Is this the start of the next stock market crash?

The stock market was down today and my office was awash with talk of a stock market crash.

dow jones

“There goes my retirement,” said one of my older coworkers, partially in jest but it was the younger crowd that seemed more worried. I work in a place where no one ever talks about their investments but today that changed. People know that I’m interested in investing but I rarely get any bites when it comes to investment conversations. Suddenly, I was deluged with instant messages from people asking if they should take their money out of the market.

“Is this the start of something bad?”

I didn’t really know how to answer that.

“This is the stock market,” I said, “this is how it works.”

It wasn’t a great answer but the best I could come up with. The truth is often just that simple. Sometimes and more often than not stocks go up but sometimes they go down. Sometimes they go down a lot and for extended periods.

“Is that time now?”  Continue reading “Is this the start of the next stock market crash?”


Is the stock market overvalued?

Is the stock market overvalued?

That’s the million dollar question for us investors, isn’t it, but the answer is not quite as easy as some make it seem. There’s a lot of articles touting one answer or another so I wanted to take a deeper dive into a few of the metrics that are often used to judge value and see what they tell me.

It’s easy to look at the graph below taken from here and draw conclusions.

shiller pe graph

The 32.33 CAPE(Cyclically Adjusted PE Ratio A.K.A. Shiller PE) has only been higher one time in the past decade and maxed out at 44.19 in December of 1999.

That means we still have 30%+ upside so that’s it then – case closed! Just kidding!

One of things that worries a lot of people is that S&P 500 earnings have barely grown in the recent years and the run up has been primarily driven by P/E expansion.

The S&P 500 ended 2011 with a $95.04 per share in earnings and ended 2016 with $96.60 per share in earnings. More recent results are a bit more favorable with the current 12 month GAAP EPS near $105 which finally shows a return to growth. Despite that, the CAPE has expanded as prices outpace earnings growth.

Today’s CAPE is double the mean and median of 16.80 and 16.15 respectively. That doesn’t seem like a good sign and if history is a good metric, can be taken as a sign of poor returns going forward. Unless we see massive earnings expansion then one can expect poor returns if the CAPE has a tendency to revert to the mean in the long run.

The question lies in whether that’s a safe assumption to make and the answer to that is less clear despite how the graph looks. Continue reading “Is the stock market overvalued?”

Investing in video games

Gaming has become a huge part of everyday life. I’ve always been a gamer. I spent way too many hours during my high school days locked up at home playing RPGs on my Sony Playstation. It was only in the recent decade, however, that gaming has stepped out of the shadows of basements into the mainstream.

The appeal of video games for me was the great value proposition they offer. I could spend $20 on a used video game as a kid and get hundreds of hours of entertainment. I simply couldn’t beat that outside of a long fantasy novel and that appeal of the $$ spent/hr of entertainment stuck with me as I got older.

The video game industry has always been good at adapting to the changing nature of tastes and product cycles and the various revenue opportunities that exist and could be harnessed.

The model started with a game you could buy for a $50 to something like an MMO that added a recurring monthly fee and an ever expanding world. All these games started to tap into the addictive nature of progression based gaming as publisher began to realize that they could get more than just the initial sales price and the user base was willing to pay for it to fund additional content.

The turning point was when the old model of selling physical copies morphed into digital copies with additional DLC(downloadable content) that could be purchased.

The proliferation of mobile devices thrust the world of video games into the mainstream and publishers began to realize the benefits of mobile games.

Just like digital, there was an ease of distribution as well as additional ways to monetize the massive user base that mobile games attracted.

Companies realized that a that small portion of users were willing to spend extra money to customize a character or get an advantage in the game. They took advantage of the ability to attract that type of gamer to improve profits.  Micro transactions, first used outside of mobile in limited scope, became a much bigger deal on mobile. These allowed developers and publishers to sell a variety of things like extra lives, power boosts or loot boxes containing items that users could use to customize their characters. The freemium gaming model(free game with in-game purchases) became massive on mobile as publishers wanted to capture as many people as possible in hopes of catching whales(gamers who would spend a ton of money to max out everything possible).

This model soon transitioned back onto PC and console games with an added focus on micro transactions and capturing more and more revenue from the whales that would spend extra money beyond the cost of the initial game to get everything the game had to offer.

Personally, this model doesn’t appeal to me and I never pay extra for a game and will avoid any game where you can buy an advantage but the financials don’t lie.

Video game companies have done very well in recent years and a lot of it is due to the new ways of monetizing their releases.

The truth is that there is always a need for escapism and video games provide one of the most effective ways to achieve that for the end user. The product captures the attention of users due to having a low(often free) cost of entry in relation to amount of entertainment produced leading to a high user base. That means there’s often(not always) a revenue boost for the company when a game first sells. On top of that, game designers have added a very addictive progression based flow to many games with the idea of monetizing a certain percentage of the user base in a big way leading to very high margins and repeating revenue on successful games.

That new foundation of monetizing games after released has meant that the global video game market has exploded in recent years. Almost $110B in revenue has been generated by video games in 2017 and that number is expected to grow at ~6% per year until 2020.


One of the most visible trends that has driven this is the growth in Mobile based gaming. The mobile chunk of the pie started at 39% of $101B in 2016 and is projected to be 50% of nearly $130B in 2020. Continue reading “Investing in video games”

Revisiting my asset allocation

Asset allocation matters when it comes to long term returns. It serves as a guidepost to stick to when times are bad and also gives me the opportunity to balance the risk and rewards of investing according to my own goals and risk tolerance.

There is no simple formula for figuring out what asset allocation is right for an individual. There are simple ones like the three-fund portfolio which includes three total market funds that cover domestic and international stocks as well as bonds weighted in a way that matches the risk tolerance of the investor.

There are also more complicated ones that slice and dice the various asset classes with various goals like increasing return, increasing income or decreasing risk.

In some of my initial posts which you can read here, I went into detail about my investment strategies and my own asset allocation.

The asset allocation I use right now was something I developed in 2008 right after graduating college and I think it has worked well for my needs. I didn’t spend a lot of time on it back then so when I started this blog, I wanted to make sure it was still something I was comfortable with and also something that showed favorable results against a simple three-fund portfolio or even the S&P 500.

The back testing I did in 2015 showed favorable results for that portfolio in terms of risk/reward when compared to a standard three-fund portfolio as well as the S&P 500.

We’ve got another two years of data now and I wanted to take some time to revisit my asset allocation and to see if those results are holding up through the bull market of the past few years. The goal is to see if the asset allocation I have now is still something I’m comfortable with going forward.

The portfolio analysis below is a simple one using only index funds so it doesn’t mirror my portfolio exactly as I do have some individual holdings that will skew my results against a simple portfolio that only uses index funds. Still, I feel like it’s a very good approximation of whether or not my strategy is still successful on a historical basis or whether some changes are necessary.

I do know that historical returns do not guarantee future success but it’s still a fun exercise to see how my strategy has compared to simpler ones and whether all this “work” in balancing my asset classes is worth it. Do note the quotation marks around work because portfolio tracking is something I enjoy quite a bit but others may not find it as enjoyable and opt for a more simple approach.

Just like I did back in 2015, I ran the below data through portfolio visualizer using a $10000 starting point, $5000 in annual contributions and an annual rebalancing. This time, the tool runs from January 1995(the first year emerging market data is available) through September 2017.

There are a ton of different asset allocation strategies you can find out there but I wanted to keep the comparison simple.

I compared a three-fund portfolio(Portfolio 1) someone my age might use(50% US/30% International/20% Bonds), my own portfolio(Portfolio 2) and I added a Vanguard 500 Index fund as a benchmark.

The Asset Allocation Data

Portfolio Analysis

Continue reading “Revisiting my asset allocation”

401k contribution limits for 2018

The IRS ruling on next year’s 401k, IRA and HSA limits is finally here and investors who already max out their 401k are getting some good news.

For the first time since 2015, the IRS has bumped up the 401k limit. In 2018, it the limit will be $18,500, up $500 from the current $18,000. This new change also applies to other retirement accounts that mirror the 401k limit like the 403b, most 457 plans and the TSP.

The catch up contributions for those over 50 remain unchanged at $6000 for 2018 meaning the maximum deferral anyone can make is $24,500 this year, up from $24000 last year.

The benefit for heavy investors is two fold.

First, you get to reduce your taxable income by another $500 this year which can save someone in the 25% tax bracket $125 on their tax bill. That’s additional money that can be invested in a taxable account to continue growing your portfolio.

Second, the 401k is already one of the best ways to grow your portfolio and additional money in that account will help your long term results.

That means, you not only get to keep more of your money that would otherwise be taxed but can now be invested or spent but you also get tax-free growth on the additional $500 for as long as the money is in the 401k.

$500 may not seem like much but $500 extra each year for thirty years will mean you’ll have $66,000 extra in your account after 30 years. On top of that if you invest the extra $125 in tax savings every year in a taxable account, you’ll have an extra $13,000 in that account(15% tax rate assumed).

That same investment($500 every year) would only be worth $52,000 in a taxable account(15% tax rate assumed) for that same period. That’s a pretty big difference and shows the power of tax-advantaged investing and why I’m excited to get the $500 bump this year.

Unfortunately, the IRA limits, both Roth and traditional, remain unchanged at $5500 but the phase-out ranges for those for both are going up a little bit. That can help those on the cusp of being eligible for the traditional IRA deduction or Roth IRA eligibility.

The other piece of good news not mentioned in the IRS releases is that the HSA contribution limit is also going up this year. People with single coverage will have be able to save an additional $50 this year to a total of $3400 and those with family coverage get an extra $150 in tax-advantaged space up to $6900.

I wrote about the benefit of an HSA before but in essence, it’s the best tax-advantaged savings account available and any additional money you can squeeze into it is money well spent. It’s essentially tax-free on both ends(assuming you use it for medical expenses on the back end) and saves you from FICA taxes as well.

Overall, this is great news for investors everywhere especially those of us striving for financial freedom. Maxing out tax-advantaged space is a must if you are lucky enough to be able to do it and 2018 will give us more space to work with.

I’ll certainly be happy to be able to add another $550/year into my tax-advantaged space and hope others are too. I only wish the IRA limit went up to $6000 too as it’d be nice to just make it an even $500/month for the max out!

Are you already maxing out your 401k and if so, are you planning to take advantaged of the additional tax-advantaged space?