Jack Bogle Full Interviews with CNN and Business Insider

boglecnn2If you haven’t gotten a dose of Jack Bogle wisdom recently, check out this full Business Insider interview transcript and this 16-minute CNN video interview. There is a lot of ground covered between them. Here are my selected notes:

S&P 500 dividend income reliability. Bogle seems to support the idea of relying on S&P 500 stock dividends to supplement Social Security:

The basic idea of retirement income is, to me, to get a check, two checks every month, one from your fixed income and one from equity account. And you want them to grow over time. Social Security is a cost-of-living hedge, and in the equity account dividends grow over time.

The record of the S&P 500 dividends is almost a complete up trend with only two big declines going back into the ’20s. One would be in 1930s — ’33 or ’34 — and the other is when the banks stocks eliminated their dividends, back in 2009. Those are really the only significant declines in the dividends.

Investors make a big mistake by thinking too much of the value of the account and not enough about the monthly income they want to get. We could have a significant decline in the market with dividends unchanged.

Here’s a chart of the S&P 500 dividend history via Multpl.com:

sp500divmult

Helping investors improve their behavior. For example, 401(k) plans were not designed to be your primary retirement vehicle, and thus have a lot of flexibility built into them. However, this flexibility means a lot of people take money out of their 401(k) when they switch jobs or for loans that never get paid back. A similar thing when people chase performance:

With actively managed funds, people have big behavior problems. With funds that have done well, they put their money in, and when it has done bad, they want to take it out. The index fund always gives you the market return. It may be bad sometimes — it will be bad sometimes — but there’s just no evidence that active managers can win [long term].

Why you don’t see performance-based incentive fees for fund managers. I didn’t know about the SEC symmetrical rule:

The active managers have their work cut out for them. One thing they could do is put in an incentive fee. Get 10 basis points or five [0.10% or 0.05%], unless they beat the market. We’re paying people to beat the market when they aren’t doing it, and when you think about it, that doesn’t make sense.

They can put their expense ratio at 5 [basis points, 0.05%] and get another 1% if they beat the market by X. But they have to, under the SEC rules, be symmetrical. So if they lost to the market by 1%, they would be out of pocket. Managers, at least in this context, are not stupid. They know perfectly well they are going to lose that bet.

What happens if index funds continue to grow in popularity:

Right now I believe indexing to be about 22% to 25% of the marketplace. It’s not disturbing anything. Could it go to 50% and not disturb anything? I believe it could. All you’re doing is immobilizing X percentage of the shares in the market. The remaining 50% can trade away to their hearts’ content.

Could it handle 90%? I think it could, but we’re so far away from that, I don’t spend a lot of time thinking about it. The reality here, however, is that even if the market would reach a level of inefficiency, which everyone says then the active managers can win because then they can find underpriced stocks. [Laughs] It’s such a ridiculous argument it hardly bears refuting. The fact is, if the market is more inefficient, it would be easier for half of the managers to win and by definition easier for half of the managers to lose. Because every purchase is a sale and every sale is a purchase.

This is not a problem that I worry about very much. Markets stay relatively efficient because there continues to be big rewards for those that can figure out any small inefficiency, even for a short period of time. Those rewards aren’t going aways, so markets will stay efficient, and low costs will continue to matter.

Research Affiliates Custom Portfolio Expected Returns Tool

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Investment advisory firm Research Affiliates has updated their interactive Asset Allocation tool, which now provides estimates of expected returns for more than 130 asset classes and model portfolios. There are two expected return models, “valuation-dependent” and “yield-plus-growth”. In addition, you can input your own custom asset allocation.

My initial reaction is that while the tool got new bells and whistles, it also became more confusing to navigate and harder on the eyes. Here’s a screenshot of their scatter plot showing the expected risk and return for several asset classes under their valuation-dependent model.

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I created a custom portfolio “CustomMMB” using my current portfolio asset allocation and it is charted below on their risk/return map. In a separate window (not shown) you can see how each individual asset class contributes to the total expected return.

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As you can see, my portfolio did not offer the maximum expected return for its risk level. The RA efficient model portfolio that did includes an exotic mix of asset classes, including Emerging Markets bonds (non-local currency), Bank Loans, US Private Equity, European Private Equity, and direct investments into US Commercial Real Estate (not through REITs). Unfortunately, I’m not even sure how to access many of those asset classes.

I appreciate that they freely share their research methodology and results, specifically covering the valuation perspective. US Equities have historically high valuations, but interest rates are also at historically lows. The next 10 years should be interesting…

Another portfolio analysis tool that lets you input your specific asset allocation is PortfolioCharts.com Safe Withdrawal Rate calculator. This Research Affiliates tool says my expected 10-year real return is only 2.4% (equates to a nominal expected return of 4.6%). The PortfolioCharts.com tool says the same personal asset allocation has a historical perpetual withdrawal rate of over 4% over a 40-year timeframe.

PortfolioCharts.com Safe Withdrawal Rate Tool (Updated)

eggosI just noticed that PortfolioCharts.com has updated their Withdrawal Rate Calculator. It has improved visualizations and as a personal finance geek I even found it fun. You can enter your specific asset allocation slices down to 1% and see customized results.

The Withdrawal Rates calculator shows the safe withdrawal rate for any asset allocation over a variety of retirement durations based on real-life sequence of returns. Those looking to retire early or leave money to heirs can also see the perpetual withdrawal rate that protected the original inflation-adjusted principal.

You can read about the specifics behind these improvements here. You should also read all the assumptions here. For example:

The withdrawal rate is the percentage of the original portfolio value used for one year of retirement expenses. Each year, expenses are adjusted for inflation (not for portfolio size) to maintain constant purchasing power.

Briefly, a “safe” withdrawal rate (orange) allowed a portfolio to go as low as $1 but never hit zero at the end of the timeframe. In other words, the ride could have still gotten quite hairy for a while. A “perpetual” withdrawal rate (green) never ended up less than the initial principal, even adjusted for inflation. The author Tyler recommends the perpetual WR for early retirees or for people who desire to leave an inheritance for heirs.

Here is the specific chart for my current portfolio asset allocation:

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I would be quite happy with being able to confidently withdraw over 4% (+ inflation adjustments) of my portfolio for the next 40 years. The short-term drawdown paths can still be scary though. The usual caveats with using backtested data also apply.

Playing around, I noticed that the simplest way to change things up was by adding a healthy chunk (~20%) of gold instead of stocks. This seemed to significantly improve the perpetual withdrawal rates in the short-term (0 to 15 years). It’s too bad I still don’t have a firm fundamental understanding of gold. If you can’t maintain faith in it when things are scary, then you shouldn’t own it in your portfolio.

A Semi-Retirement Update, Father’s Day 2017

okaydadI’ve been told that my blog isn’t personal enough. Father’s Day seemed like an appropriate time to share how our efforts towards financial freedom have altered our day-to-day lives.

Guiding principle. When I first started chasing the idea of “early retirement”, it was mostly about escaping the chains of a 9-5 corporate job for the next 40 years. These days, I am driven primarily to avoid the most common deathbed regret:

I wish I’d had the courage to live a life true to myself, not the life others expected of me.

This is beautifully phrased, as it will mean something different to everyone. You have to push away the expectations and noise coming from society, your co-workers, even your friends and family. Some people call it mindfulness or meditation, I just call it that quiet voice inside you. Another good take on this from Anthony Bourdain:

It’s a quality-of-life issue with me. Am I having fun? Am I surrounded by people I like? Are we proud of what we’re doing? Do we have anything to regret when we look in the mirror tomorrow? Those things are huge to me.

Choosing semi-retirement over daycare. Up until 2012, my wife and I were dual, full-time earners with a healthy savings rate used to steadily accumulate assets. We spent our free time eating at new restaurants, traveling, hiking, skiing, and playing with our two dogs.

When our first child arrived, we weren’t quite ready to live off our investments but we still wanted to spend a lot of time raising our kids. We decided that we would both work roughly 20 hours a week (“half-time”) and share the stay-at-home parenting duties between us. Technically, we both semi-retired at age 33. At the same time, it was nothing to brag about because many families have a single income parent and a stay-at-home parent. We just happen to split it up. Today, we continue as 50/50 parents and somehow accumulated three kids: a 6-month old, a 2-year-old, and a 4-year-old.

For a many couples, it is simply financially efficient to keep working full-time and pay for daycare. For others, both individuals want to maintain their career trajectory. Both are a valid options and we don’t pass judgment. For us, giving up essentially one full income was also a big decision. We were concerned that we would be giving up current income now and likely stall our future career growth.

Ever since growing up as kid with a dad working long hours, I made a promise to be different when I had children of my own. I never want to utter the words “I wish I spent more time with my kids”. As a direct result of our aggressive savings rate in our 20s and early 30s, we felt comfortable taking an unconventional path. We are thankful every day that we don’t have to drop off our baby at 7am, work all day, come home, and only see them for an hour before bedtime.

Snapshot of our daily lives. We are not the most frugal family, but again we try to live aligned to our values. Our home is not overly big – two girls already share a bedroom and eventually all three will share one bathroom. We cook dinner at home more often than not. We rarely eat out. Our frequent flyer points are mostly idle nowadays, but we did take our 1-year-old and 3-year-old to visit the UK and France last summer. One of the highlights was feeding free-ranging reindeer in Scotland.

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Is semi-retirement all sunshine and rainbows? Yes, we’ve never had to deal with daycare or hire a nanny. Either my wife or I have been there for every single bathtime and bedtime. One of us has been present for all the first laughs, first words, first crawls, and first steps. But we also feel physically exhausted at the end of every day. I’m definitely more worn out now than our time as DINKs (dual income, no kids).

You really start to appreciate working with adults again after wrestling with three little tyrants children under the age of 5. Yesterday, my oldest child decided to stick her finger down the youngest’s throat. Guess who got to clean up projectile vomit off a shockingly-high blast radius? I’m pretty sure the comic Fowl Language installed a hidden camera inside my house (check out the book as well):

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There is a huge difference between doing something difficult and aligned with your personal values, and doing something difficult and not aligned with your personal values. Sure, we could spend our free time doing a million other easier things. But perhaps happiness is being able to choose your hard thing and then spend your time working on it. For now, parenting young children is my hard thing. I’m not terribly good at it, but I try… This is a precious time and I want to savor it before it ends.

You may think I’m crazy. That’s okay. Remember, the point is to live a life true to yourself and ignore what other people think. Now excuse me while I clean the vomit stain off my shorts.

Early Retirement Portfolio Income, 2017 Q1 Update

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While I understand the arguments for a “total return” approach, I also appreciate the behavioral reasons why living off income while keeping your ownership stake is desirable. The analogy I fall back on is owning an investment property that produces rental income. If you are reliably getting rent checks that increase with inflation, you can sit back calmly and let the market value fluctuate. The problem is that buy only things with the highest yields only increases the chance that those yields will drop. Therefore, I am trying to reach some sort of balance between the two approaches.

A quick and dirty way to see how much income (dividends and interest) your portfolio is generating is to take the “TTM Yield” or “12 Mo. Yield” from Morningstar (linked below). Trailing 12 Month Yield is the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. SEC yield is another alternative, but I like TTM because it is based on actual distributions (SEC vs. TTM yield article).

Below is a close approximation of my most recent portfolio update. I have changed my asset allocation slightly to 65% stocks and 35% bonds because I believe that will be my permanent allocation upon early retirement.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 4/19/17) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
25% 1.88% 0.47%
US Small Value
Vanguard Small-Cap Value ETF (VBR)
5% 1.83% 0.09%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
25% 2.75% 0.69%
Emerging Markets
Vanguard Emerging Markets ETF (VWO)
5% 2.31% 0.12%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 4.42% 0.27%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX)
17% 2.87% 0.49%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
17% 2.20% 0.37%
Totals 100% 2.50%

 

The total weighted 12-month yield on this portfolio has historically varied between 2% and 2.5%. This time, it was on the higher end of 2.50% mostly because inflation has picked up and thus the TIPS fund started to yield more. If I had a $1,000,000 portfolio balance today, a 2.5% yield means that it would have generated $25,000 in interest and dividends over the last 12 months. (The muni bond interest in my portfolio is exempt from federal income taxes.)

For comparison, the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a low-cost, passive 60/40 fund that has a trailing 12-month yield of 2.12%. The Vanguard Wellington Fund is a low-cost active 65/35 fund that has a trailing 12-month yield of 2.55%. Numbers taken 4/19/2017.

These income yield numbers are significantly lower than the 4% withdrawal rate often quoted for 65-year-old retirees with 30-year spending horizons, and is even lower than the 3% withdrawal rate that I usually use as a rough benchmark. If I use 3%, my theoretical income would cover my projected annual expenses. If I used the actual numbers above, I am close but still short. Most people won’t want to use this number because it is a very small number. However, I like it for the following reasons:

  • Tracking dividends and interest income is less stressful than tracking market price movements.
  • Dividend yields adjust roughly for stock market valuations (if prices are high, dividend yield is probably down).
  • Bond yields adjust roughly for interest rates (low interest rates now, probably low bond returns in future).
  • With 2/3rds of my portfolio in stocks, I have confidence that over time the income will increase with inflation.

I will admit that planning on spending only 2% is most likely too conservative. Consider that if all your portfolio did was keep up with inflation each year (0% real returns), you could still spend 2% a year for 50 years. But as an aspiring early retiree with hopefully 40+ years ahead of me, I like having safe numbers given the volatility of stock returns and the associated sequence of returns risk.

Early Retirement Portfolio Asset Allocation, 2017 First Quarter Update

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Here is an update on my investment portfolio holdings after the first quarter 2017. This includes tax-deferred accounts like 401ks, IRAs, and taxable brokerage holdings, but excludes things like our primary home, cash reserves, and a few other side investments. The purpose of this portfolio is to create enough income to cover our regular household expenses.

Target Asset Allocation

The overall goal is to include asset classes that will provide long-term returns above inflation, distribute income via dividends and interest, and finally offer some historical tendencies to balance each other out. I don’t hold commodities futures or gold as they don’t provide any income and I don’t believe they’ll outpace inflation significantly. I also believe that it is more important to have asset classes that you are confident you’ll hold through the bad times, as opposed to whatever has been doing well recently. The things that looked promising in 2000 were not the things that looked promising in 2010, and so on.

Stocks Breakdown

  • 38% US Total Market
  • 7% US Small-Cap Value
  • 38% International Total Market
  • 7% Emerging Markets
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 50% High-quality, intermediate-Term Bonds
  • 50% US Treasury Inflation-Protected Bonds

Our current target ratio is 70% stocks and 30% bonds within our investment strategy of buy, hold, and rebalance. With a self-managed, simple portfolio of low-cost funds, we minimize management fees, commissions, and income taxes.

Actual Asset Allocation and Holdings

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Stock Holdings
Vanguard Total Stock Market Fund (VTI, VTSMX, VTSAX)
Vanguard Total International Stock Market Fund (VXUS, VGTSX, VTIAX)
WisdomTree SmallCap Dividend ETF (DES)
Vanguard Small Value ETF (VBR)
Vanguard Emerging Markets ETF (VWO)
Vanguard REIT Index Fund (VNQ, VGSIX, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt Fund (VWITX, VWIUX)
Vanguard High-Yield Tax-Exempt Fund (VWAHX, VWALX)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

Commentary

In regards to my target asset allocation, I tweaked the stock percentages slightly so that I will end up with at least 5% overall in any given asset class when I reach my final ratio of roughly 65% stocks and 35% bonds in the next few years. Despite the recent outperformance of US stocks vs. the rest of the word, I am still keeping my 50/50 split between US and International holdings.

In regards to specific holdings, I did some tax-loss harvesting between my Emerging Markets and US Small Cap ETF holdings. I am also shifting towards dropping my WisdomTree ETFs and going to the more “vanilla” Vanguard versions: Vanguard Small Value ETF (VBR) and Vanguard Emerging Markets ETF (VWO). This should lower costs and increase simplicity. Otherwise, there has been little activity besides continued dollar-cost-averaging with monthly income.

I’m still somewhat underweight in TIPS and REITs mostly due to limited tax-deferred space as I really don’t want to hold them in a taxable account. My taxable muni bonds are split roughly evenly between the three Vanguard muni funds with an average duration of 4.5 years. I may start switching back to US Treasuries if my income tax rate changes signficantly.

A rough benchmark for my portfolio is 50% Vanguard LifeStrategy Growth Fund (VASGX) and 50% Vanguard LifeStrategy Moderate Growth Fund (VSMGX), one is 60/40 and one is 80/20 so it also works out to 70% stocks and 30% bonds. That benchmark would have a total return of +7.73% for 2016 and +4.96% YTD (as of 4/17/17).

So this is what I own, and in a separate post I’ll share about how I track if I have enough to retire via dividend and interest income.

S&P 500 Histogram: Annual Returns Are Negative 1/3rd Of The Time

prepyourAs we stand today in early 2017, the performance of the US stock market since 2009 has been pretty impressive with only a few minor hiccups. I am not calling a market drop, but the best time to prepare is before an emergency or crisis occurs. Humans have a well-documented loss-aversion bias. We react to losing money much more severely than positive returns. Therefore, it is wise to remember that historically, the annual return of the S&P 500 index is negative approximately 1 out of every 3 years.

Here’s a histogram that organizes into “buckets” the historical annual returns of the S&P 500 Index* from 1825-2014. We see that negative returns occurred 29% of the time. Legend: DotCom bubble (grey), Great Depression (yellow), Housing bubble (blue). Source: Margin of Safety.

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(* For periods before the S&P 500 existed, the S&P Market Index is used. Before that, I have no idea!)

Here’s a similar chart that shows the annual percentage change of the S&P 500 index from 1927-2016. I counted that 28 out of 89 periods were negative (31.4%). Source: Macrotrends.

sp500_returndist

We should expect and accept that negative returns will come 1/3rd of the time. The drops are part of the package. Just like having a hurricane, tornado, or earthquake preparedness plan, you should have a market drop plan. Do you have a cash cushion so you don’t feel the need to sell temporarily-depressed shares? Do you have a high-quality bond or cash allocation that you can use to rebalance and buy even more stocks when they reach lower valuations?

Vanguard ETF vs. Mutual Fund Admiral Shares

Building My Portfolio BlocksAllan Roth has a new ETF.com article called Why ETFs Won’t Replace Mutual Funds. Inside, he offers the following reasons why if you are buying Vanguard funds, he typically recommends the Admiral Shares mutual fund over the ETF.

Vanguard Mutual fund advantages

  1. Can buy fractional shares
  2. No premium or discount—all transactions are at net asset value
  3. No spreads between bid and ask
  4. Less cash drag, as dividends are reinvested more quickly
  5. Can do a tax-free exchange from mutual funds to ETFs, but not the reverse
  6. Can do automated dollar cost averaging

In the interest of fairness, I will offer up the following:

Vanguard ETF advantages

  • Lower minimum investment amounts. Usually one share is only about $100, and some brokers even offer fractional shares.
  • No purchase or redemption fees. No short-term trading fee. Vanguard has these on a few mutual funds, for example the Vanguard Global ex-US Real Estate Fund Admiral Share charges a 0.25% fee on both purchases and redemptions.
  • You can easily hold, buy, trade Vanguard ETFs at any brokerage firm. The cost to trade will be as with any stock. (Vanguard mutual funds and ETFs trade free with a Vanguard brokerage account.) You might prefer the customer service of another firm, or you might prefer the convenience of having everything together if you hold non-Vanguard investments. You might already have free trades anyway, for example with the Robinhood app.

Expense ratio is a tie with Admiral Shares. I don’t know if it an official “written in stone” polcy, but Vanguard has a long history of keeping the expense ratios of ETFs and Admiral Shares mutual funds the exact same (mostly $10,000 minimum investment). The Investor Class usually has a slightly higher expense ratio (mostly $3,000 minimum).

Tax-efficiency is a tie. I will add in this reminder that in the case of Vanguard (and only Vanguard as far as I know), the ETF and mutual funds share the same underlying investments and thus the same level of tax-efficiency, utilizing the benefits of both where possible. From the Vanguard ETF FAQ:

Are there any tax advantages to owning a Vanguard ETF®?
Because Vanguard ETFs are shares of conventional Vanguard index funds, they can take full advantage of the tax-management strategies available to both conventional funds and ETFs.

Conventional index funds can offset taxable gains by selling securities that have declined in value at a loss. In addition, they tend to trade less frequently than actively managed funds, which means less taxable income gets passed on to shareholders. Vanguard ETFs can also use in-kind redemptions to remove stocks that have greatly increased in value (which trigger large capital gains) from their holdings.

My money. I hold most of my portfolio in Vanguard mutual funds (Admiral Shares). One reason is that I am old and have a good amount of capital gains in the mutual funds bought before ETFs gained traction. I also hold some Vanguard ETFs, mostly bought back when ETFs were cheaper because I didn’t have enough money to qualify for Admiral shares. (Prior to 2010, the minimum for Admiral funds was $100,000! These days the minimums are mostly a more reasonable $10,000.) These days, I don’t have a strong preference, but I slightly prefer the simplicity of buying mutual funds.

Vanguard ETF tool. If you really want to pick at the details, Vanguard offers their own ETF vs. mutual fund cost comparison calculator. It’s pretty good and even includes things like historical bid-ask spreads.

Bottom line. There are certainly differences between ETFs and mutual funds. It is worth comparing the advantages and disadvantages before making your decision. However, in terms of the big picture, we are talking about relatively small differences. Being low-cost, transparent, and diversified are more important features. Given that both have their relative advantages, both ETFs and mutual funds will be around for a long time.

Personal Capital Review 2017: Automatically Track Net Worth and Portfolio Asset Allocation

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Personal Capital is free financial website and app that links all of your accounts to track your spending, investments, and net worth. You provide your login information, and they pull in the information for you automatically so you don’t have to type in your passwords every day on 7 different websites (similar to Mint). Investment-specific features include tracking portfolio performance, benchmarking, and asset allocation analysis.

Net worth. You can add your home value, mortgage, checking/savings accounts, CDs, credit cards, brokerage, 401(k), and even stock options to build your customized Net Worth chart. You can also add investments manually if you’d prefer. I have a habit of accumulating bank and credit union accounts, so I find account aggregation quite helpful.

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Cash flow. The Cash Flow section tracks your income and expenses by pulling in data from your bank accounts and credit cards. This chart compares where you are this month against the same time last month. If you hate budgeting, you may find it easier to view a real-time snapshot of your spending behavior. Their expense categorization tool is not as advanced as Mint.com, as you can’t for example tell them to always classify “Time Warner Cable” as “Utilities” and not “Online Services” or whatever they do by default. The default is usually pretty accurate, but if it isn’t you have to change it manually.

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Portfolio. This is where Personal Capital is better than many competing services, by analyzing my overall asset allocation, holdings, and performance relative to benchmarks. They also analyze your investment fees to see if you can get them reduced. I first signed up for Personal Capital four years ago, and since then my investments have gotten spread out even further. I now have investments at Vanguard, Fidelity, Schwab, TransAmerica (401k), and Merrill Edge. It’s nice to be able to see everything together in one picture.

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For comparison, Mint does not allow manual input of investments and it did not break down my asset allocation correctly based on my linked accounts. In fact, all it shows is a big orange pie chart with “99.9% Not Sure” and “0.00 Other”. Not exactly helpful.

Personal Capital considers the major asset classes to be US stocks, International stocks, US Bonds, International Bonds, and Cash. The “Alternatives” classification includes Real Estate, Gold, Energy, and Commodities.

If you have one bank account, one credit card, and a 401(k), you may not need this type of account aggregation service. Life tends to get messy though, and this helps me maintain a high-level “big picture” view of things.

Security. As with most similar services, Personal Capital claims bank-level, military-grade security like AES 256-bit encryption. The background account data retrieval is run by Envestnet/Yodlee, which partners with other major financial institutions like Bank of America, Vanguard, and Morgan Stanley. Before you can access your account on any new device, you’ll receive an automated phone call, email, or SMS asking to confirm your identity.

How is this free? How does Personal Capital make money? Notice the lack of ads. Personal Capital makes money via a optional paid financial advisory service, and they are using this as a way to introduce themselves. (People who sign up for portfolio trackers have money…) Their management fees are 0.89% annually for the first $1 million, which is rather expensive to my DIY sensibilities. They are a legit, SEC-registered RIA fiduciary and currently manage over $3.6 billion. In my opinion, this status improves their credibility as an entity with access to my sensitive information.

Note that if you give them your phone number, they will call you to offer a free financial consultation. If you answer the phone or e-mail them that you don’t want to be contacted anymore, they will honor that request. However, if you simply ignore the phone calls, they will keep calling. Know that you can keep using the portfolio software for free no matter what happens. Therefore, if you aren’t interested, I would recommend simply being upfront with them. A simple “no thank you” and you’re good.

Bottom line. It’s not what you make, it’s what you keep that counts. The free financial dashboard software by Personal Capital helps you track your net worth, cash flow, and investments. I recommend it for tracking stock and mutual fund investments spread across different accounts. I’d link your accounts on the desktop site, but interact daily through their Android/iPhone/iPad apps for optimal convenience (log in with Touch ID or mobile-only PIN).

New Year’s Checklists: What Is Your Financial Priority List?

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Updated for 2017. You’ve worked hard and you have some money to put away for your future self. What should you do with your money? There is no definitive list, but each person can create their own with common components. You may also want to revisit it again every year.

You can find some examples in this Vanguard blog and see what I had down in this 2006 blog post. Here’s my current list:

  1. Invest in your 401(k) or similar plan up until any match. Company matches typically offer you 50 cents to a dollar for each dollar that you contribute yourself, up to a certain amount. Add in the tax deferral benefits, and it adds up to a great deal. Estimated annual return: 25% to 100%. Even if you are unable to anything else in this list, try to do this one as it can also serve as an “emergency” emergency fund.
  2. Pay down your high-interest debt (credit cards, personal loans, car loans). If you pay down a loan at 12% interest, that’s the same as earning a 12% return on your money and higher than the average historical stock market return. Estimated annual return: 10-20%.
  3. Create an emergency fund with at least 3 months of expenses. It can be difficult, but I’ve tried to describe the high potential value of an emergency fund. For example, a bank overdraft or late payment penalty can be much higher than 10% of the original bill. Estimated return: Varies.
  4. Fund your Traditional or Roth IRA up to the maximum allowed. You can invest in stocks or bonds at any brokerage firm, and the tax advantages let you keep more of your money. Estimated annual return: 8%. Even if you think you are ineligible due to income limits, you can contribute to a non-deductible Traditional IRA and then roll it over to a Roth (aka Backdoor Roth IRA).
  5. Continue funding your 401(k) or similar to the maximum allowed. There are both Traditional and Roth 401(k) options now, although your investment options may be limited as long as you are with that employer. Estimated annual return: 8%.
  6. Save towards a house down payment. This is another harder one to quantify. Buying a house is partially a lifestyle choice, but if you don’t move too often and pay off that mortgage, you’ll have lower expenses afterward. Estimated return: Qualify of life + imputed rent.
  7. Fully fund a Health Savings Account. If you have an eligible health insurance plan, you can use an HSA effectively as a “Healthcare Roth IRA
    where your contributions can be invested in mutual funds and grow tax-deferred for decades with tax-free withdrawals when used towards eligible health expenses.
  8. Invest money in taxable accounts. Sure you’ll have to pay taxes, but if you invest efficiently then long-term capital gains rates aren’t too bad. Estimated annual return: 6%.
  9. Pay down any other lower-interest debt (2% car loans, educational loans, mortgage debt). There are some forms of lower-interest and/or tax-deductible debt that can be lower priority, but must still be addressed. Estimated annual return: 2-6%.
  10. Save for your children’s education. You should take care of your own retirement before paying off your children’s tuition. There are many ways to fund an education, but it’s harder to get your kids to fund your retirement. 529 plans are one option if you are lucky enough to have reached this step. Estimated return: Depends.

I wasn’t sure where to put this, but you should also make sure you have adequate insurance (health, disability, and term life insurance if you have dependents). The goal of most optional insurance is to cover catastrophic events, so ideally you’ll pay a small amount and hope to never make a claim.

What If You Invested $10,000 Every Year For the Last 10 Years? 2007-2016 Edition

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Instead of just looking at one year of returns, here’s an annual exercise that helps you look at the bigger picture. You may know the 10-year historical return of the S&P 500, but most of us didn’t just invest a big lump sum of money in 2007, and most of us don’t just invest in the S&P 500.

Investment benchmark. There are many possible choices for an investment benchmark, but I chose the Vanguard Target Retirement 2045 Fund. This all-in-one fund is low-cost, highly-diversified, and available in many employer retirement plans as well open to anyone with an IRA. In the early accumulation phase, this fund is 90% stocks (both domestic and international) and 10% bonds (investment-grade domestic and international). I think it’s a solid default choice where you could easily do worse over the long run.

Investment amount. For the last decade, the maximum allowable contribution to a Traditional or Roth IRA has been roughly $5,000 per person. (It was $4k in 2007, but has been $5k or higher since.) That means a couple could put away at least $10,000 a year in tax-advantaged accounts. If you have a household income of $67,000, then $10,000 is right at the 15% savings rate mark.

A decade of real-world savings. To create a simple-yet-realistic scenario, what would have happened if you put $10,000 a year into the Vanguard Target Retirement 2045 Fund, every year, for the past 10 years. You’d have put in $100,000 over time, but in more manageable increments. With the handy tools at Morningstar and a quick Google spreadsheet, we get this:

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In this case, I would say that ending up with a gain of over $50,000 for every $10k annual investment is nothing to sneeze at. If you put in $20k every year, your gains would have been over $100,000. Some of that money was invested right before the crash in 2008, and some has only been in the market for a few years. Not every year will have turned out to be a great year to invest, but taking it all together provides a more calm, balanced picture.

Investment Returns By Asset Class, 2016 Year-End Review

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Although I am not always successful, I’ve been trying to pay less attention to the daily, weekly, even monthly movements of the markets. Once every few months, I will update my portfolio spreadsheet and make sure that I am investing new money towards my target asset allocation, but that’s about it. That said, I do enjoy a good year-end review. Here are the trailing 1-year returns for select asset classes as benchmarked by passive mutual funds and ETFs. Return data was taken from Morningstar after market close 12/30/16.

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Commentary. If anything, I think 2016 reminded us that although many people are paid essentially to make predictions, most of them aren’t very good at it. Indeed, the more important skill is explaining why things actually turned out the way they did in hindsight. That way, you have a reason to believe their next prediction…

As 2016 ended, I was a bit surprised to see that every asset class listed above had positive returns. Accordingly, most people who owned a diversified portfolio in 2016 had decent returns. The Vanguard Target Retirement 2045 fund (90% diversified stocks and 10% bonds) was up about 8.9% in 2016. My personal portfolio (overall 70% stocks/30% bonds) was up about 7.8% in 2016.

As I get closer to having to live off of my portfolio, I am increasingly focused on the amount of dividends, interest, and rental distributions that my portfolio gives off. (This is in the low 2% range.) I know that total return is more important, but seeing the cash come in makes me more comfortable. I like the analogy to an investment property. If you get a reliable $2,000 in rent coming in every month like clockwork, you care less about the market value of the house itself.