1H 2021 Financial Samurai Review: Money, Family, And Business

1H 2021 turned out to be a raging bull market! The S&P 500 closed up 14.4%. At the beginning of the year, I had predicted an 8% rise in the index. However, my original year-end target price of 4,088 was quickly breached by early April.

Then, after 1Q 2021, I upgraded my year-end target to 4,200, and it was breached again on May 6. Now it feels like we’re just running up the score. Let’s really cherish the good times. We deserve it.

In this 1H 2021 Financial Samurai review, I’d like to highlight some things I’ve learned about investing, family, and business. I also want the review to provide a glimpse of life during the pandemic for future generations.

1H 2021 Review: Money

Public Investments (~30% of Net Worth)

After outperforming the S&P 500 in 2020 (+40% vs. +18%), my public investment portfolio underperformed in 1H 2021 (+9.14% vs. +14.4%). The reason was because my single stock tech names like Tesla, Netflix, and Apple underperformed the S&P 500 YTD.

Further, about 20% of my portfolio is in individual long-duration municipal bonds, which don’t really move much. Bond funds were also down slightly in 1H 2021 because rates went up. Even though comparing a stock/bond portfolio to an all-stock index fund isn’t apples-to-apples, it’s still an interesting exercise.

I wasn’t smart enough to rotate out of tech at the beginning of the year and into banks and consumer cyclicals. However, I also have an allergic reaction to creating taxable events in my taxable investment accounts. Therefore, I tend to just focus on a holding period of forever so long as I believe in the company.

My taxable investment accounts are much larger than my pre-tax retirement accounts out of necessity. I need them to be large enough to generate enough passive income to fund my lifestyle. Otherwise, I wouldn’t have left work in 2012.

What’s Next For Stocks In 2H 2021?

So far, I’ve been too conservative in my outlook. But at least I got the direction right. The below chart shows how the S&P 500 has performed after increasing by more than 12.5% in the first six months.

After a strong first half, the average return over the next six months was 7.1% and the median return was 9.7%. 75% of the time, the next six months showed a positive return. 

The S&P 500 is currently trading at more than double its historical median P/E ratio of 15X. The Shiller PE ratio is more than double its historical 15.85X multiple as well. Therefore, valuations are sky-high. But these valuations are on depressed earnings.

S&P 500 index performance for the second half after a strong first half

Besides my remaining SEP IRA contributions, I’m no longer investing new capital in stocks. Companies now must prove to investors earnings will indeed rebound to lofty estimates so that valuations can normalize in 2022 and beyond. So far, they are.

Although I’m not enthusiastic about the stock market, historical data and positive earnings momentum are why I’m leaving my equity exposure untouched. I’m letting it ride.

With valuations so expensive, we should all expect another correction. However, will it feel so bad this time given we’re up so much since January 1, 2020? Probably not as the likely overall sentiment will be to buy the dip. 

Lessons About Stocks

It’s hard to get your forecasts right. Therefore, focus on an appropriate asset allocation and net worth composition.

As you grow wealthier, the amount invested may start feeling a little scary. However, if you focus on the percentages, not the dollar amounts, it may help you overcome your fears of investing.

The other lesson is about mean reversion. You can get lucky investing in individual stocks some of the time. However, performance tends to mean-revert over time. Therefore, having the majority of your equity investments in an S&P 500 index fund makes sense. Keep it simple.

Below is another chart from Personal Capital showing my public investment performance since January 1, 2020. My hope is that my tech names start outperforming again. However, nobody knows the future.

Financial Samurai investment performance since January 1, 2020

Real Estate (~40% of Net Worth)

Every real estate indicator shows that real estate performed well in 1H 2021. The S&P/ Case Shiller composite index of 20 metropolitan areas gained 14.9 percent through the 12 months ended in April 2021. This was the largest annual price increase since December 2005.

Even lowly San Francisco, where 23-year-olds can make $200,000 all-in right out of college, saw a median single-family home price reach a record-high $1,950,000 in May 2021 according to the MLS.

Big city living is making a huge comeback. Therefore, I think it’s smart to search for rental properties in big cities that will benefit from both the rise in rent and principal. Big cities have underperformed the overall U.S. housing market during the pandemic, which is one of the reasons why I find big cities attractive.

What people don’t seem to realize is that many big-city residents have made a lot more wealth than the average American. When you start off with a higher average net worth/income, you tend to make more money in a bull market.

Yet, our real estate values have not grown as quickly as the rest of the country. Therefore, we are finding much better relative value.

San Francisco Median Home Prices May 2021

Heartland Real Estate En Fuego

My long-term investment thesis of investing in heartland real estate since 2016 has been proven correct. I couldn’t foresee a pandemic normalizing remote work. However, I felt strongly the “fanning out of America” would continue thanks to technology.

I’ve been working from home since 2012. Working from home is more efficient and provides for a superior lifestyle than working in an office. Therefore, now that millions have finally experienced the same thing, there’s no going back to the way things were.

I was speaking to a small tech company CEO the other day who said that remote work is a boon for their hiring needs. Pre-pandemic, it was tough to compete with big tech, who would always pay top dollar. But now, his company is finding talent everywhere.

Home value index of various cities

When it comes to investing, focus on long-term trends. Once you identify a trend, position your capital accordingly. Gaining exposure is the main goal. Unless you are an investment professional, spending your time finding the best deals within the trend may not be the best use of your time.

My strong belief in the fanning out of America is why I invested $800,000 in a real estate crowdfunding fund that is predominantly invested in the Midwest and South. As the fund begins to return more capital, I will reinvest the proceeds in more heartland real estate to maintain or grow my position.

In the next 10 years, I want to have more of an equal exposure between coastal city real estate and heartland real estate.

Venture Debt

I’ve invested in three venture debt funds and I plan to invest in a fourth. So far, the returns have been in the mid-to-high teens. However, the returns could ultimately end up being much higher because the funds own warrants in some of their companies.

I like venture debt investing because of where it is in the capital stack. It’s riskier than traditional lending, but it isn’t as risky as private equity investing. If you can lend money at a high-interest rate to a well-capitalized company that is growing, your investment tends to work out. We’re talking 10% – 15% interest rates.

If you can then get warrants (option to buy a company’s equity at a particular price by a particular date), your venture debt upside can increase. You can learn more about venture debt investing here.

Overall Net Worth Growth

Below is my net worth chart using Personal Capital’s free tools. The big dips and peaks are from money recognition timing issues. For example, if I transfer funds from one bank account to another.

The chart shows a 6% increase. However, it is misleading because it only reflects my public portfolio’s growth and savings divided by my net worth. 70% of my net worth is in real estate, private equity, and various private funds that have not been revalued all year.

If I were to mark-to-market the 70%, my overall net worth is likely up closer to 12% – 15%. My target annual net worth growth rate is 10%. In a future post, I’ll explain why I like to keep real estate valuations static for years.

1H 2021 Financial Samurai Net Worth Chart

1H 2021 Review: Family

Children have made our lives more meaningful. They give me the motivation to focus on my health and our finances every day. For if I were to die young and end up broke, that would suck for everyone. Children have also made me a little more compassionate.

When I come across really angry or disrespectful people online, I always wonder whether they were neglected growing up. Besides a genetic disposition to be a certain way, what else could cause people to be so nasty sometimes?

We should all try and treat others with more empathy and kindness. Who knows what is going on behind closed doors or what type of difficult upbringing people have had.

Raising young children during a pandemic has absolutely been the hardest thing my wife and I have ever had to do. Childcare is the greatest test of endurance, especially if your kids don’t sleep through the night and don’t nap during the day like our son. But once we get through it, I’m positive we’ll get stronger.

Suggestion: If you’re a hiring manager, hire a parent who has had to homeschool their kids during the entire pandemic. This parent is used to working at all hours of the day and night. This potential employee will also likely be super pumped to get back to working full-time after their kids go back to school.

Have Children Sooner Rather Than Later

If I could snap my fingers and ensure zero complications in mother and child, I would have another baby. For those of you with many children, you are truly blessed! Although, there are many costs to raising many children as well.

My wife and I started too late because we were too focused on our careers. However, I don’t blame us because it’s expensive living in New York and San Francisco.

As parents in our 40s, we worry about health issues if we were to have another child. Roughly 15% of the world’s population has some type of disability. This is another reason to show kindness to everyone.

If you know you want to have kids, have them sooner. Although I do believe the ideal age to have a baby is in your early 30s from a biological and financial standpoint. There really is no perfect time.

As far as our children are concerned, the pandemic has been a time of joy! From picking cherries on a Tuesday to visiting the zoo on Wednesdays to running around the playground every day, they’ve been thoroughly loved.

It’s good to shield our young children from the cruelties of life until they are ready. Goodness knows there’s enough bad things that happen every day.

1H 2021 Review About Business

Business was great in 1H 2021 partly because I tried harder. There was also huge pent-up advertising demand as corporates felt more comfortable spending. Even though I made more money, I’m not any happier.

In fact, I’ve noticed periods of less happiness because I crossed my ideal balance of 80% fun / 20% business for too long. For most of 1H 2021, I was closer to 60% fun / 40% business. As a result, I’m reverting back to my old ways for the rest of the year.

They say it’s better to focus on one or two subjects to grow your business. However, life is way more interesting than just talking about various ways to make more money. And if you’ve got enough sustainable passive income, the marginal joy of making more money declines.

For example, I’m currently all-in on fatherhood. Therefore, I’d love to discuss more about education, building self-esteem, developing a strong work ethic, and learning how to play nice with others. Of course, I’ll also discuss estate planning topics like using a 529 plan to transfer wealth as well.

Part of having fun is doing whatever I want online. Having a business model based around free is definitely more freeing.

If you no longer enjoy running your business, you increase the risk of burnout. Therefore, make sure you properly calibrate your time to improve your odds of survival. Surviving is half the battle!

How To Keep Pushing On When You’re Losing Financial Motivation

One of the most difficult things I’ve found is trying to make more money when you feel you already have enough. Partly due to frugality, I have a relatively low threshold for how much is enough. It’s one of the reasons why I left maximum money behind at age 34.

The main way I was able to push myself to make more money during the pandemic is by focusing on what the new money could buy. More specifically, I came up with a list of what the new money could buy for our children.

For example, I believe one of a parent’s main responsibilities is to provide a rich education for our children. Therefore, with preschool starting back up this fall, I made it a goal to generate $3,000 a month in after-tax income to pay for tuition.

Depending on how much motivation you need to make more money, you can come up with an endless list of things to tether your money-making endeavors to. Other common examples include a mortgage, healthier food, health care, after-school activities, and college.

At some point, you may find that making more money becomes a soulless endeavor. Therefore, identify specific purposes for why you are working so hard.

A Time For More Joy

My goal is to reduce Financial Samurai-related activity back down to a maximum of 20 hours a week until August 25, 2021. A 50%+ average reduction in time spend should work wonders for my mental health and happiness.

After August 25, when my son returns to preschool, I will re-evaluate whether to continue my sabbatical or not. My suspicion is that I will itch to do more again since I’ll have six more hours of free time a day. However, I won’t know until I get there.

It feels great to join the ranks of 4 million job quitters in America! If something is not giving us joy, more of us are collectively saying no mas!

Job quitters surging to all time highs

However, old habits die hard. I’m afraid I won’t be able to take things down in the second half of the year as much as I imagine. Therefore, I’m going to count on my wife to slap my ass once I hit the 2.85-hour mark a day. I’ll also encourage her to encourage me to go out and play more.

The ideal scenario is for all our investments to continue going up while we do less work. That’s the beauty of passive income. That said, none of us should be surprised if we see a correction in our investments. At the same time, we’re so far in the money that I’m not sure many of us will really care too much.

The financial windfall since the pandemic began doesn’t seem real. Therefore, I encourage all of us to spend our boot and live it up more.

Readers, how was your 1H 2021? What are your plans for 2H 2021? Anybody quitting their jobs and YOLOing it? Who else is deciding to take things down a notch?

1H 2021 Financial Samurai Review: Money, Family, And Business is written by Financial Samurai for

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