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The Good Things about a Recession in Early Retirement

by Apr 8, 2020

‘We ‘retired early’ in June 2019, and we almost immediately hit the most dreaded scenario: the bear market. Although definitely not pleasant, I found there is a good side to it.

First a market correction…

In 2019, during the summer, and more so from October onwards, the market started a small correction. Our investments, for some reasons, were more impacted than the market. We lost around 10% by the end of the year.

On top of that, the Pound fell during the summer by another 5%. As the majority of our savings are in GBP, but we spend in Euro, this added to our losses.

We reacted by selling a few investments to rebalance our portfolio and eliminate some of the shares which were more exposed to the downside.

…then a pandemic

At the beginning of 2020 our portfolio started to recover. For some reason we hadn’t redeployed all the cash we got from selling shares in the summer, so when the market started to crash during the COVID-19 pandemic, we weren’t fully invested. Nonetheless the bear market wiped 4 months of ‘going up’. We sold out of more investments, and stabilised the portfolio at a loss. To be fair, it was a small loss, but big enough to change the year from ‘positive’ (ie. slightly above breakeven, where our gains can cover all our costs for the year) to negative. This wasn’t great for our morale!

Rollercoaster

We keep 2 years in cash so we are relatively well insulated from market movements. Also, we are quite flexible, and we can stretch that money for even longer if needed. Well, at least that’s the theory, because of course we’re not happy at all with seeing our portfolio not reaching the 4% safe withdrawal rate, let alone not reaching breakeven!! 😭

The good thing about the recession

Unfortunately recessions and bear markets are bound to happen. And if really one had to happen, it’s probably best it happened at the beginning of our early retirement.

We all have a theoretical understanding of what can go wrong in early retirement, but it’s difficult to have a practical one: you need to experience things to really get them.

So this market crash has thought us that we need to be considerate in the way we use our money. It’s easy to feel lucky during a bull market; but as soon as a bear market starts, we may be caught off guard. Without such an early warning we could have made decisions we may now regret. We could have made a financial mistake, or in general we could have started having a lifestyle which we could only afford during the good days.

The recent lockdown has given us an even clearer picture of how things can suddenly change for the worst. And some perspective too – one thing is to worry about our portfolio losing some value; another thing is not finding food in supermarkets!

So, provided we can safely survive the pandemic, and go back to our normal life, we have learned quite a lot about the adjustments we can make to our lifestyle so it’s good and sustainable in all markets!

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