Return on Investment – Income Assets

We are doing another historical review today, after we reviewed our historical savings rates earlier this week. However, this time we will be looking at the development of our income assets. We will look at the historical return on investment on those assets. And, in addition, we will also be looking at the return on investment on our total net worth.

Historical Income Asset Allocation

When we were doing the historical data evaluations for the savings rates, we obviously did more than just that. It was a great time to review most of our historical developments. it took at bit of time to get to this stage, but it is interesting and fun to see the (financial) developments match with life decision we made in the past.

Same as with the saving rates, data up to 2010 is a “best guess” based on income/tax statements, (partial) excel overviews of expenses and receipts from all kinds of purchases. As of 2011 the data is very accurate as we have been keeping track of our finances in detail. The result looks a follows:

Historical Income Asset Allocation

2006-2016 Income Asset Allocation

Income Asset Allocation History

We were able to reconstruct our finances back to 2006, which is when Mr CF got his first job out of University. The first few years we earned quite a bit of money so our savings rate was high. Unfortunately we did not invest much into the stock market at that time, only Mr CF had some ETF’s. This was a financial legacy from his parents (a gift when I turned 18, the fund were to be used for school/housing/etc.).

As interest rates were pretty good at that time, we deposited most of our money in “Deposito’s”, which are savings accounts with fixed interest rates for fixed durations. We got around 3.5-4.5% per year on most of these accounts (which is amazing compared to these days).  For the period between 2006 and 2009, we did not own a house (were renting at that time to remain flexible in our living locations). The percentage of our income producing assets was therefore high, but did not really grow organically over time due to a lack of real estate of stock market exposure.

As of 2010 we sunk pretty much all our money into a McMansion (and cars/motorcycles). The drop in income producing assets is shocking to say the least! But we simply did not know any better at that time. Fortunately, we started with company pension plans and our income producing assets slowly grew again between 2010 and 2013.

The Income Asset Turn-Around Years

In 2014 we had our financial epiphany and started our turn-around. We withdraw money from out mortgage to purchase two rental properties that year. Significantly improving the amount of income producing assets.

We sold our McMansion in 2015, investing the money we got out of our house into our pension accounts (maxing our the RRSP’s), as well as unregistered investment accounts/crowdfunding. This process was slow and steady for about a year and a half. Some of the money “left” was used for the purchase of our home and associated rental properties in 2016. The resulting jump in income assets is pretty impressive! Not only in percentage, but also in return on investment which we will be looking at next.

Return on Investment – Income Assets

Due to a lack of data, we were not able to reconstruct the return on investment on income producing assets before 2014. But it is safe to say that percentages would have hovered around 2.0-4.5% for the period 2006-2010. Considering we did not have any stocks during the crisis in 2008 and 2009, we never actually “lost” any money. We therefore likely also did not see any negative returns on income producing assets either. For the period 2011-2013 they would have probably been between 4-6% considering we primarily held ETF’s within our RRSP accounts and the market was slowly recovering.

What we do know is the return on investment as of 2014 till now. Because our investment strategy is very diverse, and because of exchange rate variations (which were positive for us), the return on investment is actually rather good. Especially for 2014, when the market went up nicely and exchange rates shifted in our favour. The ROI for 2015 and 2016 is still very good due to climbing markets, but is dropping somewhat due to our real estate investments. The latter is however providing good cash-flow results, which is what we prefer.

We calculate Return on Investment on Income Assets (IA) as follows:

((Net Worth this year – Net Worth previous year) – Invested Funds ) / IA (previous year)

The results are as follows:

2014-2016 ROI Income Assets

Historical Return on Investment of Income Assets

Return on Investment – Overall

We also calculated our Return on Investment on All Assets (i.e. our Net Worth), which we did as follows:

((Net Worth this year – Net Worth previous year) – Invested Funds ) / Net Worth previous year

This is rough measure to figure out how well you have been doing with your money over time. For example, when you buy a big house, cars or go on expensive holidays. Your overall assets will decline (directly or over time) due to expenses and/or depreciation. However, if you are in an wanted area, your house may actually increase in value and add to your net worth. In our case, our home did increase in value, but this was offset by money we spend on the yard and basement development.

Return on Investment - All Assets

Our historical return on investment on our net worth

As noted prior, we purchased our house, cars and motorcycles in 2009 and 2010. This lead to a massive drop in our Return on Investment on our overall assets. However, this was not the only reason, the drop in 2009 (and the rise in 2011) were actually also significantly affected by fluctuating exchange rates.

That beign said, we are just very happy to see that since 2011 we have been doing well and our net worth is increasing steadily. This is partially caused by an bull market and partially by our FIRE revelations and decisions. We are working hard to keep the percentages as high as we can going forward.

Return on Investment – Yearly Average

Now this is the one that hurts the most. When looking at our total net earnings over the years (so income minus expenses) and compare that to our net worth at the end of 2016, you can calculate the average yearly Return on Investment (on all assets). In this case ours was……just 2.9%. We barely kept up with inflation (could be worse, we could have lost money)!

But if we now only look at the last three years (after we discovered FIRE and rearranged our finances), it’s a more respectable 8.7% yearly average. For two Duchies just winging it, that’s pretty decent. And it even included some rookie investment mistakes. We are a very happy couple 🙂

How did you do over the years, do you know your return on investment on your income assets?

 

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10 comments

  1. Nice track record. What you could also do, to give you more ideas , is calculate an internal rate of return (IRR) taking into account the actual moments and amounts you added to your portfolio. You could then see how that compares to your 2.9% average. Excel can do that quite easily when you have the data. It’s a time weighted vs money weighted return thing as obviously the larger your portfolio, the more impact a 1% change has. I think the IRR method should give you a higher value than 2.9%=
    Personally, I only invest since 2015 so I think this is too short to do any historical analysis.
    Thanks for writing this post.
    Regards,
    DIB

    1. Thanks DIB. Unfortunately, I can tell you now already that we don’t have sufficient data to figure out the IRR. At least not before about mid 2014. For the period thereafter, it would be one hell of a job to figure it out. Albeit it would be interesting to see, for us it’s not worth the effort at this time. Maybe when we are FI 😉

  2. I don’t really understand how you calculate the total net earnings.

    Other then that you are also talking about RRSP. Isn’t that something from the US? We have our pension plan in the Netherlands, but what do you mean with RRSP? I don’t know what the lettres stand for, so this could be a stupid question…

    1. The calculations have been simplified to no more than the start and end values of our net worth and savings. Using either our net worth at the start of the year, or the value of the income asset portion of that. It’s not high quality book keeping . Sorry.

      RRSP = Registered Retirement Savings Plan. It is a Canadian pension plan, bit of a heritage from time spend in Canada. It works quite a bit different from our Dutch system as you can control your own pension account. We have most of our dividend stocks in these account. It’s all nicely tax sheltered that way. We will pay withholding tax and income tax (box 1) when we withdraw from thses accounts. Hope this helps.

  3. Nice work, cool to have so much historical data:)
    It would be interesting to see the ROI per asset class (stocks. bonds, savings, real estate) and how it evolves over time, does one indeed keep you on track when the other crashes? Could help optimizing the diversification

    1. He, don’t give me any more ideas. This already was quite a bit of work! 😉
      The balancing effect for us is indeed in the cash-flow from real estate and the capital gains/losses of the stockmarket. But that being said, we are not yet FO and right now the paychecks make all fluctuations in investments a mute point. But when we do reach FO at some point in the future, we hope that the “stable” dividend income and real estate income provides the lifeline of covering of our expenses and the remaining capital gains the cherry on the pie for holidays and extra’s.

  4. Great work you did here…

    The results from the past 3 years are quite amazing. Keep that going. Or as you like better: keep the cash flow going.

    Our story is similar. We are only heavily in the stock market since 2014. Before, we were in real estate.

    With hindsight, it is the selling of my real estate that got me in contact with the FIRE community. I had a lot if cash to invest and Google was my friend…

    1. I have to admit that I think the ROI of the last 3 years could have been a couple percent higher if we would have only invested in the stock market. But considering we are at all time high value at the moment, there will be a correction at some point. It is at that time that, hopefully, our diversified portfolio will help us out. We hope that our cash-flow will allow us to keep buying through a dip, increase the stock market portion of the asset allocation and ride the next wave up. Sounds good in theory, but I’m curious to see how it will all play out 🙂

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