What a Bear Market Feels Like

Depending on how you measure it we are right around the 10 year anniversary of the GFC which a lot of people classify as Lehman Brothers going under, although of course there are plenty of other significant events.  I had a pretty up close view of the GFC as at the time of much of it I was in London working on the equities trading floor of one of the biggest banks in the world.  Although the crisis had already been going on for quite some time at this point it had been somewhat slow moving and felt more like just a regular bear market than the huge event it turned out to be.  There isn’t actually a set definition of what a bear market is but I’m going to use a fall from peak to trough of at least 20%, which the GFC easily qualifies for.  Given that many in the FIRE community have never experienced a bear market I thought it was worth taking a look at what it felt like for me at the time. 

As the GFC was before the Volcker rule which prohibited most proprietary trading came into being, most banks were investing huge amounts of their own money in markets which had worked out well for quite some time.  Come the GFC, not so much.  Working on a trading floor every day I was seeing massive amounts of money being lost every day.  I’m not exaggerating when I say that my desk alone had several days where we made, but mostly lost, over 10 million USD in a single day.  The equities trading floor as a whole made and lost multiples of this amount, not to mention the other markets based divisions within the bank.

This excellent article covers the US rather than Australia but it still highlights the incredible volatility around that time.  During September and October some of the larger daily falls were 9%, 8.8%, 7.6% with plenty of other large falls to go with it.  There were also daily gains of 11.6%, 10.8% and 5.4%, so it was a massive rollercoaster ride.  The overall trend was very much down though, with the S&P 500 index falling 41.8% from September to February.  Most other stock markets had pretty similar falls with the ASX200 falling about 46.5% from August 2008 to February 2009.  Imagine seeing your investment pretty much halve in value over a 6 month period.  In August you might have had a million dollars, 6 months later you’re down to $535,000.

Embarrassingly for me nowadays although I was in my early thirties at the time I didn’t actually have huge amounts invested back then.  This was due to a combination of working in London which has a very high cost of living, spending a lot of my money on travel, my upcoming wedding, and just generally not saving as much as I should have.  So the actual effect on my investments although big in percentage terms wasn’t that much in dollar terms, somewhere in the low 5 figure range at a guess.  In any case although it didn’t have a huge impact in dollar terms it certainly had a massive one in other ways for me.

One of the biggest ones was that the desk (your particular product area on a trading floor is called a desk regardless of whether it’s one person or a hundred) that I was working on which had started the year with 13 people ended the year with just 3, and unfortunately for me I wasn’t one of them.  So from having a pretty decent income (although I was definitely not on the huge money everyone assumes investment bankers are on!) all of a sudden I was on a zero income. 

Because I was in the UK on a visa I wasn’t entitled to any sort of unemployment benefits so there wasn’t any sort of a social safety net to fall back on.  It was purely down to what I had in my emergency fund which thankfully was a pretty decent amount, as well as what my then fiancé/shortly to be wife was earning which wasn’t much due to her being on a student visa and only being able to do casual work for up to 20 hours a week.

From time to time on FIRE blogs I see people say that if there was a market crash they would just go back to work.  And maybe this works out but in the GFC unemployment in a lot of countries went through the roof (although not in Australia) and it was very hard to get another job, and there was no guarantee it was going to pay as much as the previous one. 

I spent over a year out of work in London and didn’t have many interviews at all in this time despite having a pretty attractive resume and applying for at least a hundred jobs.  So hey, maybe going back to work would be an option but I wouldn’t want to be relying on that as my only backup plan because chances are that a lot of employers are going to be putting on hiring freezes and cutting staff rather than hiring more, because this is what they always do.

The thing most Australians don’t realise is that the GFC barely touched Australia.  Oh sure there was a big hit to the stockmarket, and a small hit to property prices, but the unemployment rate only went from 4% to 6% as the commodities boom meant that there wasn’t much of a hit at all for the average person.  GDP kept right on going up and has kept doing so since.  Hell, every man and his dog (sometimes literally!) got handed a cheque for a thousand dollars!

In the UK there was a similar hit to the stockmarket, but house prices fell about 20% and unemployment doubled from 4% to 8%.  In the US again the stockmarket had a similar fall with house prices falling over 30% and unemployment skyrocketing from 4% to 10%.  Those are huge differences compared to what happened in Australia.  If you were living in one of those countries you were much more likely to lose your job, the value of your home had potentially dropped below the amount you owed on it, and whatever you had invested in the sharemarket had probably halved in value.  

In Australia although the stockmarket losses were pretty much the same there was only a slightly increased chance of losing your job and property prices were pretty much the same.   I remember travelling back to Australia from the UK to see family and it was as though nothing had happened at all compared to the UK.

So when I hear younger people in particular say that they got through the GFC just fine my immediate thought is that they didn’t have to really go through anything.  They probably didn’t own any property, they had some minimal amount in their super which they barely looked at if they were the typical twenty something, and they were probably still in a job so everything was fine.   Of course they handled it just fine, nothing happened to them!

What happens if the next crisis hits Australia harder though, or is localised to Australia?  To my mind the most likely cause of a crash here is the property market which has been going up for a very long time.  The Royal Commission into Financial Services has forced lenders such as the banks to look at borrowers income and expenditure more closely and lo and behold it would seem that most borrowers don’t know how much they are actually spending so when this is properly taken into account the amounts which can be responsibly lent out is dropping. 

We’re also seeing banks funding costs go up due to the US raising rates which makes it harder for people to make repayments.  If you can borrow less then you spend less on a house and demand goes down as do property prices, which is what we are starting to see now.  Which funnily enough was one of the major causes of the crash in the US and UK. 

If we start seeing property prices go down, unemployment goes up, and banks start taking losses then they’re going to be cutting their dividends pretty sharpish which will likely push their share prices lower.  In the last crisis in the US the major banks weren’t allowed to pay out dividends for quite some time, it’s not unthinkable that the same thing could happen here. 

If you’re in a position where you’ve lost your job and therefore your income from that job, the value of your home has gone down, your mortgage payments have gone up, the value of your investments has gone down and your income from those investments has done down as well it’s not going to be fun times.  Hopefully if you’re into FIRE you’ve got a decent emergency fund and you have at least some income from your investments so you’re in a better position than most but it’s still likely to hurt.

The effects of this aren’t just financial but also physical and mental.  I lost about 10kg over the course of a year from being stressed out pretty constantly.  One of my bosses started developing weird skin blotches.  Lots of guys started losing their hair.  I was constantly stressed out as was pretty much everyone I worked with.  Everyone was sleep deprived, everyone was worried about whether they’d have a job at the end of the day, everyone was losing bucket loads of money hand over fist, it was not a fun time. 

I look at my facebook memories most days and reading my status updates from back then I was obviously feeling the pressure.  This is one of the reasons I’m a big fan of having a pretty large amount in your emergency savings account, because you may one day need it to support yourself and your family for an extended period of time!

All of this raises the question then of how would people deal with a GFC type event that actually has a significant impact in Australia rather than the fairly minimal one it did last time?  I’ve talked previously about sequencing risk  and obviously one of the big worries is that this happens to me as well.  As I mention in that post dividends in STW (which is another Aussie index tracking ETF which was around back then) were cut very significantly although the dividends on the underlying investments didn’t fall quite as much, so if you were planning on relying on dividends for your income stream then that’s going to be a problem.

If the next crisis hits the Aussie market harder and dividends get cut further or banks aren’t allowed to pay them as the US banks weren’t post GFC for a number of years, and if companies aren’t making profits then they aren’t going to be paying out much in the way of dividends, so say goodbye to a lot of your income.  Even worse if you are planning on actually selling down your investments over time to meet your living costs then it’s not going to be much fun doing so if they’ve halved in value.  Basically you’re going to need a plan in place to ride out the storm, and that storm could last quite some time.

The plan for my family is to be living off dividends so if those get cut it’s obviously going to have an impact on us.  Ideally at that point the amount of dividends we are receiving annually is enough to cover our spending for each year, but I also plan on having a year or two worth of living expenses parked in a mix of high interest savings accounts (HISA) and term deposits so that if it all goes pear shaped we’ve got plenty of time to wait for markets to go back to normal.  This cash buffer is something that will likely be built up over the last year or two before retirement because between now and then I want to have our money working hard for us in the stockmarket, with the exception of the money in our emergency fund.  It’s not a foolproof plan because who knows what might happen, but at least it should give us a fair amount of room to come up with a better one if we need to!

What’s your memory of the GFC?  Do you have a plan in place to deal with a similar crisis in Australia?  If you liked this post and would like to read more like it then please subscribe!