Saturday, January 5, 2019

2018 Review and New Goals for 2019!

Image result for new year resolutions2018 was overall a good year for me in terms of meeting the goals under my control, but I failed to meet my net worth goal due to the market downturn, and my overweight in foreign stocks and small cap stocks, which did poorly compared to the US stock market, also meant that I failed to beat the S&P500 index.

My total expenses in 2018 decreased significantly compared to 2017, while my savings rate surged well above 90% and dividend income grew modestly. I continued tilting toward lower dividend yield and higher growth to reduce my tax liability given my relatively high income. A summary of all my goals since inception of this blog can be found under my Goals tab.

2018 Goals Revisited
I set 6 goals at the beginning of 2018 to meet by end of the year. The first four are financial and the last two to help me stay current and maintain a sharp mind. All of these goals are specific, measurable, achievable, realistic, and time-based (SMART).

1. Reach a net worth of $1,400,000.
2. Beat the S&P500TR.
2. Receive $18,000 in dividends.
3. Save 90% of my after-tax income.
4. Read 60 books.
5. Read the bible in one year.

Goal #1:
Reach a net worth of $1,400,000.


I set this goal based on $1,174,539.92 net worth at end of 2017 and target of about $130,000 savings based on earnings and saving rate projection, with 10% organic growth (I was somewhat bullish at beginning of the year 2018 as the bull market seems poised to go higher still), which would get me to $1.4M.

As it turned out, 2018 happened to be a losing year for the stock market, with the S&P500 returning -4.38% on a total return basis. Foreign developed market returned even worse at -13.43% and emerging market worse yet at -16.10%. Foreign stocks are got sacked in 2018 after a seller 2017, and I am glad to have gradually shifted away from foreign stocks due to their higher tax burden and less investor-friendly corporate cultures.

Due to the volatile stock market this year, I actually reached $1.4M net worth goal in August, only to see it slip back down toward the end of the year along with the stock market.

During my Mid-Year Review 6 months ago, I assigned 50% chance of achieving this goal by year-end depending on what the market does, which turned out to be accurate.

My personal rate of return in 2018 was -4.77%, roughly in line with the US stock market. (my portfolio is currently about 86% in US stocks.) This was offset by net cash inflow propelling my actual net worth achieved at the end of 2018 to $1,292,823.80. I fell short of my goal by 7.66%. This was despite my net cash inflow from savings of $174,299.60 exceeding my target by about $44k. Going forward, organic growth will play an increasingly important role in determining whether I meet my net worth goals.

Goal #2:
Beat the S&P500TR


I set this goal as the S&P500 is the benchmark against which every money manager is measured. I had figured a 50% chance of meeting this goal (basically a crapshoot). 

My actual return of -4.77% failed to beat the S&P500TR's -4.38% by 39 basis points. That is actually pretty close and probably a better result than most actively managed mutual funds. 

A number of factors contributed to this result:
1. My portfolio contains about 14% in foreign stocks and 10% in small cap stocks. Both of these asset classes significantly underperformed the S&P500 index. 
2. I was slightly leveraged, about 1.03. Leverage is double-edged sword that helps positive returns and hurts negative returns. 

Goal #3:
Receive $18,000 in dividends. 


I set this goal based on $844,305.03 taxable portfolio value at the end of 2017 and target of 2.0% dividend yield with $106,000 new cash influx earning a similar 2.0% yield, in line with my expected portfolio dividend yield and projected savings at that time, which would give me $17,946 dividends, which is close to $18,000. I wrote also that with dividend growth it should get to $18,000 with about 80% success.

During my Mid-Year Review 6 months ago, I was on schedule and optimistically assigned 70% chance of achieving this goal by year-end.

Actual dividend received in 2018 was $18,472.77. This was about 102.6% of my goal. Right on.

My average dividend yield was $18,472.77/average portfolio value = $18,472.77/(($844,305.03+$967,335.59)/2) = 2.0%.

This is slightly above the market yield of 1.8%.

Goal #4:
Save 90% of my after-tax income.


I set this goal based on my past savings pattern which has exceeded 90% savings rate. Maintaining a 90% savings rate allowed me to become financially independent (FI) in less than 3 years (see table below)! Although I am already FI and could afford to live on my dividend income alone, I plan to keep working a bit longer to help build a bigger asset base for a greater margin of safety against higher than expected expenses and discretionary spending.

During my Mid-Year Review 6 months ago, I was confident and assigned 95% chance of achieving this goal by year-end, as I was ahead of schedule at half time.

Actual savings rate: 97.09% (all-time high as my expenses came way down after I significantly lowered my housing expenses since March 2018)

The table below shows the number of years it takes to be able to retire as a function of savings rate.
Savings Rate (Percent)Working Years Until Retirement
90under 3
95under 2

If one saves only 10%, one would not become FI for 51 years, essentially having to work until social security or pension kicks in. Even a 15% savings rate, most commonly advocated by financial planners, would not allow one to retire for 43 years, which is way too long. On the other hand, saving half of one's income would allow one to retire after working for 17 years, much more reasonable. Saving 90%, made possible by a high (100k+) income, can drastically cut the number of working years to under 3! The latter is the path I have taken and it is working wonderfully for me.

The graph below shows my trailing twelve month dividend income versus expenses over time.

The red dividend line crossed the blue expenses line sometime in July 2015. I began working in July 2010, so it took me 5 years to reach this breakeven point of financial independence. In my earlier working years, my savings rate were closer to 80% than to 90%, so that table above is pretty accurate. Now I am working on building the buffer. It is comforting to know that I do not have to rely on income from my job to cover my living expenses.

I will continue to maintain a high savings rate because it is my lifestyle to live simply, and I want to build upon rather than give up on all the progress I have made so far.

Goal #5:
Read 60 books. 


I set this goal based on my love for learning and desire to stay current and keep my mind sharp.

This was a step up from a goal of 50 books a year which I exceeded in 2017.

During my Mid-Year Review 6 months ago, I had already met this goal and read 68 books.

Actual number of books read in 2018 was 91, which exceeded my goal by 51%!

Okay, a confession: 43 of these books were audio books, without which I would have fell short of goal.

About 64% of the books I read were non-fiction, mostly related to finance, business, investing, and psychology. About 36% were fiction, most were classic fiction with no copyright that I could get for free as audiobooks or ebooks.

Average pages per book was 237 and average rating on Amazon was 4.2 stars.

Looking ahead to 2019, I won't have much time listening to audiobooks, so I need to realistically revise my goal downward.

Goal #6:
Read the bible in one year.


This goal helps me to remain spiritually minded, and as a bonus the Bible is written in a superb linguistic style is ideal for improving one's language skills. The Bible is very long though, so to help me stay on track, I relied on an app with daily reading plans, which was instrumental in helping me stay on track to achieve this goal.

During my Mid-Year Review 6 months ago, I was optimistic and assigned 95% chance of achieving this goal by year-end, as I was on track to keep up with it using the bible reading app.

In 2018, I used an app with Spanish version and commentary to help improve my Spanish reading skills. I plan to go back using the old app with the KJV in 2019 because the KJV language is more aesthetically pleasing.

In summary, I managed to achieve 4 of 6 goals I set for 2018, for an overall success rate of 67%. As for the only goals I failed to achieve, I was pretty close and at the market's mercy. While this felt short of the 80% success rate achieved in 2017, I am happy with the result. In 2016, I achieved 3/5 goals, for a 60% success rate. In 2015, I only achieved 1/6 goals, for a 17% success rate. In 2014, I achieved 2/5 goals, for a 40% success rate. There is still room for improvement though as I strive toward 100% success rate!

New Goals for 2019:
1. Reach a net worth of $1,600,000.
2. Beat the S&P500TR.
3. Receive $19,000 in dividends.
4. Save 95% of my after-tax income.
5. Read 50 books.
6. Read the bible in one year.

The first one assumes that I add $175,000 savings to my current net worth of $1,292,823.80, and a 10% return, which would come to $1,614,606. Rounding it down a bit comes to $1.6M. I have no idea what the stock market will do in 2019. 10% is simply the long term average stock return. So I am not all too confident in reaching this goal at all. Barring a major bear market, I figure probably 50% chance of achieving it.

The second goal is the same as last year's. The S&P500TR is the benchmark against which every money manager must measure his performance. I have had mixed results with this since I started tracking my returns, but I am continuing to learn and improve and hope to eventually achieve this goal. To help achieve this goal, I will try to stay close to 100% stock allocation, add some leverage as appropriate, and buy stocks on dips. I figure perhaps 50% chance of achieving it.

The third goal sets a reasonable target for dividend income. My current taxable account portfolio (excluding retirement accounts) is $967,335.59 with a yield of 1.9%. Of my projected $175,000 savings, $25,000 goes toward retirement accounts, leaving $150,000. I plan to tilt toward lower yielding stocks in the future to limit tax drag. If I add $150,000 savings throughout 2018 at a lower 1.0% yield, I shall collect $19,129 dividend income in 2019. That is close enough to $19,000, so rounding my goal to an even $18,000. Success for this goal will be defined as within 5% of goal up or down, so between $18,050 and $19,950. Failure on the downside means too many dividend cuts or turnover. Failure on the upside means too much dividend income tax liability. I figure about 80% chance of achieving it.

The fourth goal is a more ambitious 95% saving rate, increased from 90% previously, as my expenses have dropped significantly. Given that I have achieved this goal in 2018 and I do not foresee any significant change in my income and expense, I figure 95% chance of achieving it, not quite 100%, as unexpected expenses could come up.

The fifth goal is a step-down from 2018 but in-line with previous years to stay current and keep my mind sharp. I figure about 40% chance of achieving it, as I won't have time for fast audiobooks and have always struggled to meet this goal based on print books.

The sixth goal is a repeat from 2018 as I find Bible reading quite refreshing. I plan to use my favourite KJV daily bible reading app to keep track. This goal takes me about 15 min each day, and is in addition to my goal #5 above. I figure about 90% chance of achieving this goal.

That's all for 2018. Happy 2019!

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