Those who live by the SORR die by the SORR

Or why Sequence of Returns Risk (SORR) works both ways.

The stock markets had an amazing run over the last 20 years or so. From the depths of the dotcom crash in 2003 to 2021, there has been an almost uninterrupted surge in the value of stocks. Even the blip of the 2008 crash looks uneventful compared to the subsequent gains.

In those 20 years there’s been a lot of winners. If you had a big mortgage and kept your job – you are quid’s in with your debt burden getting less and less and your house soaring in value.

Greedier investors jumping on the BTL bandwagon will have been making hay from the magic money machine of high rents and low (tax deductible) mortgages.

If your money was in the markets – particularly in growth sectors – you will have seen massive growth and are sitting on huge profits.

If you were on a fixed income, benign inflation meant you didn’t do so badly. Sure, the collapse in interest rates maybe made your cash savings return next to nothing but is that the worst that could happen?

Losers? The Young

Sadly, the young have been truly screwed by the last 20 years. Globalisation is great for cut price white goods and premium white collar jobs but it’s no use if you are on a low wage. Add to that any combination of rent being so high you can’t save for a house deposit, the eradication of final salary pensions, student loans, job insecurity/shortages and can’t outcompete 7 billion other people in the workplace.

Other losers include those who made the wrong financial choices. Buying too much house for too much money in 2006. Getting caught up in the wrong get rich quick scheme. Or the passive financial losses that come from not obsessing about switching your pension fund from the one that charges 1.45% to one that charges 0.145% a year. Or any other micromanagement of your finances like switching utility/insurance provider every year.

But I don’t want to talk about that. I want to talk about how with the recent stock market correction that we are seeing – shares in behemoths like Amazon, Tesla and like – the companies that until very recently were literally worth trillions and have lost massively in 2022.

Watching the Bandwagon Pull Away

I have to admit that besides most of my ISAs & Pensions being in low cost global trackers, I have never been that invested in technology stocks and I always believed that the bubble would eventually burst. I thought that the relentless story of how FAANGs would rise in value forever, and then Bitcoin and then Tesla was designed to pull in money from the gullible and allow the early adopters to cash out.

Instead, I have invested heavily in very, very boring renewable energy stocks and funds. They promised a steady dividend that rises with inflation. I could see that my money was being used for something constructive – with value and a purpose. The returns were promised in the region of 9% (IRR) and they’ve always delivered (and then some). Of course for growth companies and their fans – companies that were profitable and could pay dividends were just dinosaurs who would go extinct. If your return on capital for investing within the company was not worth more than 9% – you were in the wrong business. To the extreme you had companies like Tesla valued at 1000 times annual profits. Even now, the P/E is 99 while VW has a P/E of 4.

VW vs. Tesla over 5 years – no competition

But a 9% return year in year out looks pathetic when tech stocks were delivering 9% a month and everyone was getting rich.

This story from Reddit’s FIRE UK board made me sit up and thank my lucky stars I don’t own investments that recently doubled in value and are now halving.

But I think that there are many in the Financial Independence movement who read Your Money Or Your Life – which inscribes a very risk adverse investment profile of cash savings, boring bonds and low-risk blue chips – and they threw all that out the window and realised that the shortcut to financial independence was betting on the boom, chasing memes, believing in the next big thing and making it big.

And the thing was that it worked. Until it didn’t. Sad face.

I wrote previously about the Sequence of Returns Risk and I badly articulated about how it worked both ways. The very fact that you’ve suddenly become rich makes it almost inherently more likely that you’ll lose a lot in the case of the markets falling. And this guy who’s position is like mine (wife, two kids, 40, he retired – I could if I wanted to) but I subscribe to the view of only getting rich once. Whatever propelled his net worth to FI levels by 40 was some good earning, some good saving and a lot of luck from choosing yesterday’s winners. Unfortunately, you need to learn to quit while you are ahead. Like Retirement Investing Today has done – although he always had a conservative investing approach.

What is Sequence of Return Risk

Essentially, for a new retiree having a few bad years in the first 5 years of retirement are very bad (as it you’ll go broke or need to reduce your SWR), whereas if the markets crash after that time you’ll do much better since you’ve already banked previous gains. Financial Samurai has a great post on it.

If you could choose it, you’d hope for a crash in the markets while you are buying stocks (so long as the bear market doesn’t eat your job) and boom once you retire. Unfortunately the class of 2022 from FIRE University is looking at the opposite. Some numbers I looked at for SWRs put the Bear then Bull scenario at 10%, while the Bull then Bear is down at 1.7% over 30 years.

A Cautionary Tale

If this Reddit story is true, then the husband is in a terrible position both financially and psychologically. Actually – scrap that – financially he’s fine, if your £1,000,000 is now worth just £500,000, you still have £500,000 – how much is enough?

Elon giveth and Elon taketh

But the bigger they come the harder they fall – the sense of loss that he must be suffering, no wonder he’s drinking more and taking it out on his wife and kids.

Truly being Financially Independent (for me anyway) means being Free FROM money – not free with it. If you have actually got enough money to retire early then do the decent thing and put it away somewhere with low volatility, low risk, low reward and check every month or so to see how it’s going.

That’s sort of what I do – once a month check-up and even then it’s a dispassionate counting exercise. Add up all the numbers from all the accounts – find out were up £20,000 or down £20,000 and don’t care too much about it all.

So, I’ve learnt to stop caring about money so much and I don’t want it to control me. I’m also happy to miss out on the next big pump and dump scheme and I’m looking forward to the day when Elon Musk’s Tesla is valued like a car company and not a tech company.

Thanks, GFF


  1. “The bigger they come the harder they fall” – I’m never going to win big, but neither will I lose big, hence I’m happy trudging along with my annualised returns of 9%.
    Have noticed that several of the current crop of new FIRE wannabes seem to want to get to FIRE as soon as possible so have shunned boring index trackers to ‘gamble’ on more exciting investments, including crypto. They could prove me wrong and reap the rewards in the future but can they stay the distance?

    Also ignoring the usual FIRE advice of having emergency funds in instant savings accounts, some have their EFs as investments and have come a cropper when having to dip into their funds during this downturn.

    Liked by 1 person

    1. Exactly.
      Just as boring shares got boring returns and will face a boring bear market – investors who sought out high risk – to the extent that many consider a measely 12% return on “stable coins” to be sufficient diversification from a 100% crypto investment strategy.

      Liked by 1 person

  2. Oy vey, you are feeding some seriously spammy Monevator-copy-and-pasters link love 😉 Monevator himself only appears fourth, midway between the duplicators. Don’t feed the trolls, shoot the blighters as spam, it’s what Akismet is for

    With you on the general thrust though, I find it hard to disagree – tech is great. Until it isn’t. And valuation matters. We’ve seen this movie before in 2000. I am also not seeing the mayhem, though arguably I have in my portfolio at the moment.Of course, whom the Gods wish to destroy, they first make mad, so my time may yet come.

    Although I do take Monevator’s point that the decline in the GBP is shielding some of the mayhem from our eyes.

    Some of the millennial meme-stonkers scare me though. The rule is simple. Never buy stocks with borrowed money. End of. I saw that go titsup for people in the dotcom bust. Sure, professionals like FireVLondon and ZX48k may be able to do that and qualify risk, but redditors? Seriously. Same for crypto.

    More generally I wonder if there will be a day of reckoning for the early FI/RE movement. It has changed significantly from the people who crawled from the wreckage of the GFC, where it was rather more about frugal living while you were working to build up a stash rather than requiring racy returns to rule for years. The long term (decades) return from the stock market seem to be more like 4 to 5% and that sort of thing needs RIT-like levels of Saving Hard, or starting out with a lot of capital to be able to retire early.

    Liked by 1 person

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