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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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Hey you two, I have been following your informative blog and story for a couple years now. Much respect for sharing your lifestyle and investment information. Since you are fellow Canadians, perhaps I can help you out a little bit. Instead of using excel to figure out your net worth across many accounts, I use Wealthica. http://www.wealthica.com. It is free and does a good job of tracking net worth. It would be nice if it had a money weighted way of tracking performance but since it is free, i’m not complaining. Take care and be safe!
Interesting. I will definitely give it a try! Thanks!
Have you been rethinking having bonds in your portfolio given the drop in yields?
Nope, bonds are great in recessions because they rise to counteract falling equity prices.
ZAG is still paying a yield of ~3%. It’s because it contains bonds that were issued before interest rates dropped. If it falls below 2%, I might reconsider but for now I’m happy.
Thank you for the David Roberts painting.
When you changed to 70/30 did you change the distributions within the equities and bonds?
Sure, less bonds more equity.
Happy to hear that your portfolios have remained resilient and bounced back during this downturn. I bought the scary March drop, but only in specific sectors and specific asset classes, versus throwing it all into the indexes, and it’s performed very well.
I’m very skeptical as to whether the risk parity strategies (IE 60/40) of buying index funds of stocks & bonds many FIRE bloggers have advocated will continue to provide the returns they have in the last 30 years moving forward. While indexation and passive investing is great when a small % of people do it, the price discovery mechanisms they rely on no longer work when everybody just piles in regardless of valuations. Passive investing is now a significant portion of the market and it creates systemic risks.
The five FAANG stocks alone account for 20% of the S&P 500’s market cap and all the other companies are in awful shape so it appears to be propping up the market along with the money printing distortions created by the feds. When the the 10 year UST interest rate is already so low at 0.70% and inflation is ~2.5% depending on who you ask, the real returns on bonds are negative and provide what Jim Grant would call “return-free risk”for buying bonds today.
I guess that’s the billion dollar question in finance today – whether the anti-correlation between stocks and bonds and underlying premise behind modern portfolio theory will continue. They obvious have for the last 30 years, but historically over a longer time frame of say 100 years and 25-30 year secular shifts, they have been correlated and underperformed other asset classes during these bigger super cycles.
That’s just my 2 cents and worries today – I could be all wrong, the feds will continue to pump trillions of dollars to prop up the markets, buy up everything in sight including junk bonds. The market will melt up to all time highs and we’d all be richer on paper!
Just out of curiosity, have you guys considered gold as an inflationary hedge and portfolio insurance when so many great finance minds such as Ray Dalio and Paul Tudor Jones are coming out to say they believe will outperform?
Regards & stay healthy.
Very much in the same mindset.
Ray Dalio’s latest chapter on his website explains the longer term debt cycles and explains how when bonds reach down to 0% rates, they act as a ticking time bomb. They do great as rates drop, up until governments have to print just to keep prices down and trust is lost in the currencies (bonds). Very much worth a read.
I personally have decided to hold gold in place of bonds. Gold tends to have similar effects to bonds in recessions (uncorrelated with stocks) but is also a hedge against inflation / out of control money printing. Bonds have done great over the last day 60 years as they started at such high rates (low prices) and have slowly moved to high prices (0% rates). Very limited upside.
How do you buy gold?
Jack, this is such an important information! And I totally agree. Inflation is the hidden enemy here. And I am writing this from Europe, Czech Republic – Prague. The prices of vegetables got extremely expensive over the last three months. Tomatoes and bell peppers for example have skyrocketed – they are 50 percent up! And the same goes for other necessary ingredients. Needless to say, the Czech Government has just silently raised property tax 50 percent up as well because they borrowed a massive sum of money to give away “COVID-19 free cash to small businesses”. Let me tell you, right now I think inflation is nowhere near the 1 cipher range…
I have heard that argument, and there were instances during the market meltdowns in March where index funds briefly detached from the value of their underlying assets, but things seem to have calmed down now.
As for gold, I need income in retirement and gold doesn’t pay any, so no.
Can you describe in more detail how you negotiate AirBnb rates? Do you simply email a bunch of hosts? Do you propose rates? Ask for a long term rental discount? Just curious
FIRECracker just sets a time period (4 weeks so we get the monthly discount) and watches for deals on the AirBnb website. Sometimes she also messages them and negotiates directly. She also watches for sublet and long term lease opportunities on Kijiji and Craigslist.
I like how you guys divided up your portfolios so that your blog/book income are separate from your original retirement funds. One thing I am curious about after reading this post is how will you tap into your Portfolio B if needed? More of a theoretical question, as I don’t think situations will require it at this point. Also, if you do get into those funds, especially considering your previous cautious portfolio mix, will you consider that a failure of the 4% rule?
Interesting questions, but let’s hope it doesn’t get to that point.
There’s a few things I can do, like using the yield from Portfolio B, or simply selling some ETFs and spending it down a little bit. I’m not planning on it, as I would personally consider that a failure of my 4% rule. I’d rather control my spending using geo-arbitrage than do that, but so far it doesn’t look like it’s necessary.
Me too … and looking at future deals for later this year .. maybe Xmas in Vienna …
Just curious, are your dollar amounts in CAD or USD? And are you worried about a weakening Canadian dollar like in 2009?
The total is reported in CAD, but about half of my holdings are actually in USD, so if the Canadian dollar weakens my USD holdings become worth more.
Financials looking solid! Airbnb prices around my area have gone down by 30%-40%! Still, hope you guys will be able to go back to some “real” geo arbitraging soon. Nothing beats South East Asia 🙂
I miss Thailand. *Sniffle*
I think your summary of “not out of the woods yet” is apt. We’ve only seen first quarter earnings, but the vast majority of the financial turmoil is going to fall into Q2.
When Q2 numbers finally get posted, we’ll see who’s swimming naked. 😉
Yup. That’s why I’m building up my “yield cut offset” fund. Fingers crossed I won’t need it.
Love being overly conservative! We’re in the same boat with only 60% in equities at this point as were so close to pulling the plug completely. And we’re planning to live on sub 3% of withdrawals. And I have so many other “back ups” to keep us from failing. By that I mean that the following are not included in our passive income/FIRE calcs: our home, a separate fund for future car purchases, my pension, any potential CPP/SS, OAS, GIS, and anything in our daughters RESP. So yea, it’s a little ridiculous at this point haha. We do plan to do a glide path back to somewhere in the 80-100% equities range 5-10 years post retirement once we get past the sequence of returns risk phase.
The only major thing we’ve done differently these past few months is convert some of our USD cash over to CDN cash to fund our Canadian registered accounts this year as we haven’t seen the USD/CDN at this exchange rate in years and our portfolio is roughly 70% USD 30% CDN.
Sub 3% withdrawal rate? Wow, I thought I was overly conservative. You realize 3.5% withdrawal is already a 100% success rate, right?
Haha yes, you can call me Conservative Clara as I still prefer to be below 3.5%. There are variables out of our control getting us from 4% to sub 3% which is why I prefer to be conservative to ensure we don’t approach anything over 3.5% – the USD/CDN exchange rate (we assume 1.30 in our models) and no major unfavourable changes in policy to Canada Child Benefit. I also want to buffer for any unforeseen future events that I can’t even think to factor in at this time.
I know you guys wanted out of your jobs asap but I’m not in as big of a rush. For us it’s always been about enjoying the journey and creating a happy life along the way. My wife retired early when our daughter was born so we don’t have the stress of day care, two working parents, drops offs/picks ups, etc. It helps to enjoy a part time job where I’m off and with my family 80% of the time yet we’re still able to maintain a 50% savings rate. It’s low stress 95% of the time and it pays way more than the pennies we make from our little blog haha.
man i wish i was you…my portfolio is not as pretty as yours
within your fixed income, do you have pref’s and if so are they within an etf or individual organizations? are the pref’s index based or industry based?
thank you in advance
i appreciate your openness and willingness to share
I used to own them in CPD, which is a Preferred Share Index ETF, but I sold them at the beginning of the year because I didn’t need the yield from them anymore.
Sorry you may think you’re a conservative investor, but you’re actually not properly accounting for quite a few glaring risks in your framework which can be dangerous for readers to adopt.
It’s a misleading to call 15k cash as 3 years expenses worth when it is just 5 months. it’s only 3 years when ASSUMING no cuts in dividends but that is precisely the kind of event you’re bracing for in having it.
Also the elephant in the room is the news all across the board of major blue chip companies cutting dividends often at the instruction of central banks. Using one event of 2008 as the be all end all for how dividends behave in downturns is myopic and smacks of confirmation bias. These aren’t small mom and pop companies now turning off the tap on dividends. This loss of income won’t be felt yet since you’ve said you harvested your yield for this year before shit the fan but the loss of income is looming and projecting a rosy outlook on yield is either tone-deaf or wilfully ignorant on it.
as you rightly point out, bonds tend to do well during crashes. Underscores ever more that filling up your fixed income/bond component with dividend stocks or REITS instead of conventional bonds to chase yield and income means you have more volatility in market crashes. Div stocks and REITS got hammered and should be categorized in your equities, making you more 80/20 in fact.
Lastly, the fact that your portfolio dipped below your 1mil starting point should give you pause as to your previous bold claim at the start of the year that you have statistically beaten sequence of returns risk 100% when you can so easily find yourself back to a point below where it started. Hope you and your readers can see some risks that aren’t properly considered yet and it’s disappointing that you skirt the issue on these points in assessing the portfolio crash
> Hope you and your readers can see some risks that aren’t properly considered yet and it’s disappointing that you skirt the issue on these points in assessing the portfolio crash
This whole comment is just as self-assured as the way it’s painting what it critiques. I’d suggest readers look more into portfolio theory and withdrawal rates. There’s also the practicality that problems will be seen a decade or so before they become serious. Michael Kitces is another source for putting this sort of stuff in perspective.
you’re right you’ve got side hustle and portfolio B to tap into. as you well deserve and should. but for anyone else who “truly” retired from the advice here would mean that the plan has failed and they don’t have the luxury of a second portfolio dip into and would have to drag their ass back to work.
So it’s great you guys are fine. but if the advice you’re pushing on everyone may lead to this outcome, isn’t time to call some points into question?
I think you may be missing the “cash bucket” concept – as I get closer to FIRE – I am paying more attention to building / reallocating portfolio so that have at least 3 years of cash to guard against exactly the situation we are experiencing. Anyone who is retired or retiring should do the same. Don’t lose money unless HAVE to sell into bad market. As I understand it – Yield Shield refills the cash bucket- it’s not what I need to pay bills this year (or next).
no, their yield is used for expenses and the cash bucket is reserved for expenses that yield can’t cover
a truly “conservative” investor shouldn’t have to even think about the possibility of deploying a backup portfolio or using side hustle income (which most others following this approach to FIRE won’t have). so I hope they would own this oversight and caution readers accordingly which I’ve been commenting a lot about as a flaw in this yield shield approach
> been commenting a lot about as a flaw in this yield shield approach
a lot? You don’t say! =P
I think there’s a lot of good discussion to be had around being TOO conservative as well. The opportunity cost of years of one’s life unnecessarily spent unhappy and away from family and friends is real.
scoopFi, when you say 3 years of cash i assume you mean having 3 years of expenses on hand. in their case that means 120k
they have 15k and calling it 3 years cash on the assumption the yield is never below 35k/year which is strange when that’s exactly the scenario when you need the cash
I’m pretty sure they have more than 15k in cash – above indicates up to 3? (but will let firecracker / wanderer infirm as needed). Lots written on bucket method – Christine Benz on Morningstar has some good articles as well on “how the buckets are holding up” – all pretty much say the same thing – you need enough cash to get you through a few years in order to avoid adverse selling.- and of course, the less you spend the less you need.
No, they have 15k cash cushion. for them one year of cash reserve = 5k arrived by 40k expenses – 35k expected dividend payout. They assume dividends don’t get cut to make 5k as one year cushion.
That’s exactly my point that it’s not accurate to call 15k as 3 years of cash reserves when it’s not even 5 months expenses.
Here’s my recommendation. You be you and let them be them. They’re sharing how they consider things are appropriate with their finances. If it really concerns you so much, I recommend you have your own blog and outline how you’ve been doing things over the last few years. That way, we can all see how “right” you are and then we can all “own our oversight”.
Until then, you don’t have much of a pot to piss in.
No reply necessary. Just sharing my observations.
He’s 100% right. The author is an idiot. Running out of money, especially with their portfolio B is extremely unlikely because the 4% rule is already conservative in a world of too big to fail. But as a matter of portfolio strategy, they’re doing really bad and are either too stupid to realize it or too arrogant to admit it. It’s interesting to watch how different strategies empirically play out, but I hope nobody reading their blog copies their strategy.
If your schtick is being the success case for a new revolution of values and hailed as a thought leader and expert for FIRE by writing a book and being on tv for it, you are undoubtedly opening yourself up to criticism. The first half of their message is great: saving, indexing, don’t market time, live below your means. It’s the second half of the “revolution” in getting people to quit their jobs forever and selling them on a portfolio that is not as robust as people are led to believe that’s the problem I have.
The sinister side is that because of the side hustle and for the sake of maintaining “brand”, they’re incentivized not to acknowledge the criticism. It may not have started that way but this eventually is no different to the hated financial advisors disingenuously selling active investing funds for commissions and higher fees. They love calling bullshit on that and that’s similarly why I push back on the yield shield message that will likely do more harm than good for many in the long run.
As I said, 90% of what they’re saying is great for people. But the yield shield approach has potential to unravel all the good the rest built up and by then it’s too late for most. Even though Bryce and Kristy will no doubt be fine as they are resourceful and have decent side hustle.
You’re correct in that our Cash Cushion assumes no major cuts in dividends, and that’s exactly the point of failure we’re hedging against by using geo-arbitrage to cut expenses.
Every recession is different, and you can’t prepare for every unexpected thing that happens because they are, by definition, unexpected. The only thing you can do is set yourself up to have as many levers you can pull to keep your retirement safe when the bad times happen. That’s what I’m doing now.
Respectfully, dividends being cut during a recession shouldn’t have been unexpected. Also is the enhanced volatility of holding REITS and dividend stocks in your bonds allocation worth it when your motivation is to avoid selling stocks at a loss yet receiving a dividend is mathematically the same as selling stock anyways by being a forced return of capital? Do you disagree with this premise or perhaps, simply unaware that stock prices fall by the same amount as the dividend paid?
You’re left either with more shares of a lower share price or less shares of a higher price, in either scenario. In the end, the value you have in stocks is the same whether you sold from your equity position or whether you received cash from your dividends.
Any benefit from receiving dividends in a crash is psychological but not one borne out in the math (your favourite). But if you’re skewing your portfolio to be more equity based than you realise (in having div stocks and REIT in bonds), it is no longer a neutral psychological benefit but one with volatility costs on your portfolio.
this talks about it some more
https://www.etf.com/sections/index-investor-corner/swedroe-investors-odd-affection-dividends?nopaging=1
How are they getting 35K of dividends on a 1.3M portfolio?
First of all, 35K is not just dividends. It’s the yield, made up of bond interest, dividends, and rental income from REITs. And secondly, it’s 35K on Portfolio A, worth around 1.1M. Yield from Portfolio B–worth around 200K–isn’t included since that’s after retirement income . 1.3M total net worth is combining port A and B. We separated the portfolios because we are actually living off the portfolio we retired with (port A) to keep the FIRE experiment pure. Port B is only used for business expenses of the blog and book, donations, and gifts.
you’re down 8%!?!
HOW? have to reassess your holdings. That’s very under par!!
sorry to hear
How is that under par?
i have Mawer Tax Effective Balanced
-2% ytd
sometimes active management wins the game? im happy!!
Okay, obviously those LotR screenshots are the best part of this post but the other best part was you taking the time to explain why the stock market is still going up despite all of the awful, Very Bad Things taking place. It’s enlightening to view it through that lens and helped me explain my own views on the crisis so thank you for that.
I’m also happy to see my investment returns are mirroring yours, which shouldn’t be a surprise as we’re both invested in index funds. Even if I know that in theory, it’s still nice to see someone so successful doing the same thing the rest of us are.
Yeah, hopefully we’re already past the worst of it in terms of the stock market. In terms of the human toll, that’s an entirely different story, unfortunately.
Just curious as to why you’d have so much in cash (3-4 years worth of expenses)?
The best savings accounts I’m seeing today are at 1.5%
Why wouldn’t you keep most of that cash in bonds instead which are earning ~5% (VBMFX 5% YTD) and can be sold to replenish cash for expenses in needed?
Bonds can go down in value, but cash can’t. That’s what I keep for short term spending needs.
from a confusing way of defining 3 years, it’s actually 15k cash. not the 120k that it sounds like.
Glad to see you guys are hanging tough and your portfolio is surviving.
I’m 90% equities, but down less than 10% because of a huge tilt towards the United States, large-cap, and technology.
Like you, I do keep quite a bit in cash so that I never have to cash out the equities during a long bear market.
Cheers!
Yikes, that must have been volatile. How did you feel as your portfolio dropped 30%?
It wasn’t that volatile because large cap U.S. didn’t drop nearly as much as small cap or international equities–and the tech tilt helped too. My feelings were very specific: super bummed that I didn’t have more cash to deploy into equities. Volatility has never bothered me (through dot com bust and GFC–including a 55% drop during the GFC). My overarching focus is what do equities and the overall U.S. economy look like 10 years hence. I’m still modestly bullish on that question relative to other potential liquid asset classes. I’m probably just wired differently than most. I see opportunity in these crises….
In terms of Geographic Arbitrage, it’s not that you can’t travel around the world to cut expenses anymore, you just can’t do it right now. Right now your travel situation just hit the pause button. You’ll get your chance. I may run into you 2 along the way. Keep the faith.
I caught FIRECracker wistfully looking at our old travel photos the other day. Sigh.
As a Canadian student, I was told to search millennials and debt. I came across your cbc news article. I hate debt and I want to get out of it, if I invest my savings I was thinking I could use the stock market to pay off some my student loans. I have never invested in stocks and need some advice. How would I invest 6, to 10 thousand dollars, right now during covid -19 stock market? Where do I go to buy the stocks?
Hi Kristi,
You could start by reading Millenial Revolution’s investment workshop: https://www.millennial-revolution.com/investworkshop. It’s a free step-by-step guide, and it covers much of the basics. Also, don’t be afraid to take the time to read as much as possible about investing. It’s better to miss an investment window because you’re educating yourself than to make a costly mistake.
You say that you are planning to invest to get rid of student loans: you will want to pay attention to your time horizon, as you won’t necessarily make money short-term, especially during the pandemic recovery phase…
> if I invest my savings I was thinking I could use the stock market to pay off some my student loans.
This is called “leverage”: using borrowed money to invest, hoping the returns will be higher than the interest rate. You can get larger returns than on the money you have, but also lose more money faster—leverage magnifies both the up-side and the down-side.
If you have loans at, say, 6%, you need a return of more than 6% to even have any benefit whatsoever. If there’s a loss of, say, 8%, then that year you’re effectively down 14%.
Same with keeping a mortgage while investing.
Hej, also have a look at this post from EarlyRetirementNow. He Compares the yield shield approach with a 60/40 portfolio.
https://earlyretirementnow.com/2019/02/13/yield-illusion-swr-series-part-29/
A plain and simple 60/40 would have done much better in 2020 as well:
See here:
https://earlyretirementnow.com/2020/04/08/financial-lessons-from-the-first-quarter-2020/
No doubt you guys will survive through thick and thin but the backup options aren’t really applicable for readers planning a retirement portfolio.
“Geo-arbitrage” for the average early-retiree ultimately means people having to get by on less. If the objective is to plan a lifelong retirement around a certain lifestyle, this isn’t applicable as a portfolio management tool. Otherwise it means most people already can retire now and when things go south, just downsize your home or eat more Kraft dinner, or worst case, move to Laos.
“Portfolio B/Side-hustle” – again, great and well deserved cushion for you guys. Totally inapplicable for readers who don’t have this. For everyone else, this “backup solution” is tantamount to being forced back to work.
my “yield cut offset” fund …. what is that?
So, on a previous post you said you started the year with 1.2M before harvesting any yield. https://www.millennial-revolution.com/invest/our-2019-finances-part-2/
Then on another post you claimed to having harvested 35k yield plus 2 years of cash cushion. More or less 50k. https://www.millennial-revolution.com/uncategorized/in-a-crisis-cash-flow-is-king/
Yet now you claim to have started the year with 1.2M after harvesting the yield.
It doesn’t add up. Where did the 50k go?
Thanks for sharing this.
I’ve read your book which talked about the 2008 crisis but seeing how you hold on as things progress right now is so much real and appealing.
Thanks to you two I’ve started to invest and budget properly, thanks again.
Thank you Bryce for another well-written article full of helpful visuals. Thank you for sharing your financial information and helping others toward financial freedom. It seems unkind that some readers gave negative criticism instead of gratefulness. Please don’t let one bad apple spoil the whole bunch. I would like to give you and Kristy complements:
1. Your book Quit like a Millionaire has taught me so much about financial planning and financial independence. I told my family, friends and classmates to read it.
2. Your blog has taught me a lot on various subjects such as investing, traveling, renting vs. buying a home, geoarbitrage, minimalism, etc.
3. You write clearly and logically. Please keep on writing.
4. You share private financial information to help us toward financial independence. I appreciate and admire.
5. I like your pictures, graphs, charts, tables, facts & figures, video clips, etc.
6. In the book, Kristy said she was not very smart and had to spend a lot of time studying in school. Oppositely, I think you both are very clever at a young age.
7. You are very brave to quit your job to travel the world. I admire.
8. You are very kind to help others with financial matters through this blog. I appreciate.
9. You advocate for renting versus buying a home. Even for folks keen on buying, they should read your book and blog to become more prepared.
10. Although I have a home base and enjoy living close to my friends, I find your nomadic lifestyle appealing and satisfying. I may not become a perpetual traveler, but you have inspired me to travel more.
Keep on exploring and writing!