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Thursday 10 January 2019

My Early Retirement Plan - 3 Years Down

Counting backwards 
3 down and 12 to go! This means that, time-wise, I am 20% of the way to financial freedom. Unfortunately, investment-wise, I am not as far along…

Over the last few years, the markets have been incredibly frustrating. I see it when I do my monthly investment tracking, and I see it in the emails I receive from the blogs readers. (I am also getting a lot of mail from people who are frustrated with their current providers due to poor performance – I must mention that the kak returns of late have more to do with the poor market performance and less to do with the providers. Although if you are with a high fee provider you are probably suffering more…)

2018 saw the continuation of the sideways market that we just can’t seem to shake. The result is that I find myself slipping further and further behind where I hoped to be. As it stands, I am now close to 30% off. It’s not pretty.

Many people are starting to wonder if they should rather just stash their cash in the bank (and in fact you would have been better off over the last 4 years if you had!). I mean, we thought equity investments were meant to be inflation beating and all that? WTF right?

At this point you may find it hard to believe, but history has shown (time and time again) that your best shot of generating an inflation beating return over the long term is by investing equities (and by long term I am talking decades, not the 3-5 year period most market commentators usually mention).

Remember how you always read that you need to be patient with your investments. Do not sell when the prices are low. Don’t try time the markets. Remember how all that stuff that made perfect sense when you read it and you agreed with all of it?

Well now is the perfect time to put all that theory into practice. This is the type of market which scares most investors away and punishes the impatient. If you have a long time-frame and are willing to push through, you will be well rewarded for your patience and perseverance.

Personally I am staying 100% invested, no plans to switch into bonds/cash/bitcoin/blueberries/ (*insert 2019 fad over here*)

How’s My Early Retirement Plan Going?

Okay let’s take a quick peek at the scoreboard.

According to my Early Retirement Plan, I should have started 2018 with R1.335 Mil worth of investments. However I started the year on the back foot (due to previous mentioned market under-performance of the last few years) and I found myself more than R200k behind – R1.161 Mil (i.e. as the 2018 champagne corks were popping I was already 13% down).

Things then kind of hovered between 15-20% off my target before some particularly bad months in October, November and December capped off a pretty crappy year.

Here’s how the actual numbers played out…

Planned Versus Actual

The first chart shows the planned value of my investments in grey, and then my actual investments in blue. You can see Timmy (the blue worm) appears to prefer horizontal crawling instead of vertical soaring. I’m hoping that this year he will be able to pick his head up a little.

Zooming in on the 2018 section of the above chart, the horizontal movement is more pronounced.

In the next chart you can see the percentage deviation of my actual investment value versus my planned investment value on a monthly basis. I don’t like the way this is heading, and you can see I am starting 2019 at a serious disadvantage.

Nasty - currently around 30% off. Still a long way to go though, and I am confident this ship will turn around.

This next chart shows how much income I could draw from my current investments (using the 4% Rule), versus my estimated monthly retirement expenses (in today’s money). The long term goal is to have the income line match the expenses line - when that happens I will be financially free!

Still quite a way off, and I could only cover around R4'000 worth of monthly expenses at this point.

And finally, the next chart shows the value of my investments as a percentage of the amount I would need if I were to retire in that year. The idea is that this should grow with each passing year and hit 100% at the end of 2030 (or in a perfect world even sooner!)

This last chart is horrible for me to look at! Despite contributing a proverbial shit tonne of money to my investments in 2018, I only crept 0.02% closer to financial freedom. But hey, I guess progress is progress, and it could always be worse. The way I see it is I am laying a solid foundation so that when markets run again (and trust me they will) little Timmy is gonna soar!

Other Charts

I also like to keep an eye on my exposure to different investment vehicles and asset classes.

Below is a chart (click for a larger image) showing the percentage of our investments in each investment vehicle/product. Charts for end 2015, 2016, 2017 and 2018 are shown to indicate how this has evolved since I started the blog.

I am really liking the trend of a growing percentage allocated to our TFSA’s. Very cool that this portion has grown to 18% (from a mere 4% in 2015). I want this portion to be as large as possible, because it will remain Tax Free leading up to and for the entire duration of my Early Retirement.

On the flip side, I want to reduce the weighting of my Government limited investments (Pension and Preservation funds). These will take a tax hit once they are cashed out, and I will be forced to convert some of it into an annuity product which could result in income tax as well. So while these have nice tax benefits now, there will be tax implications later, and so I am happy to see the combined Pension/Preservation fund weighting drop to below 60%.

2018 again saw some benefits in terms of my company’s share matching scheme coming through. I again cashed out some of those shares as I would like to keep this single company exposure to below 5% of the overall portfolio.

The discretionary equity allocation remained unchanged at 20%. I make minimal contributions to this part of our investments these days (too busy focusing on maxing TFSA's and my company's share matching plan). I do like the Tax flexibility this part of the portfolio could give us in future. For example, we could use it for our Local Property allocation in my wife’s name, since she won’t have any annuity income in retirement and could use the REIT dividends as the exempt portion of her income. We could also take out a combined R80k of profits a year, which would be free from Capital Gains Tax (due to the R40k per person annual CGT exemption).

So that's how my allocation to various investment products /vehicles looks. With regards to asset allocation, I continue to target the following (as per this article)
  • 40% Local Equities
  • 40% Offshore Equity
  • 10% Local Property
  • 10% Offshore Property

At end 2018, my asset allocation was as follows (if you would like to calculate your asset allocation, check this article). Grey bars are my targets, and the colourful bars are my actual values. You can click the image for a larger version.

I am chuffed that I managed to get our offshore property allocation to pretty much bang in line where I want it to be. We are however quite light on the offshore equity part, and so that is where I will be targeting our 2019 TFSA buying.

There has been some shuffling of the decks at my companies pension fund, and they have dropped their allocation to hedge funds (which I am quite happy about) and so the “Other” category is now 0. They also reduced the allocation to local cash and bonds (again something which I am in favour of, considering my long time-frame.) Of course I have no control over what the powers that be at my pension fund do, and I am limited in terms of what I can hold in my Preservation Fund (damn you Regulation 28!) and so I kind of have to roll with the local Equity and Bonds/Cash punches.

Other Notable Events In 2018

Okay and now for some of the other interesting 2018 happenings.

Single Income

Perhaps the biggest change to our finances in 2018 was the fact that my wife stopped working to stay at home with Junior. She has done an amazing job, and he is developing into a real little terror person (complete with unreasonable demands, snappy comebacks and a discerning palate).

There is no doubt that this decision put a handicap on our income and investment contributions for the year, but some things in life are more than just about the numbers. You never get the first years of your child’s life back, and we have not regretted a single aspect of the decision.

Having said that, it is almost time to start considering school for the little guy (from what I have read, from about the age of 3 children start falling behind in social skills if they are not in a school yet). So towards the end of the year my wife will return to work – we will have additional income, but education costs will also loom large.

Writing for Just One Lap

Another highlight of 2018 for me personally, was being given the opportunity to write some content for Just One Lap. If you don’t know who they are, stop reading right now, and head on over to www.justonelap.com. Do it!

I have huge respect for Simon and Kristia and the awesome work they are doing that side, and I am super chuffed to be able to contribute! You can find my Wealthy Maths articles over here.


Okay enough of 2018, moving swiftly along to 2019...

Going forward will be more of the same for me. I will continue keeping a close eye on expenses and maxing both mine and my wife’s TFSA accounts (hoping the limits get increased this year, that would be great!) while my pension fund and share matching options continue at my employer.

The rest is just patience!

Wishing all of you a prosperous and happy 2019! Hope it's a cracker!

Till next time, Stay Stealthy!
 - ~ - ~

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