FIRE in a Recession
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As I write this I am sitting at my kitchen table instead of my office because like a lot of the world right now I am working from home to help stop the spread of the coronavirus. Let me tell you I am not set up to work from home. All my chairs are too hard and the snacks are way too easy to get to. I am watching my waistline grow by the hour and I'm pretty sure I have worked myself right into feeling like crap from the stress and poor diet.
Of course it doesn't help that on top of being pretty much forced to stay home I am watching my investment portfolio take a pounding as the worldwide economy grinds to a halt and all my money loses value.
Notice I said lose value and not lose money because as long as I don't sell anything I am not actually losing money. My money is still in the market and I still have the same shares in the economy that a couple weeks ago were pushing my net worth north of $100,000. What I need and what everyone needs right now is just a bit of patience and long term thinking to look past this current crisis and think about the future.
Recession- a FIRE Perspective.
People that aren't chasing FIRE will typically look at a what happens during a recession and have only one thing cross their minds
Because they have already lost their jobs, will lose their jobs, or there watching their investment/retirement portfolio tank. Now the first two are genuinely terrible things and my heart reaches out to all those that are in that situation. But that last one is a fallacy of the highest order and it is costing people so much money it a tragedy all its own. It is a tragedy because those losses didn't need to happen. Those “losses” you see on the computer screen are not real, they are what are called paper losses. They only become real when you panic sell your stake in the economy in a naive attempt to save your money. By selling at the bottom you are achieving exactly what you are trying to prevent.
This whole thing can be prevented by being aware of this fact and keeping in mind probably the most useful advice anyone will ever give you.
“This too shall pass”
Unless western civilization as we know it comes crashing down around our heads eventually everything will recover and we will get back to living our lives. It might take awhile but we will get there.
So being the savvy adherent to the FIRE principle that I am sure you are(or soon to be) what should you be doing during a recession? Well the simple answer is,
Assuming you have a,
Flexibility is Key
While doing nothing is usually the best course, sometimes you have to make changes to fit what is happening in your life. The obvious and painful thing you need to be flexible around is losing a job. If you lose your job then by all means you should probably cancel automatic investments and take a look at your hopefully plump emergency fund and figure out your next step.
But assuming you don't lose your job and you are confident you won’t then you can actually take advantage of a recession by pumping more money into your portfolio. You are probably thinking why would you put more money in during a recession? The answer is the very thing that has people selling stock like crazy. Stock is losing value as the economy slows down and companies contract. What that means is that stocks or an index fund that cost 100 dollars to buy before the recession now costs 70 dollars. That means it is on sale and you can purchase more shares for the same amount of money.
What this means in the long run once things are on the upswing again is that you own more shares than you could have if the economy hadn’t gone into a tailspin. This means you will get more dividends and more growth into the future which means you will be richer sooner.
But this opportunity to buy shares on sale is not something you should do if you have a small or non-existent emergency fund or if you have a job that is precarious in a recession. I personally am not able to do this in this current recession (spring 2020) because it has already been a expensive year for my family ie. (furnace tried to kill us so it was replaced)
But in the future when the next one hits and another one is going to come I hope to be in the position I can take advantage of this sale on shares.
So just to reiterate what you should do during a recession is the following,
Moral of the Story
This recession and its cause are going to be a temporary thing so there is no reason to lose your wits and act like it is the end of the world. So relax, enjoy the ride and buy some discount index funds as long as you don't touch the emergency fund to do it.
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