How Much Is Liquidity Worth?

Here’s my first world problem of the day:

My company offers post-tax 401k contributions. I have never contributed to my 401k post-tax, thereby paving the path toward a Mega Backdoor Roth, because my employer hasn’t allowed for rollovers from my 401k. Which means I’d either have to not invest those contributions for a long time or instead deal with super annoying tax stuff on the post-tax gains being rolled over from a Traditional to Roth account that I didn’t want to bother with.

But then I realized: I’m leaving in less than two months.

Which makes Mega Backdoor Roth contributions a lot more approachable and a lot less rife with confusion.

The catch, though?: I’m leaving in less than two months. Which means I might not have a salary until who knows when. Which further means liquidity is at a premium. Which means maybe I should favor getting my salary in cash to sit on like a greedy dragon rather than stuff it into my retirement fund for favorable tax treatment.

That said, fiance did just finalize his job offer, so we’re probably in decent shape for a while? We can’t live just off his salary, but a back of the scratch pad calculation indicates his pay plus our emergency fund will last for about three years assuming we more or less follow our joint budget plus personal allowance plan. My last few paychecks would add another six months or so to that runway. That’s assuming I don’t make one red cent (but also that we don’t face any truly expensive emergencies). I can’t imagine being unemployed for that long given how strong the job market is right now, particularly for tech.

On the other, other hand, if I take the cash now, then fiance can contribute correspondingly more money into his pre-tax 403(b) when he starts his new job. Which brings us to the old “take the tax break now or later” debate.

I think I might take the middle-of-the-road path and dump half my pay into Mega Backdoor Roth and the other half keep in cash. If by Q3 I have decent job prospects, we’ll up fiance’s 403(b) contributions so we can utilize both our pre- and post- tax investment space.

Anyway I’m interested in hearing some opinions on the matter:

How much do you value liquidity? Would you go for the Mega Backdoor Roth contributions, pre-tax 403(b) contributions, or stockpile some cold hard cash?

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Stock Market Dip: How Are You Reacting?

I am not a financial planner nor a financial advisor. This post reflects my own uninformed opinions and does not contain financial advice. 

After a comeback rally Friday, the DJIA closed at ~24,200, still down about 9% from its high at the end of January.

For those of us with a long time horizon, this downturn is a blip. Whether the market bounces back or craters in the next year or two isn’t make-or-break for me, though it may shift my FI plans, depending on timing of the recovery.

That said, the recent stock market volatility has tipped the scales on at least one borderline decision:

Because I plan to quit my job, I have decided to build up my cash cushion a bit before maxing out my retirement accounts. I still plan to fill my 401k before I leave, but I want to make sure I have cash on hand first in case my employer terminates me early. I’ve dropped 401k contributions down from 50% of my income down to the match; I’ll push it back up after my cash cushion reaches optimal levels. The stock market volatility has, in effect, tipped the balance toward this more conservative course of action.

Other than adopting more conservative sequencing in preparation for my sabbatical, though, I have no plans to change my behavior. I’m pretty happy with my investment allocation. Charitable contributions continue apace. Given that I’m looking unemployment in the face, I’m feeling remarkably unfazed. That said, give it a few months and a potential recession and see whether I’ve changed my tune.

At least for now, though, all there is for me to do market-wise is to watch and to wait. And to idly speculate what may come next (mostly because it’s fun). With no real basis whatsoever– no data, not a finance person, etc etc etc hedging– my guess is this correction is going to be “the big one” we’ve all been waiting for. Maybe it’ll last a few months, maybe even a year. I wager– again, based on no knowledge, wisdom, or reliable intuition into these matters– this’ll end up being a 30%+ correction and the DJIA will drop below 20,000 once more. I’ll be DCA-ing in anyway, I’ve been wrong about this stuff before. But, hey, we all try to think about what’s next during crazy times, don’t we?

How are you reacting to recent market fluctuations (if at all)? How low do you think we’ll go?

How I Invest & My Asset Allocation

For a personal finance blogger, I talk about investing remarkably little. Maybe it’s because my investments are on autopilot– I think about them maybe once a quarter when I rebalance. Also, I’m not well-versed enough about financial markets to conjure up any “alpha” (I’m probably using this word wrong, even) versus following the standard advice of diversified indexing. As the disclaimer says, I am not a financial planner.

That said, in the spirit of living up to my blog’s name, let’s talk about how I invest.

Investing Philosophy

I like to keep my investing low maintenance. So my rules for it are simple:

1. Low-fee index funds. Because nothing eats up returns faster than a 1+% annual fee.
2. Stick to a diversified asset allocation. This means both using index funds as in the first bullet, and also investing across different asset types, which we’ll get into below with the asset allocation.
3. Rebalance once every quarter. I used to pay a lot more attention to the daily fluctuations of my investments. That was dangerous and stupid. I made a lot of mistakes, got scared too easily, and was headed down a gamble-y path with investing that I didn’t want to be on. So now, I stick to my asset allocation, check in once a month for my financial round-ups, and then rebalance once a quarter. 
4. Put stocks in post-tax retirement savings. I max out my Roth space with high growth assets before putting them in my Traditional 401k/IRA space. That way I optimize the benefits of my Roth, i.e. not paying any more taxes on growth, by using it for those assets that will see the biggest increase in the long term.

Asset Allocation

I’d like to say my allocation was well-reasoned, that I modeled a variety of strategies before picking my current portfolio. But that would be a lie. I came up with my allocation through a combination of an old Vanguard quiz that I can’t find online anymore and reading The Value of Debt in Building Wealth by Thomas J. Anderson.

I tend toward a 70/20/10 stock/bond/other split, which reflects my relatively conservative nature. I tilt more international, particularly toward emerging markets (read: China), because I am wary the halcyon days of American economic dominance will last until my retirement, nearly half a century away.

Unlike many conservative investors, I eschew gold, mostly because I don’t understand the appeal of non-fiat currencies. For the the same reason, and because of power consumption/environmental concerns, I do not invest in cryptocurrencies.

The below table summarizes my target asset allocation, my current asset allocation, and the difference between the two:

Rebalancing My Assets

Clearly, my current portfolio is a little out of what with my preferred allocation. Mostly, this is because of an unfortunate jaunt into P2P lending, which, because P2P loans are difficult to liquidate, will continue to keep a stranglehold for another 1-3 years. As those loans come due, I’ll be transferring those payments back into international stock.

I have also maxed out my company’s ESOP because a 15% discounted stock means an automatic 35% annualized return. Can’t beat that! Once those stocks are issued, though, I plan to sell them immediately and plop the money into some combination of commodities and stocks.

Not reflected in the above table is the fact that I have some bond funds sitting in my Roth 401k, which contradicts rule #4 of my investment philosophy. Because of my 401k broker’s restrictions, those won’t be able to be exchanged for stock funds until January 2018, which means I’ll just have to wait until then to properly re-allocate.

So to summarize, because my blog not-so-subtly doubles as a personal to-do list, during my next rebalancing in January 2018, I will:

1. As P2P loans are paid off, transfer money to fill in gaps in other investments.
2. Sell company stock, transfer amount to commodities index.
3. Exchange US bond funds in Roth 401k for international stock funds (tax optimizing allocation).

What do you invest? What is your asset allocation?