Since the elections we have been in a market unlike any I have seen since the late 1990’s. The recent corporate tax cut from 35% to 21% could boost the stock market value over 20%, so the run appears to be continuing. Most investors realized double digit returns last year if their stock exposure was 60% or higher. With money in our pockets and a tax-cut driven upward market, I am seeing some 1999 investor psychology beginning to manifest.
Our human nature seems to look at recent growth in portfolio values as something we can spend or use up. After all, it was not there a year ago. Just take the gain and we are right back where we were, right? If we see, let’s say, a $50,000 increase in our values during 2017, we might think that the account would not suffer if we took out a previously unplanned $35,000 for a new car, remodeling or gifting to our children, who always could use the money. We tend to think of gains as carbohydrates, available for burning up, rather than fats which can be stored to weather future difficult times.
In our March 2000 newsletter, I wrote an article saying “we cannot spend the fluff.” After riding the bull market of 1995-99 capped by the spectacular Dotcom rise in 1999 where we saw the likes of EMC, Dell and, of course, Qualcomm, most of us were pretty confident. I remember some clients would call me a genius, which is most definitely an indicator of a market top! Two families told me at the beginning of the year 2000 that they would be “disappointed” if their accounts did not return 25% the next twelve months. Besides our “irrational exuberance,” we were also spending more freely. Janet and I bought a new house in 2000, others spent their new found dollars on a Cadillac instead of their normal Chevrolet, bought
granite tops for our kitchen counters rather than Formica, or cruised to Alaska rather than the Caribbean. Some of us spenders basically burned up our built up fat and then struggled for a decade once the party was over.
I remember when I was in my thirties and running marathons, I read an article on how to improve your performance. The premise was that distance running was a function of two things: heart size and body weight. Believing my workouts at the time were sufficiently building up my heart, I decided I needed to get my body weight down. Today, I weigh 210 pounds. Then, I was a 175 pounder determined to get my weight down to 150! As I approached this goal, my body fat was calculated at less than 2%. A friend then asked me to join him and others for an ice-fishing party at a local strip pit where a friend of his had built a home. So, on the chosen day we cut a hole through the ice and began fishing. The blue gills were hungry and plentiful. After a half hour of rapid pulling in of fish, I began feeling a little dizzy, then some disorientation, and finally had to be helped off the lake, taken to his friend’s home where I laid on a couch with multiple blankets for about two hours. I had encountered hypothermia. When the cold hit, I had no fat to burn to generate internal heat, so I had set myself up to nearly freeze to death! Investing needs fat to be stored and used when the markets are harsh.
So, if my account goes up $50,000 while I have been withdrawing a respectable 5% of values, can I spend any of the gains? Certainly, but keep your withdrawal rate at 5%, i.e. increase withdrawals by $2,500/year. There are exceptions to this strategy and it may not be what your advisor would recommend for you, but we must think of excess gains above inflation as “temporary.” The gains are NOT OURS. Those who do not heed this advice might find themselves “living on the edge” sooner than they think possible. Be smart and live for the next battle. It will most certainly come, but not just yet.