2021 March FIRE Journey Update

Back in August, I posted an article on my investment strategy in 2020. It is time to show how it played out so far. My focus is to accumulate growth company stocks and ETFs with reasonable valuation. Despite many people, myself included, pointing out that we may be in a huge asset bubble, I am going to stay in the market and hopefully no matter what the future holds, I will have enough assets to live off of when I retire some day. I will post monthly updates on my finances. If you are interested in finding out more about my FIRE (Financial Independence, Retire Early) journey, please like my Facebook, Twitter page or put your comment below. You will be notified when I post any new content.

Investment performance

The account that I am sharing is my M1 Finance growth portfolio. This is an account that I opened 7 months ago. The main reason for using M1 Finance is the automatic investing feature. By regularly buying stocks and ETFs based on a target allocation, it removes all the emotion. It helps me accumulate shares on a “Dollar cost averaging” basis. It is one of the best practices for long term investors. 

If you are interested in opening an account on M1 Finance, please use my referral link and you will get $30 from them when you deposit $1000 into your account.

I started the portfolio with $10,000 in August. In the beginning, I kept investing $4000 each week. Later on, I increased the frequency and put in $1000 per day instead. The initial portfolio was made up of 73 different company stocks and ETFs. Since these are growth companies, the dividend yield was only 0.54%. 

Today, the value of the portfolio ballooned to over $230,000 and it is more diversified. Surprisingly, the return was fantastic. The gain so far is about $36,500, which is about 18.9%. M1 uses a different method called ‘Money-weighted return’ to report the gain. Since the average value of the portfolio during this period is close to $100,000. Return of $36,500 is a much larger percentage than 18.9%. By that measure, the ‘money-weighted return’ is 38.9% so far.  My goal for this account is to grow it to a 7 figure account in the next 3-4 years. 

What investments do I have?

My portfolio consists of the followings:

  • 34% (target 40%) Growth Portfolio (48 companies)
  • 11.7% ARK Innovation ETF (ARKK)
  • 11.4% Technology Stocks (15 companies)
  • 8.5% Recovery Stocks (11 companies)
  • 8.4% Financial Select Sector SPDR Fund (XLF)
  • 7.4% Energy Select Sector SPDR Fund (XLE)
  • 4.4% ARK Genomic Revolution ETF (ARKG)
  • 3.2% Health Care (5 companies)
  • 2.6% ARK Fintech Innovation ETF (ARKF)
  • 2.6% ARK Next Generation Internet ETF (ARKW)
  • 2.6% ARK Autonomous Technology & Robotics ETF (ARKQ)
  • 2.5% Vanguard Small-Cap Value ETF (VBR)

As you can see, it is still dominated by technology and growth companies (~73%) . About 18.3% of my portfolio are more established financial (8.4%), energy companies (7.4%) or small cap companies (2.5%) that are deemed to be less expensive. 

Another 8.5% of them are ‘recovery stocks’. These are companies which I believe that they will benefit as the economy recovers.  

Until recently, I hardly sold the shares because most of the companies have long term potential. In addition, selling them would trigger tax for short-term capital gain. Nonetheless, I sold the followings for various reasons below:

  • PG&E Corp (PCG)
  • Simon Property Group Inc. (SPG)
  • Energy Select Sector SPDR Fund (XLE)
  • New Oriental Education & Technology Group, Inc. (EDU)
  • Jetblue Airways Corp (JBLU)
  • Baidu Inc (BIDU)
  • US Global Jets ETF (JETS)
  • United Airlines Holdings Inc. (UAL)
  • Alibaba (BABA)
  • Dave & Buster’s Entertainment Inc (PLAY)
  • Federal Realty Investment Trust (FRT)
  • Barrick Gold Corp (GOLD)

JBLU, JETS, UAL, PLAY and  FRT are part of my ‘Recovery Stocks’ portfolio. I sold them because their valuations are very high and it seems that the recovery is fully priced in. For GOLD, since people are more confident in the economy, they are reducing the holdings of precious metals, I decided to cut the loss and invest the money elsewhere. For EDU, BIDU and BABA, they are Chinese companies and there are concerns about the transparency and accuracy of their accounting, so I decided to sell them so that my money won’t be tied up in case of delisting. PG&E (PCG)  is one of my recovery stocks as well. I was counting on their stock to recover once all the litigations are resolved in a few years. However, the drought in California is getting worse each year and PG&E is likely to get into new litigation if there are more wildfires.

The proceeds of about $18,000 were used purchase financial stocks like Allstate Corp (ALL), Bank of New York Mellon Corp (BK) and Royal Bank of Canada (RY). In addition, Netflix (NFLX), Home Depot (HD), Tattooed Chef, Inc (TTCF), Intel (INTC), United Microelectronics Corporation (UMC) and Vanguard Real Estate ETF (VNQ) are added to my portfolio now. 

This rotation replaces weaker companies (like airlines and retails) with stronger ones while adding diversity (VNQ vs FRT). It also reduces risks. Interest rate is likely to go up in the future as the stimulus bill was passed. Financial companies stand to benefit with rising interest rates because they have more room to make profit. Overall, I feel more confident holding these companies long term.

Despite the fact that I sold some shares of XLE, 7.4% of my portfolio is still made up of fossil fuel based energy companies. In the long term, they are likely to be replaced with clean energy counterparts. In the short term, I think they still have room to appreciate because of the two trillion dollar infrastructure plan if it passes. I will hold it a little bit longer until the capital gain becomes long-term. Meanwhile, I will not add any more shares to it by setting the target allocation to 4%, which is lower than the existing allocation.

Rental Income

As mentioned earlier, I purchased a rental property a little over a year ago. Thankfully, my tenants have stable jobs and they pay rent on time through auto payments. It saves their time as well as mine. Since it is a condominium, most of the maintenance is taken care of by the HOA.  There is hardly any maintenance needed on my part. It is as carefree as it could get.

I receive about $2200 a month of rent each month, of which $1000 goes to the HOA and property tax. Since I refinanced my main residence to pay for this investment property in full through an LLC, there is no mortgage payment paid by the LLC. It pockets about $1200 a month before other expenses. 

Despite the rent is stable and maintenance is minimal, I am seriously thinking about selling it because I realize that the return that I get doesn’t justify the risk. I am lucky that I got good tenants. But the pandemic taught me that bad things can happen so quickly and they impact the life of so many people. My finances could be very different if they lost their jobs and become unable to pay their rent. 

Expenses

Since I pursue FIRE, I try to minimize my expenses so that I can quit the rat race earlier. During the pandemic, my wife and I both work from home and my kid studies through online classes. Most of the traveling, gasoline, entertainment and after school expenses are almost gone. These are the average monthly expenses over the first 3 months in 2021:

  • $4500 mortgage payment (principal + interest) and property tax withholding
  • $1130 on groceries and takeouts
  • $130 on bills, subscriptions (cell phone, software, Disney+ , Amazon, etc.)
  • $90 on cables
  • $200 on Electricity and Gas (PG&E)
  • $75 on Water
  • $120 on home improvements
  • $136 on health and wellness
  • $740 on shopping
  • $312 on travel (we did not travel, but need to pay the annual HOA fee of my timeshare.)
  • $27 on entertainment
  • $85 on gasoline and automotive related expenses
  • $116 on professional services

Overall, non-mortgage related expenses are about $3160 per month. This doesn’t account for the health insurance premiums paid as part of the payroll deduction. 

Shopping category is much higher than last year because I recently replaced my 7-year old PC laptop with a new Apple Macbook Air M1, which costs me over $1300. I expect the shopping expenses to reduce in the coming months. 

To maintain a similar lifestyle in retirement, we will need about $110,000 per year net income. Since I am a conservative person and I am trying to retire early, my safe withdraw rate (SWR) is 3%. I need to accumulate $3.6 million of today’s value in investments. It will probably take another decade if the market cooperates. Of course, if we pay off the mortgage and become debt free again, reduce our expenses and move to places with lower property prices, we could make the goal of retiring early more achievable. But for now, we focus on our careers and wealth accumulation. 

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