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Focus on Your Saving Rate When the Market Fluctuate


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.

Some charts

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.

stock market mini crash

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.

net worth stock market crash

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.

market fluctuation portfolio net worth

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?

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{ 24 comments… add one }
  • Ernie Zelinski September 4, 2015, 1:31 am

    I agree with you about the importance of saving. No doubt my stock portfolio fluctuated a lot, not only over the last few weeks, but over the last year or so. I am too lazy to look.

    Ultimately, however, I know that my net worth is going up nicely. That’s because I also have a lot of money in cash deposits and my saving rate (both in percentage and actual amount) is lot higher than most people’s. I am spending a lot more money than I ever have in my life and am still always surprised when I calculate how much my net worth has gone up over the last 5 years or so. So I must be doing something right. That something is saving a lot of money.

    • retirebyforty September 4, 2015, 10:20 am

      Cash is king in this environment. Saving a significant percentage of your income is the best thing most of us could do. Of course, having more income helps tremendously.

  • John C @ Action Economics September 4, 2015, 4:47 am

    I did the same thing when I started investing too, I invested in individual stocks and looked at the short term returns of mutual funds. When I realized the real difference is made by my contributions early on, I worried less about “hitting a home run” and I put everything into index funds and focused on throwing more cash in. My portfolio has seen a decent dip the last couple weeks, but nothing another month of contributions won’t overcome.

    • retirebyforty September 4, 2015, 10:22 am

      Experience is the best teacher. 🙂 A few speculative stocks are fine, but our core investment should be in low cost index funds. For most people anyway.

  • Steve Miller September 4, 2015, 4:50 am

    Hey Joe,

    Do you keep track of your total net worth and your liquid net worth (invested assets)? I do that so that I can compare our 4% spending rule against the liquid net worth vs. the total net worth.

    Just curious if you do something similar.

    • retirebyforty September 4, 2015, 10:27 am

      Yes I do. I have these bins set up in my spreadsheet.
      – Liquid: dividend stocks in our taxable account, checking, saving, CD, etc..
      – Retirement: 401k, Roth, IRA, and other tax advantaged accounts
      – Illiquid: real estate, personal loan, and pension.
      We haven’t started our draw down yet so I don’t worry too much about liquidity.

  • Justin @ Root of Good September 4, 2015, 5:38 am

    Our net worth went a little crazy (by -$74,000) in August, but we’re still as wealthy as we were back in February, so I’m totally fine with the volatility. No panic selling, no sleepless nights. I’m a little disheartened that I don’t still have a paycheck that I can use to dump even more money into the markets, but that’s okay too since we have “enough” already.

    • retirebyforty September 4, 2015, 10:28 am

      Yeap, I wish I have more cash to buy more dividend stocks. That’s the downside of no having a full time job. 🙂

  • Tawcan September 4, 2015, 6:58 am

    Haven’t calculated our net worth since we only check every quarter but I have no doubt our net worth dropped a bit due to the recent market drops. Like you said, focusing on the savings rate to so you can invest more stocks during down market is more important in the long run. This is exactly what we’re trying to do. Save, save, save, buy assets, buy assets, buy assets.

    • retirebyforty September 4, 2015, 10:29 am

      That’s a great way to go. No need to check your net worth while the market is volatile. It won’t change anything. Great job!

  • Mr. Utopia @ Personal Finance Utopia September 4, 2015, 7:38 am

    That’s good advice about focusing on increasing one’s savings rate instead of trying to chase down the investment vehicle with the highest return. There’s nothing wrong with trying to maximize your return, but pumping more money in via increased savings will get you to financial independence much faster.

    And, is my suspect eyesight deceiving me? Does that picture show your net worth at $1.99M? If so, wow. That’s awesome. I read your monthly financial updates but didn’t realize you guys were doing that well.

    • retirebyforty September 4, 2015, 10:31 am

      Of course, we try to maximize our ROI too. But I’m just not very good at it. I’ll have to be content with market return and have fun with just a few speculative stocks.
      Thanks! The net worth is some what inflated. Our properties aren’t value correctly and we’d have to pay a ton of tax and fees when we sell. We also have have to pay tax when we withdraw from our retirement accounts.

  • freebird September 4, 2015, 7:44 am

    Joe, this hits home with me, as I reviewed my end-of-year records for the past 25 years, some years were great, others not good at all, and overall I pretty much matched the indexes after many thousands of hours spent trying to beat them. I ended up doing well not because of my investment performance but rather due to my large and persistent cash input over the long haul, in other words the magic of dollar cost averaging. I was lucky to the extent that trying many different ideas over the years helped diversify my holdings, but while it was interesting to learn about many industries, it wasn’t very productive.

    Anyway remember that when you dollar cost average, VIX is your friend because you acquire more shares at the lower prices.

    • retirebyforty September 4, 2015, 10:34 am

      That’s great! I think most regular investor realize that at some point in their investing career. It’s really difficult to beat the market. Do you buy VIX? It seems like a difficult fund to invest in. You have to be on the ball for that.

      • freebird September 4, 2015, 11:32 am

        Oops, sorry, no I meant that ‘volatility’ helps you when you dollar cost average, that’s all. Volatility is nothing to be concerned about if you’re not trading, you actually benefit from the stock price swings when you’re accumulating. Of course decumulation in such an environment takes a different strategy.

  • Stockbeard September 4, 2015, 10:57 am

    Joe, you say you have dividend stocks in your taxable accounts. Shouldn’t you optimize here, and have most of your dividend stock in your non taxable accounts (IRA?) which are not taxed on that kind of capital gain?

    Or did I understand something wrong here?

    • retirebyforty September 4, 2015, 11:53 am

      We have dividend stocks in our taxable account because we plan to use the dividend to help pay the bills once Mrs. RB40 retires. At that point, we won’t pay much tax. For example, we didn’t have to pay tax on dividend in 2013 because our income was in the 15% tax bracket.

  • DP @ Someday Extraordinary September 4, 2015, 11:46 am

    This is good advice. In fact, one of the biggest lessons I’ve learned is that it is wise to have some funds available for when the market does become volatile. Those dips at the end of August – especially that 1,100 point Dow drop – often present huge buying opportunities to a shrewd investor.

    Understanding cycles and using them to your advantage can pay huge dividends. You can’t be afraid of them. I just posted an article on cycles that was published on Seeking Alpha, as well. Use them to your advantage! You’re right – focus on savings and not your returns in the short term. The long term will work out!


    • retirebyforty September 5, 2015, 8:44 am

      That’s the hard part about being semi retired. We don’t have as much cash infusion. We had to keep some cash on the side for these opportunities. Also this is why you need bonds.

  • Jason September 4, 2015, 6:23 pm

    This is fantastic how you have done over the past year. And you are dead right about finding your specific strategy. Even though I invested, when I first started, in mutual funds that had fairly long track records. I didn’t even consider fees or other items. It is only over the past year or so that I have moved half of my investments into index funds. I only wish I had larger capital to dump more money into the market.

  • Sylvia @ Miss PF September 5, 2015, 8:05 am

    My savings rate is what I am going to focus on this year. I am going to try to save 5% more than last year.

    • retirebyforty September 5, 2015, 8:46 am

      Good luck! 5% increase is a great number.

  • nicoleandmaggie September 6, 2015, 10:16 am

    I have no idea how our portfolio has been doing. Most likely it has been matching the ups and downs of the stock market with some cushion from bonds, just as it has been designed to do. The best thing for a long-term investor to do is to pick a sensible strategy (that takes into account risk) with low fees and diversification and to automate it. The money will be there when I actually need it.

  • Financial Samurai September 6, 2015, 12:55 pm

    This is good advice. We must control what we CAN control. I’m encouraging my community to dial up their savings to MAX MODE from now through the new year.

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