The Time Freedom Podcast

Are You Ready for the Next Crash? There’s Always One

Episode Summary

Today, we kick off a two-part series on fast follow investing, starting with the problem we face as freetimers: What happens when the market crashes right when you need your money? Brian and Kirby discuss why an investment loss takes more than you think to recover from and why the usual fixes, like holding cash or shifting to bonds, don’t fully solve the problem. They also explain why fast follow is meant to complement buy-and-hold passive index investing, not replace it!

Episode Notes

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In March 2020, Brian watched his portfolio drop by about $50,000 a day. After 23 years of saving, he was just about ready to start using that money, so he panicked and sold everything to cash. That locked in a $200K loss, and then he missed a $300K rebound. It was a half-million-dollar mistake.

Brian and Kirby dig into the problem most buy-and-hold investors don’t face until it’s too late: what happens when the market crashes right when you need your money. They cover why a 50% drop takes a 100% gain to recover, why losses hurt about twice as much as gains feel good, and why holding cash or shifting to bonds doesn’t fully solve the problem. Brian also shares what his current approach, fast follow investing, would have done during that same 2020 crash. Next week, they get into how it works.

Top 5 Takeaways:

  1. A crash hits differently when you need the money. When you’re young and still saving, a drop just means buying shares at a discount. When you’re about to use your savings, the same drop can push your plans back by years.
  2. Losses take more to recover than you think. A 50% drop needs a 100% gain to get back to even, and a 90% drop needs 900%. Keep losses near 20% and you only need a 25% gain to recover.
  3. Losses feel worse than gains feel good. Research suggests a loss hurts about twice as much as an equal gain, which is why so many investors sell at the bottom, like Brian did.
  4. Getting out is only half the problem. Brian’s biggest cost wasn’t the $200,000 loss but the $300,000 rebound he missed by staying in cash. A good strategy has to get you back in, too.
  5. Cash and bonds help, but they have trade-offs. A cash reserve lets you wait out a downturn but doesn’t manage the loss. Bonds lower your returns and don’t always protect you; in 2022, stocks and bonds fell together. Fast follow aims to limit losses while still earning a strong return.

Chapters
00:00 The 2020 losses that prompted a new investing approach
06:05 A surprising comparison introduces fast follow investing
10:20 Why fast follow may complement buy-and-hold
11:09 The risk of needing savings after a market crash
15:00 Loss asymmetry: why recovery takes more than the drop
17:16 Why investment losses can feel especially painful
20:00 Brian’s 2020 sell-off and the cost of missing the rebound
23:46 Investor education and when portfolio strategy should change
25:14 Cash, bonds, and other approaches to limiting downside
28:36 Why the hosts leave fast follow mechanics for part two

This episode is for educational purposes only and is not individual investment advice. Backtested results are hypothetical and do not guarantee future performance.