Q1 2018 Financial Scorecard: Volatile Equity Market Takes Its Toll

Early RetirementWhen I think back on our finances for the first quarter of 2018, I have to quote Charles Dickens.

“It was the best of times, it was the worst of times.”

The good times included getting paid my annual bonus for 2017, going on a great family trip to Walt Disney World, and, ultimately, making some modest progress on our Net Worth, 529 Account Funding, and Passive Income goals.

The bad times included paying for that vacation in Florida, missing on some of our short-term financial goals, and a volatile stock market that finally reminded us equity prices don’t always go up!

Although the S&P 500 Index was down only about 1% for the entire first quarter, the market had fallen nearly 10% from its January peak by the end of March.

Market volatility was at elevated levels during the first three months of the year. To put that volatility into perspective, consider this:

The Dow Jones Industrial Average (DJIA) has been calculated since the late 19th century.

Two of the five largest daily point gains in the DJIA’s history occurred over the past three months.

And three of the five largest daily point losses in the DJIA’s history occurred during the first quarter of this year.

Fears of an all-out trade war with China have continued to spook investors in April, and it seems like we are always just one tweet away from a 500 point move in the market!

As I mentioned above, despite the market’s volatility, we did make progress on all of the goals associated with our pursuit of financial independence and early retirement during Q1 2018.

It just wasn’t as much progress as I hoped we’d have when the S&P 500 had raced out to a 7% gain for the year by late January!

Let’s take a look at how we did:

I. Net Worth: 79.9% of Goal (+2.0% during Q1 18)

Our actual net worth (excluding home equity and 529 accounts) rose by almost 2.5% during Q1 18.

Given that the stock market was down for the quarter, you’d think I’d be doing cartwheels over this result!

But the fact is, our net worth was higher at the end of January than it was at the end of March, even though I didn’t receive my annual bonus for 2017 until late in the first quarter. I just have to accept that markets go up and markets go down, and remember that as long term investors, the trend will more often than not be our friend!

Even though our net worth is lower now than it was two months ago, we still moved 200 basis points closer to our FIRE goal in the first quarter, and are now 79.9% of the way to our target net worth.

Because the markets moved against us in February and March, however, we just missed on our short term goal of getting 80% of the way to our net worth target by the end of the quarter. We did pass the 80% mark a couple of times during the quarter (towards the end of January when the stock market peaked, and again in March after receiving my bonus before we paid the balance due on our federal and state taxes for 2017), but the final numbers tallied as of March 31st don’t lie!

Since we’re so close to 80% right now, one good day in the stock market will likely push us back over that threshold. Because of that, I think it makes sense to revise our short term net worth goal even though we didn’t technically accomplish our current one:

If the markets cooperate, I think we can get to 85% of our net worth target by the end of 2018.

But as we were reminded over the past couple of months, equity markets will have a significant impact on both whether and when we hit our financial goals.

II. 529 Account Funding: 44.9% of Goal (+3.4% during Q1 18)

We once again made progress towards our funding target for our children’s 529 accounts during Q1.

Early RetirementThe total value of our 529 accounts climbed by more than 8% during the quarter, but in contrast to prior quarters, that growth was fueled only by our additional contributions, as the net asset values of the funds we are invested in were generally a bit lower at the end of March than they were at the beginning of January.

I do take some solace in the fact that late last year I moved 25% of our 529 holdings into a more conservative age-based option, from the most aggressive equity-focused option available. This move saved us from larger losses as the markets moved against us in February and March.

We plan on using the 529 accounts to begin paying for college expenses in less than eight years, so capital preservation will become increasingly important to us as our children get older. Because of this, it’s unlikely I’ll move back to the most aggressive asset allocation in these accounts, unless we experience a major market correction that I just can’t help trying to take advantage of.

Despite recent market volatility, I haven’t made any changes to the relatively aggressive asset allocation in our retirement accounts, as we don’t plan on touching that money for many years.

We still have a long way to go to hit our 529 account funding target. We will need many more quarters with both strong investment performance and additional contributions to achieve our goals. Fortunately, our home state offers an income tax credit on a portion of our contributions, so we remain incentivized to continue funding our college savings plans.

Our near-term goal for 529 funding is to be half of the way to our ultimate target by the middle of 2018. Since we won’t be able to get there solely by additional contributions, we’ll need a boost from the market in the second quarter to achieve this goal. I’m not as optimistic that we’ll get to a 50% funding level over the next three months as I was at the beginning of the year, but it’s definitely not impossible!

III. Passive Income: 28.8% of Goal (+1.5% during Q1 18)

Although we made progress on our passive income goal during the first quarter, we failed in our short-term goal to get to 30% of our long-term target by the end of the first quarter.

I did deploy part of my bonus into dividend-paying stocks and a high yielding online certificate of deposit in March, but I also sold a portion of our position in mall REIT CBL & Associates Properties, Inc. during Q1 to realize some capital losses. This struggling company still pays a high dividend, even after it was cut late last year, so selling CBL shares negatively impacted our passive income.

As I’ve noted before, our passive income target is our “stretch goal” on our path to FIRE. I don’t think there is any way we’ll be able to fund our anticipated early retirement lifestyle solely through passive income by 2021. We’d have to increase our net worth by an insane amount over the next few years, and invest most of that money into dividend stocks, bonds, and cash flow positive real estate, to have any chance at achieving this goal.

That said, we did made decent progress on our ambitious long-term target during Q1, as our expected annualized passive income rose by almost 6% since the beginning of January.

As with our 529 account funding goal, we have a very long way to go with our passive income target. All of our efforts improved our funded status by just 150 basis points during Q1, to 28.8% of our target, from 27.3% as of January 1st. It’s great we’re moving in the right direction, but with just 13 quarters between now and possible early retirement, the math is not on our side to achieve this goal.

We’re not quitting, even though we’re kicking the can for a quarter on our previous short-term goal – my goal for Q2 18 is to continue focusing on making sure our assets are working hard for us, and to get our passive income to 30% of our target over the next three months. Better late than never!

IV. Target FIRE Date – Friday, July 2, 2021

Another quarter of tracking our financial performance for Retiring On My Terms is in the books, and we now have just over three years until our Target FIRE Date!

If I were a betting man, I’d still wager we can reach our Net Worth Goal in 2020, and our 529 Account Funding Goal by our Target FIRE Date in mid-2021. Math tells me our Passive Income Goal is not achievable within our timeframe, but that doesn’t mean we won’t keep trying!

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