With Chiang Mai’s beautiful but very short “winter” now behind us, it means temperatures begin climbing, skies get hazy due to inversion layers that occur during the hot and dry season and many expats begin their annual bitchfest known as “The Burning Season” all over social media. For us it means the end of day tripping and a short break before a one week beach vacation at a moderately priced Koh Lanta resort. After that we return home for a week and then hit the road for four weeks for a month-long escape from the bad air. Given Thailand’s low-cost of living, we’re running about $3,500 under our annual fiscal year budget so it’s affordable to overlap monthly rent if we stay away from the more popular Andaman Sea beach destinations where everyone else goes. Searching for a more low-key area still far enough south to escape the haze, we found a three bedroom house for rent on Airbnb at a ridiculously low rate of about $21 USD per day in a sleepy beach community half way between Hua HIn and the gateway town of Chumphon. Planning on driving, we’ll be able to cart more stuff than flying and see a bit of the country as well.
So for now, let’s talk finances. Depending on your situation, some of you may have noticed the one and only positive aspect of the Trump Disaster is a rather fast rise of the stock market. Simply put, Wall Street loves billionaires and while very few of his moron supporters will ever see one penny since they’re mostly financially ignorant, underemployed and too stupid to understand why trickle down economics always fails miserably, those of us in the “sweet spot” (invested properly but not wealthy) are doing well. Finally seeing an enormous albeit very short correction that brought the markets down to earth last week, I thought I’d post a follow-up to my recent financial comments.
Having received an unexpected amount of positive feedback when I briefly touched on asset allocation and diversification, let’s get the disclaimers out-of-the-way. Most importantly, I am not a licensed professional and nothing I say should be taken as a solicitation or endorsement of any financial products. But I did spend 32 years working in various administrative and support roles for some very well-respected financial institutions in New York City and San Francisco. Not intending to make this an economics lesson or online college class, I’ll keep the teaching down and include an educational link when I use financial terminology. With lots of great blogs focusing on how to retire early, not that many focus on what to do once you’re there so I’ll give it a shot. While never wanting to manage anyone else’s money, I’ve been a “self-directed investor” for over 20 years and that’s enough time to analyze all the graphs and after almost three years of early retirement, I can say we’re ahead of the curve so if you don’t mind some boring graphs to make my points, read on. Please also note that since we’re both American citizens, some strategies I discuss only apply to U.S. residents but the concepts are universal and can be applied from almost anywhere.
Since the blog is almost four years old and most people who check out the “about” page usually don’t make it past two paragraphs, let me summarize our situation. Investing all our cash together for almost 20 years now, Diane and I both started with small cash contributions and began building a diversified portfolio of mostly open end no load mutual funds, and some individual stocks. Simply put, our goal from day one was to accumulate enough assets for early retirement although our plan got pushed up by five or six years due to an untimely “elimination of my position” (layoff) in 2013. Having worked as a Registered Nurse after moving in with me from Canada in 1996, Diane’s first job in the USA had a good 401k (tax sheltered) plan and when we decided to pack it up and move to Canada in 2000, we already had a good head start which leads me to my first piece of advice. Never cash out a tax sheltered retirement plan when changing jobs. Rather, take advantage of the rule that allows you 90 days to “rollover” your account into something compatible like an Individual Retirement Account (IRA) at a self-directed brokerage firm.
Another highly useful tool for Americans is understanding the advantages of a Roth IRA which is a tax sheltered plan where you make “post tax” contributions (thus no tax deduction) but all capital gains grow tax sheltered and you’re not taxed when you use the funds later in life. There’s a whole bunch of rules and limitations on who’s eligible, when funds can be withdrawn without early withdrawal penalties and who can benefit so please refer to the link if you need a primer. If you’re American, already versed on the topic and lucky enough to be in a situation where you’re living tax-free (meaning your worldwide income is below the threshold for filing and paying any federal tax), I highly encourage annual partial conversions from a Traditional IRA to a Roth IRA. By converting an amount that combined with all your other income keeps you below that threshold, you’re using a loophole that allows you to convert existing traditional IRA assets into a Roth IRA without paying any tax. Successful financial status is about what you keep, not what you make and the more assets you accumulate in a Roth IRA, the less tax you’ll pay later. If this paragraph makes no sense or isn’t applicable for you, it’s OK because now I’ll talk about why we don’t worry about huge market swings.
Skipping past the specifics, I’ll touch on some obvious things that are often hard to visualize while you’re stuck in the rat race. After moving to Canada, we left our investment assets in IRA Rollovers and let them grow over the next seven years. Ineligible to contribute any more without U.S. sourced employment income, we made minor tweaks to asset allocation when needed and mostly concentrated on Diane’s RRSP (Canadian tax sheltered plan) which was already well-funded when we met. Having built a new house in 2002 at the start of the century’s biggest housing bubble, that allowed us to buy cheap, pay it off in full and sell for more than double in only seven years. Sticking to the early retirement plan, we reinvested almost all the cash into a huge down payment on a very overpriced suburban San Francisco house in 2008. Perfectly timed thanks to the beginning of the Great Financial Crisis, we bargained the seller down almost 17% from asking price at a time when banks were desperate to write mortgages.
Returning back to California just in the nick of time, I started my last conventional office job on the day Lehman Brothers collapsed and the markets began a six month free fall. Diane had already been hired six months before and was diligently maxing out her employer sponsored retirement plans. Luckily, her company fell into a very strange but advantageous class of quasi-government and private which somehow qualifies them to offer both a 403b and a 457b (lesser known tax sheltered retirement plans for qualified institutions that reduce your taxable income by making contributions via payroll deductions). With IRS guidance allowing a maximum contribution of $17,500 per plan, that allowed us to double up our retirement account contributions and lowered our taxable income so much we received large tax refunds every year (because they tax payroll on gross salary with an assumption you’ll make no voluntary reductions). Also “maxing out” my own 401k plan, here’s two very important tips I learned.
Always make the maximum contribution possible to any employer sponsored tax sheltered retirement plans. You can’t miss money you’ve never seen so sign up as soon as you start and don’t look back. If you legitimately can’t afford to do this, make the biggest contribution possible every check. Paying yourself now for future rewards is one of the hardest psychological decisions you’ll make but unless you’re pulling in an executive salary, it’s necessary if you want to be writing a blog post on a hot tropical Wednesday afternoon like I am.
Practice Dollar Cost Averaging all the time (even outside your tax sheltered plans). Simply put, this means if you get paid bi-weekly, divide the maximum allowable contributions by 26 and contribute an equal amount every two weeks that mathematically gets you to the limit. If you’re inexperienced with the investment choices in your company plan, don’t just do what sounds easy. Ask for help. I reallocated three of Diane’s co-workers assets because their investment choices made no sense. As I was searching good links to define this strategy, several of the top Google hits are idiots quoting studies contradicting this tried and tested investing method. Always a firm supporter of backing up statements with facts, this leads me to those boring graphs I told you about.
Another good strategy for early retirement is prepaying the mortgage diligently. Granted timing plays an important role in your future and luckily, we both started new retirement plans a few months before the market bottomed. Living way below our means in the nation’s most expensive housing market meant sacrificing weekends in Napa Valley for Saturday nights with free DVD’s from the public library and during our highest earning years, we lived on less than 20% of our gross income after contributions towards IRA’s, employee sponsored retirement plans and mortgage prepayments. Preparing for the worst goes a long way and with seven great years in the market, being laid off wasn’t really very scary. As experimental expats, we live entirely on the cash from the sale of our house which is safely invested in fixed deposits and savings accounts. With 15 years to grow until we need the investment portfolio, here’s where the boring but relevant stuff comes in and why we don’t care when the market corrects even by large amounts.
Over time, markets always go up no matter how many financial crisis happen. (We’ve lived through three in our investing lives). Here’s my advice to anyone still working: Develop an asset allocation plan that’s well diversified and includes at least one-third of assets outside the United States, make sure it fits your risk tolerance, continue investing without thinking about market conditions, don’t read any financial press except Bloomberg.com (they’re all looking for a headline) and check/adjust your positions at least once annually. Learn a bit about asset correlation and fixed income securities which can help shield you when equity markets correct. For proof, I’ll show you some examples of different investment classes we’ve held over time.
Interpreting the graphs is simple: The right axis is the real percentage return of the investment including all reinvested dividends (ALWAYS reinvest dividends and take advantage of compounding). So 100.00 means it’s doubled in value. The number on the top right axis shows the real annual percentage yield earned over the period shown. The bottom left axis shows the investment’s inception date and the top left axis shows the asset’s price (not important). Finally, the dots along each security represent a transaction. Through 2014 you’ll notice many dots which represents small purchases of each security every paycheck. Once our employment ended, we became ineligible to contribute in any tax sheltered investment accounts so the dots become fewer and they then represent a reinvested dividend (Securities laws force mutual funds to pass on any dividends received from the underlying securities to shareholders and that’s called a mutual fund distribution).
The first graph shows the return on a fund investing in U.S. Mid-Cap Stocks. (a company with a market capitalization between $2 billion and $10 billion). One of the most overlooked segments and hard to find quality funds that follow a “pure mid-cap” style, it’s one of my favorite market segments. Having owned it for 14 years, it’s now “closed” (unavailable to new investors) and even after the large dip of 2008, it’s yield is 9.3% and it doubled in about 8 years.
The riskiest but also reaping high rewards, this U.S Small-Cap fund invests in smaller companies and I never keep more than 10% of the portfolio in this asset class. We got into it in Diane’s first week of her job in 2007 and it’s tripled in value since then. (Small caps are companies with a market capitalization of between $300 million and $2 billion.)
Investing in very Large-cap dividend paying companies (other than Google, Apple and the most well-known giants), a dividend paying fund is a must for long-term investors. One of my newest funds, we only bought it two years ago and even the large correction shows it’s still yielded 11.1% although two years is not long enough to judge performance of any long-term investment.
Not to be forgotten, the graph below shows the return of one of our Core Fixed Income funds. Dubbed an Intermediate Bond Fund, it invests in corporate bonds, U.S. Government bonds, mortgage-backed securities (they still exist and are a very important part of a good portfolio) and money market products to an extent. Considered moderate risk, the fund invests in bonds with medium maturities and despite the current rising interest rate environment, it almost always loses less or even gains on those 1,000 point drop days. Bond funds don’t double very quickly and they’re not supposed to; Instead, they pay monthly dividends representing interest from all the underlying securities. In the old days, bonds yielded 5 to 6% but our 3.9% return since 2009 is above average for today’s world and notice the lack of volatility in the graph in any market condition.
Fixed income funds come in many different styles and Strategic Bond Funds like the one below are riskier but offer higher returns. Investing in things like foreign bonds, “junk” bonds and illiquid securities, they help add diversification but should be used conservatively.
Never forget to include the rest of the world in your investment portfolio. Despite what many Trump supporters think, the United States represents only about 40% of the world’s market capitalization and will no doubt decline under a moron president trying to oust globalization in a digital world and promote isolationism and trade wars. Meanwhile, this side of the world is thriving and the graph below shows why you want to include Asia in your portfolio. Although not shown here, I suggest adding a smidgen of the asset class known as Emerging Markets as well as Fully Developed Markets. The San Francisco based mutual fund company we use is easily the best for investing in the Asian market. Making special mention of the far right side, pay special attention to what’s happened in Asia since the Trump disaster.
Finally, I’d add that my personal goal is to never lose more than 60% of what the S&P 500 loses on a down day. Always trying to structure our portfolio to meet my goal, on February 5th, 2018, the Dow Jones Industrial Index lost 4.6% and over 1,600 points and the S&P 500 lost 4.2%. Taking a hit of only 2.3%, our portfolio took a much lower beating than anyone who owns only U.S. equities. And as for Index Funds, (passive mutual funds that mimic an index), I won’t pan them but personally I don’t want to own the index; I want to beat it. And when everyone else loses a ton, I want to lose a pound. In fact, four of our investments showed a gain on that day because in general, bonds go up or stay unchanged in value when equities get crushed and vice versa. The financial crisis was an exception because that was a liquidity crisis. We are NOT in one now so don’t let anyone tell you “the market is doomed to fail” anytime soon.
Barring Trump starting World war III, the capital markets are not in any imminent danger and the chart below summarizes everything I’ve said. Yes, I know many people think the wave of populism will end the world’s élite (and very unfair) system of wealth disparity. Guess what? Not gonna happen unless they launch the nukes and everything I’ve said gets replaced with Mad Max movie scenarios.
Two things jump out when you look at our annual returns broken down over a ten-year period. Despite an enormous loss exceeding 45% in 2008, staying invested during the entire fiasco meant recovering all of it and then some the next year. Everyone got hammered in 2008 including the most conservative investors and the never ending coverage that made it seem like financial Armageddon was around the corner sent millions of scared investors running for cover. Many pulled all their cash out, stopped contributing to their retirement plans and avoided stocks and bonds for years to come. Missing the best seven-year run in our lifetime, they all failed to see why buying Apple at the market bottom on March 9th, 2009 at $11.87 would’ve been the smartest decision they ever made. (It’s $172.99 today). We continued maxing out our retirement plans and wound up with many hundreds of very cheap shares that are still part of our portfolio today.
Equally telling, notice there’s 36 red months out of 120 in a ten-year period. With a well diversified portfolio and proper asset allocation, you’ll take advantage of certain segments of the markets that gain while others falter and ultimately smooth out the losses. Certain economic or world events may cause everything you own to go down sometimes but knee jerk reactions to news are normal and staying the course led us to a monthly gain 70% of the time over the last decade.
Concluding this gargantuan post that I apologize for making so long, keep in mind the obvious. As the post tile says, 8% of zero is zero. Only you can gauge what dollar amount makes you feel comfortable enough to retire early and honestly, I would’ve liked to have a lot more. Relatively confident that we’ll exceed our investment goal after all our cash from the house sale runs dry, we only have a small pension to supplement eventual withdrawals from the investments. Never having used any financial professionals, I’ve used online retirement estimators but I’ll tell you with certainty that you’ll never accurately gauge how you’ll live after the employment income stops because life changes and shit happens. Hopefully, you’ll keep your job past age 48 if you’re not ready for the worst case scenario but by doing the right things now, your blog title might have a more confident sounding name than “Experimental Expats”. Good luck and cheers from Northern Thailand.
Questions, comments and suggestions are always appreciated.
Promising not to turn the blog into a CNBC commentary, this will probably be my last financially related post for a long time. Feel free to PM if you’re interested in chatting further.