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Are You Prepared for The Stock Market Blowoff?

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Are you prepared for the stock market blowoff?Wow, the stock market is starting off 2018 with a bang. The S&P 500 index increased over 6% in less than a month and it is not slowing down. Investors are euphoric. Everyone is sure the stock market will keep going up and we don’t want to miss out. I’m not immune to this feeling. I just maxed out our 2018 Roth IRA contributions ($11,000) and put it all in the US stock market. The S&P 500 index will push through 3,000 this year for sure. Financial Samurai said this is the final stages of a blowoff and I completely agree. Let’s see what the blowoff stage is about and how we can prepare for it.

What is a Stock Market Blowoff?

If you’re a new investor, you probably haven’t gone through a market blowoff before. This final phase of the bull market is characterized by a steep increase in price follow by a steep drop in price and volume. In the mania phase, investors feel exuberant about stocks and they don’t think they can lose.  Nobody knows where the top is, though.

S&P 500 index

To me, this feels like 1999. Everything is going up and everyone keeps talking about the stock market. I went out to lunch with Mrs. RB40 last week and I overheard 2 conversations about stocks. Everything is just going too well so investors are very bullish. Check out the steep rise of the S&P 500 index over the last 2 months. Here are some of the reasons why the stock market is going gangbusters.

  • The US and global economy are very healthy. Consumers are buying and almost every economy grew at a healthy pace in 2017.
  • US unemployment rate is at its lowest point since 2000. Consumers feel confident about their income so they aren’t afraid to spend.

US unemployment rate

  • The US tax reform will put money in everyone’s pocket. Employees will have more income to spend. Businesses will have more money to invest. The tax reform will give a great short term boost to everyone.
  • The interest rate is slowly climbing, but it is still very low. This is good for consumers and businesses.
  • Valuation doesn’t matter. Stocks are going higher and nobody wants to miss out. The PE ratio is approaching the dot com bubble territory. However, it doesn’t matter because stock will keep going up due to investor confidence. Tesla has 0.2% of the US automobile market, but it is worth more than Ford. Amazon’s PE ratio is 360. These numbers are somewhat unreasonable. The Shiller PE ratio for the S&P 500 is getting very high.

PE

  • Credit card debt is at an all-time high. Consumers are confident about their finances and they are borrowing money to buy stuff. This is great for businesses in the short term.
  • Margin debt is also at an all-time high. This means a lot of people are borrowing money to invest. I had a margin account when the Dot Com bubble blew up and it didn’t turn out well. That’s why I don’t use a margin account today. However, a lot of investors think they can’t lose and they are driving the margin debt balance to new record high every month. This is a bad idea at this stage of the bull market.
  • Investors are exuberant. See the AAII Investor Sentiment Survey. Most investors are feeling bullish. This result is for week ending 1/24/2018. Note that it was even higher in the previous week.

investor sentiment

Preparing for the blowoff

Stock prices can’t keep outpacing the earnings. Eventually, the valuation will revert to historical means. During the Dot Com boom, investors thought the stock market was entering a “new paradigm” because of the internet. Profitability and earnings didn’t matter as long as the business was growing. Everyone was caught up in a mass hallucination. Unfortunately, the new paradigm didn’t last and the bubble burst.

I predict that the stock market will crash by the end of 2018, but it’s just a stab in the dark. Nobody knows what the stock market will do. The S&P 500 index could increase 30% before we see a crash. If you’re really conservative, you might think cashing out before a crash is the way to go. However, that’s the wrong move. You’ll miss out on a lot of gains in the mania stage. You have to ride the wave up and brace for the downside too.

Here are some steps to prepare for a stock market blowoff.

  1. Keep investing. You have to keep investing no matter what happens. We kept investing through the last financial crisis and it turned out very well. People who stopped investing missed out on much of the recovery. Experts predicted the end of this bull market for years now. If you listened to them, you’d miss out on a ton of gains.
  2. At least 18 months COL fund. It’s a bad idea sell stock when the market is crashing. This COL fund does not have to be in cash. It just needs to be somewhere you can access after a crash (not in stocks.) Unemployment usually increases after a stock market crash so you need to be prepared. If you have a COL fund, then you won’t need to sell stocks to pay your bills. We have over $400,000 in bonds and that will cover our cost of living for many years.
  3. Figure out your target asset allocation. This is the easiest way to get through any market. Once you figure out your target asset allocation, you can just stick to it and ignore everything else. Our target asset allocation is 70% equities, 20% bonds, and 10% alternatives. If the US stock market crashes tomorrow, I would be fine with it. I’ll just rebalance and get my asset allocation back on target. If you need help figuring out your target allocation, here is my post on How to Figure Out Your Asset Allocation.
  4. Check your asset allocation. It is also important to keep an eye on your asset allocation periodically. The stock market did very well in 2017. That might have thrown your asset allocation out of balance. The easiest way to check your asset allocation is with Personal Capital. Once you’ve added your accounts, the asset allocation is available at a click of your mouse. You can see a sample of a report below.

asset allocation

  1. Be a bit more conservative if you have life changing events coming up. Life events can have a major financial impact on your household. It’s best to be cautious if you’re going to retire, have a kid, buy a house, get married, or send a kid to college. I suggest reducing your stock allocation for a while. Mrs. RB40 wants to retire by 2020 so we should reduce our equity exposure at some point.

So that’s what I’m doing to prepare for this stock market blowoff. I’m not doing anything drastic like getting out of stocks. The world economy is doing very well and I think the stock market still have some legs. We are in our mid 40s so we will be invested in the stock market for many years to come. At this point, it’s best to keep investing and stick with our target asset allocation. Going a bit more conservative for a few years would be okay too.

What about you? Are you prepared for a stock market blowoff? What’s your plan?

Sign up for a free account at Personal Capital to help keep track of your investment. Personal Capital connects with your banks, investment accounts, and credit cards to give you a clear picture of your finance. I log in almost every day to check on my accounts.

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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{ 92 comments… add one }
  • Mr. Tako January 29, 2018, 12:30 am

    Hi Joe! We’ve been letting the cash pile up for awhile now, so we’re prepared to weather a downturn that’s 5 years long.

    Other than that, we’re just going to “ride the wave”, through the ups and the downs.

    I don’t pretend that I can “time the market” so I just stick our plan. It’s worked well through a couple recessions so far!

    • retirebyforty January 29, 2018, 7:59 am

      That’s a lot of cash. Do you have bond funds? I think either would work well at this point.

  • Ernie Zelinski January 29, 2018, 1:03 am

    You ask, “What about you? Are you prepared for a stock market blowoff? What’s your plan?”

    Well, my financial advisor at ScotiaMcLeod in Toronto presently looks after around $965,000 Canadian in investments in my so-called Retirement Account (untouchables). This is mostly in dividend stocks but he does put around 30 percent of the amount in GIC’s and other safe investments.

    Then I have around $550,000 Canadian in my Prosperity Accounts (touchables which I manage) that is all in safe investments (GICs or Daily Interest Accounts). My half-duplex (which is worth only around $325,000) has no mortgage on it. For the record I have absolutely no debt because I hate debt with a passion. Given that at the age of 68 I am still making a great pretax income from my intellectual property, I am in a pretty good financial situation to weather a stock market crash. In fact, my plan should be to spend quite a bit more money than I have been spending to ensure that my heirs don’t get too much money. But that is another story that I will address some time later.

    • retirebyforty January 29, 2018, 8:01 am

      I think you should spend money too. I hope to be in your position someday. Enjoy it!

  • TMac January 29, 2018, 1:36 am

    This will be my first big market correction since I started investing properly in shares. I’m watching values and am watching the S&P 500 – as per the Jeremy Grantham article (who thinks that if the S&P 500 melts up (as it seems to be now doing), it could crash somewhere around 3400 and 3700). Once it reaches 3400, I’m planning to sell certain holdings that I think are most at risk from a downturn. But others I will keep. I’m also starting now to build up some cash. BTW – although I’m in the UK, a severe market correction in the US will of course affect everywhere else, hence why I’m looking at the S&P 500 as a marker). I’ll miss out on some gains by selling, but I think by 3400, any drop is likely to outweigh gains and it is pointless trying to time the market. I’m a little nervy I guess!

    You said you were upping your bond holdings this year. What do you think about gold funds? I’ve been doing some reasearch and the funds are hardly consistent returners but I’m planning to move a little into there. Finally, I’m going to do some research into marijuana-related stocks. The regulartory regime is very different in the UK, but this sector might be like alcohol and tobacco – it does well in good time sand even better in bad times! Of course ever increasing numbers will use for medical purposes too and since people are getting older, that might also help. I don’t know much about this area at all just now – hence my need for research.

    • retirebyforty January 29, 2018, 8:05 am

      Selling at 3400 is timing the market. I think you’ll learn a lot this year. Good luck!
      I don’t know how gold works. I’d rather stick with bonds. I don’t know much about marijuana stocks either. Sorry!

      • TMac January 29, 2018, 9:43 am

        OK, thanks. I think you’re right re this being a learning experience. I’ll do more research 🙂

  • Lily | The Frugal Gene January 29, 2018, 2:04 am

    18 months aye? We barely have 6 months right now! Ack! Need to do something about that. We have been pouring everything into our portfolios.

    Retirement contributions for this year is about $66k not including the solo 401k…so we’re in it for the long haul either way. We are the new investors that you’re talking about. We never had actual skin in the game during a downturn so… it’ll be interesting. I was born in the 90s Joe! Does it feel like the 90s or 2007 like Sam thinks? 🙂

    • retirebyforty January 29, 2018, 8:07 am

      I think you should put 18 months into bonds, CD, or something that you can access relatively easily.
      Wow, how did you put $66k into retirement funds? Write a post about this.
      I think it feels more like 1999. Everyone and their grandma were buying stocks. In 2007, the mania was about real estate.

      • Joe January 29, 2018, 8:34 am

        I live and worked in Silicon Valley since 1990 (early retired now), and invested through both the dot com bubble and the financial crisis. This is nowhere near dot com mania yet, but after the last few months, we are getting closer to that point.

        During the dot com bubble, everyone was checking out stock quotes while in line at the post office to file estimated taxes for how much they made off the stock market. Everyone was daytrading at work. People were exchanging tips through email daily. All lunch conversations were about stocks. Engineers were writing personal trading tools. New grads were becoming CEOs right out of school and raising venture capital with no problem. There were an enormous amount of IPOs, and any internet related IPO would pop 200+% on the first day of trading. Right now, can you even name the last big-name IPO? SNAP? Boring…

        It feels more to me like 2007 also. But I don’t see a debt/housing crisis on the horizon, which was fairly obvious in 2007 when looking at loan performance.

        • retirebyforty January 30, 2018, 2:11 pm

          I think you felt it more because Silicon Valley was the epicenter of the dot com boom.
          In Portland, it wasn’t that crazy. Only a few people quit to day trade. Most people just kept working. The IPOs were pretty crazy back then.

  • Ms99to1percent January 29, 2018, 2:24 am

    Yes we are prepared. Our emergency fund would last us 2 years since we wouldn’t need to pay for daycare.

  • Chris Urbaniak @ deliberatechange.ca January 29, 2018, 3:05 am

    Hi Joe,

    We’re following the “Couch Potato” investing strategy. Basically we frequently purchase four broad market low-cost index and index mutual funds (US equity, CDN equity, Int’l equity, CDN bonds), and rebalance regularly back to our target allocation.

    Because we’re still in the accumulation phase with solid employment and a good savings rate, I am looking forward to a “sale” in the market!

    Chris

    • retirebyforty January 29, 2018, 8:08 am

      What’s your target allocation? I’m curious. It’s interesting to see CDN equity in there.

      • Chris Urbaniak @ deliberatechange.ca January 29, 2018, 2:48 pm

        As a Canadian living in Canada, I admittedly have a bit of home-country bias. As a result, I’m targeting around 1/3 CDN equity, 1/3 US+Int’l equity, and 1/3 CDN bonds.

        As a slight alternative, the Couch Potato movement up here preaches equal parts CDN / US / Int’l equity, with the sum of all equity vs. bonds based on the standard method of selecting your equity/bond mix. For example, many people take the “balanced portfolio” approach of 20/20/20% equity and 40% bond.

  • Accidental FIRE January 29, 2018, 3:31 am

    I’m starting to let some cash pile up for sure. And I’m definitely ready for the blowoff, I’ve been through a few myself before and they didn’t scare me then when I had WAY less net worth, so they won’t scare me now. Things will go on sale!!

    • retirebyforty January 29, 2018, 8:09 am

      It scares me more this time because we’re older and I don’t have a job anymore. In previous blowoffs, I’ve always had 100% in equity. Now, I’m more conservative.

  • [email protected] January 29, 2018, 3:40 am

    You’re right that the market had been too good to be true lately. It can’t keep up like this forever. That said, history shows that you can’t time the market. I’m in for the long haul and am leaving my asset allocation exactly as I’d planned it.

    • retirebyforty January 29, 2018, 8:50 am

      That’s the least stressful way to deal with a blowoff. We’ll probably go a bit more conservative if the market keeps going up like this.

  • Tom @ Dividends Diversify January 29, 2018, 4:23 am

    Hi Joe, I think the market has more room to run. It will be irrational for a while. And, it will probably end badly. 1987, 1999 and 2007 tell us so. But gosh, most have forgotten 2007 and hardly anyone remembers 87 and 99. I only have about 50% allocation to equities and I’m not chasing the rally with very much new money. I’m also looking to remove weaker positions from my holdings. I will have plenty of cash ready for when stocks go on sale. Tom

    • retirebyforty January 29, 2018, 8:51 am

      I’m looking to sell off some growth stocks. At this point, it’s safer to go with value. Good luck!

  • Cubert January 29, 2018, 4:34 am

    Is that Mt. St. Helens??? Scary schtuff!!!

    Great warning, Joe. My strategy is to duck and cover. But seriously, I’m going to continue to diversify into value real estate (i.e., non-bubble rentals and Airbnbs) so as not to rely solely on index funds. Man, it’s looking bubble-icious out there…

    • retirebyforty January 29, 2018, 8:53 am

      You got it! That eruption was pretty crazy.
      I’m diversifying into real estate too. Portland is getting expensive, but it doesn’t look like a big bubble yet. People are still moving here.

  • Brian Davis, SparkRental January 29, 2018, 4:37 am

    Great breakdown Joe. It’s an important point, but one often glossed over, that just because a market is overpriced based on historical averages doesn’t mean it’s a bad time to invest. It’s funny, if you go back and look at the pundits talking in June 2009, they talk about how investors may have missed the best part of the recovery, but “it’s not too late to make some gains on it.” And those are professional financial analysts. I’m a big fan of slowly and steadily continuing to invest, knowing that in the long haul I’ll come out on top.

  • Turning Point Money January 29, 2018, 4:37 am

    We have taken some off the table last week and probably more this week, but we are thinking about putting a large downpayment on a house sometime this year. I feel much better moving what we will use for the downpayment to cash.

    For the rest of the portfolio, let the roller coaster begin.

    • retirebyforty January 29, 2018, 8:55 am

      Good idea to take some money off the table if you’re buying a house. Your monthly expenses will probably increase quite a bit.

  • FullTimeFinance January 29, 2018, 4:40 am

    While I’m probably more diligent about it now in general I’m staying the course. A recession can happen at any time. That applies now but it also applied last year, two years ago, ect

  • Ms. Frugal Asian Finance January 29, 2018, 5:04 am

    Amazon stocks increase like crazy every single day. It’s hard not to think about when the bubble bursts. Euphoria can only last so long.

    I’m more afraid of a layoff than a stock market blowoff. Those two scenarios seem to go hand in hand though 🙁

    • retirebyforty January 29, 2018, 8:56 am

      Yeah, companies will layoff people after a crash. Everyone needs to be prepare for the worst.

  • Apathy Ends January 29, 2018, 5:15 am

    I don’t remember the last time my stock app had red bars on it!

    Since I (and a large percentage of Millennials) have only invested through a bull market I’m not sure we are ready for the inevitable correction.

    Personally we will be able to stomach the drop and invest as the market falls but there will definitely be some panic selling. We only have 2-3 months of living expenses right now – thankfully we have stable jobs but that can change Very fast.

    • retirebyforty January 29, 2018, 8:57 am

      What will you do if you get laid off? You might need to shift some money into bond funds just in case. No job is secure these days unless you work for the federal government…

  • Buckeye Girl January 29, 2018, 5:20 am

    I am feeling a little remorse for taking some schnitzel a year ago and shifting our balances more conservatively – emotion got the better of me. We still are fairly aggressive at 75% equity (but it was a lost opportunity). If a down cycle occurs it will be hard for me to not buy as things go on sale. I actually kept your strategy for market drops and I am curious whether you would still use it or merely use a rebalancing strategy. Here is what I had:

    S&P 500 drops from peak:
    15% Invest 1/3 of cash reserves
    20% Invest 2/3 of cash reserves
    25% Invest all of our cash reserves
    30% Sell 1/3 of bond funds and invest
    35% Sell 2/3 of our bond funds and invest
    40% Sell all bond funds and go all in with stocks

    • retirebyforty January 29, 2018, 9:02 am

      Yes, that is still my plan. Although, a bit different from your. And our cash reserve is pretty low right now. I’ve been putting extra cash into real estate crowdfunding. We won’t make any significant new investment until the market drops 20%. We still contribute the max to our 401k and Roth IRA.
      drop 10% invest 25% cash
      drop 15% invest 50% cash
      drop 20% invest rest of cash
      drop 30% invest 50% bonds
      drop 40% invest rest of bonds

      Also, I will need to refine this because Mrs. RB40 is retiring soon. We’ll probably keep at least 10% of our allocation in bonds no matter what.

      • Timothy Woodward January 30, 2018, 11:50 am

        Hi RB40 & Buckeye Girl—I like your plan for market correction. When you say a 10% market drop gets a 25% cash injection, what is the 25% part of? 25 % of total portfolio, or 25% of total cash held?

        Thanks!

        • retirebyforty January 30, 2018, 12:14 pm

          25% of cash held (minus emergency fund.) We still need to keep some emergency fund.

  • Mr. Freaky Frugal January 29, 2018, 5:52 am

    All I’m doing to prepare is my annual Portfolio Rebalancing at the beginning of April. I do reduce my US Stock allocation slightly based on the current value Shiller PE when I rebalance.

    It does feel like US stocks are REALLY high right now, but I’ve been saying that for the last 2 years. If anyone had told me that I’d still be in a Bull Market when I FIREd in 2012, I would have thought he was crazy. I’ll take luck over skill anytime though. 🙂

    • retirebyforty January 29, 2018, 9:04 am

      Yeah, I feel the same way. I never thought our net worth would doubled in 5 years when I retired in 2012. It’s pretty crazy.
      I shifted more toward international stock as well.

  • Dividend Growth Investor January 29, 2018, 6:03 am

    I am prepared for a melt-up and a melt-down. Since I focus on dividend income and dividend growth, I don’t even care if the stock market is open.

    If you plan to accumulate assets of course, you want stock prices to be lower, because that way you buy more future income at value prices.

    DGI

    • retirebyforty January 29, 2018, 9:06 am

      I hope to pick up some dividend stock and boost our dividend income when the market crash. It’d be a great time to permanently increase our income.

  • Caroline January 29, 2018, 6:07 am

    I re-balance my portfolio regularly and it’s well diversified. I should survive a blowoff.

  • Dave @ Married with Money January 29, 2018, 6:11 am

    We’re bulking up our cash for sure and trying to diversify our income streams. We live essentially off of my income, so at least if I have a job we’ll be okay (not great, but not foreclosing either).

    If I get laid off, we can stretch our emergency fund with my wife’s income for about a year, not factoring unemployment into the mix or any side gig money.

    If we both get laid off, that’s where we’ll be in a pickle. We don’t have nearly enough saved up to withstand both of us losing our jobs simultaneously, and with me contracting it’s a very real possibility.

    So I think this year we’ll take some time to bulk up our EF even more and have that ‘COL Fund’ as you call it.

    • retirebyforty January 29, 2018, 10:04 am

      Hopefully, you won’t both get laid off at the same time. That would be really tough.
      I was trying to find the right word for the COL fund. It’s not EF because EF should be in cash. It just needs to be accessible when needed. I think bond funds are okay for that.

  • [email protected] January 29, 2018, 6:23 am

    Those of us that have a passive portfolio should pay attention and rebalance.
    Follow the written plan, stay the course.

    Boglehead mentality! 🙂

    • retirebyforty January 30, 2018, 1:47 pm

      That’s the easiest way to do it, and probably the best for regular investors like us.

  • Steve @ familyonfire.org January 29, 2018, 6:53 am

    We are planning to stay the course, we should have no issues even with a 30 – 50% correction. I will probably look into pulling out a bit more cash later in the year to just keep us covered for say 6 more months.

  • Adam January 29, 2018, 7:03 am

    Two years ago we mapped out our path to FI. I assumed maxing out HSA + 401(k) plans and 7% gain each year. We’ve been outpacing that, so each quarter I’m churning most of the excess into VBTLX. As a result we’re ahead of our targets, we still have equities to the tune of exactly where I expected us to be, and there’s an additional healthy war chest of bonds to sink back into stocks if and when the market turns down. It’s a nice place to be.

    • retirebyforty January 30, 2018, 1:48 pm

      That’s a great strategy. You’ll have some opportunity fund to take advantage of any big correction. Good job!

  • [email protected] January 29, 2018, 7:22 am

    Hi Joe, I am looking forward to a correction in the market so I can buy at cheaper evaluations. I have been thru 1987-2000 and 2008 corrections and have made nice gains by having cash ready to invest after any market downturn. 2018 or 2019 who knows when it will happen.

  • Jeannie January 29, 2018, 7:29 am

    I’m kind of excited for a market meltdown. I have never been through one as an investor and I’m curious about how I will behave. I have a balanced portfolio with ~ 70% stock/30%bond so I think I will be Ok. But human emotions are well, irrational. My job is really secure but good reminder to beef up my emergency fund.

    • retirebyforty January 30, 2018, 1:49 pm

      70/30 is really conservative for a young person with a secure job. I’m sure you will make it through unscathed. Good luck!

  • Lazy Man and Money January 29, 2018, 7:41 am

    A lot of good thoughts here. I thought the market was overvalued before this run-up.

    I’ve been focusing more on my asset allocation as you suggest.

    – I tilt it more towards international equities that haven’t had quite the same run-up and aren’t trading at the same PEs. They’ll still get hit if the US stocks have a blowoff, but hopefully it won’t be as much.
    – I still invest in oil which has been cheap for a long time. I hope it won’t get hit as hard in a big market blow-off.
    – I’ve actually invested in bonds for the first time ever. I had previously figured I was too young, and I’m generally super-aggressive.
    – I invest a little bit in stocks that have been beaten down. Chipotle and GE are names. They have their own unique business problems, but I feel they could turn it around.

    • retirebyforty January 30, 2018, 1:51 pm

      I think going more international is a good idea at this point. I did too.
      I don’t know about Chipotle and GE. It seems like they might take a long time to turn it around. Probably good in the long term.

  • Adam and Jane January 29, 2018, 7:45 am

    I have seen crashes in 87, 2000 and 2007. I started working in 87 and did not invest yet. I did lose some money in 2000, the dot com days. One friend lost 100K with Qualcomm. Ever since 2000, I have zero money in the stock market. We have no stomach for stocks and we prefer to sleep at nights.

    We have NO FEAR if the stock market tanks and we have NO FOMO if the stock market doubles. We are not greedy. We are happy with a 3.5-4% income each year. Our passive income is 2-3X expenses so we don’t have to worry about inflation too.

    Since 2009, we ONLY buy individual Municipal bonds to generate tax free passive income to prepare for laid offs and dooms day.

    For 2018,
    Our munis will generate 87.5K tax free.
    Our 401Ks will generate over 80K in fixed 4.35% like a savings acct.
    Jane is collecting her 52K pension.
    Our expenses is 50-65K and no mortgage.
    Also have 8 years of living expenses in cash.
    I am still working for another 20 months until I can retire at 55.

    Adam

  • Done by Forty January 29, 2018, 8:32 am

    Great run down here, Joe.

    I like the 18 month COL idea. If I might ask, do you keep your bonds accessible (i.e. – in a taxable account)? All of our bonds are in retirement accounts (for tax purposes, as they throw off dividend income) so we’re in a bad position to use them in case of a downturn.

    • retirebyforty January 30, 2018, 1:54 pm

      Some are in taxable account and some are in retirement accounts.
      If we really need to use the bonds in our 401k, I’ll sell and convert to Roth. Our income would be low at that point so the conversion shouldn’t hurt too much. We have plenty in Roth already so we don’t really have to wait 5 years. I might need to talk to a tax expert about this.

      • Done by Forty January 31, 2018, 10:03 am

        This is one of the neat advantages of actually being retired from a tax standpoint: you’re not necessarily going to get hurt if you engage in a taxable event.

        For us, working still and in a not-so-great tax bracket, I have to think long and hard before selling investments. For now, a cash emergency fund will have to do the trick.

  • Felipe January 29, 2018, 8:44 am

    Great advice to have 18 months of expenses saved. We have been saving cash also, figuring this party had to end at some point. I’m seeing real estate prices in some areas level or drop a tad. Your recent posts mentions the rental market changing in your area. We have two rentals paid off to provide income. Rent may drop a bit but in the housing crisis rent went up. People were losing their homes to foreclosure and needed to rent.
    I’m pretty close to saying June of July of this year I’ll quit the full-time job if things haven’t tanked yet. If we have a meltdown, maybe I’ll keep the paycheck a few more months.
    From reading here, lots of others are expecting some mayhem. We’re overdue for a correction.

    • retirebyforty January 30, 2018, 1:59 pm

      Thanks for your input. I think rent didn’t changed much during the financial crisis. I’m not sure what people who lost their home did. Most probably moved to a more affordable area and some became homeless.
      Good luck!

  • Mike H. January 29, 2018, 8:50 am

    My basic plan is to stockpile cash, sell some of my non-dividend individual stocks, and keep dollar cost averaging into index funds. When the market starts dropping, I’ll infuse cash into good companies I can get at good valuations. I’m historically VERY bad at market timing (have gotten lucky a couple times), but very good at following a rule like “invest $10k in VOO if the price drops 10%”, etc.

    BuckeyeGirl above has a good plan (U of M grad here, so that’s painful to say…). If you own rental properties, you should also set aside some money to cover a vacancy, eviction proceedings, or emergency upkeep; when money gets tight, home maintenance is one of the first things to get put on the back burner.

    • Buckeye Girl January 29, 2018, 12:06 pm

      I think stockpiling cash is a good idea.

      I want to do my alma mater proud, but I cannot take any credit for the equity purchase plan in the event of a market downturn. That is all Joe. I liked it so much when he published it years ago i kept a record of the plan. As much as I want to think that my investment decisions are not emotionally driven, i have come to realize they are. A year ago I side-lined a portion of my equity team (for all the wrong reasons). After watching the market exploding upwards I felt the tug to send some of that equity team back on the field, but I am staying strong. The benched equity players will not play again until there is a market correction. When the market tumbles my impulses are too quick to buy bargain stocks, so I liked Joe’s rules for buying when the market drops.

  • Nick January 29, 2018, 9:01 am

    Getting through a blowoff, like the dotcom, is 90% mental.

    Ok, maybe a lot more than that if you end up losing your job.

    But, when it comes to your portfolio, it’s all about what’s between your ears.

    Like you said, asset allocation will help people mentally weather the storm.

    Don’t get too excited about the highs or too down about the lows, keep investing, and everything will work out.

    Thanks for all the great advice, Joe!

  • Wise Money Tips January 29, 2018, 9:06 am

    After all the recent record highs without any major pullbacks, it’s probably prudent to be a bit cautious here. But selling everything is definitely not the answer. No one can time the market reliably. Then again putting money to work aggressively in such a hot market may also not be wise. Just keep investing a portion of your income regularly and dollar cost average. Maybe invest a bit less when the market is hot, and some more when the market has sold off.

  • Revanche @ A Gai Shan Life January 29, 2018, 9:40 am

    I just had a dream last night about this – I apparently got some random premonition that the stock meltdown was starting and I sold off ALL our holdings in the taxable portfolio and then bought them again a couple months later when they were rock bottom. I wish I saw how that played out.

    Last month I adjusted my IRA holdings to be 1:2 (international stocks:US stocks), and I’m still holding a small treasury fund in my ROTH IRA.

    We’ve got 18 months of cash that won’t be dumped into the market like originally planned. That will either should be deployed into my CD ladder or I may stop where I am with that and pivot into the bond fund that I started researching instead.

    All disposable cash we earn this year will go into savings of some sort because I want to be SURE we can weather a massive downturn coupled with a market meltdown without having to sell off any stocks while they’re dropping like rocks.

    • retirebyforty January 30, 2018, 2:01 pm

      That’s a nice dream. 🙂
      I would love to get it right just once, but I’m too chicken to put 100% on the line. That’s too much like gambling.
      Good luck!

  • savvy January 29, 2018, 10:04 am

    I’m mostly staying the course. However, I did shift a little bit more into bonds (went from 15% to 17% with 20% goal). Given that I’m only a few years out from semi-retirement, I figure I should be a little more conservative.

  • nicoleandmaggie January 29, 2018, 10:11 am

    We are OVER-prepared! But hey, some of those excess cash holdings are probably going to get turned into a new car soon.

  • Doug January 29, 2018, 10:12 am

    Business as usual but up and buy down. Will get some good aristocrat at some good bargains during the 08 drop I added google and Apple and AZO and BRk.b sold Azo and half my google to put it into solid dividend companies. Still have a nice chunk of Google left so if we hit a nice downturn I could add a share or two to google. Have a little bit of cash stored up. But I have my military retirement coming in so I’m semi retired. If I find a job I will go to work but no pressure to go. Bring on a buying opportunity. Currently saving so I can add later this year

  • Financial Orchid January 29, 2018, 10:55 am

    2.5-3 years of living expense earmarked already. Is that too conservative? I want extra cushion for traveling and enjoying life while I’m unemployed and economy’s in the gutter at the same time.

    • retirebyforty January 30, 2018, 2:02 pm

      That’s very conservative, but it sounds like a good plan if you plan to travel for a while. I’m jealous. 🙂

  • Peter January 29, 2018, 10:59 am

    I would love a stock market sell off. As a dividend investor, a drop in the stock market would be wonderful as I can accumulate high quality stocks on sale.

    However, as many have stated, its tough to time these things. Its a good time to be careful and not go all in but also to stay the course and invest.

  • Teri January 29, 2018, 11:01 am

    My plan includes most of what has already been discussed. Was in 100% US Stocks. Since the miraculous growth of these stocks I’ve gotten afraid and am now putting more into International stocks and bonds. Figure this as selling at the top and buying at the bottom, since bond returns are negligible today. Current allocation goal is 80% US Socks, 10% International Stocks and 10% US Bonds. Can’t quite give up on the meteoric growth of US stocks, yet. Mostly increasing my cash holdings as opposed to putting everything into stocks or bonds, in the hope that cash won’t fall apart at the same time the market does.

    I’m already semi retired and have no need for the money I have invested in the stock market so rise or fall, I’m still saving quite a bit and will be okay.

    • retirebyforty January 30, 2018, 2:04 pm

      I like your allocation. US stocks had been doing so well. I think we are all addicted to the outsize gains. I’m a bit more conservative.

  • Richard Nielsen January 29, 2018, 1:44 pm

    Good article however me like lots of other investors follow the Ben Graham portfolio where you start off 50%/50% stock/bonds and vary all the way up to 75% and all the way down to 25% (never less) each according to market valuation.
    For us, it’s time to come closer to 25% stocks/75% bonds at this time !!

    • retirebyforty January 30, 2018, 2:05 pm

      That’s really conservative. I’ll research the Ben Graham portfolio.
      How do you know when to change the allocation?

  • The Optimal Choice January 29, 2018, 2:47 pm

    Knowing any gains we may make this year could be offset by a correction (or recession) in a year or two makes it tough to keep investing at my previous rate. But as we all know here, it’s not about what happens next year. It’s about ten, twenty, and thirty years from now.

    So while I would love to make the most of out of a blowoff and the following downturn, I think I’ll just stick to my 80/20 split in stocks and bonds using VTI and BND.

  • sam January 29, 2018, 3:31 pm

    Hi,
    I started my journey ten years ago so this would be my first downturn. Until a few days ago, my asset allocation was 50% property, 40% shares and I0% cash. I am not waiting for the big rush when everybody selling but have already doing so now. Current asset allocation is 20% property, 5% shares and 75% cash.

  • Mr. Groovy January 29, 2018, 4:01 pm

    To paraphrase Maxwell Smart, “I’m ready for the correction, and loving it.” I don’t know when it’s going to happen, but a 2008-like correction is coming our way. And when it does, I not only have enough cash to weather the storm, but I also have enough cash and bonds to load up on equities when there’s “blood in the streets.” Thanks for the reminder, Joe, that cash and bonds are great hedge against the vagaries of a fickle and merciless market.

  • Jason January 29, 2018, 5:30 pm

    I think you are right this is a blowoff, but it might also be in the middle of secular bull market, which means that we could have another decade of a run left. I am not sure but one way or the other I will just continue to chug along. I have time. I won’t be FI for about a decade or so anyway. I am ok with that. I like my job. I have great job security and the like and we are preparing for life changes (hopefully a new addition to our house soon). Big thing I have is do I beef up our emergency fund or take it and pay off some of our consumer debt or because of the security of my job do I take those monies and fully fund a 2017 and 2018 IRA for my wife? Decisions, decisions.

    • retirebyforty January 30, 2018, 2:08 pm

      That’s the big question. A secular bull market would be great for investors.
      Even at 80/20, we’d be a lot more wealthy in 10 years.
      Either way, I’m sure we’d be fine.

      I don’t know about paying off consumer debt vs investing in Roth. It depends on the interest rate. Although, I’d probably pay off the consumer debt first. Nobody ever regret paying off a loan.

  • Financial Rookie January 29, 2018, 6:36 pm

    I think when it happens I’ll crack a beer and relax. Just like I do normally.

  • Laura January 29, 2018, 7:20 pm

    Oh, man! The tension in waiting for the ball to drop… Will be rebalancing in a few weeks once 401(k) out of blackout period and then just wait-and-see. Having been through this 2x before, it’s not fun to watch the stock or employment situations.

  • Ten Factorial Rocks January 29, 2018, 9:13 pm

    Good post, Joe. I have positioned myself defensively now after being in 100% equities for the last 5 years. I like Warren Buffett saying “Don’t risk what you have and need for what you don’t have and don’t need”. Good luck to all.

  • David @iretiredyoung January 30, 2018, 4:33 am

    I’m sure that we’re OK as our rental property income that covers our living costs. However, that doesn’t remove the nervous feeling about current stock market valuations. My plan is to not panic, and just hold through any downturn, but I still find that I doubt myself almost every day.

  • Smart Money And Travel January 30, 2018, 9:54 pm

    Nice post Joe. At the moment we’re about 95% in U.S. equities. We are both working so our hedge is using our paychecks to consistently buy equities like we did back in 2008.

    I do think this earnings season and the next will be strong, so the market will push on in 2018.

    If we weren’t working like you Joe, then we’d be more conservative as well. We’d likely have a 2 year CD ladder and remain 90-100% invested in U.S. equities.

  • Sara January 31, 2018, 8:21 am

    My gut is telling me this is coming. I’m a peanut-sized investor, but I’ve decided to start padding our emergency fund with any extra cash we get instead of putting it into our Roth like I was doing last year.

    My husband and I were young during the Great Recession and ended up losing a lot on our first house (we had a baby and ended up buying in 2007 on the urging of my MIL) and it has made me cautious when I see the current surges in stocks because I remember what it is like when a bubble pops. And I’d like to be in a position to buy this time when it does.

  • FrugalUrbanFarmGirl January 31, 2018, 5:58 pm

    Nice read, Joe! We will ride the wave like we did previously, except this time we won’t be overconfident. We made the big mistake of having too much cash on hand last time (waiting around for a cash real estate purchase that didn’t happen) and not doing incremental investing with it, instead we threw it in the market at the almost peak. We lost over 75% of that as the market tanked. Lesson learned. In recovery we worked overtime at our jobs, saved, scrimped and put every bit of what we had after bills were paid into the market. A good lesson there. Also, fortunately we still work and will probably do what we did before with our monthly incomes, going in at the bottom. I’m still quite nervous since we are at FIRE and want to keep it that way. I do know one thing for sure– when the market does tank, your readers and I will be anxiously awaiting a post from you and others in the FIRE community.

    • retirebyforty February 1, 2018, 8:58 am

      Oh wow, that must have been gut wrenching for you. It worked out well if you stuck with it, but it must have sucked in the moment. Good luck!

  • Alex February 1, 2018, 12:41 pm

    We sold everything (taxable) at 25k to pay off the house. We’d been paying it off aggressively and when our taxable account balance (minus taxes) hit our mortgage we went for it. Sort of a form of emergency fund to have no house payment, maybe? We are finance junkies who could rattle off statistics against market timing (it’s time-in, not timing :P) but even still 25k seemed high enough that it wasn’t like we were selling low, and having the house paid off at 30 is very nice.
    Now our net worth ($1.2M 🙂 ) is at about 50% house 45% retirement and 5% cash. Aside from maxing out retirement accounts we are finding it mentally tough to get back into the market now. Will probably keep that cash growing until it feels like a good amount to dump in should the market tank, and when it hits that amount we’ll start a slow drip back into the market. Dollar cost averaging always beats lump sums right… 😉 So hard to invest everything in the market when it feels like mania all around you (not to mention the maniac as president driving it all…)
    With this market melt up I was reminded of your article about getting deeper into stocks if there was a sell off, and that was when the market was like 16k! To hit the 10% or 30% sell off marks you laid down there would take like a 60% sell off from these levels. Crazy how relative that all is. You still sticking to those same percentages, or expecting larger falls before you cycle back into stocks?

    • retirebyforty February 2, 2018, 1:52 pm

      Actually lump sum usually beat DCA. That’s because the market goes up in the long term. At this point, I’d go with DCA too. The market is over priced.
      We’re in stock, but probably will go more to cash soon. If the market crashes 30-40%, then I plan to sell bonds and move that allocation to stock.

  • Bernz JP February 4, 2018, 10:27 am

    Well, I wasn’t expecting that more than 600 dropped last Friday and ended up watching CNBC the whole day. I was a little anxious about some of my investments but fortunately, my holdings were not hit that much compared to the other stocks. A lot of anxieties are building up over the weekend and people are nervous to see what will happen tomorrow (Monday). We’ll see!

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