Saturday, January 21, 2017

2016 : Year in Review

2016 ushered in the birth of this blog. I started this blog as a way to analyze and track my portfolio results in order to introduce a level of accountability to my savings plan and early retirement goals.

I've always had a clear investment plan in mind as well as a goal to retire early in the not so far off future but it wasn't until this year that I took a long hard look at my numbers to see how far along I actually was and whether financial Independence and early retirement was actually in the cards. 

I realized early on that I still had a lot of work to do by seeing how far away I was from my targeted investment plan. This blog helped me refocus on my goals and take steps to change that.

I became more aware of my expenses and saw the benefit and motivation that tracking data brings with it.

I saw excellent results in my portfolio driven by both constant contributions and excellent market performance and began to realize that financial independence was a possibility for me.

Through this blog, I began to look inward and assess what was really important to me beyond finances and got the motivation to bring back a side hustle I started in 2013(writing) and give it another try for 2017 as a way to expand my skills and find something to make my post-retirement life more meaningful. 

I think a lot of those things happened because I started this blog. I still would have saved money if I didn't but I wouldn't have directed it in a way that most benefited my portfolio and wouldn't have gotten a better understanding of my own expenses and savings rates and how they affect my future plans.

I wasn't someone who was way out of line when it came to spending or saving or laziness before but this blog certainly brought a new level of consistency to my life. The weekly posts I forced myself to write here at the start became one of my favorite parts of my week towards the end of the year and the continued enjoyment of writing brought along some ideas of how to do more of it in 2017.  

I met a lot of great people in the community as well; people with similar goals and ideas and enjoyed reading their posts, talking to them, celebrating with them and learning with them. This was a good year for me for a variety of reasons and the blog certainly was a part of that. I look back at 2016 and the posts I made here as a trial and see the positive results the trial has yielded in my portfolio and my personal growth and I look forward to doing more of the same next year. 

I went back recently and combined all of the data I tracked in 2016 to see how the full year wrapped up. I had a full year of tracking for my portfolio and dividends but missed the first two months of savings rate/expenses tracking. This full year(almost) of data will help me build a good foundation to grow from and I look forward to seeing all of these things(portfolio, dividends and savings rate) grow for years to come. 

This post will lay out all my successes this year and help me set goals for 2017. I'll make a separate post around 2017 goals but all of it will use this data as a basis to grow from. 

Thanks for reading in 2016 and hope you stick around for 2017. It's awesome to be a part of the communities that spawn around common themes whether they be FIRE, early retirement, dividend growth, etc. There's a lot of awesome people out there to connect with that have aspirations beyond just working 9-5 forever and are searching for a way to get there by saving as much as they can now to have those opportunities later and I'm glad to be part of this community now and in the future. 

First, let's take a look at my portfolio.

Sunday, January 15, 2017

My savings rate and expenses - December update

December was a great month. Lots of family time, lots of time off and lots of dividends plus three paychecks which always makes for a strong savings rate if expenses don't creep up. 

My family isn't huge on gifts for a variety of reasons. Part of it is that most of my family is not in the US as we're first generation immigrants and part of it is that we're all notoriously difficult to shop for which means we've historically just exchanged cash and gift cards. It was actually my parents who brought up the idea of just stopping gifts all together for the adults and only buying gifts for the kids(there's only one) which I was happy to get on board with as a cash exchange didn't really make much sense anyway.

For our family, the holidays are more about spending time together as we were never huge on gift giving mainly because we grew up poor in Europe and early on in the US and didn't have the money half the time. It may seem odd that we never changed that dynamic much after we shifted into the middle class but it just wasn't something that mattered to us much then or now. Therefore it wasn't hard to make the decision to just cut out gifts all together and concentrate on other things during the holidays. We still do small little gifts like chocolates but there's no major expectations from any of us when Christmas approaches.  

That means that my holiday gift expenses for me weren't that huge. I got small gifts here and there and bought my girlfriend and my nephew something nice but I didn't dread the holiday shopping season as much as others because I knew ahead of time that my spending would be limited. 

My girlfriend's family is a bit different as they spend a bit more than us. This was the first year I participated and was impressed by the efficient way her family chooses gifts for everyone else. I enjoyed all the google spreadsheets and tracking that they do in regards to what everyone's getting, how much it all costs and what everyone owes at the end of the day. 

All that means December wasn't bad for me from an expense and effort perspective. I didn't have to do much shopping for anyone and the shopping I did do was all on Amazon. I let my girlfriend handle everything on her end and just cut her a check for my portion of the expenses. I didn't actually pay her for that until January so that expense isn't reflected in this month's expenses but it wasn't a big one anyway as the total cost of all the gifts they got was split among multiple people. 

On the savings rate front; things were good due to this limited spending. Three paychecks plus reasonable expenses means good things when it comes to that. 

Let's take a look at how things look for the last update of the year. First up is the gross income breakdown.

Sunday, January 8, 2017

My portfolio - January update

It's the first update of the new year and the latter part of 2016 as well as the first week of 2017 continued to show positive returns.

The S&P 500 was up 0.35% since the last update; nothing major but anything above zero is good to see. I've talked about valuation in the last portfolio update so I won't reiterate that here but we'll soon get a big group of Q4 reports that will likely give some clearer insight into what's expected for 2017. If Q4 earnings show growth, it'll be the first time the S&P 500 index has show growth in two consecutive quarters since Q4/Q1 2014/2015 which would be good news and might bode well for 2017 especially if guidance is favorable as well.

December was a three paycheck month for me which meant some additional savings flew into the account. I maxed out my 401k this year as well as my HSA and still have my 2016 ROTH IRA contribution to make which means solid near term portfolio growth due to contributions although I probably won't make the 2016 contribution till I get my bonus in a month or two.

I'm looking forward to see what 2017 brings with it and hope we can continue the run we've seen in the past few years. I'd just like to see some earnings growth this year to bring some of the valuations back into reality as another year of flat earnings will make it difficult for the market to grow a lot with where it's priced right now.

My portfolio grew over $70,000 in 2016 through contributions and market appreciation(25% growth!) and I collected just north of $7000 in dividends. At this pace I'll be retired in no time! Note that this is comparing the 12/11/2016 update to the 2015 update in the same month. If I compare today's update to the January update in 2016 then the growth is actually north of 30%!

I know every year won't be as successful as this and we'll have some pain throughout the journey but it's nice to see my first year tracking my portfolio be so fruitful and I hope the long-term journey is more of the same.

The holidays have made for a quieter than usual market than the previous month and it was nice to take a break from the hustle-and-bustle of work and relax. I hope you all had a similar break and enjoyed the time with your loved ones but now it's time to get back to the grind and grow that portfolio to help achieve our goals.

Let's take a look at the portfolio this month.

Friday, January 6, 2017

Turning a hobby into income

I've often asked myself what I wanted to do after I "retire" because retirement means different things to different people. I talk about retirement and financial independence interchangeably because to me they mean similar things; it's a time where you have the option to quit your day job and do whatever you actually want to do with your life.

The goal for me is to reach financial independence and then decide if I want to transition into early retirement or continue working. I think a lot of people want to quite their job as quickly as possible but I often wonder if they ask themselves what they'd do with their time if they quit? There's a reason that a lot of millionaires and billionaires continue doing...something long after they're financially settled and that reason has to do with boredom. 

I'm in the middle of an extended vacation right now. It's great not going to work but it's also quite boring at times. Historically, in my free time, I am a professional at wasting time away by sitting on my ass while watching TV, playing video games or surfing the net. I'm on this journey for financial independence and early retirement and yet I've never really thought about what I want to do with the time after that.

Doing nothing sounds pretty appealing right now as I head back to work but I'm not so sure it's something I'd want to do for the rest of my life.

Now that's not to say that the alternative is awesome. 

Working a 9-5 gig in an office isn't everyone's idea of a good time either and while some enjoy the hell out of it and don't mind doing it until they're 65, I'm not one of those people. 

I'm lucky enough in that I have a job that I somewhat like at the moment but if I had the option of this versus something nothing without financially worry; I'd choose nothing. Nothing means no office politics, not having to get up at 7 A.M. on a snowy cold day and all the other BS that comes with office work. I think that's the dream for most people - no more office work but what exactly does that mean? If I'm not working in an office then what the hell am I doing with my day? I bet a lot of people have a ready answer to that but I really don't and that's something I want to change this year. 

If you're one of those people who have it all figured out then I bet your answer has something to do with one of your hobbies. These can be anything from traveling, blogging, gardening, working on cars, or whatever interests you. I think if you ask people what they want to do after they retire, you'll get an answer that includes hobbies in one way or another. I want to garden more, I want to read more, I want to travel more, etc. 

I've spent some time the last few weeks asking myself this same question. It's easy to say I want to retire early and start saving for that retirement but I also wanted to define what that retirement would include. For me, it's not as easy as saying, I'm done working, now I'm going to sit, hang out, go on walks and read because I think(and know through experience in college) that I'd get bored of that rather quickly.

I want something more out of life, I want my personal growth to continue when I quit the office grind. I think a lot of people don't realize how beneficial your job is as a driver of personal growth. I know I've become quite a different person in the past ten years and I think a lot of that is due to my job environment and the things it forces me to do and endure. I've struggled with social anxiety through my teenage years(forget about presentations!) and have learned to deal with it through my job because it puts me out there and allows me to practice things I'd never otherwise practice in a structured environment.

I'm not a social butterfly in general and having to get out there every day and talk to people has made me a much better speaker, presenter and overall a better person to be around. All I'm saying is that jobs aren't all bad and you get a lot of benefits besides a paycheck if you look for them.

It's certainly not all great and frankly a lot of it sucks ass and if I won three million dollars tomorrow, I'd be out the door in a second BUT there's structure there that helps you manage your life better and stimulation that your brain sorely needs to grow and be healthy. I may not appreciate a lot of it but I appreciate those parts. I want those parts to still be in my life when I do ultimately give up the 9-5 gig and transition into something else.

And that's where writing comes into play. These questions around what I actually want to do when I finally pull the plug on retirement ultimately come down to a hobby that I've enjoyed since my teenage years and that's writing. I don't mean the type of writing I do on this blog although I do enjoy that as well, I mean publishing short stories and novels; creating characters and worlds.

Sunday, January 1, 2017

December dividend update

Happy new years!

Welcome to the last dividend update for 2016. It's the biggest one of the year for us ETF/mutual fund investors as many of those either pay quarterly and/or annually in December. I do have one fund that makes up a good portion of my portfolio that pays entirely in December making this my biggest dividend month of the year.

I hope you had a great holiday this year and enjoyed your time off if you were lucky enough to have any; I know I sure did.

2016 was a good year for me and I look back at it fondly and I hope it was the same for you as well. I've got some plans and goals for 2017 I'll talk about in a future post that will hopefully get me to my goal of financial Independence sooner!

The market has continued to perform decently in the last month of the year and I'm excited to see what the new year brings. I always like this time of year when the calendar turns and we can look forward to a fresh slate of new earnings that will give us some indication of how companies did during the important holiday season and what that means for potential 2017 performance.

I've written before in my last portfolio update how a lot of 2017 projections have a pretty high growth rate assumption built in and I'm eager to see if that comes to fruition or if the estimates are overly generous like they have been in the past years which has lead to pretty high valuations. I wonder how long stock prices can keep growing if earnings are flat like they have been in the past few years and that'll be one of the things I'll be keeping a close eye on when evaluating stocks in 2017.

Let's take a look at how my portfolio employee Steve did in December, one of his busiest months.

Sunday, December 18, 2016

My savings rate and expenses - November update

Happy Holidays!

It's time for the last savings update of this year as the December expense data will be covered in January. The year has flown by in a breeze and ushered in the cold dark depths of hell(winter)!

I've gotten past the ugliness of last month and while there was one bill for my medical expenses that fell into this month; most of that is behind me and I can get back to savings rates that are in the double digits. Anything above last month's 8% will be a welcome sight and I think I actually controlled my spending pretty well this month.

There was that one medical bill but also some discretionary spending in the form of a new warm jacket and hoodie that cost a pretty penny. I've always been the type to buy cheap clothing but felt like winter is one of the areas in your wardrobe one should really splurge on and I did just that this year. The new jacket is a huge change from the cheap ones that barely kept me warm and has actually made me enjoy winter(I usually hate it) a bit more since I can walk around in comfort and not be miserable and cold.

Beyond that, winter months are slow at work which gives me time to recharge. The good thing about the end of 2016 in particular is that I have four work days left and then I get to enjoy a nice eleven day break! I'm certainly looking forward to that as it'll give me a preview of life after early retirement.

I'll be glad to have that time to reflect on the year and look forward to the year ahead.

I already have some ideas of what I want to do differently for 2017 and where to best devote my time and it involves a potential way to increase my income. I'll make a post about that soon as it deals with a way to turn a hobby of mine(writing) into a potential income generator that can help increase my savings rate and shorten my time to retirement! It's something I did in the past and earned money with but I never stuck with it and since it's something I want to do in retirement; I figure it'd be good to get back into it and get more practice while doing it.

However, that's a story for another post however so let's take a look at where my money went this month.

First up is the gross income breakdown.

Sunday, December 11, 2016

My portfolio - December update

It's the last update of the year and the stock market rally continues to push portfolio values to new highs.

This year has really flown by and it feels like it was only yesterday that I started tracking my portfolio on this website. Now I've got a full year of portfolio data and have done a great job of bringing my portfolio closer to my target asset percentages.

The S&P 500 had one of the best months since the post-February dip rally as it was up over 4% in the past 30 days. Those of us who thought the stock market was overvalued a few months ago(myself included) have been surprised by the way the market reacted to the events of the past few months. There are still a lot of question marks around the market valuation and whether the optimistic earnings growth projected for 2017 will materialize.

I did some digging for my own edification and right now according to Factset, the expected earnings growth rate for 2017 is nearly 12% driven largely by a 345% growth rate in Energy(that might seem high but earnings shrunk 75% in 2016) and mid teens growth rates in other areas(and earnings reductions in real estate).

That's generous based on the nearly flat growth rates since 2014 but apparently analysts are bullish on what the trump presidency means for certain industries. That puts the forward P/E ratio at a 17.1 against a 10 year average of 14.4 so it still speaks to an aggressive valuation of the market as a whole even if you feel that the earnings growth estimates are realistic. Tracking back to historical forward P/E averages, it means a potential of a 15% reduction in 2017 for the pessimist in all of us. .

I do like to look at that data like that but also like to look at how accurate these predictions have been in the past.

The projected growth rate for the S&P for 2016 at the same time last year was about 7% and we're looking at flat growth in 2016 so about a ~7% miss on that projection. That assumes Q4 isn't a blow out quarter across the board but so far it looks to be in line with expectations.

The projected growth rate for 2015 at the same time two years ago was 7.6% and the true growth rate was just shy of 1%. I think the trend I see is that analysts are often overly optimistic about the growth potential of companies in the S&P so I'm not putting much faith in the nearly 12% growth rate for 2017 or the forward P/E ratio of 17.1 but I'm generally more pessimistic than some others when it comes to investing.

A forward P/E of 17.1 becomes an 18.4 if we assume the growth rate projection is about 7% higher than what will materialize. This isn't based on anything beyond two years history so it's nothing to hang your hat on but does give us another data point to support the potential overvaluation of the market right now. An 18.4 P/E could potentially mean a nearly 25% reduction in prices if stock prizes normalize.

So what does that mean for me as an investor? Will I be making drastic moves to go 100% cash and wait for that 25% reduction for when stock prices normalize? I think you all know the answer to that just by reading the name of the blog.

There's a lot of data points out there that lead you one way or another but the one data point I use is the historical return of the market in the long term. I still truly feel that the market will be up in the long run and that the best way to benefit is to stay in it through the highs and the lows.

Right now, it certainly "feels" like we might be at a high but I'm not certain of that nor is anyone out there no matter what they tell you.

P/E ratios and other valuation metrics may make it seem like the stock market is overvalued but they were the same way months ago and the stock market has only gone higher. Sure, the stock market could drop 25% and we could all say; of course it did because of the valuations getting out of control but what if they don't? This might also be the lowest the market will be for the next 10 years as we enter an era of prosperity and selling now will mean missing out on all those gains. Even if you sell now and the market does drop; how will you know when to buy back in? The truth is and this is something I truly believe is that that you just can't time the market.

My firm belief is that no one knows anything so it makes no sense to react to data points that may mean nothing in the grand scheme of things. If earnings growth is 15% next year and higher the year after then today's prices may seem like bargains.

On the other hand, if earnings growth is anemic next year and stock prices tank then so what? If you're worried about that scenario then you need to revisit your risk tolerance and see whether your stock allocation is right for you. There are plenty of people who started investing after 2008 and have known nothing but gains and quick recoveries. These are the people that really need to look at their portfolio and decide whether they're comfortable with their stock allocation and comfortable with the potential of a 25%+ drop. If not then the end of the year is as good a time as any to make some changes and to revisit your investment plan to see if you're still happy with your risk exposure. High stock exposure can mean a 50% drop in values in the blink of an eye and while there's a high likelihood of recovery; there's no clear timeline as to when that recovery will come so keep that in mind. The worst decision you can make from a long term return perspective is to sell low and then miss out on the rally when it eventually comes down the road(it may take a while).

Risk tolerance is a personal choice and is one of the reasons I have a bond allocation as well as an allocation to cash if I feel like the stock market values aren't realistic.

It gives me a mental safety net and a sense of calm around my investments while allowing me to benefit from stock market gains and not make stupid decisions like selling when I "think" stuff is overpriced. It does add an element of market timing to my investment style but it's an element I enjoy as a Finance professional and it helps me sleep at night so I'm OK with missing out on some potential long term returns to gain that.

I've thought stocks have been overpriced since the start of the year and I've been near my cash maximum since then missing out on some gains during the market rally but to me that's worth it because I have the piece of mind that if the market crashes - I have some cash on the side and an allocation to bonds that will help me weather the storm.

It's a two sided coin and a personal decision to make. High risk tolerance will always lead to higher returns AS LONG AS you actually have high risk tolerance and don't just think you do. Selling at an inopportune time is the worst thing you can do for long term returns.

As I make this final update - I look back at my asset allocation plan and I still like what it allows me to do. It allows me to participate in the market at all times but have a safety net in cash and bonds for when I feel the market is too frothy for my liking. While that limits my potential gains - the cap on cash(10%) and low allocation to bonds(7.5%) means I'm still mostly invested in stocks which will generate good long-term returns for me as long as I can ride out the ups and downs of the market.

I always like to revisit my asset allocation every year to see if I want to make any changes and if my risk appetite has changed. At this point, I don't think it has and will be keeping the same asset allocation for 2017 but may consider raising my bond exposure in a year or two after my portfolio size crosses a certain dollar threshold.

These past few years have been pretty much nothing but ups but I am ready for the downs if they do appear in the near or long term and that's just as important as buying the right stocks for long term returns.

Speaking of ups - let's take a look at my portfolio this month.