Monday, October 06, 2008

Wealth Builder Ratios - Q3 2008 Update

Here is our Q3 2008 Wealth Builder Ratio update. I am disappointed with this year's YTD results versus goals and 2007 results. 2008 has not been very kind to our financial plans and goals so far. Through September 30, 2008, the Dow was off 23.91%, the Nasdaq down 21.49% and the S&P 500 down 18.2%. For more details on the relevance of these ratios, please see this How Much Is Needed To Be Wealthy - The NUMBER.

Ratio and Target

Q3 2008

Q3 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. However, in 2008, the poor performance has continued through September. This year's declines have caused our portfolio to lose 2.36 times my pre-retirement salary. Most of the recovery was due to a 15.8% gain in my company stock since June 30. We have now lost about 2/3 of our 2007 gains.

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 versus 23 in 2007 is due to the stock market decline in 2008. Our total stock and CD/bond investments fell 10.6%. My company stock, which had declined 17.2% to June 30, 2008, has recovered to only being down 4.5%. Thus, our total investment losses improved to -12.5%

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. Since we will wait for the market to recover before selling some investments to cover this payment, this payment is not likely to happen this year.

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 ratio of 20. (on 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 the bear market in 2008, our stock, bond, and CD investments have lost -10.6%. Including stock options, our investments fell -12.5%. This compares with an S&P return of -23.91% and a Dow return of -18.2% through September 30, 2008. Number 3 will be achieved if we make an additional payment equal to about 4% of our mortgage principal before the end of this year, which is now unlikely.

It has been very challenging retiring at the beginning of a bear market. 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 the next 1 to 2 years.

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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