Wow. 2018 was, well, something. For the first nine months of the year, it seemed both the market and my finances could do no wrong. Then the fourth quarter rolled around to everyone that what the market giveth, the market also taketh away. Let’s break down what happened this year in our 2018 year in review.
Despite the obvious impact on my mental health from watching as 10%+ of my net worth vanished at the hands of a rising rates and an increasingly likely trade war, I still think 2018 was a massive success. Let’s review what went well, what could’ve went better, and the lessons I’ll take with me into 2019.
The Good
- I started Financial Freedom Lab! I’ve been wanting to start a blog to document my adventures in personal finance for a long time and finally took the plunge. I’m excited to see how this experience will hold me accountable for more prudently managing my finances.
- My perspective on personal finance experienced a seismic shift. This one isn’t really quantifiable, at least not for several years. The way I characterize what happened is I went from viewing wealth accumulation as a passive activity (401k allocations, investing in stocks because they’re easy, etc), to becoming fully active on shaping my financial future.
- I’ve implemented a focus on passive income in my portfolio construction. I now see that a large part of my anxiety arises from the concern that the assets I’ve accumulated are more reliant on appreciation than on cash flow. Since then, I’ve taken concrete steps to acquire assets that will increase my monthly cash flow. This is a virtuous cycle while I’m still employed full time since I can reinvest those earnings into additional assets while I don’t need the cash flow, and live off the money when I do. These efforts have led to achieving over $700 in monthly passive income from my investments already!
- I made my first real estate investment! After countless hours of research on real estate investing, I finally pulled the trigger on a real estate crowdfunding investment. I am still not yet ready to try to be a full time investor, but I found some pretty compelling opportunities to invest with some of the best real estate investors in the game, so I got the best of both worlds.
- Even with the insane volatility in the fourth quarter, my net worth rose 44.5% year over year. This is partially due to a bonus I received from my job, but also because I shifted my focus toward hacking my brain to pay myself first, which led me to automatically saving a much larger portion of my income.
- I invested a relatively small amount into my first venture capital investment. Through a venture capitalist I met via personal contacts, I was able to invest in secondary shares of Ripple, the cryptocurrency company aiming to upend the money transfer business. As with all VC investments, it’s much too soon to recognize any kind of success or failure on this investment. But hey, it’s pretty exciting to say you own part of a private company!
- Finally, I invested a portion of my bonus in one of the funds my team manages. This is a gesture of good faith toward my firm and because I am an employee I pay no fees. It’s a win-win! Similar to my real estate or VC investments, this is a long-term investment and doesn’t produce income. It does, however, give me exposure to a relatively niche type of credit product that it would be hard to replicate in public markets.
The Bad
- Obviously, the fourth quarter hurt almost everyone. Extreme volatility in the markets led to my net worth dropping nearly 12% from it’s highest point. A painful lesson for sure, but great mental preparation for the eventual recession we’ll experience.
- Even though I tracked my expenses religiously, I didn’t do as good a job as I should have in cutting my extraneous spending. I still spent far too much money eating out and shopping and didn’t actively intervene to change that.
- I invested in my real estate transactions through my LLC. This move was ill advised because now I will have to pay self employment taxes on that income and elect to treat the LLC as an S-corporation, which brings its own set of complications. Now I know the simple rule: all investments should be under my own name, and all business interests should be held in the LLC.
The Lessons
- Always consult a CPA when making decisions that could impact your personal or business tax liability.
- Actively work to curtail excessive spending in discretionary categories
- Allocate investments to minimize your day to day stress. If you’re the type to can easily stomach 3%+ daily swings in your net worth, then go for it. But if you’re like me and don’t want to reach for the Pepto every week, perhaps you should consider allocating a bit more conservatively.
- Asset allocation is the single largest driver of your long term financial success. Getting it right is an intensely personal exercise that looks different for everyone. Maintaining the proper asset allocation over time is a full contact sport. You really have to manage your investments actively to make sure you’re where you want to be.
2019 is shaping up to be quite an interesting year. Whether this is the year we enter a recession is anyone’s guess. But I have a feeling there’s going to be fireworks of one sort or another. Armed with the lessons I’ve learned in 2018, I am confident that my progress toward financial freedom will only accelerate!
