Ten Lessons From The Great Recession

pawneeFor my family, September 2014 marked the the end of the Great Recession, which (for us) had started in October 2008. Navigating the recession took a year longer than my worst case assumption of five years.

I wanted to share my lessons as I can feel the temptation to ignore them returning!

#1 – You can’t know your partners – I’ve lived with friends for up to six months at a time and had no idea about their personal situation – my favorite quote here is one about knowing your marriage… “if you’re lucky then you might know 50% of your marriage, YOUR half.”

#2 – Burn rate kills – Between October 2008 and March 2009, I lost 100% of my net income. Without significant changes, I knew the loss of income would screw up our family finances. I would have really freaked if I knew that interest rates were going to zero! Staying variable enabled us to cut 90% of business expenses and 50% of household expenses – these were gone by April 2009. The lesson here is to be very careful of building up long-term financial commitments.

#3 – Real Estate, even prime, is only liquid in a bull market – there is an urban myth that real estate is a low volatility asset class. Until 2009, there were many national markets that had NEVER gone down! I will not be able to time the market – I should always be willing to sell early – future purchases should only be made for assets that the family is willing to hold for more than 25 years.

#4 – For my core capital, my benchmark return is zero – there is a portion of my family balance sheet that would be very painful to lose. Don’t risk capital for tiny yield – examples here are constantly pedaled by brokers (foreign currency deposits, derivative-linked investments, highly-leveraged investment schemes, alternative assets, growth stocks).

#5 – I’m a better man when I’m constrained – This applies in all areas of my life. At the peak of the boom there was tremendous ego and waste in my life. I’m very fortunate that life gave me a kick in the butt and I had to make choices. I don’t have the emotional maturity to be unconstrained in action, maybe someday!

#6 – Create plans B, C and D – ring fence different aspects of your life, and finances – NEVER guarantee another person’s obligations (see #1 above). In 2014, my life has a series of fallback plans to deal with potential setbacks – I spent the recession taking steps to protect myself, my wife, my kids, and my family.

#7 – Investment properties should avoid furnished rentals, anything with a material housing association payment, and anything with a cost to hold (vacant) that’s greater than long term interest rates – I made good money by investing in real estate through the bottom but would have done better by focusing on properties with a lower cost to hold.

#8low-cost passive index investing gives me what I need. The best gamblers I know take a profit-share on other people’s money and use non-recourse leverage.

#9 – stop trying to win – I misallocate energy, money and time when I forget that a simple life is a good life. Reaching for external success and excessive financial wealth leads to poor decisions and choices. I make my best choices when I measure wealth in terms of health, controlling my schedule and sharing time with people I love.

#10 – don’t capitalize luxury expenditure – particularly, second homes and depreciable assets – stay variable!

My errors and misjudgments persist across cultures and generations!

Choose Wisely

 

Moving Into An Equity Position – Lump Sum

We sold our house in September, the market is at an all-time high, interest rates remain near an all-time low…

What-to-do?

My existing portfolio mix is 60/40 equity/debt. I’m happy with that position so will ring fence those assets and continue to rebalance quarterly.

With the new money…

  • 40% Intermediate Bond Fund
  • 30% Short-term US Government Bond Fund
  • 30% Equity (20 US / 10 Int’l)

I came at the equity number because I could live with the impact of a 20-50% equity market decline (6-15% of total portfolio) if a big drop happened the day after I invested. Considering greater exposure to a drop was too painful.

To move my allocation from 30% equity to 60% equity:

  • Take 130 weeks to do the move
  • Move equal amounts each week by exchanging short-term bond fund for the two equity funds that I use (VTSAX/VTIAX) – set up an automatic exchange on Vanguard
  • Track the individual purchases (automatically via Vanguard) to create options for tax efficiency – if you track your cost based on specific purchase IDs then you can specify the exact shares that you want to sell/exchange at a later date
  • Review quarterly
    • 20% drop in the market will trigger a 10% increase in equity weighting
    • 30% drop in the market will trigger another 10% increase in equity weighting
    • 40% drop in the market will have me shift to my goal weighting of 60% equity

My strategy (30% equity to start) is more usual for an investor older than me. It is particular to my own situation and not advice for you.

For expert advice, check out All About Asset Allocation by Richard Ferri.

Here’s my original article, about buying equities, from March 2014.