2020 In Review

2020 has been one roller coaster of a year. I hope that you and your loved ones were able to stay safe and healthy. Nothing is more important than health; certainly not money.

With that said, this is a personal finance and investing blog. Let’s take a look at 2020 from an investing perspective and see how things went.

First, a Sankey diagram of our household finances for 2020. All branches of the diagram are normalized to 100% of our gross income in 2020.

As you can see, our take-home income for the year was 64.5% of our gross income after taxes and deductions. Our expenses were rather high this year at almost 43% of our take-home income, or 27.5% of our gross income. This was in large part from a major purchase this year and insufficient withholding for taxes in 2019. Going forward, I would estimate that our expenses should only make up about 20% of our take-home income because we are quite frugal. We also increased our withholding in 2020 to avoid owing a lot of taxes in 2021.

With regard to savings and investments, you’ll see that our investments grew by 79.3% of our gross income for the year. Therefore, despite our expenses, we accumulated more savings than we took home for income this year. Also, our investment returns for the year almost exceeded our expenses. This is the power of investing!

Turning to the topic of investments, let’s see how things went in the markets in 2020. Note that I am a passive, index investor as described in my book (apart from a short stint of day-trading that was relatively unfruitful).

S&P 500 in 2020

Source: Macrotrends.net

Overall, the S&P 500 closed on December 31st at 3756.07, up 15.76% from it’s January 2 opening at 3244.67 and up 16.26% from the previous December 31, 2019 close at 3230.78. Keep in mind that the change in index price alone does not fully capture the returns of the index, as many S&P 500 companies do pay dividends. Therefore, the total return of the S&P 500 in 2020, with dividends reinvested, is 18.40%. However, the total US stock market significantly outperformed the S&P 500, ending up almost +21% YTD with dividend reinvestment.

Also, due to the market crash in March and a rather volatile sequence of returns this year, an investor with periodic investments (for example, monthly) into an S&P 500 index or total market index fund likely had money-weighted rate of return (MWRR) greater than 18% or 20%, respectively. For more reading on why this occurs, check out my article on sequence of returns and why it matters. Basically, while an investment in the S&P 500 from January 1st grew 18.40% by year’s end, any investments made during March to August grew by far more.

My Portfolio & Asset Allocation

From my Fidelity app

(my entire portfolio is not with Fidelity, but my overall asset allocation within Fidelity is pretty accurate)

As you can see, my allocation is approximately 80/20 stocks/bonds, and of my stocks my US/international split is about 85/15. I still believe that bonds are an important part of a balanced portfolio. However, with bond yields at historic lows, bonds are not generating much fixed income. This situation is unlikely to change for some time. At my age, bonds are used less for fixed income and more for diversification and buffer against market volatility.

Next, my actual holdings and how each performed. Most of my investments are in total stock market index funds, S&P 500 index funds, international index funds, and bond index funds. I do have a few non-index fund investments (TSLA and O) but these represent a negligible percentage of my portfolio. You’ll see that I own multiple funds that serve essentially the same purpose (i.e., VTSAX, FSKAX, FZROX). There’s no real reason for this except that I invest with both Vanguard and Fidelity, because Vanguard was the first brokerage account I ever opened, and Fidelity manages my employer 401(k) plan. Later on, I wanted to try out Fidelity’s ZERO funds. And although I prefer total stock market funds, I still own some S&P 500 funds from when I first started investing. Also, I should note that a total stock market fund is not offered in my 401(k) plan, so I “approximated” one using FXAIX and FSMAX. The bottom line is that you don’t need to own a dozen or more funds like I do. A 3-fund portfolio (total US stock market index, total international stock market index, and a bond index) is sufficient for most people. Fund returns are as of 12/31/20:

Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX). YTD +20.99%. Recently hit 1 trillion dollars in assets under management, a truly remarkable milestone. The largest and possibly greatest index fund ever created. May John Bogle rest in peace, because his creations have allowed countless ordinary Americans to become millionaires without tricks or gimmicks.

Vanguard 500 Index Fund Admiral Shares (VFIAX). YTD +18.37%. The oldest and most popular S&P 500 index fund in the world. Really the OG of index investing. Still a great fund, but total stock market funds have become more popular recently in the spirit of true passive investing. Mostly a legacy investment from when I first started investing.

Vanguard Total Bond Market index Fund Institutional (VBTIX). YTD +7.74%. A bond index fund. Note that despite historically low bond yields, bond funds have grown some this year because the price of bond funds tend to increase when interest rates decline. So most of this growth represents increase in the fund’s NAV rather than the dividend yield.

Fidelity Total Market Index Fund (FSKAX). YTD +20.78%. Fidelity’s version of VTSAX with no minimum investment and even lower expense ratio (.015 vs .04). However, seems to have lagged behind VTSAX slightly this year.

Fidelity ZERO Total Market Index Fund (FZROX). YTD +20.50%. Keep in mind that while VTSAX, FSKAX and FZROX are all total stock market index funds, they do not track the same benchmark. At least in 2020, the lack of expense ratio isn’t nearly enough to make up for a disappointing 49 basis points of performance gap compared to VTSAX.

Fidelity U.S. Bond Index Fund (FXNAX). YTD +7.79%. Fidelity’s U.S. bond fund. See above. Outperformed VBTIX by 5 basis points this year.

Fidelity Total International Index Fund (FTIHX). YTD +11.07%. Part of my foreign diversification.

Fidelity Emerging Markets Index Fund (FPADX). YTD +17.82%. Also part of my foreign diversification. However, emerging markets are more volatile with greater potential for both returns and risk compared to mature international markets.

Fidelity ZERO international Index Fund (FZILX). YTD +11.05%. One of Fidelity’s ZERO funds, appears to be very similar to FTIHX in performance, although has fewer holdings.

Fidelity 500 Index Fund (FXAIX). YTD +18.40%. Fidelity’s S&P 500 index fund. Again, no minimum investment and lower expense ratio. I hold this because my employer’s 401(k) offering through Fidelity does not have FSKAX available.

Fidelity Extended Market Index fund (FSMAX). YTD +32.16%. A small- to mid-cap U.S. stock market fund. I hold this because together with FXAIX, I can approximate a total stock market index fund in my 401(k) account. You might note that the rest of the U.S. market greatly outperformed the S&P 500 this year, and this also accounts for the total market outperforming the S&P 500. At least some of this is attributable to Telsa (TSLA), which grew by over 700% this year, now with a behemoth of market cap. Tesla is one of the top holdings in FSMAX, but as of December 2020 Tesla is now part of the S&P 500 instead.

Overall, investments were up across the board in 2020, in many cases defying logic and reason. Remember that historically, the S&P 500 only returns around 9 to 10% CAGR. The bull market that started in 2009 continues onward. With a surge in COVID during the holidays, contentious stimulus talks, a new administration, and concerns for overvaluation in the market, will there be another market correction in 2021? Or will widespread vaccination and unprecedented quantitative easing lead to another year of all-time highs? Who knows. As for me, I plan to keep doing what I’ve always done: be frugal, minimize expenses, continue automatic investments, trust the process, and stay the course. Stay safe and best wishes for the new year! And as always, happy investing!