Portfolio Asset Allocation & Holdings Update – February 2012

I took some time this weekend to check on my investment portfolio, including employer 401(k) plans, self-employed plans, IRAs, and taxable brokerage holdings.

Asset Allocation & Holdings

You can view my target asset allocation here, along with links to other model asset allocations. Despite the headlines, I still like to buy, hold, and rebalance primary in low-cost index funds. Here is my current asset allocation:

I continue to rebalance continuously with new cashflow. Everything looks okay; stocks have been on a pretty good run recently for whatever reason and bond yields are still kept low by central bank policy. My personal outlook for the world economy is still uneasy. My current ratio is about 75% stocks and 25% bonds, but my goal is to get closer to a 60% stocks and 40% bonds setup, the classic balanced fund ratio within the next 5-7 years.

The main change since last time is that I dropped the stock funds in my 401k plan and moved them all to my taxable accounts for tax-efficiency reasons. I needed for space for bonds. I also stopped buying shares of the stable value fund in my 401k because new purchases only earn 1.25% interest. Instead, I am buying the only other bond option which is the behemoth PIMCO Total Return (PTTRX) which has a relatively low 0.46% expense ratio due to it being an institutional share class. This fund is actively managed and includes various types of bonds, but since the portion is so low, I’m still classifying it under my short-term nominal bond asset class.

Stock Holdings
Vanguard Total Stock Market ETF (VTI)
Vanguard Small-Cap Value Index Fund (VISVX)
Vanguard FTSE All-World ex-US ETF (VEU)
Vanguard MSCI Emerging Markets ETF (VWO)
Vanguard REIT Index Fund (VGSIX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX)
PIMCO Total Return Institutional* (PTTRX)
Stable Value Fund* (3% & 1.8% yield on existing balances, no longer contributing)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities

* Denotes 401k holdings due to limited choice.

The overall expense ratio for this portfolio is in the neighborhood of .20% annually, or 20 basis points, which is much lower hurdle to overcome than the average mutual fund expense ratio of over 1% annually. This is all self-directed inside accounts held at Vanguard (IRAs, taxable), Fidelity (401k, Solo 401k), and a small retirement plan provider. I have some “play money” assets at other discount brokers that is invested in individual stocks, but the total is less than 2% of our net worth and not included here.

Goal Progress

Due to our goals to achieve financial independence early, I use a 3% theoretical safe withdrawal rate on my portfolio for the purposes of my tracking. This means that I expect every $100,000 that I save will provide me an inflation-adjusted $3,000 in expenses forever. However, in reality we will probably adjust our withdrawals based on our personal inflation, continuing income, and market returns.

With portfolio increases and additional contributions, at a 3% withdrawal rate our current portfolio would now cover 50% of our expected non-mortgage expenses. If you recall, I also plan to have the house paid off, and I will be making a lump sum payment shortly to bring our home equity past 50% as well. Hopefully as we cross the 50% hump, things will accelerate as portfolio growth will benefit from compounding returns and our mortgage balance will shrink faster from the opposite effect as more of our monthly payment goes towards principal as opposed to interest!

Comments

  1. Individual equities don’t seem to be a primary focus of yours. But I was hoping at some point you might do an article on ADRs. Specifically; fees, foreign withholding tax, whether there is an advantage holding the original shares in the local currency instead of the ADR, etc. I think It’s a ripe area for investment, with a few extra complications I’m still trying to sort through.

  2. Captain Cheapo says:

    I recently lowered my equity/bond ratio from 80/20 to 50/50. There’s just a lot of economic headwinds blowing in and the indexes worldwide have had quite a run over the last two years. I don’t make a lot of moves. About once every two years I rebalance the portfolio. I was one of the fortunate ones who was able to switch into all bonds before the tech bubble, housing bubble/financial crisis occurred. I never manage to nail the tops or bottoms (can anyone?). But, I have probably managed to save ten years of work by coming close enough. Personally, I’m in two investment clubs, one which has been performing at a pace for the last three years that would make the average hedge fund manager blush. I only wish my substantial 401K holdings were manageable in the same fashion. PTTRX has been a godsend though. Glad you found it as well.

  3. From what I gather I am around the same age as you and have a similar stock/bond mix. I actually toggle from say, 75/25 down to 65/35 quarterly in 5% increments if stocks have a particularly strong or weak quarter. It probably doesn’t add much to my total return but it also probably doesn’t hurt too much either. The only area where we significantly differ is that I have a bigger overweight to emerging markets equities. I think those economies will have higher growth than developed economies over the next decade and the the P/E ratio of the index is pretty reasonable (even after the jump in January).

  4. Captain Cheapo says:

    I agree Andy. I have reduced my international portion of equities to zero and have raised my emerging markets portion to 25%. Though, I think the US markets are due for a bit of a comeback in the next few years, albeit a slower one.

  5. What about taxes?

    When you use a 3% draw-down rate, don’t you need to subtract taxes on the dividend / interest / appreciation portion that? Also, I am guessing a least part of if is tax deferred, so don’t you need to use a much lower number than 3% post-tax?

    Also, regardless of your political leanings, one must also acknowledge that captial gains and income taxes are near historic lows – so a responsible plan for retirement should assume a higher tax burden, no?

  6. Paying off my mortgage was one of the best financial things I’ve ever done.

  7. I made a large lump sum payment on my mortgage a few years ago. The interest rate on my mortgage was much higher than interest rates on savings, money market funds, or CDs, so this move made sense to me at the time. However, now I am looking to move to a new home and having the cash on hand versus tied up in my mortgage would give me more flexibility. Going forward, I will probably be very reluctant to pay down my mortgage, instead, favoring to save/invest what I would have otherwise paid towards my mortgage.

  8. Jonathan,

    Is it 2012 or 2011?

  9. Do you consider your withdrawal rate in retirement before or after dividends? Currently, my asset allocation has an overall yield of about 2.5%. To withdraw 3% a year, would require very little removal of principal itself. Are you planning on withdrawing 3% a year in principal regardless of the dividend payout?

  10. Ack 2012!

    I expect the 3% withdrawal to include dividends and bond yield. Right now a 60/40 blend using broad index funds would create about a 2% yield. If needed, I will eat into principal at a 60%/40% allocation because with 60% broad stocks there is a good chance for capital appreciation. When the yield is higher than 3% I could just buy more shares.

    A 50/50 blend of dividend-tilted stocks and income-oriented bonds would create a 3% yield even today if that’s what I wanted. See Wellesley or Wellington funds for just one example.

  11. What happened to your secret crush VWINX :-))) I still don’t see it

  12. OT. Jonathan, do you have advice on how to request Chase to let you open a new CC account (say, the Freedom CC) while closing a prior account (say, a Slate CC)? Have you tried to do something like this before with Chase?

  13. Captain Cheapo says:

    I’ve done it. Just call them up and tell them to reduce the available credit on your slate card and simultaneously apply for the Freedom CC. There’s really no reason to close your old cards (unless they become annual fee cards).

  14. I have a question about Stable Value fund. I am under the impression that yield on past balances would be reduced to current yield but your post doesn’t seem to indicate that.

  15. Emerging Markets is currently 25% of a main “total international market” funds, which I add an additional 5%, for a total of (25% of 40%) + 5% = 15% of overall stocks.

    @JR – I still have a crush on VWINX, but I’m worried about the tax hit right now as I’m in a really high tax bracket. All that bond interest will be taxed at ordinary income rates! Also, there is proposed legislation to increase taxation on dividends for either everyone or just those in higher tax brackets. Since I’m not retired yet, that’s a lot of taxes on income that I’d just be reinvesting.

    @Harish – I just apply, and if I get reject I call the Chase reconsideration line at 800-763-9795. If needed, I can talk with them about what I need to do. If I get the card, I would just close the other card or call up and transfer credit lines.

    @Nit – It depends on your plan. Some plans will say something like “all deposits from 1/1/12 to 12/31/12 will pay 1.25%. All deposits from 1/1/05 to 12/31/11 will earn 2.5%.”

  16. Jonathan –

    How do you organize your stock and bond asset locations given they are in different accounts? I have my investments in a few different accounts but really have no idea what my overall stock to bond ratio is and where my investments are held (% large vs. small cap, etc). Is there a program you use to organize your investments or do you just use excel? I’m a little bit of an investment rookie, but am trying hard to take control of my own investing.

    Thanks!

  17. @Jake – I personally just use a spreadsheet in Google Docs nowadays. It encourages me to keep things simple! All my fund holdings pretty much fit into one asset class each, so I don’t have to dig inside to see what goes where.

    I also try to consolidate funds so that an entire IRA is dedicated to one asset class, making it easy to check the balances on something like Mint.com or Yodlee which are account aggregators.

  18. Probably one of the best articles out there about withdrawal rates…gives a great history and the reasons behind assumptions…with links to some of the original research.

    http://financialmentor.com/fre.....eally-safe

    Enjoy fellow MMB readers.

  19. Would you consider VIG (Vanguard Dividend Appreciation ETF) to replace your some of your stock allocation?

    The standard diversification “theory” recommends owning the world’s equity (both US & international & REITs), but if you look at the data during the 2008 crisis, all these funds are almost 100% correlated. In fact, international & REITs had a steeper declines.

    The VIG, which tracks high-quality companies that consistently increased their dividends, had lower volatility during the 2008 crisis period, and slightly higher returns compared to the S&P 500.

    This idea of VIG came to me after reading Warren Buffett’s recent letter where he recommended buying high-quality companies than can “retain its purchasing-power value while requiring a minimum of new capital investment. ” (Companies that can increase their dividends consistently usually require minimum new capital investments.)

    http://finance.fortune.cnn.com.....er-letter/

    Anyways, nice blog – keep it up!

  20. Jonathan, have you rolled over old 401k from your previous employers to Vanguard and invest in your target funds under Rollover-IRA a/c?

  21. I guess my question is what leads one to decide between VGSIX (mutual index fund) and VNQ (etf), both of which are administered by Vanguard and track the performance of MSCI US REIT index? Looking at the performance of VGSIX and VNQ over the past year, they both look identical, w.r.t price and dividend yield (wasn’t as closely tied for period > 1 yr).

    I’m not very aware of how such funds are administered, but it seems redundant for Vanguard to have two separate, identical investment vehicles. Perhaps the index is only available to Vanguard customers while the ETF allows access for outside clients? Meanwhile, incoming funds from the ETF are possibly thrown into the VGSIX fund?

    If this were the case it’d seem a bit odd to me if VGSIX and VNQ each had their own expenses. One would generally assume that the mutual index fund would have the higher expenses, no? What are the chances that Vanguard ‘backdoors’ VNQ traffic into VGSIX , possibly even at a lower, preferential expense rate, possibly at the ultimate expense of its mutual fund clients?

    Or perhaps I make no sense. Apologies if that is the case. Just curious.

  22. @Jonathan – Good going..
    With kids 529 savings, kids educational expense, monthly emergency fund savings, I merely have 5% to put it aside for retirement these days. Since I started doing with Betterment.com, I don’t even look at them but I should.

    @Akshay

    I have done it in the past. I rolled to TRoweprice funds few years ago which is down 30-40%

  23. I agree with the vast majority of things on this blog, but one thing I don’t get is paying off the mortgage early… why do that? I’m just wondering. You probably have or could refinance at no cost into a loan with an interest rate of 4%~. Over the long term, you could likely find something to do with that cash that would yield more than 4% – say, buying another house and renting it out, opening some kind of business, lending it to someone, even keeping it in high-yield checking or savings accounts (which are likely to climb above 4% in the next few years, although I guess there are no guarantees there).

    I know not everyone is comfortable with these strategies, and clearly paying down the house is a more conservative option, but I’m surprised you would do that considering that you’re disciplined enough to borrow tens of thousands of dollars from credit cards at 0% and pay it back on time after making a profit. I think you could treat the mortgage the same way – as a cheap source of cash (a really cheap source of cash, at the moment) to invest elsewhere.

    Just wondering about this. Keep up the great work on the blog!

  24. @Sj – VIG looks okay, but if I were to buy dividend stocks I’d mix it between my current allocation and a income-oriented one. Just because the big companies have done well recently doesn’t mean they’ll be the answer for the long run. It’s good to have diversification into other economies as well IMO – even if they are correlated it doesn’t mean they all go up the same amount.

    @Ashkay – Anything that I can roll over, I have rolled over to an IRA with Vanguard, except for a small $2k 401k that is already at Fidelity. I don’t to roll that over because I am doing non-deductible IRAs so the pre-tax and post-tax money would commingle and the taxes would make my head hurt. I’ll roll it over as well once I stop doing the non-ded IRAs.

    @Ivor – For the case of Vanguard, VNQ and VGSIX are just different share classes of the same pool of investments. ETFs and mutual funds have different features so you just have to weight the pros and cons of each. Same underlying investments.

  25. I did not get tax hit thing you mentioned for VWINX. If I buy VWINX for my Roth IRA…i should be fine as the gain will not be penalized?? Am I getting it correct?

  26. Christopher says:

    Sir,

    In reviewing your previous AA’s I’ve not read a brief justification for holding VEU & VWO. Just curious of your reasoning for not using VSS-International small cap instead of VWO? Otherwise, way to stay the course over the past few years you’ve generally maintained a similar makeup in your allocations.

    Appreciate reading your thoughts on the matter.

  27. I too share Ashkay’s concern about your overall portfolio beta. I know you’ve read and reviewed El-Erian’s “When Markets Collide”. I came across a well thought out article that looks at how the “New Normal” effects asset allocation written by Advisor Perspectives.

    What it showed was, even with a high number of different mutual funds and ETFs, the overall portfolio diversification was extremely inadequate. This includes the vast majority of equity allocations having 90+% correlation. This fits very well into the risk-on/risk off macro-driven, futures-controlled world that we currently live and invest in. I agree that correlations can and do change, and that we need exposure to many different economies. However, I feel that we will not see the 20+ year bull markets in equities and bonds that our affluent elders benefited from.

    To briefly summarize, the recommendation was to use ETFs/Mutual Funds to gain exposure to emerging markets index, small cap value index, REITs index, Bonds (mainly TIPs), and Commodities (small slice), while building a portfolio of dividend growth equities that show a history of dominating their sector and growing their dividend payouts. Examples would be CLX, AFL, JNJ and XOM.

    To be sure, these dividend growth equities won’t provide 25+% per annum returns, but the goal is to keep beta (risk) low while building up ever growing dividend cash flows to increase your return on cost (or return on invested capital) into the 20+% range over 15-20 years. For example, CLX has grown its dividend at a rate of 10+% over the past 5 years. At a current yield of 3.5%, in a little over 7 years, your yield on cost of your initial invested capital will have doubled to be 7% per annum. The sell rules are simple, if a dividend is cut, you sell. If a dividend stops increasing, you hold until the dividend raise is reinstated, or sell if it is cut.

    Since I’m still very young (26 y/o) and a first-year medical student, I invest very aggressively (83% equities [33% ETFs, 50% individual securities], 7% commodities, 10% bonds).

    Please see the link for sample portfolios and more detailed reading for your enjoyment.

    Good luck and Godspeed.

    http://www.advisorperspectives.....cation.pdf

  28. Ryan @ RPP Financial says:

    I was researching Roth IRAs and came accross your blog. It is very informative. I was wondering though, if you have any posts on expense ratios for mutual funds. I noticed the fund you mentioned you hold in this post have very low expense ratios, but I can’t help but wonder if a fund like PONAX instead of PTTRX would actual yield better returns long term. The expense ratio is higher, but it appears the annual returns are high enough that it could cover the difference. Any thoughts?

  29. What was the total return (performance) for your portfolio for 2011?

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