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Jason’s Random Words

As Jeff so eloquently recently pointed out, I’m getting older.

And as I discussed in the podcast episode linked and embedded above, I’m getting closer to the time in life when I will shift from building wealth to actually spending that wealth.

Sure, it’s not just around the corner. My son is about a decade away from pursuing college or trade school or whatever he chooses to do after high school, and my wife and I are probably 12 or 15 years away from retirement.

The good news is we are in a good situation. Because we have been very diligent savers over the past 15 years, have enjoyed relatively high earnings and invested much of our discretionary income, and — the one thing that’s a product of luck and outside of our control — invested across one of the best bull markets in the past century, we should reach our financial goals even if we see very weak returns from the stock market over the next decade.

When volatility becomes risk

We’ve enjoyed a pretty remarkable run since March 2009, but much of the decade before that was a bit of a “lost” period for many investors.

As Ben Carlson pointed out, the 1982-1999 bull market — the S&P averaged 20% per year over that period. But it was followed with 16% in returns from the March 2000 peak to the October 2007 precipice of the Global Financial Crisis. To be clear: That’s not 16% a year; that’s 16% in total returns, less than 2% a year.

And it got even worse. The Great Recession would wipe out all of those returns, and erase years of gains. By the bottom in March 2009, the S&P was down about half from the 2000 peak, and nearly 60% down from the 2007 high.

It wasn’t until 2012 that the market was back above those 2000 highs for good, once the current bull market that’s been such a boon for everyone reading this was running full speed, charging through the pandemic and the 2022 bear market like they didn’t happen.

A few thoughts that resonate with me

The first is that if you’re still multiple decades from retirement, big market downturns represent amazing opportunities to invest. I personally got a huge bump from the market selling off by half nearly at the beginning of my investing journey, right when I was maxing out my contributions and my wife and I both were entering our peak earning years. Warren Buffett has wrote about the power of downturns and stagnant markets as rocket fuel for those who are accumulating stocks. I’ll certainly continue to benefit from that, as we continue to make significant contributions to our investment accounts.

But the second thought weighs more heavily every day. My retirement will largely be funded by the money we have already invested, and less by future contributions. And that means that a protracted market downturn is a now a greater risk to reaching my financial goals.

We could see the current bull run continue for another five years or a decade. AI has the potential to deliver economic potential greater even than the internet has created over the past quarter century, and falling interest rates could deliver the same soft landing we saw in the mid 1990s that kept the previous bull market running another half-decade. For this reason and the fact that I plan to have another four-plus decades of life to fund, I will remain primarily invested in stocks, but the uncertainty of the market in the short term is a material risk now.

Comedian Ron “Tater Salad” White once quipped, “I don’t know how many of ‘em it would’ve taken to whip my ass, But I knew how many they were going to use. And that’s a handy little piece of information to have.” He wasn’t talking about bad years in the market, but his words strangely resonate.

I think about managing my wealth in the same way. I don’t know how many bad years for stocks it would take to whip my portfolio’s ass, but I know how many they can use. And that’s a handy little piece of information to have.

Jason

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