Briefing v2.0 | What FIRE gets WRONG about retiring off index funds

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One of the safest, most effective investing-based retirement strategies is investing a large sum of money in index funds. How large? Absolute minimum size would be $500k, but ideally $1M. Such funds are allocated to an index fund (S&P 500 is the de facto equities market benchmark). This allows you to build equity in an asset with a long history of gradually increasing value over time, while also receiving dividends (~4% quarterly, various index fund ETF yield’s may differ).

This strategy is safe, effective, time-tested and highly touted by the FIRE community and some of its more voracious proponents. While we at MRP agree it is a good strategy, I want to analyze one enormous flaw with this strategy that is often not even mentioned: bear markets.

Many advocates of retiring and living off index funds predicate their strategy on the assumption that the market will only ever move up, sideways, or down only a little (small market corrections ~5-10%)...

What about bear markets?

Bear markets, though not common, are long term, optimism-siphoning downward trends that extend over the course of years and act as a macro market correction to simmer frothy and overextended prices to more realistic levels. Lower lows become the new norm and months, if not years, of market growth are erased exponentially faster than your portfolio’s value grew.

If you had gone all-in or DCA’d near the top of the 1999-2000 Tech Bubble, you would not have broken even until December 2016 (and possibly selling at a loss for 10-15 years).

More importantly, your portfolio’s cost basis (average price per share) may get hammered into the red. What’s the implication here? If you’ve been dollar-cost-averaging (DCA) into an index fund every month (generally safer), or went all-in at a single price (riskier), as you gradually sell shares of your index fund retirement portfolio (still collecting dividends, of course), you may be selling your shares at a loss. The point here, is though this may have been a great strategy up until recent years, it may not be the safest, most effective strategy for current market conditions. Since markets bottomed during the 2008 Financial Crisis, markets have rallied strongly. As of the writing of this briefing (May 2019), the markets have been hovering around, and even making repeated new all-time highs (ATHs).

Generally, we want to buy low, sell high. Not buy at ATH, sell lower. Which seems more likely, given current market conditions?


TLDR: Why this strategy may not be optimal for someone starting this strategy in 2019?:

  • Market ATHs = high cost basis = high risk to sell at loss (how much higher can they go before pulling back?)

  • Market ATHs = high-priced index funds = less index fund shares you can afford = less dividends

  • Weakening market fundamentals/leading indicators

  • Long Term Technical Analysis shows strong likelihood of bear market starting in 2020s

How to modify the ‘Retire off lump sum of money in index funds’ for current market conditions?

Market conditions:

1) Bottom of bear market, sideways consolidation, early/middle stages of long-term bull market

(otherwise you’ll be selling shares monthly at loss)

2) Near top of bull market/ATH’s?

  • Invest into inverse (short) index fund ETF with dividend yields

(market prices decrease = your portfolio increases)