Quarterly Net Worth and Asset Allocation Update: Q2 2020

What in the world is going on with these markets?  With unemployment at double digits and an expected contraction in GDP around 6%, it seems unreasonable that the stock market is trading close to an all-time high.  When we reported our Q1 2020 net worth update, based on April 3, 2020 figures, we saw a 12.5% reduction of -$97,289 to our passive income portfolio compared to our Q4 2019 figures.  Ouch!  And just like that, a measly 3 months later, we’ve recovered it all back.  Excuse me?  2020 has been a whirlwind to say the least.

Does Wall Street know something that the rest of America doesn’t when it comes to what a post-COVID-19 pandemic future looks like?  The number of new cases around the world continues to rise daily, although the daily deaths have come down since it’s high of 8,485 on April 17th.  13% of Canadians lost their jobs in April which equates to nearly 2 million Canadians without jobs. Over 40 million people have applied for unemployment in the US since March.  The official US unemployment rate was 14.7% in April – the highest since the tail end of the Great Depression.

20 million Americans lost their jobs in March and April.  While the US economy added a record 4.8 million jobs in June, we’re seeing a surge in new infections (boy am I glad to be out of Florida!).  Unemployment remains in the double digits in the States and Canada and we likely will see European countries get there too once their stimulus programs expire. There are many other data points that can be reviewed including projections by academic and financial institutions alike.  Without getting into the weeds, it suffices to say that the COVID-19 pandemic is doing unprecedented damage to the global economy.

What the hell is going on here?  I have no idea.  Are stocks valued way too high and will eventually slide again?  Are the markets getting ahead of fundamental/economic reality? Are we going to see a W shaped market versus the current V shape?

Since 2008, the FED has been manipulating the stock market more than ever before and it has only accelerated through COVID-19.  Through a heavy bond repurchase program that has driven investment-grade bond yields down, the opportunity costs of holding stocks have dramatically changed too.  While stocks haven’t been very attractive for many investors, being the least attractive asset class still drives up the price.  We really are living in a bizarre time.

We shall see what the future holds.  The main idea is to ignore the noise.  All I know is that over time, the market goes up.  No one can tell what is going to happen.  We are investing for the LONG TERM. In the grand scheme of things, this really is just a blip and shall pass.  Can you even spot the turmoil caused by COVID-19 when looking at the 90 year historical performance of the S&P 500 below?  All you can control is the amount of money you’re able to throw at the market each month.  Focus on what you can control and let the markets do their thing.

Just like in our previous quarterly updates, we are going to break down exactly where our current investments live for our Q2 2020 update.

How have we done in the past three months? How do we compare to our FIRE number? Did we reach our magical number yet?

A Look Into Our Liquid Assets

As of July 3 2020 here is a breakdown of our liquid assets (home and car not included as these are illiquid!):

 

Any Liabilities?

We also still have a mortgage in place that will be paid off by the time we retire. Currently there is $44,992 remaining here. So here’s the total amount of our passive net worth:

Hold The Phone.  We Have How Much Cash?

Research shows that being 100% invested is better than hoarding cash. This Seeking Alpha article breaks down the numbers and shows how that works. Even though the math works (100% invested in the market), psychologically, I feel better having cash available and on hand.

It helps me sleep better at night.

Since we are so close to our FIRE date, we are holding quite a bit more in cash than we normally would. However, I can report that we have been deploying some of this cash this quarter. Having all this dry powder during a down market is a nice feeling. Our overall breakdown is:

21.8% in cash, what?!  Keep in mind, last quarter we were at 25.4% so it’s come down a few percentage points.  But yes, a ton of cash.  During our wealth building phase we were NOT this heavy in cash. We are not financial advisors in any sense, but we would not recommend holding this much cash during your wealth accumulation phase unless you have a large purchase coming up such as a down payment for a home.

Now that we are approaching our FIRE number, we are being SUPER cautious and do not want to be heavy in stocks. I’m only thinking this way because we are so close to withdrawing from our portfolio once we retire early and I do not want to fall victim to sequence of returns risk. We are thankful to be in this conservative situation given the current market conditions.

Our short term play is to be ~60% in stocks and our long term play is to be back at 90-100% in stocks like we were for a majority of our wealth accumulation phase. At the end of Q1 we were only 52.6% in stocks with the dip in the markets so we have been injecting some cash into the markets to get our allocation back in check and we’re pretty much back on track now. The game plan is to transition via a glide path to a higher stock allocation over the next 5-10 years.

What Are We Planning To Do With All Of This Cash?

Our goal is to retire early in approximately a year from now – we are flexible with the timing as we’ve designed a very happy life living on 50% of 1 part time income.  Ideally, it will match up with hopeful babes 2 arrival at some point in 2021 so that we can utilize Canada’s generous 18 month paid parental leave (we will net ~$25,000 after taxes) so that we will not have to withdraw anything during our first year and we will still be covered with my employers health coverage during that time frame too thus eliminating the need to get supplemental insurance for dental, vision, and prescriptions at the beginning.

Over the next year $44,992 of the cash will be going towards paying off our mortgage. We also use credit cards for everything which are set up on auto pay to come out of our US checking account each month. We are currently averaging an annual spend of ~$25,000/year so there’s another $25,000 out of the checking account. So with the $207,801 we have in cash now, we can expect to have $137,809 in cash remaining (207,801-44,992-25,000) when we FIRE.  The majority of this cash sits in our Motive Savvy Saver high interest savings account earning 2.05% interest and will provide us with more than enough of a cash cushion in our first few years of early retirement. So our cash portfolio isn’t necessarily doing nothing for us this whole time. This is still too much cash than what we want on hand so the plan is to throw extra into the markets into our tax advantaged accounts over the course of the year to take advantage any buying opportunities that may arise.

We also plan to contribute the max TFSA allowable annually from this cash pile during our first few years of early retirement as TFSA contribution room is not tied to an income.  This likely will mean we will have cash for 4 years once we do pull the plug.

What Do We Invest In?

To dig even further, here is a breakdown of the different accounts we have our non-cash investments in:

• Vanguard US Total Stock Market Index Funds: 46.2%
  • This is either in VTSAX in our US accounts or VUN.TO in my Canadian accounts. We are big fans of tracking the overall US stock market. As we transition into more and more equities over time, it will be into these accounts as well as international indexes.
• Vanguard US Total Bond Market Index Fund: 21.3%
  • We hold VBTLX in our US accounts. This is the highest amount of bond indexes we have held in a long time (although the portfolio percentage has come down a few points since our previous Q1 2020 update as stocks have rebounded). Over time, we will likely sell down these investments first when it comes time to withdrawing from our portfolio.
• Vanguard Target 2045 Index Fund: 22.0%
  • VTIVX which is made up of the following: 54% VTSAX, 35% International Stock Index, 7% Total Bond Index, 3% Total International Bond Index. We like target date funds even though it has a slightly higher expense ratio (0.15% vs 0.04%) because it provides us with some international funds and this index rebalances itself over time.
• Company Stock: 7.5%
  • I only own one individual company stock and it’s for a renewable energy company I’ve worked at for years. I’m going to leave this broad and not revealing my current and past employers names will be the only secret I keep on the blog as I do not want people knowing where I used to work.  Maybe I’ll reveal it once we FIRE…
• Canadian Aggregate Bond Index: 1.3%
  • We hold a small amount of Canadian bonds in our portfolio.
• International Funds: BlackRock iShares Core MSCI All Country World Ex Canada & Developed All Cap ex US Index: 1.1%
  • We’ve decided to hold off on XAW since the majority of these holdings are US companies.  Any future international investments will be via VDU.TO which is 100% international ex-US.
• REIT Index Fund: Less than 1%

That’s it!  Some acute FImily followers may realize that we made some changes to our allocation over the last quarter.  What did we do?

• As noted on our exchange rate post, we’re been keeping an eye on the USD/CAD exchange rate and have moved $14,000 of our USD cash over to $19,500 CAD as we haven’t seen the exchange rate this high (1.40) in years.  It’s since come back down to the 1.35 range and we will keep an eye on it to see if it crosses the 1.40 mark again to signal a additional shift of USD to CAD.
• We paused our aggressive mortgage plans and eliminated the double up monthly payment for now.  We still are paying 15% more each month and still have the plan to have our mortgage paid off in 2021 (via a one time lump sum payment).  This will allow more cash on hand to invest if another dip comes in the near future.
• We threw another $10,000 into Nic’s TFSA and shifted the majority of the funds in cash over to VUN.TO.  The goal this year is to get this account fully funded to it’s max contribution room.  I’ve also been researching a bit more into the possibility of opening up a TFSA for myself (a dual US/Canadian citizen where the US does not recognize the TFSA as a retirement account).
• We plan to move the cash we converted from USD to CAD into Nic’s spousal RRSP.  
  
• Our Motive high interest savings account went from 2.2% to 2.05%.  Kinda expected given the environment we’re in.

Here’s a chart with the breakdown:

We are big fans of Vanguard, index funds, and low fees. If you are interested in learning more about any of the funds we invest in, click on the links below:

• Funds within our US portfolio:
  • Vanguard Total Stock Market Index Fund Admiral Shares our (VTSAX),
  • Vanguard Total Bond Market Index Fund Admirals Shares (VBTLX),
  • Vanguard Target Retirement 2045 Fund (VTIVX),
• Funds within our Canadian portfolio:
  • Vanguard US Total Market Index ETF (VUN),
  • Vangaurd’s Developed All Cap ex US Index ETF (VDU)
  • Vanguard Canadian Aggregate Bond Index (VAB)

For my visual learners, the chart below depicts how heavy we are in US index funds. A large majority of our investments from stocks or bonds are in either a US stock market index funds or US bond market index funds (a majority of the Vanguard Target 2045 fund is in US holdings). As planned, we are making some adjustments this year to get ~10-20% of our portfolio in international funds.  Last update we dipped down to 7.35% international and now we are up to 9.6% international.  A majority of the upcoming purchases will be in VDU to keep upping this figure.  It can be argued that many of the companies in the US stock index have a significant amount of business taking place abroad. Again, we are not here to argue or tell you what to do, we are simply showing you our story and methodology.

What About Currency?

Note that for the sake of this exercise, we are keeping all currencies as is in their current currency denomination, but as we mentioned in a previous post outlining our FIRE number, we are using currency arbitrage to keep our safe withdrawal rate below 4%.

As of this writing, 73% of our accounts are in USD and 27% are in CAD. If we converted all USD to CAD based off today’s exchange rate of 1.36, we’d be looking at a total of $1,144,550 CAD in our investment accounts.

Assuming $35,000 in annual expenses, this puts us at a 3.06% withdrawal rate.  If we bumped up our expenses to $40,000 it would be a 3.49% withdrawal rate.

We also have the Canadian Child Benefit (CCB) working in our favor which brings our withdrawal rate down to 2.10% at $35,000 annual spend and 2.54% at $40,000 annual spend.  This assumes the CCB supplements our child related costs while we have kid(s) in the house and then our income drops once the kid(s) are out of the house and the associated CCB is gone.

Where Do We Stand?

For those who have been following along, you know that our FIRE number is $875,000.

So let’s do some simple math:

$8750,000 – $907,645 = -$32,645

Last quarter, we were back on the climb and needed $97,334 to reach our FIRE number.  Now, we are above and beyond our FIRE number.  WTF?!?!  That’s a bump in our portfolio of almost $130,000 within 3 months. No seriously, W. T. F.

I’m still very weary of these markets so it will be interesting to see what the remainder of the year has in store for us.  Knowing that we are NOT withdrawing from our portfolio at this time and instead saving/investing 50% of my part time income is allowing me to sleep very well at night.

Our Net Worth:

As for our total net worth, we would then add in the value of our illiquid assets like our home and cars we well. Our townhouse is valued at roughly $315,000 and our two cars are valued around $12,000 (with an additional ~$10,000 in our future car fund not being included in our FIRE numbers either).  Of course we will not know the true value of these illiquid assets until we actually sell them down the road.

Adding these two figures into our net passive investments of $907,645 above gets us to a total net worth of:
$1,234,645

Those following along know we have a few other items in our portfolio that we like to hide behind the scenes as our true emergency fund such as my Health Savings Account (HSA), my pension from my previous employer, our child’s RESP, any CPP/SS/OAS/GIS potentially coming our way in the future, and our car fund so for the sake of this exercise we are not including them.

Voila! Stay tuned to see how our net worth has changed in 3 months when we check back in on this.

What is your asset allocation and where are you at on your journey (i.e. paying off debt, wealth accumulation, retired early, etc.)? Do you calculate your net worth?  If so, how often do you check in on your accounts? As always, thanks for tuning in and comment below 

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We believe in stacking up life hacks to keep your enjoyment levels to the max without depleting your bank account.  Here are some ways to further educate yourself and save thousands of dollars over your lifetime by making some simple adjustments:

• Investing Newbies: Check out our free Investing 101 Series.
• How much are you paying for your phone plan?  Canadians, learn more about Public Mobile, and see how we are paying $3/mo for our cell phone plan.
• How much are you paying for internet?  Canadians, learn more about the various Independent Service Providers out there to see who services your area so you can lower your monthly bills.
• How much are you paying for home insurance?  We were able to reduce our rates by 25% by switching over to Square One Insurance.  If you live in BC, AB, SK, MB, and ON, check out Square One for your home insurance, landlord insurance, and/or tenant insurance.  Use this link to receive an extra $15 off your quote.  (Note that you must use this link to start the process to get the $15 off even if you prefer to pay over the phone.)
• How much are you paying for your monthly utility bills?  See how you can likely save on this monthly expense.

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