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