Compound interest or market bubble

Being in a place of lean FIRE at age 28 I often think about giving up nursing and pursuing passion projects and local traveling. Like most people in my position, I have some doubts about having enough to retire. There is a lot of fear around quitting your job due to running out of money. People are really good at planting doubt in your mind at a time when you are already scared and nervous about giving up your job. The fire movement is relatively new and abnormal to most people so of course that creates a level of fear around the subject.

One of the biggest arguments I hear against the viability of FIRE is that markets are at an all time high and therefore, in a market bubble. I shake my head when I hear this. Markets are supposed to reach new all time highs as that’s how markets work. But what frustrates me the most, is that people forget about compounding interest when it comes to the total stock market.

My friend had a look at the graph of the S&P 500 below and said I’m not putting my money in the stock market it looks like a bubble to me. The “bubble” is actually the result of consistent exponential growth i.e. compounded interest growth.  It can be modelled by the same math that depicts bacteria cultures etc.


Note that plotting 9.5% returns over the past 90 years gives the same looking “bubble” as noted in the graphs above with the blue and tan lines. On a logarithmic scale, we actually have a very consistent growth. There’s always up and down years, but 7% after inflation is actually a very conservative “average”. The power of compounding interest explains why the S&P 500 continues to reach new all time highs and will continue to do so in the future.

This subject can certainly get more technical (we could use P/E ratios etc)  but keeping it simple, the power compounding explains the current markets conditions adequately enough to squash any self doubts about running out of money. Saving a 3 year emergency fund will greatly increase the odds of never running out of money.  Market conditions during the first 5 years of retirement is very critical in determining the likely hood of succeeding in retirement as illustrated by the Trinity study. Which is why having an emergency fund is critical to avoid selling shares during a recession.

If your portfolio is 25 times your annual expenses and you have an additional 3 year emergency fund (dividend income during those 3 years plus emergency fund to cover the gap) I personally believe you will never run out of money as long as that money is invested wisely.

There are multiple was to mitigate the risk. Personally when I retire from nursing it’s not like I will never create value ever again. With an extra 50 plus hours a week I will have much more time, energy and creatively to apply to my life. When you create value for others you get value back in return be it money or social capital. Most of the FIRE “leaders” such as MMM, Vicky robins, Paula pant and so on have actually more than doubled their net worth post FIRE. They created value for people and in return got value back through legacy, social capital and money. The idea that you will never earn a dollar post FIRE is impossible even if you tried. In Canada you can expect a pension (although reduced due to short working career) as well as old age security and the guaranteed income supplement. So by the time you are 65 you would have another ~$2,000 a month in income on top of your portfolio withdraws.

Happy friday and don’t worry so much

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