YTD Savings Rate
At the beginning of the year, I estimated my savings rate to be around 44%. First, it’s hard to estimate your income when you don’t know what kind of annual merit increase you’ll receive plus two potentially large bonuses. Really, everything needs to go right to get any kind of accuracy.
At the half-way point of this crazy year, I achieved a 47% savings rate. That’s not bad considering I had a kid in college and I’m accelerating my mortgage payoff.
Estimating the second-half of 2020 gets interesting. I’m diverting 1/2 of my bi-weekly paycheck contributions to a side-fund that will likely go toward my mortgage. This will slow my savings rate and I’ll probably finish the year around 40%.
Again, not bad considering a kid in college and accelerating a mortgage payoff. Without those, I’d likely be in the 65%+ range for a savings rate, which is where I’m hoping to be by 2022. My last few years of working will put me into hyper-savings mode.
30-Year Bankruptcy Probabilities
Making sure my stocks (and dividends) survive horrible conditions (like COVID-19), risk has been top of mind lately. And now I’ve recently identified which stocks will receive a heavier weighting in my portfolio (6%, 4%, or 2% maximums).
I found this chart of particular interest. AAA rated bonds don’t guarantee that your companies won’t fail but it’s highly unlikely. Companies like GM and Hertz (currently filing bankruptcy) have been AAA rated in the past. Hard times still fall on what appears to be the best of companies.
30 years is a long time and ratings don’t go from AAA to BBB overnight. Companies usually earn their way to lower credit ratings through years of bad decisions or change they couldn’t manage.
I often say that I want my companies to survive at least 30 years. This chart shows that you don’t want a bunch of high-yielding BBB dividend paying stocks. And this is just for the stock to survive. Having the dividend survive takes on a whole different type of analysis.
But step one is to have your stocks survive and filing for bankruptcy crushes that hope. Having a AAA or AA company in your portfolio doesn’t guarantee great total return but it’s comforting knowing they likely won’t become bankrupt.
Essential vs Non-Essential
My current employer is a privately-owned family company with two very different businesses. One is essential, they are having a decent year, and we send the family a nice dividend. The other business is non-essential and they are trying to survive. I think they will survive but the business will never be the same again.
And that’s the lesson I suppose. That non-essential businesses will look differently in a few years (assuming they survive). The family is now looking for ways to increase the value of the essential business because they find it safer and their core holding. They will likely reduce (not eliminate) new capital going to the non-essential business for some time. Even then, they will only input new capital for the non-essential business if they feel margins are huge or the probability for success are high. They are already taking risk by investing in a non-essential business.
Maybe there is something to learn from this in how we manage our long-term portfolio. It’s always great to have companies with big growth but bad times do strike every 10-20 years. Will your companies survive? Will they look differently after the event? That’s likely what we’ll find out in the next couple of years as we deal with the fallout of COVID-19.
Companies like Johnson & Johnson, with decades of rising dividends, has seen nearly every event has continues to thrive. That’s real strength and something I want to anchor my portfolio.
Chart of the Day (Also, Head Fake of the Day!)
25 years from now, some young economist will look at early-2020 and think something great must have occurred when they look at this chart. They won’t truly understand the economic impact that COVID-19 had on the economy and how so many chart anomalies occurred.
This chart will be one of the great head fake charts of all-time regarding wage growth. It makes things look like wages increased significantly during times of extremely low inflation. That would be a great chart if it were true.
What they won’t know is that an unusual event occurred that basically wiped out most of a the low-paying hourly jobs and left high-paying salaried positions. I don’t know about you but I didn’t get a raise during this period. I guess it just shows you have to be careful looking at historical charts because you never really know the context or what really occurred to make metrics move.
Thanks for reading!
Mr. TLR