For the past year, I’ve been conducting a small set of experiments on myself and my finances. It’s part of a concept I’ve been developing that I’ve been calling “Perpetual Value,” where the main idea is that I can create a positive-reinforcing cycle that allows me to make small liquidations to benefit me in the present, but also positions me to invest more for the long-term. You can read it more extensively here if you’re curious: Perpetual Value Theory: Demonstration
If you’ve been paying attention, you may have noticed I posted a results post back in April, but that was a slightly different experiment. I’m conducting two experiments simultaneously that apply the theory in two slightly different ways. The first one is to see if I can maximize my long-term capacity to contribute towards high impact nonprofits by investing some of the money I would have presently donated. I started that one first in March of 2018, and you can read the results of the first year here: Microfoundations in Action.
This experiment is slightly different in that it applies to my personal budget rather donations, and it applies an annual contribution rate increase. I started off this year with something conservative, in that I’ve been putting 5% of my take home pay into this investment strategy. Every year moving forward, I’m going to increase the rate by 2%, and thus, I’m now going to be contributing 7% of my take home pay for this year. At the end of each cycle, I’m going to cash out 5% of the total balance of my fund and that gets added back to my budget. The idea is that these first few years are going to be quite negligible, but over time it should pick up momentum to the point that the vast majority of the money I’m living on in a given year is going to come from these investments that have grown in value, rather than just simply living off of paychecks.
Enough theory, let’s look at some results!
First Year Results
Over the past 12 months, I have contributed a total of $2,009.73 to the fund, and had a balance of $2,129.52. This meant I could liquidate a maximum of $106.48 from the account (5% of the total balance). I decided to keep things a little more simple and cashed out $105. I’m behind this year from the projected value, as I project an average investment growth to be 10% annually, and for this year, I achieved a 6% growth rate. Which I should clarify, my 10% growth rate is projected average return, and assumes year-by-year fluctuations, so it currently is not problematic that this first year is below that number. Over time, I will be tracking what the average return is over the years and see if that does reflect my projection.
Where did the money come from?
When we look at the specifics of the assets I own, and what exactly was liquidated, there is an easy answer and a more complicated answer. The easy answer is to observe the value of my portfolio, and liquidate 5%. You then can calculate the distribution of how much of what I liquidated came from my own pocket and how much came from growth.
To demonstrate, what my portfolio consists of is actually a compilation of 4 different portfolios that are comprised by what are called Robo Advisors. They are low-cost services that take different strategies of diversifying investments. You can read more in depth of how each of these services work here: Robo Advisors.
- Betterment: $388.23
- Swell: $412.62
- Acorns: $569.84
- Betterment IRA: $758.83
I chose to liquidate from the non-IRA Betterment account, because it had the lowest growth rate over the past year (I’ll get into why I have two Betterment accounts shortly). I had initially put in $378, which meant that it had grown by only 2.7% during that time.
Utilizing the power of Dollar-Cost-Averaging
The rationale behind the lowest performer is due to the mindset of dollar-cost-averaging, along with the assumption that the long-term projections for each of these portfolios should be relatively similar. If they all should average around 10% growth over time, then by liquidating the one that grew the least means that I’m on average selling off assets that were bought at relatively higher prices, and thus will limit my growth potential down the road. When I start buying up more assets, I’ll buying more shares in my Betterment portfolio since it’ll be less disruptive to my average cost compared to the other portfolios that I already bought at lower prices. If I buy more in those other portfolios now, it’s going to reduce my average growth since these new shares will have been bought at a relatively higher price.
If we were to look at all my investments in this Perpetual Value experiment, it says my investments grew by 6% in this first year. If I were to evenly liquidate across all the accounts, it would have meant that $98.74 of the $105 would have come from my own pocket that was just returned to me, and $6.26 came from investment growth. But since I pulled from Betterment that grew at 2.7% that means in general, $2.84 is from growth.
That is technically the oversimplified answer. The more accurate answer required a bit more digging into the reports. What I learned was that Betterment has the same mindset for optimizing dollar-cost-averaging, and they don’t just liquidate assets at an equal rate, but do what is called “Tax Loss Harvesting.” This means that they look at every transaction I made in the account sells as many of the portions that were bought at a higher price. It’s also to optimize tax efficiency as well, because if you can sell an asset that was bought at a higher price than what you sold it for, you get the opposite of a Capital Gains tax, but get to counter balance those gains taxes with how much money you lost.
With that, I technically lost money during this liquidation, since I paid $106.96 for the assets I sold for $105. But again, this will set me up better for the long run as I got to keep more of the assets that I bought at a lower price.
Small steps today– leaps and bounds tomorrow.
Great, so I saved less than $3; what’s so great about that? It’s significant because it sets the foundation for exponential progression in preserving capital. Today, I got $105 put into my bank account, of which $102.16 was previously my own money. Another way of looking at it is that 97.3% came from my income that I just postponed putting in my bank account, but every year on, that percentage is going to keep going down. Every year, the amount I’m going to get back is going to increase, and not only that, but percentage of where that money is coming from will progressively be coming from growth rather than my actual wages.
How to still use an IRA without penalties.
Now to go back to the two Betterment accounts, the reason why I have two different ones is that one is a taxable account, and the other is a tax-optimized Roth IRA account. One of the quick criticisms of this theory that I’ve been working on is that it requires you to invest in accounts that don’t get tax incentives. But since the liquidation requirement is simply 5% of the total balance, this means that only the 5% that is liquidated needs to come from a taxable source, the rest theoretically can all be in tax sheltered accounts. So my investment distribution is 60/40 in that 60% of my investments go into taxable accounts, and 40% into IRAs. I put the majority into taxable accounts so that as my liquidations increase in size, there will always be a balance in these taxable accounts to pull from without having to liquidate any of my IRA assets that would get hit with high tax penalties.
What $105 buys you.
Now the most important part of this whole thing: What did I do with this extra $105 in my bank account?
I was trying to figure out what would be something fun to mark this first year of testing out this concept, and that’s when I stumbled upon a Kickstarter campaign for these shoes that are made out of recycled plastic and used coffee grounds! Yup, I’m buying a pair of coffee shoes. These shoes use coffee and plastic to create the fabric for the shoes, which the coffee actually works well as an odor retardant, as well as to help make the shoe waterproof while still being light and flexible. Rens Original.
I only paid $85 of the $105, so technically, I spent the remaining $20 to subsidize an annual subscription to the meditation app called Headspace, that I actually got a 40% discount on as well. So in total, I got a pair of shoes plus 4 months of Headspace Plus.
I know that was pretty dense stuff here, but I wanted to document the progress of this concept so it doesn’t just be something I thought up and didn’t follow through with. This may not be that useful presently as I write this, but this could be useful insights looking back at if this ends up being a valid form of investment strategy. That way we don’t just get sold the end story, but rather we’ll have access to see how a given strategy played out over time.