rodiy2k
Recycles dryer sheets
I was reviewing our progress towards ER and was fascinated by some of the results so I wanted to share some thoughts about why it’s imperative to ignore the financial headlines, build an asset allocation plan that works for your situation and stick to that plan.
Disclaimers first: I am 48, my wife is 42; We lived in Canada from 2001 until 2007 and used $435K from the sale of our Canadian house for a down payment on a house in suburban San Francisco; We took a $400K, 15 year mortgage in 2008 and should have it paid off 2018; (We prepay as much as possible). Our plan is to expatriate to Southeast Asia and live off the house proceeds for as many years as possible before using any retirement assets. A small pension that can begin 3 years into the ER should help. So basically we started our retirement plans from scratch in 2007, excluding about $50K left from the house sale (invested in a taxable brokerage account) and about $40K in an IRA Rollover from a previous 401k. We opened up two IRA Roths in 2007 and have maxed out both ever since. (Not everyone will be able to do contribute to a ROTH while participating in an employee sponsored tax-sheltered plan; Hint: The more you contribute to the 401k, the more you lower your taxable income which is what is used as a guideline for the allowance of ROTH contributions.)
Anyway, today I analyzed our total return relative to our total contributions and there are a few points I wanted to stress that will certainly help with ER: I know I sound like an article from Kiplingers but the message bears repeating.
1) Always max out your retirement accounts and ensure you use dollar cost averaging to always invest at different times all year long: My wife started her 403b and 457b in September, 2007, 3 months into the bear market and 18 months ahead of the market bottom and subsequent huge march back up. Our returns are: Contributions: $193,087.29 / Current balance: $251,648.25 Total return: 23.27%. Our asset allocation is at least 40% in diversified fixed income, in ONLY non-passive (managed) mutual funds and a few ETF’s. Granted we are very lucky to have Fidelity as the sponsor who offers a wide variety of investment choices; We prefer employment with larger institutions who usually carry the clout to offer better retirement plans.
2) If your company plan has a match, always ensure you get the maximum: Here’s where it gets interesting; My company matches 50 cents on every dollar up to the federal maximum of 6% AND my company contributes 0.5% of annual income into the 401k as a profit sharing bonus every year. I have significantly less investment options but still have quality fund companies like T Rowe Price and TCW (masters of fixed income). I started in January, 2008. Contributions: $70,066.46 / Current balance: $99,376.97 / Total Return: 29.5%. It’s astounding what a difference the company match has made, even with less contributions.
Although my wife makes and contributes double what I do, our combined total return is 25.03% thanks to always staying invested regardless of how bad the markets get or what ridiculous calamity-du- jour occurs. Obviously timing has a lot to do with it because starting 3 retirement plans near the start of a 5 year bull market obviously helps. But that brings me to my third point:
3) If a core investment in your asset allocation hasn’t changed fundamentally, don’t sell because everyone is heading for the exits: Two examples here: our oldest investment is T Rowe Price Mid Cap Value Fund, which has long since closed to new investors; We own it for 9 years in the IRA Rollover and have purchased 4 blocks of $2500 in ’04, 06, ’08 and ’11, each time using rebalancing options since this account is non-contributory. I’m a huge proponent of US Mid-Cap funds which and always want that asset class as a core component. Looking at the graph on my financial software program, we bought the fund at a NAV of $22.00. It peaked in April ’07 with a 65% gain including distributions and then fell as low as a $20.00 NAV, turning 3 years of gains into a -6.0% loss. It then recovered and passed where it was at its peak in Feb, 2011 and is currently sitting at a 90% gain including distributions. Never bail on stocks when most everyone else does because you will most certainly lose the rise back from the bottom. I aim to double the return of an active mutual fund in 8 to 10 years and even with a 47% drop in value during the crisis, staying the course has worked.
We also have some Canadian mutual funds in my wife’s RRSP,the Canadian version of a tax-sheltered plan; Believe me, it’s very hard to grow wealth in Canada, mostly due to exorbitant fees and less skilled fund companies; We own a High Income Balanced fund since 2001, consisting mostly of the large banks like CIBC, Royal and TD; This fund is up 123% with no contributions since 2005. If you find an allocation that works, stick with it.
4) Sometimes the bond market is wrong: During the recent global bond market sell off, I made no changes to my fixed income allocation which includes US agencies, GNMA’s, intermediate term corporates, emerging markets, and global sovereign funds. I also didn’t lower duration despite the fear that bond markets are destined to be crushed due to an immediate start to QE tapering; although most of my bond funds are down for the year, the amazing equity returns have more than made up for the losses which keeps my portfolio with a nice return but significantly less risk than one with more equities. I will eventually lower duration on my core fixed income but rates are not going anywhere until 2015 or later. I did sell my long holding of TIPS when the yields crossed back over into positive territory and took a whopping 12% gain; Imagine that: investors accepting a negative yield based on an unwarranted fear of inevitable runaway inflation due to QE that never happened.
Obviously everyone’s situation is unique and we have some added advantages like no kids (they are expensive). But we live below our means, prepay almost $17,000 a year in addition to maxing out 5 tax-sheltered accounts every year. I believe the key to ER is a strategy of capital preservation and growth; I add value in country specific ETF’s like Malaysia (EWM)which fared better than every emerging market ETF during the recent selloff but also returns less over a 10 year period than others with more risk. I hope this advice serves as a boost to anyone that’s on the fence about whether they can afford ER.
Disclaimers first: I am 48, my wife is 42; We lived in Canada from 2001 until 2007 and used $435K from the sale of our Canadian house for a down payment on a house in suburban San Francisco; We took a $400K, 15 year mortgage in 2008 and should have it paid off 2018; (We prepay as much as possible). Our plan is to expatriate to Southeast Asia and live off the house proceeds for as many years as possible before using any retirement assets. A small pension that can begin 3 years into the ER should help. So basically we started our retirement plans from scratch in 2007, excluding about $50K left from the house sale (invested in a taxable brokerage account) and about $40K in an IRA Rollover from a previous 401k. We opened up two IRA Roths in 2007 and have maxed out both ever since. (Not everyone will be able to do contribute to a ROTH while participating in an employee sponsored tax-sheltered plan; Hint: The more you contribute to the 401k, the more you lower your taxable income which is what is used as a guideline for the allowance of ROTH contributions.)
Anyway, today I analyzed our total return relative to our total contributions and there are a few points I wanted to stress that will certainly help with ER: I know I sound like an article from Kiplingers but the message bears repeating.
1) Always max out your retirement accounts and ensure you use dollar cost averaging to always invest at different times all year long: My wife started her 403b and 457b in September, 2007, 3 months into the bear market and 18 months ahead of the market bottom and subsequent huge march back up. Our returns are: Contributions: $193,087.29 / Current balance: $251,648.25 Total return: 23.27%. Our asset allocation is at least 40% in diversified fixed income, in ONLY non-passive (managed) mutual funds and a few ETF’s. Granted we are very lucky to have Fidelity as the sponsor who offers a wide variety of investment choices; We prefer employment with larger institutions who usually carry the clout to offer better retirement plans.
2) If your company plan has a match, always ensure you get the maximum: Here’s where it gets interesting; My company matches 50 cents on every dollar up to the federal maximum of 6% AND my company contributes 0.5% of annual income into the 401k as a profit sharing bonus every year. I have significantly less investment options but still have quality fund companies like T Rowe Price and TCW (masters of fixed income). I started in January, 2008. Contributions: $70,066.46 / Current balance: $99,376.97 / Total Return: 29.5%. It’s astounding what a difference the company match has made, even with less contributions.
Although my wife makes and contributes double what I do, our combined total return is 25.03% thanks to always staying invested regardless of how bad the markets get or what ridiculous calamity-du- jour occurs. Obviously timing has a lot to do with it because starting 3 retirement plans near the start of a 5 year bull market obviously helps. But that brings me to my third point:
3) If a core investment in your asset allocation hasn’t changed fundamentally, don’t sell because everyone is heading for the exits: Two examples here: our oldest investment is T Rowe Price Mid Cap Value Fund, which has long since closed to new investors; We own it for 9 years in the IRA Rollover and have purchased 4 blocks of $2500 in ’04, 06, ’08 and ’11, each time using rebalancing options since this account is non-contributory. I’m a huge proponent of US Mid-Cap funds which and always want that asset class as a core component. Looking at the graph on my financial software program, we bought the fund at a NAV of $22.00. It peaked in April ’07 with a 65% gain including distributions and then fell as low as a $20.00 NAV, turning 3 years of gains into a -6.0% loss. It then recovered and passed where it was at its peak in Feb, 2011 and is currently sitting at a 90% gain including distributions. Never bail on stocks when most everyone else does because you will most certainly lose the rise back from the bottom. I aim to double the return of an active mutual fund in 8 to 10 years and even with a 47% drop in value during the crisis, staying the course has worked.
We also have some Canadian mutual funds in my wife’s RRSP,the Canadian version of a tax-sheltered plan; Believe me, it’s very hard to grow wealth in Canada, mostly due to exorbitant fees and less skilled fund companies; We own a High Income Balanced fund since 2001, consisting mostly of the large banks like CIBC, Royal and TD; This fund is up 123% with no contributions since 2005. If you find an allocation that works, stick with it.
4) Sometimes the bond market is wrong: During the recent global bond market sell off, I made no changes to my fixed income allocation which includes US agencies, GNMA’s, intermediate term corporates, emerging markets, and global sovereign funds. I also didn’t lower duration despite the fear that bond markets are destined to be crushed due to an immediate start to QE tapering; although most of my bond funds are down for the year, the amazing equity returns have more than made up for the losses which keeps my portfolio with a nice return but significantly less risk than one with more equities. I will eventually lower duration on my core fixed income but rates are not going anywhere until 2015 or later. I did sell my long holding of TIPS when the yields crossed back over into positive territory and took a whopping 12% gain; Imagine that: investors accepting a negative yield based on an unwarranted fear of inevitable runaway inflation due to QE that never happened.
Obviously everyone’s situation is unique and we have some added advantages like no kids (they are expensive). But we live below our means, prepay almost $17,000 a year in addition to maxing out 5 tax-sheltered accounts every year. I believe the key to ER is a strategy of capital preservation and growth; I add value in country specific ETF’s like Malaysia (EWM)which fared better than every emerging market ETF during the recent selloff but also returns less over a 10 year period than others with more risk. I hope this advice serves as a boost to anyone that’s on the fence about whether they can afford ER.
