Wow! It’s May already—a third of the year has shot by.
A year ago, I vowed to be less in thrall of the market’s daily gyrations. No more being glued to CNBC. No more checking our portfolio’s value every day after 6 pm when it reflected the latest mutual fund prices. I wanted a set-it-and-forget-it investment strategy.
And for the most part, I’ve stood by this vow. I check our net worth about once every month or so. Our portfolio is a 40/60 split between stocks and bonds/cash, and we’re only invested in two funds—a total stock market index fund and a total bond market index fund. We made one trade so far this year. We sold some of our total stock market fund at the end of March to get back to the 40/60 split.
So all in all, I think Pfau, Kitces, and Collins would be proud of me and Mrs. Groovy. We’ve created a portfolio that’s easy to manage, doesn’t kill us on fees, and provides adequate protection from the bane of every recent retiree, the dreaded sequence-of-returns risk. And so far this year, our portfolio returns plus my small pension have far eclipsed our household expenses. Here are the results.
|Increase in Net Worth||YTD Household Spending||Increase in Net Worth + YTD Household Spending||YTD Pension||YTD Market Change|
As of 5/1/2017, our net worth is $43,769.83 higher than it was on 1/1/2017. But so far this year, we have spent $10,806.03. Since we’re using our portfolio to fund a good chunk of our retirement expenses, this means our net worth has really increased $54,575.86 for the year. Is there such a thing as a gross net worth increase? Anyway, my pension contributed $6,184 to our gross net worth increase, and Mr. Market contributed $48,391.86.
Not freakin’ bad. We’re on track to spend less than $3,000 per month this year, and our net net worth is on track to increase $131,307 this year. This early retirement thing is easy-peasy.
Is the Big One Coming?
But is this early retirement thing really easy?
My fears are twofold. First, I have very little faith in our elites. I just don’t think those who are running big government, big journalism, big education, big entertainment, big business, big finance, etc., etc., know what the hell they’re doing. Second, from my ignorant, layperson perch, the stock market looks extremely overvalued.
The Shiller PE Ratio is currently at 29.38. This is a higher valuation than just before the Great Recession. In fact, it’s the third highest valuation since the 1880s. It got up to 30 just before the Great Depression, and it got up to 44 just before the Dotcom Crash.
So is the “big one” coming? I think so. And since Mrs. Groovy and I are no longer gainfully employed, and don’t have additional years of dollar-cost-averaging to offset a steep market decline, wouldn’t it make sense to scale back the stock portion of our portfolio? Go with a 30/70 or 20/80 split? Sure, we may lose out on a year or two of stock market momentum, but if the stock market has a 30 or 40 percent crash in the near future, we could rebalance to a 50/50 or 60/40 split and make a killing.
In the below table, I look at the effect of a 40 percent stock market crash on a $1 million portfolio of various allocations. For our purposes here, I assume that the bonds/cash portion of the portfolio will retain its value during the crash. I’ve also included the amount of money one could throw at dirt cheap stocks after the crash if one decided to rebalance to a 60/40 allocation. As you can see, all three hypothetical allocations hold up pretty well against a 40 percent stock market crash, and all three hypothetical allocations provide ample resources “to be greedy when others are fearful.” Ah, decisions, decisions.
|Initial Portfolio Allocation||Value of Stocks Pre-Crash||Value of Bonds/Cash Pre-Crash||Value of Stocks Post-Crash||Value of Bonds/Cash Post-Crash||Value of Stocks After Rebalance to 60/40||Value of Bonds/Cash After Rebalance to 60/40||Amount of Bonds/Cash Used to Buy Dirt Cheap Stocks|
Okay, groovy freedomists, that’s all I got. What say you? Is the big one coming? Should Mrs. Groovy and I reduce our stock holdings? Or should we just sit tight with our current 40/60 allocation? Let me know what you think when you get a chance. I’d love to hear your thoughts. Peace.