Mid Year Personal Finance Review

By [email protected]
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July 3, 2021
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Its been a month since my last post. Most certainly the frequency of my blog posts have gone down significantly. I want to in part blame myself for the time mis-management and in part to the phenomenon called “life-happens”!

Regardless, one constant in my life has been investment readings and in general keeping abreast of market happenings!  After a robust start to the year, in the last month or so markets have taken a breather… The SPAC mania of the first 3 months of the year has subsided, folks have in general gotten used to the meme stock phenomenon and the news cycle around meme stocks has receded in the background. Crypto saw a massive uptrend earlier in the year and since then has fallen down almost 50 % from the peak.

For better part of the year thus far (through end of May) value stocks (as represented by the ETF ticker:VTV) handily beat S&P 500 and Nasdaq index. Although going into the second half, value rally has some what fizzled, value is still up relative to the S&P 500 and Nasdaq index. Banking and Energy sector have in particular been the shinning sectors of 2021, XLE (engergy ETF) up ~46 % year-to-date and KRE (Banking ETF) up ~27 % year-to-date as compared to ~16 % for S&P 500 and ~13.5 % for Nasdaq. 

Mid-Year Net Personal Finance Review

As for AVI family, 2021 has been a good year for us overall as well. The chart below shows how various parts of AVI family net-worth has changed through the year.

The most striking fact is the growth in home equity, upwards of 60 % as of this writing. Two factors have contributed to this massive rally: (a) AVI family lives in suburbs of Seattle, and the Covid-19 move towards suburbia has significantly boosted housing market in our neighborhood. (b) I have been aggressively trying to pay down mortgage on the house.

It may sound odd that I am paying down my mortgage, given the absurdly low borrowing cost on housing loan and the looming inflation, which makes fixed interest loans even more attractive. My reasoning for following this odd strategy is in response to the following question: What is the best risk-off strategy to deploy cash in current market environment?

To me, the macro environment of today does not offer many opportunities to deploy cash efficiently, without incurring a net-loss on expected future returns on capital invested. By paying down mortgage, I am best positioned to produced a guaranteed rate of return of 3.1 % (30- year fixed mortgage rate on AVI family primary residence). The alternative would have been to sit on cash in anticipation of some kind of market re-rating. If you notice the chart on the evolution of cash in AVI family portfolio, at the end of first quarter, the liquid cash portion of AVI portfolio had grown by ~14 % as compared to start of the year, not accounting for non-deployed cash sitting in brokerage account.

I am learning the hard way, how painful it is to not finding any opportunities in the market place to deploy cash and as a result watching cash piling up in the portfolio. Buffett has a $140 Billion Cash problem and I cannot imagine how frustrating it must be for him to not be able to deploy this cash in the current market environment. One cannot but simply admire and respect the discipline of the man!

AVI family Net Worth increased by ~29 %, however, Accessible Net Worth (defined as Net Worth – Home Price – Liability), which is a better measure of portfolio growth, increased by ~36 %. The percent increase in ANW being larger than percent increase in NW, is reflection of the fact that AVI family Net Worth today as fraction of the house price today is greater than AVI family Net Worth as fraction of house price at the beginning of the year.

On investment front, AVI family non-retirement investment portfolio (~29 %) fared quite a bit better than AVI family retirement investment portfolio (~19 %). Part of the reason being the lack-luster performance of gold, which is down ~ -6 % for the year thus far. Under active brokerage account, I am heavily invested in banking sector and sin-stocks (cigarette, booze and oil). Both these sectors have fared well and consistently across the board, all my active-investments have fared quite a bit better than S&P 500 for the year. This is reflected in the ~29 % gains for non-retirement investments for the year to date in AVI family portfolio.

Whats in store for the next-six months?

Contrary to the popular narrative of bullishness for second half of 2021, I am not sold on the market-opening narrative and inflation fears are high up on my mind. While Feds have indicated no rate-hikes for a foreseeable future, even a hint of rate-hike (way into the future), forced by the reality of persistent inflation, will in my opinion will send markets into turmoil, very fast putting a damper on the amazing market rally of 2021. As such, for the remainder of the year, I will continue holding a risk-off view, paying down AVI family mortgage, doubling down on inflation trade whenever an opportunity presents and holding sufficient liquid-cash ready to deploy at opportune moments. As an added precaution, I am also starting to seriously consider some portfolio insurance, in the form of buying some S&P 500 put options with year end expiry schedule.

Video/Book/Article/Audio

Too many to list, given the cadence of my writing has decreased significantly. However, here are a few that I wouldn’t want to miss

Active Portfolio, Personal Finance, Retirement Portfolio, Value Investing
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