Have you re-balanced yet?

You can’t go a day without seeing articles on the pending crash/adjustment/correction to the stock market. Folks are talking about when this giant run-up of the last year will correct back. They point to high P/E ratios, way “out of whack” with traditional measurements. At the same time, others say that reduced regulations & taxes are going to push the market even further. For most of us, it is much too difficult to figure out, so what are we to do?

African elephant female and her baby elephant balancing on a blue balls.

The obvious answer – re-balance! Each of us who invests should have an asset allocation that determines how much we want in stocks, bonds, real estate, precious metals, etc. This should be based on our “risk tolerance,” where we identify how much risk (and stock market craziness) we want to participate in. For me, my risk tolerance is “moderately high” (it used to be “high”) so I’m into a 70/30 split with stocks/bonds. Mrs. 39 Months likes a lot of cash, so we end up really with a 60/40 split. Note that about ¼ of that “60” is in REITs, which is my way of investing in real estate.

The problem comes when one asset class or another really “takes off” and leaves the asset allocation off track. It is here where smart investors use re-balancing to reduce the risk and prepare for the correction that is due to occur. Re-balancing involves selling a portion of your “winners” (in this case the stocks that have just run up) and buying some more of your “losers” (bonds, REITs) in order to re-balance your portfolio. Re-balancing forces you to sell high and buy low – the quintessential investor plan.

For me, I tend to re-balance twice a year (January & July). Some folks do it more often, but I think you can drive yourself crazy if you do it more often. I also don’t re-balance if something is over a 2% variance (i.e. if I am supposed to have 30% and I only have 28.5%, I let it ride).

Some investment companies make it easy to re-balance. The Vanguard website has a specific section for selling out of one fund and purchasing shares with that amount from another. TRowePrice’s is a little more cumbersome, but not bad. Other brokerage houses, like USAA, make you have to do it all yourself, with your own spreadsheets and calculations. Still, its math, which I enjoy doing.

As an example, I looked at my Vanguard IRA account at the end of the year, and found this:

Name Symbol Current Price Current Shares  Current Value % of Portfolio Amount “off”
Vanguard 500 Index Fund VFIAX  $             246.82 237.6  $     58,655.54 19.6% $6,374.7
Vanguard REIT Index Fund VGSLX  $             117.55 392.6  $     46,146.13 15.4% ($6,134.7)
Vanguard Small-Cap Index Fund VSMAX  $                70.78 805.5  $     57,011.95 19.1% $4,731.1
Vanguard Bond Index Fund VBTLX  $                10.75 7397.1  $     79,518.65 26.6% ($10,105.7)
Vanguard Int’l Index Fund VGTSX  $                30.52 1881.2  $     57,415.51 19.2% $5,134.6

Looking at this, I chose to sell of $6,134.70 of S&P500, and put it into REITs (to get back to around 17.5% for each) and sell off the Small Cap ($4,731) and International ($5,134) and buy into the Bond Fund (+$9,865). This gets me close to my original allocation.

Now, if the S&P500 corrects 10%, I still have taken a significant chunk of money off the top and put it into a different investment. I also bond the bonds and REITs when they were down, allowing me to get bargain.

Have you re-balanced yet? How often do you do it?

 

Mr. 39 Months

Clearing your “Shop” for the next project…

For many folks who do crafts work, there comes a time when you have completed a long, drawn out project, and you take the opportunity to do a reset of your space. It is an opportunity to clean, repair & sharpen your tools, clean up the area, take stock of your materials and area, and determine next steps to improve them before you start your next project.

For me, I am an amateur woodworker. With Christmas done, I can get back to the arts & crafts sideboard that I have been working on (still need to complete the drawers and the doors). You can kind of see it in the back there. Before that, however, I clean the shop, cull my woodpile, sharpen up the chisels and planes, and get everything ready for the next batch of work.

I often think this is similar to the end of year financial work that people have to complete. Some of the key items that folks work on right before/right after the New Year.

  • Tax planning for year-end, and for the new year (especially in tax-advantaged accounts)
  • Capital gains/loss harvesting (done before end of year)
  • Rebalancing of the portfolio (I always do this twice a year, Jan & July)
  • Review investment performance and determine what changes need to be made
  • Review investment performance and make adjustments to next year’s projections based on updated knowledge

With this done, folks can start work in the new year, with their plans in place – able to “hit the ground running.”

For me, I have some minor tweaks to my investment allocation. For tax planning, I prepaid my property taxes, so that I could deduct them for 2017 taxes – but now it appears that this won’t be allowed (still up in the air). Ah well, at least I tried to do something, instead of just sitting there. Finally, I want to look back over the stocks in my value investing “fun” account to see what their performance is, and what the price should be.

Like a lot of FIRE folks, I will have an update in the next week or so on 2017 and goals for 2017, and I look forward to reading other FIRE bloggers results and objectives for the New Year.

Happy new year to everyone in the community!

 

Mr.39 Months

 

Goal setting for 2018: Traditional vs Zero based

It’s the end of the year, and that means folks in the FIRE community taking stock of where they are at year-end versus their goals/objectives, and then setting new goals for 2018. For many of us (the really crazy ones) this is one of the best times of the year, where we get to pat ourselves on the back for goals met, rationalize why other goals weren’t, and dream about the future – the sweet, sweet financially independent future.

Steven Covey, in his landmark book The Seven Habits of Highly Successful People, wrote about the need for people to create a personal mission statement and to define their roles in life prior to trying to set substantial goals for yourself. An example of life roles might be:

  • Spouse
  • Parent
  • Christian
  • Neighbor
  • Change Agent
  • Scholar

He then wrote that, once you identify your life roles, you can think about the long-term goals that you want to accomplish in each of these roles. He believes that, if you take the time to determine your personal mission statement and roles, then the goals you set are often dramatically different from the goals most normal people set.

He goes further to say that an effective goal focuses primarily on results rather than activity (example: increase weight lifted by 10% versus “go to the gym every other day). These sort of  goals give you better information on your efforts, how to get there, and when you have arrived.

One of the other areas in goal setting that you might benefit from is a move from traditional historic/incremental budgeting to more of a “zero-based budgeting” model. The traditional method is the most common method of budgeting and is used in most financial institutions. It is based on historical information and involves an incremental approach. In simple terms, the managers take last year’s figures and adjust for growth and/or inflation, plus or minus any significant changes in expected results. A person could use this both financially (to track his budget increase) or personally (to show weight loss). Just take the previous years figures, make a few alterations, and “wham” – you have a goal!

Another way of budgeting is zero-based budgeting, which originated in the 1970s. Many businesses will budget and plan out things to maintain financials. In the past, businesses would only look at specific things and would assume that everything is already in place and does not need to be double-checked. However, in zero-based budgeting, everything that is to be budgeted needs to be approved. Since zero-based budgeting requires an approval for budgeting, this means that budgets are started from a zero-base, with a fresh decision on everything being made every year.

Dave Ramsey has a good blog post on Zero based budgeting

I like to think of zero-based budgeting as starting from scratch. It often leads you to different ideas and perspectives, and can be used not just for budgets, but for all aspects of goal setting. You sit back and think about areas that you haven’t addressed before, but that you might want to pursue (new hobbies & crafts, places to travel, etc.) and the creative juices start flowing. It can be very similar to that moment in time when you first got the FIRE bug, and everything seemed new and exciting.

Other types of budgeting:

  • Priority based: Priority-based budgeting is designed to produce a competitively ranked listing of high to low priority discrete bids for resources which are called “decision packages”.
  • Activity based: Activity-based budgeting differs from traditional budgeting in that it concentrates on the factors that drive the costs, not just on historical expenditure.

So as you start setting your goals for 2018, don’t just limit yourself to basing your goals on 2017 – take the opportunity to brainstorm new ideas, and try new things!

 

What are you planning to do for 2018?

Mr. 39 Months

 

Hat tip to Global FS Consulting for definitions on various budgeting methods.

Excellent article on preparing for the next downturn at Get Rich Slowly

In an article at Get Rich Slowly, JD Roth goes through some analysis on the potential for a pending recession (we’re overdue) and what we should be doing to prepare for it.

Some of his simple steps include:

  1. Bolstering your emergency fund
  2. Balancing your budget (don’t succumb to lifestyle inflation when times are good)
  3. Double-down at work, rather than seeking a new job (since recent hires might be the first ones let go at your new company)
  4. Make sure your asset allocation matches your risk tolerance (I rebalance every 6 months, and I’m due to relook at it Jan 1)

Overall, its an excellent read, with some good points.

Mr. 39 Months

Losing the battle with Mrs. 39 Months about Christmas Decorations

It’s the holiday season, and as everyone knows, the world is full of companies trying to commercialize everything and sell you bunch of stuff you don’t really need. I wrote about how we try to resist this, and how others can as well.

Unfortunately, I can’t say we are doing everything right in the 39 Month household. Mrs. 39 Months plays at being cynical, but she really does seem to love this season, and goes out of her way to purchase additional decorations for the inside of the house (the outside is pretty much in place now, with few additions over the last 5 years). Call it the Christmas spirit, call it “nesting” call it whatever – she enjoys adding to our interior decoration.

While I could complain about it, or question why she is spending the money on the items, after 31 years of marriage, I have learned a few things – and after multiple years pursuing FIRE, I have learned others. The key is living deliberately, and deciding what you want to spend your money on. If something truly does give you joy, and you are spending cash on it (instead of going into debt) then you should feel free to spend the money on it!

Why go through 10 years of misery just to say you are financially free, and can start living like you want. This sounds an awful lot like the old retirement plan (work till 65, then live it up). That isn’t the way the FIRE community is working their plan, as evidenced by all the folks whose blogs and podcasts I take in.

We are already fully funding our retirement accounts to the max, and putting away more funds. In fact, in 2018, we are going to go from 35% to 50%+ of our pre-tax money going towards achieving financial independence. Smiley faces all around.

So go “splurge” on something you would like, especially if it’s not going to come anywhere near breaking the bank. Enjoy life now, and enjoy it once you reach FIRE.

 

Happy Holidays to everyone.

 

Mr. 39 Months

Putting up with Put-downs: Dealing with Trolls, haters and other miscreants while FIRE blogging

While recently reading through some of the FIRE blogs I regularly go through, I came across and article by ThinkSaveRetire, in which he was discussing the Facebook blowback he was getting after an interview for CNBC on retiring early. Apparently there are a lot of people out there that don’t like it when someone gets of the treadmill – and demonstrates that they could do it to, if they chose to.

The Stoic philosophers (Seneca, Marcus Aurelius, etc.) actually had a few things to say about the “haters” in their day and how to deal with them.  I guess the Roman empire had their share of trolls.

Remember that the ancient Stoics were very concerned about maintaining a sense of tranquility in their lives, and the anger that insults could bring up was unwanted. They wrote extensively about dealing with slights and insults, in order to maintain their “frame.” Some of their ideas:

  1. Pause when insulted, and see if there if the insult is true. If it is, there is little reason to be upset. As Seneca said “Why is it an insult to be told what is self-evident.”
  2. Pause to consider how well-informed the insulter is. He may be saying something bad about us because he sincerely believes what he is saying. Rather than get angry with the person, talk calmly with them to set them straight.
  3. Consider the source of the insult. If it is someone who you respect, then the critical marks shouldn’t upset you – it should make you reevaluate you ideas. If it is someone you don’t respect, then you should feel glad at the insult because “if they think I am wrong, then I must be doing something right.”

In terms of response to insults, rather than insulting back, the Stoics ideas included:

  • Use of humor to deflect an insult, to show that we don’t take the insulter or the insults seriously
  • Don’t respond at all – again to show you we don’t have the time to waste on them

In the end, whenever you “put yourself out there” you are going to get a certain percentage of people who enjoy trying to “get a rise out of you.” Don’t waste your time with them – just keep on your journey to FIRE. After all, living well is the best revenge.

Mr. 39 Months

 

Note: A lot of these ideas I found in the book A Guide to the Good Life (Stoic Joy) by William Irvine.

Excellent post at Our Next Life about fears & excitement as they approach early retirement

Excellent post about the emotions running through a couple as they are just 4 weeks from early retirement.

She runs the spectrum on the uncertainty, sadness, and physical ailments that have popped up as they close in on their final date. An excellent read when people want to understand what it will be like as they approach the frontier.

 

Mr. 39 Months

So what are you thankful for?

It’s that wonderful time of year in the US, when we get in cars, drive for hours, sleep on inflatable beds or fold-out couches, and then stuff ourselves with turkey and stuffing, before falling asleep on the couch while watching football. In truth, it is supposed to be the time of year when you reflect back on a bountiful harvest and all the good things that happened to you and your loved ones throughout the year, and gives thanks for it. Often folks seem to have a difficult time throughout the year counting their benefits, and only at the end of the year do they spend any time reflecting back. This is a mistake.

This year, I have been filling out a 5-minute journal, which is a daily journal with specific things to fill out in the morning and in the evening. The idea being that this will help prepare you for the day (what are you grateful for, what thing would make the day successful, daily affirmation) and clear you mind at the end of the day (what went well, what would have made the day even better). It’s also full of motivational quotes and small tasks to do weekly.

The biggest benefit to it, in my mind, is its requirement to list out three things daily that you are grateful for. It can be silly things (grateful for a warm bed) or profound (grateful for the friends that I have around me), but it makes you remember to be grateful every day.

I’ve also started reading about Stoic philosophy. Yes, go ahead and get it out – I listen to Tim Ferris podcasts and sometimes take his advice on certain things. Sue me. One of the best books I’ve read is A Guide to the Good Life by William Irvine. He describes the ancient history of the Stoics, and then shows how to apply their teachings to modern life.

One of the key parts of Stoic philosophy is to imagine the bad things that can happen to you in life, and then think about how you can react and continue to live, even if these happen. The purpose is not just to steel yourself against the evils of the world, but to appreciate what you have. In discussions on death, they teach to think that this moment might be your last, or this might be the last time you see a friend. This is so you can truly value the time you have, the people you live with, the food you eat.

So don’t just value your friends, family and life once a year. Value them constantly and give thanks now.

 

Mr. 39 Months

Uh – Oh. My Spouse is thinking……

The community typically has a situation where one spouse is “on fire” with getting to financial independence, but the other isn’t as easily convinced that this is the way to go, or how this might benefit/affect them. They will listen patiently to their spouse go on and on about effective tax strategies, paying off debt and high savings methods, but it doesn’t really sink in.

Maybe they pick up on the travel hacking early, because they see the benefit from that – and get a little excited. Still, even if you are sharing the rapidly accumulating savings, your prospective FIRE date, and count it down on a board, they just don’t get excited. They look at you with an amused smirk, pat you on the head and send you away.

Then something happens (bad day at work, a need to travel that they can’t meet do to a work commitment, etc.) and then they start asking questions. Are we really that close to retirement? How do you withdraw the money when we aren’t even 65 years old? How do we handle health care?

It is at this point that you know that it is starting to sink in – they are actually starting to envision a life where they don’t have to work, where they are financially free. It can be liberating, and it can be scary. If someone is just coming to the concept, they will be full of questions, and want justification for the answers (just like all of us FIRE true believers were at the beginning).

Well, the other night Mrs. 39 Months suddenly starting quizzing me on how you do a “ramp down” of your funds after you retire. I wasn’t sure if it was because of a bad day at work or if my comments had gotten through, but she was interested. After about 5 minutes of discussion, she seemed satisfied, though no exactly sure of the method. Still, I take it as a positive sign that she is coming to the realization that we are almost there.

So be patient with your significant other as you travel your road. It may take them a little longer, but they’ll catch up soon enough.

 

What have you and your partner discussed in your run up to financial independence?

Mr. 39 Months