November Update// Thoughts on Diversification

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More Than Meets the Eye

It doesn’t look like much has changed on the graph since last month. Our assets as a multiple of annual spending increased ever so slightly from 15.6 to 15.7X. However there was much happening behind the scenes and beyond the numbers to discuss this month.

On the assets side, I was excited to sit down and look at our numbers this month with daily reports of markets at “all-time highs”. Our assets did go up, but by only 2.2% from where we were last month. While that is nothing to sneeze at (anyone who would not sign up for 25+% annualized gains on a passive portfolio, please raise your hand), I was a bit disappointed to see those results after all the hype about the post-election market rally. To give that context, consider that we have about 35% of our portfolio between the Vanguard Total Stock Market and S&P 500 Index funds which were up about 4.5% for the month and another 10% in the Vanguard Small Cap Value Index, up a whopping 10.2% for the month.

However, as the US markets have been going crazy, international funds are all down. Most notable were emerging markets, down 4.3% for the month, with Europe down 2.1% and Pacific Rim stocks down 1.3%. Bonds dropped over 2% due to a small rise in interest rates. REITs were also down nearly 2% in November. Overall, it was much more of a mixed bag than I was anticipating.

On the spending side, we decided to try to make a conscious effort to stay at home and just relax for the month after running almost every weekend in September and October including trips to Colorado, New England, and Washington D.C., as well as a couple of local climbing trips. We would slow down and recharge. We discussed having a “No Spend November” to experiment with how little we could spend. Well, we kind of did well. Despite hosting both of our families for Thanksgiving and getting our Christmas shopping done for the year, our spending was down about $200 compared to last November aside from two big spends.

However, the two big spends, turned out being pretty big. Mrs. EE had some medical bills with a trip to a specialist regarding her autoimmune condition and another visit to a hand specialist, complete with MRI, for a climbing related injury. Luckily, she got pretty good news on all fronts aside from the bills. Up until the last eighteen months, aside from the birth of our daughter, we have had virtually no medical expenses. Seeing how much these expenses have added up over the past year give us a new appreciation for the importance of both good health AND having good insurance to successfully navigate early retirement.

We also made a fairly sizable charitable contribution this month. Rather than donating to charities based on regular budgeted amounts, we tend to do most of our charitable giving on an irregular basis as situations arise where we think we can really make an impact and one of those situations came up this month. Some things are more important to us than budgets and our “No Spend” challenge, so we did it. I’ll be writing more about that in a separate post.

All in all, these two spends had our otherwise low monthly expenses up by over $1,000 compared to last November, which came off the books. This increase wiped out most of the investment gains as reflected in the graph. Boo!

Thoughts on Diversification

My disappointment at our investment gains, despite being up by over 2% in just one month, had me reflecting on a lesson from one of my recommended resources for becoming a DIY investor, William Bernstein’s “The Intelligent Asset Allocator”. In the book, when recommending investing portfolios, Bernstein warns of having tolerance for tracking error between a diversified portfolio and a portfolio focused on only domestic stocks. There is good evidence in long-term data for having a diversified portfolio containing international stocks, small stocks and bonds. However, it is easy to feel that you are making the wrong decision during periods when your portfolio is lagging the major domestic indexes that make headlines daily in newspapers, on TV, and the internet.

It is also difficult to block out “expert” opinion. “Experts” are attributing the domestic rally to investors bullish on a pro-business, pro-America President Trump. However, “experts” were also speculating chaos and crashes due to the uncertainty of a Trump presidency. Maybe my post FIRE gig will be to become an expert. Mrs EE always tells me I have a hard time making up my mind and Little EE loves to tell me “I am right, and you are wrong”, so I think I may be qualified!?! Or maybe I’ll just admit what I don’t know and should stick with our diversified investing plan.

I find it important to remind myself that the purpose of diversification is not to try to choose the best performing investment portfolio for any given time period. In fact, diversification 100% guarantees that in any given time period you will not have an optimal portfolio. This is because at least some part of the portfolio will be under-performing relative to the other. To have an optimal portfolio, we need to know what will be the best performing investment class and go 100% all-in there. However, we can never know what that will be for any time, even if we are an “expert”. Therefore, we simply are placing bets in different areas, each with a positive expectation over the long haul, with the idea that over time we will give ourselves a good chance at success no matter what happens in the world. At least that’s what we’re doing until I get my expert credentials.  😉

How was your month? Did you do any better than us in the rally? Is spending staying under control in this holiday season? Share your thoughts below.

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12 comments on November Update// Thoughts on Diversification

    1. Thanks AT. I don’t know if this month makes us doubt our plan, but it is the first time that I’ve really seen diversification work against us in an obvious way and thought it was good to point out these things that I’ve read about but never really experienced in my relatively short time as a DIY investor.

  1. Our month wasn’t too shabby either. Our portfolio was up more than yours, but that’s probably because we have it ALL in VTSAX. Hahahaha, kidding, but we do have a lot in there which was probably driving the recent gains.

    So far our spending has stayed under control, with just a few one-offs.

    Glad to hear the hand injury wasn’t too serious.

    1. There is something to be said for the “simple path” as described by JL Collins or a similar approach taken with small cap value stocks early on as advocated by Paul Merriman who I have also featured. Either would be looking pretty smart this month. I’m comfortable with understanding and sticking to our plan, which in my opinion is far more important than having the “best plan”.

      Finger supposedly not too serious, but really nagging her. Kind of hard to rest it with a computer job and small kid in the house. Oh well. Hope your Achilles is healing as well.

  2. Last month was interesting.. I saw about a 11% gain. I do a lot of individual stock investing which to be honest has it’s perks… and also headaches at times.. But Over all is time consuming. I’ve been shifting a lot of my individual winners and going into a broader market to minimize my involvement.

    I’m really starting to go for the passive avenue now that I have grown my basis a lot the last 5 years actively trading individual equities. I think it was a good plan, but I’m ready to less work managing my investments.

    1. I am actually looking to go the opposite direction from you Tim. I think passive indexing with a diversified portfolio is the best way for us to allocate capital during these times when we are so busy with full-time work. However, I hate the idea of working so much just to shovel money into overvalued assets. I look forward to becoming a real estate investor and investing in private business as a new challenge in early retirement when I have the time to do so. The interesting thing about all of this is that there are many “right” ways to get us where we want to go.

      1. I think actively managing as I have been doing for every years has been fun.. but also some time consuming. But it has given me some appreciation for the markets and how a lot of different aspects of investing work.

        I to have been looking at new avenues to invest.. and more specifically because I feel market assets are pretty high I have been focused on building up some cash and paying off debts on rental properties rather than making a lot of new investments. This will free up my cash flow in the future should the markets really go on sale at some point.

        There are MANY MANY right ways to do it… Some in the end are ultimately better than others.. but none us have a crystal ball to tell us what that will be.. The key factor for me in my personal annual expenses and savings rate especially early on. Now I throw money in investments and I don’t even notice the contributions since the balances are so big. But that just tells me it’s working because it was supposed to do that eventually… cheers!!

        1. Agree on all fronts. Though we have taken different routes to get here, it seems that we’ve arrived at the same place.

  3. Although weare a fan of the notion that you can get international diversification from large US companies, we are not “all in” on that idea. Specifically, we have a ratio of 4:1 US: ex US stock in the equities part of our portfolio. Over the long haul, a diversified portfolio will win out. In terms of how much international is necessary, it is up for much debate. We are comfortable with this level of exposure to ex US stocks yet firmly believe in US businesses.

    We will post an end of year portfolio update for family PIE with more gory details of how the portfolio performed over the whole year.

    Keep doing what you are doing. Stay the course and don’t be swayed by the noise from those who should know better to try and predict market movements.

    All the best!

    1. Our ratio is closer to 2:1 US:Non-US, but I otherwise agree with you 100%. I’m all about gory details so will be on the lookout for that.

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