Financial Samurai Mid-Year 2018 Investment Review And Outlook

Financial Samurai 1H2018 Investment Review And OutlookAfter the 10% 1Q correction, I did a lot of reflecting and decided that I had too much risk exposure. As a result, I decided to move from roughly a 70/30 stock/bond weighting down to a 55/45 stock/bond weighting by selling stocks when the market clawed back to even and buying a slug of bonds after the 10-year yield breached 3%.

Overall, my public investment portfolio is up 4.7% vs. +1.5% for the S&P 500. My portfolio was largely helped by positions in Netflix (+80%), Amazon (+78%), Google (+20%), Omega Healthcare (+15%), and Facebook (+9%), and hurt by a couple individual California municipal bonds bought in 2017 (-4%, -6.1%). The muni bonds will eventually pay par value (0%), but in the meantime, they are underperforming.

Bonds (45% of portfolio)

I wrote in my 2018 outlook post that I thought 3% would be the cap on the 10-year yield in 2018, despite an estimated four additional Fed Funds rate hikes for the year. Therefore, when the 10-year yield broke 3% on 5/15/2018, I backed up the truck and bought a couple bond ETFs between 5/15/2018 – 5/17/2018.

Here’s a snapshot of about $360,000 worth of bond ETF purchases in one after-tax investment account. The right column is the cash balance. I bought more California muni bonds in my other after-tax account. The right column is the cash balance in one account after selling stock when the S&P 500 rebounded.

Buying Bonds In 2018

I believe we’ve seen the top for the 10-year bond yield this year. By the time the Fed raises rates two more times, the yield curve will be flat-to-inverted, portending to a recession. As the fear of a recession grows, there should be a steady demand for treasury bonds, which will keep a lid on yields.

With the overall portfolio up 4.7% for the year, I’m tempted to go 100% treasury bonds if the 10-year yield gets back up to 3.1% to lock in a conceivable 6% – 7% total return for the year. Alas, my greed for higher returns keeps me invested in stocks.

Stocks (55% of portfolio)

The only portfolio I’m trying to get right is my “house sale proceeds” portfolio. Making money with the house had been so easy since 2012, that I didn’t want to mess up the proceeds. I’ve more or less left my other portfolios alone because I’m comfortable with their respective asset allocations.

According to my weekly performance e-mail I get from Personal Capital, my You Index™ for July 1, 2018 says I’m up 5.89% YTD. The You Index™ is the performance of all of your current stock, cash, ETF, and mutual fund holdings. It does not include your individual bonds, options, or other alternatives, hence why it’s higher than my +4.7% overall performance.

Personal Capital YouIndex

Originally, I thought I’d be OK investing most of my house sale proceeds in risk assets because I had already de-risked by $815,000 by paying off the mortgage, but I was wrong about the stock portion. Losing $50,000 at one point in February in stocks made me uncomfortable.

After selling some core S&P 500 holdings in the first half of March when the S&P 500 recovered 65% of its loss, I began repurchasing stock in early April and the end of June to get my stock portfolio weighting up to ~55%. The second half of June was weak in the stock market, so I decided to rebuild my position.

S&P 500 First Half 2018 Performance

Here’s a snapshot of buying roughly $100,000 worth of core index ETFs during the June sell-off, including $15,404.95 of Netflix after its 6% sell-off. My general policy for over a decade has been to purchase between 10% – 20% of my investable assets in single stock names. I’ll write more about this strategy in the future because it has made all the difference.

Buying stock in 2018

Currently, I’ve got roughly $55,000 cash left to deploy in my “house proceeds portfolio” before having to transfer new cash from my savings account if so desired. There are a lot of moving parts to my investments to keep track of, which is why I’ve been toying with hiring a financial advisor to manage everything. But by continuing to outperform so far, I’m probably just going to suck it up and continue managing everything myself.

My #1 goal is to not sell anything in my house proceeds portfolio for the remainder of the year, and only contribute when there is further weakness in either the stock or bond market. I think I’ve finally constructed a portfolio that matches my risk tolerance, but we shall see how the portfolio holds up when volatility strikes again.

Real Estate Crowdfunding

I had dinner with RealtyShares on June 27, 2018 to get an update about their latest operations. At the dinner were the Senior Director of Capital Markets, Director of Asset Management, and VP of Investor Sales and Client Success.

I was pleased to learn that RealtyShares has set up more Investment Committees to vet each deal before hitting their platform. In the past, there was just one large Investment Committee that looked at all deals to let 5% of them onto the platform. Now each deal must be approved by multiple Investment Committees. Further, management has aligned Investment Committee compensation with the performance of each deal they approve. Hence, if a deal performs poorly, Investment Committee members who voted for the deal will get dinged.

With more eyeballs looking at each deal, the end result should be better deals for investors. Of course there are no return guarantees, but as an investor, it is reassuring to know that even before I do any due diligence on a project I like, RealtyShares has already done more due diligence than ever before.

The equity fund I’m in closed two more deals in 1H for a total of 17 deals. One of the deals was an office building in Minneapolis, Minnesota with a 5-year target hold and a target 15.3% IRR.

RealtyShares Minnesota Office Building Deal

The other deal was a student housing complex in Toledo, Ohio with a 24-month target hold and an 18.4% target IRR. Both deals look fine to me because I’m looking for any real estate exposure outside of the San Francisco Bay Area where I still own two properties and one property in Lake Tahoe.

RealtyShares Toldeo Multi-Unit Housing Deal

In the beginning of June, I received a surprise $5,855 dividend payment. It’s nice to have, but I’ve reached my limit for the amount of capital gains and ordinary income I want to receive in 2018. As an S-Corp owner, you have some flexibility in how much you can pay yourself between salary and distributions to manage your tax liability.

Based on my dinner conversation with the folks at RealtyShares, the fund is on pace to reach its target IRR of 15% over five years, but I’m not holding my breath. If I can get an 8% IRR, I’ll be ecstatic. For those of you looking to invest in a fund as well, you might get a chance in 2H2018. I’ll be sure to keep you updated.

RealtyShares Dashboard Returns

Surprise $5,855 dividend payment in June given all deals are equity

Other Investments

Venture Debt – I had a capital call for $30,000 from my second venture debt fund investment. The fund has investments in an online beauty company, three hardware device companies, a semiconductor company, and a couple software companies. I have zero insight into these companies, and they all seem pretty random to me, but I trust the fund managers know what they are doing. One of the co-founders is a Berkeley business school classmate I’ve known since 2003.

Financial Samurai – I had two inquiries about selling Financial Samurai. One inquiry was from an individual who had no idea what he was talking about. But the second inquiry was from a boutique investment bank representing a publicly listed company out of Europe. It’s nice to feel wanted, but I don’t plan to entertain offers until after July 2019 because I promised myself I’d own and operate Financial Samurai for 10 years. In a low-interest rate environment, you want to be buying strong cash flow assets, not selling. Further, this site is fun and easy to operate. I’d love to use it as a business and communications teaching platform for my son.

Physical Real Estate – I’ve been eyeing some beach homes on Oahu and they are all coming down in price. The weakness sets up nicely for when we plan to move to Honolulu before my son starts kindergarten in 2022-2023. I’m also noticing some random opportunities in SF as well. For example, the house I put a low ball offer for in May is still on the market. Summer is one of the best seasons to hunt for relative bargains.

Financial Samurai beach home Hawaii

Tennis in the morning, beach with the family in the afternoon, blogging in the evening sounds good.

Net Worth +6.7% But Stalling

Despite strong corporate earnings growth, it feels like we’re going to be stuck in a +/- 5% range for the S&P 500 and a 2.75% – 3.11% range for the 10-year bond yield. If the Fed really does raise the Fed Funds rate two more times by the end of the year, I’d be looking to buy more defensive assets to prepare for weakness ahead.

I like my relatively defensive 55/45 portfolio + real estate crowdfunding exposure away from expensive coastal cities. The inland empire has more room to run, but even it will eventually face headwinds, hence my 8% return expectation versus 15% target. I’ve also still got about 10% of my liquid net worth in cash.

If someone gave me a chance to lock in a 8% overall public investment return for the year, I’d take it. For a blue sky scenario, we could see bonds stay flat with the S&P 500 rallying by 10% by year-end, but I doubt it. There are just so many headwinds.

Financial Samurai 1H2018 net worth growth

1H2018 net worth growth, the kinks are due to trade delay recognitions

Overall, my net worth has grown by 6.7% YTD according to my Personal Capital dashboard. This is because savings tacked on about 2%. I’ve left my private investments and real estate values the same, which could provide some upside surprise.

Remember to always establish some goals for your investments. If you do, you’ll be much more focused on getting your investments right.

My main goal for my house proceeds portfolio is to have enough money to buy a beach home in Hawaii. If I can grow the portfolio by 5% a year for the next 3-4 years while the Hawaiian housing market continues to soften, dreams will come true.

How are you positioning your investments for 2H2018? How have you done so far? What are you investing for?


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