In early March of 2020, there were stirrings of a sickness coming from China and spreading across the world. As it made it’s way into Europe and it looked like it was coming to the states, the stock market took a bit of a drop, perhaps 5% in a day, then 10%. I had a colleague email our staff, saying
“I’m not a financial consultant but I am fiscally aware. I would strongly encourage you to get into your Tiers retirement account and take a look at it. The market is taking some huge hits this week due to the Corona Virus and some adjustments may need to be made to protect yourself.”
Keep in mind, most of my colleagues have not ever logged into their account. I believe the overall drop for the S&P 500 in the 2020 spring was 34% from the high. The rebound of this drop was much faster than anticipated and by November, levels are back to about January 2020 levels. In response to that email, I sent:
“However, you don’t lock in losses unless you sell. It is good to be aware of what you are invested in. If your time horizon is long you will likely recover and you will see ups and downs with the market. Don’t panic.” I ended the email with a link to this youtube video, ah the soothing sounds of JL Collins’ voice telling you to calm down and this too shall pass.
Now, my colleague was not wrong, however when you time the market and try to time a good time to get out of the market, you also are having to time when is it a good time to get back in the market. And many people miss the bottom (since you don’t know until after it has passed) and are afraid to put their money back in because there may be another drop, and then it keeps going up above when they took it out and then they are purchasing the funds at a higher price than they originally had.
There are others that see this drop and realize, stocks are on sale, I need to load up any extra money! During times like these there are high emotions and when we humans have high emotions, it makes it difficult to think clearly. This is why it is a good idea to create an INVESTOR’S POLICY STATEMENT when we are level headed and emotions are not high. Investor’s statements can be changed and scenarios may come up that are outside of the statement created, but we can do our best with the knowledge we have at the time of the creation of the statement.
Ep 189 of the ChooseFI Podcast, you can listen here, has a great discussion on how to create your own Investor’s Policy Statement, or this article has a good explanation of this statement.
Here is my current Investor’s Policy Statement:
I am planning on retirement when I have 30 years at my employer, age 58. This is so I will have a secondary health insurance premium mostly covered when I reach 65. I am shooting for financial independence a few years before retiring. Our current planned yearly spend is between 90k-100k. In retirement I plan to have passive income from the stock market as well as from real estate investments. We currently invest about 30% a year of our after tax income. We will strive to max out Roth IRA’s yearly and HSA’s if given the chance to have one. We will also invest in 401k’s, 403b’s, 457b’s, pre tax and after tax to have some taxable income in retirement.
I will keep a majority of my retirement assets in stocks, with 10% in bonds. I will increase the % in bonds as I get within 10 years of retirement and after, unless I can offset a healthy amount of retirement with real estate cash flow. I will keep a majority of stocks in stocks that track fairly closely with the S&P 500 or the total stock market(VTSAX). I can 10% or less of the stocks allocated towards International total stocks, and small cap value. I can use up to 5% of my invested funds towards individual stocks, or riskier plays (fun money, or money I’m willing to lose). I will rebalance to my planned allocations at least once a year, but can rebalance more often if allocations get more than 2% off. The idea would be to sell my winners at a high price and buy the down items at a less expensive price. I will work to rebalance in the accounts that will affect my taxes the least, if possible. If I’m not able to rebalance my accounts well because it isn’t a priority, then I will switch to Target Date Retirement Funds because these funds will automatically rebalance yearly. I will invest in index funds, for the low fees and the knowledge that I can’t beat the market, most the high flyers revert back to the mean over time.
I will keep 3 months of living expenses in an easily accessible account as an emergency savings fund. Amounts from 3-6 months emergency funds can be invested in our brokerage and we are okay with selling those for a loss if needed in an emergency. Amounts over 6 months should be invested, unless we have a special purpose, ie sinking fund for vehicle purchase or downpayment for property.
I took Paula Pant’s course, Your First Rental Property(highly recommend), and created the following Real Estate Investment Guiding Statement as part of the course:
I’m going to buy rental properties that are multifamily or single-family homes.
I’m looking for properties that cost less than 400k in total.
I do not want to buy properties that need a significant amount of upfront repairs to become rent-ready for the first tenant, unless the numbers are really good and I can hire someone to do the work.
I will not buy a property until I have a minimum of 3 months PITI(premium, interest, taxes, insurance) set aside as cash reserves for this property. While that is my personal minimum reserve requirement, I would ideally like to set aside 6 months PITI before buying this property.
My objective is to buy 1 property every two years.
My goal is after homes are paid off, to earn $3,000/month from rentals, roughly take in $6,000/month.
Cash flow goal of $200-$300/month/door before mortgage paid off and more after mortgage paid off.
I will only buy properties that have a minimum cap rate of 5% or greater in the estimated middle-case scenario using Your First Rental Properties Spreadsheet for Analyzing a Property
I will only buy properties that have a gross rent multiplier of 9 or lower grm-ratio of price of real estate investment to its annual rental income before accounting for expenses. GRM is the number of years the property would take to pay for itself in gross received rent.
The following characteristics are “deal breakers” that would cause me to NOT buy a property: Foundation damage (if expensive to fix), Meth lab
The following characteristics are “red flags” that would cause me to hesitate about buying a property: Gas tanks stored underground, Extensive earthquake damage.
The following characteristics are ideal that would get me excited about a particular property: More than one income stream (multi, coin w&d, commercial, long term, furnished finders, airbnb potential), on a lake (for personal use/airbnb), near hospital or graduate college.
I will require my tenants meet the following criteria: Credit score 600+(exceptions include medical debt, one time things), Income 3x gross (or co-signers/college student), Number of years with same employer 1, but need 2 years of past employers.
I will allow pets with pet deposit and monthly pet rent per animal, any legal animal as long as they take care. Max number of pets will be a 2:1 ratio of humans to pets. Extra $100/month if pregnant Mom has babies, until babies rehomed. No max weight or restricted breeds unless home insurance has restrictions. Tenant must pick up poo outside and clean up if animal has accidents inside.
This is how I will handle the positive cash flow from my properties:
1)I will maintain a minimum cash reserves of 3 months PITI
2)I will maintain an ideal cash reserve of (6 months PITI, a year of 5% capex, 5% maintenance)
3)If I spend my cash reserves as a result of repairs, Capex ,or vacancies, I will prioritize replenishing my cash reserves above all other goals until my reserves reach a minimum of 5k
I will use the cash flow from my rental properties for the following: Growing even larger cash reserves, making upgrades & improvements to the property, saving for a down payment on another rental property, making extra payments towards principal balance on mortgage/other investments.
I will only sell my home under the following economic conditions:
1)I don’t want to be a landlord
2)I have tried different property managers
3)I want to 1031 exchange up
4) Expenses become too great and rental price stagnates
5)If gangs move into the area/neighborhood becomes too dangerous
6)If selling property pays off other mortgages or debts
7)If divorcing
8)If loved one is sick and we are unable to have a reliable property manager
9)If we move overseas & unable to find a property manager
Goal: Revise this guiding statement every 1-2 years.
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