Winter Is Coming
Well it’s been a little over 2 weeks since my last post on Ninja Capitalist so I hope all my readers don’t think I’m dead. After a long and continuous grind throughout the year I was finally granted some vacation time and decided to go to Cuba and I enjoyed every minute of it!
Cuba was an interesting place. It’s one of only a handful of countries that still lives and breathes communism. If you hate standing in line at the DMV, just imagine doing the same thing just to get access to the internet! Speaking of the internet, I tried opening my Schwab app on my phone to check on my investments while in Cuba (hoping I finally hit the big one), and as a result Schwab locked my account. The response I got was that American banks can’t have any sort of relationship with Cuba. So in the event you make a trip to this little island nation, don’t log into your financial apps!
Vacation aside, as we continue marching toward the heart of winter, I figure now would be a good time to provide a quick update on some year-end topics I’ve been thinking about. First and foremost, if you haven’t already, start tracking your financial performance with an app like Personal Capital. These performance tracking tools can help you set goals and then help you measure your performance to make sure you reach your financial objectives. I’ll also cover my goals and performance so far in 2017. Second, make sure to comb through your portfolio and look for any weaknesses. With valuations at all-time highs, make sure you are comfortable with your allocation plan and make sure your portfolio can withstand a market downturn. I’ve been preaching about this one for a while (Read: Portfolio Management), but today I’ll provide a deeper dive into my cash strategy.
Our most favorite subject: performance tracking. It seems like every company obsesses over it, and they have a good reason to. Leveraging tools that monitor your performance helps ensure your financial plan is on the right path, and that’s a great thing. You can become much more efficient by leveraging technology. I use Personal Capital, because I like the easy-to-use interface and it helps me track my spending, investment allocation and overall net worth. Using a tracking tool has helped me immensely. I’ll tell you one thing, it’s a hell of a lot more convenient than saving receipts!
My Goal for 2017 was to increase my personal net worth from $115,000 in January to $160,000 by the end of the year. I’m currently at $152,000 in the middle of November so I might need some major help from my portfolio if I want to reach this goal over the next month. For a 27 year-old I guess I’m doing alright, but I sure as hell won’t make MTV cribs with these rookie numbers. My investment performance is slightly underperforming the market this year, which is the first time that’s happened since I started investing about 5 years ago. This has been quite an annoyance for me, but I’m in it for the long run and I know that over time investing in high quality companies at low valuations will eventually win out.
I never thought I would throw my net worth out there on the internet, but here it is.
I’ve made some decent progress this year increasing my net worth by $35K, which equates to about 30% growth. But I’ve also been hanging onto a large cash balance (currently at ~$35K, but was as high as $50K) throughout the year, which has been a major drag on my performance. I typically save about 50% of my take home salary (after taxes and contributions) and move most of my savings into my investment accounts. This is actually less than some other personal finance guys on the web who aim to save 70% of their take home pay, but I live in San Diego and shit just ain’t cheap here.
As I look towards 2018 I hope to continue building my net worth and my overly ambitious goal is to hit the $200K net worth mark. Maybe I should just gamble on Bitcoin, but for now I’m taking the slow and steady path to building wealth. I’ll write a post in early January, which will dive deeper into my FY 2017 stats.
The most important part to building wealth is to just start somewhere. Don’t worry about how much or how little money you have. From there, you can utilize these free tracking tools to set goals and watch your wealth grow!
I’m currently holding onto a bit more cash than I would like. Throughout the year I’ve maintained ~$35,000 cash balance, which was driven mainly by high stock valuations and the urge to save for a downpayment on a house. This has been a major drag on my performance. Just earning a 5% return on that balance would give me $1,750! I don’t know if the opportunity cost has been worth it yet, but having a strategy for cash management should not be overlooked when putting together a financial plan.
As stock valuations continue to hover around all time highs, I believe it’s prudent to have a decent cash buffer in order to take advantage of opportunities when they arrive. If there aren’t any cheap stocks out there, I would rather sit in cash than plow money into overpriced assets. A good medium while I play the waiting game is to invest that cash into money market funds. I’m making about $10-$15 a month from these funds so at least I’m not loosing out to inflation. Most money market funds are similar across brokerages so I just invested in Schwab Value Advantage Money Fund (SWVXX). Just make sure the fund isn’t overpriced and don’t pick a fund that charges transaction fees.
The second driver that lead me to save some cash is to potentially buy a home if a good opportunity comes along. The major theme with housing across the U.S. is that homebuilders have been extremely cautious since the financial crisis and quite simply there are not a lot of new homes being built. As such, the lack of supply has forced housing prices to increase. A 20% downpayment on a $600,000 home, which is about average here in San Diego, will require about $120,000. Due to the high amount of capital needed, I’m kind of torn between selling my investments to come up with the $120K or just slowly continue building up cash until I reach the amount needed. However, due to rising home prices I’m not overly eager to buy anything at the moment. I also would prefer not having to sell off most of my investments to buy a home. So for now I figure I’ll just keep accumulating cash until something meaningful comes along.
There really isn’t a right answer when it comes to how much cash you should have in your portfolio. It comes down to each persons needs and their purpose. However, I think building a strong cash balance provides optionality. I can take advantage of market dislocations or jump on a home buying opportunity when those events present themselves.
As you begin to bundle up around the fireplace and recap your year, remember to take charge of your financial plan and take advantage of free financial tools like Personal Capital. Also start thinking about building up an adequate cash balance since stock valuations are at all time highs. Don’t put yourself in a position where your short on cash in the middle of a market panic. Give yourself some optionality!
Last but not least, I hope everyone has a great Thanksgiving holiday and try not to overeat too much!