Quarterly Investment and Net Worth Review
The first quarter of 2009 has ended. Thus, it’s time to formally re-visit a couple of performance metrics in the Mr. and Mrs. ToughMoneyLove financial empire. (OK – our financial realm is more like a hamlet than an empire but it’s still important to us.)
Financial Performance – Separating the Wheat from the Chaff
For us, the premier financial event in the first quarter was paying off the mortgage on our second home. That won’t be reflected as a change in our net worth because it just swapped cash for debt. It also won’t show up in our investment returns, even though by paying off the mortgage we realized a tax-free return of 5.75%, the interest rate on that mortgage.
Quarterly Investment Returns
All of our investments are included in what I refer to as our retirement portfolio. These are the assets we will use to provide income when I stop practicing law (or when I substantially cut back). These include what will be our “retirement emergency fund” as well as mutual and exchange traded funds with a long term horizon.
For the quarter ending 3/31/2009, the internal rate of return for our retirement portfolio was -5.53%. (The “portfolio internal rate of return” is, stated simply, the rate of return produced by each dollar in an investment for the amount of time that dollar is in the investment. It includes re-invested dividends.)
One benchmark index – the Dow Jones Industrial Average – fell 13% in the first quarter so by comparison, our 5.5% drop doesn’t look too shabby.
There were two asset classes in our portfolio that sort of anchored us to a “better than the Dow” performance. The first was Vanguard Inflation Protected Securities (VIPSX) which gained 5.25% in the first quarter. We triple-overweighted in VIPSX in 2007 when I became concerned about inflation. The inflation hasn’t hit yet but the safety aspect of inflation protected Treasuries has attracted a lot of buyers, driving prices up.
The other anchor is also a safety play (for our retirement emergency fund): I-Bonds. Ours were acquired beginning in 2000 and are collectively yielding over 5%, all tax deferred and inflation protected.
In the second quarter we will continue to increase our cash-equivalent holdings to lower our overall market risk. I am also investigating and testing strategies for creating alternative income streams from (mostly) passive web properties. I approach this effort as a way to compensate for a diminished retirement nest egg. Assuming a 4% portfolio withdrawal rate in retirement, generating $1000/month in relatively passive online income is the equivalent of having an additional $300,000 invested in the market.
Net Worth Changes
Our net worth is an important measure of our financial progress. I have had lots of people (mostly other bloggers who love talking about credit scores) disagree with me on this point. If you have a guaranteed government pension (with cost of living adjustments) that will meet all of your needs, then you don’t need to care about net worth. That doesn’t apply to us.
Our net worth fell by 2.1% in the first quarter, all due to the 5.5% loss in our investments. Compared to the end of first quarter 2008, our net worth is 6.1% lower. Not too bad under the circumstances. Investor Warren Buffet lost 40% in personal net worth in 2008. Who’s the genius now Warren? (Sorry – couldn’t help myself on that one.)
Assuming that the stock and real estate markets have found a bottom (who can tell?), we should see substantial positive movement in our net worth through the remainder of 2009.
Comments? Criticisms? How are your numbers looking after the first quarter?