2018 Year End Update and Asset Allocation

*This post may contain affiliate links. Please see my disclosures.

“When the bear rears its ugly head, throw cash at it until it goes away” – Anonymous.

2018 has come to a close and I have now completed two thirds of the “work nine more months” plan. The fourth quarter came with gut wrenching excitement if you check your investment accounts on a regular basis (that’s me!). Here is the year end update on our asset allocation and investments.

There was some tinkering and attempts at market timing this quarter. We watched the total market index go from a near all time high to down 21% by Christmas Eve. I threw some cash at the bear market during the quarter, played with some option and financial stocks, then finally sat down and wrote an investment policy statement.

Related Content:

Q2 Investment and Asset Allocation Update

Q3 Investment and Asset Allocation Update

Net Worth

Mutual Funds:  64.7%.   This comprised of 52.2% low cost, passive index funds and 7.86% in one active Vanguard mutual funds (Vanguard Wellington).  We reduced our allocation towards passive small and mid cap funds this quarter, primarily to attempt to take advantage of what I believed was a buying opportunity in the financial stocks. I also started buying the total market index inside two of accounts with the cash allocation between November 24th and December 15th.

Individual Stocks:  36.52%.  This allocation moved up by 15% for the quarter!

This jump was almost entirely from adding financial stocks in the quarter. I work in banking and started buying a basket of the large and regional banks in December. There were a number of companies off by 30%+ as opposed to 20% for the total market. Naysayers were talking about it being the end of a credit cycle, disruption from fintech, ect, but these names were priced as if they were going to see -10%/-20% earnings growth. Unfortunately I started buying these in early December and but did keep buying these through Christmas Eve.

The investment theory was simple. 1) I do not believe there are systemic credit issues within the banks. Most of the risk has been regulated out and they will look more like boring utilities. 2) At these prices (7 to 11x earnings per share), the Banks would be able to redeem between 6% and 10% of their outstanding shares per year. Even if they saw low single digit declines in their business from competition, share repurchases would outpace the decline and reward shareholders.

Side Note: I’ve already trimmed some of these holdings back in January, happily taking 5-15% gains that outpaced the market by a couple of percentage points.

REITs:  5.26%.    I trimmed down the REIT exposure a bit more this quarter, primarily to reallocate money into the financial stocks. Had I held some cash, there were some awesome buying opportunities on two of my favorite REITs. This will be an asset class I look to increase in early retirement, but both interest rates and the overall market can cause volatility in these companies. Having a lit of good REITs and target prices you’ll pay combined with patience will reward you in REIT investing.

Cash: -2.28%.   What!?!? I certainly threw cash at the bear market this past quarter. Not only did I throw all the cash I had at it, I briefly borrowed on my margin line to throw cash at the market. I’ve done this in the past, but felt a different level of anxiety this time as someone who is planning on turning off the firehose of cash soon. As of late January 2019, I am out of the margin debt and rebuilding a cash/bond allocation.

2018 Total Return: (4.40%). The return of Vanguard’s Total Stock Market Index was (5.17%) and our portfolio returned (4.40%), resulting in an 85% correlation to the market. Our medium term goal will be to have a portfolio that returns 65% of the total stock market index in the first five years of early retirement. 2018 was a decent step towards this goal, although its questionable if all the tinkering in the portfolio was any better than owning a simple stock market index and bond market index fund.

So what happens next?

Raise cash & buy bonds: I blew through our cash/bond allocation then even borrowed some money to invest more. I’ve set a number of limit orders to help sell equities and generate cash. Bonds had a negative year in 2018, but they will serve as a buffer to volatility in the portfolio. In an ideal scenario, the S&P 500 will get back up to 2,750 and the 10 year treasury yield will reach 3% and I will sell index funds/stocks and buy bond funds.

Setting up for a draw down strategy: The last investment inflows come in this quarter then the hose is shut off. This means the portfolio needs to change to something that can withstand monthly withdraws regardless of market volatility. There’s also the possibility for a home sale and home purchase later in the year and access to the funds to do it will be important.

Accepting the cash inflows ceasing: Early retirement is more than just a spreadsheet. We have always operated with a scarcity mindset and parting with savings and investment earnings will be a challenge. However money is just a tool and its a tool we’re using to buy our time back and create more flexibility in our life.

Leave a Reply