MMB Portfolio 2022 3rd Quarter Update: Dividend & Interest Income

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Here’s my quarterly income update for my Humble Portfolio (2022 Q3). I track the income produced as an alternative metric for performance. The total income goes up much more gradually and consistently than the number shown on brokerage statements (price), which helps encourage consistent investing. Imagine your portfolio as a factory that churns out dollar bills.

Background: Overall stock market dividend growth. Stock dividends are a portion of net profits that businesses have decided to distribute directly to shareholders, as opposed to reinvesting into their business, paying back debt, or buying back shares directly. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation.

In the US, the dividend culture is somewhat conservative in that shareholders expect dividends to be stable and only go up. Thus the starting yield is lower, but grows more steadily with smaller cuts during hard times. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total US Stock ETF (VTI), courtesy of StockAnalysis.com. Currently, 31% of VTI’s net earnings are sent to you as a dividend. Notice how it grows gradually, with the current annual dividend 80% higher than in September 2013:

European corporate culture tends to encourage paying out a higher (sometimes fixed) percentage of earnings as dividends, but that means the dividends move up and down with earnings. Thus the starting yield is higher but may not grow as reliably. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total International Stock ETF (VXUS). Currently, 47% of VXUS’s net earnings are sent to you as a dividend. Notice how it stays more stable (but also dropped during 2020 due to COVID), with the current annual dividend only 20% higher than in September 2013:

The dividend yield (dividends divided by price) also serve as a rough valuation metric. When stock prices drop, this percentage metric usually goes up – which makes me feel better in a bear market. When stock prices go up, this percentage metric usually goes down, which keeps me from getting too euphoric during a bull market. Here’s a related quote from Jack Bogle (source):

The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

My personal portfolio income history. I started tracking the income from my portfolio in 2014. Here’s what the annual distributions from my portfolio look like over time:

  • $1,000,000 invested in my portfolio as of January 2014 would have generated about $24,000 in annual income over the previous 12 months. (2.4% starting yield)
  • If I reinvested the income but added no other contributions, today in 2022 it would have generated ~$53,000 in annual income over the previous 12 months.

This chart shows how the total annual income generated by my portfolio has changed. It’s not all about current yield.

TTM income yield. To estimate the income from my portfolio, I use the weighted “TTM” or “12-Month Yield” from Morningstar (checked 10/5/22), which is the sum of the trailing 12 months of interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed (usually zero for index funds) over the same period. The trailing income yield for this quarter was 3.33%, as calculated below. Then I multiply by the current balance from my brokerage statements to get the total income.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield Yield Contribution
US Total Stock (VTI) 25% 1.74% 0.44%
US Small Value (VBR) 5% 2.30% 0.12%
Int’l Total Stock (VXUS) 25% 4.18% 1.05%
Emerging Markets (VWO) 5% 3.95% 0.20%
US Real Estate (VNQ) 6% 3.89% 0.23%
Inter-Term US Treasury Bonds (VGIT) 17% 1.42% 0.24%
Inflation-Linked Treasury Bonds (VTIP) 17% 6.24% 1.06%
Totals 100% 3.33%

 

Commentary. My ttm portfolio yield is now roughly 3.33%. (This is not the same as the dividend yield commonly reported in stock quotes, which just multiplies the last quarterly dividend by four.) Both US and international stock prices have gone down, and my ttm dividend yield has gone up. The price of my Treasury bonds have also gone down as nominal rates have gone up, but the yield will eventually go up as the money is reinvested into new bonds at higher rates. My TIPS yield has gone up significantly as it tracks CPI inflation. Of course, the NAV on my TIPS has also gone down, as real yields have gone up (again will be better as money is reinvested). TIPS are a bit complicated like that.

Use as a retirement planning metric. For goal planning purposes, I support the simple 4% or 3% rule of thumb, which equates to a target of accumulating roughly 25 to 33 times your annual expenses. I would lean towards a 3% withdrawal rate if you want to retire young (before age 50) and a 4% withdrawal rate if retiring at a more traditional age (closer to 65). It’s just a useful target, not a number sent down from a higher being. During the accumulation stage, your time is better spent focusing on earning potential via better career moves, improving in your skillset, and/or looking for entrepreneurial opportunities where you can have an ownership interest.

Even if do you reach that 25X or 30X goal, it’s just a moment in time. The market can shift, your expenses can shift, and so I find that tracking income makes more tangible sense in my mind and is more useful for those who aren’t looking for a traditional retirement. Our dividends and interest income are not automatically reinvested. They are another “paycheck”. Then, as with a traditional paycheck, we can choose to either spend it or invest it again to compound things more quickly. Even if we spend the dividends, this portfolio paycheck will still grow over time. You could use this money to cut back working hours, pursue a different career path, start a new business, take a sabbatical, perform charity or volunteer work, and so on.

Right now, I am happily in the “my kids still think I’m cool and want to spend time with me” zone. I am consciously choosing to work when they are at school but also consciously turning down any more work past that. This portfolio income helps me do that.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

MMB Humble Portfolio 2022 3rd Quarter Update: Asset Allocation & Performance

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portpie_blank200Here’s my quarterly update on my current investment holdings as of 10/4/22, including our 401k/403b/IRAs and taxable brokerage accounts but excluding real estate and side portfolio of self-directed investments. Following the concept of skin in the game, the following is not a recommendation, but just to share our real, imperfect, low-cost, diversified DIY portfolio. The goal of this “Humble Portfolio” is to create sustainable income that keeps up with inflation to cover our household expenses.

“Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have in their portfolio.” – Nassim Taleb

How I Track My Portfolio
I’m often asked how I track my portfolio across multiple brokers and account types. There are limited free options nowadays as Morningstar recently discontinued free access to their portfolio tracker. I use both Personal Capital and a custom Google Spreadsheet to track my investment holdings:

  • The Personal Capital financial tools and real-time tracking (free, my review) automatically logs into my different accounts, adds up my various balances, tracks my performance, and calculates my overall asset allocation daily.
  • Once a quarter, I also update my manual Google Spreadsheet (free, instructions) because it helps me calculate how much I need in each asset class to rebalance back towards my target asset allocation. I also create a new tab each quarter, so I have snapshot of my holdings dating back many years.

October 2022 Asset Allocation and YTD Performance
Here are updated performance and asset allocation charts, per the “Allocation” and “Holdings” tabs of my Personal Capital account.

Target Asset Allocation. I call this my “Humble Portfolio” because it accepts the repeated findings that individuals cannot reliably time the market, and that persistence in above-average stock-picking and/or sector-picking is exceedingly rare. Costs matter and nearly everyone who sells outperformance, for some reason keeps charging even if they provide zero outperformance! By paying minimal costs including management fees and tax drag, you can actually guarantee yourself above-average net performance over time.

I own broad, low-cost exposure to productive assets 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 have faith in the long-term benefit of owning publicly-traded US and international shares of businesses, as well as the stability of high-quality US Treasury and municipal debt. My stock holdings roughly follow the total world market cap breakdown at roughly 60% US and 40% ex-US. I add just a little “spice” to the vanilla funds with the inclusion of “small value” ETFs for US, Developed International, and Emerging Markets stocks as well as additional real estate exposure through US REITs.

I strongly believe in the importance of knowing WHY you own something. Every asset class will eventually have a low period, and you must have strong faith during these periods to truly make your money. You have to keep owning and buying more stocks through the stock market crashes. You have to maintain and even buy more rental properties during a housing crunch, etc. A good sign is that if prices drop, you’ll want to buy more of that asset instead of less. I don’t have strong faith in the long-term results of commodities, gold, or bitcoin – so I don’t own them.

I do not spend a lot of time backtesting various model portfolios, as I don’t think picking through the details of the recent past will necessarily create superior future returns. Usually, whatever model portfolio is popular in the moment just happens to hold the asset class that has been the hottest recently as well.

Find productive assets that you believe in and understand, and just keep buying them through the ups and downs. Mine may be different than yours.

I have settled into a long-term target ratio of roughly 70% stocks and 30% bonds (or 2:1 ratio) within our investment strategy of buy, hold, and occasionally rebalance. This is more conservative than most people my age, but I am settling into a more “perpetual income portfolio” as opposed to the more common “build up a big stash and hope it lasts until I die” portfolio. My target withdrawal rate is 3% or less. Here is a round-number breakdown of my target portfolio.

  • 30% US Total Market
  • 5% US Small-Cap Value
  • 20% International Total Market
  • 5% International Small-Cap Value
  • 10% US Real Estate (REIT)
  • 20% US Treasury Nominal Bonds or FDIC-insured deposits
  • 10% US Treasury Inflation-Protected Bonds (or I Savings Bonds)

Commentary. According to Personal Capital, my portfolio down about 18% for 2022 YTD. My US and International stocks have dropped again (even more than the bonds, which also dropped) and so available cashflow is being placed into buying more of those asset classes.

During this last quarter, I sold all of my municipal bonds and bought US Treasuries instead. Due to the rising rates, I had no capital gains to worry about. When I previously cycled into muni bonds, munis were yielding 24% more than Treasuries even before accounting for the tax benefits. In September 2015, I compared the 1.78% SEC yield of Vanguard Intermediate-Term Tax-Exempt Investor Shares (VWITX) to the 1.48% SEC yield of Vanguard Intermediate-Term Treasury Investor Shares (VFITX). The ratio was 1.24. As of October 2022, the ratio is now 0.93 (3.26% vs. 3.51%). At those levels, I am getting compensated much less for the additional risk of municipal finances. My bond portfolio is now US Treasury bonds, bank/credit union CDs (bought if/when the rates exceed US Treasuries), TIPS, and savings I bonds. Can’t get higher quality than that.

I take solace that for now I see more shrinking P/E ratios as opposed to crashing earnings on the stocks side, my REITs are yielding more, and my bonds are yielding more. One good thing about more “normal” interest rates if they can hold is that it gives conservative (often older) savers a chance to keep their principal safe and still earn a small bit of income without market volatility. My primary fear remains that of war.

I’ll share about more about the income aspect in a separate post.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

The “No Risk” Portfolio: Stock Upside Exposure with 100% Money Back Guarantee

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Everyone loves a 100% money-back guarantee. A popular option on insurance policies is the “Return of Premium” rider. Let’s say you buy a $1,000,000 term life insurance for 30 years at $1,000 a year. At the end of 30 years, if you’re still alive, the insurance policy will no longer pay you the $1,000,000 if you die, but it will return all the premium you paid ($30,000). In your mind, you could think of it as “no risk” because you’ll get your $30,000 back no matter what!

Similarly, a very popular option on income annuities is the “Return of Principal” rider. Let’s say you pay $100,000 upfront in exchange for them paying you $7,000 in annual income for the rest of your life. What about the unlikely but possible chance that you die early in the first few years? A “return of principal” rider will guarantee that your survivors will at least get that $100,000 back. In your mind, you could think of it as “no risk” because you’ll get $100,000 back no matter what!

Create your own 100% Money Back Guarantee Portfolio. Insurance companies already sell complicated equity-indexed annuities that extend a form of this “no principal loss” to investing. But why not apply it to DIY investing? You may already see the flaw in the “no risk” terminology, but if you still like the psychological benefit of knowing you’ll have at least the same number of dollar bills come back to you after 10 years, read on to create your own “no risk” investment portfolio. Allan Roth writes about this in the AARP article Stock Market Investing for the Faint of Heart.

Let’s say you have $100,000. Right now, I see a 10-year FDIC-insured CD paying 3.60% APY (non-callable!) available from Vanguard. Using the Zero Risk Investment calculator from DepositAccounts, I know that I could put $70,210.56 into that CD today, and at the end of 10 years, I will be able to withdraw $100,000 no matter what. That means, I can take the remaining $29,789.44 today and buy stocks. Even if those stocks implode and lose every single penny of value, I will still have $100,000 at the end of 10 years. 100% Money Back Guarantee!

From that perspective, whatever you get from stocks is upside. This chart shows how much of the stock return I would still be exposed to. If stocks alone returned 8% annually, the overall portfolio would still go up about 5% annually, and my total at the end of 10 years would be $164,313.17.

If this level of safety sounds good to you, look more closely. That’s basically a 30% stocks/70% bank CD portfolio, and bank CDs are very similar to high-quality bonds. This is also why I prefer investing in US Treasury bonds and bank CDs for the bond part of my portfolio, I like having a portion of my portfolio that I don’t have to worry about at all. You could also use Treasury STRIPS (zero-coupon bonds) to guarantee a certain future payout.

What if you had a little more faith and just wanted a money back guarantee against the possibility of a 50% stock market loss after 10 years? That would allow you even more stock market exposure at roughly 45% stocks and 55% bank CDs:

This is an interesting alternative viewpoint for deciding your stock/bonds ratio. Personally, I think having even a 50% decline over a full 10-year span is very unlikely, but having a 50% decline over a 1 or 2 years span is very likely. That sharp decline (and all the real-world events causing that decline) is what makes people panic. If you have more faith in the resiliency of stocks, you can own more stocks. Only want to protect from a 10% loss after a 10-year span? Then you could hold 80% stocks to guarantee your money back in that scenario. If, on the other hand, you believe that stock returns are just a random walk with a greater dispersion in results over longer periods (including the possibility of the S&P 500 ending at 1,000 or less in 10 years), then you might want to own a lot less stocks.

Insurance companies are happy to sell you “return of premium” and “return of principal” riders (they are not free, they have a cost that either reduces your payout received or increases your premium cost) because know they can invest your money in the meantime and pocket the returns. If interest rates are high, that means inflation is likely high as well, and the buying power of your $100,000 is shrinking over time. So really, you are still exposed to risk: inflation risk.

More investment education can help us better tolerate stock market volatility, but we also need to be honest about our human tendencies. If using this “100% money back guarantee” structure helps you maintain a certain level of exposure to the stock market, then that can be a good thing. The fanciest investment strategy will fail if you can’t stay invested during the inevitable downturns.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Money Magic: 5 Levers To Boost Your Safe Retirement Income By $50k+ a Year

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In personal finance, I often think in terms of “levers” to push or pull. Here are five different levers to increase your portfolio safe withdrawal rate in retirement. Here are three levers used increase your final savings balance at retirement:

  • Asset allocation: How are you investing your money?
  • Savings rate: What percentage of your income do you save?
  • Time horizon: How long are you saving for?

Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life by Laurence Kotlikoff has another good example of pulling certain levers involving a couple that comes to him with their proposed retirement plan. By tweaking these five different levers, he is able to increase their allowable monthly spending (above housing) by over $6,000 a month for the rest of their lives (a net present value of over $1.5 million):

  • Delay taking Social Security. “First, they should wait to begin taking their Social Security benefits till age seventy, rather than immediately at sixty-two.”
  • Use your 401(k) to fund your retirement early years instead. “Next, they should start to withdraw from their 401(k) accounts now, rather than wait till seventy.”
  • Buy joint survivor single premium immediate annuities. “They also should take their 401(k) withdrawals in the form of joint survivor annuities.”
  • Downsize your house/condo. “Next, they should downsize their four-bedroom house by half.”
  • Move to a lower-tax state. “And finally, they should move to New Hampshire, which has no state income tax.”

The result:

This retirement makeover will make an amazing difference. In fact, it will more than double the Smith’s sustainable retirement spending! Under their original plan, the Smiths could afford to spend $5,337 per month in addition to covering their housing costs and taxes. Under the new plan, they can spend $11,819 per month in addition. That’s a ginormous increase and adds up to a $1,578,374 increase in lifetime spending measured in present value. In other words, the new plan amounts to handing the Smiths a bag filled with around $1.5 million in cash. This is money magic, pure and simple.

Now, I’m not sure I would use the term “magic”, but these are readily-available choices and the numbers come from the author’s MaxiFi retirement planning software. Living in a two-bedroom condo instead of a four-bedroom house is not the same experience, but at least you should explore it and weigh the costs and benefits. Using single premium immediate annuities to supplement Social Security is a way to guarantee income, and they are the simplest and most transparent form of annuities that are easy to comparison shop directly. I bet that significant percentage of retirees don’t even run a free, no-obligation quote.

I enjoying finding and thinking about the levers in my life. Even if not financially-optimal, it feels good to make a conscious choice and know that your actions matter. I know that I could have made more money by moving to a different state with better job opportunities, lower taxes, and/or lower cost of living. I know that I could have bought a bigger house, but also a much smaller house.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

JP Morgan Guide to Retirement 2022: Personal Finance Charts and Graphics

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The JP Morgan Guide to Retirement slide deck is provided to its advisors to discuss retirement planning with clients. Updated annually, they kindly share this document publicly and it contains many useful charts and graphs, like the one above that reminds us to focus on what you can control, and to not waste time and energy on what you can’t. Below are a few more highlights from the 52-page 2022 edition that I found most helpful.

How does everyone else manage given all the news of low savings balances? Well, the reason it is called “Social Security” is because without it, there would be widespread poverty amongst seniors. The higher your spending, the more you must rely on your other assets to replace your current income in retirement.

You may have seen variations of this chart elsewhere, where “Quitter Quincy” who starts early but completely stops after only 10 years ends up at the same place as “Late Lyla” who starts late but contributes for another 30 years (triple the time).

How the average household spending changes by age (amongst relatively well-off households).

How to prioritize your savings.

Look how “Escalating Ethan” does nearly as well by allowing a 1% auto-escalation once a year.

You might think that because you pay 401k loans back into the original account plus interest that it won’t hurt your final retirement balance, but the missed compounding growth can really impact things.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

How Do Your 401(k) Stats Compare? Vanguard How America Saves 2022

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Vanguard recently released the 2022 edition of their annual How America Saves report, a 110-page report targeted at industry insiders which looks at the nearly 5 million 401k, 403b, and other defined-contribution retirement plans. If you wish to geek out on 401k stats, there is a great deal of information in this report. Here are a few highlights based on 2021 data:

Employee contributions. The average/median employee contribution rate amongst participants was 7.3%/6.1% in 2021. Median means that half of people were saving more, while half were saving less. Average is weighted more by absolute dollar savings. (Click to enlarge.)

Employer contributions (company match). The total average/median contributions by year was 11.2%/10.3% (employer and employee combined). This means that the average/median employer/company contribution was about 4%. (Click to enlarge.)

How much does Vanguard think we should be saving? I found this quote noteworthy:

We believe participants need to reach a total saving rate of 12% to 15% or more to meet their retirement goals.

Maxing it out! Overall, 14% of participants saved the maximum annual amount of $19,500 ($26,000 age 50+) for 2021. However, 58% of those with incomes of $150,000+ maxed out their contributions. Here is the full breakdown by income:

(Not really sure how the folks earning under $15k per year are doing it… maybe these income numbers are after subtracting the contributions?)

How are people investing? Asset allocation. This chart shows the trends in asset allocation as the participants age. The increased use of Target-date funds and other professional management options has changed it so that young people are less likely to hold cash. (Click to enlarge.)

Account balances. The average account balance was $141,542 for 2021; the median balance was $35,345. This disparity means that a small number of plans with very high balances skews this often-quoted average upward. (Click to enlarge.)

I don’t pay much attention to this stat because the average includes workers across different age groups, income levels, job tenures, and so on. If I just switched jobs and rolled over my old 401k into an IRA, technically my balance is zero no matter what.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Retirement Income Green vs. Red Zones from Jim Otar

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Jim Otar is a retired engineer-turned-financial-planner who has written many books and articles about retirement income. I recently found an old bookmark and reread his article Lifetime Retirement Income: The Zone Strategy from RetirementOptimizer.com. One core principle of his retirement advice that you don’t plan using averages:

The averages don’t cut it. For proper retirement planning, you must base your retirement solutions and strategies on adverse outcomes and not average outcomes.

For example, you don’t plan for average life expectancy. You plan for reaching age 95 for both you and your spouse/partner if applicable.

Green Zone: You have enough money that you can simply live off a balanced portfolio of stocks and bonds, even if returns are on the unlucky side of history and much lower than average. Here are the numbers for his calculated sustainable withdrawal rate until age 95:

For example, if you are 65 years old and need $40,000 of annual income from your portfolio (above Social Security and other income sources), then you would need a portfolio balance of $40,000 divided by 3.8% = $1,052,631. (Alternatively, multiply $40,000 by 26.3.) If you have more than this, you are in the green zone. You’ll have enough money even after a market run that is bad historically, and you’ll probably end up leaving a decent estate or be able to spend more later on.

Red Zone: You need guaranteed income. You don’t have enough to live off of a portfolio of stocks without a decent chance of running completely out of money. The most prudent advice is to buy annuities that will provide a guaranteed level of income and stretch your limited assets for the rest of your lifetime, no matter how long that is.

The advice is then to use your money to buy a single premium immediate life annuity with payments that are indexed to inflation (CPI). At the time of writing, such an inflation-indexed SPIA would pay more that the sustainable rate above. The effective “safe withdrawal rate” for the same 65-year-old above would be 4.5% to 4.9%. Unfortunately, this article was written back in 2007 and as of 2022 there are zero insurance companies that offer inflation-indexed immediate annuities.

However, the same overall concept still applies. The Red Zone means you need to take critical action. You should see how much guaranteed lifetime income you can receive from a single premium immediate annuity (SPIA), perhaps with an escalation rider that increases your payout 1%-3% every year. You will need to consider reducing expenses somehow (downsize home, relocate to lower cost-of-living area). You may need to find additional income (keep working, rent out property). You might need to do all three.

Grey Zone used to mean that you were between the 3.8% withdrawal rate of the Green Zone and the 4.5% withdrawal rate of the Red Zone. Today, I assume it simply means you are close to green, but not quite. You should take some of those Red Zone actions listed above.

I found the Green/Grey/Red Zone concept to be an interesting retirement planning framework to consider. If you don’t have enough, you shouldn’t just wing it with stocks and hope for the best. SPIAs can help you stretch your money for a more secure retirement. I believe that SPIAs aren’t discussed enough in personal finance, and if there were more demand, perhaps the competition would create better and higher-yielding SPIA products. The problem is that non-transparent products like indexed annuities that promise things like “market-linked returns with no downside risk” are both better sellers and offer higher commissions to most insurance salespeople.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Maxing Out the 401k Company Match: How Many Actually Do It?

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At the top of many personal finance “To-do Lists” is to max out the employer match offered in your 401k/403b retirement plan. It’s usually the first “savings” step after paying down high-interest debt and keeping up with your bills. Here’s a screenshot from the Standardized Personal Finance Advice Flowchart via Reddit:

And here it is again from JP Morgan Asset Management, right after building up an emergency fund:

I’ve read this advice so many times, but how many people even complete this Top 3 item on the list? To be clear, this is just contributing enough to maximize your employer match contribution, not maxing out your allowable employee contribution. (That’s on the list of standardized advice as well, but at a slightly lower priority level.)

Vanguard recently released its How America Saves 2022 report with tons of data about the retirement accounts that they help manage. Let’s see what they found.

First of all, what does it take to max out your 401k company match? Roughly a 6% contribution rate over the years.

So… how many people actually max out their 401k company match? Roughly 70% of participants contributed at least the max match rate in 2021. For participants in plan with an auto-increase feature, this number goes up to 77% overall after three years.

If you aren’t at least maxing out the company match and getting your “free money”, hopefully this stat provides some peer pressure. Over 2/3rds are doing it! You don’t want to be below-average, do you?? 😱

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Reader Question: Buying Individual Corporate Bonds on Secondary Market At 6% APY?

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Here’s a good question from reader Elizabeth in response to yesterday’s post about buying Treasury bonds on the open secondary market:

One thing I’m interested in is on that same table you shared – Corporate bonds rated BBB are around 6% for 5 years. Can you write about this? What are the pros and cons?

Here’s my thought process. Yes, us “retail” investors can also buy individual corporate bonds via major brokers with a fixed income desk like Fidelity. (Bond trading is rare on newer trading apps like Robinhood.) The bonds are judged by various rating agencies and usually separated by their grading. Right now, I see a Moody’s BAA3-rated corporate bond with 5 years left until maturity paying 6.78% interest (click to enlarge):

However, corporate bonds are not within my circle of knowledge. The special thing about every single US Treasury bond is that they are all fully-backed by the US government. Same with an FDIC-insured bank CD or NCUA-insured credit union certificate. It’s like comparing all 16 oz. jars of JIF brand peanut butter; I know all of them are the same, so I can just buy on price.

Once you venture into the world of corporate bonds, things get a lot more complicated. There is wide range of potential credit risk from the issuing company. If the company fails, you may not receive your initial principal back. There is call risk from callable bonds where the issuer can redeem your bond early (to their benefit), not to mention several other early redemption wrinkles like “make whole call”, “sinking fund protection”, and “special optional redemptions”.

Baa3 and BBB- rated bonds are still technically “investment-grade”, but they are just one notch above “below investment-grade”, aka “junk”, aka “high-yield” bonds. Here is a quick table of bond ratings from Investopedia:

If take a closer look at the available bonds above, you’ll see that only one bond is paying over 6.7% and it doesn’t even have an S&P rating, which means there might be something funny going on. The rates quickly go back down to the 5.XX% range.

Do I know why one bond has to pay 6.7% interest rate to entice a buyer, while another one only has to offer 4.8%? I must admit that I really have no idea.

Bonds are for safety. In addition, I should remember my reason for holding bonds. They are my safety blanket. They are my next 10 years of expenses that are guaranteed to be there even if bad things happens. What if Russia bombed a NATO country tomorrow? The US would be obligated to go to war. China might then feel that it has to back Russia. Who knows. Hope for the best. Prepare for the worst.

My goal with bonds is to maximize yield without sacrificing safety.

Stocks are for growth and upside potential. Let’s take the bottom bond highlighted – an Ally Financial corporate bond paying 5.6% yield for the next 5 years. Ally Bank is familiar to me, and I am a longtime customer. Why not buy that bond? Well, if I bought that bond, the most that it will ever pay me back is the bond face value and interest. Worst case is still that Ally goes bankrupt and I lose all or most of my entire investment and end up with zero. This has happened, and to much larger companies than Ally.

Up to 6 days before their eventual collapse, Lehman Brothers had an A investment grade rating. The eventual recovery on their bonds was 21 cents on the dollar.

However, I could also buy Ally Financial stock (ticker ALLY). Right now, it is trading at only a 4.72 P/E ratio and is even paying a dividend yield of 3.54%. Five years from now, I could be sitting on a +50% or +100% or +200% total return. In other words, if you want to take on risk for a higher return, you are competing with stocks. There is ongoing debate about the inclusion of high-yield bonds in a portfolio, but I prefer to take risks with stocks and keep my bonds as safe as possible.

Consider a low-cost, diversified mutual fund or ETF. The benefit of holding riskier corporate bonds inside a mutual fund/ETF is that any one corporate bankruptcy won’t wipe you out. You can be diversified across hundreds of companies. Now, you can’t control the maturity as tightly, you’ll still lose some yield to management costs, and you’re still subject to interest rate risk. If you own the Vanguard Total Bond Market ETF (BND) or any Vanguard Target Retirement Fund, you already own corporate bonds inside a fund.

If I had to buy corporate bonds and wanted a stream of higher income without a reckless amount of credit risk, I would consider the Vanguard High-Yield Corporate Fund Investor Shares (VWEHX, $3k min) or Vanguard High-Yield Corporate Fund Admiral Shares (VWEAX, $50k min). VWEHX has a 0.23% expense ratio and a 30-day SEC yield of 6.71% as of 07/18/2022. VWEAX has a 0.13% expense ratio and a 30-day SEC yield of 6.81% as of 07/18/2022.

You are buying a basket of nearly 700 bonds that straddle the line between investment-grade and below investment-grade. This is a bond fund that I would own for the income stream, not if I needed the entire amount in cash soon as it can drop quite a lot during times of market stress. The expense ratio on this Vanguard fund is much lower than the industry average. Just a suggestion for further research. I don’t own this fund. In fact, I don’t own any corporate bonds at all.

Hope that helps!

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

MMB Portfolio 2022 2nd Quarter Update: Dividend & Interest Income

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via GIPHY

Here’s my quarterly update on the income produced by my Humble Portfolio (2022 Q2). I track the income produced as an alternative metric for performance. The total income goes up much more gradually and consistently than the number shown on brokerage statements (price), which helps encourage consistent investing. I imagine them as building up a factory that churns out dollar bills. You can still track your dividend and interest income with a total return portfolio. You don’t need a bunch of high-yield stocks, MLPs, leveraged REITs, or covered call ETFs.

Background: Overall stock market dividend growth. Stock dividends are a portion of net profits that businesses have decided to distribute directly to shareholders, as opposed to reinvesting into their business, paying back debt, or buying back shares directly. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation.

In the US, the dividend culture is somewhat conservative in that shareholders expect dividends to be stable and only go up. Dividend cuts tend to be avoided. Thus the starting yield is lower, but it can grow faster. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total US Stock ETF (VTI), courtesy of StockAnalysis.com. Currently, 31% of VTI’s net earnings are sent to you as a dividend. Notice how it grows gradually, with the current annual dividend 76% higher than in September 2013:

European corporate culture tends to encourage paying out a higher (sometimes fixed) percentage of earnings as dividends, but that means the dividends move up and down with earnings. Thus the starting yield is higher but may not grow as fast. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total International Stock ETF (VXUS). Currently, 47% of VXUS’s net earnings are sent to you as a dividend. Notice how it stays more stable (but also dropped during 2020 due to COVID), with the current annual dividend only 25% higher than in September 2013:

The dividend yield (dividends divided by price) also serve as a rough valuation metric. When stock prices drop, this percentage metric usually goes up – which makes me feel better in a bear market. When stock prices go up, this percentage metric usually goes down, which keeps me from getting too euphoric during a bull market. Here’s a related quote from Jack Bogle (source):

The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

My personal portfolio income history. I started tracking the income from my portfolio in 2014. Here’s what the annual distributions from my portfolio look like over time:

  • $1,000,000 invested in my portfolio as of January 2014 would have generated about $24,000 in annual income over the previous 12 months. (2.4% starting yield)
  • If I reinvested the income but added no other contributions, today in 2022 it would have generated ~$48,000 in annual income over the previous 12 months.

This chart shows how the annual income generated by my portfolio has changed.

TTM income yield. To estimate the income from my portfolio, I use the weighted “TTM” or “12-Month Yield” from Morningstar, which is the sum of the trailing 12 months of interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed (usually zero for index funds) over the same period. The trailing income yield for this quarter was 2.99%, as calculated below. Then I multiply by the current balance from my brokerage statements to get the total income.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield Yield Contribution
US Total Stock (VTI) 25% 1.61% 0.40%
US Small Value (VBR) 5% 2.12% 0.11%
Int’l Total Stock (VXUS) 25% 3.87% 0.97%
Emerging Markets (VWO) 5% 3.35% 0.17%
US Real Estate (VNQ) 6% 3.14% 0.19%
Inter-Term US Treasury Bonds (VGIT) 17% 1.25% 0.21%
Inflation-Linked Treasury Bonds (VTIP) 17% 5.59% 0.95%
Totals 100% 2.99%

 

Commentary. My ttm yield is now ~3%. Both US and international stock prices have gone down, and my ttm dividend yield has gone up. The price of my Treasury bonds have also gone down as nominal rates have gone up, but the yield will eventually go up as the money is reinvested into new bonds at higher rates. My TIPS yield has gone up significantly as CPI inflation has spiked. Of course, the NAV on my TIPS has also gone down, as real yields have gone up (again will be better as money is reinvested). TIPS are a bit complicated like that.

Use as a retirement planning metric. As a very rough goal, I support the simple 4% or 3% rule of thumb, which equates to a target of accumulating roughly 25 to 33 times your annual expenses. I would lean towards a 3% withdrawal rate if you want to retire young (before age 50) and a 4% withdrawal rate if retiring at a more traditional age (closer to 65). It’s just a target, not a number sent down from a higher being. During the accumulation stage, your time is better spent focusing on earning potential via better career moves, improving in your skillset, and/or looking for entrepreneurial opportunities where you can have an ownership interest.

Even if do you reach that 25X or 30X goal, it’s just a moment in time. The market can shift, your expenses can shift, and so I find that tracking income makes more tangible sense in my mind and is more useful for those who aren’t looking for a traditional retirement. Our dividends and interest income are not automatically reinvested. They are another “paycheck”. Then, as with a traditional paycheck, we can choose to either spend it or invest it again to compound things more quickly. Even if we spend the dividends, this portfolio paycheck will still grow over time. You could use this money to cut back working hours, pursue a different career path, start a new business, take a sabbatical, perform charity or volunteer work, and so on. This is your one life and it only lasts about 4,000 weeks.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

MMB Humble Portfolio 2022 2nd Quarter Update: Asset Allocation & Performance

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portpie_blank200Here’s my quarterly update on my current investment holdings as of 7/8/22, including our 401k/403b/IRAs and taxable brokerage accounts but excluding real estate and side portfolio of self-directed investments. Following the concept of skin in the game, the following is not a recommendation, but just to share an real, imperfect, low-cost, diversified DIY portfolio. The goal of this “Humble Portfolio” is to create sustainable income that keeps up with inflation to cover our household expenses.

“Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have in their portfolio.” – Nassim Taleb

TL;DR changes: Went from 67/33 stocks/bonds ratio to 64/36, so buying more US and International Stocks with available cashflow.

How I Track My Portfolio
I’m often asked how I track my portfolio across multiple brokers and account types. (Morningstar also recently discontinued free access to their portfolio tracker.) I use both Personal Capital and a custom Google Spreadsheet to track my investment holdings:

  • The Personal Capital financial tracking app (free, my review) automatically logs into my different accounts, adds up my various balances, tracks my performance, and calculates my overall asset allocation daily.
  • Once a quarter, I also update my manual Google Spreadsheet (free, instructions) because it helps me calculate how much I need in each asset class to rebalance back towards my target asset allocation. I also create a new tab each quarter, so I have snapshot of my holdings dating back many years.

July 2022 Asset Allocation and YTD Performance
Here are updated performance and asset allocation charts, per the “Allocation” and “Holdings” tabs of my Personal Capital account.

Target Asset Allocation. I call this my “Humble Portfolio” because it accepts the repeated findings that individuals cannot reliably time the market, and that persistence in above-average stock-picking and/or sector-picking is exceedingly rare. Costs matter and nearly everyone who sells outperformance, for some reason keeps charging even if they provide zero outperformance! By paying minimal costs including management fees and tax drag, you can actually guarantee yourself above-average net performance over time.

I own broad, low-cost exposure to productive assets 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 have faith in the long-term benefit of owning publicly-traded US and international shares of businesses, as well as the stability of high-quality US Treasury and municipal debt. My stock holdings roughly follow the total world market cap breakdown at roughly 60% US and 40% ex-US. I add some “spice” to the vanilla funds with the inclusion of “small value” ETFs for US, Developed International, and Emerging Markets stocks as well as additional real estate exposure through US REITs.

I strongly believe in the importance of knowing WHY you own something. Every asset class will eventually have a low period, and you must have strong faith during these periods to truly make your money. You have to keep owning and buying more stocks through the stock market crashes. You have to maintain and even buy more rental properties during a housing crunch, etc. A good sign is that if prices drop, you’ll want to buy more of that asset instead of less. I don’t have strong faith in the long-term results of commodities, gold, or bitcoin – so I don’t own them.

I do not spend a lot of time backtesting various model portfolios, as I don’t think picking through the details of the recent past will necessarily create superior future returns. Usually, whatever model portfolio is popular in the moment just happens to hold the asset class that has been the hottest recently as well.

Find productive assets that you believe in and understand, and just keep buying them through the ups and downs. Mine may be different than yours.

I have settled into a long-term target ratio of roughly 70% stocks and 30% bonds (or 2:1 ratio) within our investment strategy of buy, hold, and occasionally rebalance. This is more conservative than most people my age, but I am settling into a more “perpetual income portfolio” as opposed to the more common “build up a big stash and hope it lasts until I die” portfolio. My target withdrawal rate is 3% or less. Here is a round-number breakdown of my target portfolio.

  • 30% US Total Market
  • 5% US Small-Cap Value
  • 20% International Total Market
  • 5% International Small-Cap Value
  • 10% US Real Estate (REIT)
  • 20% High-Quality bonds, Municipal, US Treasury or FDIC-insured deposits
  • 10% US Treasury Inflation-Protected Bonds (or I Savings Bonds)

Commentary. According to Personal Capital, my portfolio down about 16% for 2022 YTD. My US and International stocks have dropped enough that all new cashflow is being placed into buying more of those asset classes. Simple as that. Keep on truckin’.

Since that was so short and boring, here a quick fact that I keep in my head. Using the “Rule of 72”, we know that if your portfolio returns 7% a year, it will double roughly every 10 years. $10,000 invested for 10 years will double to $20,000. However, $10,000 invested for 20 years will quadruple into $40,000. $10,000 invested for 30 years will octuple into $80,000. That provides a sense of the power of compounding and how it starts slow but kicks into turbo mode later on. I’ve been investing for about 20 years, so I’m getting to the good part! 😉

I’ll share about more about the income aspect in a separate post.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Fidelity Solo FidFolios: DIY Custom Direct Indexing (Similar to M1 Finance)

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Fidelity just announced a new feature called Fidelity Solo FidFolios. You can make a custom index with up to 50 individual stocks, or a custom asset allocation portfolio using ETFs. You can then buy into your custom portfolio all a once using flat dollar amounts and Fidelity will juggle the fractional shares. For example, your $50 purchase could be split into 50 different individual companies.

“Now more than ever, investors want the peace of mind of trading, monitoring, and rebalancing custom stock portfolios in a simple way,” said Robert Mascialino, head of Fidelity’s retail brokerage business. “With the ability to align to a specific theme or individual values, Fidelity Solo FidFoliosSM helps leverage the power of direct indexing to build a customized portfolio while simplifying how investors manage what they own.”

Costs. Flat $4.99 per month, with a 90-day free trial. No stock commissions. Works within your usual Fidelity brokerage or IRA account. If you stop paying the fee, you just end up holding those individuals stocks and/or ETFs.

Note that this is different from their Fidelity Managed FidFolios, which is professionally managed by Fidelity and more about using tax-loss harvesting to gain a slight after-tax advantage. The cost for Managed Fidfolios is 0.40% annual management fee with a $5,000 initial minimum.

This may sound familiar, as it is pretty much what the start-up M1 Finance first introduced years ago, with the important distinction that M1 Finance is free (so far). Motif Investing also ran something similar before they shut down and their technology was acquired by Schwab.

I believe that a “custom robo-advisor” feature is going to be widespread in the future. Many DIY folks would like the ability to make your own customized all-in-one Target Retirement Fund. It’s really not that technically difficult to allow everyone to create their own custom glide path. I explored this with a small investment in M1, but in practice I have found it trickier to implement if you have to rebalance across various 401k plans, IRAs, and taxable brokerage accounts. Still, I’d rather use M1 Finance or this Solo Fidfolio over another robo-advisor that changes their model portfolios every few years to match up with whatever is currently trendy.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.