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Happy new year (and Happy Lunar New Year) 2023 everybody! Sorry this post is pretty late as the new year period has been hectic due to personal travels, but better late than never! Let’s take a look at what happened in 2022 shall we?

Remember when 2020 and 2021 ended? I think most of us thought that those had to be the worst that 2020’s has in store for us… and boy were we wrong!

War in Ukraine, runaway Inflation, oil price spiked, 7 Fed rate hikes, S&P 500 dropped over 24%, Nasdaq dropped more than 35%, various crypto currencies & companies collapsed, and tech companies ended the year with massive layoffs – and those are just some of the key events in 2022! My, how the picture has changed from just a year ago.

I’m sure I speak for many here that staying calm and continuing to invest steadily in the midst of all that going on was difficult, everybody was running for the exit. However, continuing to invest was exactly what I did… with the addition of another high-risk experiment thrown into the mix.

Let’s take a look at how that went down for me.

Normal Investments in 2022

Here’s a quick look at where I deployed my capital in 2022:

Here are the absolute amounts injected:

The Investment Funds

This year, I didn’t have has much to invest as some previous years, partly due to an unforeseen healthcare expense for my family. However, I still count myself very lucky to be able to still invest this significant sum into the market during a year where most asset prices are on sale.

Investment Assets

As you can see, the majority of the funds – as usual – went to broad-based market indices.

SRS

For the SRS portions of the investment went to Amundi Index MSCI World Fund that was available through Endowus. It is the fund with the lowest management fees that they have which offers market cap exposure to global market index. However, it only has exposure to developed markets (more similar to IWDA and SWRD) and does not have any exposure to developing markets, but that’s good enough for me.

Update [26-Jan-2023]: Apparently Endowus added an iShares Developed World Index Fund in October 2022 which tracks the same index as the Amundi fund AND for a cheaper fee (0.12% instead of 0.18%.) I wasn’t aware about this until JS informed me in the comments at the bottom of this post! Since it tracks the same index and is cheaper, iShares is a better fund and I may switch over for the lower fee.

Update [1-Feb-2023]: Great news! Looks like that Amundi has now lowered their fee to 0.10% and that’s been updated on Endowus website as well here: https://endowus.com/investment-funds-list/amundi-index-msci-world-fund-LU2420245917#fundInformation Thanks to Ben in the comments for checking with Endowus. So Amundi has become the cheapest Index MSCI World Fund again.

VWRA

For the parts outside of SRS, the majority simply went to VWRA to give me as broad of a market exposure as I can get. Like almost everything else, given it’s broad exposure, VWRA also went down more than 25% when it hit it’s lowest point – and I kept buying all the way down.

Ethereum

The last and smallest portion of my investable funds this year went to Ethereum. Luckily none of my Ethereum investments were caught up in all of the bankruptcies… unlike quite a lot of people who were invested in crypto. High yield earn programs were attractive, but now we see why it is not risk-free.

I had my Etherem in Hodlnaut for quite some time, however when TerraLuna collapsed, then Celsius, Voyager, and 3 Arrows Capital went down – I decided I should be safe and withdrew my ETH from there… and lucky I did, several months before Hodlnaut froze withdrawals.

While I managed to maintain control of my ETH, unfortunately, I was not immune to chasing the falling knife. I basically finally convinced myself to dip my toes into crypto right as the crypto hype peaked – so maybe use me as an indicator for when bubbles will pop next time. If I finally get in, it’s probably a good time to start getting out, lol. So as the crypto prices fell, I chased it down for a little bit until I figured I probably don’t know what I’m doing in crypto and stopped. I likely won’t be adding any more funds into Ethereum and just keep what I have as a lottery ticket.

Of all the funds I’ve added to Ethereum so far (about SGD 15,000) only about SGD 6,600 is left, more than 55% loss.

Luckily this is a tiny amount of my portfolio.

However, that’s just the normal part of my investments…

The Risky Investment Experiment – Leverage & Lifecycle Investing Strategy

This section is absolutely not recommended for the faint of heart and is definitely not part of a standard Bogleheads strategy and is absolutely much more risky – so do not try this at home. However, since I’ve started deploying this strategy, I wouldn’t be 100% transparent if I don’t also disclose this portion of my investment. So here we go, let’s get into what this actually is.

What is Lifecycle Investing Strategy?

Lifecycle investing is an investment strategy that is described in the book “Lifecycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio” by Ian Ayres and Barry Nalebuff.

The high-level summary of the strategy is basically: If a well-diversified portfolio provides on average 8-10% real return per year, and if we are able to gain access to cheap leverage that costs lower than the return, then investing with this leverage will allow investors to get higher returns. This is due to profiting from the difference between the interest rate and the rate of returns of the portfolio. This strategy also allows the investor, who tends to have less investable cash early on in their life, to invest with larger amounts earlier on to then pay it back later as they reduce the leverage later in life – something the authors called “time diversification.”

So in 2022, I went about trying to execute on this strategy.

The Leverage Facility

According to the concept in the strategy, the strategy works better if I am able to secure low interest leverage facility. The lower the interest, the better, because then the margin between the interest rate and the portfolio’s rate of returns would be higher over the long term.

I was able to secure a leverage facility from a financial institution (legit ones, not loansharks) that, at the beginning of the year, was at 1-Month Term SOFI + 0.88% for the USD leverage facility, which at the beginning of the year was equivalent to about 1.18%. This was a tremendously amazing rate! This means if I borrowed SGD 100,000 and I am able to generate a return of 8%, I would be making a difference of 6.82% or SGD 6,820 from the borrowed money!

Now… that’s the up side. What were the downsides? There are many, and these makes this strategy way more risky than normal investments.

The Risks

Now because leverage is essentially borrowed money that I have to pay interest on, there are several “strings” that are attached:

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Borrower must pay interest

Since this is borrowed money, the lender will have to make money from lending this money out. So in order to borrow this money, I will need to agree to pay interest on the amount that is borrowed. In this case it is a floating rate that is fixed to the 1-Month Term SOFI rate with a margin of 0.88% on top.

Given that this is a floating rate, it can go up and it can go down – and oh boy did it go up this year. More on this later.

If I am not able to make payment on the interest and the total amount of borrowed funds exceed the value collateral, then I may be vulnerable to margin calls and my position could be liquidated. Which brings me to the next point.

Borrower must provide collateral

Well, not “must” but whenever you borrow money you’d get much lower interest rates if you provide some form of asset to “guarantee” the loan. This is often called a “secured loan” in the industry since the loan is secured against another asset. This means that if I am not able to pay back what I borrowed, the lender can take ownership of the collateral instead. The lender will usually only lend a percentage the value of the collateral to give them a margin of safety.

A good example is a mortgage. The bank is happy to give a loan which amounts to 75% of the property value because if I am no longer able to make payment, they can always sell the property (for as much as 25% off!) to recover their loan. So this is extremely safe for them.

In this case I secured the loan against my main portfolio, which means the amount I can borrow is directly correlated with the value of my stocks. If the value of my stocks go down, the amount I am allowed to borrow will also drop – which brings us to the next big risk of this strategy. Margin call.

Margin Call

Since I am borrowing funds against the value of an asset like my portfolio, if the value of the borrowed amount exceed the value of the collateral, the lender starts taking on a huge risk – the risk of not being able to recover the loan amount. Therefore, the lender will not allow this to happen and that’s when margin calls enter the scene.

Margin call is essentially a “call” from the lender to the borrower to ask the borrower to add more collateral so that it can support the borrowed amount. If the borrower does not supply the necessary additional collateral, the lender is allowed to liquidate the collateral to pay back the loan to reduce the amount that is borrowed.

In the case where the collateral is also an investment portfolio, if the market drops enough, it could reduce the collateral value enough to cause a margin call. This can cause me to force sell my stocks position when the market is down, compounding a bad situation.

In the worst case, it could cause a death spiral as asset prices drop, I have to keep selling as prices go lower and lower until my entire portfolio is depleted. So it is extremely important for me to keep the margin between the borrowed amount and the collateral value large enough to ensure that a margin call is unlikely. Thus borrowing “as much as I’m allowed” is a horrible idea as any market drop will cause a margin call.

So keeping all these risks in mind, how did I execute the strategy?

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But seriously, this is definitely not something I’d recommend anybody try.

Executing lifecycle investing

According to the book, the authors were talking about 2x and 2.5x leverage, which is extremely aggressive and faces a high risk of margin call. Of course you’d also get a higher return if markets moved in your favor. However, I did not go for anywhere near that level of margin… mainly because I’m not crazy, I don’t expect to be lucky, and I’m not greedy.

I considered the downside risk and decided that I will always maintain a margin of safety of at least 50%. This means that I will maintain a leverage position that will not get a margin call even if the market drops by 50%. That was my strategy going in and that allowed me to borrow up to around USD 300,000 while having that 50% drop safety margin.

With that in mind, here’s how the leverage was deployed:

Rationale

During the course of the year, I thought about the use of leverage based on the below principles:

1. No meme stocks or high risk plays. This is not a suicide mission. We want to increase returns through leverage while maintaining the portfolio risk profile. So I will definitely not compound the increased risk with investing in higher risk assets.
2. I want to keep the majority of the funds still invested in index funds to capture the diversified market return. (Thus the VWRA and IWDA makes up almost 85% of the purchases.)
3. I want to also keep the exposure to AAPL, which is my high conviction play, to about 10% of my portfolio. (Explains the AAPL purchase as AAPL went down.)
4. I also want to more or less dollar cost average into the market, in case the market goes down.
5. If there are opportunities due to severe market corrections, I want to capture the downturn. (Thus the QQQ purchase due to massive correction.)

And as the market started going down, I started deploying funds. However, this would turn out to be too soon.

As the war in Ukraine started, I immediately started deploying funds in increments of USD 10,000 and as the market continues to decline due to both Fed rate hikes and crypto market turmoil I deployed more.

I ended up deploying almost USD 260,000, the majority of the USD 300,000, by the end of May. However, as we all know, that was nowhere near the bottom of the market. So as I kept deploying my leverage positions as the market go down, I am paying interest on these amounts while I am also losing money on these positions.

As an example, it was equivalent to borrowing USD 10,000 to buy something but it ended up now being worth just USD 8,000 – I’ve lost USD 2,000 and still have to pay interest on the USD 10,000 loan. Not great.

The final USD 40,000 were deployed in the final 6 months of the year, nearer to the bottom of the market (so far.)

Loan with Floating Rate in a Rising Rate Environment

If you’d like more warnings as to why this strategy is extremely risky, then look no further. Since the U.S. Fed has been working extremely hard to combat inflation, they’ve raised the Fed Fund Rate a total of 7 times this year, going from an almost effectively 0% interest rate to 4.25% by the end of 2022.

This has caused the interest rate for the funds I borrowed for this leverage play to also increase. Since the start of 2022 to the end of 2022, the rate has gone from 1.18% to more than 5%.

At the moment, based on the USD 300,000 leverage position, I will have to pay more than SGD 1,600 monthly to the lending institution in order to keep my position from ballooning. A double whammy.

So now let’s take a look at how this experimental investment has done so far.

Lifecycle Investing: Year 1 Performance Review

Here’s how the performance of the leveraged investment is broken down:

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Play stupid games, win stupid prizes…

So far, definitely not great. Not only am I paying interest on this loan, the investment has dropped in value so this has been a relative disaster so far. So what in my future plan for this experiment?

Future Plans for Lifecycle Investing

While we can see that this experiment has not produced a positive return this year and has instead generated a negative return instead, I intend to keep holding onto my leveraged positions. Why?

There are several reasons:

1. This is also a long term play. The concept of lifecycle investing requires a long time horizon to play itself out – that is at least 10-20 years. While the return in 2022 has been negative, we all know that single year returns of the market is unpredictable and it can go down and go down by a lot. However, I still believe that in the long term the leveraged investments will do well.
2. I do expect the high interest rate environment to end eventually. Maybe not in 2023, but I believe while the Fed will keep rates high until inflation is brought to 2%, eventually rates will slowly be reduced once inflation is tamed. That will begin the next growth cycle.
3. My leverage position is less than 50% of my total assets, thus it is relatively safe.

This does not mean that I will not be paying down my leverage position if situations change in unprecedented ways (like another massive stock market bubble or if interest rates double or something ridiculous like that.) If my interest rate increase above 8% then it just doesn’t make sense to keep the leverage simply from a potential returns perspective.

However, at the moment, it makes sense for me to keep this going.

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In the longer term, I will likely try to maintain the leverage portion of the portfolio to be roughly equal to or close to 50% of my own cash investments. This will maintain 150% exposure to stocks and equities market (depending on the current market condition.) Given this level of exposure, we’d expect that my portfolio returns should be about 50% more than what the market returns over the long term – but of course, if the market goes down, my portfolio will also go down 50% faster than the broad market.

Whatever happens, I’ll keep you guys updated on this part of my experiment – similar to my House Gamble portion. Speaking of which, let’s take a look at how that is going!

House Gamble Update #3

The last house gamble update was in my mid-year post and at the time it has been about breakeven and at the end of 2022, we are still back at about the same. Here’s a chart of the investment value over time:

We are still sitting at around breakeven, and so far – with all the interest that has been paid for the loan – we’re at about an XIRR of 1%. Luckily not negative, but the results here have not been impressive either.

Again, rates here has also been increasing due to the increased rate environment. However, similar to the Lifecycle investing section above, this is a long term play and the high rates should eventually come down and the stock market should begin recovering. Therefore, I will still continue with this experiment into the long term.

So now that we’ve looked at all of my investments individually, let’s take a look at the entire portfolio to see what that currently looks like and how it did for the year.

Total Portfolio Performance Review

Here’s the current breakdown:

As you can see, after I’ve gotten rid of STI ETF (swapped it to Amundi and partially VWRA) and also EIMI (swapped it for VWRA) we have a lot less tickers to keep track of.

All of these positions includes the amounts that have been invested using leverage. Here is the numerical breakdown amounts rounded to the nearest thousands:

Since we ended 2021 at about SGD 994,000 we are actually SGD 154,000 worse off than last year… despite all of the funds added this year and all the leverage strategies.

In fact, given that the leverage strategies was a net negative, the results for this year is worse off because of the leverage.

Now let’s take a look at what you guys are likely here to see, the pretty charts!

Overall portfolio nominal performance so far

Look at that massive drop from roughly SGD 1,000,000 milestone at the end of 2021 to now barely SGD 840,000 at the end of 2022… after over SGD 100,000 capital injection. This already includes deducting out the amount loaned for the leverage play – so this is net value.

Given that the leverage play has been horrible this year, that’s dragging down the performance as well. This is a lot more pronounced in the nominal gains chart.

Gains in nominal dollars

As you can see, at the peak at the start of the year, the nominal gains was as high as SGD 340,000 but as the year started, the gains started shrinking – and quickly.

At the lowest point in October, the gains within the portfolio shrunk to as low as SGD 35,000 – a drop of over 300,000 from peak to trough. OUCH.

Even now, at the end of 2022, we’ve only just recovered slightly to around SGD 77,000 in gains. Now let’s take a look at what that looks like in terms of percentage of total invested funds.

Percentage Gains, both absolute as well as XIRR

This way of visualizing makes the portfolio’s miserable performance this year even more clear. As you can see at the start of 2022, the portfolio gain in percentage terms was around 50%. That means for every dollar I invested, I made an additional 50 cents – amazing! At that time the XIRR, the annualized returns, was hovering around 20% p.a. which is insanely good given the average historical performance of the stock market.

Of course, as I mentioned in my year end review for 2021, I don’t expect that kind of outperformance to continue – little did I know how soon that would come true.

By the lowest point of the market in October 2022, my percentage gain has dropped to as low as just 4.5% (from 50%!!!) and the XIRR to as low as 1.8% p.a. (worse than inflation.)

Now by the end of 2022, we’ve recovered a little bit and my gains has moved to 9% and XIRR to about 3.5%.

As you can see though, the market does not have to recover very much to significantly improve the performance of the portfolio as long as I ensure to keep continuing to invest during the downturn.

Let’s take a look at the capital injection (without leverage) against the market movement

The blue bars are the money that I added to the portfolio in the respective years, and the red bars are the changes that were due to the market.

As you can see, in the previous years, the market has moved in our favor, but within the last year, it has wiped out most of the positive movements of the previous years (erased more than SGD 250,000 off my portfolio value.)

Here’s the data in table form:

Basically spent the whole year investing to end up more than SGD 155,000 less in my portfolio, lol.

So that was how my investment portfolio performed… how has all this affected my FIRE Plan?

Review of FIRE Plan

Given the performance of the portfolio in 2022, this has surely affected the FIRE date – at least the super optimistic one from last year. We said that at the end of 2021 – optimistically – I could be at my FIRE number within 1.75 years and – pessimistically within 3.33 years. Now let’s relook at the same chart after 2022:

Optimistic Estimate

As you can see, based on the method I walked through in last year’s post here, you can see that now the optimistic projection has me hitting the FIRE number in another 26 months (2.2 years) – given that the last optimistic estimate was 1.75 years one year ago, the optimistic date has been delayed by 1.45 years or more than 17 months!

Pessimistic Estimate

In terms of the pessimistic date, last year the projection was 3.33 years (so at this time, if the projection held true, I should only have 2.33 years left on the pessimistic side), but given the current portfolio value, that has gotten worse as well. Using the chart above, the current pessimistic projection is now 48 months (4 years) from today! This reflects a delay of 1.67 or 20 months!

This is slightly demoralizing but it is to be expected! Even at the end of 2021, I knew that the party could not go on forever, so this market drop and delay to my expected FIRE date was going to happen sooner or later. What I didn’t expect was how soon – now we know!

Now let’s take a look at the impact of all this on my overall net worth.

Net worth review for 2022

As you can see, we were on a pretty exponential trend until the start of 2022, then the exciting events of this year unfolded. I ended the year with my investment portfolio & cash-out refinance portion down from a year ago, however the property value and CPF accumulation canceled out the market movement. This resulted in my ending the year at roughly where I started, at a net worth of roughly SGD 1.5 million.

The property portion is only growing due to increase in equity as I am continuing to pay the mortgage and also buying out my dad’s share of the property over time. Given that I am projected to completely pay back my dad for the property by February of 2023, this portion will not be growing much anymore – but that also means I will have more cash available to continue investing into the market instead in 2023.

Conclusion

All in all, not too bad and this year has been more of a speed bump than a disaster for the FIRE-Path Lion household. It is times like this that we count ourselves lucky that our strategy allows us to not take excessive risk, stay in the fight during downturns, and live to fight another day.

Given that we are subscribers to the Boglehead and passive investing approach to investing, this year has been wonderful opportunity for those with longer term investment horizons like us. It has given us the opportunity to accumulate assets at lower prices, at times when others were running for the exit, at times when nobody wants to be buying.

I believe when we look back several years from now on this part of our investment journey, we would see that 2022 was the year where we were putting rocket fuel into our investment tank, setting ourselves up for the successful launch of our early retirement. Only time will tell, but luckily, time is also on our side!

Looking Towards 2023

So what will I be doing in 2023? If you’ve been a long time reader of this blog, you would already know my answer, I am going to be intensely staying the course of course!

I will continue to be shoveling as much cash as I can spare into the market in 2023, especially because the market is still down. Whether the market has already bottomed in October 2022 or will go on to make lower lows this year on 2023, it doesn’t matter. I am viewing this as a great opportunity to buy in cheap.

The reason I have added the word “intensely” to that statement is because I am now also holding a leveraged position to follow this path. I am counting on it working out in the long term and will generate additional returns for my portfolio. However, whether this works out or it doesn’t, I will certainly keep you guys updated right here on this blog.

How about you? How did your investment do in 2023? Let me know in the comments below!

Until next time!
FPL