Lessons from the Great Financial Crisis

The tramp quit his engineering job from a major Silicon Valley semiconductor company, 33. He now travels the world, seeking knowledge from other wealthy people so that he can teach people how to be financially independent of themselves.

Welp, I think we are all in recession now.

Whether you are rich, poor, left or right, Canada, Europe, China or American. Stock markets around the world are in free fall and we all know why.

U.S. stocks were sold after Donald Trump retaliated against the U.S. president in a case of China’s escalating global trade war.

Dow falls 2,000 points after China retaliates against Trump

Through all this, I felt a strange sense of familiarity. Just like I’ve been here before. More than 1,000 points fell back to back every day, panicked conversation heads on the news, a terrible prediction of the end of Western civilization as we know it. That’s when I hit me.

It feels like 2008.

There is an old saying that when the stock market gets higher and higher, everyone feels like an investment genius. But when the stock market tanks, you will find who is actually a good investor.

But I’m not here to tell you to suck it up and ignore the headlines. The headlines are real, and it’s natural now. What I can tell you is what I learned from dealing with the last big financial crisis and tell you how I could get through the last round of nonsense. Hope this helps.

Stay investing

When the market crashes, it is really easy to sell everything and then transfer to cash until the dust settles. I remember vividly holding the “Sell All” button of my brokerage account and trying my best no Press this button. My head told me not to, but fear was screaming at me. In the end, my head won and I didn’t push it. Thankfully, I didn’t, because if I had been hit by a financial crisis for the first time, I would never be a millionaire.

The question of trying to dance in and out of the market is that when to go out is obvious, but when to re-enter the market. The market can always recover, but no one can predict when. Recovery can occur when governments unite and begin to decisively save the economy. But this can also happen when a completely random geopolitical event or natural disaster forces the government’s hand, and by definition those black swan events are invisible.

Maintain global diversity

Recently, through 100% equity, 100% distribution of the U.S. stock market, investors have become too comfortable. I understand that over the past few years, the advancements in AI have driven the excellent double-digit returns of the S&P 500, and I have heard multiple people question why they bother investing in the rest of the world.

OK, that’s why.

Like in 2008, this crisis was 100% created by the United States. While other economies like Canada, Europe or the United Kingdom have only one big problem to deal with (i.e., U.S. tariffs), by declaring a trade war with the world, the United States will be nailed to the impact of the largest domestic tax volume since 1968, they must compete with the retaliatory tariffs of all who they are bothering.

Canada has announced retaliatory tariffs, and so is China. The EU is preparing its own set of retaliatory tariffs, and they won’t be the last one.

As a result, the United States leads…loss.

There are two basic methods for this tariff war. First, the United States saw their way wrong and threw away the tariffs. The other is that the United States insists on using their guns and keeps tariffs permanently, in which case the rest of the world will eventually lift the United States out of trade relations and trade with each other.

In both cases, exposure to the international stock market will be the key to recovery. So far, it acts as a buffer, outperforming 13% of the U.S. index, and when recovery finally occurs, it has the potential to cause recovery.

Negotiate your rent

I want to speak now to all the renters who read this blog. Now is not the time to be afraid. Your location is much better than the homeowner’s debt.

Amid the 2008 collapse and pandemic, the recession was bleeding with landlords and rental prices fell. We have seen rents now start to decline in major cities, and with this recession’s strength, these forces may continue.

The last time we took the boat (2020), we were able to jump from rent to rent and lower the market. Being a nomad can help, but even if you don’t want to move, you can use it as a negotiation chip to negotiate with your landlord.

Firecracker will write an article on how to do this.

Avoid debt

In every major financial crisis, the person with huge mortgages is the first to be screwed up. Especially if they get stuck in a situation where both spouses need to work hard to cover the debt payment. Then, with one (or two) people fired, their financial situation collapsed like a house of cards, and they lost everything.

Don’t be like those people. Now isn’t the time to buy a house.

Fill your cash bucket

They say that cash is king in the recession, and this time it is no different.

Now is the time to make sure you have 6 months to one year of emergency savings savings. You can put this money in a high interest savings account, or buy money market ETFs in a brokerage account, but keep the money as liquid and easy to use as possible. Unemployment has begun to continue, who knows how long this will last.

Keep buying storm (if you accumulate)

Statistically, most of our readers are working on fire, which means they are in the accumulation phase of their fire journey.

If your job seems unstable, or may be affected by these tariffs, then you will surely build a cash buffer first. This is your top priority.

After you complete this, you must continue to buy the market even if everything is down.

It’s easier said than done. I remember clearly that I had a $1000 discount on my salary and put it into my index funds, just owning the market tank the next day, removing over $1000 from the market value of my overall portfolio.

“What did I just do?” I thought. It feels like I’m really setting fire. But what happened is that I am buying ETF units at a discount price and when the inevitable recovery occurs, we are able to be stronger than the decline.

From 2008 to March 2009, the value of the stock market was reduced in half, and a long road to recovery began, eventually reaching pre-crisis levels around 2013. However, because we bought it when the price went up, we reached the breakeven point around December 2010, and we reached the breakeven point just three years before the rest of the market caught up.

This is the hardest part of investing during the stock market crash, and I won’t lie. Every fiber of your fiber fights you as you continue shoveling money into a fire that looks like a burning bin. But you have to remember that this is different from gambling because the index funds cannot reach 0. This requires every company in the index to go bankrupt, and some companies may be because of this tariff war, but not everyone will go bankrupt.

The world economy will eventually survive and grow again sometime in the future, and that’s your bet.

Fill your cash bucket (if you retire)

Keep some cash convenience for those readers who are in the final stages of their fire journey or even retired.

The 4% rule states that if you withdraw 4% of your initial portfolio and adjust your withdrawal based on inflation, your portfolio has a 95% chance of going through the entire 30-year retirement period. This still leaves a 5% chance of failure, which is called the return risk sequence.

We have written a lot about earnings risks, but to look back, if you start retirement during an abnormal stock market return period in the stock market, you have the potential to run out of money because you will be forced to sell as the market falls.

To hedge against this risk, we propose a strategy in the book, such as a millionaire, called the cash buffering strategy. Basically, this means putting enough cash outside of your portfolio sitting in a savings account (or investing in money market ETFs) to prevent exiting the portfolio in a downward market.

To find out the size of the required cash mat, take the estimated cost of living (E) and subtract the annual rate of return on the portfolio (y). This is how much cash is needed to survive for a year without selling any assets. In our book, we recommend keeping 3x your cash buffer so you can survive a 3-year recession without having to put anything down.

So, for example, if your annual living expenses are $40,000 and your portfolio earns $30,000, then your cash buffer target will be ($40,000 to $30,000) x 3 = $30,000.

in conclusion

Things went well, and the last time the government conveyed a record stock market, low unemployment rates and well-controlled inflation. But the U.S. government has decided to kick the world and scream into recession.

But it is during these terrible times that real investors distinguish real investors from trendy adventurers. Can you watch the stock market fall, still do the right thing for your portfolio, or will you lose your nerves and let fear guide your actions?

I think we’re all going to find out.

How do you manage it during times of crisis? Let’s hear it in the comments below!

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