Focus on longterm saving during recessions

Economic shocks are good times to focus on the longterm. Look to the fundamentals.

After an impressive year on the stock market in 2019, I’m certainly not expecting that to continue. I’m projecting a slower year of growth for my company. Many are waiting for the n’t. Last year 70% of economists predicted a recession for 2020.

Of course it may not happen. (In December 2018, we thought there was a recession looming.) But the critical point for (fairly) passive retirement savers like myself is that even if there were a major slowdown (recession or otherwise), we have to keep focused on our longterm goal.

This became a common refrain during last month’s Personal Finance Day, a goofy, somewhat-tongue-in-cheek annual event I host with two childhood friends. This was the fifth year.

Below I share a few notes from this year’s installment.

Each year, we come together, now living in three different states, to exchange ideas and concepts we’ve learned about how money works and intersects with our lives. As middle class kids without a lot of money savvy growing up, we’ve helped each other get a lot more informed. It’s a kind of study group that masks a chance to meet up with old friends.

I’ve long believed this mix of silly fun and genuine learning is a really fabulous way to work through complicated topics. It always reminds me of how network effects can contribute to wealth inequality.

All three of us were born into (white) middle class families without any real introduction to public equities, wealth generation or foundations of finance. But we have had access to each other (and a dizzying array of other opportunities), and through the years we are getting savvier about complex financial systems.

Black Americans tend to have meaningfully less upward mobility than white Americans do — even Black men born into wealthy families, according to an influential study released in 2018.

It’s taken me my entire adult life to work through what to many are pretty simple concepts. It’s even starker for Americans less privileged than I am. So as I get more comfortable with (still pretty foundational elements), I try to share that with my coworkers, friends and others who might be interested.

The point here isn’t blind pursuit of fabulous wealth (I’m personally not expecting that). Instead this is about security and opportunity. Talking openly about it feels like a gesture toward normalizing healthy behaviors.

If we confront a recession too many of us will pullback. But instead economic shocks are when — whenever possible — we need to stay the course. The trouble, of course, is many of us can’t stay the course when we lose a job or take on other challenges.

Here are a few notes from this year’s PFD:

  • Wealth creation is a transition from labor to capital. Income-generating assets seem beyond the reach of most of us, especially ones like business ownership and real estate. But your 401k plan is an example of capital ownership; if your investments include index funds or are otherwise in the stock market, you are, after all, a (very small) shareholder of a very big company. Capital is the “make money while you sleep” stuff, yet just half of Americans are invested in the stock market, and 60% own their home. (They’re taxed differently too)
  • “To turn $100 into $110 is work. To turn $100 million into $110 million is inevitable.” I found this quote from Seagram CEO Edgar Bronfman (1929-2013) insightful, which I brought up having seen it in the Netflix-Vox episode on Billionaires.
  • Dollar cost averaging is a strategy for the inexperienced and overwhelmed among us. Timing the market is foolish, especially for people like me who lack unique insight. Better to consistently contribute investments as part of a strategy. For me, it’s largely index funds because that’s what I can manage.
  • Saving for retirement is all about starting early. The power of compound interest means that starting at 20 or 25 or 30 makes it so much more attainable than putting it off until after you’re 40. Even small contributions.
  • Consider the Sequence of Returns Risk. I had never really considered how impactful it can be for timing a retirement around the given performance of a portfolio. I’ll need to do more learning here but I’ve been learning more about Dynamic Spending for a Safe Withdrawal Rate.
  • Financial Independence, Retire Early (FIRE) always comes up. Last year I was enamored by this concept of keeping costs so low as to build up a corpus of invested money to then manage. But it takes big money. For a simple example, from a 4% draw rate, you’d need a $1.25 million corpus to withdraw $50,000 annually.
  • Strive to contribute 15% of your income toward retirement. This includes any 401k match your company offers. Each PFD, we talk a lot about various rules of thumb.
  • Standard Minimums for retirement goals: By 35, have 1.5 times your salary. By 40, have 2 times and by 45, have 3 times (SOURCE).
  • Life insurance and other estate planning are important. I am only getting to this in my 30s with my first child on the way. We talked about how we haven’t done much with these yet but I hope to this year.
  • Review average rates of return by asset class. I found this graphic detail interesting, showing the variability of asset class. We happen to have just lived through a strong decade of stock market growth. That doesn’t necessarily have to last forever.

Overall, there was general unease about the coming year. My friend James said he’s “thinking we are due for a once in a decade economic shock which could be a major geopolitical event” He’s expecting volatility. At the least I expect some kind of slowdown.

I’ll keep contributing to my traditional retirement savings plan and thinking about opportunities to put myself in a better situation if there is a correction. We all should, so I hope to help others be able to do the same.