The year 2016 was very good to Mrs. Groovy and me. Not only did we retire (yeah for us!), but we saw a sizable increase in our net worth. And what’s our Groovy secret? Wait for it…wait for it…okay, enough of those cheesy wait-for-its. Here it is: DON’T SUCCUMB TO FEAR!
That’s it. Not exactly a revolutionary investing strategy, but it worked. Let’s see how.
Mrs. Groovy and I started 2017 with a net worth $180,601.96 greater than the net worth we had on January 1, 2016. A good chunk of this growth came from our contributions. We contributed a total of $62,350.08 to our Roths and our workplace retirement plans in 2016 (this number also includes our employer contributions). But an even larger chunk came from Mr. Market. He added $118,251.88 to our net worth during the year.
But wait. It gets better. The S&P 500 was up 9.5% for the year. The Barclays US Aggregate Bond Index was up 2.65% for the year. Had our 50/50 portfolio performed merely as well as these two standard benchmarks, Mrs. Groovy and I would be about $59,000 poorer.
So what went right? Why was our return this year nearly twice the return of what the above benchmarks would have provided (11.81% vs. 6.07%)?
Part of our good fortune was due to luck. Lithium Americas (LACDF), one of the two individual stocks we own, entered into a joint venture with SQM (a major lithium producer) to develop a lithium deposit in Argentina. For justifiable reasons, this excited investors and Lithium Americas was up 70% for the year.
But most of our good fortune was due to a steadfast adherence to one basic investing principle: don’t panic.
Energy, for instance, was down big in 2015 (-17%). But rather than sell our energy fund (FSENX), we threw an additional $10K into it in December of 2015. This paid off big in 2016. By the time we sold FSENX during the last week of December 2016, it was up 35%.
And then there was the Brexit. The Brits decided to give the proverbial middle finger to the EU in June and the DOW quickly dropped some 850 points. Again, rather than follow the herd, we instead took advantage of this dip and threw an additional $20K into our stock funds (VOO, IJH, and IJR). And bully for us that we did. The DOW is up 16% since the Brexit.
Finally, who can forget the most tumultuous presidential election since 1968? When it came to the prospect of Donald J. Trump becoming our next president, the experts were hardly bullish. Two Dartmouth economics professors predicted the market would drop 7%. The former chief economist of the International Monetary Fund thought likewise but didn’t provide a number. He just said a Trump win would “likely crash the broader market.” And the esteemed Nobel Laureate in economics, Paul Krugman, had this to say on election night.
It really does now look like [we will have a] President Donald J. Trump, and markets are plunging. When might we expect them to recover?
Frankly, I find it hard to care much, even though this is my specialty. The disaster for America and the world has so many aspects that the economic ramifications are way down my list of things to fear.
Still, I guess people want an answer: If the question is when markets will recover, a first-pass answer is never [emphasis mine].
Good thing we didn’t listen to the experts and sell any of our stock funds. Staying the course and doing nothing proved to be as sound as ever. The DOW is up 11% since Trump’s victory.
Buying—or at least holding—when there was “blood in the streets” worked very well in 2016. Will it do so again in 2017? Who knows. But as long as Warren Buffett is a firm believer in this contrarian style, we’re sticking with it.
What we aren’t sticking with, however, is the composition of our 2016 portfolio. Last year, our portfolio had a 50/50 split between stocks and bonds/cash, and was comprised of 10 asset classes and 16 funds.
For 2017, our portfolio is more conservative and less complicated. It now has a 40/60 split between stocks and bonds/cash, and it’s comprised of 3 asset classes and 4 funds. Here it is.
Equity Breakdown (not including our two individual stocks)
We’re going with a more conservative and less complicated portfolio for one reason: We don’t trust our elites. The feds are over $19 trillion in debt. No state in the union has a fully funded pension system. Our young people have over a trillion dollars in student loan debt. Higher education and healthcare show no signs of ever becoming “affordable.” We have more dependency, more crony capitalism, and more cultural rot than ever before. But all is well. The only problem our political class sees is the composition of power. The Ds think there are too many Rs in power, and the Rs think there are too many Ds in power. “Once we get this balance right,” says the partisan shill to the viewers of “non-fake” news, “everything will be fine.” Our elites remind me of the character Chip Diller in the movie Animal House.
Whew! Sorry for the rant. It’s tough being a recovering political junkie. Now back to our portfolio and that trust thingy.
We don’t trust our elites. All is not well. At some point in the not too distant future, an economic crisis will steamroll America and our Chip Diller elites. And our task, given that we are retired and are in the withdrawal phase of portfolio management, is to give ourselves the best possible chance of surviving another 2008-like implosion on Wall Street. In other words, we don’t want our portfolio to tank so much we have to go back to work. Enter Michael Kitces, Wade Pfau, and JL Collins.
Kitces and Pfau believe the first five years of retirement are critical to portfolio management. If your portfolio takes a serious hit during this time, the odds of you outliving your portfolio go up significantly. To guard against this risk, Kitces and Pfau suggest that you enter retirement with a relatively low exposure to stocks (20%-40% of your portfolio). They then suggest you increase your stock exposure over time (e.g., 2% a year until you reach a 60/40 split). If you want to read more about their “rising equity glidepath” strategy, you can do so here.
Mr. Collins is a big proponent of simplicity. He believes the average investor’s fortunes are best served by a two-fund portfolio. His reasons for this are as follows:
- The average investor sucks at picking stocks.
- Professionals suck at picking stocks.
- Since the average investor can’t beat the market, and since the average investor can’t rely on a fund manager to do it for him or her (once fees are accounted for), the average investor’s best strategy is to shoot for market returns. Nothing more, nothing less.
- You get market returns by buying low-cost, broad-based US stock and bond index funds.
- Forget international funds. S&P 500 companies do business all over the world. That’s enough international exposure.
- Forget real estate (i.e., REITs). The inflation protection it offers is no better than that offered by US stocks.
Are Kitces, Pfau, and Collins trustworthy? We think so. Their reasoning is sound. And they don’t appear to be harboring ulterior motives (i.e., they’re not looking for our vote and they’re not hawking any brokerage firms or funds in which they have a vested interest).
But only time will tell, of course. If our portfolio holds up well during the next Wall Street implosion, then these dudes are freakin’ geniuses.
Okay, groovy freedomists, that’s all I got. The year 2016 was indeed very groovy for Mrs. Groovy and me. But it wasn’t because we did anything special. We just stuck with one of the core principles of personal finance and investing. We didn’t panic. We didn’t try to time the market. We just stayed the course, ignored the hyperventilating, and bought the dips.