Monday, July 07, 2008

Wealth Builder Ratios - Q2 2008 Update

Here is our Q2 2008 Wealth Builder Ratio update. I am disappointed with this year's results versus goals and 2007 results. 2008 has not been very kind to our financial plans and goals so far. The first half of 2008 yielded the worst returns since 1970 and is the 10th worse since 1900. The Dow was off 10.2% alone in June, 2008, the worst June return since 1930.For more details on the relevance of these ratios, please see this How Much Is Needed To Be Wealthy - The NUMBER.

Ratio and Target

Q1 2008

Q2 2008


Income to Salary

Target=0.8 2007=3.41


For the third year in a row, the returns of the stock market under performed in the first half of the year. This year's declines have caused our portfolio to lose 4.65 times my pre-retirement salary. We have now lost all of our 2007 gains, plus some.

Fortunately, we do not yet need to sell any investments for our retirement expenses. At this point, we are staying invested in the market, and taking the opportunity to increase our cash position during rallies.

to Salary


The significant loss is due to the stock market decline in the first half 2008. Our total stock and CD/bond investments fell 10.6%. However, my company stock declined 17.2%, reducing the value of stock options and increased our losses to 21.6%. OUCH!

Debt to Salary


Currently, our only debt is our home mortgage. Since we retired, we have not made our usual 4% principal payment in January. We will wait for the market to recover before selling some investments to cover this payment.

My financial goals for 2008 are:

1. Continue to maintain an Investment Income to Salary ratio > 0.8. (off track)

2. Maintain a Savings to Salary (final before retirement) ratio of 20. (off track)

3. Reduce my Debt to Salary Ratio by 0.1 to 1.41. (off track)

(For reference, Salary refers to gross salary just prior to early retirement in October, 2007.)

Both #1 and #2 were directly correlated with how well our stock, bond, and CD investments did. Due to a weak first quarter in 2008, our stock, bond, and CD investments have returned -10.6%. Including stock options, our investments fell 21.3%. This compares with an S&P return of -13.73% and a Dow return of -14.7% for the first half of 2008. Number 3 will be achieved if we make an additional payment equal to about 4% of our mortgage principal later in 2008.

At this point, I am concerned but not panicking. Our short term expense (next 3-5 years) are invested in CDs, bonds and money markets. So we can wait for the stock market to resume an upward trend, hopefully.

In our Q4 2007 update, I noted that "2008 will be an interesting (and probably volatile) year, given the economic and political uncertainty, and the upcoming Presidential election. Next year will be a good test of the effectiveness of our investment strategies." So far 2008 is proving that statement to be correct:-)

For more on Strategies and Plans , check back every Monday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

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