At least once a year, you need to do an asset allocation review. An asset allocation review will help make sure you have the proper risk exposure.
In a bull market, the wealthy get way more wealthy than the average person. Even if your $300,000 portfolio is up 30% to $390,000 this year, that’s nothing when Warren Buffet is up $10 billion!
Who cares if your $800,000 house appreciated to $1 million when some 23 year old rejected a $3 billion cash dollar offer for his photo messenger app. Ah, the unfortunate curse of financial comparisons.
I’d like us to do some financial reflecting after a fantastic bull run since 2009. Nobody thought 2020 would turn out to be so great in a pandemic either. It’s important we review our asset allocation every year and figure out how we feel about where we are to make future allocation decisions. It’s very hard to ascertain our risk tolerance without getting a little personal.
Asset Allocation Review: Two Parts Offense, One Part Defensive
If I was a greedy guy I would have stayed on Wall St. for another five years instead of leaving after 13 years for a life as a poor writer and a bootstrapping entrepreneur. It’s so much easier to make at minimum $250,000 as a Director at a major investment bank than $250,000 with your own startup. A day job is a piece of cake compared to entrepreneurship!
Instead of using a recovering economy to make more money from a day job, I used a recovering economy to take more risks in the name of long term freedom. Leaving my job was a very calculated risk that took one year of planning before I pulled the trigger. If we were still in a bear market in 2012 it would have been much harder to believe in my abilities to generate income on my own.
If you don’t count my online business, my net worth / asset allocation is split roughly 35% in stocks, 40%-45% in real estate, and 25% in CDs. I hold practically no cash. This is the two parts offense, one part defense I’m talking about. Here’s my recommended net worth allocation by age chart.
Let’s go over my asset allocation review.
Most of my stocks are performing in-line with the market +/- 5% because most of my stocks are index funds and structured notes tied to indexes. A smaller, but still significant portion of my stock exposure is my rollover IRA punt portfolio where I’m constantly hunting for unicorns. I’ve had some nice wins, but the portfolio is underperforming the markets because I’ve been much too cautious. My forecast for 2013 was for gains of just around 10% so I reduced risk in my rollover IRA accordingly. Chalk another one up to passive index investing over active investing!
I’ve also come to the conclusion that implementing Rule 72(t) to extract money from my IRA penalty free is out of the question for now due to the growth of my online business. The online business generates enough to live a normal life, hence it’s important to stop being so risk averse and allocate the rollover IRA portfolio more heavily towards the stock market for hopefully decent returns over the next 24 years until age 60.
I certainly wish I had invested in higher beta names in the stock market at the beginning of the year. Because the active portion of my stock portfolio is underperforming, plus the fact that I’m not utilizing any of my investment gains or dividends on life, I don’t feel even a hint of wealth increase from stocks. Stocks continue to feel like an amorphous entity that provides no comfort. Here one day, gone the next.
Stocks are the most volatile part of my asset allocation review.
Every wealthy person I know owns real estate as part of a diversified portfolio. Real estate is supposedly up around 20-32% in San Francisco, depending on which analysis you believe and which price segment you follow.
Real estate was about 35% of my net worth last year, but due to price appreciation it’s grown to 40%-45% of my net worth which is partly why I’m thinking of offloading at least one rental and rebalancing. The problem I have is where to put the proceeds. I’m certainly not going to dump even more money in the stock market when I’m having a difficult time deploying capital in my active rollover IRA!
Because Zillow updates their zestimates 3X a week now compared to just once a month a couple years ago, I’ve got into the habit of constantly checking my property values like I check my stock portfolios. Not good because one of the reasons why I love real estate is that I don’t have to think about the asset much at al. I like to buy things, forget about them, and wake up 10 years later to hopefully much more wealth. Just be careful because the online real estate pricing estimates are often wrong.
Real Estate Still Very Attractive
I’ve got to admit it feels amazing to see property prices go up so much because I’ve got multiple properties that are all levered. You’re only really long real estate if you have more than one property. If you rent and own nothing, you are short. If you only own your primary residence then you are neutral.
A 10% property price increase is a 50% cash on cash increase if you only put 20% down for example. Unfortunately I’ve got over 50% equity in all my SF properties so I’m not that levered. But I can’t wait for my poorly timed investment/vacation property purchase in Lake Tahoe to start recovering lots of its equity again. Vacation properties are the first to go down and one of the last types of real estate to go up. But when they do recover, they can go up quick because of excess liquidity.
Receiving monthly rental income really makes me appreciate rental property despite its occasional hassles. A rise in real estate prices does the most in terms of making me feel wealthier, even to the point of fantasizing about buying a new automobile to replace Moose.
Real estate is my favorite part of my asset allocation review.
I’ve got a chunk of change invested in CDs producing roughly $3,000 a month in interest. They are scattered across three banks which is partly the reason why I use Personal Capital to keep track. All of the CD interest is reinvested to principal, which means I haven’t spent a penny of CD proceeds in over 10 years. I asked one of my banks the other day if I could withdraw some of the YTD CD interest penalty free to pay for property taxes, and they said I couldn’t without a penalty because I didn’t elect the option to deposit interest proceeds to another account. This is an important detail to consider when you first open a CD so take note!
At a ~3.8% blended annual return, I’m losing big time compared to the stock and real estate markets. At the same time, the 3.8% annual return is risk free. I sleep well knowing that if the world ever falls apart again, I’ll still have $3,000 a month to live on until I can get back on my feet. Protecting your financial nut in retirement is crucial and my $36,000 a year in income is like a pension that I hope will last forever.
Earning only 3.8% annually doesn’t make me feel poorer since it’s still a positive return, but it doesn’t make me feel any richer since I see the opportunity cost lost of not investing more into the stock and real estate market. I’ve been practicing allocating 30% or more of my savings/bonus towards CDs since 1999 given I worked on Wall St. The last thing I wanted was to lever up more into the stock markets given my salary, bonus, and career depended on the whims of the market. After 14 years of CD investing, old habits are hard to change.
The only thing that makes me feel poorer is having cash in a checking or savings account. This is the reason why I hardly ever have more than one month’s worth of living expenses in cash.
Your X Factor is an important part of your asset allocation review. A large part of the reason why I don’t feel so bad about not making a day job income anymore or having such a large allocation towards low returning CDs is because of my X Factor. Business revenue is up about 40% YoY. But operating profit is up anywhere from 150%-170% based on the financial analysis conducted during the company offsite.
There’s no better business than running an internet business. Its low cost, potentially unlimited demand curve, and flexibility to work from anywhere in the world make blogging awesome.
Spending four weeks in Hawaii reviewing the financials, coming up with a game plan for next year, conducting team building events, and doing research about Hawaii for future posts has truly been fantastic. I strongly believe in producing content based on first hand experience.
It may get expensive flying around the world to experience the culture and interview people about their perspectives. But I think it’s absolutely worth it in the end. Being able to see the future of America through six weeks of investigative journalism in Europe last Fall is worth way more than the $10,000 expense.
If my online business was floundering, I’d probably feel like I was falling behind in this bull market despite my stocks and real estate. The online business keeps me busy during retirement by actively using my knowledge learned at my previous job. Being able to put theory into practice is a wonderful reward.
GROW YOUR WEALTH BY BEING MORE AWARE
Although I’m not 100% leveraged into this recovering economy, I do feel modestly richer due to the growth of my business. I’ve got to remind myself that making money is a means to an end. Having the freedom to do what you want is priceless. It cannot be overemphasized the longer I experience this crazy journey.
One of the major concerns I have is the widening gap between the rich and poor. A bull market does a better job at masking inequalities despite math saying otherwise. The reason is because at least more people are benefiting from an improving economy.
It’s when the rich are still rich during a downturn and the poor are just struggling to survive when all chaos breaks loose. It’s my sincere hope that through discussions we have here on FS that more people will become financially empowered to live their lives the way they want.
We all need to find a comfortable balance with money. Hoarding cash and not investing in assets that have the potential to appreciate is not the way to go. My goal is to rebalance my net worth to around 20% risk free, 35% stocks, 10% bonds, and 35% real estate. I’ll discuss in a future post on how I plan to get there.
Make sure you do an asset allocation review at least once a year!
RECOMMENDATIONS TO BUILD WEALTH
The easiest way to do an asset allocation review is by signing up with Personal Capital. It is a free online platform which aggregates all your financial accounts in one place. This way, you can see where you can optimize.
Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing. I can also check how my net worth is progressing. I can also see how much I’m spending every month.
The best tool is their Portfolio Fee Analyzer. It runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying!
They also recently launched the best Retirement Planning Calculator around. It uses your real data to run thousands of algorithms to see what your probability is for retirement success. Once you register, simply click the Advisor Tolls and Investing tab on the top right and then click Retirement Planner.
There’s no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Why gamble with your future?