End of 2011 - Period 2010-2011 ($ 165,000, +$45,000)

Financial goal:

- In the overall  the only changes were the additional savings and some fluctuation due to the fact that the assets are held in four different currencies.

- At the current inflation rate and the administration fees  combined around 5%,  it is very much uncertain how to get to my point B. My original goal was to have $ 2 million.

Inflation adjustments -two observations:

- Financial independence goal review. I should either to adjust for  inflation my nest egg or the financial independence goal, i.e. it should go to $ 2.1 million.

- Beyond financial independence. The invested money will earn at equal or just above the inflation rate,  the returns (annual income) will start depreciate immediately.

When is 10% annual income savings rate enough?

I ran several scenario - annual contributions as percentage of annual salary, inflation, interest returns on the investments, Company (employer ) contributions:

Due to inflation expectations and the risks, once retired I would keep my money in the inflation protected vehicles - precious metals, government bonds.

Assets investment in different currencies - USD, EUR, GBP, RUB

Why to invest in various currencies?  

World major Currencies.  There is several major currencies in the world - US dollar, Euro, Pound Sterling, Japanese yen and Swiss Frank. 

The latter is just a combination of the four currencies (Official Swiss Franc 2011 composition is 60.2% USD, 26.7% Euro, 4.2% Pound Sterling, 3.9% Japanese yen). So there is no real point to buy  Swiss Franks - they are known to change the currency composition quite dramatically.

Japanese yen - on December 29, 1989, Tokyo's Nikkei stock average reached its all-time peak of 38,915.87. Twenty years later, the Nikkei has never again reached that level — and, in 2009, reached a new low of 7,054.98.

Renminbi (CNY ), although through most of its history, the value of the  renminbi was pegged to the U.S. dollar. Recently CNY has been strengthened to US Dollar - year to year from 6.6 to 6.3 - about 5% difference.

Fear of losing value.

November 2011 update - ($165,000, + $9,000 or +5,3%)

I achieved  my annual savings goal - $ 40, 000 accumulated! At the moment I keep them in EUR and following my diversification and asset reallocation idea I will invest them at the beginning on the next year.

No striking good results, but I am on target.

Inflation influence

Inflation. There is so many articles written about inflation, explaining benefits and downsides of it. 

What does it mean for an investor?  Part of the budgeting is  not only see how are you doing now and where the money goes to, but to have vision how to get from A to B.

Using my portfolio I will demonstrate clearly how does it mean an additional 10 (ten) years of work. The prospects and planning without taking inflation into account are rosy and glamour:

 

This means, that should I keep my contributions at $40 K a year, I will reach my target of financial Independence ($60 K a year from my investments at 3% interest) between 2033 and 2042, depending on the stock market performance.

My emergency fund and precious metals are not contributing towards growth - I use interest rate for the savings account at the inflation rate. It does not exactly right, but it simplifies.

This is a bit disappointing but let's have a look at the inflation adjusted scenario:

Diversification 2012

My current and future asset allocation is represented in the following table:

It seems that I am overexposed to cash. I know that the stock markets all over the world are mostly disappointing and not encouraging at all.Quite frankly the only incentive to invest in stock market is that interest on savings accounts (deposits) at the banks very low. The most I could get out of mine is 2,5% gross annually. This does not even cover inflation.

This is what I want to do at the begging of next year - to re-balance my portfolio in terms of cash and various currencies.   Portfolio diversification:

October 2011 update ($ 156,000 , +$ 9,000 (+7.6%))

My goal for this year was to accumulate $40 K USD a year and invest them.  

 I will be concentrating on stocks (mutual funds).  Yes, ideally I should do in small increments, every month. So I will do a one off lump sum transfer next year and then in equal  portions afterwards.

Observations: