Military Financial Independence

Let’s discuss your plan for getting through a bear market and reaching financial independence. If you don’t have a plan, then by the end of this post you’ll know how to craft one. You’ll feel good about taking action and you’ll sleep better at night.

You’ll cope with these situations every 5-10 years during all phases of your very long life. We’ll review how to assess bear markets and recessions when you’re approaching financial independence. We’ll cover what happens if you reached FI last week and quit your paid employment just before the market tanked. (Been there. Done that.) We’ll explain how to handle the economy when you’re FI at a young age and still have decades of life expectancy.

I can’t change your emotions but I can help you change your reactions and your behavior. My family is in this for the rest of our FI lives, and we no longer twitch every time a short-term event causes uncertainty and volatility. I’ll show you how to build that long-term perspective too.

Every financial crisis is filled with fear, uncertainty, despair, panic, and paranoia. And I’m not even talking about the stock markets yet!

[By the way, this post is evergreen. There’s a persistent rumor that search engines will punish sites for using keywords like “coronavirus”, “COVID-19”, or “SARS-CoV-2.” We experienced personal-finance bloggers don’t fret about the SEO– we use the keywords that our audience wants to see.

I wrote this blog post in late March 2020, during Hawaii’s 14 days of self-isolation for residents returning from travel. I feel fine and I hope that continues for another five or six decades.]

You’ll find more apocalyptic keywords all over the Internet, and I’m not going to obsess over them. Instead let’s talk about the psychology of behavioral finance. We’ll learn practical ways to cope with our emotions and our concerns. I’ll share the skills that we’ve acquired through experience… we certainly didn’t gain them through brilliance.

We’re going to switch our perspective to optimism.

“Optimism”? Seriously?!?

Yep. I’m 59 years old, and I’m hitting the “older male” demographic for a susceptible immune system. I’ve had bronchitis and pneumonia several times and my pulmonary function tests claim I’m down to a 70% capacity. During my military career I lived with chronic fatigue and acute stress for decades, and I’ve wreaked havoc on my body’s defenses. Looking back on my life, I’m perpetually amazed that I’ve survived to reach financial independence.

And yet I’m still optimistic– especially when I read blog posts written by my fellow Baby Boomers.

As submariners learn very early in their careers, when you’re operating underwater then the casualties tend to have binary results. You’ll either take all the emergency actions and fix the problem, or… you won’t get the boat back to the surface and the rest won’t matter. That “escape” suit? Don’t count on it. Rely on your training and your teamwork. Practice until it becomes a reflex. Build your optimism on your skills and your shipmates.

It sounds a lot like every service’s military training, doesn’t it?

This binary result is the same way to endure the financial markets during global catastrophes.

The markets will either recover and go on to new growth, or… the catastrophe destroys the economy and life as we know it. The only question is how long the bear market persists, because the markets can remain irrational for far longer than we’re solvent.

Apocalypses are way beyond my locus of control. The only thing I can do during bear markets is to take care of my health and my finances. That helps develop the right attitude.

Focus on the things that you can control. Address your feelings, take the appropriate actions, and fix the root cause of the problems with your investments and your emotions. You’ll get plenty of practice as you save and invest for financial independence. Your reactions will improve, and you’ll be more optimistic too.

Yet another bear market.

My first thought on seeing the market’s steep drop was “Well, here we go again.” My spouse and I have invested for over 40 years, and we’ve seen this volatility before.

The consistent result among all of these bear markets: they’ve all recovered.

Remember: if the markets don’t recover then it’s because the global apocalypse has rendered the markets irrelevant.

Every time the bear market starts, it’s because investors are surprised by an unexpected event that’s grown out of control. If it was an expected event, then a bunch of us would have seen it coming and prepared for it. If we could control surprises then we would have handled it before it took over the markets.

One of the consistencies among bear markets is that we immediately insist: “It’s different this time!” That pessimism is pervasive: whatever we did during yesterday’s bear markets could never help with this amazingly new snowflake situation, and we’re all doomed.

Of course this time it’s different. If it was the same as last time then we would’ve seen it coming and prevented it.

The causes of a bear market are always different. Humans have short-term memories and we don’t know enough history to react rationally to the next surprise. Eventually, we’ll get smarter enough experience to handle the next surprise and we’ll notice the common factors.

Is it really different this time? Here’s a common factor: most bear markets last for 2-3 years. Even when a recession feels like forever, my personal experience is that the markets recover. They had to– or I wouldn’t write this post. Bear markets recover relatively slowly and they’re fraught with worry, but they’ve recovered.

Control what you can.

When you start investing, the Internet presents you with a bewildering array of options.  The financial industry claims that you can’t possibly manage your money on your own, and you need help. You need “free” information from the media (including us bloggers) to stay informed. You have to use “free” apps to help you execute your purchases, and you must seek help to grow your wealth. You’re even told that you can only handle the stress when you have a team to hold your hand and guide you through these complicated systems.

Ironically the talking heads and the researchers and the gurus are right about one aspect of investing: you can’t control the market’s daily volatility, even when you (think you) understand what’s happening.

As an investor, you only get to control three things: your asset allocation, the expenses you pay for it, and the amount you invest.

For the duration of the last bull market, we’ve seen plenty of bold talk about buying during the next bear market or economic recession:
“Stocks are on sale, yay!”
“Buy the dip!”
“Put that dry powder to work!!”

After 40 years, I can affirm that it’s easy to be bold during a bull market.

How bold do you feel in the second month of a bear market? How will we know exactly when to place those buy orders? What about the second year of a bear market? Forget about when you should go all-in with the market– when will this all end?!?

Now’s the time to start thinking about your emotions of a bear market’s behavioral financial psychology— and how well you’ll sleep at night.

How to handle your bear markets:

• Have a plan.
• Choose your asset allocation.
• Put it in autopilot.
• Find your support network. Turn off the financial media, don’t obsess over your account statements, and go live your life.

Your plan:
Your first step at every life transition is figuring out your short-term goals and long-term goals. (This applies during bull markets as well as bear markets.) Early in your career, you’re planning to pay off consumer debts (short-term goal) while claiming the match in your TSP and 401(k). You’ll boost your earnings and move through jobs (and unemployment). You’ll invest for retirement (long term) and financial independence (for your lifestyle). Maybe someday you’ll buy a house (long-term) or not (short-term).  What about raising a money-savvy family?  Caring for aging parents?  Enjoying global perpetual travel?  Talk it out and write it down.

The best plan for your goals is written on an index card.

Keep it simple, especially when you’re new to investing. You want to explain your choices to your significant other, and maybe even to a six-year-old.

You can get really formal with an Investment Policy Statement if that makes you feel better, or be casually snarky with your plan. Either way you have to write it down and make it accessible for that moment when you want to panic and sell everything.

During bear markets and other stressful times, you’ll review your goals and your plans. You’ll consider why you’ve chosen your priorities and your assets, and you’ll analyze how your emotions are affecting your cognition. Maybe you’ll even ask a financial advisor (or a trusted friend) to talk you down off the (metaphorical) ledge.

Your asset allocation:
This is the tough part. All of the logic and math of an asset allocation can be hijacked by your emotions– not just fear but also greed. I’ve experienced this as a steely-eyed killer of the deep, and I’ve seen it in thousands of other military families. It’s reportedly even happened in Warren Buffett’s family.

You can read the details of asset allocation at the Bogleheads Wiki.

You’re going to decide how aggressively you want to invest in stocks and real estate, and you’re going to decide how much volatility risk you’re willing to tolerate.

Intellectually you know that you’ll invest in stocks for a goal that’s at least 10 years away. You’ll use bonds for goals that are 5-10 years off. Short-term goals are in CDs and money markets. If you’re investing in real estate then you’ll build long-term cash flow instead of counting on short-term appreciation.

That’s math and logic. However, volatility will hit your emotions hard.

The problem is that the risk-tolerance quizzes don’t create the same feelings as a bear market. Everyone looks at the numbers and rationally concludes “Sure, I can handle a 50% paper loss for a year or two.” Emotionally, however, the actual experience feels completely different from the quizzes. Try to reframe the analysis for your personal timeline.

During the next bear market, can you stand to see your accounts shrink by a year of gains? Two years? Will you lose a decade of progress or end up even worse off? How long can you watch those paper losses pile up? What if you’re laid off when the market tanks? Will you lay awake night wondering “When will this end?” or even worse “OMG what have I done?!?”

No worries. Bear markets help you recalibrate your asset-allocation choices and your risk tolerance.

Keep it simple. You don’t need to boost your returns with options spreads or inverse-leverage funds. You can ignore exotic assets like cryptocurrencies, precious metals, or property-tax liens. If you’re investing in real estate then have an emergency-repair fund for each property. If you leverage your rental’s equity with a mortgage then keep enough cash to handle a vacancy of at least two months.

Diversify your asset allocation using passively-managed index funds with low expense ratios. (Lower than 0.25%/year. 0.10% is better. 0.04% is great.) If you’re going to pick individual stocks or bonds (or investment rental properties in the same ZIP code) then limit those assets to 10% of your overall asset allocation. 10% is big enough to boost your returns if you’re brilliant, and small enough to limit the damage if you’re… not.

Don’t “go all in” on a cheap asset, let alone a cheap stock. During 2008-09 on the Early-Retirement.org forum we watched an investor buy more stock in Bank of America every month. He understood the industry and the company, he did the math, and he loooooved the stock’s dividend. He loaded up every time the shares “went on sale.” He wasn’t greedy but he thought it was a safe haven, and he definitely confirmed his bias by deciding to “believe in his analysis” and “have faith in the numbers.” He left no margins for error or surprises.

His tactics worked… until they didn’t. BoA abruptly revealed billions of dollars of poorly performing loans and cut their dividend to a penny. Over half of this poster’s investment income vaporized overnight, and his assets lost 75% of their value. He could have controlled his asset allocation, but the company’s operations (and its results) were all totally beyond his control.

If you read those last two paragraphs and thought “Eh, I know how to do better than that”, then experiment with the 10% part of your asset allocation. The more you read about it and work at it, then the higher your returns might rise. However it also might turn into a full-time side job, and you might be reluctant to turn your back on it for a military deployment with minimal bandwidth.

If you lay awake at night worrying about what you need to do with your investments when the markets open in the morning, then you’re working too hard. Keep it simple.

Put it in autopilot!
This is why you choose a simple asset allocation, and limit your “brilliant investor” ideas to 10% of your asset allocation.

When you’re pursuing financial independence, bear markets are where your effort and your automation really pay off.

Set up payroll deductions or checking-account transfers to buy your asset allocation every pay period or every month. You don’t want to deal with decision fatigue and you certainly don’t want your emotions to hijack your plan.

Check your asset allocation percentages every few months, but don’t obsess over them. If you plan to split your asset allocation at 70% stocks and 30% bonds then let it drift a few percentage points each way. If it gets down to 60/40 then you buy more stock funds for a few months to bring it back to 70/30. (This is when stock index funds are on sale.) If it rises to 80/20 then you might not want to buy expensive stocks anyway, and you’ll put more of your savings into bonds or CDs.

If you have a lump sum to invest then you could buy your asset allocation in one transaction: get it over with and move on. If this feels stressful then invest that lump sum over 6-12 months.

Find a support network.
Turn off the financial TV and the daily market reports. You can check your account statements for errors and maybe think about rebalancing, but don’t obsess about the recent losses.

Go live your life. Focus on family, friends, and career… in about that order. Go outside. Try to exercise, eat better, and get some sleep. It’s not easy to do these things during stressful times, but it helps.

Like any other stressful time, during a bear market you’re going to talk with family & friends. Find people who have at least as much investing knowledge and risk tolerance as you. Read Internet forums and Facebook groups to find posters in similar situations, and ask questions.

If you’re still feeling stressed about your options then consider financial advice.

Maybe you’d want to consult a fee-only CFP from NAPFA, the Garrett Network, or XY Planning Network. They charge by the hour (or project) without commissions or upsells. You might also decide that you’d prefer a financial coach instead of a CFP. Coaches can do everything that a CFP does except recommend specific investment funds or stocks.

How will a bear market affect your FI plans?

What stage of your financial independence journey are you in?

If you’re just starting your career and your path to FI, then follow the four steps above. If you’re paying down debt then you should still invest for your employer match in your 401(k) or your Thrift Savings Plan. Adapt your investment decisions to the interest rate on your loans. If you’re paying less than 4% interest then maybe you’re comfortable at making the minimum debt payments and investing more in your asset allocation of your 401(k) or your IRA. If your debt has a higher interest rate then accelerate its payoff and sleep better at night.

If you’re carrying a mortgage or student loans then you might even want to investigate refinancing to a lower interest rate. I’d happily restart our 30-year fixed-rate mortgage if we could drop the rate from 3.50% to less than 3%.

If you’re approaching FI and planning to retire soon, then make sure you hit the tripwire of the 4% Safe Withdrawal Rate before you quit your employment. Learn about sequence-of-returns risk and consider keeping two years of your retirement expenses in cash during the first decade of financial independence.

If you’ve already reached FI (the 4% SWR or cash flow from rental properties) and quit your job, then you should be fine! The 4% SWR will survive bear markets even if your annual spending rises to 6%-7% of your shrinking investments. You’re not a spending robot. You’ll review your expenses and make smart choices. If the bear market extends longer than two years then you’ll investigate variable withdrawal schemes and consider moving to lower-cost areas. The success rate of the 4% SWR gives you plenty of time to adjust your tactics, and dealing with a bear market while you’re FI is still a far more enjoyable life than the best days in the workplace.

What we’re doing in our family:

At Hale Nords, we’re neither buying nor selling. We’re not even rebalancing.

We’re focused on long-term next-generation goals and we’re living our lives.

Short answer: we’re staying with our asset allocation.

Long-term answer: after 18 years of retirement, our investments will survive bear markets. Our emotions are still challenging, but the 4% SWR follows its math.

My spouse and I reached FI for the first time in late 1999 (in retrospect), along with everyone else who invested in a high-equity portfolio during the Internet bull market. We didn’t know about the 4% Safe Withdrawal Rate back then and my military billet did not suck, so I stayed on active duty.

After 9/11 when the stock markets re-opened, we ran our numbers again. This time we knew about the 4% SWR, and despite the market’s epic meltdown we were about a nickel over the tripwire.

I retired from active duty in June 2002, just as the Internet recession was headed for the bottom.  The next few months were not fun, and there were several intense spouse discussions about asset allocation, but our Plan B was getting a job for a year or two. (We never needed to do that.) At retirement we had set aside two years’ expenses for sequence-of-returns risk, and we kept spending from that cash. The rest of our asset allocation was in equity mutual funds, although we began moving toward equity ETFs with cheaper expense ratios.

2008-09 was no fun, either, but we stuck to our two-year cash stash plan and our asset allocation. We did some tax-loss harvesting but we stayed invested.

After 2012 we drew down the cash stash. We’d survived the decade of vulnerability to sequence-of-returns risk and our spending had risen more slowly than inflation. Today our annual spending is around 3.5%, comfortably within the 4% SWR and invulnerable to historical returns. We’re confident that we have more than enough assets for the rest of our lives.

In 2017, in a “Well, duh” epiphany, I stopped tracking the markets. I shut off my daily e-mail summaries and my alerts and retrained myself to stop looking at our investments every week. It took a while, but I no longer obsess about the daily numbers. I check Personal Capital when I’m working on income-tax returns or totaling an expense category. (Or researching a blog post.) I’m in our Fidelity accounts when I’m transferring dividends to our checking account. Otherwise I’m blissfully ignorant.

Personal Capital also showed that our equity index ETF shares (purchased in 2003-04) had much higher expense ratios than today’s index ETFs. We’re getting rid of the last of those higher-expense ETFs and moving to Vanguard’s total stock market index fund (ticker VTI) in a tax-efficient manner. We’ve donated many of those shares to charity for the income-tax deduction.

We reached financial independence on a high savings rate, and we’ve endured bear markets before. Today we have reliable income from my military pension (and in a decade, Social Security) and a little cash flow from a rental property. Because of our volatility experience and those inflation-adjusted annuities, we have an extraordinarily aggressive asset allocation: it’s >95% equities with the rest in cash.

Instead of looking at the stock markets we’re focused on estate planning and philanthropy, and we’ll work harder on giving it away.

There’s no reason to make rapid moves. As I wrote this post, we were 98% stocks and 2% cash.
That 98% includes:
52% VTI.
24% Berkshire Hathaway “B” shares, for our heirs and charities.
12% in the dividend ETF (DVY), slowly moving to VTI.
10% angel investments, winding them down.

As this bear market began, my old reflexes kicked in. I could sell put options on our ETF shares. I could put our unused cash to work in more shares of a total stock market index fund. We could do more aggressive marketing on our next book and pursue freelance writing with public speaking. I’ve done those things before, they work, and I can do them again.

But we don’t need the extra income or assets. Life is already awesome.

Our worst drop in this bear market (so far) is 18%. In 2009 our net worth dropped 56% from peak to trough and then recovered, so in 2020 we’re not worried.

We’re living our long-term goals now.

Our daughter and son-in-law recently gave birth to our first grandchild. We’ve gifted Arya the cash to start her 529 account, and her parents are really happy to buy the index funds at a 30% discount.

In the “living our lives” goal, we visited them for a month of diaper duty. There was grandparent sleep deprivation (I took the midwatches), but we gave the parents a much-needed break. I enjoy taking naps with a baby in my lap.

Arya’s parents have a high savings rate for their own financial independence, and they’re well on their way. Poopie diapers are a great metaphor for a bear market, and during our visit, our granddaughter offered many opportunities for that financial discussion. My daughter Carol and I also finished editing our book about raising money-savvy families, and now we’re starting the marketing with social media and podcasts.

That’s our legacy for everyone’s next generation. Arya seems pretty satisfied.

Your call to action:

Make a plan.

Choose your asset allocation.

Put it in autopilot.

Find your support network.

[earnist ref=”the-military-guide-to-financial-independence” id=”70177″]

Related articles:
How Should I Invest During Retirement?
Yet Another Decade In Review Post
The 1980s-2000s: How I Wish I’d Invested Back Then
Our Retirement – The Spending Smile Of Financial Independence
“Hey, Nords: How’s Your Net Worth?!?”
REVEALED: Our Asset Allocation During Financial Independence (published in 2015)
How Do You Survive A Stock Market Crash?
Lifestyles in Financial Independence: Your Mortality