Asset Allocation – an old word that was in heavy use until the dot.com boom

Back when I was a young investor in the late 80s and early 90s, one of the big topics of discussion was “asset allocation.” As most of you know, this was how you broke down your investments in a variety of buckets (stocks, bonds, precious metals, real estate, etc.) in order to gain the benefits of each and to offset some of the drawbacks.

When you were investing back then, this was a primary part of the discussion, and even folks starting out in their 20s were encouraged to invest in a significant percentage of bonds. Of course, that was when bonds were paying close to double-digits in dividends/interest!

Something odd happened in the late 90s with the dot.com boom – everyone stopped talking about asset allocation, and just started pursuing a 100% growth stock strategy. Due to that, and many other causes, a bubble was formed as everyone bid it up, and then it finally popped in 2000. Many of the growth/IT companies lost 80%-90% of their value, or when out of business completely.

Then 2006-2008, the real estate market was the place to be, and folks ended up going “all in” for houses, condominiums, apartments, and REITS. The prices were bid up again, and then – pfft! Another great crash, this one close to 50% of the stock value being killed – and many folks underwater on their mortgages for a decade.

Now we have hit another “crash” where people using Index funds and Vanguards “buy the whole market” index have priced the market up (over 24 P/E ratio on the S&P 500 before the crash vs. a historical average around 15). While the market is showing signs of recovery (just look at yesterday’s jump), it still is down significantly and will take some time to work its way back, especially if the economy sputters coming out of the Chinese Flu.

I was looking through my investments and allocations, and realized that, if I had been 100% in the S&P500, I would have dropped over $350K during 2020, but since I am at a 70/30 split with our investments, I only ended up down $250K as of the March 23. My allocation helped “ease out the rough parts.”

I wonder if everyone’s pursuit of the “fast buck” or the quick gain (dot.com stocks, real estate, etc.) is one of the major causes of these bubbles. Instead of following the “get rich slowly” kind of attitude, everyone seems to want to chase the brass ring. Yet as we have learned in the FIRE community, just reaching FI does not make you happy – and you need to plan what you are going to do once you reach FI, or you will end up nuts (or going back to work).

It would be nice if that word got out to more people in our society – do not rush it, but enjoy the ride as you go. Plan, but do not try to short-circuit the process. Maybe then, we would have growth without as many mad crashes.

Mr. 39 Months

So how have your FIRE calculations been affected by the recent “Unpleasantness?”

As I write this, the American S&P500 Stock index is down 31.8% from its high on Feb 14, 2020. Trillions of dollars have been wiped out in the span of five weeks, primarily due to the uncertainty of the Chinese Corona Virus. Many folks, myself included, expected some sort of a market correction this year (the P/E ratio of 24+ vs. a historical average of 15 almost guaranteed it). Still, this as been a staggering loss for many, including myself.

My paper losses have been something around $250,000 from the beginning of the year (it would have been $350K if my allocation was 100% stocks). My plans to achieve FI on July 1st of this year are pretty much trashed (even without the recalculation that our financial advisor forced upon me). So how is my morale?

Actually not bad. I think this is due to my age – “with age comes wisdom.” In terms of the Chinese Corona Virus, my generation has been hearing about the end of the world so many times, that this sort of things bounces off. We will get through this like so many other things. In terms of market dropping, I’ve been through 1987, 2000, 2008 and now this. The market will recover, and the younger folks have even more time that we do. It does look like my retirement timeline will need to be reset, but even that doesn’t have me too frustrated.

Like many folks, I’ve been sequestered from work for this past week, working from home. While the workload has been heavy, I’ve been able to get it done. However, I find that I miss the comradery of my work peers, and it has made me realize that I can’t just retire and sit on the porch (most FIRE people can’t either). So when I retire, I am going to have to make sure I have a lot to keep me busy (side hustles, charity work, etc.) In the meantime, I think I will be OK with working a while longer in order to build myself back up to my FI number.

How are you doing in terms of your drive towards FI? How has this drop affecting your plans, if you are already retired or moving towards it? Are you handling this downturn well? What moves have you chosen to make (if any) in your investment strategy or allocation? I hope that you aren’t “overreacting” or panicking like so many folks I hear about. The S&P 500 is trading at a P/E ratio of 17.34 – which is still a little high vs. its historical average. Bonds aren’t selling well, due to the Fed’s interest rate drop. What do you do?

I’d like to hear from other people on how they are reacting to this. One great thing about our community is how much we share, including the “nitty-gritty” details.

Good luck in the weeks ahead!

Mr. 39 Months.

Now is the time of testing…..

Well, it has been an interesting couple of weeks in the market! My beginning of month post noted that I was down about 5.4% for the year on March 1st. Little did I know it was going to get a lot worse!

For the second time in 15 months, folks in the FIRE community (and everyone else) are dealing with a double-digit sell-off of the market. As of close-of-business Monday (Mar 9) the old FIRE standby, VTSAX (Vanguard’s index for the entire market) was down -19.3% from its previous high. The Price-Earnings ratio for the S& 500 in mid-February was 24.24. By Monday, March 9, it was 20.67. Note the historical P/E ratio is around 15, so we still have a long-way to go until the stocks are priced where they are historically.

So what to do? This is why I call this “the time of testing.” So many people in the US and the FIRE community have gotten use to the markets consistently going up, with a few “hiccups,” but nothing substantial. Now two large events within 15 months may have you questioning if it is not time to play it safe, buy some gold, or shift resources to bonds/savings. It would be the “safe play.”

Do not fall for it. All the financial advisors I have talked with, in 2000, 2008 and Dec 2018 say the same relative thing. Have your planned allocation and investment plan, based on your risk tolerance – and stick to it. Continue to invest when the market jumps up, or when the market drops like a stone. In the end, you will be rewarded.

I’ve often heard the story that, while the stock market returns around 10% a year, on average, the typical investor only gets half that. This is because when the market drops; they jump out – solidifying their losses. They then wait to get back in, and miss many positive gains before they finally jump back in. It is for that reason that most successful investors take the “buy and hold” strategy of investing. Warren Buffet is known for saying that the optimum holding period for him is “forever.”

So we are all being tested right now, especially those who are close to retirement, or who have just retired (sequence of return risk?). Will you pass the test?

Wealthy Accountant’s comments on the current situation

Mr. 39 Months

A Life of Continual Learning

One of the financial podcasts I listen to, Stacking Benjamins, had an interesting topic on their Friday show. A financial article/letter was written in which the person took the task the concept of getting to FIRE by cutting expenses alone. Their article went on to discuss the income of the bottom two quintiles of income in the US ($11K and $31K average income) – how can someone cut expenses and save 30%+ if their income is so low, they are barely getting by (or is many cases, not getting by at all). You just can’t cut enough to get to FIRE!

The show’s guests and host generally agreed, and emphasized that they had been pushing this idea before. Only someone making significant amounts of salary can afford to spend $5 on a latte or purchase avocado toast. Their belief was that one could only cut expenses so much, and the key to further improving your financial life is to increase your earnings. As you increase your earnings, you try very hard not to correspondingly increase your expenses. Keep your expenses in line with what you spent before, and save the increases.

Some methods for this include:

  • Put 1% of your income into your 401K when you first get hired, and then every pay raise, put at least an additional 1% of your pay into your 401K. By the time you are 30, you’ll be putting 10%+ away, and will hardly miss it.
  • Setting aside automatic withdrawals to your emergency fund, and once that is fully funded, just shift that money to automatically go into an investment fund (or Roth IRA, etc.)
  • If you get any sort of bonus, put at least half of it away into investments/savings

Yet, how do you go about increasing your income up from the annual pay raises (typically around 3%)? The key is that you have to be able to provide more value than your current work – either to your existing employer, or to a new employer. The other way is to expand your value, on your own (entrepreneur work with a side-hustle). The idea is that you should look to continually improve yourself so that you can make additional money. To improve yourself, you must  dedicate yourself to continually learning new skills and improved knowledge.

New skills/knowledge expands your ability and usefulness. You can now do things beyond your current job function, you can teach others these new skills, and you have increased the flexibility of your boss (or your own situation). This makes it less likely you will be the one chosen to be let go in case of a downturn (you can do multiple jobs) and enhances the ways you can make money in your entrepreneurial endeavors.

So dedicate yourself to constantly learning new things. With the internet, YouTube, articles, books, etc. there is a wide range of ways to learn and apply new skills. I personally am working on a side hustle (TKD Woodworking) not only to make additional money, but to learn new skills (not just woodworking, but business, marketing, and website design skills). You should always be pushing your self to grow – otherwise you may find yourself spending too much time sitting around in front of the TV or online gaming. You have so much potential, that it’s a shame to waste it.

So what are you learning about lately?

Mr. 39 Months

Casting “Shade” on the FIRE Movement

                    

Is it just me, or does it seem like the FIRE movement has been “taking fire” from snipers a lot lately? In listening to the Stacking Benjamin’s podcast this morning on the way to work, they talked about a tweet-storm that was created when Tracey Alloway tweetedOne thing I’ve often wondered- does the financial independence/retire early movement (#FIREmovement) survive the eventual end of the current bull market? The idea of pouring all your money into $VTSAX and living off it for the rest of your life feels like such a bull market thing

Jason Zweig of the Wall Street Journal chiming in with immediately followed this “No, because the fintech companies paying thousands of dollars a month in poorly disclosed affiliate marketing fees to all those “independent” FIRE bloggers will run out of VC cash in a bear market.”

Ouch! The comments and tweets from there came fast and furious, with folks defending and attacking the FIRE movement. Apparently, the tweets succeeded in agitating many folks (maybe the tweet author’s intent) and got the conversation moving again.

It just seems to me that the FIRE movement has been taking many hits recently, partially due, IMO, to the release of the movie “Playing with FIRE.” The ideas of financial independence are starting to pop up, and the result is that it is being both castigated and explored in some depth.

The general consensus on the Stacking Benjamin’s show was that the tweets didn’t really represent the FIRE movement accurately, but also noted that many folks in the movement hadn’t really dealt with a serious market correction (2008-2009) where 50% of their investments drop. The panel noted that this will affect some FIRE people (the ones who didn’t really embraced the concepts), but the ones who are actually following the ideas will probably continue to push on and readjust their end dates while continuing to save towards their goal.

I think that many of the anti-FIRE folks use a “straw-man” argument where they place the FIRE people as checking out of society, sitting on a beach, and sipping mixed drinks. They are going to just sit there for 50-60 years and not do anything else. I do not know about you, but this does not seem to match what I have seen from people in the FIRE world. I see folks that are “type A” and always busy, so once they hit FI, they just keep going. They work in less lucrative but more enjoyable fields, either volunteer their time, or find other activities to keep them busy. My bet is after a couple of years, even those who are taking a break will re-enter the market. So I do not see as much of an issue as the “anti-FIRE” folks.

I guess we will see when we hit our next market downturn. I am betting on 2021 for a dip, but nothing like the 50% drop in 2008-2009. However, my plan would be to just “stick with the plan” in that case.

I hope your FIRE plans include the potential for a market correction, and that they will still work out for you.

Mr. 39 Months

Gratitude

           

Well, it is the Thanksgiving season in the US, and one of the key holidays of the year has come and gone. I have noticed that Thanksgiving, a holiday dedicated to gratitude for the year, seems to be a primarily American holiday, not in keeping with a lot of other countries. Yes, just about every culture has a “harvest festival” where you celebrate a good harvest and the opportunity of plenty. However, Thanksgiving in the US is more than that – its focus is around “counting your blessings,” being with family, and acknowledging how well we actually do have it in this life.

I know one of the key parts of my daily ritual is the Five Minute Journal, which asks you at the start of your day to write out three (3) things that you are grateful for, and at the end of the day, to list three (3) amazing things that happened to you that day. The idea is to make you realize how good you actually have it, both right as you start the day, and right before you head to bed. The result should be an increased sense of happiness and well-being, and I have to say it has helped me a lot (in addition to my readings in stoicism).

So what are you grateful for in your life?

For me, I am grateful for:

  • My loving wife of 33+ years, Mrs. 39 Months
  • My family (Mother, brothers, sisters, nieces & nephews)
  • My health (had a few health scares, and know folks who are in bad shape, so very grateful for this)
  • My chance to earn a good living, and to enjoy the fruits of my labor
  • My country (in my opinion, best country to live in the world)

Everyone can look at their lives and find things they are grateful for, and I urge all of you in this holiday season to look at your life and constantly give thanks for the blessings you have.

Thanksgiving 2017 Post

Mr. 39 Months

Financial Advisor meeting #4 – Sad Trombone….

I’ve included several posts about our recent meetings with a financial advisor

Financial Advisor Meeting #1

Financial Advisor Meeting #2

Financial Advisor Meeting #3

As I noted previously, Mrs. 39 Months doesn’t trust my numbers, and wants to get a second opinion. By involving a third party, I’ve been able to get Mrs. 39 Months to provide more information on how she sees our FI journey going, her spending expectations, etc. Its been well worth it in that respect. We finished our 4th meeting with the financial advisor late last week, and the results, to say the least, were very disappointing to me.

The “basic” plan we asked him to work up for us had me working for an additional 4 years (instead of “retiring” at 56, assume we continue to work till I’m 60 and Mrs. 39 Months was 62). He came back with the analysis, and it showed us running out of our liquid assets around age 95/97. We’d still have the fully paid off house to use as a reverse mortgage, but his analysis showed us just barely scraping by. Sad Trombone (wah, wha!)

Well, I didn’t really take this sitting down, as I knew the assumptions put into the analysis drove a lot of this. I’d tried to get advance copies of his analysis (at least the base one) in advance, but I wasn’t able to. So I started picking it apart there in the middle of the meeting. Some of his assumptions:

  • Spending of $90K in the first year – even though we gave him a budget of $72K (plus taxes), he had some assumptions in there that pushed the first year’s spending to $90K
  • Inflation of 3.25%. Seems a little high compared to the last ten years, but I won’t argue
  • Medical inflation of 6.5%. I think this actually is good, based on the past

Yet the big assumption that pushed this out was the return on investment of various investment classes. They got their data from Morningstar, which is reporting the following returns, by class, to be used for planning purposes. Note that these are total returns, including inflation:

  1. Large Cap Growth Equity (top 1,000 of Russel for growth): +5.02%
  2. Large Cap Value Equity (top 1,000 of Russel for value): +6.08%
  3. Mid Cap Equity (smallest 800 of Russel 1,000): +6.06%
  4. Small Cap Equity (Russel 2,000): 7.24%
  5. US REITs: 7,59%
  6. International Equity: 7.59%
  7. Emerging Markets Equity: 7.26%
  8. Long-Term Bonds: 3.4%
  9. Intermediate Term Bonds: 3.69%
  10. Short-Term Bonds: 3.48%
  11. High Yield Bonds: 6.07%
  12. International Bonds: 2.73%
  13. Cash: 2.68%

Holy cow! The S&P500 has returned roughly 10% for the last century, but I’m supposed to base my retirement on it only returning half that for the next 40 years? International Equity is going to be US equity, even though its been getting its but kicked for years now? Cash at 2.68%, even though its been trading at crap levels for over a decade? I just don’t see the sense in these numbers. Apparently the thought is that we’re about to head into a period of serious investment non-performance, like the decade long period after 1929, 1965 and 2000. I’m just not sure this is correct.

I’ve asked them to re-run the analysis based on the $72K a year in expenses. I think we are going to go round & around on the returns assumptions in the analysis. Not sure how I’ll handle this.

We are going to have some further discussions. I’ll let everyone know how that goes.

Year of Saying “Yes”

A very good article from Leftover Dollars on their “Year of Saying Yes.” Basically, they had a loved one who passed away after an illness of 2-1/2 years. That person had lead a rough life, without a lot of funds, and at the end, even when they had the opportunity, they chose not to spend money or time trying to experience or enjoy parts of their life that they had expressed an interest in. They maintained their “I don’t have enough money” attitude all the way up to the end.

Leftover Dollar noted that the experience of watching this “played a huge role in my FIRE journey.” Because of LD’s childhood, she was a natural saver and very frugal, so even as things went well and money became available, purchases and lifestyle inflation was put off, due to a fear of being broke “and scared of the chaos that ensues when the money runs out at the wrong time.”

I’m not sure how many folks in the FIRE community pursue it due to deep emotions on poverty and not having enough money (probably a significant portion). In this case, LD used her loved one’s final situation as motivation to start “saying yes” to all the things she wanted to do, but had been holding out on. She sought out a new job because she didn’t enjoy her current one. She traveled, visited old friend, and embraced life. “Basically, whenever an opportunity arose that I really felt would enrich my life or satiate some longstanding curiosity, is said yes. I acknowledged that I could afford it and made it fit into my budget.”

Its an excellent read, and I suggest you take a look if you have the time.

How many of us are holding back while pursuing FI, trying to put in that last dollar into our retirement funds? How many things have you passed up, even though you wanted to? While I definitely don’t embrace the “YOLO” lifestyle (you only live once), Mrs. 39 Months and I have done our share of traveling, spending and generally enjoying life. I came late to the FIRE movement – I only got to saving 40%+  of my income in the last couple of years. Before that, it was more like 20%.

Still, I find as we get closer, I’ve had the urge to say “yes” to a lot more. Once we hit our FI goal (8 more months?) I plan on saying “yes” a lot more often.

How about you?

Mr. 39 Months

Burnout – how to deal with it

Full Time Finance and Chief Mom Officer have interesting articles out on Burnout, the idea that at certain times of your life, the issues of work, family, finances, etc. combine to push you towards the edge (and sometimes over it) – and your body and mind naturally seek ways to relieve the pressure and keep you from exploding (or dying). It is a big problem is our world, though folks have been dealing with stress and burnout for millennia. It just seems to be something new due to the fast pace of life and due to the fact that it is happening to you!

Burnout

Burnout is one of the major reasons folks get on the FIRE wagon, as they seek to escape from the stress and move towards a better life. It is only through later reading that newcomers to our community learn that the secret to success in early retirement is to be retiring “to” something, not “from” something.

Chief Mom Officer laid out her four stages of burnout:

  1. Exhaustion
  2. Shame and Doubt
  3. Cynicism or Callousness
  4. Crisis

Anyone that has been following the blog knows that I was reaching the point of burnout at the end of last year. I was well past #1 and #2, and pushing #3. My writing took a darker turn, and the issues I had with my work and my boss definitely affected my home life, my writing, and my happiness. I was seriously considering resigning from a lucrative position, in which I enjoyed the work (just not the boss).

I was fortunate to have a supportive spouse (one of the reasons why you should always have friends and family to talk to, and who see you regularly – so they can tell you if you are acting differently). Luckily, I was able to renegotiate the position, and my company put someone above me between the problem boss and me. So far, it has worked well, and I have continued to do well in the role.

Full Time Finance notes some of the causes for burnout (primarily work related causes) are:

  • Overwork
  • Poor treatment and neglect
  • Insufficient challenge (an odd one, but one he explains well)

I am sure there are others involved that folks could name.

The key is to be on the lookout, identify when you are suffering burnout, determine the cause and try to create the change needed to deal with it. It is not easy, especially in our dog-eat-dog world, but your emotional and physical health may depend on it.

Good luck out there!

Mr. 39 Months