Blogging is a bit tough this week. RB40jr is at home all week and I can’t wait until he starts school next week. Also, my mom went back to California so we don’t have a readily available babysitter anymore. This means the only time I have for blogging is after RB40jr goes to bed. I was planning to write about the importance of saving rate, but I’m having writer’s (blogger’s?) block. Normally, I would stick with it and take extra time to build an article. However, with limited time, I just have to change topics and go with something that flows better.
New investors tend to focus on finding the “best” investment, but what they should really focus on is increasing their saving rate. Most people can increase their saving rate by 5% or 10% without a drastic change in lifestyle. On the other hand, it’s really tough to beat the market consistently and increase your rate of return. When you’re starting out, your portfolio value will be relatively small and increasing your saving rate will have a much bigger impact than increasing your ROI.
Let’s say your portfolio is worth $100,000. If you increase your ROI by 2%, that’s only $2,000 extra. It’s probably much easier to cut back and focus on saving $2,000 extra instead. Your saving rate is directly under your control, but the stock market is out of your hands, as this August illustrated.
New investors should focus on increasing their saving rate
When I was new to investing, I tried to pick the “best” investments. I did it all wrong, though. In my 401k, I picked the funds with the highest return from the previous year. I didn’t know that over 80% of actively manage funds underperform low cost index funds over the long term. I also didn’t know that the stock market is cyclic. The funds that did very well the previous year probably won’t repeat their performance this year.
In my brokerage accounts, I purchased speculative tech stocks because the price kept increasing. This didn’t turn out well because a few years later, the dot com bubble popped and my portfolio crashed along with Pets.com. Needless to say, I wish I spent the time to learn how to invest and avoid those pitfalls. Experience is the best teacher, but it wasn’t fun to go through those stressful periods.
That’s why I encourage everyone to start investing as early as possible. It can take many years to form an investing strategy that you’re comfortable with. You need to go through a few market cycles to see how you will react to the volatilities. Here is the investing strategy that I can live with through the ups and downs. It works for me, but it might not be the right fit for you. Everyone needs to find their own investing strategy.
- Most of our retirement funds are in low cost index funds. This is the core of our net worth.
- Our taxable account is invested in mostly high quality dividend stocks. Most of these companies should be able to maintain their dividend payout during a downturn. The price may drop, but quality stocks should come back when the market recovers.
- I invest in a few speculative stocks to keep life interesting. Luckily, I sold off all my Loyal3 IPOs in July so I didn’t have to worry about them.
- 20% of our investment portfolio is in bond funds. If the market drops further, I will have the option to trade some of these in for stocks.
- We have alternative investments in rental properties, REIT, cash, international equities, and P2P lending. These offer diversification and cushion the blow when the market crashes. International equities have been underperforming the US market over the last few years, though.
With this strategy, we don’t have to worry about how the stock market is doing and we can just focus on saving as much as we can. In the short term, our portfolio will gyrate wildly along with the stock market, but it should be fine over the long term.
Let’s see how we did over the last 12 months. This is an interesting period because the market has been pretty volatile. We can see a dip last October and the current mini crash. With my investing strategy, I didn’t have to lose any sleep and just kept on investing.
Here is our Personal Capital net worth chart over the same period. It looks like the October 2014 dip didn’t really affect us much and we kept on trucking. The ongoing gyration decreased our net worth by $80,000 in August and set our net worth back a few months. Actually, this chart probably isn’t that accurate because Zillow tends to overvalue the properties in our area. In my Excel spreadsheet, our net worth is set back to the beginning of 2015.
Below is the chart of our monthly net worth changes. Our net worth increases most months so that’s good. We have a few negative months as well, but we are trending in the right direction. I checked my spreadsheet and it looks like we added about $5,000 to our net worth every month. You can see that the changes are usually bigger than $5,000. At this point, the stock market movement influences our net worth much more than the contribution from our income.
When I started investing, I focused a bit too much on maximizing the ROI and made many rookie mistakes. Fortunately, I was saving as much as I could as well. Now, I just focus on saving as much as I could without worrying too much about ROI. This cut down on the stress and made it much simpler to invest. I just need to keep investing through all market conditions. It’s simple and stress free.
Did your portfolio fluctuate much over the last few weeks? What’s your strategy for getting through a volatile stock market?