Monday, January 05, 2009

Wealth Builder Ratios - Q4 2008 Update

Here is our Q4 2008 Wealth Builder Ratio update. I am extremely disappointed with this year's results versus goals and 2007 results. 2008 has not been very kind to our financial plans and goals. Through December 31, 2008, the Dow was off 33.84%, the Nasdaq down 40.54% and the S&P 500 down 38.49%. I am glad this year is over.

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

Q4 2008


Income to Salary

Target=0.8 2007=3.41


The stock market perfomance for the final quarter of 2008 signficantly reduced our returns. This year's declines have caused our portfolio to lose 5.4 times my pre-retirement salary. Most of the loss occurred in our diversified stock portfolios with fell about the same as the market, i.e. 35 to 40%.

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 the strong ration of 23 in 2007 is due to the stock market decline in 2008. Our total stock and CD/bond investments fell 19.8%. My company stock, which was only down 4.5% at the end of September, 2008, fell 15.6% for the year. Thus, due to the leverage of stock options, our total investment losses were -27.3%.

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 were waiting for the market to recover before selling some investments to cover this payment and the recovery didn't happen.

My financial goals for 2008 were:

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

2. Maintain a Savings to Salary ratio of 20. (missed)

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

(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 returns. Due to the bear market in 2008, our stock, bond, and CD investments have lost -19.8%. Including stock options, our investments fell -27.3%. This compares with an S&P return of -38.49% and a Dow return of -33.84% through December 31, 2008. With this year's poor market performance, we did not make an additional payment equal to about 4% of our mortgage principal before the end of this year.

It has been very challenging retiring at the beginning of a bear market. 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. At this point, I am very concerned about reducing our withdrawal rate, and am looking at possibilities of generating regular streams of income through part time employment, and if needed, full time employment.

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." 2008 is prove that statement to be correct:-)

Hopefully, this will be the rebound year, as I propose in my 2009 economic predictions, and allow our retirement investments to recover.

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 © 2009 Achievement Catalyst, LLC

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