I have not really discussed my investing and savings activity since the beginning of 2017 so I thought I would dedicate this post to that.
At the beginning of each year, my wife and I set savings goals for the year. We usually do an update at mid-year to adjust our goals if there have been any changes to our incomes or if we expect any significant upcoming expenses.
We target a savings rate of 70% to 75% for the year, thus, 70% to 75% per month as well. We calculate our savings rate as:
Savings rate = (Income after all expenses and taxes)/(Income after tax)
Included in income is our employment, self-employment, and investment income.
For the month of January 2017, our savings rate was 91%. We had a great month in terms of earning income and a strong month in terms of minimizing expenses. We kept expenses to a minimum as we only ate out once or twice a week. There was not much other discretionary spending. The rest of our spending was on needs including shelter, utilities, groceries, gas, and parking.
The month of February 2017 is not over but we anticipate a savings rate of close to 65%. The drop off in savings from January was due partly to lower income. We also had higher expenses primarily due to professional fees. Our discretionary spending was bit higher on bookings for travel. Our discretionary spending on food (restaurants) was higher earlier in the month and now is back to normal levels (eating out once or twice a week). The rest of our spending was on needs.
With the professional fees out of the way and the expectation that our income will be higher in March 2017, we expect to have a higher savings rate in March.
I think some people may think that our savings rate is absurdly high. That is okay with us. We are happy with the way we are living right now. We do expect our savings rate to decline once we have children but we hope not too much because our savings rate is quite high to begin with. We would rather be contrarian when it comes to saving rather than follow the herd into debt. The more we save now, the more freedom we give ourselves in the future.
It has been boring on the investing side for us since the beginning of the year. We have not purchased a single stock or ETF since the start of the year. We have not sold anything either.
We were fully invested on US election day. Since then our stock portfolio is up substantially but we do not view this favorably as bargains are hard to come by in the market now. We would rather have stocks be at cheap valuations because we are still in our buying years. High valuations do us no good right now. High valuations are probably a negative because they can make you complacent and make you think that you are richer than you really are.
We have been accumulating cash in our various portfolios since November. I have been converting some of my CAD to USD whenever the CAD strengthens to the USD so that I can be ready to invest in US stocks when prices decline.
I find that all of the stocks I own and those on my watch list are not worth buying at the moment. US stock market valuations keep going higher making bargains even harder to come by. Global Investment Management firm, Grantham, Mayo & Van Otterloo (GMO) forecasts seven-year asset returns for specific types of assets. They do these forecasts on a monthly basis. Generally, these forecasts have been pretty accurate. Currently GMO is forecasting returns of less than 1% after inflation for US high quality stocks. The ratio, market cap/GDP, is projecting negative stock returns for the next year. Robert Shiller (economist who predicted the US housing bubble back in 2007) recently stated that it is looking as though stocks should only return 1% after inflation or even negative returns because of excessive valuations.
I think it is important to note that I am not trying to time the market based on a whim. I am trying to see where valuations are based on historical levels. Valuations are how investors buy any type of asset – stocks, bonds, and real estate. You look at the price and you compare it to what you are getting. It is like shopping. Most of us look for bargains when we shop. Investing should not be any different. Why overpay?
If valuations are too high, it is expected that future returns should be low. If valuations are low, it is expected that future returns should be high. No one can time this perfectly. It is an art, not an exact science. I am building cash reserves since I think future returns of cash invested in Canadian and US stocks today may be low. I am trying to be as patient as possible. I find the hardest part of investing is doing nothing while everyone out there keeps on buying and driving asset prices higher. But when the tide turns, that is when I will start using my excess cash on bargains.