Subscribe to this BlogSwimming Naked When the Tide Goes Out
A nugget of wisdom that Warren Buffett has passed along more than once to Berkshire Hathaway investors is this: "You only find out who is swimming naked when the tide goes out. " What the oracular Omahan seems to have meant by this is that you don't really know or appreciate the risks that companies are taking until they are tested by adverse conditions–a corollary to the saying that everyone looks like a genius in a bull market. Buffett  used the line a year ago, for example, in reference to the follies of large financial institutions exposed by falling home prices.
While the tide-going-out phenomenon clearly applies to companies, it is relevant to personal finances as well. In a booming market and a booming economy, we don't have to worry so much about our debt, our obligations and our expenses and our safety net. We don't have to worry so much about where that last penny goes, because there are a lot more pennies and dollars on the way. But when times get tough, we discover out that we are the ones swimming naked: Gosh, I guess I shouldn't have tilted my portfolio so much toward stocks. You know, I'm spending a lot of money each month on my health club membership, and I hardly ever go. And, hmm, is that all the cash I have on hand? I guess I'm living closer to the edge than I thought.
So, with the benefit of 20/20 hindsight, what have you learned about your own bathing suit, Â or lack thereof? What were the major risks you were taking with your personal finances, and did you even realize it at the time? Â I'm curious to know what you've discovered as the tide has fallen.
With the S&P 500 currently down about 45% (and headed back lower, in my opinion) our (wife & my) retirement savings are down a little less than 4%, after backing-out continueing contributions. Including the contributions, we have more now that we ever have had. Got out of stocks between summer '07 and summer '08 and darn happy for it. Waiting to get back in and while I would have liked to have ridden this historical rise, I don't think the party's quite over yet.
Depending on how old you are, JJ, I would not necessarily say you took on too much risk, though that is a possibility. Your emergency fund is supposed to be kept in liquid FDIC insured instruments.
I used a ROTH IRA to be both an emergency
fund and tax advantaged retirement fund.
(You can withdraw principal from a ROTH IRA
without penalty after 5 years holding the IRA even before 59 1/2. )
I had $40K principal (about 9 months
survival mode expenses not counting unemployment ins.) and another $13K
interest. All nearly 100% stock.
I figured that even with a 25% drop in
the market, I'd still have the principal
for an emergency fund.
Surprise: the market dropped 50% !
I do have about 4 months
short term money in CDs/savings in
the bank, but I should have taken
less risk in the Roth IRA.
I am 50, but I am only 25% in stocks. I had for years a bad case of remorse, because everybody was preaching stocks allocations at least equal to age. That being said, the loss on my stocks still hurts…