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Tracking our portfolio

One of my most important jobs in early retirement is closely tracking the performance of our portfolio. Why? We want to make sure we are invested in portions of the stock market that support our original investment thesis and goals of generating enough passive income to never have to work for someone else again. My portfolio tracking job is a process of really counting the dividends deposited in our accounts and noting the growth or decline of our accounts throughout the entire year.

How’d we do in 2018?

Our final result for 2018 is an unrealized (on paper) portfolio loss of -5.34% overall. That’s not great. But compared to the S&P 500 for 2018, which was down -6.24% overall for the year, our portfolio remained almost a full percentage point above the mark. That’s not bad. And the good news is that we had a 2.13% dividend yield for 2018 without our condo sale proceeds included, so we are definitely heading in the right direction. And the great news is, as of the day that I’m writing this post our portfolio is up a whopping 6.04% since the end of 2018. That gain  in just 39 days has already wiped out our 2018 losses. Crazy.

Now, now. Get your fingers out of your ears. I know this is the part where most folks glaze over and stop listening. But hang in there with me as I walk through it all and know that it’s going to be OK.

What happened in 2018?

2018 was a pretty crazy year. First I retired in April. Then a week later we left on a 3 week trip to France, Germany, Austria, and Switzerland. I actually thought about canceling right before it was time to leave because that’s also when when we decided we wanted to reach FIRE by the end of the year. But everything was already booked and we would have lost our deposit money by canceling.

Then Ali retired a few months later in September. Suffice it to say, 2018 was not a typical budgeting year for us. Additionally, we hadn’t finished putting our full portfolio in place by the end of the year with all our investment accounts set to carry us into full FIRE. We still had Ali’s 401k to roll over to a personal IRA, and there was a lot of paperwork to fill out and waiting to do for that process to complete. And we still had to find the perfect buyer and sell our condo, which took more time than we expected as the crazy real estate market in Seattle was starting to slow down the closer we got to the end of the year.

Building a post-FIRE portfolio

How the heck do you know what to invest in to achieve the income needed to be financially independent forever?

1. Draw up our Investor Policy Statement (IPS) to ferret out our goals and understand our concerns.
2. Pick the investment funds that meet our needs for income and risk tolerance. Invest a stash of liquid assets that represents at least 30x our annual living expenses in Exchange Traded Funds (ETFs). See our post “What’s Our Number?” for more detail.
3. Track our investments and note our findings so that we stay accountable to our goals.

Staying focused

The key to being a successful investor is understanding your goals and values. Using a list of questions in an IPS is an easy process to get to the heart of your investment style, risk tolerance, and philosophy should you encounter bumps down the road like a big market decline. This document will serve as your home base to return to when seeking new opportunities or when faced with bigger choices in the future.

According to one FIRE blogger, The White Coat Investor, “…an IPS is a rather personal document as it not only dictates your financial plan, but also reveals your values, which are often very different from those of other people.”

It can be hard to figure out how to start filling out an IPS. For us it was a bit of a chicken or an egg kind of a process. But I had done a lot of research on many of these topics before we got to the step of answering the questions ourselves. Here’s a snapshot of our IPS:

Income:

1. How will you generate income? 

   We have invested in the stock market to produce the lion’s share of our passive income since we quit our jobs. We could have gone with rental income but we are not interested in that at this point due to our previous experience as landlords for two properties.

2. What kind of market investment vehicles will you choose? 

   We will invest in low cost index fund ETFs that generate both baseline stock price appreciation (capital gains) as well as paying out dividends. See “Finding Your Funds” below for more detail.

3. How will you offset your exposure to volatility risk inherent in the stock market?

   We will create a separate bucket of funds to cover 3 years of living expenses made up of bonds, CD’s, and cash to alleviate the need to sell any positions that are down should the market experience a correction.

Expenses:

1. We will set a budget that includes ALL of our expenses such as food, housing, medical, taxes, and travel (see our “AOC 60/40 Budget Categories” for more detail). That budget will be equal to or lower than our frugal average living cost for 2017 and 2018 in Seattle.
2. We will sell our car and our home and invest those funds in our investment portfolio.
3. We are choosing to be home-free while traveling for the next few years to test the idea and practicality of geoarbitrage.
4. We will closely track our daily living expenses and adjust to the collected data as we grow accustomed to this new lifestyle.
5. We will keep our annual expenses well below 3.5% of our portfolio as a target ceiling to protect from a down market or sequence of return risk (see our “What’s our magic number?” post for more detail).

Investments:

1. We will create a 75/25 portfolio allocation comprised of equity to fixed income (bonds, CDs, or cash) of low cost ETFs across our taxable account, IRAs, and Roth IRAs.
2. We will create a 3 year bucket of living expenses within the fixed income portion of our allocations using the proceeds from the sale of our condo (the condo sale did not conclude until January of 2019).
3. We will only make investment changes to rebalance our portfolio once a year or when we have new funds to add (we will not modify our investments due to natural volatility in the stock market).
4. During our annual portfolio rebalance we will revaluate our equity to fixed allocations based on the state of the overall market and might shift our ratios should equities become more reasonably priced.

The following pie chart represents the distribution of our net worth across our different accounts and in our condo, as of December of 2018.

Finding your funds – what’s your ticker?

By reading and listening to all of the content I found online, in books, and in podcasts I was searching for the “sliced bread” of investing. Eventually I came across one of the godfathers of the FIRE movement, JL Collins. Jim offers a very straightforward and condensed approach to investing that won’t overwhelm you when you’re ready to take action.

“Sound investing is not complicated. Complicated investments make money only for those selling them.” —JL Colins

Take a moment to watch this fun video of Jim explaining his investment approach.

Not only does Jim have a great sense of humor, he has a very calm approach to building a portfolio that’s simple and low cost. He lays it all out on his website and in his book “The Simple Path to Wealth.”

Jim’s approach is threefold:

1. Buy the broad US market through low cost ETFs.
2. Balance that with low cost bond ETF funds.

   Note from me: The amount of bonds you include is directly related to how much you will stay awake at night worrying about your investments, and more bonds equals less worry but it also equals less capital growth.

3. Rebalance your portfolio once a year.

Jim suggests investing through Vanguard or a similar low cost broker. We personally use Charles Schwab for all of our investment accounts. But there are many low cost brokers out there offering similarly styled low cost ETFs that are delivering very similar levels of performance and low fees. Choosing your low cost broker is truly a Coca-Cola or Pepsi kind of a thing (and though Ali hates when I drink soda, when I do have some I prefer Coca-Cola as a little homage to Warren Buffett).

By the end of 2018, we had simplified our investments into four ETF funds across our taxable account, IRA’s, and Roth IRA’s at Schwab. And nearly 26% of our net worth was tied up in our condo. But within our investment accounts we’re targeting an asset allocation of 75% equity and 25% fixed (bonds, CD’s, money market funds, or cash). Our four ETFs are listed below with their allocations. All of these are held by Schwab, including the Vanguard ETF.

Our ETF funds:

• SCHB Schwab US Broad Market ETF        (50%)
• SCHZ Schwab International Equity ETF  (25%)
• SCHZ Schwab US Aggregate Bond ETF     (12.5%)
• BSV Vanguard Short Term Bond ETF        (12.5%)

The graphic below is how investment aggregator site Personal Capital was calculating our allocations at the end of 2018. The percentages shift throughout the year and can be off our targets at any given moment, but we are only tracking the allocation not reacting to it at this point.

Year-end findings

Within Personal Capital we can track our personal index, 75/25 equity/fixed, to four broad indexes that include the S&P 500, DOW, Foreign equities, and US Bonds. As you can see from the Personal Capital graph below, our personal index tracks the S&P 500 and DOW rather closely since we are nearly 50% S&P 500. Our Foreign equities negative performance is moderated by our Bond holdings since we hold them in equal weight each at 25%.

Conclusion

In 2018 we didn’t really beat the market but more importantly, we didn’t lose as much as the market. This result clearly represents how our Bonds are working for us to moderate a down market. I’m very happy to see this in action. And we gained 2.13% in dividends on 75% of our net worth, which I’m also very happy about. And in 2019 with our condo proceeds added to the mix that 2.13% would represent a larger dollar amount on 100% of our net worth.

Building a portfolio is very personal and specific to your life goals. I feel confident this is a really solid place to start our FIRE journey. I know we will make adjustments over time based on the guidelines we’ve set out in our IPS. For instance, we might move into higher paying dividend funds or REITS (Real Estate Investment Trusts) as we see where the overall market heads.

We will keep to our budget, track our portfolio, play the long game, and stay calm.