Early Retirement Portfolio Asset Allocation Update, April 2016

portpiegenericIt has been a while, so here is a 2016 First Quarter update on my investment portfolio holdings. This includes tax-deferred accounts like 401ks, IRAs, and taxable brokerage holdings, but excludes things like our primary home and cash reserves (emergency fund). The purpose of this portfolio is to create enough income to cover household expenses.

Target Asset Allocation

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I try to pick 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. In addition, I have doubt that I would hold them through an extended period of underperformance (i.e. don’t buy what you don’t can’t stick with).

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

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)
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
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 terms of the big picture, very little has changed. I did not accomplish my plan of relocating my holdings of WisdomTree SmallCap Dividend ETF (DES) and WisdomTree Emerging Markets SmallCap Dividend ETF (DGS) into tax-deferred accounts. I pretty much left them where they have been, inside a taxable brokerage account. I am currently leaning towards simply selling them completely and making my overall portfolio more simple. I would just have Total US, Total International, and US REITs for stocks. I would technically still hold a “small value tilt” on my holding in my kid’s 529 college saving plan asset allocation.

As for bonds, I’m still somewhat underweight in TIPS mostly due to lack of tax-deferred space as I really don’t want to hold them in a taxable account. (I noticed that shares of TIP are actually up 4% this year, less than 4 months in). My taxable bonds are split roughly evenly between the three Vanguard muni funds. The average duration across all of them is roughly 4-5 years.

A simple 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 -0.87% for 2015 and +1.42% YTD (as of 3/31/16).

I like tracking my dividend and interest income more than overall market movements. In a separate post, I will update the amount of income that I am deriving from this portfolio along with how that compares to my expenses.

Comments

  1. I love these specific holding updates. I’ve been struggling to simplify my allocation more and more. I still feel compelled to own individual stocks although I’ve gone to mostly indexing now. I’ve also been test driving betterment and I like it quite a bit more than I thought I would. Since I’m still accumulating the tax harvesting element is pretty good and I also like that it solved the problem of having tiny cash balances. I know there’s other ways to solve it.

    It also makes it harder to “tinker” because they don’t let you really futz with allocation. I may not like their allocation 100%, but the drop in activity on my part is historically leading to better performance relative to my own behavior.

    Separately, I read a Paul Merriman post about putting $5,000 in an account for your kids when they are born and allocating it to small cap stocks (which have best performance over long periods of time). So I did that. Basically split it 70/30 US/International small cap. The idea is that I will keep it in there for 65 years and they get it at retirement. When they start working I can turn it over to them, convert to IRA or whatever makes the most tax sense. i thought this was a very good idea of his!

    Cheers!

  2. Jon, Thanks for sharing your wisdom. Unless I am missing something you have not shared what are your investments in taxable vs non-taxable. Are you doing the same allocation across both the accounts or do you have different allocations with the taxable account loaded with less taxable assets

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