So I am not a big fan of market timing – where you try to predict where the market is going to go, and make investment decisions based on that. I am more of a “buy and hold” kinda guy, who determines his allocation of investments, and then sticks with hit, rebalancing as needed. This held me “in good stead” during the 2008 and 2020 “crashes” where I just left the money in place, and waited (in some cases over a year) for it to build back up.
In March 2020, the market dropped down, and from that low of March 17th, it has doubled since then. I didn’t lose any money, because I never sold. I’ve also talked to you about my concern of the market, especially the S&P 500, being overpriced when compared to historical P/E ratios and other metrics. I recently adjusted my allocation, due to these concerns. Still, the majority of my investment career, since the dot.com crash, has been focused on long term investing.
But what happens when you have events in your life that demand a short term view on your investments? Due to Covid, my company has instituted a vaccine mandate (before the government even mandated it) – everyone has to be vaccinated by Oct 1st. While I am not an anti-vaxer (I got the Shingles vaccine this year in March, and just got my tetanus booster) I do have concerns with the Pfizer, Moderna and J&J vaccines, based on my analysis.
I’m looking at taking the Novavax vaccine once it becomes available in the US (4th Qtr?). However, that doesn’t look like it will be done in time for my company mandate, so it appears that I may be let go in early 4th Qtr 2021. Since I am FI, it doesn’t really get me too anxious.
However, I do have a significant portion of investments in a company 401K and Deferred account. The 401K I can let sit (or just transfer over to my IRAs) and that would still match my “buy and hold’ methodology. Even if it dropped right before I left, by transferring it to my IRA and letting it sit there for a couple of years, it would move back up.
However, the Deferred money would be paid out immediately upon termination of employment. The assets would be sold, and it would be a taxable event. Since I am looking at using this money for the first couple of years of retirement, I am concerned about it dropping suddenly, right as I planned to use it.
Several issues have me concerned right now:
We are heading into October, and October is typically not a good month for the market (see crashes in 1929, 1987, etc.)
There is a lot of negative news coming out of China right now (Evergrande, bank issues, etc.) that might cause the market to hiccup
Supply chain issues continue to affect companies and their Black Friday sales
Covid continues to be a net drain on the world, with its impact still to be figured out
So in this case, I have chosen to “time the market” with this deferred account. My typical allocation was 25% S&P500, 25% International, 25% Bonds, 25% Small Cap. I’ve now gone to 100% cash with it, and I’ll probably stick with that till November, or until I get let go by my company.
I’ve spoken before about my “side hustle” of TKD woodworking in the past (look through link on the right). I really love woodworking, and its given me an outlet where I can fund my interest, improve my skills, and practice the administrative tasks of running a company (financial documents, website, etc.)
One of the issues with any sort of hand labor (carpentry, automotive, etc.) is there is a danger from the tools you use. You need to always be on guard, especially with powered equipment (like Table saws, miter saws, etc.). Whenever I’m working with powered equipment, I make sure the guards are on, and I use a healthy respect for these tools. It is one of the reasons I got a Sawstop table saw – it has a braking system in it that cuts out the saw if it detects it is cutting flesh. I can honestly say that I have not had a power-tool injury in the 30+ years I have been doing this work.
Unfortunately, I now can’t say the same about hand tools. Yes, those tools that are powered by Human muscle. Its very embarrassing.
I have a few old-time wooden hand planes that I don’t use very frequently. I’ve got them stored above a cabinet, since I only pull them out once every 2 years or so. Well, I was pulling something out of the cabinet, and one of the hand planes fell. For wooden hand planes, the blade is held in with a wooden wedge, and in this case, the wedge came loose, and the blade fell down. Did I step back and away? Of course not, I reflectively tried to catch the plane & blade, and the result was a somewhat severe cut to my ring finger on my left hand. Ouch!
Visit to minute clinic and then hand doctor yielded a bandaged hand, and then an operation to reattach one of the nerves in the hand. Luckily there was no damage to the ligaments, so I still have full range of motion. But for the next 2 weeks, I’ve got no shop time – have to keep in clean.
Lesson’s learned – never store sharp tools above where they could fall. This has been fixed in my shop now. As my wife says, it could have been worse.
Go Curry Cracker had a good article on his purchasing decisions for his new car. It starts with some of the basic advice of the book, Millionaire Next Door. He then walks through his decision making process on what to buy, used vs. new, electric vehicles, cost of ownership, and financing vs. cash purchase. Overall its an excellent article for anyone thinking of getting a new/used vehicle in the near future.
My history (and Mrs. 39 Months) is interesting, in comparison to the Millionaire next door. The book discusses the pluses and minuses of purchasing new and used, when to trade in, when to lease (almost never). For us, we tend to purchase new, and then drive the vehicles forever. I have owned four vehicles in my life, and two of them I have left on the side of the road after 100,000+ miles/multiple years. Literally driving them till they died.
My third vehicle I put 280,000 miles on over 10 years, and finally traded it in when the creaking on it (whenever I braked) go too bad. I’m now driving my fourth car, a 4-door sedan, with 180,000+ miles on it over 11 years. I hope to keep driving this one till I decide to retire – and then it’s a truck!
Mrs. 39 Months has only owned two cars. The first she drove for 16 years before trading it in, and the current one, which she has driven for 14. While she doesn’t put as many miles on it as I do (due to work) she also doesn’t see a need to purchase a new one every 3 years.
Well, Mrs. 39 Month’s car has started to have some electrical problems (bad symptom) so she has started looking for something new. She has a good idea of what she wants, but due to the current issues with the automotive supply chain, we haven’t been able to find what she is looking for available. So we’re nursing her car along right now until maybe 2022. Hopefully…..
The benefit of being FI and in good financial shape is that we’ll be ready to pay with cash on this (and my future purchase). Hopefully we can get a good deal here and she’ll have another car she can drive for 15+ years. Wish us luck.
I continue to be stunned and surprised at the increase value of the market as the year continues. From its March 2020 low point of 2,237.4, the S&P500 has now hit $4,524.09, basically doubling in value in 17 months. It seems like the market will just keep going up & up!
We all know this isn’t possible, but folks have been betting against the market (including me) for months now, and we continue to get it wrong. That’s why its always important to stay in the market, no matter what. Don’t pull your money out, because by the time you figure out the market has turned back up, you’ve already missed a significant amount of gains.
That being said, I have had two major concerns at this moment:
The presence of high inflation may continue and force the fed to raise interest rates. If so, that will do some damage to the returns of my bond funds (which haven’t performed very well comparatively for the last several years).
The S&P 500 continues to be way overvalued, with P/E ratios more than 2X historical values.
So I made the decision to make some changes to my investment allocation.
Change Bond allocation from 20% to 10%, reducing my exposure to the Fed raising interest rates
Change S&P500 allocation from 20% to 15%, reducing my exposure to the “overvalued” S&P
Add 15% allocation to dividend stocks – typically those steady stocks that continue to throw off income, even when the market sinks somewhat
While you could say that this might reduce my returns by reducing my exposure to the S&P 500, I actually have increased my stock allocation from 60% to 70%. I’ve just changed some of the stock investments to dividend stocks, which may not grow as fast, but should grow and throw income off better than bonds in the current environment.
So, my new allocation for my IRAs is:
15% dividend Stocks
15% S&P 500
20% Small Cap stocks
20% International stocks
We will have to see how that goes in the near future.
A key part of planning for Financial Independence is to determine the assumptions you make for the future. This is always a “moving target” as we are trying to predict the future. We can go back to past periods of time and try and use that (this is what the 4% rule was based on) but we are trying to predict an ever-changing future. This is fraught with risk.
A person’s personality (and their spouse’s personality) now “comes to the fore” here. If they are optimistic, then the prediction is on high investment returns, low inflation, and good health. If they are pessimistic, then its low investment returns, high inflation and potential higher costs for health care. Most folks are somewhere in between – but this is a key part of the “angsts” of people trying to hit their retirement goals – and has been for many decades. The fact that folks are living longer (and thus the big problem if they guess wrong) has further caused people’s stomachs to churn.
Many people in the FI community have never lived in a high inflation era. Inflation got smacked down in the 80s, so for the last three decades, we’ve been living with 2% – 4% inflation. For those of us older (late 50s, 60s) we remember the 70s and early 80s, where inflation hit double-digits and caused a massive crunch in people’s plans for retirement. That’s why boomers typically overestimate inflation, and non-bloomers underestimate.
The same goes for investment returns. From 1968 – 1982, the stock market returned a net 0% – fourteen years! So again, boomers tend to be a little more conservative in their return predictions. Non-boomers have known some pretty sweet times for the market (and some crashes) so their predictions might be more aggressive. I’ve written before about how I think the market is way overvalued, so we may be in for a significant correction/crash in the near term.
So what are my FI assumptions?
Inflation -3% per year
Social Security increases – 2% per year (i.e. doesn’t keep pace with actual inflation)
Stock returns – 7.8% per year (down from historical 10%)
Bond returns – 3.1% per year (down from historical 4.6%)
Return for 60% stock/40% bond portfolio – 5.92%
Return after inflation – 2.92%
Life timeline: Live to 97 (me) and 99 (Mrs. 39 Months)