The past week was extremely busy for AVI family. Mrs AVI took keen interest in painting the younger AVI kiddo room and the only contribution from Mr AVI, remove cover panels from electric outlets! Before you think how insensitive, Mr AVI was busy as well and doing the stuff that most Americans supposedly hate, filing taxes. As such, the first 10 days of the month slipped by quickly and the networth update post also got delayed!

In the spirit of better late than never, without further ado, lets dive right into the networth status for Mr AVI family for June. The numbers reported below are as of July 3rd 2020.

• Net Worth (as a fraction of FI number): 67.48
• Liquid Assets/ Debt Ratio: 1.665
• Cash balance/ Two Year Living Expense: 0.9799

NW Distribution Table:

Synposis:

• The two big changes relative to last month are, significant decrease in checking account funds, and a sizeable drop in mortgage. It should not take much of an imagination to add two-and-two to realize that Mr AVI paid down his mortgage, it now stands at 20 % of Mr AVI target FI number.
• In the process of paying down the mortgage, Mr AVI also refinance his home loan, going from a 7-1 ARM mortgage at a rate of 3.5 % to 30-year fixed mortgage at 3.125 %. The mortgage was refinanced with Homefinity.
• Hindsight 20-20, Mr AVI refinanced tad sooner as rates in the COVID-19 environment have been falling and at one point it was possible to get 30-year fixed loan under 3 % and 15 year fixed loans were available at as low as 2.55 %.
• It will take an entire blog article to discuss my rationale for choosing 30-year fixed as opposed to 15-year fixed loan, suffice to say I like the flexibility of low fixed monthly payments and the optionality to pay down additional principal as and when macro events dictate. As noted in the Pay Off Mortgage Early blog post, Mr AVI plans to pay-off the mortgage as soon the conditions outlined in the blog are met!
• The checking account cash drain is expected to continue for another month for atleast two reasons: (1) Filing taxes, alas the deadline is upon us and (2) Home renovation. Mrs AVI has planned yet another home renovation project, flooring!
• Markets were rather subdued for the month, not withstanding the massive rally in the tech (and bubble stocks, i.e., TSLA). At this point in the market cycle, the spread between growth and value stocks is the highest its ever been, even surpassing the levels seen back in the 1999-2000 tech bubble era!
• Equity stocks in Mr AVI portfolio (see here) have a value-bias with couple of tech-growth stocks providing a buffer against the continuous drawdown for value oriented strategy. As such, the gains in growth portion of AVI equity portfolio was washed out by the losses in value portion of the AVI equity portfolio and the net result, the portfolio of investments remained flat for the month.
• Yet another point worth noting, Mr AVI has maxed out on all his retirement-portfolio investments for year 2020, including the IRA accounts as well as 401K accounts. Since there is no more an outlet for automatic investment, it is expected that the cash build up in Mr AVI portfolio is going to grow.

Musing

I have quite a few topics to talk about, some of which are more suited for a blog article.

FIRE flavors: In several of my past blog posts, I talked about FIRE movement, a topic that is near and dear to my heart. I talked about flavors of FIRE, such as lean-FIRE and fat-FIRE. Recently I came across two additional versions of FIRE: (a) coast-FIRE and (b) flamingo-FI. While there are subtle differences between these two versions of FIRE, they share a key idea, reach a certain level of savings and allow it to grow until retirement without any further contributions to savings.

The focus changes from producing income to sustain day-to-day living and agressive savings (FIRE style) to producing income to sustain day-to-day living. The two ideas differ in the time periods involved. With coast-FI the focus remains earning income until FIRE, whereas with flamingo-FI, the focus is to speed up the path to FIRE within a given time frame (10 years).

Moneyflamingo has an excellent visual that demonstrates the difference between these concepts, which I am reproducing below

Source: www.moneyflamingo.com

In one of my future blogs I will get into how these ideas work in numbers for AVI family. For now, I want to note that I am warming to the idea of coast-FIRE as a reasonable approach for a broader segment of families who may not necessary want to adopt to a FIRE lifestyle, which invariable involves some level of minimalism, and at the same time would love to find a way out of the rat-race.

High Income vs High Savings: Minimalism is espoused in the FIRE community as a path towards financial independence. As mentioned above, frugal lifestyle may not be a cup-of-tea for everyone. An alternative path to FIRE (and possibly fat-FIRE) is to not focus on savings, instead work towards growing your income. I found myself in the later camp and have been pursuing a path towards higher income, without sacrificing on some of the lifestyle choices, until I started reading The Complete Tightwad Gazette.

The book is a compilation of newsletters that author Amy Dacyczyn ran in the 1990s. In one of the newsletter article, right at the top of the book, Amy presents her view on the two different perspectives stated above. I have to say, she presents the most eloquent case for why high savings is the path to pursue to a satisfactory lifestyle. To quote from her article, Telling you to earn more instead of saving more is like saying “Don’t eat less, exercise more”. 

It goes without saying there is not much of a debate here. If possible, an ideal goal is to strive to earn more and at the same time save more of the incremental dollar earned, yet stories abound of high-income earners living hand-to-mouth! The lesson for me, try to follow the ideal but be biased towards saving more from here on forward.

COVID-19 and the markets: Unless one lives on Mars, it is hard to not see the dichotomy that is the pandemic and the devastating effect it is having on small businesses and certain sectors and the relentless upward march of the markets overall, driven by tech boom. In the past week, I heard two strickingly different views on whether markets are reflecting reality or are heading into bubble territory.

The bullish case for markets to continue to grow is presented by Bill Miller, the famed investor, who ran the Legg Mason Capital Management Value Trust, with a record of having beaten S&P 500 for 15 straight years from 1991 to 2005. In a recent wealthtrack interview he stated, at current price levels, one could throw a dart at S&P 500 stocks and probably on 8 places out of 10 that it lands on, it would be an OK investment. I highly recommend hearing him out to better understand the bull case for markets.

The bearish case is put forth in a daily briefing podcast, dated July 10th by the Raoul Pal, the macro focused investor and founder of Real Vision.  Raoul puts forth the thesis that human reaction function is what matters and that the virus’s effect on behavior is more significant than the virus itself. In the backdrop of alarming rise in COVID-19 cases, he believes caution to be a prudent strategy, especially when bond markets are sending clear signal to the investor.

I find a grain of truth in both arguments and am a living proof of the same. I am invested in some of the S&P 500 stocks that have been battered to death and havent recovered at all, and as the chart below shows, majority of S&P 500 stocks except for the FANNG or FATMAN stocks, all other stocks in the index are yet to see any recovery.

Its easy to see the argument presented by Bill Miller. 450 odd stocks of the 500 in the index are still in the red!

Video/Book/Article/Audio for the Week

• Podcast: Series of interesting interviews on Real Vision Podcast.
• Book: Over the weekend I started reading Freedom at Midnight by Larry Collins and Dominique LaPierre, fascinating third person view on one of the seminal events in world history, the emergence of Indian and Pakistan as soverign nations.
• Video: From the archives, Warren Buffet lecture circa 1998, to graduates of business school at University of Florida, Gainesville. Gem of a talk!