Financial Samurai 3Q 2017 Investment Recap: Redeploying Capital

Financial Samurai Quarterly Investment Review3Q 2017 was a complete blur. After selling my rental house in June, I was mentally exhausted and decided to do a whole lot of nothing except try and be a good father and continue writing on Financial Samurai. The feeling was kind of like wanting to just sleep in after taking a final exam.

Having a lot of cash all at once is actually kind of stressful. Because I don’t want to lose out on gains in a bull market, I’m anxious to put money to work. At the same time, since the absolute figure is much larger than I’m used to, I’m afraid any rash investment decisions might lead to regrettable losses.

Out of the ~$1,800,000 in proceeds, I reinvested ~$935,000 as detailed in my post: Ideas For Reinvesting Proceeds After A Home Sale. Then I invested an additional $174,872 in new money.

This post may provide insights into helping wary investors redeploy a large windfall and setting up an investing system during a bull market.

My 3Q investment objectives were the following:

* Redeploy ~50% of house sale proceeds with an overall return objective of 10% a year

* Keep the remaining proceeds liquid in order to have enough ammunition to buy a cheaper house with ocean views if an opportunity arises

* Buy the dips in the stock market to bring exposure weighting up by 5%

* Read perma-bearish websites to have a well-rounded perspective since I’ve been relatively bullish for so long

* Reduce wage income for the rest of the year to reduce taxes given the home sale

(audio version of post with some added nuance)

3Q2017 Investment Review

Financial Samurai 3Q 2017 Investment Recap

Total July Investment: $317,580

Stocks: $82,000

$29,000 in large cap tech names

$20,000 in son’s 529 plan (a 18-year target date fund that’s essentially 95% stocks, 5% bonds)

$33,000 in an S&P 500 index fund

Bonds: $235,000 in various California muni bonds with YTM of 3.7% – 3.85%

Mortgage Pay Down: $580

$580 Lake Tahoe vacation property (I automatically pay $580 more a month)

Comment: After paying off $815,000 in mortgage debt in June, I wasn’t motivated to pay more debt down. Instead, I focused on building a California municipal bond portfolio for low risk and high certainty. I didn’t expect to invest as much as I did in stocks, but there was a sell-off in the beginning of the month that tempted me to deploy capital. 

3Q2017 S&P 500 Performance

S&P 500 had a dip in early July and was very volatile in August

August Recap: $537,403

Stocks: $92,000

$42,000 in the S&P 500 index fund

$15,000 in my son’s 529 plan

$35,000 in various large cap tech names

Bonds: $234,111 in various individual CA zero coupon muni bonds with YTMs of ~3.85%

Venture Debt: $72,712 in second venture debt fund

Mortgage Pay Down: $13,580

$12,000 to Squaw Vacation Property

$1,580 to Golden Gate Heights primary

Real Estate Crowdfunding: $125,000

The RealtyShares DME fund invested $600,000 in a preferred equity investment in Vernazza Apartments, a 168-unit garden-style apartment complex in Las Vegas, NV, only 3.5 miles from the Las Vegas Strip, 4.5 miles from McCarren International Airport and 8 miles from downtown Las Vegas.

3Q2017 10 Year Treasury Yield Performance

Bonds prices were rising until August, and then reversed course hence the higher yield

Comment: There were multiple sell-offs in the stock market in August, which made me invest more heavily in stocks than I normally do. Although I’m not excited about stocks, I decided to hold my nose and focus on asset allocation since I’m ~5% below my target equities allocation of 25% of net worth. I focus on tech and the S&P 500 b/c my rental house was a derivative play on tech.

I slowed my municipal bond purchases because the 10-year bond yield edged down to about 2.15%, which made yields unattractive. If the 10-year bond yield gets back to 2.5%, I will be aggressively buying again.

My b-school classmate launched his second venture debt fund, so I decided to invest $200,000, of which $72,712 was called in August. The first fund has returned about 12.5% a year for the past three years, with one year left to go.  

I’m not fond of the multi-unit Las Vegas residential property by RealtyShares, despite the sponsor putting up $3.5M and this being a preferred equity deal. I’ll be publishing a detailed post about this deal in an upcoming post. Recall that I’m trying to diversify away from expensive coastal city properties and cities like Las Vegas, where prices are much more susceptible during a downturn. Instead, I’m much more interested in the heartland. At least there’s no state income tax in Nevada, which will therefore suffer less if state income tax deductions go away under the Trump tax plan. 

September Recap: $254,889

Stocks: $46,000

$15,000 in an S&P 500 structured note with a 15% buffer and 100% upside participation

$31,000 in an S&P 500 index ETF

Bonds: $74,116

$74,116 in an individual CA muni bond yielding 3.25%

Mortgage Pay Down: $9,773

$7,773 to Lake Tahoe Vacation property

$2,000 to Golden Gate Heights primary residence

Real Estate Crowdfunding: $125,000

The RealtyShares DME Fund approved an investment up to $825,000 common equity investment in River Ranch Apartments, a 104-unit multifamily community located in Canyon Lake, TX. The property is centrally located between Austin and San Antonio (an equidistant 1-hour drive from the CBD’s of both cities) and just minutes from New Braunfels and Interstate 35, providing access to major employment hubs. The property was built over two phases in 2011 and 2017 and features Class A construction, with amenities including a swimming pool, fitness center, laundry facility, BBQ/picnic area and covered parking.

River Ranch Apartments at Canyon Lake, Texas RealtyShares deal

Comment: Nothing looked good in September. It was only in the last week of September that I invested some money in the stock and bond market due to small pullbacks. There’s now excitement about Trump’s tax cut plan, which boosts earnings for large corporations, its shareholders and small business owners. If tax cuts pass, public companies are trading at ~10% cheaper valuations than current forecasts. Further, my online media business’s bottom line might increase by 5% – 10%. 

The 10-year bond yield climbed back to 2.35%, but still not high enough for me to get excited about putting significant money to work.

The RealtyShares domestic market equity fund bought another property in Texas, which is what I want them to continue doing. Now I’ve got exposure in Houston, San Antonio, and Dallas. The latest is a three year deal with a target 16.3% sounds good. But to be conservative, I’m modeling an 8% IRR instead. 

3Q2017 Investment Total: $1,109,872

Remaining cash balance: $1,090,000

Concluding Thoughts

The reason why I continue to hoard so much cash is because I’m addicted to owning physical property, even though being a landlord pains me to no end. I was going to offer $1,500,000 for a fixer, but the agent said don’t bother. It ended up selling for $1,700,000 after being listed for $1,300,000. I was going to offer $1,600,000 full ask for a house if they agreed to cancel their upcoming shows, but the agent declined and the house also sold for $1,700,000.

I keep going back and forth with whether I should just buy a $1,700,000 house that may be worth $2,000,000 three years from now. It’s a lot of money, but it’s $1,040,000 less in SF housing exposure than I had before I sold my rental. But every time I write up an electronic offer, I start to dread having to hire contractors and eventually find tenants. As a result, I’ve motivated myself to try and earn an extra $100,000 a year in business income instead.

For the rest of the year, I plan to continue buying the S&P 500 any time it corrects by 1% or more up to $100,000 each time. If the 10-year yield gets to 2.5%, I will invest an additional $250,000 – $500,000 in bonds. Finally, I’m having dinner with three people in October from the RealtyShares investment committee and will ask them to explain their investment rationale in a couple existing projects and hear what they have to say about future investment plans.

If no corrections occur, I’ll just continue to invest at least $10,000 a month in each asset class and hold the rest in cash just in case a sweet house pops up or a big correction comes along.

Finally, I ran my investments through Personal Capital’s Investment Checkup feature to see how I was doing and also analyze my current investment asset allocation compared to their recommendations based on my profile.

According to the chart below, my public investments are up 9.78% YTD, which is underperforming the S&P 500 by 3.9% and outperforming the US Bond index by 6.74%. I’m happy with the results so far, because I’m shooting for a 10% annual return with my new investments, and a 4-6% annual return in my overall net worth. Because I reached my target retirement figure in 2012, it almost feels like any gains since is a bonus.

What my You Index doesn’t capture are the returns from my physical real estate, real estate crowdfunding, and online business. The online business has fortunately been my best performing asset this year.

Financial Samurai Investment Performance

Here is a chart highlighting my current public investment allocation versus Personal Capital’s recommended investment allocation based on my financial objectives. The 16.6% weighting in Unclassified are manual entries of my private fund investments in venture debt, private equity, and real estate crowdfunding. Therefore, my Alternatives weighting is closer to 17%. Because I just sold my house, my cash portion is much higher than recommended.

Personal Capital Investment Allocation Recommendation

Overall, I’m quite happy with my investment allocation in the current environment. You can find your custom Personal Capital Investment Checkup under Planning -> Investment Checkup to see if your investments are matched up with your financial objectives.

Readers, how did you invest in 3Q and what are you expecting for the remainder of the year? Will this bull market ever end? Disclaimer: Unless you are me, or your finances and risk tolerance are exactly like mine, don’t invest like me. Graphic by

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