Here are some investing lessons from a surreal 2017. It's always good to learn and review each year to hopefully improve risk-adjusted returns.
At the beginning of the year, I decided to track my investments with a detailed spreadsheet. My cash flow was increasing and I wanted to make sure the money was being properly deployed. If I force myself to think for hours about how to invest my money, hopefully I won't rashly spend it on completely wasteful things such as a sports car that can't fit a baby seat or a vacation property I'll hardly ever use.
On the flip side, ever since the housing crash I've had a heightened fear of losing money. This is especially true since I haven't had a job since 2012. It takes around three years as an entrepreneur to feel confident you won't starve on the streets. When you are a parent, the pressure is even more. As a result, I tended to hoard cash, which is suboptimal in a bull market.
This post will go over my investment thought process by category for 4Q2017. I'll also conclude with some investing lessons learned about the year. The goal of tracking our investments is to try and take full advantage of a bull market.
Investing Lessons From A Surreal 2017
In summary, I mobilized a total of $2,263,319 into various investments in 2017. This is why I say 2017 was so surreal. This was the most amount of money I've ever invested in on year.
$750,000 of the $2,263,319 was invested in conservative investments (bonds, mortgage pay down, and home improvement). They should return ~4% or more gross a year. The remaining $1,500,000+ was invested in riskier assets with a target return of between 8% – 18%. My goal is to achieve a 10% total annual return, but will gladly settle for 8%.
The $2,263,319 invested was largely helped by a rental home sale in June 2017, which gave me ~$1,788,000 in proceeds ($2,740,000 sale price). Due to declining rents, expensive valuations, potentially rising mortgage rates, higher property taxes, potentially negative tax policy changes, PITA tenants, better investment opportunities, and less time due to a newborn, I thought it best to sell one of three properties in CA.
Overall, I reduced my risk exposure by $476,681 and increased my cash position by $450,000. Despite the decrease in exposure and increased balance sheet, I still have synthetic full exposure to risk assets due to $1,092,000 of remaining mortgage debt from my primary residence and vacation property rental.
Real Estate Investing Lessons 2017
Because I wanted to see if I could find a winter property deal, I held onto a lot of cash. I found two homes that I liked, but the sellers wouldn't entertain my low ball offers. I wasn't even sure I'd be happy with the purchase even if they did accept my offer because of all the maintenance and tenant issues I'd have to deal with again. For example, one home had a serious leak in the garage that kind of gave me a little PTSD from all the leaks I experienced at my old rental house.
By Dec 1, I realized I was never going to buy another property in San Francisco again, so I decided to invest another $300,000 in real estate crowdfunding after meeting up with the team again for dinner. Since the summer, the fund invested in a flex-industrial deal in Chicago MSA, a multi-family in Phoenix, a strip mall in Orlando MSA, and a multi-family in Canyon Lake, TX.
Although a total of $800,000 in real estate crowdfunding sounds like a lot, I view it as buying a $800,000 portfolio of 12+ different properties across the country at much lower valuations and much higher net rental yields compared to having $2,740,000 in one very expensive rental property in San Francisco that is now at risk of depreciating due to declining rents and new tax legislation that limits mortgage interest deduction and SALT deduction.
The next physical property I will buy will be a primary residence in Oahu. The plan is to move back to Oahu within the next five years before my son starts kindergarten. I really like the idea of buying physical property to personally enjoy, and then renting it out years down the road if you have the funds and the desire to move. If the rental experience goes well, I'll keep the property. If not, I'll sell it and follow my BURL real estate investing strategy.
Stocks Investing Lessons: Bought The Dips
In October, I started getting excited about the potential passage of a tax plan that would lower taxes for large corporations and businesses like mine with pass-through income.
As a result, I invested more aggressively into stocks because I felt the market would respond favorably if the plan passed. Further, my desire to buy another property kept going down. Corporate earnings are estimated to get a 8% – 10% boost and small business with pass-through income might see an even larger gain.
The timing of this tax plan is fortuitous given I've spent 8.5 years building a lifestyle business that has now reached a level where it will benefit from tax changes. Nothing has made me more bullish than business tax reform, which is why I need to keep my emotions in check through this investment review process.
Finally, I superfunded my son's 529 plan with $70,000 while his mom and grandma contributed $14,000 each. We figured this would be a good method to diversify contributions since once you superfund, you can't contribute for four years. It's good 529 plan owners have the flexibility to use the proceeds for grade school education now.
See: How The New Tax Plan Will Ruin Your Life If You're Not Careful
Bonds Investing Lessons: A Positive Surprise
Bonds performed well in 2017 with the the long-bond index fund TLT up ~10%. My California muni bond positions are up ~3.5% + ~4.5% gross adjusted yield for a total gross gain of about 8%. Not bad given I was just looking for around a 4% gross gain with my safe money.
Once the 10-year bond yield gets back to its 12-month high of 2.6%, I'll be looking to buy more bonds again. I see a 3% cap on the 10-year bond yield for 2018.
Related: The Case For Bonds: Living For Free And Other Great Benefits
Mortgage Pay Down
If you add on the $815,000 of mortgage debt I paid off by selling my rental house, I'll have paid off a total of $921,000 of mortgage debt in 2017. It feels fantastic to have almost a million dollars less in debt, even if the interest rate was low. By consistently paying off random chunks of extra principal throughout the year, it was easy to pay down an additional $106,646 in principal.
I've still got about $1,092,000 in mortgage debt to pay down between my vacation property and my primary residence. I certainly don't need so much cash, but I want to continue legging into risk assets just in case there's some type of downturn or a change in my lifestyle.
My plan is to pay off my vacation property mortgage by 2023. I probably won't pay off my primary residence within five years because I need as much cash as possible to buy our future dream residence in Hawaii.
Related: Pay Down Debt Or Invest? Follow The FS-DAIR Framework
I've committed $200,000 to my friend's second venture debt fund. They've called $96,219 within one year. I expect them to call the remaining $103,781 by the end of 2018. The fund's objective is to earn a 15% – 20% IRR. Based on the performance of his first fund, a more likely return of 10% – 13% should be expected.
It felt great not having to do any home improvement projects since 1Q because we now have a baby who requires precious sleep. Any disruption of sleep would have been infuriating for all of us since my wife and I were like zombies for the first three months.
Finally, out of the $611,000 in stock investments, $50,000 of that was in highly speculative investments that have surprisingly done well.
Related: How To Make Speculative Investments Without Losing Your Shirt
Main Investing Lessons Learned In 2017
My biggest mistake was not being more aggressive investing in the stock market at the beginning of the year. I didn't have as much liquid cash because I hadn't sold my rental house yet, but it was the Trump presidency and high valuations that gave me hesitation. I wasn't too hopeful about tax reform either.
My best move was selling a rental house for 30X gross annual rent before the SALT deduction got limited to only $10,000 and redeploying the capital in properties around the country trading at just 10-14X gross annual rent. Life feels so much better not having to deal with housing issues anymore. It's also nice to worry less about natural disasters.
Here are several lessons from 2017 that may help you become a better investor.
1) Try to look beyond the politics and focus on fundamentals.
Given I live in San Francisco, I know plenty of people who decided to pull much of their money out of the stock market at the end of 2016. They were so blinded by their hatred of Donald Trump that they missed out on huge gains. Focus on economic and earnings fundamentals. Generally speaking, deregulation and lower taxes are good for business, which is good for business investors. Further, in my mind interest rates would remain accommodative for longer.
Unless our politicians actually reform laws, there is often a disconnect between how much investors believe our politicians can do and how much they can actually. Reduce risk if you wish. But don't get out of risk assets completely.
2) Real estate is an easier investment over stocks.
How can this be when stocks just went up ~20%? Having to reinvest my home sale proceeds was exhausting. If I didn't have weekly reminders to invest, I wouldn't have because of the uncertainty of what to invest in, the timing of the investment, and the actual act of deploying capital. Every investment I make gives me a little bit of anxiety due to my fear of losing money and looking like a buffoon.
With real estate, despite the leverage, all you're doing is enjoying your home or collecting rent checks (if you're lucky). When you're just living, you aren't questioning every single investment you make. Therefore, for most people who are too busy to track the market, owning real estate over the long run is an easier path to wealth. Despite my terrible tenants, the $1 million of equity gain from 2012 – 2017 was the easiest investment money I've ever made.
If you don't have enough money to buy real estate, then owning an S&P 500 index fund over the long term is fine too. Just know that the longer you rent, because of inflation, the longer you will regret your decision. Inflation is an unstoppable beast that will eat you alive.
Real estate is also less risky than stocks. Therefore, I have more of my net worth in real estate than I do in stocks. Ironically, I think most of us can also end up making more from real estate.
3) Think in percentages over absolute dollars.
Because I had never invested more than $500,000 a year in my life, having nearly $1.8M to re-invest was intimidating. But as soon as I started breaking the investment amount into percentages, deploying capital became easier.
Find out what each asset class is as a percentage of your net worth and calculate what each new investment is as a percentage of your investable assets and net worth. This exercise is particularly helpful for frugal people whose wealth has far outstripped their spending habits.
4) Stick to an investment framework no matter what.
Once you've decided how much you can comfortably invest each month and what type of asset allocation is best for you, execute your plan without fail. It is almost always the case you will be surprised by how much you end up accumulating or how much debt you end up paying down over time.
5) Make a positive change during a bull market.
Remember, there needs to be a purpose for your investing, otherwise there's no point taking any risk. Perhaps you can now update your target retirement date earlier. Or maybe you can expand your list of target schools for your child now that you're a little wealthier. Always focus on the end goals for why you invest.
Investing Lessons 2017 – Wrapping Things Up
According to the final weekly personal investment performance e-mail I get from Personal Capital, my public investments returned 15.87% in 2017. I'm happy with the results because my total capital exposure is significant relative to how much we spend. Further, my goal after leaving work was to earn a 4% – 6% tailwind a year while I build a lifestyle business, which has frankly trounced the market’s return each year since inception.
It's really hard for me to take on more risk because of my fear of having either one of us go back to work during the crucial first five years of our son's life. At the same time, I can't help but want to take full advantage of the bull market while it lasts. The further I can run up the score, the bigger the buffer during the inevitable recession.
Finally, one positive surprise I experienced this year was that once I elongated my investment time horizon to 20+ years due to the birth of our son, I became much more at peace with my risk exposure. To invest for someone's future feels wonderful.
Investing Lessons From A Surreal 2017 Is A Financial Samurai original. Check out my Top Financial Products Page and subscribe to my free newsletter to help you achieve financial freedom sooner.
50 thoughts on “Investing Lessons From A Surreal 2017”
I subscribed to your blog a while ago and read each post…but I’m somehow frozen to invest anything anywhere anymore. My first big loss was the tech bubble in 2000 where lost my shirt within 2 weeks. Next, came the 2008 crash, when I lost my job and eventually had only 2000$ to my name, lived in California in a rental, and suddenly couldn’t pay rent any more and knew of several families having lost all and living in cars due to the crash.
Now, having started my own business 9 years ago, i have almost a million in cash just sitting in the bank, a mortgage with about 600k left.
I am sticking my head in the sand…know I lost out on so much over these last good years, but don’t even know where to start. All the terminology you and your readers throw around even gets me hyperventilating…what to do? And is this a bubble now, and if yes, when will it crash. I know inflation will eat away my cash over time. My brain goes in circles and I don’t have the mental energy to grab on to this complex subject and run my business at the same time. Can one have cash and still feel like a loser? First world problem for sure.
I’ve been there. My friend kept urging me to invest my money through the 2008-9-10, and I kept putting it off dealing with too many things, downsized, bought new house, starting business, renting out rooms and suite, getting set up. And finally I started, opened a discount online brokerage account, consolidated funds, and then started buying stocks at the end of 2010, and slowly through 2011 and 2012. Bought a few stocks at first, sold immediately if they went down, but slowly got my cash invested and gained confidence. At first I bought only small positions and followed them on business news. I started with core holdings (e.g. big banks) and dividend paying stocks and went from there. Whatever you buy, you can sell if you get scared. Keep the ones going up, sell the ones going down. You do not have to invest the entire amount at the same time. And you do not have to buy high beta (volatile) stocks. I am still buying in this market if I think the stocks will go up. Much harder to decide when to sell something that has run for a long time. It does not have to be that complex, you just have to watch it every day, scan business news. Spend an evening with a few books. Skip the complex chapters. It takes time — a little every day, not hours of study.
A Permanent Portfolio or 3-Fund Portfolio that’s 50/50 is a great place to park cash if you aren’t sure where to invest, imho. But then, real estate scares me. Vacancies, damage, all sorts of issues worry me. I guess in the end all that matters is that you have a decent place to park your money.
My investments are all vanilla, and like the market, I received nearly 20% returns. I’ve not yet been invested during a true correction or recession. I’m not sure what that will feel like, but I just remind myself that it is important to think in decades. And now that I have a godchild, I need to ensure I have enough for them, too. It’s good motivation.
Nice explanations and summary. Seems many of the FIRE crowd have real estate assets. Some interesting take aways.
Investable worth almost trippeled from sale of rental property, 700k to 2.2M, nice timing!
Net worth is just north of 1M, 2.2M minus debt on properties. Great job for such a young person.
Had large cash hoard, hopefully for tax bill!
How about an article on real estate investments returns, leverage, hassles, tax benefits, depreciation recapture and how the capital gains tax works. I’m guessing you’ll owe 20% on your gain, or 1.7M x 0.2 or 340k. What are your thoughts? You have a way around this tax? Would be great to hear.
Best for a prosperous 2018
Hope not! There is the $500K tax free exclusion, probably prorated, and all the costs to sell and remodeling costs that raises up my cost basis.
I’ll have to do additional research on my sale for the 500k exclusion. Thought it was only for primary residence? If not, I’m doing a happy dance!
Nonetheless, 1.7M starting point you are looking at close to a 200k hit in taxes after deducting 500k and couple hundred k for sale costs.
Yep! It’s for primary residence. Tell me more about your home sale and how much you paid in taxes. I can’t tell if you are talking about your home sale details and how much taxes you are going to pay or have paid, or whether you are telling me how much taxes I’m going to pay without knowing all the details.
Related: Clarifying The $250K / $500K Tax Free Home Sale Profits Rule
My investment property sale is small and I thought I had the taxes deciphered.
Your post, mentioning the 500K Tax Free Sale Rule while discussing your investment property scrambled my thoughts on the rule. It seems like you were saying you are going to use this rule for your investment property sale. I don’t know all the details of your sale, there are bread crumbs that you lay across multiple articles that state how much you purchased it for, how much you sold, it is an investment property, approximate holding time and more. I’m ensuring that you are aware that there will be a tax hit on this based on depreciation and capital gains. The tax hit will be large and would hate for ya to have a large tax bill and have to sell an asset at a bad time to pay “the man”.
Sam, do you still recommend starting a blog as a good source of passive income? If so, how do you suggest monetizing the blog? (“How to monetize your blog” would make a great post!).
Happy New Year!
I always will recommend folks brand themselves online at least with their own website. It is a no-brainer. Get rich off your name/brand, don’t let Facebook, Twitter, etc get rich off you
Monetize your blog by writing what you know and care about 3X a week for 3 years in a row, and you will surprise yourself with the opportunities that come your way.
I like the podcast. I have more opportunities to listen than I do to read the blog. Please keep it up.
An awesome performance this year and, as difficult as it may have been, it must have been a cool experience to have over $2M to invest at one time.
Bond performance surprised everyone, especially given how tight rates already were at the start of the year and expectations of rising rates. Loan performance was even more surprising, as returns were strong despite continued low rates and repricing risk. It is amazing what corporations are able to finance in this market though…
Curious to see what 2018 brings! I’m still investing for the long-term so just trying to stick to my strategy and ignore the market fluctuations.
I had the same problem but to a smaller extent in 2013 when I sold my house in Vancouver. I ended up having a lot of the cash sit on the sidelines and finally reinvested all of it fully in 2017.
Exciting that you are planning on moving to Oahu. Which neighborhood were you thinking about? We went to scope out neighborhoods this last trip and Kahala seems like a great neighborhood. Hawaii Kai seems a bit far but I guess if you don’t have to commute then it doesn’t matter. The views from the Tantalus areas are amazing too.
Both neighborhoods are good.
Check out this post with a couple homes in Oahu: https://www.financialsamurai.com/its-always-good-to-dream-about-living-the-dream/
Great job this year! Selling your house was huge and it really seems like you made the right move. Having fewer tenants to deal with is great and you did really well overall with the sale. I’m sure that wasn’t an easy process and then having to try and redeploy your cash after isn’t an easy task. You’ve had one heck of a busy year and really have made the most of it!
Happy New Year!
Can you share some of your spreadsheet templates – without your personal information of course? I don’t know how to create these fancy calculations on excel or google sheets, and what you’re using can help us reader to be more accountable to our investments. Thanks Sam!
Sure. You can download the spreadsheet at the bottom of this post.
First time I’ve listened to a post via audio
I am beginning to enjoy the content more when actual dollar amounts are used.
It helps with perspective and the educational value.
Great to hear you enjoyed the audio version and subscribe to the iTunes channel. This version actually took almost 2 hours to record because I kept on messing up, and there kept being distractions like my neighbors motorbike and the garbage man coming at 7 AM Etc!
I couldn’t help but chuckle at this. In the beginning, when I did 30-sec intros I messed up 90% of the time. Of course, using an editor would help me out if I was serious about it.
I also agree with Jason. A few years ago, when I was in the phase of learning about FI and ER, I focused on most of your articles with numbers in them, theoretical or actual numbers – it helps.
I am wondering: How many Kids do you and your wife plan on having?
Are you planning on having anymore kids, or are you done with just one son?
Hi Brian, tell me all about yourself. Thanks!
Which 529 plan did you end up going with?
I went with Fidelity b/c I have my SEP IRA and Solo 401k there, so it was easy to set up and transfer funds etc. As a CA resident, there are no special breaks / deductions.
Really enjoyed these updates all year Sam. Great problems to have when you are reinvesting from a previous large gain!
Happy New Year!
Another good update. I love your Blog! Thanks for being more than just… keeping expenses low while investing in vanguard.
Keep up the great work!
Thanks for reading Jim! I might have to simply in 2018 to keeping expenses low and focusing on VTSAX. It’s a plan that has worked well! :)
Nice work Sam! I have a question for you- what amount or percentage is your ideal of cash to have on hand? I’m a reader -but don’t think you have ever suggested a cash level or amount to maintain? Thanks for a great year of reading!
I like having about 5% of your investable assets or your net worth in cash. But every case is different.
There is always a money making opportunity every day. Just have to go find it.
Recommended Net Worth Allocation By Age
In Times Of Uncertainty, Take Stock Of All Your Cash
Awesome thanks well done..I must have missed those two!
Looking forward to an update on the RealtyShares investments (and more real estate crowdfunding posts) in 2018. Now that you’re more heavily invested, and more time has passed, has your thinking on these sorts of deals changed?
For sure. I plan to continue my quarterly updates in 2018 and highlight the good and the bad.
My thinking remains:
1) Diversify into heartland/flyover states and away from coastal city real estate
2) Conviction is HIGHER now that the new tax plan has passed with the $10K SALT cap and $750K mortgage cap
3) Invest in the fund with 12 – 16 deals, b/c they are picking the best deals on their platform and have a high incentive not to mess things up if they want to raise new funds
4) Learn from the investments of the fund and eventually invest in specific deals w/ real capital (1-2 years away)
I’m curious about your investment in RealtyShares vs FundRise. I thought I saw some previous articles where you were talking about using FundRise to invest in the heartland states.
If one is not accredited yet, is FundRise still a good option?
“Real estate is an easier investment over stocks.”
Great tips! Thanks for sharing, Sam. The lessons above sticks out to me the most. I’ve lately wondering if we should invest in rental properties or just put our money into stocks so that we won’t have to deal with tenant issues.
Not sure why, but after our son came back to the US, my desire to deal with and interact with people that can cause trouble has declined significantly. Maybe it has to do with the fact that taking care of a 3yo is exhausting sometimes.
Either way, hubby and I will still buy another house after our mortgage is paid off. Congrats on the 1M mortgage paydown!
I’m in the process of selling off all of my rentals. The returns (at least where I live) weren’t worth the hassle. I was averaging 3% – 6%. It was a nice steady cash flow, which was great, and there is certainly something nice about being able to touch your investment… but I’ve since started selling them off and I’m investing in crowdfunding instead, kind of like Sam. Double the return, no headaches, no realtors, no fixing anything, etc.
Thanks for sharing your investment strategy this year. It’s interesting to see what you did with the proceed from the rental sale. That million dollar gain is incredible. Nice job.
I’m planning to consolidate down to one property, but it might take a couple of years to work everything out.
It’s great to hear about your Oahu plan. I’d love to come visit after you settled down in HI. Good luck in 2018!
2018 could be the perfect time to sell in Portland, but it seems like you guys still have a ways to run w/ Seattle getting so expensive.
Come on by! We hope to have a pool to chill out in, or at least be close to the beach.
I took my daughter’s 529 money out of the S&P 500 Index Fund and put it in a CD fund in February. It probably cost me about 45K in gains but she was starting college in August and I too was concerned about how the market would respond under the early days of a Trump presidency. I probably would have left it alone if we didn’t need to start tapping it right away. We have what we need for 4 years of undergrad and 2 years of grad school so I struggle with whether or not to leave it where it is or put it in a little more aggressive fund that is about 80% bonds and 20% stocks and REITs. Part of me says just leave it alone because we did well accumulating over 300K in 15 years and we achieved the goal and purpose for the fund so why put any of it at risk if we don’t have to. However, it would be nice to get a little more than 1% return that I am getting now without taking on too much risk.
I wouldn’t sweat it too much b/c your gains are huge, and you’re using it for its main purpose of paying for education. If the purpose is served, you win!
But I guess, what age are your kids? If they are more than three years away from going to college, perhaps not the best move to liquidate.
We only have one child and she just completed the first semester of her Freshmen year in college. That is why I made the move out of the market in February because I knew we were about to start tapping the 529 and I was concerned about the market direction right after the Trump election. I just paid her second semester so the first year of college expense is behind us at about 45K.
There you go. You did the right thing using the 529 exactly what it was intended for.
Great recap and logic of your investing strategy! One question: do you think it’s important to first max out ones 401k and throw some money in an after-tax account too before acquiring a rental property?
Absolutely. Maxing out the 401k is the easiest low hanging fruit to pick. Building an after-tax investment account is good for flexibility. Finally, I like buying property to LIVE AND ENJOY first, and then renting it out in the future.
Maybe you and Joe (RB40) will be neighbors someday! That would be cool.
Your advice of looking past hate is wonderful (#1). It’s really hard to not mix emotions with your investing but everything is cloudier from within. The internet can be an echo chamber too. I wonder how Kurt feels about that tweet now (and his actions).
I think we need a FinCon in Hawaii in the future!
Good perspective and smart to look at things on a by quarter basis. 2017 wasn’t that eventful for me, I’ve been hoarding cash as I shop around for a mobile home park.
Nice summary, Sam – congrats on your continued progress. I also liked your lesson #3 – thinking in terms of %’s. Doing so helps keep things in perspective.
On your other questions:
– Overall, a solid year in 2017. Due to the bull market and steady savings contributions, our net worth increased by ~25%.
– It’s important for us to remember that we’re not geniuses during a bull market. It feels like we’re “really smart” right now, but that logic will likely get flipped on its head whenever the next bear comes around.
– Thinking ahead, we moved about ~10% of our net worth / equity gains from the past year into a short-term bond fund. Future retirement savings into my 401(k) are also getting allocated there for the moment. We’re looking to build up some cash-like equivalents if a buying opportunity or dip in the market presents itself.
Sam – I’m on a train now listening to a few audio versions of posts I already read previously.
My only recommendation: move the audio icon / player to the top of the post! Don’t hide :)
Nah, I’m training people to just subscribe to my iTunes channel if audio is what they want. My goal is to create two tracks of FS consumers. The reader track will eventually figure out that they can listen to the audio if they go to the bottom of the post. It takes time to “train” the consumer, but it works out in the end based on my experience.