In The Right Lessons and The Wrong Lessons, I said the right lessons from the recession and the bear market are “so simple they don’t need any further explanation.” A reader Mark suggested that I shouldn’t be so dismissive.
“If you tell him/her it’s so simple that he should be ashamed of himself for failing to grasp your full meaning, then your are negating that investors desire to learn – in effect saying ‘do it because I said so.'”
After thinking about it for a little longer, I agree with Mark. So I decided to write down what exactly I learned personally from the recession. These will serve as notes to myself in the future. I apologize if the lessons look so obvious. I hope there is enough personal flavor to make them more interesting.
The first lesson I learned: Keep Your Job.
After the recession, I come to realize how important it is to keep my job. My employer had a RIF in 4th quarter 2008. Fortunately I survived. The company didn’t pay a year-end bonus like it used to. Nor did it give a “merit increase” to anybody in 2009. I expect my 2009 income to be 10% less than what I earned in 2008.
A 10% pay cut is nothing compared to losing a job. This blog would get more interesting with my unemployment stories, but it wouldn’t be fun for me. I have an emergency fund. I prefer not to use it. I don’t want to find out how unemployment insurance works in my state.
I want to make sure I add enough value to my employer so they would keep employing me. I used to goof off sometimes during working hours and post on forums, tweet, or reply to comments on my blog. I’m weaning off from such activities. I installed a Firefox browser plugin called LeechBlock. It’s a voluntary Internet filtering program. You tell it which sites to block between which hours on which days and it will block them.
It’s fun to post on forums, tweet, and reply to comments on my blog. I get some thank-you’s from time to time, but those won’t pay the bills. Although I get some money from ads on this blog, the ad dollars are far too small relative to what I earn from my job.
I’m aware that some successful bloggers can earn over $200,000 a year from their blogs, I don’t think I will ever get there. I’m a very shy person. I’m not good at self-promotion or networking. I take a “if there’s value, people will see it” approach (or is it “if you build it, they will come”?).
In late 2008, I was asked to contribute a chapter to the book The Bogleheads’ Guide to Retirement Planning. This book got published recently (I’m still waiting for my copy). It turned out that among some 20 contributing authors, I’m the only one under a pseudonym. Of course I would love to see my contribution recognized by my real name, but I don’t want to jeopardize my job in any way, now or in the future.
Not knowing what lies in the future, I decided to keep my non-work related activities from my future employers. I don’t think it makes any difference to readers of the book or this blog what my real name is.
For the foreseeable future, I will earn my living from my job. I’d like to keep my job and grow my employability. If you see that I post on the blog or forums less frequently, please excuse me. Keeping my job is really important to me.
[This post contains a link to Amazon.com. Amazon.com will pay a commission of 4% – 6.5% to me if you make a purchase within 24 hours after you click on the link.]
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KD says
I would slightly rephrase “keep your job.” A job is a contract between two parties. You may be doing exceedingly well in your job but that still does not assure that you will keep your job. I would, may be, call it “Be realistic and proactive in talking about your future with the company during a recession – offer to be useful in ways the company didn’t see you before. Especially if a round of lay offs are happening.”
Sanjeev says
I am a regular reader of your blog and do subscribe to other PF blogs as well. I rarely comment on such posts, so, this one is just because I felt very strongly to let you know that I value what you do here. While other bloggers find reasons to earn dollars by shamelessly finding reasons to feature different products, compare useless online brokers, lending clubs, etc, your blog comes out very fresh in its thoughts, ideas, and sincerity.
Keep up your work, honesty, and integrity. It sure will pay dividends. I am looking forward to tons of more posts from you.
John says
My perspective is a tad different. As I am retired, keeping a job is not an issue. Keeping my nest egg intact is. I’m not really a “trader” or a market timer, nor (must I admit) do I follow the moving-average rule-of-thumb you noted. Not that it’s a bad rule-of-thumb, mind you, I’m just a bit of a contrarian.
I try to keep my AA at 40/60. Of the 60% I have in “bonds”, roughly 2/3 is in laddered CDs (CDs are nominal bonds, as you so correctly pointed out to me several months ago . . . think now-banned poster “bozo” at Bogleheads).
The way I keep my nest egg intact and protected (insofar as possible) from the ravages of the inflation I truly expect to befall us within a few years is to:
(1) Rigorously follow the “age in bonds” maxim (trust me, when you hit retirement, you’ll sleep better);
(2) Tilt toward retail CDs over bond funds (even TIPS, which I must admit I own). You can do ever so much better shopping around for the “best deals” and laddering out five years (or more). I have been able to “beat” inflation by 200 – 300 basis points or more in CDs with no effort, and that sure beats most TIPS yields, even on their best days);
(3) Pick your re-balancing points with care. Don’t wed yourself to a particular calendar date (such as a birthday). I have pared my stock holdings three times in the last three months (the latest being today). If your stocks are running on hyper-drive, DCA “down” as it were into bonds. Stated another way, ring the register;
(4) With due respect to Jim Cramer, don’t get greedy. I’ve been through many a cyclical bull and bear, and one secular bull (1983 to 2000) and one secular bear (2000 to present). When your returns are way out-of-whack with historical reality, it’s time to cash in some of those chips. Conversely (with credit to Warren the B.), keep your powder dry and buy hand-over-fist when others panic, DCA’ing into the abyssal plain;
(5) As you reach retirement, calculate how much you need to supplement social security and pension income, and how much of a nest egg it will take to throw that off at a 4% SWR. When you get that “amount” in the bank, and you are at an age-appropriate allocation (age in bonds, do I need to say it), relax. Beyond that point, it’s not rocket science.
Just my $.02
Don says
John,
Great post. Would you be so kind as to go into a little more detail on (2)? I am recently also looking into a bond strategy, have been told by a friend I trust that bond funds aren’t a good way to go, but haven’t gotten enough of a handle on how to go about doing this myself.
I’m also all ears for a good bond book. I’m 50 next year and expect to be able to retire at 65 but may not for several years after (if ever – I like my work!). Bonds are coming into focus for me after not owning any my entire life.
Much obliged, to you and TFB. Great site.
Harry Sit says
Sanjeev – Your comments just made my day! I trust and respect the intelligence of my readers.
John – Thank you for sharing your thoughts from a retiree’s perspective. When you are retired, you are no longer beholden to your job but it comes with other challenges! One day I will get there.
Don – What a coincidence. After rolling over some money from my IRA to my solo 401k at Fidelity, I’m looking into investing some money in bonds or CDs. I will have a few posts on this subject shortly.
John says
Don, TFB’s companion blog (“ExploreBonds”) is about as good a place to start as any. If you’re contemplating adding bonds to your portfolio (a great idea, by the way), an easy way to dip your toe in the water is to buy a “balanced” index fund (I have VBIAX as a core holding in my IRA). If you want to goose your bond percentage over the 40% of the typical balanced index fund, you can do that with other bond funds (I have VIPSX, Vanguard’s TIPS fund) and laddered CDs. Avoid high-maintenance actively-managed funds with high expense ratios and “flavor-of-the-month” bond funds.
Your friend probably is suggesting that you avoid bond funds right now because interest rates will go only one place from here: up. Bond funds’ NAVs go down as interest rates go up, so folks get all nervous and jerky. They shouldn’t. Research any particular bond fund and you’ll find something called “duration.” While the mathematical concepts behind duration make my head ache, Bernstein calls it the “point of indifference” with respect to interest rate changes. A fund with a duration of 3 years, for example, “catches up” with interest rate increases after three years by purchasing new bonds with the higher yields as older bonds mature or are sold. A fund with a duration of 7 years plays “catch up” longer. Generally speaking, in the current rate environment, you want a fund with a duration closer to three years, all other things equal. The trick is to be patient and hold the bond fund at least as long as its duration. If my understanding of Bernstein is correct, after that point (of indifference) the increased yields of the new bonds offset the reduction of the NAV caused by the lesser value of the unmatured bonds.
At least I “think” that’s the way it works (I yield to TFB on bonds, as he’s forgotten more on the subject than I could ever hope to learn).
Now, why CDs? My CD ladder is just a bond fund, really. Except it has no expense ratio and no fluctuation in NAV (I’m ignoring brokered CDs and the secondary market). As a general rule, CDs with longer maturity dates offer higher yields, but the general rule is riddled with exceptions. Special deals and promotions pop up all the time. I use the “bankdeals” blog to research rates and terms before I have any CDs coming due. Commercial websites such as “bankrate” are OK, but they tend to omit many of the truly best deals out there.
OK, so you’ve done your research and found the best rates for the “rungs” of your CD ladder. Let’s say you’ve selected a five year ladder. You’ll note (in today’s rate environment) that the rates for anything less than three years are really, truly, low. Well, I suppose you’ve also noticed that the Fed has interest rates near zero and inflation (if you believe the BLS) is non-existent. What you’re looking for is called the “real rate of return”. When I said in my prior post that I “beat” inflation by 200 – 300 basis points, it was shorthand for the rate I obtained on the CD minus the (then) rate of inflation (disregarding taxes). So, even if you only get 2% on that Ally CD for the first year of your ladder, you’ve just “beat” by 200 basis points. Not too shabby.
OK, fast forward one year. Your Ally CD is coming due. Roll it into the best 5-year CD you can find. Eventually (in five years), your ladder (or, more precisely, this ladder) will be composed entirely of 5-year CDs.
That having been said, there are many refinements which could be discussed, e.g., how to add to a ladder, how to manage tax-advantaged IRA CDs once you hit 59 1/2, why credit unions tend to offer better rates than banks, why “hot money” deals are harder to find these days, I could go on.
But I think I hit the high points.
Wai Yip Tung says
What’s better than keeping your job? Keep 2 jobs! Obviously it is better to have your spouse’s job as a safety net. This is not an option for me right now. I was hoping to develop a second set of skill to hopefully get some freelance income (carpenter? translator?) Unfortunately I simply don’t have extra time to do this right now.
I bet the ad income from your blog is probably minimal. But don’t underestimate the value of your work. The day you post the entry “I’M OUT OF WORK”, I bet you’d find far more job lead from your readers than you’d without this blog.
Anie says
I tried so very hard to keep my job but they ditched me anyway. I’m now on UE and staying at home with the baby and it’s surprising how close the UE checks are to the amount I was bringing home after paying daycare expenses.
It’s rough out there in the world now, as I’m still paying off student loans that got me my job but probably won’t get me another in the same field. Do I stay at home and make that work, even after UE runs out? Do we finance me going back to school, which is REALLY expensive?
I’d be interested in hearing what to do after “Keep your job” is no longer an option~