November Update// Thoughts on Diversification
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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