2012 in review

Happy New Year everyone. Hard to believe its 2013 already. Time to look back at 2012 and see how I did versus my retirement goals. For those interested the 2011 review is here and the 2010 review is here. This marks the end of our 3rd year living the full time RV lifestyle and all I can say is bring on year number 4! OK, lets get right down to a review of 2012 from an investing perspective.

As a reminder my overall goal in retirement is pretty simple in principle. I stated it pretty clearly last year;

Before I jump in to the performance numbers, its important that I make clear what my yearly goal is for my investments. I only have one goal every year,plain and simple. Here it is – its so important that I’ll make it separate, bold, and italic… ;)

  • Investment goal: to increase my total net worth, every year, after all spending, fees, taxes.

That’s it. Simpler than you thought? Notice that there is nothing about beating the market, or beating some benchmark that someone says is really important. If I meet this goal, who cares about the market or some benchmark? This goal insures that I never run out of money and always grow my net worth. For me, that’s what retirement investing is all about. What about inflation you may ask? That is automatically embedded in this goal. Inflation will drive spending during a given year so as long as the goal is met, inflation is taken into account.

An important point about this goal is that it does not mean that if I don’t meet this goal that I cannot continue my retirement. After all, the4% SWR rule, states that you can withdraw 4% from your portfolio every year, adjusted for inflation, and be OK. It has worked throughout history and I think will work in the future. But under the 4% rule you can and will have year to year decreases in your net worth which can be worrying. There are no guarantees. So, I have set for myself a harder goal of increasing net worth every year and actively manage my portfolio to achieve this goal. If I fail in one year its not that big a deal. I will learn from that experience and try and do better.

For 2012 as a whole I met my investment goal of increasing total net worth after spending, fees, and taxes. That makes 3 years in a row, 5 years in a row if I include my 2 year trial run before cutting the cord completely from work. Total net worth at the end of 2012 was up about 2% from 2011 after all spending, taxes, and fees. I achieved my overarching goal. Now, lets break it down a bit more into investing and spending.

You have 2 big levers to pull in retirement, the first being spending. Most of the time spending is pretty flexible and controllable. But there are some years where things are outside your control. 2012 was one of those years for us and we spent 30% more than our planned budget, all the increase being on medical bills. I don’t worry too much about these year to year fluctuations but try to concentrate more on a 3 or 5 year average of spending. For 2013 we don’t foresee any major medical bills and we’re looking to get back to our normal budget. Obviously, the high spending this year made the investment return side of the equation a bit more challenging.

On the investment side, your second lever in retirement, I was pleased with the results. The overall return of the portfolio was approximately 6% for the year. This was more than enough to cover all our spending needs, outsized though they were. Now, when measuring investment returns it is dollar weighted returns that matter. This means looking at your total portfolio among all assets, cash, bonds, stocks, real estate. What does it matter if you made 40% on your stock investments if they were only 10% of your portfolio? The 6% overall return was with an average allocation of 70% cash throughout the year with the rest of the 30% mostly in equities but with some bonds as well. Unfortunately cash these days makes next to nothing, about 0.3% in 2012 in SHY for example. The bond allocation was all munis which returned about 9% for the year in the leveraged muni CEFs that I own. I was very pleased with the equity returns of just over 20% in 2012. The big winners were EPD, AFL, and WMB for me and there were no major losers (by design – i.e. cutting losses early). The VIX was too low for most of the year to make option selling a  good risk/reward play as well. In the retirement accounts the IVY timing model returned just under 2% for the year. The 2012 performance for the asset allocations I track are below.

2012 retirement asset allocation performance

My biggest disappointment in 2012 was being under invested. A 70% average allocation to cash throughout the year is high even in the uncertain environment we are in. I was very focused on managing risk in 2012 and maybe I did it too well. During the year my max drawdown was less than 3%. My major plan for 2013 is to work on bringing my cash allocation down to a more reasonable level, even if it ends up being still at 40-50% of assets. My view of most risk assets remains the same as last year – they’re over valued based on history. In 2012 most of the market return was from multiple expansion which made them more richly valued (see here). On the other hand many foreign markets are undervalued on the same metrics. So, I’ll remain conservatively positioned but look for value where I can find it with a focus on dividend payers, undervalued bonds, etc…

In summary, 2012 was another successful year. The overall goal of growing net worth after spending was met despite a very high year in spending and being too conservatively allocated. In 2013, I’ll be working on both of these levers.

Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.

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12 Responses to 2012 in review

  1. Jeff & deb spencer says:

    Congratulations on keeping your goal streak going. Curious if you set back funds for a future major purchase like a new class A or stick/brick home when/if you come off the road?

    • libertatemamo says:

      Not really. I do think about our exit plan and what that would entail but I don’t actively set funds aside and not invest them. But I do always keep a good enough chunk in ‘safe’ investments to implement an exit plan when we so decide. There is no new RV in our future, we’re happy with what we’ve got, and its 100% paid off. Our exit plan will prob involve some small house/cottage somewhere we love for either part of the year or full year.

      Paul

  2. Congratulations. Why do you allocate 70% to cash. Risk management? OR Waiting for bargains? OR Other reason?

    • libertatemamo says:

      Hi Doug. Its just the way it worked out this year mainly due to risk management. But in these market environments, classified by high historical valuations, I would not go below probably 40% cash.

      Paul

  3. heyduke50 says:

    I too have a similar goal but am a much more active day trader/swing trader. I may not have reached my goal if it were not for the last week in December. The first week of January was even better and I am now at 60% cash myself.

    • libertatemamo says:

      Yep, end Dec, early Jan has been great for trading. I used to trade a lot more than I do now. Just a lifestyle choice. I’ve traded futures, warrants in Hong Kong, options on short time frames and I’ve found I’d rather be doing other things. My trading these days is position trading with a min of a month time frame and I’m beginning to move to more quant strategies where I can have them be even more automatic.

      Paul

  4. Mark says:

    Happy New Year to you, Nina and the furry kids. For the life of me I can’t figure out why you give of your time to write this blog when you could be spending time with your beautiful bride, a glass of wine, another hiking trail or just kickin’ back watching the sun go down but I’m appreciative of the fact that you do. Thanks.

    In looking at the asset allocation performance table you posted one can’t help notice the huge return disparity between the IVY B&H and the IVY trading portfolios. Do you think that it’s just a matter of being invested or not during the wrong 30-day period(s) or is something else going on there?

    With respect to your trading portfolio, and there’s no need to bare your soul here if you don’t want to, do you have any traders or sellers remorse over jettisoning EPD and AFL as you did late in the year? I understand what you were doing and entertained some thoughts of doing it myself. What stopped me was that I couldn’t see any missteps these companies (EPD & MCD in my case) had made which was affecting the price action in their shares. They were doing the things that led me to buy them in the first place and so I saw no intrinsic reason to walk away at this point.

    While I’m not married to my positions my past history has been that generally miss out on gains or poorly time my exits. Is it just a matter of discipline or are other things in force here?Mark

    • libertatemamo says:

      Hey Mark, Happy New Year to you and yours as well. Also, thanks for the kind words. I like to help out other investors where I can. Its fulfilling and doesn’t take that much time. Besides, gotta keep the ole noggen working – part of my recipe for a happy retirement.

      On to your questions. You ask some great ones. First, on IVY. I plan a whole post on this topic but basically this is part and parcel with these timing systems or any system. There are periods where they under perform, particularly for IVY timing is sideways moving markets. This past couple of years have been awful for trend following systems in general. I’ll dive down in more detail in the post but basically this kind of stuff happens with these systems.

      On my trading portfolio, no I have no sellers remorse. I learned a while back to get rid of those kind of emotions. They don’t impact my trading. There is always another opportunity out there and I can always get back in. Most people get frozen into indecision with sellers remorse, the worst thing that cam happen. So what if the stock goes up after you sell it – you can get back in or find another one. Try and learn from the event and move on.

      In regards to EPD and AFL, the trades worked out great for me. As I said with EPD, I had to reduce its size in my portfolio – it was a huge part of my allocation due to its success. So, I set a stop, it hit it, and I got out, on average at 52.50 or so. I did a full sale because partial MLP sales are a nightmare come tax time. I waited my 30 days for the wash sale rule, waited for a price that confirmed a new uptrend, and got back in with a more reasonable allocation, around 10% of my portfolio. I am back in at around 51.50.

      For AFL, it had an amazing run the last 6 months of 2012. I got out just post election, realized it was super strong, got back in, and rode it through Dec, and got out again on the late Dec pull back at 53.70 ish. No regrets. In fact the uptrend in the stock is now broken and its consolidating. I am keeping an eye on it waiting for a good entry.

      Hope that helps a bit. Selling is often the hardest part of investing.

      Paul

      • Del Clark says:

        Paul,

        Thanks for the response to Mark’s IVY question. Looking forward to your future post on the subject.

        Regarding options trading you said “The VIX was too low for most of the year to make option selling a good risk/reward play.” Can you say more about how you use VIX to help you determine whether to trade options?

        And when you do trade options, would you mind sharing what kinds of trades you make? I did quite a bit of options trading in 2012 and it worked out well (selling puts and selling covered calls).

        Thanks,

        Del

  5. Del Clark says:

    Paul,

    Thanks for the response to Mark’s IVY question. Looking forward to your future post on the subject.

    Regarding options trading you said “The VIX was too low for most of the year to make option selling a good risk/reward play.” Can you say more about how you use VIX to help you determine whether to trade options?

    And when you do trade options, would you mind sharing what kinds of trades you make? I did quite a bit of options trading in 2012 and it worked out well (selling puts and selling covered calls).

    Thanks,

    Del

    • libertatemamo says:

      Hey Del, sorry I missed this comment.

      As far as options, I only get interested when the VIX goes above 30. At other times, I find just trading stocks a much better risk/reward play. Trading options to make anything less than 2% monthly premiums in a conservative way I don’t think is worth it.

      When I do trade options, I usually only sell puts to collect the option premium. I’m not a big fan of covered calls since you have limited upside and unlimited downside although it can be an OK strategy on very conservative dividend stocks. But in general there are easier ways to make more money.

      There are always special cases where I do things like trade deep in the money calls or things like that but in general there are great times to trade options and now is not one of them with the VIX so low.

      Also, my thinking on this has changed over the years. With the right risk and money management system I find trading stocks a much better risk reward opportunity.

      Paul

  6. Del Clark says:

    Paul,
    Thanks for the response and the information.

    A new question for you … what do you think about selling puts on IVY ETFs as a way to get started in the strategy when you’ve missed the last “go long” signal?

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