- How The Hell Are We Going To Pay For All This Stimulus? - July 13, 2020
- Investment Workshop 59: Are Robo-Advisors Compatible With FIRE? - June 22, 2020
- Reader Case: Grounded in Vancouver and Dreaming of FIRE - June 19, 2020
A reader recently asked us “how is your portfolio doing? Is the Yield Shield holding up?” And our reaction was “good question. We should probably take a look at that.” A side effect of not being terribly anxious during this crazy time is that we haven’t been checking our portfolio all that often, but now’s a good time as any to see how things are going in our retirement accounts.
But before we dig into the numbers, just to recap our retirement income strategy, our ability to survive this recession is based on three things:
- The Yield Shield: Our portfolio continues to pay a yield, consisting of dividends and interest, equal to about $35,000
- Our Cash Cushion: In addition to our current year’s expenses sitting in cash, we have 3 years of additional cash set aside
- Geographic Arbitrage: While we can’t travel internationally anymore to lower expenses, we have found that because nobody else can travel, AirBnb prices have plummeted, so as a result, we’ve been able to drop our living expenses to Thailand levels.
We are definitely more pessimistic than our fellow FIRE bloggers, who tend to be have absurdly high (90%+) equity allocations. Instead, we have been 60% equity/40% fixed income for most of our retirement (despite the rampaging bull market we were in), and only in January of this year did we raise it to 70% equity/30% fixed income.
We also have a way more pessimistic cash management strategy than others. While other FIRE bloggers rely on their blog income to fund their living expenses, we deliberately don’t, instead sequestering that money away into its own portfolio (which we call Portfolio B), and we don’t use it to fund any day-to-day living expenses.
Don’t get me wrong. I’m not calling anyone out and saying there’s anything wrong with spending your blog income. It’s just that what if your blog income evaporates? If you had built that into your budget and your blog turns off the spigots, you’d be screwed.
Which, by the way, did happen. Even as our traffic has grown during this pandemic (presumably because everyone’s stuck at home with nothing to do but surf the internet), our advertising income plummeted. The tourism industry for some reason isn’t so keen on buying ad space right now. Can’t imagine why. So good thing I wasn’t relying on this blog to pay rent.
So without further ado, let’s dig into the numbers. How has our portfolio been performing during this outbreak?
How Has Our Portfolio Performed?
It’s always a bit awkward to figure out our portfolio value because it’s spread across 7 different accounts, but I sampled each account every two weeks this year and then added them all up in Excel. Here’s what I found for Portfolio A, meaning our main retirement portfolio.
After taking into account our Yield harvesting that we did in early January, we started 2020 at about $1.2M. We rose slightly through January, even as the coronavirus was rampaging across Asia where we were travelling. Then the first cases hit Europe and the US around February, and that’s when the stock market really started getting walloped.
We hit a local minimum in early April, when our Portfolio A briefly dipped below $1M (Boooooo!). Early April was also when Trump (and Trudeau) signed massive stimulus bills to keep the economy from falling off a cliff, and that’s when stock markets started recovering (Phew!)
I must admit that during this time, I was briefly tempted to try to time the markets by either doing a tactical rebalance, or using put/call options, but the big-ass daily swings in both directions that were happening during this time made me hesitate. Friends who had made a lot of money trading options were seeing their gains vanish when Trump would say something and stock markets would rally unexpectedly the next day. So I basically just sat on my hands and didn’t change my asset allocation.
From the beginning of the year, the US stock market was down 30% at its worst point. In comparison, our portfolio was down 17% in early April. You would figure that a 70% equity portfolio would drop closer to 20%, since 30% x 70% = 21%, but bonds rise during downturns (especially when central banks drop interest rates to zero), so it has a cushioning effect.
As of right now, the US stock market is still down 13% YTD, while we are down about 8%. The Canadian and the US stock markets have basically moved in lockstep since our economies are so tied together, but the EAFE index has recovered slower due to, presumably, less stimulus measures in Europe. But on the other hand, their economies are opening back up now so maybe they’ll catch up soon.
Portfolio B, which holds all the income we’ve received after retirement, is invested similarly at 75% equity/25% fixed income as a pure indexing portfolio as described in our Investment Workshop without any Yield Shield assets. Here’s how it performed.
It’s followed a similar path, rising slightly in January before falling off a cliff in February, hitting its lowest point in early April before rebounding.
Adding both of these investment portfolios together, as well as adding in the amount of cash we have sitting in a savings account for this year’s expenses, plus our cash cushion of $15k, this is what our total net worth looks like.
Current net worth: About $1.35M. That ain’t bad.
How did the Yield Shield Perform?
One of the central lynch-pins of our recession-proof strategy was to avoid selling equities at a loss and instead harvest the yield generated by the portfolio to live off of. While it’s certainly possible dividends get cut, bonds are unlikely to do so. We back-tested our Yield Shield portfolio through the last recession and found that our portfolio experienced a drop in income by about 10% in 2008, then returned back to normal the year afterwards.
2008 was a particularly bad worst-case scenario for the Yield Shield. Dividends are generally paid by large, mature corporations who are sitting on so much cash they don’t know what to do with it. So generally, banks, insurers, and other financial-type companies. Financial companies, if you recall, were the companies that got whacked in 2008.
This recession, on the other hand, is hurting small companies the most, especially mom-and-pop establishments like restaurants. All the stores you hear in the news closing up shop weren’t able to survive because they didn’t have enough cash set aside to survive being closed for more than a few weeks. That’s definitely sad, but those companies weren’t the ones paying dividends anyway.
The big dividend-paying companies, like Bank of America, on the other hand, simply switched to remote work and never shut down.
So if we look at our portfolio’s yield, we can see that so far we’ve received $12086.13.
Since we’re a third of the way through the year, if we multiply that by 3, we get $36,258.39. That’s right on target for our expected yield of $35k.
Are We Out of the Woods Yet?
Not yet, but we’re getting there.
The single biggest thing that could cause problems for us is a sharp and sustained yield drop. While it’s not likely for all the reasons I outlined above, if it does happen it would have a ripple effect on our finances.
This year we’re going to be fine no matter what because we already harvested last year’s yield in January. But if the portfolio yields less than we expect at the end of this year, we’d be forced to use up more of the cash cushion than we anticipated, which means the 3 years of cash cushion we saved would run out sooner than we thought.
But we do have plenty of defensive moves to deploy. As FIRECracker noticed, by taking advantage of crashing AirBnb prices we were able to drastically reduce our living expenses while we’re stuck back in Canada. That means we’re building up spare unspent cash from our monthly budget. So we’re going to take this spare cash and earmark it to counteract any unexpected yield drops this year. Using our current spending numbers, we should be able to generate around $5k by the end of the year. That would offset a potential 15% yield drop, which is worse than the 10% drop we saw in 2008.
Another option is we deploy Portfolio B. I’ve kept this money separated from our living expenses to preserve the “purity” of our retirement, but if the chips were down and we really ran into trouble, it’s still our money and can be used if we needed it. And of course there’s side hustle income from this blog and our book, which I’ve arbitrarily decided not to spend, but again, I can if I needed to. And finally, we could sell bonds from Portfolio A which have gone up in value.
To be clear, yields have not been cut, and I don’t think they will be cut to that extent because this recession is not hitting big dividend-paying companies to the extent that it’s hitting smaller mom-and-pop shops, but if something unexpected truly happened, we have enough backup plans to last for over a decade.
So even though right now, it seems like our finances are being besieged on all sides…
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