It is that time where we share our progress and a few ideas or actions we’ve taken over the past month.
Before that, I want to take a minute to say thank you to all of you who were kind enough to take the time to comment or send us private messages in response to the November update in which Mrs. EE shared a bit about the health and diet issues she is struggling with.
We were overwhelmed by the number and quality of responses we got ranging from the simple “Hang in there!” to several page long e-mails with some awesome resources and specific tips and advice.
We tried to respond to every comment and e-mail individually. In case we missed anyone, it was simply an error of omission as we printed out many of the longer e-mails, read them and took notes on paper and came back to reply. If we missed anyone (or even if we’ve already told you once), THANK YOU! All of your support and input is greatly appreciated.
About That Graph
Ugh. Our assets as a multiple of our spending fell from 16.9X to 15.8X in one month.
We did poorly on both sides of the equation. It was a bad month across asset classes dropping asset value by .53% despite continued large contributions. Meanwhile our spending was up substantially. The spending was a result of continuing on a more costly diet, taking a much-needed family vacation, paying an outstanding bill that we finally received for some housework that had been completed back in September and some increased year-end charitable donations.
Knowing What I Don’t Know
One of the hardest things about managing your own investments is admitting what you don’t know and following a set, mechanical plan. Reflecting on this year’s investment returns is a good example of that.
At the beginning of the year, if I was a market timer and had to predict and sell one of our investments which I thought would have been the big loser for the year, I would have guessed REITs. Coming off a year of 30+% increases, and with a 5 year return up over 70% it had the look of an asset poised for a fall. Instead it was the class in my portfolio with the best return. (With a return of just better than 2%, maybe a better way to say that is it was the least bad.)
On the flip side, if I was a betting man, I would have guessed that international stocks would be carrying the year for us after everything domestic did well in 2014. Well it is good that I’m not a betting man as international was down big, with Emerging Markets down a whopping 15+%.
Overall, I am a proponent of not paying too close attention to what your investments are doing in the short-term and not tinkering. You could drive yourself nuts worrying about things out of your control. However, once in a while it is worth taking a look at to remind ourselves of how much we don’t know. As for us, we’ll be sticking to our boring plan, controlling the things we can and ignoring those we can’t.
Out of Here “Losers”
Speaking of things we can control…
A few months ago, we wrote about pondering tax loss harvesting and at the time we decided it wasn’t worth the effort for a minimal gain. In general, I think that tax loss harvesting is overvalued, especially as it is being sold as a benefit of robo-advisors by companies like Wealthfront and Betterment. Michael Kitces, whose blog I regularly read and I think is one of the smartest people in the financial advising space, offers some interesting insights and analysis here for anyone interested in a deep dive on the topic of tax-loss harvesting.
When I wrote my original thoughts on the topic, I received a comment from fellow blogger Financial Velociraptor who suggested looking at your cost basis once at the end of the year and then making a decision to harvest or not. While this goes against everything that you read about constantly monitoring for losses to maximize harvesting opportunities, it made total sense to me as someone who wants to be a passive, hands off investor. It prevented me from driving the Mrs. nutty with my overanalyzing and trying to pick the perfect time to harvest. It also is consistent with Kitces’ ideas that harvesting is generally overrated and so not worth spending a ton of time and stress thinking about.
At the end of the year I took a look and realized that I had a perfect storm and so pulled the trigger and sold off a bunch of losers in our international funds to harvest a large loss. I felt that this opportunity represented a perfect storm for us for several reasons and may be the only time we ever tax-loss harvest.
- Tax-loss harvesting is really a tax-deferral strategy. You are simply selling off your losing funds and buying a similar investment which is highly correlated but not identical to the original investment. Thus, you are lowering your cost basis for which you will have to pay taxes later. We are in position to maximize tax-deferral as this is one of our last years that we anticipate having a large income as we near our FI Day.
- The benefits were large as we were able to cancel out about $12,000 in gains from old actively managed mutual funds we sold off earlier in the year. We were sold these funds years ago as sold by our former financial advisor. (If you don’t understand why you don’t want to hold actively managed funds in a taxable account, you should read this.) Thus we saved ourselves about $2,000 in taxes for taking less than 30 minutes to analyze the situation and make the trade. If anyone knows of anywhere else I can get that rate of return, please contact me!
- There was no cost and little risk of tracking error as we did the trade all without cost within our Vanguard account.
Becoming a “1 Percenter”
As you can tell from the graph, I am unfortunately not writing about our wealth growing so much that we are now in the top 1% in the country. Fortunately for you, I am sharing one of the most simple tips that any reader of the blog can take to use their money to make a little more money.
We have traditionally kept an emergency fund of 2-3 months of cash on hand in a local bank. Now that we are approaching our early retirement, we have decided to up that to 5% of our total investments which means 1+ year of our normal spending will be kept in cash going forward as a buffer against market swings. This has us thinking about how to make a little money on this now substantial amount of money that is just sitting there at pathetically low interest rates of <.1%.
We looked into CD’s which still don’t yield even 1% unless we tied up our money for over 2 years. However, several online banks are offering 1% savings accounts with no fees and the ability to link to your other accounts for free.
1% interest rates will not make anyone rich. However, it is a free couple hundred dollars every year which over time adds up. Also, it is important to note that online banks, like brick and mortar banks, are FDIC insured so you are taking no extra risk for this 1% premium. To us this made it a no brainer as the effort to switch is minimal.
Happy New Year!
How was your 2015? Are you making any year end/beginning changes to your financial plans? Any big 2016 goals or resolutions you’d like to share? Comment below.