Sunday, December 31, 2017

2017 Year in Review

The older I get, the quicker time seems to pass. Here we are at the end of another year. A lot has happened, but it still seems like yesterday when I shared some of my goals for 2017.

Tonight we’ll be going to bed before midnight (we did the countdown with the kids on London time). Before the year is officially over here in the US, here is a quick re-cap of how I did with 2017 goals.

2017 Intellectual Goal


Similar to previous years, I had set the goal of reading 52 books this year. I blew this goal away and completed 62 books in 2017. My reading is perhaps the largest impediment to me blogging more, so I may consider scaling back my reading at some point.

I did read mainly from my “to-read” list, but added a lot to the list so it didn’t really get shorter. My local library also started offering Hoopla, which I loved since it has a great selection of books already on my list. Sadly, it became too popular (expensive) so it has since been discontinued at our library.

In no particular order, some of the best books I read this year include:

1. The Undoing Project: A Friendship That Changed Our Minds - This was a great story about the pioneers of behavioral economics written by one of my favorite authors, Michael Lewis.

2.  1493: Uncovering the New World Columbus Created - Charles Mann: From the same author as 1491, this book detailed many of the secondary impacts of Columbus' voyage on the globe and not just the American continent.

3. When to Rob a Bank - Steven Levitt and Stephen Dubner: From the creators of Freakonomics this is another compilation of fun experiments and research of everyday topics through the lens of economists.

4. Born a Crime: Stories from a South African Childhood - Trevor Noah: I've been very impressed with Trevor Noah as the new host of the Daily show and reading his history of his childhood was hilarious and sad.

5. Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase - Duff McDonald: I've always been impressed with Jamie Dimon but reading this helped me see even more things that he's done behind the scenes that prove he's the right guy for the job.

6.  Chaos Monkeys: Obscene Fortune and Random Failure in Silicon Valley - Antonio Garcia Martinez: I like reading inside stories of companies from the viewpoint of a non-executive (this book was mainly about Facebook). Silicon Valley is a different world in many regards, and I'm glad I don't work there despite the opportunity for obscene fortune.

7. Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires trying to Reinvent Money - Nathaniel Popper: I read this over the summer and afterward made a small 'investment' in crypto currencies (I since took out my initial investment but still have a position that is 3x my initial investment). This book is a good background on the history and use of bitcoin.

8. Work Rules!: Insights from Inside Google that will Transform the way you Live and Lead - Laszlo Bock: This one came recommended by several people at work and was written by a senior HR leader at Google. Although I don't have the budget to do nearly as much for my employees as what Google offers, I have taken some of the learnings to heart and made some changes.  There are a lot of things you can do to show employees you value them short of gourmet catering 3x/day.

9. Humans Need Not Apply: A Guide to Wealth and Work in the Age of Artificial Intelligence - Jerry Kaplan: Artificial Intelligence has and will continue to change the modern workplace. This book raises some questions that need to be answered as this field continues to advance.

10. Pound Foolish: Exposing the Dark Side of the Personal Finance Industry - Helaine Olen: It shouldn't surprise you that there are many so-called financial experts in the media who really don't know what they are talking about. This book attempts to dethrone some of the more famous finance personalities. In some cases I felt she was spot on and in others she just had an ax to grind, but the overall message of being skeptical is wise.

2017 Career Goals


I was intentionally vague in describing my career goals, but I will say that I have been pleased with my career growth in 2017. It wasn't my best year, but I learned a lot and helped my team grow. 2018 is shaping up to be a very challenging year but I have laid the foundation for 2018 success in 2017. I wasn't planning on getting a new job or promotion in 2017 but did have an interview for a promotion recently. For a variety of reasons I doubt I'll get the job, but the fact that I was considered even for an interview bodes well for future opportunities.

2017 Financial Goals


I set what felt like a lofty goal of reaching $700k net worth by the end of 2017. The Stock Market in 2017 performed much better than I had assumed. That and some other wins helped us reach this goal back in September. Our next big goal and milestone will be to reach $1M net worth and we are going to stretch to try and get there by 2020.

Other accomplishments for the year included welcoming our fourth child into the family, adding a stamp from Chile to my and my sons passports, and lots of travel within the US. I’m now up to 43 states visited and just have some hard-to-reach states left. We also found time to do home projects like adding a fence, new patio, and exterior paint.

We are still figuring out 2018 goals but they will likely be a continuation towards our longer term goals such as paying off the house, visiting new countries, and spending time with family.

Wednesday, December 13, 2017

Are Index Funds Safe?

In the years following 2008, any time I recommended a mutual fund, portfolio, managed account, or any other investment, clients would almost always ask me: "How did this do in '08?"

What people were really asking was "is this going to protect me from the downside next time the market corrects"?

This often lead to discussions about bond funds, which at the time showed steady 10-year track records like the blue line in this graph.


"See, look how smooth the growth has been compared to stocks (yellow line is the S&P500)". A few years ago, the 10-year return for bonds even looked better than stocks. Lots of money poured into bond funds from cash that investors had pulled out of stocks but were too afraid to get full back into stocks.

Shift to Index Funds


As stocks have continued to set new records, including now the first year ever of 12 winning months, a tsunami of cash has been piling into index funds driven in part by charts like this one:



"Stocks are the best long term investment, but why waste money on actively managed funds when the mostly underperform the index?" Sound familiar?

A lot of this capital has come actively managed stock funds but also from cash and bond funds. If money is going into Index Funds from cash and bonds, many of these investors previously cashed out of stocks.

During the 2008 financial crisis, I met too many people who thought that actively managed funds "should have seen it coming" or "should have gone to cash". It came as a surprise to many investors that their mutual funds prospectus prohibits market timing. Now those same investors who poured cash into bonds when they were still afraid of stocks have been rushing to index stock funds as stock performance continues to enhance feelings of FOMO.

Personally, I doubt their original unrealistic expectations have changed. The market has gone up for so long there hasn't been the need to blame anyone for losses, and there are many who have pitched index funds as "safe". Sure, they're safe in that they are diversified, but when the average investor asks if something is "safe", they aren't thinking about the difference between systematic and unsystematic risk. They are asking whether they'll ever lose money. They'll tell you they know the risks of investing in the market, but when we next see a >10% drawdown that will all be forgotten.

Are Index Funds Safe?


Index funds are no "safer" than the actively managed mutual funds they've been replacing in investor portfolios. The only things they save you from are higher fees and the risk of underperforming the market. I'm all about being a DIY investor, but it is important to have realistic expectations. When the market tanks, you'll be just as exposed as anyone else. I'm ok with that risk, but the average investor attempting to time the market may be disappointed.

I'm very curious to see what happens to fund flows after the next market selloff. Will those new to indexing strategies truly stick with it? As much as has been said about the change in investor preference and behavior, I'm still skeptical.

There is strength in numbers, and following the herd mentality sometimes just feels right. Sitting in cash when everyone else is losing feels great at that moment. That still doesn't mean it's the right move long term.

Tuesday, December 5, 2017

November 2017 Net Worth Update - Up again

NOVEMBER SUMMARY


November is behind us and we continue to make progress towards our financial goals. For the first month in what felt like a while, we haven't had any major travel or home improvement projects, which is nice.

This month I also reached my goal of reading (or listening to) 52 books for the year. I have met this goal every year since I starting tracking it in 2011 and only started getting into audiobooks in the past couple of years (I'm about 50/50 reading vs listening). Not everything I read is worth recommending, but the best books I read this month were:

The Simple Path to Wealth, by JL Collins. The title sums it up best - it really is a simple read about a topic that many try to overcomplicate.
Religious Literacy: What Every American Needs to Know about Religion, and Doesn't, by Stephen Prothero. This isn't a religious book but was helpful in learning about religions role in our culture.

And of course, the market continues to surprise and delight contributing to our 13th consecutive month of net worth increases. We ended the month with a net worth of $731,362, up nearly $10k.


CASH


Our cash balance stayed pretty flat this month and will probably do the same thing for December. We mostly completed our Christmas shopping in November and also booked a cruise for this coming Spring. So far, we've only booked flights and made the initial payment towards the cruise and we'll cash flow the remaining cruise costs.

In our house, Christmas tends to be a pretty low key holiday. We make it special but don't go all out, especially for the kids. This year, we will spend less than $1,500 on gifts, most of that on gifts for each other.

For the kids, we'll spend under $100 each and you know what's crazy? They'll be thrilled. By not constantly giving things to the kids, even small or simple gifts become a big deal. Also, I hate clutter, and if you're being honest most Christmas gifts are clutter. We really try to make sure we aren't contributing to a cluttered house whenever we buy gifts. The one exception to this rule lately has become Legos. Since introducing them to our house earlier this year we've been able to keep the mess to a minimum, but I tolerate it since it is contained and they really spark the kids' creativity.

As inexpensive as electronics have become, we are pretty firm in our stance of kids not having their own electronic devices. This will only get harder as they get older since many of their peers at school or church are already getting their own tablets or phones.

INVESTMENTS


Similar to previous months, the biggest factor driving our net wort change was our investments. The S&P 500 was up 2.81% in November, and our investments were up 3.1%. This is basically just the market gains plus our normal monthly contributions.

For our primary portfolio, our asset allocation is heavily weighted to US stocks, as shown below:

I've been allocating out of bonds for some time now but still have some lagging positions. Rather than have the bond income reinvest into bonds, I reinvest it into stock mutual funds.

CARS


As expected, the value of our vehicles declined this month. Back when I had the Corolla, the value had pretty much leveled out and KBB had it hardly depreciating at all. Now with a newer car, I expect to see the value steadily decline for the next several years.

Something to know about my wife's car is that she doesn't drive it much. LIke hardly at all. We live close to our church and kids schools, our kid takes the bus from the bus stop two doors down, and I do almost all of the grocery shopping on the way home from work. With her natural hermit tendencies, this means that there are times when she goes almost a week without driving anywhere.

For years, whenever I review coverage with our auto insurance provider, I always ask how low can we say her car is driven each year. Consistently, I've been told 8,000 miles is the lowest they can quote (even though she probably doesn't drive 1/2 that much). This came up again when I called to add the new car to our insurance, but this time I was told that they actually could quote a lower rate but that I would have to give them an odometer reading and call back with another reading in 30 days.

I gave them the odometer reading and made a reminder to call them back in 30 days. The grand total of driving for those 30 days? Under 300 miles. I told you we didn't drive that car much. They rounded it up to 4,000 miles per year, but that one change lowered our insurance bill by almost $200/year.

HOUSE


Zillow says our house value came down slightly, but we paid extra on our mortgage so the decreased principal helps offset the loss. Nothing too groundbreaking here, but it is exciting to see that we'll now be consistently paying down over $1,500/mo. Our current plan is to increase this amount further starting in January.

Our home improvement projects in November were limited to general maintenance and repairing a few spots of rotted trim on the exterior.

This is the time of year where we look at our last 12 months of spending and decide which areas we want to increase or decrease our spending in the next year. In 2017, we spent roughly $9k on home repairs/improvements, which was roughly what we've spent in 2016, and slightly less than 2013-2015. In 2018, we're thinking we may lower that expense further to make additional progress on the mortgage, but we do have plans to renovate our master bath and kitchen at some point, each of which would be at least a $10k project.

529 College Savings Accounts


I am now including these funds in our net worth, but we haven't really changed much with this account. The amount we've saved here has been growing steadily, but will not be enough by itself at this rate to pay for 4 years of college for each of our children. Our goal is not to be able to fully fund their educations, but this will make a good contribution. Once our home is paid off (within 5 years from now), we will revisit how much we are saving here vs increasing our taxable investing.

Net Worth Summary


A year ago when we set the goal to reach $700k net worth by year end,  it felt like a stretch goal. Market returns have certainly helped by significantly exceeding my assumptions, but I would rather be conservative in my projections. As gains continue to exceed our expectations, we can reach our goals with even lower future growth assumptions.