- The “Keep Your Rent” Movement: Are The Rent Strikers Freeloaders? - March 30, 2020
- In a Crisis, Cash Flow Is King - March 27, 2020
- Return of the Bear Market: Are You Ready? - March 16, 2020
Continuing on from last week’s 2019 spending roundup, I thought I’d take today to give an update on the earnings side of our 2019.
How did our Blog/Book Do?
I’ve said this before, but I never expected to make any income once we retired. I’d used the POT score (for those of you with college-bound kids or are looking to switch careers, use this score to evaluate and compare degrees) in Quit Like a Millionaire to figure out which degree would increase my income the most per dollar spend on education, but who knew that you could actually make money following your passion? I have to admit, it’s not easy money (we did have to face-plant and get 200 rejections for 7 years learning how to write after all), but every dollar we’ve made from the blog is the most rewarding income we’ve ever gotten.
And of course, this year, we published a book, and it actually did well, hitting #1 best-seller status in multiple Amazon categories. That was a TON of work (who knew media interviews would be as exhausting as they are?), but it’s by far the proudest accomplishment of anything I’ve ever done. My childhood dream was to be a best-selling author, and somehow it all came true in 2019! And it’s all thanks to you, our readers, for helping us make this happen. Hugs to you all!
How’d our Portfolio Do?
But let’s not forget about our investments!
When we started this blog and, much to our surprise, it actually started making money, we decided to split off our investments into two portfolios: Portfolio A which held all the money we saved up before retirement and the one we use to fund our living expenses, while Portfolio B holds all the money we earned after retirement and is used to mostly pay for business expenses. So how did each do last year?
Portfolio A is structured as a 60% equity/40% fixed income, with our Yield Shield assets mixed in in order to guard against Sequence of Return risk by providing us a nice steady income regardless of capital gains/losses.
We started the year with $1,034,000.
We ended it with $1,200,000.
For a total one year return of 16%.
I have to be honest, I’m not used to these kinds of performance numbers. Unlike some of my FIRE blogger friends, we are relatively gun-shy when it comes to risk, which is why we retired with a 60%/40% portfolio instead of the 90%/10% allocations that they are somehow comfortable with. A portfolio like that is supposed to be posting gains or losses in the mid to high single digit range. A double digit move in either direction is extremely unusual, and this year our portfolio smashed through double digits and just kept going.
This was not due to any cleverness or even good luck. As I mentioned a few weeks ago, despite the overwhelmingly negative headlines in the news last year, the equity markets were on FIRE, with the S&P 500 increasing an eye-watering 28%. And it wasn’t just the US either. Canada went up 20%, and even the EAFE index got to participate in the fun, popping up 18%.
This year, it didn’t matter which geographical location you were invested in. If you were invested in the stock market at all, you made a killing. And if you didn’t, you missed out on one of the best stock market performances I’ve ever seen.
Portfolio B (which contains all our post-retirement income) is structured as a 75% equity/25% fixed income portfolio. Unlike Portfolio A, it’s a pure indexing portfolio with no Yield Shield, and is built using the same ETF as our Investment Workshop portfolio.
We started the year with $105,000.
We ended the year with $210,000.
For a total one year return of 100%!
All I gotta say is, thank God I put everything into crypto!
I’m kidding, I’m kidding. Don’t put everything into crypto. Because we’ve been putting money as we’ve been earning it into this portfolio over the year, most of the “gains” are phantom gains caused by me adding cash. It’s actually one of the reasons we decided to keep out pre- and post-retirement portfolios separate, since it’s difficult to tell how your portfolio is doing if you add or remove money from it over the year.
Of the $105,000 this portfolio gained over the year, the vast majority of that was new cash added in, which was our net after-tax income of $75k. The other $30k came from investment gains.
Total Net Worth
So by adding these two together, that means that…
Our net worth started the year at $1,139,000.
And it ended the year at $1,410,000.
That means this year, our net worth increased by $271,000.
You have to remember, we’re still relatively new to this whole millionaire thing, so while we understand the ridiculously powerful math behind money’s ability to generate more money, it wasn’t until now when I added up our portfolios that it hit me how powerful this math truly is.
This year, because of the investment gains on our portfolio and the side hustle income we made doing what we love, our net worth increased more than any other year on record. Neither FIRECracker nor I have ever even earned anything close to $270k, let alone saved that amount. Money’s ability to make money is a truly amazing thing, and no year has ever proven that better than this one.
Sure you don’t want to come along?
Is There a Recession Coming?
So this year’s eye-popping stock market gains have of course caused people to ask that age-old question: Does this mean a recession is coming next year?
So here’s my take: I. STILL. DON’T. KNOW.
Also, and this is important: NOBODY KNOWS.
There are plenty of indicators that suggest a recession is imminent. We are now in the longest bull market in history, at 127 months. We are due for a correction, to say the least. The historical P/E ratio of the S&P 500 is 14-15, and right now it’s above 20. That can’t be good. And oh yeah, we’re heading into a US election year like no other, in which an incumbent US president who has just been impeached will be trying to get re-elected. Any comparison to past elections is pointless, because this situation has literally never happened before. So that should be fun.
But on the other hand, in years where the stock markets rise by 20% or more, the following years tend to actually go up even further, on average about 11%.
The S&P benchmark tends to log an annual return of 11.2% after a year in which it climbs at least 20%
So once again, we have contraindicating facts and figures, each making convincing arguments for stocks to either rise or fall next year. Also known as, every other year.
We’ve been investing in the stock market on and off for over 10 years. I started my investing journey right before the 2008 crash. And in that time, the stock market is always in two modes:
- The market is too hot right now. You’d be an idiot to invest now.
- The market is crashing. You’d be an idiot to invest now.
There has literally never been a situation where everybody agreed, “You know, markets look like a good deal right now. You should invest.” Never. It always feels scary to invest in the stock market. The only thing you can do is get over it and do it anyway.
What Changes Are We Planning To Make?
So that being said, are we planning on making any changes to our portfolio in the new year? You betcha. Basically, we’re planning on dropping some of our Yield Shield assets and increasing our equity allocation.
Wait, what? What madness is this? Dropping my yield AND increasing our equity with the markets so hot and a recession possibly looking? Why in the world would I do this?
Because of this.
We wrote in our book the concept of Perpetual Re-retirement, which basically states that in each year of retirement, by entering your new portfolio balance and new projected spending into FireCalc, you can measure how well your retirement plan is going based on whether your success rate increases or decreases for a new 30 year period starting now.
When we retired in 2015, our portfolio was worth $1M and we were spending $40k a year. Now, 4 years later, our portfolio is worth $1.2M, and, thanks to my awesome wife FIRECracker and her awesome budgeting skills, we’re still only spending $40k a year. If we remove $40k from the portfolio to pay for this year’s living expenses, that leaves a portfolio of $1.16M going forward. So by plugging these numbers into FIRECalc, we can see that our success rate has gone from about 95% when we first retired, to 100%.
Meaning we have successfully beaten Sequence of Return Risk. Statistically, we cannot lose anymore going forward.
So that means it’s time to get rid of some of these safeguards I had been using to guard against the possibility of a badly-timed recession destroying our retirement. Our portfolio has grown so much that even if a recession happens right now, we’ll still be fine.
Change #1: Good-bye High Yield Bonds
Change #1 is one I’ve been looking forward to for some time. I first got into High Yield Bonds back in 2012, then attracted to the eye-popping yields of 7% or more. However, as I later found out, there’s a reason for those high yields. It’s because the companies in those ETFs suck.
High Yield Bonds are composed of companies with less than stellar credit ratings, and among bond traders the informal name they call High Yield Bonds is Junk Bonds.
This is one of the few assets I personally own that I don’t recommend for our readers. Because while normal bond index ETFs are full of things like government treasuries and financial institutions, my High Yield Bond ETF was full of airlines and oil companies. And during the oil crash in 2015, this fund very nearly blew up as oil companies in Alberta started laying people off left and right and threatening to default on their loans.
So I will be getting rid of this asset this month and good bloody riddance, I say.
Change #2: Good-bye Preferred Shares
I admit, I am going to miss my Preferreds. Issued by healthy, stable financial institutions like banks and insurance companies, these things reliably pumped out a nice, steady stream of income at 5%, and on top of that the income is classified as a dividend, so the money is very tax efficient.
But long term, Preferreds just don’t perform as well as equities since they aren’t actually equity. You own Preferreds for the yield, not long-term growth, and now that we don’t need the yield as much anymore, it’s time to eliminate Preferreds from our portfolio, albeit with a hearty pat on the back for a job well done.
So half of our Yield Shield assets are gone. We still own REITs and High-Dividend stocks, and next year as we enter year 6(!) of our retirement, I’ll be looking at these and seeing if it’s time to get rid of them as well, thus moving us fully back to a plain vanilla indexed portfolio.
Change #3: Upping our Equity Allocation
In the FIRE blogging space, we are a bit out of the ordinary in that we have an inordinately low equity weighting in our retirement portfolios. Part of this came from FIRECracker’s background growing up poor giving her a risk-aversion that’s still a part of her personality, and another came from our engineering backgrounds that are always obsessed with what could go wrong. That’s why we built our retirement plan with multiple backup strategies, where we’re invested in a 60% equity portfolio AND we have a Yield Shield AND we have a Cash Cushion AND we use geographic arbitrage while other bloggers like JL Collins, Justin from RootOfGood and Jeremy from GoCurryCracker.com are seemingly comfortable with going 90/10.
Yes, we always understood the math behind that and why we’re way more likely to be part of the 95% of retirees that succeed beyond their wildest dreams. But that never stopped that tiny voice in the back of our head asking “but what if we’re not?”
Well, now that I can see that we definitely are not, I think it’s time we started upping our equity exposure, so in addition to getting rid of High Yield bonds and Preferred Shares, we will be rebalancing our portfolio to be 70% equity/30% fixed income.
And I know JL Collins would probably read that and go “70%? That’s it? Wimps.” And I don’t disagree. But after lots of discussions with FIRECracker, I think that’s about our comfort level for now.
And We’re Done
So that concludes our 2019 finances. FIRECracker successfully held the defensive line on our spending (as I knew she would), our book and our blog performed surprisingly well financially and our portfolio went gangbusters, all to add up to the most financially successful year we’ve ever had.
Who knows what 2020 will bring, but FIRECracker and I have learned that one of the keys to being happy is to celebrate when things go well rather than worry about what could go wrong all the time, so that’s what we’re going to do!
How about you? How was your 2019 financially? Let’s hear it in the comments below!
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