In personal finance, everyone knows what they need to do. The theory is crystal clear: save money, invest regularly, rebalance, buy the dips and so forth.
And yet, the reality is that you’ll struggle to find anyone who follows all the rules in the book. Theory always loses to behavioural biases and personal circumstances.
In today’s post, I want to recap how I have been managing our family’s finances over the past three months – and the reasons for doing so.
Hopefully, it will serve as a helpful bridge between some of the more theoretic concepts and what actually happens in real life.
See No Evil, Hear No Evil…
As a starting point, a reference to how our family actually tracks our net worth.
The last time I updated our net worth file was at the end of January. I had just seen my annual bonus clear into my bank account, so it felt like a good time to update the spreadsheet. With the stock markets flying high, things were good.
Since then, I haven’t yet done another update. I also haven’t checked our brokerage accounts aside from logging into Vanguard last week to open a new ISA (more on that below).
Early on in my journey, I used to update our net worth file on a monthly basis. Once we’ve got things on autopilot, we switched to quarterly – and no amount of stock market volatility will change that.
The beauty of being 100% invested in index funds is that you always know where you stand. Take your last portfolio value, add/subtract the market’s overall performance and voila! No spreadsheets required.
In addition, the less time you spend staring at your brokerage account balance, the less likely you are to waver and do something stupid. When it comes to building wealth, you win half the battle right there!
Staying Alive Aligned
Having your significant other on board in your financial independence journey is important. At times of market dislocations, it becomes absolutely crucial.
Keeping your composure when your investments are plummeting in value is tough enough. This isn’t the time you want to start convincing your significant other about the merits of staying the course.
Even though I am the one managing our family’s finances, my wife is fully aware and up to speed on everything I am doing. Transparency is critical.
Not only it helps avoid any awkward questions (our investments did what?), but it also gives you a helpful sounding board if you happen to start doubting some of your earlier decisions.
If you haven’t yet had the talk, the recent relief rally may be a good opening to do so.
Business As Usual
Here’s a recap of my stock market activity over the past few months.
I kept investing roughly £1k/month in my workplace pension. Despite Javid being gone, the trajectory of pension tax breaks for high earners is clear, so I am taking full advantage of my £10k annual allowance. It won’t last.
We’ve also been investing roughly £2k/month into my wife’s workplace pension. It works out to a pretty silly percentage of her pay but makes sense at the household level. It pays to maximize your wealth as a family.
We have also been careful to avoid getting hosed by our workplace pension providers.
While my wife’s workplace pension provides for a good array of low-cost investment options, I sadly cannot say the same for mine. Thus, I’ve opened up a pension account with Vanguard UK and transferred a big chunk of my workplace pension to it.
Buying The Dip
When the stock market started declining in February, I bought the initial “wobble” to the tune of £1k of cash I had accumulated in my SIPP account.
The market has subsequently tanked another 30%. Do I feel silly? Absolutely not. It was the right decision to make at the time. You can’t blame yourself for not having a crystal ball.
I held off putting more money to work until last week. Not because I thought I can predict where the stock market is going, but because I was waiting for the beginning of a new tax year. You can’t beat tax-efficient investing.
The evening of April 6th, I opened a new ISA account with Vanguard, deposited £10k and bought VUSA (S&P 500 ETF) for the full amount.
Between my wife and me, we have another £30k of ISA room remaining for the tax year. My plan is to fully utilize it by end of May. As part of that amount, £8k will go into our Lifetime ISAs, enabling us to get a £2k bonus from the government.
In theory, we should have dumped everything into the stock market on April 6th. Over time, lump-sum investing always beats dollar-cost averaging. In practice, however, the ability to sleep well at night beats both.
Because my job is highly geared to the macro environment, I would rather have a bigger cash pile than chase maximum returns and risk a liquidity crunch. This time around, this is especially applicable given what is going on in the real estate market.
Real Estate In Times Of Covid
You would have to spend the last month under a rock not to hear about what is going on in the real estate market.
Commercial tenants are going bust while residential tenants are struggling to make rent payments. Tensions are running high. It’s not pretty out there.
I have a separate post coming up about what I think will happen to the real estate market going forward.
For the time being, I’ll just say that as landlords ourselves, my wife and I realize that we may have a stretch where our tenant will miss her rent payments.
Are we going to evict her? Absolutely not. She has never missed a payment and is an excellent tenant in every respect.
It’s not clear what the ultimate solution will be – but it is clear we may need extra cash on hand to work through the situation.
The one thing we will definitely do is refinance our mortgage. We are currently on 3.84%. After the most recent rate cuts, we can probably lock in a 2.5% rate. Never let a good crisis go to waste.
What I Am Not Doing
Finally, here is what I have NOT done over the past few months – and have no intention of ever doing.
I am not selling in a downturn. Why would I? It’s the perfect way to start hating the stock market.
I am not timing the market. There seem to be plenty of people out there who can (even if they never bother to show any evidence!) but I’m not one of them.
The only factors that dictate the timing of my investments are: (i) availability of cash to invest and (ii) tax considerations. Nothing else.
I am not buying commodities or precious metals. Read Buffett’s 2011 shareholder letter for the best summary of why investing in assets like gold isn’t a good use of your money.
And I am certainly not buying individual stocks. I already own 500 of the best companies in the world. Why would I need anything else?