such, and I found that I needed to carve out those funds from my AA calculations since it skewed my overall portfolio. So I have ended up essentially with 2 buckets, one for 1-5 year planned expenditures and another for everything else.

Actually, 529 plans should be their own bucket for each kid.

This makes much more sense to me than lumping together an entire portfolio and putting a single AA across it all. I see the complexity with the approach, however, but I'm cool with the added complexity in exchange for the better precision.

investingdad
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Re: Understanding the Great Recession Impact

Post by investingdad » Tue Jan 16, 2018 8:04 am

MnD wrote:
Mon Jan 15, 2018 11:19 am
It was the age of debt and LBYM (living beyond your means).

My neighbor on one side refinanced his huge house with cash out 4 times leading up to the great recession. Put the cash into the house along with cars, trucks, and his small but booming construction business. Then all construction business went away and he was left with a massive debt he couldn't pay on or refinance. Sold the cars and trucks and when the game was totally over (bank foreclosure) drove away in the middle of the night in a beat up truck with bald tires with his wife and kids to her parents house in the Ozarks. House has more than doubled since foreclosure.

My neighbor on the other side had inherited a family fortune which bankrolled most of their lifestyle - he was a small church pastor and she worked admin in a dentists office. 4000 SF house and 4 high-end vehicles and many toys. In 2000 they lost a lot of money in the stock market (tech stocks) and did the usual bad timing things after the crash. After that they swore never to be reliant on risky stocks for their remaining nest egg so diversified into a mix of "blue chip" stocks (like banks and industrials) and speculative local real estate like raw land. They aged about 10 years in 2008-09 but were able to sell the big house and most of the cars and buy for cash a small condo which they could survive in on pastor and dental office wages. At their huge garage sale the wife said their condo was 900 SF and only additional storage was a small chicken wire cage in the building basement so they were selling about 95% of their possessions. The house they sold in 2010 had doubled in price since the sale.

Prior to these and many of my other neighbors "crashing" I couldn't understand what I was doing wrong with a good job, steady savings and investing, paying down mortgage debt and i just didn't seem to have nearly the cash for living large like many of my neighbors. But in 2008 and for several years following I figured it out.
I was also wondering what we were doing wrong in the early 2000s after we built our first house. We moved out of an expensive area to a less expensive one when we built because I couldn't make the mortgage math work. We wanted it workable on one income. The builders and real estate agents were having a field day and the people buying just kept piling on the upgrades and options. Prices were going up monthly and everyone had multiple new cars.

Yet...by my math, my wife and I were already outearning many of them. How could they afford it all?

Then 2008 hits.

That's how.

bironology
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Re: Understanding the Great Recession Impact

Post by bironology » Tue Jan 16, 2018 8:11 am

investingdad wrote:
Tue Jan 16, 2018 8:04 am


I was also wondering what we were doing wrong in the early 2000s after we built our first house. We moved out of an expensive area to a less expensive one when we built because I couldn't make the mortgage math work. We wanted it workable on one income. The builders and real estate agents were having a field day and the people buying just kept piling on the upgrades and options. Prices were going up monthly and everyone had multiple new cars.

Yet...by my math, my wife and I were already outearning many of them. How could they afford it all?

Then 2008 hits.

That's how.
Same here. Built house in 2000, new development, our starter home. We spent $200k, I was making $90k at the time. I recall being approved by the bank for $400k, IIRC. I thought that would have been [completely - moderator prudent] crazy. Then each of my new neighbors over the next 8 years built larger, fancier homes, with fancy toys. By 2003 the average valuation of a house in my neighborhood was $400k (mine increased accordingly to about $280k, which made us perfectly happy!). I don't know their incomes, but most were in the construction business. Masons, carpenters, landscapers. I marveled to my wife, "how do they do it? they can't possibly afford those homes and cars". I was right. They confused the gravy train of the building boon with long term earning potential.

By the time we moved out of the neighborhood in 2015, most of the other homes had changed owners several times in 15 years, many foreclosures. It was sad. I was glad that I was good at math.

investingdad
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Re: Understanding the Great Recession Impact

Post by investingdad » Tue Jan 16, 2018 8:23 am

bironology wrote:
Tue Jan 16, 2018 8:11 am
investingdad wrote:
Tue Jan 16, 2018 8:04 am


I was also wondering what we were doing wrong in the early 2000s after we built our first house. We moved out of an expensive area to a less expensive one when we built because I couldn't make the mortgage math work. We wanted it workable on one income. The builders and real estate agents were having a field day and the people buying just kept piling on the upgrades and options. Prices were going up monthly and everyone had multiple new cars.

Yet...by my math, my wife and I were already outearning many of them. How could they afford it all?

Then 2008 hits.

That's how.
Same here. Built house in 2000, new development, our starter home. We spent $200k, I was making $90k at the time. I recall being approved by the bank for $400k, IIRC. I thought that would have been [completely - moderator prudent] crazy. Then each of my new neighbors over the next 8 years built larger, fancier homes, with fancy toys. By 2003 the average valuation of a house in my neighborhood was $400k (mine increased accordingly to about $280k, which made us perfectly happy!). I don't know their incomes, but most were in the construction business. Masons, carpenters, landscapers. I marveled to my wife, "how do they do it? they can't possibly afford those homes and cars". I was right. They confused the gravy train of the building boon with long term earning potential.

By the time we moved out of the neighborhood in 2015, most of the other homes had changed owners several times in 15 years, many foreclosures. It was sad. I was glad that I was good at math.
Yes, that's a good description of what happened in our old neighborhood as well.

Using the perfect crystal ball of hindsight, it was a house down the street from us that signaled the beginning of the end. They built a house that cost about 40% more than ours did a few years earlier and had both a new Benz and Hummer in the driveway. The house was in a distressed sale less than 12 months later!

That was 2008.

Eagle33
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Re: Understanding the Great Recession Impact

Post by Eagle33 » Tue Jan 16, 2018 2:58 pm

bironology wrote:
Tue Jan 16, 2018 5:57 am
delamer wrote:
Mon Jan 15, 2018 10:39 pm

Do an internet search on the Bucket Method of investing in retirement. It is the type of approach that you are interested in.
Aha! Thanks delamer, I this is intuitive to me. https://www.forbes.com/sites/investor/2 ... 8191e2eaed

While I'm not near retirement, I do have a portion of my savings earmarked for major purchases like home improvement and such, and I found that I needed to carve out those funds from my AA calculations since it skewed my overall portfolio. So I have ended up essentially with 2 buckets, one for 1-5 year planned expenditures and another for everything else.

Actually, 529 plans should be their own bucket for each kid.

This makes much more sense to me than lumping together an entire portfolio and putting a single AA across it all. I see the complexity with the approach, however, but I'm cool with the added complexity in exchange for the better precision.
I found http://www.morningstar.com/content/morn ... olios.html by Morningstar's Christine Benz was a good intro into buckets.

quantAndHold
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Re: Understanding the Great Recession Impact

Post by quantAndHold » Tue Jan 16, 2018 3:25 pm

dbr wrote:
Mon Jan 15, 2018 10:22 am

But Chuck and Barb didn't trade their way down or withdraw their way down. The story suggests their investment simply went bust. Of course the story does lack some detail. Maybe they were all in GM, so it is possible. Enron worse than bankrupted some people.
It’s scary how common this is, especially among people whose 401k’s are heavily invested in their own company stock. I worked for one of those companies during the Enron period, and knew a lot of people who lost it all. And I have a friend now whose entire 401k is in BofA stock. He was getting ready to retire before it lost 98% in 2008. He told me that it is still all in BofA stock, so he clearly didn’t learn a thing. He’s still working.

Personally, I believe company stock in employee 401k’s should not be legal.

Guaranteed 19% return is basically what Bernie Madoff was doing. I wonder who found that investment and thought it was a good idea.

bironology
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Re: Understanding the Great Recession Impact

Post by bironology » Tue Jan 16, 2018 3:35 pm

quantAndHold wrote:
Tue Jan 16, 2018 3:25 pm

Personally, I believe company stock in employee 401k’s should not be legal.

Guaranteed 19% return is basically what Bernie Madoff was doing. I wonder who found that investment and thought it was a good idea.
If buying stock in your 401k at a discount is an option, as long as you can later swap the shares for other fund options, there's nothing wrong with that. If the company stock is the only option, I agree that should not be legal. Don't know how common that practice (still?) is.

quantAndHold
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Re: Understanding the Great Recession Impact

Post by quantAndHold » Tue Jan 16, 2018 5:44 pm

bironology wrote:
Tue Jan 16, 2018 3:35 pm
quantAndHold wrote:
Tue Jan 16, 2018 3:25 pm

Personally, I believe company stock in employee 401k’s should not be legal.

Guaranteed 19% return is basically what Bernie Madoff was doing. I wonder who found that investment and thought it was a good idea.
If buying stock in your 401k at a discount is an option, as long as you can later swap the shares for other fund options, there's nothing wrong with that. If the company stock is the only option, I agree that should not be legal. Don't know how common that practice (still?) is.
I’ve seen company stock offered in 401k’s at several companies I’ve worked at. Never at a discount. Often, when it’s “offered,” it’s a forced option, where the 401k match is all in company stock instead of the employee’s choice allocation, and it’s up to the employee to log into the account at regular intervals to sell the stock and invest in something else. Employees tend to choose the default option, so they don’t sell, and their account gets bloated with company stock, until the employee needs the money because the company gets into financial trouble, the stock price takes a dive, and the employee gets laid off.

At one company I worked at, a group of employees had to hire lawyers and threaten to sue to get the employer to let us choose how our match was allocated. Even today at that company, the default is to get the match in company stock, and most people just take the default.

Making company stock available in the 401k is one thing, but forcing it into people’s 401k accounts is not okay. Most employees are not sophisticated enough to realize the danger.

dbr
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Re: Understanding the Great Recession Impact

Post by dbr » Tue Jan 16, 2018 5:59 pm

Someone may be confusing stock at a discount in a 401k with stock at a discount in an ESPP, which is not tax deferred investing.

Traveler
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Re: Understanding the Great Recession Impact

Post by Traveler » Tue Jan 16, 2018 8:53 pm

My company's 401K match is in company stock. So each quarter I go in and sell it and divvy it up into my 3-4 fund portfolio. That said, I buy company stock through the DESPP for a 5% discount, a ~3% dividend and a ~3% return in my annual bonus. People here would say I'm overweight in company stock, but it's a risk I realize and am willing to take.

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