Mid 2020 Financial Checkup

Mid 2020 Financial Checkup

To be completely honest, I wasn’t sure if I was going to post this. To be clear, I am not struggling. When you read this mid 2020 financial check up you’ll see that I’m actually doing quite well, which is part of the issue.

We’re in a challenging time. People are getting sick and dying. A lot of folks who are unemployed and barely scraping by. There’s also a lot of civil unrest.

Taking A Break

With so much going on, I took a hiatus from blogging. A big part of me didn’t feel right writing about finance and how well I’m doing financially when I know others are struggling.

I also took a break because I wanted to spend more time with my family. When the pandemic started, I had no idea how bad it would get here. Seeing how bad it was in New York City, I was preparing for the worse. I wanted to cherish every moment with my wife and daughter. Fortunately, Covid has been relatively under control in the part of Southern California where I live and the situation was not as scary as I had feared.

Throughout this time, I wanted to stay as healthy as I can be. Therefore I prioritized getting adequate, high quality sleep. This is important for an optimal immune system. In the past I would try to fit in some time to blog when my daughter was asleep. I didn’t want to put my immune system at risk by blogging late at night. As a result, blogging was put on the back burner.

Okay, enough excuses for me not blogging. Let’s get to the finances.

 

Employment Income

Fortunately for my wife and I, we are both still employed.

While other physicians had experience a 60% (or more) pay cut due to decreased demand of surgical and medical services, I had no pay cut at all. In fact, my income was slightly increased. This is because I picked up a few more shifts. It’s not necessarily because I wanted to make more money. The reason why I worked more is because as a young anesthesiologist (I’m only 37, young for physician standards), I wanted to do more of my share of work to protect some of the older, less healthy partners in our group. Fortunately, I’ve always felt adequately protected at work.

My wife is able to work as an attorney remotely from home. And this will likely continue in the foreseeable future, probably at least through the end of 2020. Her income did not decrease either. During a time like this, it’s a tremendous privilege to be able to work from home and not have a pay cut. For a law career, she has a pretty sweet gig and a decent quality of life. No complaints here.

 

“Alternative Income”

I’m calling this “alternative income” in quotations because it’s not really income.

Instead, it’s more like additional money in our pocket due to a significant reduction in our spending.

Reduction Travel Spending

Earlier in the year, we had booked flights to Europe for the whole family (including my wife’s parents) and tickets for all of us to go on a 12 day Mediterranean cruise. Sine we were supposed to go in May, that trip was rightfully canceled. Fortunately, I received 95% of my money back as credit back to my credit card. The rest of the 5% was refunded as a travel voucher for future travel. So essentially, I got all my money back. I guess you can consider getting money back as income!

It was quite a bit of money too. Around $12,000 or so.

Spending all that credit that was transferred back to my credit card was easy. I just used the extra money on my credit card to pay for part of my quarterly taxes that were due in July.

Usually we spend anywhere between $10,000 and $20,000 on travel a year. I know it sounds like a lot, but we actually travel relatively luxuriously and recently we have been bringing our families along too.

Reduction in Food Spending

We’ve also cut down on our food expenses too.

We haven’t dined out since March. And we’ve only done takeout a handful of times.

For the most part, our food expenses have been discounted community supported farm boxes that are about $50 per week. If you’re wondering, we use Farm Fresh To You and Imperfect Foods. Sometimes we get grains in bulk and other things in the grocery store.

We don’t eat meat or any animal products, so that cuts down our costs a lot. We also do time restricted intermittent fasting; so by only eating two meals a day it further reduces our food costs.

Even though inflation has caused the price of food to increase, we are still able to keep our grocery expenses down. It’s pretty close to $200 a month.

The reduction in travel and food spending results in a savings of at least $20,000 or more for us.

 

Investments

Where does the extra $20,000+ in savings go?

We invest it, of course.

For the most part, we have been investing it according to our investor policy statement. However, we’ve  deviated from the plan slightly.

Looking at Personal Capital dashboard, our current asset allocation is as follows.

Asset Allocation

As you can see, we are fairly underweight on bonds. I’m still relatively young with a long investment horizon, so my portfolio is intentionally aggressive by design.

The unclassified class has a basket of other assets that could probably categorized as alternative. This includes Bitcoin, Ethereum, VXX, precious metals, and real estate funds, all of which remain a relatively small portion of our portfolio (about 5%). Part of the “unclassified section” is actually in a target date fund (which accounts for about 4% of our overall portfolio) that is in one of my wife’s retirement accounts. I guess since target date funds are a blend of assets, Personal Capital doesn’t really know how to categorize it.

The rest of the “unclassified section” is actually in a bond fund. For some reason Personal Capital doesn’t appropriately categorize this into bonds. One of these days maybe I can try to figure out how to reclassify it. But even when you include this bond fund, I am still relatively underweight bonds.

Anyways, so how did our portfolio do?

Investment Performance

Our portfolio has performed very well actually.

Here’s how it performed this year since the start of January 2020 compared to US Stocks.

For the comparison to “US stock”, Personal Capital uses VTI, a Vanguard ETF that tracks the performance of a capitalization weighted index representing the overall US stock market.

I’m sure you are wondering how our portfolio is outperforming VTI.

There are two primary reasons for this:

• Overall, my portfolio is weighed more heavily toward large cap growth stocks, which has been doing very well
• I’ve been pretty lucky picking individual stocks in my Robinhood account (aka my play money account)

Why I’m Overweight Large Cap Growth

Many investors have a portfolio of assets that is tilted toward small cap value. Historically, small cap and value stocks have outperformed other asset factors over time. So why in the heck is most of my portfolio tilted toward large cap growth?

To keep investing simple, all contributions to my employer sponsored pre-tax retirement accounts (401k and Keogh) are invested in small cap and small cap value funds.

Between my wife and I, we can only sock away $108,000 a year through the retirement accounts available to us. This includes a 401k, 457, Keogh and two Roth IRAs. But because we really don’t spend that much money, we have plenty left over after taxes to invest. Usually it ranges from $100,000 to $150,000 depending on how much I work and how much we travel (our biggest discretionary expense).

Since a lot of the investments in our retirement accounts are in small cap funds, our brokerage investment accounts consist mostly of a total stock market index fund (VTSAX) and a S&P 500 or large cap fund (VFIAX). Tax loss harvest using these funds as exchange partners makes sense because they are slightly different but correlated.

Tax Loss Harvesting the Losses

Back in March when the stock market had a huge decline, I started tax loss harvesting all of my losers. I exchanged lots of VTSAX to VFIAX in early March and harvested a few thousand in losses. Then the market dropped even more in mid-March. So I exchanged VFIAX to VLCAX. Lo and behold, the market dropped even further. At that point I exhausted a lot of the usual TLH partners, so I exchanged to VIGAX which is Vanguard large growth fund. In addition to the exchange, I bought another $50,000 worth in shares of VIGAX.

I didn’t really plan on being invested in mostly large cap growth through VIGAX. It just kind of happened because I ran out of TLH partners that are highly correlated to VTSAX. It turned out to be a lucky move since, at the time of writing, VIGAX is up 31% year to date versus only 8% for VTSAX.

In the end, I was able to harvest a realized capital loss of almost $20,000. Meanwhile, this investment has grown significantly.

Individual Stocks

The other reason why our portfolio has performed well is because I’ve had some luck picking individual stocks.

I totally get it. I’m well aware that on average, investing in low cost, broadly diversified, passively managed index funds beats actively managed funds and individual stock picking over time.

However, some time last year I decided to take a stab at investing in individual stocks. Maybe it was because I became a bit bored of passive investing. Or maybe I wanted to see if I could outperform the market. Perhaps I was inspired after reading The Stock MD. It was probably all of the above.

Anyways, I knew most people who trade individual stocks often underperform the market and could lose a lot of money. To manage these risks, I decided on a few rules. Basically, I would only use money I could afford to lose (“play money”) and that I would only invest at most 5% of my portfolio in individual stocks.

The Luck of Picking Winning Stocks

Even though I invested less than 5% of my portfolio, my account eventually grew to be about 10% of our net worth. Year to date, my Robinhood account has had a whopping 70% return. This is mostly because my largest positions are in Tesla, Apple, Square, and Facebook which have all performed exceptionally well.

Yes, this does include the recent correction in the technology sector. Nevertheless, I am still way ahead and I can afford an even more aggressive pull back if one does occur. Remember, this was originally my “play money” anyway.

Options Trading

To further pad my gains, I’ve been doing well with options trading too. For the most part, I sell covered calls on shares that I own. I also sell cash secured puts way out of the money on stocks that I would like to own at a lower price. This allows me to sell high and buy low while collecting some money in the form of option contract premiums. Occasionally I’ll also buy call options too. But I don’t do it very often given the considerable increased risks.

The profit I gain from trading options will be taxed at short term capital gains. Fortunately I have almost $20,000 in harvested tax losses from exchanging my index funds back in March. I can use these losses to offset some of my realized gains from trading.

 

Final Thoughts

During this challenging time, I have been very fortunate.

I enjoy the privilege of having a great job, being healthy, feeling safe at work, and having considerable financial security.

Additionally, I’ve had the fortune of having the money to invest in stock market through index funds and individual stocks that are doing very well.

While I feel incredibly grateful, I also feel a bit guilty because most people do not enjoy the same degree of privilege and fortune.

Daily gratitude is a habit that I have purposefully cultivated for a while. It’s a daily reminder for me to appreciate the life that I live and to continue helping those who are less fortunate.