Updated March 2021
It’s been a number of months since I published a portfolio update. I wanted to be careful about shoving out a bunch of information in a time of disruption and volatility and have someone take what I was writing as advice to act on. (I’m just another person writing on the internet while trying to figure this all out)
My main takeaway over the last year is that times of great disruption are often how investors learn about their risk tolerance. 2020 was the first 20%+ decline as a retiree and the third decline of 19% or more we’ve experienced since having a significant amount of investable assets. I took away more education and experience through all of this. I also believe we are still in a time of great disruption and diversification against all of the risks is my only logical choice. More on that after the numbers/details:
The Stop Ironing Shirts Retirement Portfolio:

Equity/Fixed Income Allocation
Total Equities: 80%
Total Bonds: 20%
This allocation has moved around over the past fifteen months. I was originally working through an equity glidepath and was in the low 70% range for equities in early 2020. As the market declined, I shoved substantially all of the bond allocation into the market. Admittedly I was early and didn’t necessarily buy all of the “right” equities – the lack of patience in buying during the decline ultimately cost me a lot of opportunity. I slowly began rebuilding the bond allocation in August/September of 2020 and by late February moved this back up to 20%. Cash is included in the bond allocation because I use a short term treasury fund and the total bond market index to hold the money I expect to use in the next year.
Equity Holdings:
Out of the 80% that are held in equities, 45% of my holdings are in individual equities and 55% are held in a combination of passive and active mutual funds.
Mutual Funds:
My largest mutual fund holdings include the Vanguard Income and Growth Fund, Vanguard Wellington Fund, and the Vanguard Value Index. I also have some holdings in the total market index, but these are scattered between accounts at a lower amount. Outside of these investments, we have 13% in International (primarily the Fidelity Emerging Markets Fund) and 12% in Small Cap mutual funds. The small cap value allocation was higher thanks to some purchases in 2020 and 50-60% returns, but I have been trimming this after it hit all time highs to reduce overall volatility and keep me around 80% equities.
The trend I’ll point out is I use a mix of passive and active funds. I like low cost and passive funds when investing in the larger side of US equities, while I think a professional money manager can provide value in the small company and emerging market space. I don’t believe those markets are as efficient and I’m willing to trade a portion of my return to reduce risk. Some of my larger fund holdings include the Wasatch Small Cap Value Fund and the Fidelity Emerging Market Fund. The only exception to my passive vs. active rule is the Vanguard Wellington Fund, which we’ve owned since 2011 and provides an actively managed balanced fund for less than 0.30% per year. I often tell people this can be a one fund solution for the second half of their investing career and we own six figures worth of it ourselves.
Individual Equities:
My three largest concentrations are
Costco: 7%
Entertainment Properties Trust: 6%
Disney: 5%
No other individual stock makes up more than 3% of my equity portfolio. More comments on the Entertainment Properties Trust holding will be discussed later…
Portfolio Size and Returns:
We are currently sitting at 29x living expenses for our portfolio. Even with all the disruption and six figures worth of withdrawals over that time period, our portfolio has grown almost 19% since I turned in my notice in March of 2019. The S&P 500 is up 34% during the same period, with part of the difference evenly split between withdrawals and the portfolio lagging the index. It’s amazing to see our net worth grow while *not* working.
What about the underperformance? I am comfortable with it because my goal is to take less risk than investing fully in an S&P 500 fund. In the words of Warren Buffett: “Why risk money you have and need for returns you don’t need?” The benefits of extra money are marginal to me, but the risk of a permanent loss of capital can send me back to work. I don’t think the S&P will drop 40-50% and stay there for a decade, but I’d rather not be fully exposed to that risk. My specific concern was the overexposure to highly valued technology stocks in the index, so I accepted a lower return in exchange for lower risk. I had this concern in 2019 and I still have this concern today.
What do I think about the current state of the market / economy?
As I write this, there is still significant disruption occurring in the economy. Tourism and hospitality is still challenged in the economy. In person retail and restaurants still have pandemic related friction and have not fully recovered. Many small businesses have closed and those sales have shifted over to larger companies. What will the split be between work from home/remote vs. in-person work?
There’s also significant interference going on in the economy. The federal reserve and federal government rightfully jumped in with a number of emergency measures. There were policies that took the approach of pushing money out to almost everyone twice in 2020 while the federal reserve dropped interest rates to zero. The challenge with these emergency measures though is do they end or do they become the new normal? Emergency level rates were kept at below 1% by the federal reserve from late 2008 to May of 2017. Interference is tough to remove.
There’s now another “rescue” package going through congress with some good ideas while other things that barely look COVID related.* The proposal to give out $350bil in grants to states/municipalities enjoying record property tax revenue is confusing. People who kept their jobs in 2020 are going to receive another check (or stimmie as the local surfboard shop them) and the foreclosure / eviction moratorium is continued. How does that moratorium ever end? When does it end? Housing inventory is at record lows and prices are at record highs with bidding wars because of a lack of inventory. I don’t know what the end game looks like. The same applies for federal student loans, once politicians pause payments, how is that ever reversed?
I write about all of the economic interference to remind everyone that we are still in a time of great disruption. The money supply is greater than ever and the velocity of money (how often it changes hands) is lower than it’s ever been. Inflation and deflation are both risks and there are fewer tools at the disposal of policy makers. Assets are expensive relative to historical standards, the Shiller PE Ratio sits above 34 as I write this in early March. The market’s volatility *still* hasn’t settled back into pre-pandemic numbers; the volatility index remains at twice it’s historical levels and usually a VIX approaching 30 screams a buying opportunity.
So what does this all mean for investors?
With the great disruption we’ve seen over the past twelve months, there has been a less common opportunity for outsized returns (and losses). The “Roaring Kitty” turned a $53,000 investment/bet into eight figures on GameStop. Cathie Wood put up enormous performance results with an emerging technology fund. Patient investors who waited until mid March bought individual stock names or small cap value funds and enjoyed 60%+ gains. The S&P 500 finished more than 16% higher in 2020 even though earnings fell.
“If you stand at a bus stop, you’ll eventually catch a bus. But if you run from bus stop to bus stop, you may never catch a bus” – Howard Marks
Are people running from bus stop to bus stop? Take a look at the inflow data for the ARK Innovation Fund
I see these fund inflows and wonder what will returns look like going forward? How much pain will there be from people chasing performance? Am I making any moves that are chasing performance? Patience and letting an investment thesis work out is something I personally want to be better at.
My final “what does this mean” thought comes to asset prices: When prices are high, there’s less opportunity for gain and more exposure to loss. This means there are many buyers and few sellers. Think about real estate right now: What is the risk of buying when most properties go to a bidding war and sellers waive inspections.
The alternative is true when asset prices are low – there are few buyers and many sellers. In that environment, the opportunity for gain is high and the exposure to additional loss is low (even though pessimism causes most to believe the losses will continue). Think through what type of environment any asset you’re considering buying is in.
Balancing Risk and Return:
I’m fortunate that a lot of people ask my opinion on investing and various investments. One of my first comments is usually to tell them that I’m playing a different game than most. We’re no longer in the wealth accumulation mode – additional money has little change to our life. We don’t need to take a lot of risk to meet our goals. However a permanent loss in capital from taking too much investment risk can result in a negative lifestyle change! I like work being optional, not mandatory.
If I were to give assets a risk score between 0 and 100 on a low to high spectrum, it is rare I’m going to be making many investments that score over 50 or higher. That’s my risk range. I have to accept the fear of missing out when I see other people enjoy those returns on investments that are outside my parameters. For those I talk to who are still enjoying a firehose of cash coming in from employment or businesses, there are opportunities to make those higher risk investments and enjoy outsized returns.
Economic Risks:
To expand a little on the comments from earlier, there are still great risks to the economy. Money has been flooded into the economy through policy action and the federal reserve, but there are underlying headwinds. The current political environment is pushing for slower growth policies of increasing corporate tax rates and unemploying 1.4 million additional people through a $15 minimum wage proposal. (There are valid reasons to consider both of these, but validity doesn’t change the consequences). There’s also a need for more government revenue in general to offset the multi administration spending spree, which will eventually be a headwind to growth. Politicians don’t want to have a rational conversation about tax policy and have instead embraced Modern Monetary Theory and the idea that deficits don’t matter. It’s unknown what consequences will be and it’ll probably take decades for them to fully set in.
The biggest unknown is the inflation vs. deflation argument. The money supply has increased significantly since the pandemic began.
This should be a glaring sign of pending inflation. However people still aren’t spending all of the money being pushed into the economy. Look at the change in personal savings rate over the past twelve months. Even with the record home prices, car prices, and home renovation, that’s still a lot of missed vacation, missed costs of travel sports, and many “stimmies” going into Robinhood.
The higher savings rate has caused the velocity of money (the number of times dollars change hands in a year) to plummet. This is a screaming sign of deflation. Americans are going to spend, so I don’t expect the personal savings rate to say quite this high, but this is a significant disruption to reconcile. The federal reserve is actively trying to create inflation while numerous other things happening in the country are creating deflation.
How am I investing in this backdrop?
US Equities: I see this as a “tough to be in, tough to be out” scenario. I lean towards investing in companies that can perform well in a slow growth environment and absorb both inflation and deflation. These are either companies with pricing power or that have steady pass-through margins, like dominant essential retailers. My preferred index / ETF to own now is the Vanguard Dividend Appreciation ETF, then adding individual companies to supplement this ownership. Quality matters and I’m still not a huge fan of the technology heavy large cap index funds for this stage in my life.
Emerging Markets: I like the long term outlook for emerging markets. The impact technology is having in formerly third world countries is significant. Everyone has a computer in the palm of their hand. Digital currencies means wealth doesn’t have to be tied to a state controlled bank.
I specifically invest in actively managed funds, the emerging market indexes include quasi-state owned companies which unfortunately are ripe with political corruption and poor shareholder returns. I’ll pay an active manager to avoid these companies. There’s more volatility in these investments, so I am conscious of how much of this asset class I can have.
Bonds: These are the tougher investments to hold right now. If we see inflation, bond yields go up and anything with duration gets crushed. Conversely, if deflation rears its head, treasury bond yields could go negative and anything with duration sees outsized gains. The risk of a stagnant economy and inflation like the country experienced in the 70s makes holding a significant percentage in bonds more risky than it’s been historically. I’m split in my bond holdings between the total bond index and a variety of long duration treasury holdings.
Real Estate: There will still be opportunities to make a fair return in real estate, especially when purchasing REITs or into syndications and private funds into assets that are out of favor. I built an outsized position in Entertainment Properties Trust as the pandemic began and believe it’s fair value is $60/share (It’s been gyrating between $44 and $49/share lately). Once that returns to it’s fair value, I’ll reallocate that into other real estate investments. I will probably have to accept the illiquidity risk of a private fund or syndication to meet my returns, but there are still nice opportunities out there. I recently looked at a new senior living fund that focuses on buying distressed assets, that’s something that looked appealing! I’m always open to direct ownership of real estate, but my return hurdle is higher than most (20%+) because of the tail risks that can come with investing in a single property. Financing commercial real estate for a decade and a half just caused me to see more of these tail risks and subsequently I demanded a higher return than others. .
Final Thoughts:
I enjoy sharing these thoughts and listening to what others think. Investing is about risk, returns, and each individual’s risk tolerance. That risk tolerance is both learned and changed over time. I was looking back at some of my screen shots from March of 2020 this week and it reminded me of my risk tolerance. For me, there’s a limit on risking money I have and need to chase returns that I don’t need. For others with a longer time horizon and cash flow from employment coming in, they can and should take more risk.
It’s an interesting and disrupted time in both the market and economy and caution is warranted in this environment.
I hate commenting on anything related to politics, but when investing the backdrop of this level of government interference, it must come up in an investing post. My only opinion on most of this is the lack of discussion around 2nd and 3rd level consequences of policy actions is infuriating. Actively ignoring or disputing known consequences is an evasion of reality not healthy. In the meantime, it seems like each party is hell bent on “one-upping” the next one with benefits funded by debt.
Great post, timely and informative. Thanks for sharing your thoughts.
Since you are on an equity glidepath is the plan to keep your equity at or around 80% or if there is an opportunity to walk it back, will you head back into the 70’s? Just curious as I am working through my drawdown strategy at the current moment.
I’m comfortable at 20% bonds right now. The inflation / deflation argument is difficult to figure out and I’m mostly in longer term treasuries that’ll do well in a market panic but struggle when rates are going up.
That being said, there are a number of companies/businesses I know well and I’d part with my bond allocation to buy them at a low enough price
Makes sense. Thanks!
Thanks for all the writings over the years.
Looking back, would you have made changes to the percentages of assets held in taxable, pre-tax retirement and Roths for you and Mrs. Shirts?
I have 5-10 years before leaving the workforce, and wonder how you would think of funding the buckets if all were available to the household?
That’s a good question with one variable: Housing. We’re at around 25% in after tax funds.
In hindsight I was a little too heavy in pretax accounts. The caveat is I didn’t have my housing nailed down before I quit, we just didn’t know where we wanted to be long term.
Now I’m a little light on being able to pay for a house outright and getting a mortgage as an early retiree has some challenges.
I didn’t have the Roth 401k option available for almost my entire career, so it was either pretax or after tax money
Thanks for your thoughts. While I understand the buckets aren’t the most important part of the equation, I’m trying dig in to understand the variables at play – and the housing piece is something I failed to consider.