A Good Article on Annual Financial Moves to Make

The Financial Samurai published a great post this week. 10 Helpful Financial Moves to Make Every Year. I decided it would be a good exercise to work through each one.

1. Review your asset location - Investors should rebalance at least twice a year.

• My overall portfolio split:

• 70% in the stock market. 20% of which is in 401K and Roth IRA, and the rest is invested in 7 individual stocks and 1 ETF.

• 10% is in real estate through Fundrise, which will drop to <5% as of January 1 after liquidating half of that investment.

• 5% is in passive investments.

• 15% is in cash, increasing ~20% as of January 1. Since we’ve just relocated, and are focused on building our lives I don’t want to be beholden to the performance of the market. I’m still not convinced that we won’t experience a downturn in the next 12 - 18 months, and I’d rather have the cash on hand to invest in a house, a business, or cheap stocks, then manage the stress of selling stocks while the market is down. It helps that with increased interest rates my cash is earning 5%. In liquidating a lot of my positions I did miss out on additional gains in the last quarter of the year, but those extra gains assume I actually pulled money out while the market was up (see lesson #1 here). The term unrealized gains exists for a reason.

2. Review Your Income and Spending - Chances are high you're spending more than you realize

• A review of credit card bills and an estimate of cash spent shows that last year we spent just slightly more than I would’ve guessed. We had some big expenses that I hadn’t anticipated (3 weeks in Switzerland, a 3 month road trip), but we also lived rent free for the summer and during our road trip our rent expense was limited to hotels and Airbnb’s.

3. Declutter and Donate to Charity - What expense are you currently carrying that you didn’t realize you picked up, and get rid of them in the new year.

• Other than rent, our recurring monthly bills are minimal, and in 2024 we’ll lose some (interest free debt) and pick up others (health insurance, car expense). Variable expenses (as opposed to fixed expenses) like food, travel and health items (gym, supplements etc…) make up the bulk of our expenses. So we can limit them if needed. Since our expenses are not overly extravagant, trying to reduce the cost of living for us seems futile. Instead I’ll be focused on increasing top line income in 2024.

4. Update Your Resume

• It’s hard to update your resume when you haven’t worked in five years. Very likely the reason I haven’t received one positive response from the 40 applications I’ve submitted over the last 1.5 years. Just one more reason I can’t go back to work.

• Part of this rule is to look back at everything you’ve accomplished over the lat year, which is an exercise I started doing back in 2020. In the beginning of January I write My Year In Review, followed by Goals and Plans. In the review I go as far as listing individual books I read, miles I ran, or countries I visited. I take stock of my financial position, and I do a reassessment of my allocations (Rule #1 for Sam). In my look forward, I layout things I want to accomplish. A specific trip. Getting involved in a certain industry. I also start thinking about expenses that are coming up, which investment(s) I need to liquidate, and how to do this while achieving my financial goals.

5. Keep Yourself and Your Family Safe - Besides health care, please make sure your housing insurance, car insurance, and personal property insurance coverage are enough

• A few years ago I explored purchasing life insurance. At the time I thought there was an opportunity to use it as an investment. When I found out I was wrong I nixed the whole idea. But now that we’re starting to build a life together I’m going to explore my options again.

6. Review Your Estate - At least have a will, or have an updated will if your financial circumstances have significantly changed.

• Similar to life insurance I never felt the need to have a living will. But that’s changed. I’ve seen advertisements for Livingwill.com and given the simplicity of my life I’m going to explore to see if using this site is a possibility.

7. Forecast Future Tax Liabilities - Plan for your future tax liabilities by doing a pro formal analysis on your expected income and expenses.

• In 2023 I liquidated a sizable amount of my stock portfolio and I have long term capital gains taxes as a result. One reason I liquidated a large portion was to invest in ourselves and a home as I mentioned above. The second reason is that I plan on generating taxable income this year. Since taxable income and capital gains combine to raise your tax bracket, by selling stocks in 2023 I’ve lowered the tax burden in 2024. 

8. Tie Up Loose Ends - Start the new year with the least amount of baggage possible so you have maximum momentum to achieve your new goals.

• His list is mostly financial, mine is more functional.

  • Colorado driver’s license (appt Jan 2)

  • Annual doctors visit (appt Jan 9)

  • Car registration

• Taking care of all of these to do items won’t directly help with achieving financial goals, but they can indirectly hurt them. Having a long to do list takes energy and attention away from achieving bigger goals. Knocking off these items on your list frees up that brain space to focus.

9. Run Your Investment Portfolio Through A Free Checker

• The Financial Samurai suggests using Empower’s Retirement Fee Analyzer. I haven’t done this and I probably won’t. It requires linking all of your accounts to their website, and that’s something that I’ve become skeptical of in recent years. I like to limit who has access to my information. With that said, millions of people use these apps, and if you’re inclined for a free checkup, go for it. I give my portfolio a lot of attention, and I feel confident that it’s in a good position.

10. Rekindle Neglected Relationships

• If I’ve neglected you over the last year, I apologize and I’ll do better in 2024. Living on the road, moving and focusing on building a life takes its toll. But I love every one of you and I plan on being more present in 2024.

11. Bonus: Work On Your X-Factor

• This is it. I’m doing it. It’s taken me five years to figure out what I’m doing, but now that I’m here I feel great about it. In 2024 I plan on building this newsletter, building my website, and growing my reach to see how many people I can connect with on promoting health, wealth and happiness!

Lessons Learned Over My Last 5 Years of Investing

Over the last five years I’ve spent a lot of time paying attention to my finances. I received my last W2 paycheck in February 2019, so I’ve have a lot of incentive to. Since that time I’ve survived on money saved and money invested. 

When I first left my job I did’t know much about investing. I did’t know much about the stock market and I had limited exposure to it. Aside from a company 401K (with no match) and the purchase of a 1-bedroom apartment, I had barely any money invested. If it wasn’t for a week long crash course in investing and the market during a vacation with a friend, I would’ve never gotten started.

Over the years since that trip I’ve applied what he taught me to run a mostly successful portfolio. That said, with experience has come a handful of lessons, some of which I’m sharing here.

You have to take your money off the table when you get it. 

The stock market has a genius way of lulling you into thinking you’ve made money (in some cases a little, in some case a lot), and that you will continue to do so forever (as has been the case with the bull market over the last 10+ years, the brief “recession” at the beginning of COVID not included). But it’s important to realize that the only time you make money is when you take some off the table and sell some of your position. Until then it is all at risk. If you’ve sold zero shares, you’ve made zero dollars.

The feeling you’ll encounter is FOMO, missing out on more gains (greed). There’s a great saying I’ve heard multiple times recently.

“Bulls make money. Bears make money. Pigs get slaughtered.”

To overcome that fear you have to ask yourself two questions and be honest.

1. If you wouldn’t sell some shares at a 50% gain, would you really sell at 60%, 70%? Probably not. If you’re unwilling to sell at 50%, greed has likely set in a you’ve become disillusioned that your stocks will only ever go up.

2. Will you be more satisfied taking your gain or watching your gain turn into a loss? This one is obvious but it’s one that feels like it could never happen to you… until it does. Like it has to me on several different occasions.

It is a much better strategy to take gains you can live with, and wait for the next opportunity.

There will always be an opportunity to make more money.

This is a rule that applies to everything in life, but is particularly true when it comes to finance, investing and business. It’s easy to get excited when presented with an opportunity to make money, but most investment opportunities will come with little to no returns.

I’ve been presented a wide array of business ideas to invest in. An email organizer that’s a plug-in for Gmail. A women’s focused wellness brand. Hotel development. An AI focused relationship management system. I’ve passed on most, and invested in the ones with guaranteed returns (i.e. preferred rates of return in real estate).

Jumping at every opportunity thrown your way is a good way to lose a bunch of money and come unhinged. It’s something I saw at my job. Our inability to pass on growth opportunities (whether they were clearly risky or just didn’t make sense) was the main reason for the companies eventual demise.

When it comes to stocks, we all want to own the next Tesla. But picking Tesla to be a winner is a crap shoot. My friends father who is widely successful, sold all of his position in Tesla before it took off. He had a feeling it would do well (which is why he bought it) but he ultimately cashed in when he thought it was a dud.

It’s important to take some risks in your portfolio, but not every IPO (initial public offering) is going to be successful (in fact if you read this newsletter you’ll see the trend is in fact the opposite). For every Tesla missed, another one will arise. Pay attention for the one that makes the most sense for your portfolio (as Sam Dogen puts it, a company you use, like and trust). 

For every opportunity missed, another one is right around the corner.

When everything is important, nothing is important.

There has been a handful of times in the last five years where I’ve had more than 20 individual stocks in my portfolio. I foolishly believed that I (since I was not working and had the time) could effectively manage a portfolio of this size. The gains in the market from 2018 up until and past the pandemic crash made me believe I was right. But once the bottom started to fall out of many of the companies in my portfolio, I quickly realized I was wrong.

Instead I’ve refocused my strategy and I’ve been focusing on thinning my portfolio down to less than 10 stocks made up of some of the main stays (Apple, Microsoft, Amazon), some diversification (Kimco real estate investment trust, REIT) and mostly the Vanguard ETF VTI. A portfolio this size, with companies I “know” is manageable.

From time to time I’ll pick up a new individual stock that seems poised for gains, but I keep making myself come back to the lesson, when everything is important, nothing is important.

Money is very personal.

This is probably the most important less of them all. It’s something that Morgan Housel talks about in his book The Psychology of Money, and it’s something that Sam Dogen (aka The Financial Samurai) talks about on his blog and in his book Buy This Not That. 

The example Morgan Housel uses is paying for his house in all cash as opposed to taking out a mortgage. Almost anyone you ask will tell you that taking out a mortgage is the right choice, especially in times when interest rates are at historical lows (like they were up until the last couple of years) and the market is returning near double digit average returns. But as Morgan puts it, he just didn’t want the weight of a monthly mortgage payment hanging over him.

I’ve recently had a similar experience. Over the last few months I’ve liquidated 20 - 30% of my stock portfolio to have some extra cash reserves as my girlfriend and I make a move to Colorado. I’m a believer in compounding gains, but in this case I’d rather feel secure knowing the cash is there when we need it, then having to liquidate positions when (if) the market takes a downturn.

The thought of having to sell stocks for bills when the market is not performing is one of the main things that will keep me up at night. Conversely, even if the market takes off, and I have cash on the sideline, I feel good knowing my gains are secure. For sure the 5% return on my cash sitting in a money market fund helps, but I’ve already seen some missing gains on positions sold that I’ve had to learn to accept. 

I’d rather feel secure knowing I have the cash.