26 October 2020

1Q2020 Financial Samurai Review: A Brutal, But Beautiful Quarter

Phew! It feels so good to have survived the first quarter of 2020! With the global pandemic raging on and the return of the big bad bear, March surely had to be one of the longest months of our lives.

What started off as a banner quarter with solid investment gains and record high online revenue turned into a nightmare as stocks melted down, families were forced to stay at home, fear and uncertainty engulfed us all, and thousands of people started dying from COVID-19.

Damn you COVID-19! You have temporarily ruined my dreams of a brighter future!

1Q2020 Financial Samurai Review

Given every day seems so long now, for this year, I’ve decided to go from an annual review to a quarterly review. Because so many things happened this quarter, I know if I don’t record what happened, I will forget. Because of all the uncertainty, I also think writing quarterly reviews will help me better prepare for the upcoming quarters.

I’m thankful the stock market has bounced back so strongly in April, however, we’ll have to wait until July to see whether we came out of this mess intact. For now, let’s review.

Health (1/5) – Ill For So Long

I went through the longest sick spell of my life. I caught a cold from my son in early December 2019 and didn’t completely shake it until the beginning of March. There was a short interval when I was cold-free. But I was shocked when two weeks later I got another one. I don’t remember ever having had more than one cold a year in my adult life.

The hardest part about being sick was not being able to snuggle and kiss my baby daughter during her first three months after birth. She could barely see my face because when I did hold, change, and play with her, I always had a mask on. I feared I would spread my sickness to her, and I did. She developed a cough for five days.

The second hardest part about being sick was not being able to sleep soundly. I was already sleep-deprived due to baby night time duty. However, during my off days or the hours I could sleep, I’d often wake up two or three times a night due to a bad cough. I also developed tremendous chest pain due to all the coughing. Each time I coughed I felt like there was a sharp needle trying to puncture my lungs from the inside out.

The final difficulty of being sick was wondering for a couple of months whether I had COVID-19 as the hysteria grew in February. Maybe I did given I had a dry cough for at least two months. Actually, I hope my family and I did get COVID-19 because that would mean we are hopefully now immune.

One evening during the worst of my sickness, I wished I could donate a million dollars to the Financial Gods to feel better. Then, as the stock market started to tank in early March, and my stock losses started mounting. my cold finally went away. How strange! Sorry if my donation served as a catalyst for the meltdown.

Wealth (3/5) – A Disappointment & A Surprise

Despite being relatively well-positioned for a downturn with only about 20% of my net worth in equities, I still ended up losing hundreds of thousands of dollars. It hurt, but at least I was finally feeling healthy again.

The biggest shock was temporarily losing tons of money in municipal bonds. I had purposefully bought a lot of California municipal bonds after I sold a rental property in mid-2017 to diversify and get more defensive.

The decline in municipal bonds was my biggest disappointment because they hadn’t acted the way I expected during a bear market. It was a maddening feeling as I did not anticipate economies purposefully shutting down, thereby, hurting municipal revenue. Thankfully, the Fed came out with some bazookas and announced it would do whatever it could to support the bond market.

Because so much of my attention was focused on the collapse in equity prices, I thought my net worth was down closer to 6% given 20% of my net worth was in equities and the S&P 500 was down about 32% at one point.

However, I underestimated the significance of my diversified bond position, which was between 2X – 3X larger than my equity position across my three public investment accounts. I also underestimated the stability of my index-tied structured notes, which hardly moved during the downturn.

Below is one of my public investment portfolios with minimal muni bond fund exposure that moved between -6% to +3% in the quarter. Despite the portfolio barely moving, it sure felt like I was losing all my money with so much focus on equities.

Selling my largest rental property in 2017 really was my ah-ha moment to get more defensive because it sold for a lot more than what I tried to get in 2012. In 2012, people complained that it was on a busy street next to one of the busiest streets in San Francisco. But in 2017, my one and only buyer didn’t care. He loved everything about the property. I couldn’t believe it. The sale felt like complete luck!

By the end of 2017, the markets and the economy felt like it was 2007 again so I wanted to protect my wealth and get more defensive.

As a result, my net worth grew 6.5% in 2018 when the S&P 500 closed down 4.4%. But then my net worth only grew 18% in 2019 when the S&P 500 closed up a whopping 31%.

In other words, when times are good, my net worth underperforms and vice versa. When it comes to my investments, I really strive for peace and tranquility since it’s already stressful enough being a full-time dad. Further, I’m only shooting for single digit returns because it’s enough to fund our lifestyle. I hate losing money.

For 1Q2020, my net worth closed up 2.5% compared to down 20.6% for the S&P 500 according to Personal Capital. Despite having a defensive asset allocation, the bigger reason why my net worth closed up was that I spent a lot more time trying to generate online revenue after I announced in mid-2019 that I was going to focus less on retirement and more on entrepreneurship. Unfortunately, given my net worth barely moved, I felt like at least six months of my effort was a big waste of time.

I’ve left all my real estate investments below what I think is fair market value. For example, despite a smaller home on a smaller lot with an inferior view that’s next to a super busy street selling for a handsome sum in late-March 2020, I have left the prices of two properties I own in the neighborhood at 10% lower.

Given a lot of my net worth is in private investments, it’s hard to gauge my true net worth performance. It could very well be down closer to 10% if we mark to market. What I do know was that at one point, my net worth was up closer to 7.5%. How sad to lose so much progress so quickly.

Financial Samurai (5/5): Kept On Going

Despite the cold, the sleep deprivation, the newborn, the coronavirus, and the stock market meltdown, I kept on publishing a new post three times a week and a newsletter once a week.

I was proud to have not given up during such a difficult time by forcing myself to write between 6:00 am – 8:00 am and after 9:30 pm. But I also got some much needed help, as I will share in the section below.

I also felt emboldened to do my best to help the Financial Samurai community make sense of the extreme chaos that was occurring in 1Q. After all, my tag-line is “Slicing Through Money’s Mysteries.” It was more important than ever to provide guidance, calm, and sensibility compared to all the doom and gloom you’d hear elsewhere online.

1Q2020 also solidified my belief that I have the stamina and the desire to operate Financial Samurai for years to come. The acquisition offers I received in 2018 and 2019 were tempting. However, even after 10+ years, I still enjoy writing and connecting much more than the money. The money generated from the site will continue to be a side product not a focus.

But I have to admit, with interest rates plummeting, having a high margin business the government can’t force to shut down during a pandemic is nice.

Ideally, I’d love to keep Financial Samurai going until my son and daughter tell me they want to have nothing to do with living a free, helpful, and wonderfully creative life. The world is brutally competitive and stacked against those without great wealth, fame, and connections. All of our preschool rejections (6 total) is a testament to our family’s lower placed tier in society. At least we got into our neighborhood one!

A small family business is one of the greatest insurance policies for our children. However, if they want to try and get good grades to try and get into an overpriced university to try and make a name for themselves, I won’t stop them.

Family (5/5): Why The Quarter Was Beautiful

If you ask me what I most remember from the 2008 financial crisis, the first thing I will tell you is taking a family picture on my parent’s balcony in Oahu before heading down to the beach for our 16-person wedding.

I can’t recall many details of the financial destruction, despite sitting on the sales/trading floor at a major bank because the good memories of our wedding overwhelm the bad memories of the financial crisis.

I do remember being fearful of losing my job as we went through seven rounds of layoffs. I do remember Lehman Brothers going to zero on a Monday when the government decided not to bail it out that weekend. But to remember the bad times, I really have to think hard.

During the 2020 coronavirus crisis, perhaps the same thing will happen 10 years from now if I don’t reread this post (hello 52-year-old self!). I hope my grandkids can one day read this post too about family life under lockdown.

My son and I have bonded a little bit more, but he is still extremely attached to his mother and will often rebuff my love like Jekyll & Hyde. The rejections still hurt, but not as much as they did 6-12 months ago because I’m getting used to it and I also get to spend time snuggling my daughter! Each smile she flashes recharges my battery by at least a tick. When mom is spending more time with the baby, it’s only natural for our son to want mom more.

Son in quarantine, marking down the days until he’ll be free to go to the playground again

Although being a stay at home parent to two children under three is difficult, especially when we’re forced to shelter-in-place, I am filled with joy, gratitude, and love every day. I feel extremely grateful that my daughter is healthy because you just never know, especially with “geriatric” births (over age 35). I also had low hopes of having a second kid because it took almost three years to successfully have our first.

If given the option, I would have gladly paid another millions dollars to ensure that my daughter was born healthy. Perhaps this is my way of making myself feel better about all my equity losses.

Here’s a big shoutout to my wife for keeping our kids safe, nurtured, warm, and loved every day! She has endured even longer marathon days because of the constant feeding 24/7. Thank you! You’re the best!

Passive Income: (5/5): Holding Up So Far

I haven’t noticed the cuts yet, but that’s partly because I haven’t received all my dividends yet. I’m sure they will happen in 2Q2020. I had a record high passive income quarter to go along with a record high spending quarter due to all the childcare and food expenses.

The main reason why passive income was so high was due to my real estate crowdfunding investments, which saw a large $177,000 distribution in February. To stay conservative, I included only an estimated $28,000 in actual returns since I’m assuming much of the distribution was principal. Once I get the 2019 annual report, I will make any necessary adjustments.

Cash: Still earning 1.7% on my cash which is great compared to <0.75% for the 10-year bond yield and 0% – 0.125% for the Fed Funds rate. Starting in late February, I decided to buy stocks on the way down. By end of March, I used 90% of my cash to buy stocks to get my equities allocation up to 25%.

Stocks: I expect dividend income will go down 15% – 20% as dividend payouts get cut to preserve cash at least a couple quarters. I mostly have an S&P 500 index fund in my various portfolios and individual tech stocks that pay no dividends except for Apple. I plan to focus on building my cash reserves for the rest of the year unless the S&P 500 gets below my 2,400 target again. Then I will be buying again.

Rental properties: All tenants have paid their rent on time for the three months in 1Q2020. Unfortunately, my vacation property got shut down mid-March and will likely stay shut down in April and May. I expect to lose ~$3,000 in net operating income in April and $500 in May (Resort shuts down for 2 weeks for cleaning and also b/c it is the quietest month). I’m assuming the Resort will reopen in June, but I can’t be certain. Even if it does, I’m guessing the volume will be lighter than normal.

Real estate crowdfunding: I received a $177,000 payout in February due to a couple of deals closing, which is much more than I had anticipated. Unfortunately, one of the investments the equity fund is in is a Dallas Airport Hotel that is definitely going to experience problems due to the lockdowns. I don’t expect to get anymore more distributions for the year. I also don’t expect my investments to fully pay off until 2022 or 2023, so hopefully, that will give the investments enough time to work through any coronavirus-related issues.

There is likely opportunity in the commercial space right now with the lockdowns as new projects improve terms to attract capital. Check out CrowdStreet, my favorite platform for individual commercial real estate deals focused on emerging 18-hour cities.

Bonds: Income remains the same, just the yields are lower. My biggest scare was municipal bonds selling off 10%+. Thankfully they bounced most of the way back. I don’t invest in bonds to get rich. I invest in bonds to earn income and dampen my public portfolio volatility.

Book sales: How To Engineer Your Layoff book sales have been very steady. Although I expected a larger uptick given more furloughs and layoffs are coming. If the United States averages 6 million unemployment claims a week, and the lockdowns last until mid-May, we will have roughly 47 million unemployed by then. To get the best severance package, it’s important to try and get laid off in the earlier rounds. By negotiating a severance now, you will also be helping managers save other employees who may really need a job.

Expenses (1/5): Way Up

For a frugal family, we really blew up our expenses. And you know what? I’m OK with it because I’ve had frugality disease forever. Having a newborn was as good a time as any to try and spend more on a better life.

Childcare expenses went up by about $9,200 a month because we decided to hire a night doula 5-6 nights a week. My wife has been on night duty with our son since 2017. For the first six months of our son’s terrible sleep habits, I only lasted about 4.5 months because I wasn’t able to coherently write without sleep. Therefore, I decided to use the wealth we gained over the ensuing 2.7 years to make our lives easier the second time around.

Although $9,200/month is a lot, it’s not going to last forever. Further, I was so happy to have spent the $27,600 on childcare help instead of watching it go down in the market. Still, I’m looking forward to our daughter sleeping for longer stretches so we can save on this steep expense by end of 2Q.

Since 2009, I’ve practiced consistently taking some profits in the stock market to pay for a better life. When I do, it always feels like I’m getting something for free because I view stock market gains as funny money.

In 2015, I took profits to build a new master bathroom. At the end of 2016, I took profits and bought a safer vehicle. In 2017, I took profits to pay for a hot tub, which has been my best investment ever now that we’re under lockdown. And in 2019, we sold about $1 million in stock to buy a slightly bigger house with cash. If you don’t regularly practice taking profits to pay for life, there’s no point working, saving, and investing.

Food expenses went up by ~$1,500/month partly because we increased our food delivery frequency and amount. I wanted to minimize going to the busy grocery store in order to minimize catching the virus and help with congestion for those who prefer going to the grocery store. Therefore, we ordered groceries through Amazon Prime and restaurant food with Uber Eats. It also felt good spending more money to support delivery workers and local restaurants. You guys rock!

We had the unavoidable expense of paying the full $1,950 preschool tuition for March even though our son didn’t go for three weeks. We also paid the full tuition for April, despite the school being closed for the entire month. Even if the school opens up on May 4, we probably won’t send him for a couple weeks just to be safe. It’s been fantastic he hasn’t gotten sick in a while.

Except for a pair of new tennis shoes I ordered online for $120, I haven’t bought anything for myself. I don’t think my wife has bought anything for herself either. We’re just too busy taking care of our kids.

After tax, we essentially spent 100% of our investment income, which has never been done before. It’s a little bit disconcerting to not save, which is why I was striving to increase our capital to generate more investment income by 2023.

The Most Brutal And Beautiful Quarter

Although the first quarter was tough, my wife and I appreciated every day we got to spend time with our kids. If there was ever a time to self-quarantine, it would be when you have a baby and have to stay home most of the day anyway. Protecting her health as she strengthens her immunity during her first six months of life is important. We were worried how our son’s constant sickness from preschool would negatively impact her. Now we don’t.

One thing that could have potentially made 1Q2020 better was if we both were getting paid a full-time salary while on three months of parental leave. Now that would have been sweet! I know plenty of families who are still getting paid well and not having to do as much during lockdown. If you have a job that is still paying you a full salary, please appreciate it!

Alas, we will likely remain unemployed for the indefinite future with no healthcare subsidies or retirement benefits. We also don’t qualify for stimulus checks. Survival is completely up to us.

Although this situation is concerning, I’m also excited to fully battle test our retirement funds and various income streams during a bear market. Ever since my wife and I left work, the economy has been good. If we can get through this year, we can probably get through any year just fine!

Here are some goals for 2Q2020:

  • Reduce news and social media consumption by 50%. The reason why I felt worse than I should have in 1Q was due to following so much coronavirus and stock market news on Twitter and elsewhere. The news and social media simply magnifies the hysteria and I’m not a hysterical person.
  • Rebuild my cash hoard to feel more secure. I used up about 90% of my cash to buy stocks and pay for higher expenses. I won’t be buying any stocks so long as the S&P 500 is above 2,400. I have enough exposure. If the S&P 500 gets back to 3,000, I will reduce equity exposure back down to 20% of net worth. If the 10-year bond yield gets back down to 0.5%, I will trim bond exposure.
  • Start regularly paying down my mortgage. Given mortgage rates have dropped after I refinanced in 2019, it makes sense to pay down more mortgage debt even though my interest rate is only 2.625%. I don’t want to go through the process of refinancing so soon. But if you haven’t refinanced, you should given mortgage rates are at all-time lows.
  • Step up daytime childcare duties by one hour in the morning and one hour in the afternoon to allow my wife to nap more during the day.
  • Build a mini-playground in our backyard since all the playgrounds are closed. I will buy a slide, a house, a small basketball hoop, and a tricycle. We’ll also get lots of sidewalk chalk.
  • Continue to publish three times a week, a newsletter once a week, and a podcast once every two weeks on average.
  • Look for real estate opportunities in San Francisco as tech rebounds. Talk to CrowdStreet about commercial real estate opportunities they are seeing and write a post about it. Talk to Fundrise to see how eREITs are being affected and whether there’s opportunity as well given their funds have historically outperformed when stocks are down.
  • For every post I publish or movie I watch, I will do three sets of 20 pushups and three sets of 60 sit-ups. I will also go for at least a 30 minute walk every day to maintain my sanity and blogging body.

Here’s hoping that things get much better by the end of the second quarter! April and May are probably going to be the toughest months for most people in terms of employment and cash flow. I’m confident that all the government stimulus announced so far will finally reach millions of people soon.

Hang in there folks!

How did your 1Q2020 go? What were some wins and losses?

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