We lost $750,000 in the housing bubble, and I’m OK with that.

Yeah, man…got stung for 48% of our net worth. It sucked. May as well get the moralizing out of the way, then: to survive such things you have to keep cash on hand and stick to the plan.

Right. For starters, I’ve noticed that the housing bubble—hereinafter called the “Tide Pod” thanks to the two years of britches-pooping it caused me—often seems ill-understood by folks who didn’t start investing until the recovery. I partially funded my early retirement by small-scale flipping, so here’s the story as I lived it.


The US economy collectively ate the Tide Pod just after Y2K, when to speed the dot com recovery the Fed lowered interest rates to 1%.1 Consequently, toxic mortgage-based financial products led to widespread overleveraging.

Teaser-rate mortgages. Lenders wrote 30-year mortgages offering introductory 2%-ish rates. These helped residence-minded borrowers finance homes they wouldn’t’ve otherwise been able to afford, and enabled speculators to leverage into one/several/many homes at once—with the idea being to hold until the teaser rate expired, sell, and pocket what was assumed to be guaranteed appreciation.

Mortgage-flipping. Mortgage brokers flipped loans much like speculators flipped houses. Generous commissions spurred shady loan origination practices, which added fuel to what was called the “subprime” market. Buyers at high risk of default nonetheless got their loans funded; often through outright misrepresentation of their creditworthiness—i.e., fraud—to wholesale lenders.

Mortgage-backed securities. Asset managers in search of ever-higher yields bought mortgages and “packaged” them in a form analogous to bonds whose rates were pegged to default risk. But since many of the loans comprising these securities were based on speculation and subprime, their quality was often grossly misrepresented. Furthermore, major credit ratings agencies signed off on these misrepresentations.

Credit default swaps. Derivatives players essentially wrote insurance policies for mortgage-backed security owners. Viz., Party B pays Party A a premium to assume the financial risk associated with Party B’s securities. The CDS market was poorly regulated and had no backstop; i.e., no mechanism for making Party B whole if Party A defaulted, meaning one default could cause a cascade of others: B to C to D, etc.

So check it out: trillions of dollars in bad-debt foam, all on the edge of exploding.


In August of 2001 I bought a triple-decker building in Boston, MA, moved into one unit, and renovated the other two for rental. Made good money renting them out. Everybody was doing the same, with the goal being to rent for a while, ride the appreciation up, and condo out the apartments.

We retired in 2005 and immediately sold off our units and moved to a much more rural area to take advantage of lower costs of living.2 My wife and I poured all the money into the stock market and cracked some champagne and drank it in the sun and got naked.

But maybe the timing wasn’t so excellent, for two years later the Tide Pod blew us all out. You can see its effects on our investments in the chart below.

In less than two years the value of our investments dropped from a high of ~$1.54 million in mid-2007 to a low of ~$750K in early 2009. And note that the shaded area was the cost basis of our total portfolio value, such that in December of 2009 we crossed into a net loss for our entire early retirement fund.

Now what?

Well, here’s what. Back to the moralizing.

Keep cash on hand. In December of 2007 I’d used the downwards drift to harvest tax losses on about $60K in stocks. I didn’t know, of course, the severity of the downturn that was coming, but having roughly fifteen months’ worth of expenses in a money market account meant I didn’t have to sell into a market that was bombing. I’m now religious about keeping at least six months’ expenses in cash, and preferably a year.

Don’t panic sell. Wow. This can truly save one’s ass. I’ve covered this at length, but in about October of 2008 I called my broker and directed him to sell completely out if/when my net worth was a million bucks even. He talked me back to sanity, thank bejeebus.

And that leads me to another chart. Here, to put our recovery from the Tide Pod in perspective, is our net worth between June of 2007 and June of 2017.3

You can see, therefore, that we’ve clawed our way back from $1.537 million to $1.81 million. Plus, during that period of time we’ve continued making our annual withdrawals of 3.5%-ish. Call it a half-million bucks or better. Had I panic-sold, though…well, I don’t like to think about it.

So am I OK with losing $750K in paper gains during the Tide Pod? I wasn’t then, of course, but I am now. In the long term the Tide Pod proved to be…what, a fart in a hurricane? Doesn’t sound quite right, but whatever.

Which leaves us with the Big Question. The economy’s cyclical and many are calling for a recession to happen soon. Will it? Hell if I know for sure, and hell if anybody else does either. So I’ll end with what I lead with: your best chance surviving a Tide Pod is to keep cash on hand and stick to the plan.


The best historical treatment of the housing bubble is Michael Lewis’s The Big Short, which oughtta be required reading for every FIRE-minded investor in the US. Take a look at the description and reviews and you’ll see what I mean.

Footnotes

  1. Insert many other contributing factors here, like the repeal of Glass-Steagall, that I won’t get into for the sake of brevity.
  2. Which proved to be excellent timing: two of the three people I sold to got foreclosed on.
  3. I use these ranges because prior to 6/07 I was still unwinding our rental real estate, and post-6/17 I’ve been moving our assets away from this broker and into Vanguard.

Author: ER Dude

Sick of your job? After a thirteen-year career, Early Retirement Dude fled corporate America for good. You can do it too! Visit http://EarlyRetirementDude.com or email EarlyRetirementDude@gmail.com.

10 thoughts

  1. People ask me how I can stomach a 90% equities allocation with almost $2 million invested. Simple I tell them. I mentally picture a 30% drop overnight and see if I’m comfortable having $600,000 less than I do today. Yep – I’ll still have $1.4 million and probably won’t change a thing about how we’re spending money. I’ll definitely be looking for fire sale assets and taking some ta loss harvests here and there but otherwise it’s mostly business as usual.

    1. Yeah, same-same. Funny how after so long out of the workforce our emergency plan has shrunk to, “We’ll figure it out when the time comes.” Not a cop-out, just a learned ability to get by without stressing over every possible decision tree.

  2. Too lazy to read the book, but I thought “The big Short” was a great movie.

    The oil and gas industry were was my biggest asset class during the “Tide Pod” era.
    Seeing oil prices of $147 in July 2008 go to a low of $33 in February 2009 was gut wrenching and wiped out a lot of my net worth. I stayed the course and didn’t sell, but really should have since a few of my holding went under (even doubled down on one thinking it wouldn’t go under and thought the stock was a great bargain).

    Since then I have now switched to an index investor no longer picking individual stocks. If another “Tide Pod” comes around I hope not to take any 100% losses again.

  3. Good thing you had some cash cushion. That was a huge drop after retirement. I’d lose a lot of sleep over that kind of drop.
    We did okay because I had a stable job back then. Didn’t panic.

  4. I retired in 2007 and subsequently lost 40% of my net worth. I’ve since recovered to almost double my pre-financial crisis high. Looking back now, I’m not so much bothered by the loss during the financial crisis, but by the inability to back up the truck because of not having a paycheck during that time. It was the chance of a lifetime to invest during that period, imagine what a 50+% savings rate and maxing out your 401k would have achieved.

  5. Great read congrats on staying the course now hedge your nest egg Stay Long market for ever but hedge that portfolio buy quarterly SPX puts and finance them by selling weekly or monthly calls then you sleep like a baby at night

    1. Huh? Thanks for the suggestion, but there’s no way in hell I’m gonna hedge with any kind of vertical spread, especially not one that’s combined with a horizontal. Too much potential to lose out both coming and going. I’ve played that game before and gotten my ass handed to me.

  6. “worth of expenses in a money market account meant I didn’t have to sell into a market that was bombing. ”

    Don’t you think this is costly insurance? In the post 2007 bull market it must have cost you more than the potential benefit you will see in the next crash?

    Anyway, I like your writing. Thanks.

    1. >Anyway, I like your writing. Thanks.

      Thanks! Always makes my day to hear something like that.

      >Don’t you think this is costly insurance? In the post 2007 bull market it must have cost you more than the potential benefit you will see in the next crash?

      That’s the thing about being FIRE…it’s a constant effort to optimize your cash holdings. I mean, you’ve gotta pay bills. Absolutely right that I missed out on the compound growth, though. No other alternative short of incurring debt, or at least not one that I saw. Have I been missing something? If so, please let me know.

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