I wish the first quarter had ended on January 26 when the S&P500 peak reached the all-time high of 2,872! But in the end, the first quarter of 2018 was really nothing to write home about. And the second quarter is off to a volatile start as well! But I started with this series exactly a year ago and I might as well keep going! Besides, looking at the visitor stats, these posts are some of the most popular! I don’t blame you for being nosy because net worth updates are some of my favorites to read on other blogs, too! 🙂 Soooo, where do we stand as of 3/31/2018? Let’s take a look at the cold hard numbers…
The good news: despite the market drop, our Net Worth increased by about $185k, a plus of about 6%! Was that because of smart and savvy investment moves? Of course not! As passive index investors (for the most part), we were subject to the same lackluster return in the first quarter. The gain came from two sources: 1) additional contributions, including a generous bonus in February, and 2) a higher-than-expected sales price for our condo! If I had to assign percentages I’d call this 0% skill, 50% luck and 50% new contributions.
Talking about the condo sale in January, that went faster and better than we had ever imagined. Real estate is hot in San Francisco! The realtor showed the unit on January 12 and we got an offer the next day and a proposed closing on January 23. Full asking price, no inspection, all-cash offer, i.e., no mortgage contingency! The eventual closing date was delayed by one day to January 24, but that’s still pretty impressive! So, part of the Net Worth gain came simply from getting significantly more than we budgeted in the Q4 Net Worth estimates! As I wrote before, homeownership was indeed a good investment for us!
Most of the proceeds from the home sale went straight into the options trading account, now about $1,200,000 strong. That took some guts considering the crazy market moves in early February! Volatility came back with a vengeance! But my experience with my short-put strategy has been that the most generous and reliable returns come after a spike in volatility. So, the trick is to not lose your shirt in the initial vol spike and then make money in the next few weeks and months.
By the way, not losing your shirt is easier said than done, as the investors in the inverse VIX fund (ticker XIV) painfully found out in February. That ETF was essentially wiped out! Not to toot my own horn too much, but that was the very fund I warned about in a post last year. It took only a little more than 3 months to blow up after my post in October 2017! So, for picking up a vol premium, shorting VIX futures is a very risky and unpredictable route! I very much prefer shorting put options!
In any case, most of our other Net Worth categories went up in value (401k, IRAs, Health Savings Account), but again that was entirely due to new contributions, especially in the 401k where we front-loaded contributions to make sure that we make the entire $18,500 in pre-tax contributions and $16,000 in supplemental after-tax contributions before I retire in June.
The deferred comp account gained from an additional cash infusion on the bonus date. And again, the number quoted here is already net of a roughly 40% anticipated tax bill because this account will be paid out as one large lump-sum later this year or possibly early next year. Taxed as ordinary income, ouch!
“Other Assets” almost doubled, but that’s entirely due to the left-over cash from the home sale that we haven’t deployed yet. Given our ambitious travel schedule and the resulting higher expenses during the first 1-2 years of early retirement, we may even leave some of that money in some short-term instruments (money market, CDs, etc). I think of that as insurance against Sequence of Return Risk. In other words, we’re smoothing out the additional expenditures early in retirement that would unnecessarily compound sequence risk.
Where do we go from here?
As I mentioned in the going public post in March, I will keep working until June but slowly wind down my job and handing over my duties to younger team members. Office life is becoming a lot more relaxed now – lots of invitations for coffee breaks from folks who want to learn about early retirement these days! We might win over a few new FIRE converts!
But personal finance is becoming a bit more nerve-racking now! Is it possible that I picked the worst possible time to retire? As I showed in my Safe Withdrawal Rate Series, the number one ingredient to ensure you run out of money in retirement is to pull the plug right around an equity market peak and before a deep and extended bear market. Well, we did slip into correction territory (10% drop from the peak) a few times already, so everybody who recently retired or plans to retire soon has a reason to be nervous. Personally, I’m not overly concerned (yet) because this is not the first time we’ve seen equity volatility since the start of the equity bull market in 2009. An equity market correction outside of a recession normally causes only short-term worries for investors. And among the three recession warning signs I recently identified, not a single one is even close to flashing red:
- The yield curve hasn’t inverted yet: As of April 10, the 2 and 10-year yields were still about 0.50% apart. We’ve had no recession in recent history without an inverted yield curve!
- Unemployment claims are still rock bottom, in the 200-250k range. I would look for a rise to at least 350k, even better 400k before I get worried about a recession!
- The ISM-PMI index is still very strong, close to 60, well above expansion range (>50) and certainly well above levels consistent with a significant macro downturn (<45).
So, while I believe that equity returns are likely going to be a bit leaner going forward, I don’t see a bear market around the corner either! On to the next and hopefully more profitable quarter!
Thanks for stopping by today! We hope you all had a good Q1 2018 as well!
Picture Credit: Pixabay.com
Nice quarter! Love the comment “0% skill, 50% luck and 50% new contributions”, shows some real character and humility. That being said, you did not get to $3.4M by being a complete idiot 😉
How are the holiday plans going?
Haha, even the 3.4m are more due to patience than skill! Thanks for stopping by! We will take a cruise ship out of Amsterdam to cross the Atlantic back to the U.S. on September 1. So, we will hang out in AMS for a few days before and before then in Belgium. Let’s arrange something and have a FI Meetup!
We can definitely do that! Will be back in July from the 9 week road trip, will be in touch!
Good job ERN! You are probably among the rarest few that in the FIREd crowd who can report a gain at end of 3/31 versus 12/31. That shows your investing acumen, though you are too modest to admit.
Thanks! Marching toward 10!
With a little bit of luck! 🙂
Congrats on the net worth. With regard to market pullback/correction, it’s best to stick with it and not overreact anyway. The stock market has historically shown a strong propensity to bounce back sooner than the averages would indicate when you factor in dividends and deflation.
Well, so far I’m sticking with it. But I’ve been thinking about what I’d need to see before I
… pull the plug on equities. Would need to see a recession around the corner and it doesn’t look like that so far: https://earlyretirementnow.com/2018/02/21/market-timing-and-risk-management-part-1-macroeconomics/
Is it possible that I picked the worst possible time to retire? Definitely the most-asked question of every early retiree or near retiree!!!!!
It should be. But it would also be nice if we all laugh it off six months from now when the S&P reaches the next all-time high again! 🙂
I saw the statement: “Is it possible that I picked the worst possible time to retire?” and my first thought was of course not! At least in the short term, January 26, 2018 would have been a worst time to stop taking in a paycheck and determine spending and a safe withdrawal rate. For whatever it is worth you are at least a few months too late to be retiring at the worst possible time.
Now you have made me terribly curious about how the historical worst case scenarios are affected by moving retirement by just a few months (e.g. March 1966 instead of January 1966 or July 1929 instead of September 1929). Has anyone worked out historically how much better off you are by working 3 months after the stock market peak?
I have generally taken the lazy route and modeled retirement with the annual calculations Cfiresim, instead of Big ERN’s monthly data. I know just one year makes a substantial difference (3.2299% in 1966 vs 3.4081% in 1965 for a 51 year horizon assuming capital depletion and no SS).
The 1966 episode has a long stretch of the 4% failing. 1964-1966. So moving 2-3 months forward/backward from the peak you’re still screwed. 🙂
Hi ERN!
Just curious. Since you found that a glidepath with a high proportion of bonds around the retirement period can reduce sequence of returns risk, why have you chosen to have > 80% of your portfolio in equities? Is it because you believe that there is not a bear market around the corner?
Thanks and congrats!
That too. But I think I might also be bad at following my own advice. I know some medical doctors who are bad patients themselves. 😉
Nicely done!! If only our own house sale was such smooth sailing….. Couple of immediate offers (at asking price) after our first open house ultimately fell through due to silly contingencies. A recent offer at just below asking price is being worked through. Buyers are serious, home inspection tomorrow morning. Fingers crossed, all things crossed……
I also benefited greatly from a crazy large bonus in February. My last one! I was of course extremely happy that my company went out of their way to make it a good one!! :>)
Also exercised a bunch of stock upon vesting in February. Lucky timing as company stock price fell 25% late March-early April.
Both of those helped cushion the Q1 market drop and made our Personal Capital net-worth screenshot less ugly.
Awesome! Good luck with the home sale and congrats on the big bonus! Let’s compare notes some more later this month!
Well done ERN. It’s always nice to come out in the black when the market is in the red. I really enjoyed your market indicators of a recession post. It’s nice to know there is some science behind the thinking that this is a blip and not expected to be a long-term drop.
Thanks! Knock on wood, it looks like stocks are heading up again. Again proves that outside a recession the little blips are good buying opportunities!
Congratulations on a great quarter!
I early retired right before the financial crisis, that was fun!!! Not.
In real time it must have been brutal! But the recovery was fast! Despite the deep fall it became one of the less dangerous drawdowns for retirees.
Thanks for sharing!
I wasn’t invested in index funds, so the recovery was not smooth! I had a large position to diversify out of (pre crisis) that dropped 90% and stayed there for 6 years. Then in the past two years, it suddenly decided to rocket 1000%. That’s the drawback and benefit of holding individual stocks…
Wow, what a ride! Thanks for sharing!:)
Congrats on the quarter. I was able to increase my net worth right at 5% this quarter. Although not nearly as large of a dollar amount as yours. It still feels like a nice achievement!
Nice! That means you probably bought some new equity lots at discounted prices! Dollar cost averaging! Congrats!
Nice Job Mr. ERN,
I’ll have to study some of your options posts to study your strategies. I like options and always looking for unique, more controllable ways to invest. Currently real estate notes. Very little correlation to Mr. Stock Market. Highly recommend if you have the time to pick up the skills to invest in real estate backed short term rehab/flip notes. The rates are great and risk is IMO easier to control.
Thanks! I should look into the notes as well. Higher yields than bonds and low (zero) correlation with stocks!
Why do bloggers post their net worth? What someone is investing in is interesting but dollar amounts are not required.
Dave,
It shows that the person is trying to be transparent. It is always possible to “fake it”. Showing and tracking the worth over time is instructive to the readers. I may read what a random blogger is doing with their money, if they have significantly less than me and are at a similar age, I’m not going to weigh their advice the same as a high networth similarly aged blogger.
Additionally, it’s nice to see how much of the worth comes from timing and a bit of luck in the real estate market. There is one well know blogger that significantly increased their worth because they purchased property with help from mommy and daddy in a high cost of living area with a lot of appreciation. After the sale, the proceeds from this transaction account for a large percentage of their wealth. This method to FI is for me weighted similarly to being financially independent only because of an inheritance. You may benefit from it, it was the benefactors choice to provide to you, however, if this is the majority of your worth, why should I listen to you about how to build wealth?
Transparency is key! Couldn’t have said it better!
Congratulations, that’s really awesome to still have an increase of 6% in the last quarter considering the current state of the market. Keep with your strategy and good luck with your ongoing early retirement 😉
Thanks! I am still working until mid-June, but it already feels like a mini-retirement. Much less stress at work. 🙂
Very impressive net worth. 6% is huge in Q1. Nice job. We’re about flat after Q1. That’s okay too. I need to learn more about short put. Thanks for that.
Awesome! Thanks, Joe! Well, as I said, this is still thanks to new contributions. The real test will Q3 of 2018 when we start withdrawing money. 🙂
I went to you options trading article – you have lots of comments and interest in this. Could you write a couple more updates with new examples and strategy details?
Ha, that’s the first request of that sort I got. I didn’t think people were that interested in the ES put writing strategy. I will write an update. It’s on my to-do list. 🙂
Congratulations on all the success. I loved your emergency fund episode on ChooseFI. Who knows your blog might generate as much income as your job. Woo hoo!
Cross my fingers! I might get some supplemental income. So far I have made $140 in GoogleFI referral premiums. It’s a start! 🙂
For your options trading allocation you have it at 90/10 equity/fixed — how did you arrive on those numbers?
From reading the options strategy posts, it seems like you’re holding your margin cash in bond funds but then sell puts on equity futures — I guess I’m not really sure how to think about this from an asset allocation perspective.
Thanks! Great question. It’s hard to pin down the number due to 1) leverage 2) changing option delta (due to gamma) and thus changing equity exposure.
My solution: 90/10 is the split in the total portfolio variance coming from S/B.
Thanks for the insight! Indeed it seemed a complicated thing to try and pin down when I started thinking about it.
I don’t really have a good intuitive sense for how to go about evaluating the split in total portfolio balance but I’ll do a bit more reading to try and see if I can figure out a sensible example to wrap my head around this.
Hi BigERN, Obviously a little late commenting on this post, but so appreciate you sharing your FIRE journey with us!
I also have a portion of my portfolio in private real estate equity (currently ~11%), though I have no idea what % is sensible. How would one go about creating an efficient frontier with a portfolio that includes real estate?
Same here. About 10-11%.
Efficient frontier is tricky with illiquid assets. The volatility is hidden behind the LLC veil.
I’d proxy this through using REIT volatility and correlations but using expected returns of the private investments, probably around 2-3 %-points above equity expected returns.