Are stocks still the best way to retire early?

By PURSUIT of FIRE on in FI/RE - Level 6

At the moment it feels like we are in the first 30 mins of every virus themed disaster movie that has ever been filmed. 10 days ago I wrote how 21 people had died of Coronavirus in the UK, that total is now 422 at the time of writing.

The government has finally seen the light and has put the country on lockdown but yet a lot of the public aren’t taking it seriously. The tubes are packed and many people are still going about their lives as normal.

As for the stock market, as of yesterday the FTSE 100 had dropped 34.33% since the start of the year (although we did see a 9.05% increase today). It still hasn’t dropped as low as it did in the 2008 crash but it has dropped in a much shorter time period and the economic effects of a global lockdown is likely to be felt for many years to come.

As I wrote in my last post, I still think things will get better however it might not be back to normal before the year is out.

For those of us looking to retire early, the stock market crash has likely put a spanner in the works for many of us. With the thought of losing loved ones and many people losing their jobs, retiring early may not even be much of a priority anymore. The current situation isn’t going to last forever but given what we know now can we prepare ourselves should it happen again in the future.

Are stocks still the best way to retire early?

Most retirement models look at how the stock market has reacted over any given 30 year period. In most cases these models use data going back 100 years.

However, considering the last 20 years we have seen the following:

  • 2000 - 2003: Stock market drops 45% due to Dotcom bubble bursting
  • 2003 - 2007: Stock market gains 88% bringing it back up to where it was before the Dotcom bubble burst.
  • 2007 - 2009: Stock market drops 45% again due to real estate crash.
  • 2009 - 2015: Stock market is back up to 2007 levels.
  • 2015 - 2016: Stock market drops again by 16%.
  • 2016 - 2019: Stock market has a slow overall gain of 25%.
  • 2020: Stock market drops 33% and still going due to Coronavirus.

If my only source of income was withdrawing money from my portfolio this would be a pretty stressful retirement.

As they always say you should never put all your eggs in one basket. As such you shouldn’t rely on your portfolio as your only form of income. Dividend investing is one way to diversify your portfolio but it is still investing in stocks and I doubt given many businesses are suffering that the dividend payouts are going to be very high this year.

Diversify your income streams

To have a truly safe retirement you need to diversify. It is one thing to diversify your portfolio with different types of stocks but that isn’t going to help you when the whole market is crashing.

Bonds

Bonds are another way to diversify and they are generally seen as a safe place for your money but at the same time the gains aren’t going to be spectacular. If you take the Vanguard Total Bond Market Index Fund (VBMFX) for example, you would have gained just 16.21% over the last 20 years. However that is better than the 21.42% drop on FTSE 100.

Real Estate

Outside of stocks and bonds there is real estate, however even that is having a hard time at the moment. With people not being able to work they aren’t able to pay landlords rent either. As you can see from the graph below it generally ebbs and flows with the stock market.

Gold

One thing that does well in a recession are commodities. Gold in particular is generally a safe bet, as inflation increases so does the price of gold. You can see from the graph below that gold has nearly done the opposite of stocks. Again it isn’t going to make you rich but it might stop you from losing so much money.

Cash

Another option is to have some of your portfolio in cash but again you are going to be hindered by poor interest rates and generally you will always lose money in the long term due to inflation.

Side Hustle

This brings me on to the topic I will be covering over the next few weeks, the Side Hustle. If investing and saving isn’t going to get you to financial independence then the only option left is to start your own business.



AUTHOR BIO

Alex started Pursuit of FIRE in 2019 to try and help people reach financial independence. He has spent nearly a decade working as a software developer in the finance industry and now is looking towards early retirement so he can spend more time with his young family.