Investing Lessons From A Surreal 2017

Financial Samurai investment tracker full yearAt the beginning of the year, I decided to track my investments with a detailed spreadsheet because my cash flow was increasing and I wanted to make sure the money was being properly deployed based on my risk tolerance. 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, especially 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, especially if you become a parent during the process. 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 and 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 in a risk appropriate way. 

Financial Samurai 4Q2017 Investment Review

In summary, I mobilized a total of $2,263,319 into various investments in 2017. $750,000 of the $2,263,319 was invested in conservative investments (bonds, mortgage pay down, and home improvement) that should return 4% or more gross a year. The remaining $1,510,000 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.

Financial Samurai investment tracker

Real Estate

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 the RealtyShares domestic equity fund 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: 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: 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 9%. Not bad given I was just looking for around a 4% gross gain.

US Long bond performance 2017

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

Everything Else

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 Lessons Learned From Investing 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.Generally speaking, deregulation and lower taxes are good for business, which is good for business investors. Further, in my mind employment was already on the upswing and interest rates would remain accommodative.

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 do. Reduce risk if you wish. But don’t get out of risk assets completely.

Kurt Eichenwald sold all his stock announcement on twitter

2) Real estate is an easier investment over stocks. How can this be when stocks just went up ~19%? 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.

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 invest 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.

Wrapping Things Up

Financial Samurai 2017 performance

Overall, according to the final weekly personal investment performance e-mail I get from Personal Capital, my public investments returned ~15% in 2017. I’m happy with the results because my total capital exposure is significant for 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.

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 my son, I became much more at peace with my risk exposure. Surely by 2037, asset prices will be higher. To invest for someone’s future feels wonderful.


Investors, how did your public investments treat you in 2017? For those of you who have retired or reached financial independence, how have you structured your investments so that you can sleep well at night while also benefitting from the bull market? Graphic by https://ckongsavage.com

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