Wednesday, December 09, 2009

A Return from the Abyss

Soon after I retired early in October, 2007, the Dow reached an all-time high and our retirement savings was at 23 times my annual salary. About a year later, Lehman Brothers filed for bankruptcy and confidence in the U.S. financial system was destroyed. From November, 2008 through March, 2009, a full depression appeared to be a reasonable concern, and the Dow declined 54% from a closing high of 14,164.53 to 6547.05. Our retirement savings declined 41% to 13. 6 times my previous annual salary. It seemed that financial systems would collapse and not recover.

Since March, 2009, the Dow has rallied 58% to 10,337.05, and our retirement savings has grown 25% to 17.1 times my annual salary, when adding back the amount used to pay off our mortgage in May, 2009. Although the Dow hasn't returned to the highs of October, 2007, it feels to me that a financial catastrophe has been avoided. For now, there is a reasonable chance the economy will recover, although it will likely take a long time.

The financial experience of the pass two years will likely affect our investment strategies for the rest of our lives. The next time the market seems to be going no where but up, e.g October, 2007, we will definitely sell stocks and lock in some profits. On the other hand, when the market looks like it is in freefall , e.g. November 2008 to March, 2009, I hope we have the discipline and courage to put money back into the market, and benefit from an inevitable return from the abyss.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC


Edwin said...

Ah the concept of "buy low, sell high" put into practice. It may sound simple, but it tends to be anything but. Particularly when you throw in the emotional excitement of making more and more money in the boost and the near-depression that can set in when the market is taking a dive and you are really feeling it when you look at your investments.

Shadox said...

wow... a 41% decline in your portfolio means that you were almost 100% in stock... that is a very aggressive investment strategy for someone who is retired. Have you consulted with an investment advisor?

Anonymous said...

I noticed you refer to your retirement "savings", yet it appears that you are actually referring to your stock investments. Most people consider "savings" to be bank deposits. Why do you call your stock investments "savings"?

Super Saver said...

@ Shadox,
Yes, we have a financial advisor, who has a 60/40 equity/fixed income philosophy. Because of my situation with company stock, we were likely closer to a 70/30 allocation.

@ Anonymous,
Perhaps, we have a broader definition of savings. We refer to any money not spent as savings. To us, savings can be "invested" in bank accounts, CDs, bonds, or stocks, which are relatively liquid assets. For reference, we consider money used to buy a house, car or rental/vacation home as spent, and therefore, not savings.

Anonymous said...

I agree that money not spent is considered "savings". However, once you took that money and invested it in equities, it's no longer considered savings from an investment perspective. While liquid like savings, equities are obviously not the same as bank deposits in their risk structure. I'm sure your broker doesn't label your brokerage account as a "savings" account.