Money needed to retire - poll

[zippy1]

Hi Liberty, good discusion...I think I understand a bit better now the buffer idea.  I was thinking of a live example, where there might be an issue.  lets say you are in 2007.  You have 3 year buffer capital in cash.  in 2008 you have used up 1 year of capital, so inorder to restock buffer, you sell 1 year worth of securities, and are back at 3 year buffer of cash.  That is ok, because it is before the crash.  then the market collapses in 2009 you have a decision to make.  Do you sell 1 years worth of securities to go back to 3 year buffer or do you let your buffer slide to 2 years worth of cash (again, you don't know at the beginning of 2009 whether the dow will stay at 7000 or go to 5000 in the next year).  You start thinking "what if the dow is at 5000 next year. if i don't sell any security then i'll only have 1 year of cash"  This may tempt you to sell even in a depressed market.    This is just a consideration... I don't mean to be negative just working through some issues.  Overall though i do see how the buffer would work...I also think some sort of cash % in relation to market overvaluation might work also (you approach seesm similiar to this anyway)

If I am employing this strategy, by Oct 2008, it should be clear to me that market was getting cheap.  I would have try to squeeze myself to further curtail my expenses so that the amount needed for a 3 year buffer also shrink.

 

This is nothing new. Many people around me started cutting down their expenses around that time just because of the uncertainties.

[Liberty]

Hi Liberty, good discusion...I think I understand a bit better now the buffer idea.  I was thinking of a live example, where there might be an issue.  lets say you are in 2007.  You have 3 year buffer capital in cash.  in 2008 you have used up 1 year of capital, so inorder to restock buffer, you sell 1 year worth of securities, and are back at 3 year buffer of cash.  That is ok, because it is before the crash.  then the market collapses in 2009 you have a decision to make.  Do you sell 1 years worth of securities to go back to 3 year buffer or do you let your buffer slide to 2 years worth of cash (again, you don't know at the beginning of 2009 whether the dow will stay at 7000 or go to 5000 in the next year).  You start thinking "what if the dow is at 5000 next year. if i don't sell any security then i'll only have 1 year of cash"  This may tempt you to sell even in a depressed market.    This is just a consideration... I don't mean to be negative just working through some issues.  Overall though i do see how the buffer would work...I also think some sort of cash % in relation to market overvaluation might work also (you approach seesm similiar to this anyway)

 

I think that as long as you evaluate things based on your best assessment of intrinsic value (IV) and don't listen to the forecasts (which are influenced by fear or greed), you should be able to tell when things are getting so out of whack that you shouldn't sell (f.ex. you evaluate company X to be worth around $100/share and Mr. Market is offering you $50). Maybe things will keep falling, but if that happens I still wouldn't sell.. Only if a recession lasts for 3-4 years would I have to make the choice of selling or going back to work to avoid selling, and those kind of recessions don't happen that often so there's a margin of safety there.

[jb85]

So i agree that cutting down your expenses so that your buffer of 3 years would be less.  But this kinda also goes to my point.  oct 2008 was uncertain, so how can you be confident that you'll say "ok, i only need 2 years of buffer".  if anything, i think most people would move to increasing their buffer to say 5 years during the oct 2008 time period.  This would involve selling securities in oct 2008

[Liberty]

So i agree that cutting down your expenses so that your buffer of 3 years would be less.  But this kinda also goes to my point.  oct 2008 was uncertain, so how can you be confident that you'll say "ok, i only need 2 years of buffer".  if anything, i think most people would move to increasing their buffer to say 5 years during the oct 2008 time period.  This would involve selling securities in oct 2008

 

You can't know, but you can say: History has taught me that a couple years form now things will probably be much better. If they aren't, I lose, but I'm betting the higher probability that they will be. And if I lose, chances are that selling in 2010 will turn out to be better than selling in 2008 when the panic started (panics is intense, but it rarely lasts 2 years). And if I do lose, what do I lose? Not everything, because I can sell just enough to create a 1 year buffer and see in 1 year if things are better, I don't have to recreate the whole 3-4 years buffer.

 

That's my thinking right now, anyway. I should do more research on the average duration of stock market panics and how fast things bounce back...

[given2invest]

bump.  this is a great thread.