Two and a half years ago I’d saved enough in cash and index funds to pay off my mortgage.
I didn’t do it.
Instead I cooked up a clever-clever plan to slowly pull out of equities over the next eight years – hoping to squeeze a little more from the upside along the way.
I’d won the game but I kept on playing anyway.
The Investor asked me to tell you what happened next.
What happened next
What happened was that I found out a lot about myself – especially my ability to tolerate risk
A reminder: Half of my mortgage repayment fund was sat in cash, half in equities. The idea was that instead of wholesale withdrawal, I’d stage an orderly retreat that would put me 100% in cash by 2021.
But no plan survives contact with the enemy. Especially when the enemy is me.
When I sketched out my scheme, I thought the enemy was a remote nightmare scenario where Mrs Accumulator and I both lost our jobs while equities crashed like a meteor to Earth and interest rates plumed like so much radioactive dust.
And in 2013, the recovery from financial Armageddon 2008-style felt like it had some way to run.
I didn’t want to miss out on the boost that staying strong in equities could give me as I pushed towards my next summit: financial independence.
It was a calculated risk, and some readers warned me against it. Their concerns mostly related to a deep personal hatred of debt.
If you have it, get rid of it. Don’t take chances. Cut your chains as quickly as you can and get the hell out of there. Don’t saw halfway through the manacles then hang about pulling victory poses in your cell while the guards play cards next door.
It was good advice. However I felt that time and financial wiggle room was on my side.
Change of plan
The markets climbed. My portfolio was up 20% by the end of 2013. The rise continued as I made my first annual withdrawal early in 2014.
The sun kept shining. News bulletins proclaimed record stock market highs.
It was like watching a rich kid open yet another present: “What have you got me? Oh yeah, another record high is it? Thanks.” (Tosses away).
But I get nervous when things go too well.
With expectations diminished by those record highs, it was time to rethink. Time to rebalance out of equities.
Time to take money off the table faster than a poker cheat in a Yakuza den.
By the time my 2015 withdrawal came along, my allocation to cash was already one year ahead of schedule.
There’d been a sharp, downward jolt September to October 2014. Call it a warning. I didn’t know what was going to happen next but salad days seemed less likely.
Equities marched on to new highs in May 2015. That was the last high they hit.
I pulled out another year’s cash in April.
My equities were now worth about one quarter of my mortgage.
Turmoil hit in June, August and September.
On my bike ride to work, I didn’t look at the rolling fields and trees. I kept playing my risk tolerance game
What if I lost half of everything from here?
A 50% loss would wipe out 12.5% of the mortgage fund. I could make that up in savings in less than a year. Rationally-speaking, there wasn’t a problem.
But there was.
I’d crossed an emotional Rubicon. I was taking risk I didn’t need to take. But it took the recent 15% losses to make me realise it.
What did the downside look like?
What did the likely upside look like?
Meaningless. A few extra grand or so.
Investor know thyself
“I don’t understand why you’re doing it.”
The Investor’s words skewered me like a crossbow bolt, and not for the first time. We were spending another Sunday exploring the Goring Gap near Reading – the inspiration for Wind in the Willows – and hiking our cares away. Or, more accurately, earning credits for the inevitable post-hike nosh-up at a local pub.
Anyway, I mounted my defence. It was wafer thin.
Just as the hike excused our calorie splurge, so my explanations papered over my real position. That my risk tolerance had shriveled away now my original objective was achieved.
I was much less brave in the face of losses that I had no business taking.
I sold out the next week.
That was back in November. Six years early. The mortgage fund is now 100% in cash. No one can take that away from me now.
Not even myself.
It was one of the best decisions I’ve ever made. Like popping a pill marked ‘worry begone’. Now I’m back to gazing at the rolling fields and trees (/grizzling over some other aspect of life).
I got lucky. Large losses could have punched a hole in my assets and the wind from my gut. That would have been fine if my risk tolerance hadn’t changed once I’d mentally ticked the mortgage off as ‘done’, but it had.
Since then I’ve taken much bigger losses on my financial independence fund and not felt a thing. Because that’s risk I need to take and the day of reckoning is years away.
Hopefully this earlier skirmish is a lesson I’ll remember when the time comes to take that money off the table, too.
At the very least, I know myself much better than I did. The markets tend to force truth on a person.
Take it steady,