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 via:

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, but 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 would pay 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 went skinny-dipping.

But maybe the timing wasn’t so timely, 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 downward 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 towards the end of October of 2008 I called my broker and directed him to sell completely out if/when our net worth was a million bucks even. But peace be upon him, he proceeded to talk me back to sanity. “You’ve always said you were a buy-and-hold guy,” he reminded me.

Truth…which 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 during that period of time we clawed our way back and then some. Plus, we were also making our annual withdrawals of 3.5%-ish. Call it a half-million bucks or better in total w/d’s. Had I panic-sold, though…I don’t like to think about it.

So am I OK with losing $750K in paper gains to 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 and ensuing crash 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 led with: your best chance of digesting 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 timely: 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.

16 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.

  7. Well done for sticking to the plan during that major crisis. You owe big to that broker! 🙂

    I think what you said about the 15-months worth of cash is super important.

    I think many people have an expectation that, in case of trouble, they will always be able to generate some income (eg by finding a job, a little gig or similar). I’m more inclined to think that when things go bad, they go really bad – the only thing that can protect you is suitably sized emergency fund?

    1. >You owe big to that broker!

      Absolutely.

      >I’m more inclined to think that when things go bad, they go really bad – the only thing that can protect you is suitably sized emergency fund?

      Yes and no. You’ve heard of tax loss harvesting, right? For those who haven’t, if you’re long-term investing in individual stocks–which I’ve done and continue to do–you’re inevitably gonna have losers. You can time the sale of those losers to knock down your income tax bill through the realization of capital losses while raising cash at the same time. It’s a double-whammy. Doesn’t require you to carry a long long long emergency fund, although again, I still try to have from six months to a year’s worth of cash on hand.

  8. NYTs article indicated net worth is now $2.6M. This post shows $1.8M through 2017. Not sure how you were able to add $800k in one year in a relatively flat market. Also, getting to $1.8M in 10 years minus WDs each year is a remarkable annualized returns. Not knowing the specifics of the annual WDs this appears much higher than the 10 year performance of the SP 500 in that same period. Can you explain how you did it?

    1. >Not sure how you were able to add $800k in one year

      If only I was that good. No, you’ve made a great catch and I appreciate that you brought it up because I need to make a correction. I misspoke in the post when I said immediately above the chart in question:

      > our net worth between June of 2007 and June of 2017

      That $1.7M wasn’t our net worth, but rather the balance at that particular brokerage in, if memory serves, early 2017. For NW calculations I always add a few other major assets: our house (which we own outright), cars, daughter’s 529, etc., for a total of around $450K. Our net worth at the end of 2017 was actually $2.4M. So again, a misstatement in the article. Correction forthcoming immediately.

      (For those who don’t know, the “ideal” method of net worth calculation is constantly debated in the FIRE community. My thought is that as long as you’re calculating a withdrawal rate against your investments instead of the total, then do what you like.)

      With that said, if you go back and look at that chart you’ll see that our balance at that brokerage (which up until early 2017 was our only brokerage) stayed relatively flat after our withdrawals since inception, which are always 4% or lower. I should go back and crunch the math, but I don’t think the returns are all that stellar. It’s HAS been a good run, though, especially considering post-bubble the recovery.

      But still: 2017 and 2018 have been very good years for us. I’m now an index fund guy, but back when I was still buying individual stocks I picked up and kept several stocks that have done very well: Apple, Amazon, Berkshire Hathaway, and Philip Morris. With the exception of Amazon I bought them all between 2002 and 2004. Verification is here1, here2, and here3. Black rectangles are redacted account numbers. Red rectangles show unrealized gains.

      True, they were some good catches that have beaten broad-market returns, but here’s something to be aware of.

      Again, I’m a buy-and-hold guy. I also engage in tax loss harvesting such that I’m carrying on paper shit-tons of capital gains and almost zero capital losses. This skews the overall return numbers towards the upside, yet another reason I don’t pay that much attention to annual returns in our own portfolio.

      Another thing to be aware of is that our withdrawal rate is typically 3.5% or less instead of the 4% “safe withdrawal rate.” That also serves to make the returns on our financial investments less impressive.

      Bottom line, I think, is the AAPL and AMZN and so forth have served as a wonderful net worth anchor. When we retired in 2005, however, that wasn’t the case.

      That’s the best I can do right now to answer your question. May split this out into a separate post. I’m very grateful to you for catching my misstatement, and I apologize for having made it.

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