Investment Update Mar 2020

Well, March came in like a Lion! Like most folks, March was not kind to me, with a significant drop off in the market. My investments went up & down like a yoyo, but I’m hopeful that all the Chinese Corona Virus effects have been marked in, and we’ll be ready for a little less turbulence.

Its interesting how the market has recovered over the last week. I did a quick update on March 23rd, and was down $191K for the month, but by the end of March, I was down only $161K. Still sucks, but at least its starting to come back a bit. My bet is we end up about 10% down for the year.

As you know, the allocation for my retirement accounts (IRAs, 401K, etc) is pretty much index funds, spread out between the  S&P 500, small-cap, international, REITs and bonds. I did rebalance my portfolio at the beginning of the year, selling stocks and buying bonds to get back to my target allocation. That helped a lot!

Retirement Accounts: Remember, my allocation for these is:

  • 30% Bond Index Fund
  • 17.5% S&P500 Index Fund
  • 17.5% International Index Fund
  • 17.5% Small Cap Index Fund
  • 17.5% REIT Index Fund

My 401K doesn’t have REIT option, so its just 25% for each.

Everything was down, just at different points. S&P500 was down about 12%, Small cap -20%, International 14%, REITs -19% and Bonds about 1% (?). Overall, down about 13% in my  major investments.  

My dividend account new allocation (as of Jan 2020) was:

  • 50% Dividend Stocks
  • 50% REITs

Boy, did I pick a wrong time to get out of bonds! Everything took a pummeling, down about 17% total (stocks were hit a little worse than the REITs). The interesting question is whether the stock companies will curtail their dividend payouts in 2020? We will have to see.

My brokerage account has two value index funds, and their down about 23% for the months. Again, like everyone, we just got savaged – down about 22%

So For March, I’m down -13.68% overall, and down -18.62% for 2020. I still have a little over $1M in invested assets (just barely) but was below the millionaire mark for a lot of March. Time to build back up!

Hope everyone is healthy and your April is better!

Mr. 39 Months

What are you thinking of doing with your stimulus check?

          

The US Federal Government is looking to send out checks to US citizens as part of their stimulus package for the Chinese Corona Virus, and the effect it has had on the economy. The objective of these checks is to assist individuals who have been laid out, or who are having difficulties with their bills. The hope is that individuals will spend this money and keep the economy going, rather than having it “seize up” with folks saving and holding off spending.

If you think about it, a lot of folks (mostly non-FIRE folks) live paycheck-to-paycheck, and use debt to help fund their lifestyle. If you shut off their paycheck for even a week, they’re hurting – and they aren’t spending money on food, clothes, etc. If it kept up, then even folks with decent finances will find themselves hurting, because their businesses will have lost too much revenue.

Retire by 40 had a good article on this, in which he discusses the stimulus checks, unemployment insurance, and potential ways he is planning on spending it (some of it he actual intends to potentially use to help his tenants if they are in need).  

How much will you get?

  • $1,200 for single tax filers that make less than $75,00 adjusted gross income. It will be reduced if you make more, up to $99,000
  • $2,400 for married, filing jointless, up to $150,000 AGI. If you make over $198,000 AGI, no stimulus
  • $500 for each qualifying child.

Unfortunately, we did a $50K Roth conversion last year, so our AGI is around $188,000. This pushed us almost up to the max. Based on a calculator available from Kiplinger’s, it looks like we’ll only be getting $500 for the two of us. Still, its useful money to help stimulate the economy, and I’d prefer the money got spent on folks in worse financial straights than we are.

We’re already doing what we can while in self-quaranteen at home (everyone in New Jersey has been asked to stay home unless in essential industries). Both of us can do our jobs from home, so “no skin off either of our noses.” We are ordering takeout from our favorite restaurants, to try to help them stay in business. We continue to grocery shop, and we are helping out where we can (just gave $1,000 to our local Southern New Jersey food bank). Trying to help where we can, while staying out of trouble and not contributing to the sickness/panic.

Hopefully everyone is healthy and contributing where they can!

Mr. 39 Month

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.

Timing the Market – is now the time to go “All In?”

Like most experienced FIRE investors, I don’t see the recent market “correction” as a disaster – I see it as a buying opportunity! The stock market is the only place where people go into despair when things go on sale. Very odd.

I wrote about the potential for a market correction back at the beginning of the year. At that time, the market timing signals laid out by Ben Stein were heavily weighted towards “do not buy additional stocks.” Note that this didn’t say to sell stocks, only that purchasing additional ones at the inflated prices of Jan 2020 was unwise. In this case, it appears the market timing had some validity.

So now that the market has fallen 30%+, I’m interested in potentially changing my current investment allocation, and purchasing more stock now that it has fallen, and reduce my new investments in bonds. Again, the idea is not to sell your current investments, but to guide you on what to purchase going forward. So what do the tea leaves of market timing say?

If you remember there were four categories of the timing:

  1. Price (Current price of S&P500 vs 15 year trend): For March 17th the S&P500 was at 2,529 vs. a 15-year average of 2,030. The signal is that stocks are still too high, so NO  to new stock investments
  2. P/E Ratio (Current S&P 500 P/E ratio vs 15-year trend): For March 17th, the assumed P&E was 19.03 vs. a 15-year average of 23.4. Since the current P/E is lower, this signal says Yes to new stock purchases
  3. Dividend yield of S&P500 vs 15-year average: For Feb 2019, the dividend yield was 1.97% vs. a 15-year average of 2.05%, so this signal says No to new stock investments
  4. Earnings of S&P500 vs. AAA corporate bond (stock earnings “yield” vs. yield of AAA bonds): For March 17th, the P/E ratio is 19.03, or the equivalent of a 5.25% yield (1/19.03) vs. a current AAA bond yield of 2.94% – thus the stocks are providing a better earnings yield than AAA corporate bonds. This signal says Yes to new stock purchases.

So we are 50/50 on the potential for new stock purchases. It appears the signal is saying that stocks still may be overpriced, even after a 30%+ sell off.

So what to do? I was originally thinking of changing my new investment allocations and going for a 100% stock purchases for new 401K and brokerage account purchases. Now that I’ve run the numbers, I think I’ll stick with my current allocation, and just go with that.

Also, if you remember, I changed my income account from a 25% stock, 25% REIT and 50% bond allocation to a 50% stock/50% REIT allocation – just in time to get hit with this massive sell off. This decision was a completely emotional decision, not based on a lot of analysis. So I’m not very confident in my ability to make decisions without firm analysis and numbers – my emotions seem to be 100% off.

So I’ll keep my current investment allocations (30% bonds, 17.5% REITs, 52.5% stocks in S&P500, small cap and foreign). I believe the market will recover one we get this Corona/Wuhan Flu out of our system.

Retirement Manifesto: Benefits of a Bear Market

Hopefully you are all weathering the storm alright!

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

I don’t need to tell you that taxes suck

Finally was able to get everything together for the taxes in 2019. We use a CPA because of some complications, though its fast closing in on the time when I plan on taking back over doing our own taxes (I did them up till about 2011).

Well, we got the info back, I reviewed them, and the end result was….. we owed about $2,400 to the Fed (and $500 to our state). Plus penalties. Ouch.

I thought we’d prepaid enough to make sure this wasn’t an issue, but apparently not. We’ll have to take some money out of savings to pay for it. This way, we won’t be selling stocks during the current down market. That is why you have spare funds in place.

I can kick myself a bit, but in the end, the next step should be to evaluate your current tax withholdings for 2020 and make sure they are taking enough out. Low and behold, after running the numbers – we were about $2,800 low in withholding, based on what I see coming for the year.

Back to the federal/state W-4 form, where we determine withholdings, make a few adjustments which will reduce our available income a little over $200/month, and we should be set for taxes at the end of 2020. Better to take action at the beginning of the year than to try and find money at the end of the year.

I tend to try and get our taxes to $0, or have us owe a little money. I know some people like to get a nice refund, but I’d rather not give the government and interest free loan. I can use the money better.

Hopefully, your tax situation is better than mine!

Mr. 39 Months

What a difference a week makes….

Well, I am sure many folks are looking at their investments and going “holy *@#$%.” The S&P500 is down over 11.5% from just a week ago, and almost all the other investment folks have (Small Cap, International, etc.) have been similarly pummeled. Instead of late 2018’s gradual drop down, this was a quick slide into the hole. Ouch.

I actually did a quick update of my investments on Feb 21, just to look at them. I had made some significant moves in January, especially to my income account, and I wanted to make sure I had all my tracking in line for my monthly update. As of Feb 21, I was up 3.14% for the year, having recovered from January’s slight pullback. Things were looking good!

Now, for the year, I am down 5.55%, and have lost a total of $68,977. However, it is all “paper losses” that are offset by my huge gains for 2019. If you remember, I had noted previously that, in order for my annual net worth increase to stay on target compared to the last 18 years, I would have to experience a net loss of 9.6% for 2020. Heck, we are already there – and I have nowhere to go but up!

Seriously, this loss is, in my opinion, temporary. The market was overpriced (S&P  500’s P/E ratio was 25.04 as of Feb 1st – way above its 15-16 average. Even now, as of Feb 28, it is estimated to be 22.23, so it is still historically overpriced. The market sell off is, I think, a reaction to the supply chain interruption caused by eh Corona virus. Without raw materials and finished goods from the east, many companies will not hit their earnings for 1st and 2nd quarters, resulting in this drop in price as Wall Street recalculates potential earnings. By the end of the year, I expect we will be back to where we were back on February 21.

Therefore, it is steady as she goes right now. If I had some money on the sidelines, I would be investing in the market right now – but I dollar cost average and invest every month. I did rebalance at the end of 2019, selling stocks and purchasing bonds. My bond funds are up roughly 2% for February, so that helped even out the blow. The S&P may be down 11.5%, but I am not down as much, due to diversification and rebalancing.

I hope that you will stay the course and recover as well!

Mr. 39 Months

Two-Month Checkup on Spending

For some folks in the FIRE community, the opportunity to go through their spending with a fine-tooth comb, to analyze and agonize over every dollar spent, is an act of joy. There is a constant review of spending, and a categorizing of it into appropriate buckets. There is a celebration of dollars saved, and a flagellation when we fail to meet our budget objectives on a daily, weekly or monthly basis. Again, for some folks, this is one of the things they really enjoy, both to do and to write about.

For many others, the author included, we are less exact. For a lot of folks, there is the “set it and forget it” concept, where we determine our initial budget, identify the amounts we can save every month, and then set it up to automatically put this money away. This generally follows the “pay yourself first” philosophy, where you get the money out of your site (into investments) and then live on the remaining money. That is the philosophy that I have lived with for almost 20 years, and while I may not be as quick to hit FI as many others, it has allowed me to reach the point where I am close – while not spending excessive time reviewing my spending.

Still it does make sense, near the start of a new year, to review your base budget and see how you are doing. Better to identify this in the first couple of months, rather than be surprised halfway through the year, when you have less time to react and rectify the situation. This sort of analysis also leads to some surprises. So how have I done for the first 2 months? Here is my earnings, deductions, and expenses for Jan-Feb 2020, as a percentage of total income.

Revenue
Area Category % of total
Earnings Regular Pay 98.6%
Earnings Cell Phone reimbursement from my company 0.7%
Earnings Expense Reimbursement 0.7%
Total Total
Deductions
Area Category % of total
Deductions 401K Roth 5.7%
Deductions Dental 0.6%
Deductions H.S.A. 5.2%
Deductions Long-Term Disability 0.4%
Deductions Medical 4.4%
Deductions Spousal Surcharge 0.9%
Deductions Vision 0.1%
Deductions Wellness Credit -0.7%
Total Total 16.5%
Taxes
Area Category
Taxes Federal Income Tax 11.6%
Taxes Medicare 1.2%
Taxes Social Security 5.3%
Taxes State Income Tax 4.0%
Taxes NJ Family Leave, Disability, Unemployment, etc. 0.8%
Total Total 22.9%
Expenses
Area Category
Area Category
Auto Auto Fuel 1.1%
Auto Auto Repair 0.3%
Auto Auto Registration 0.0%
Auto Auto Tolls 0.4%
Charity Charity 4.3%
Clothes Clothes 0.7%
Entertainment Books 0.0%
Entertainment LA Fitness 0.3%
Entertainment Postal/office supplies 0.0%
Entertainment Hobby 2.2%
Food Groceries 3.4%
Food Dining Out 1.3%
Food Food/Snacks 3.0%
Home Home Repair 2.7%
Insurance Life Insurance 0.4%
Insurance Home/Auto Insurance 1.0%
Investments Investments 25.8%
Investments Savings 0.9%
Medical Medical – H.S.A 0.1%
Other Other 0.2%
Other Haircuts 0.0%
Other Other 1.1%
Taxes Property Taxes 4.5%
Utilities PSE&G 4.2%
Utilities Verizon 2.6%
Utilities Water Bill 0.4%
Total Total 60.5%

Some things, which stuck out after doing this analysis:

  • Taxes still take a big bite (27.4% of gross pay). Since we aren’t paying a mortgage anymore, this is our biggest hitter
  • Investments coming in 32.1% of gross pay (51.4% of net pay after taxes & work deductions). Doing a fairly good job of putting stuff away
  • Medical is coming in at 10.5% of gross – though the H.S.A. is about half of this
  • Food and Utilities each a little over 7%
  • Charity is about 4.3% of gross (we put away a select amount every month for this). Bump this up every year, but still have a ways to go to get to the biblical 10%

The only real surprise for our budget was a $724 utility bill in February. We do an even payment plan, and they relook at it every 6 months, and then charge you or credit you, based on actual usage. We have gotten money back from this as often as we have paid it.

Overall, we appear to be staying close to our budget, and nothing is really too far malfunctioning. Looks like steady as she goes into 2020!

How are you doing with your budget and spending so far in 2020?

Mr. 39 Months