MMB Portfolio Dividend & Interest Income Update – October 2024 (Q3)

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Here’s my quarterly income update as a companion post to my October 2024 asset allocation & performance update. I prefer to track the income produced as an alternative metric to performance. The total income goes up much more gradually and consistently than the number shown on brokerage statements (market price), which helps encourage consistent investing. 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. – Jack Bogle

Here is the historical growth of the S&P 500 total dividend, which tracks roughly the largest 500 stocks in the US, updated after 2024 Q2 (via Yardeni Research):

That is a much smoother ride than the price index. I imagine my portfolio as a factory that churns out dollar bills, or a tree that gives dividend fruit.

Why I like tracking dividends in general. Stock dividends are a portion of profits that businesses have decided to distribute directly to shareholders, as opposed to reinvesting into their business, paying back debt, or buying back shares. They have explicitly decided that they don’t need this money to improve their business, and that it would be better to distribute to shareholders. 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. There is also a growing trend towards buybacks, partially because they are easier to discontinue. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total US Stock ETF (VTI) via StockAnalysis.com.

European corporate culture tends to encourage paying out a higher (sometimes fixed) percentage of earnings as dividends, but that also means the dividends move up and down with earnings. The starting yield is currently 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).

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.

In the case of REITs, they are legally required to distribute at least 90 percent of their taxable income to shareholders as dividends. Historically, about half of the total return from REITs is from this dividend income.

Finally, the last component comes from interest from bonds and cash. This will obviously vary with the prevailing interest rates, the real rates on TIPS, and the current rate of inflation. In 2024, we are finally back to getting paid a small percentage more than inflation on our cash.

Dividend and interest income from my specific asset allocation. To estimate the income from my portfolio, I use the weighted “TTM” or “12-Month Yield” from Morningstar (checked 10/7/24), 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. My TTM portfolio yield is now roughly 2.38%.

2.38% is the lowest TTM yield that my portfolio has been since 2021. So even though the value of my portfolio is much higher than a year or two ago, the actual amount of income distributed hasn’t kept up. As you can see from my total annual income tracker, my actual income from this portfolio has been mostly steady since mid-2022 (when interest rates started to rise again). Again, this keeps me from getting too euphoric from the market’s gains. A lot of it is just P/E ratio expansion, which can just as easily be followed by P/E ratio contraction.

What about the 4% rule? For big-picture 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 (closer to age 50) and a 4% withdrawal rate if retiring at a more traditional age (closer to 65). Too much time is spent debating this number. It’s just a quick and dirty target to get you started, not a number sent down from the heavens!

During the accumulation stage, your time is better spent focusing on earning potential via better career moves, improving your skillset, networking, and/or looking for asymmetrical entrepreneurial opportunities where you have an ownership interest.

As a semi-retired investor that has been partially supported by portfolio income for a while, I find that tracking income makes more tangible sense in my mind. Our dividends and interest income are not automatically reinvested. They are simply another “paycheck”. As with our other variable paychecks, we can choose to either spend it or invest it again to compound things more quickly. 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. You don’t have to wait until you hit a huge magic number. FIRE is Life!

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Vanguard Adds Automatic, Recurring Dollar-Based ETF Investments

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Vanguard has rolled out the ability to make automatic, recurring purchases of Vanguard ETFs using fractional shares (dollar-based purchases, $1 minimum) inside their in-house brokerage account. Trade commissions are still zero. I know that some readers were waiting for this feature. I believe it should be available in all accounts – as of last week it showed as a “pre-release” feature in my account but now that message is gone.

To find it, look for the “Automatic Investments” button on the main page after login. If you are already logged into Vanguard, you could try clicking this link.

You then see the option to schedule recurring purchases of ETFs in addition to mutual funds.

If you click on that, you can choose from weekly, weekly, bi-weekly, and twice a month frequencies. You can set it to repeat indefinitely, or set a fixed end date.

Note the following timing details:

If your automatic investment is scheduled outside of business or market hours (for example on a weekend or holiday), brokerage purchases will be processed on a prior business day. Monthly investments scheduled for the 29th, 30th, or 31st day will occur on the last day of the month during shorter months.

Here are some potential benefits of this new feature:

  • With fractional ETFs, you can invest with as little as $1. You don’t need to meet the $3,000 minimum initial purchase of some Vanguard mutual funds.
  • Vanguard ETFs often have a lower expense ratio than their mutual fund counterparts.
  • ETFs are a more portable form if you want to later switch brokerages.
  • In general, ETFs are more tax-efficient than mutual funds, but Vanguard ETFs and mutual funds have the exact same tax-efficiency due to their structure as different share classes.

For example, now you can automatically buy $100 of VTI every week, even though one share of VTI is over $200. To match up with this, you might set up a separate, weekly automatic transfer of $100 from your bank account into your brokerage account. I don’t know that you can set it to directly pull from your bank account.

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MMB Portfolio Asset Allocation & Performance Update – October 2024 (Q3)

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Here’s my 2024 Q3 update for our primary investment holdings, including all of our combined 401k/403b/IRAs and taxable brokerage accounts but excluding our house and smaller side portfolio of self-directed investments. Following the concept of skin in the game, the following is not a recommendation, but a sharing of our real-world, imperfect, low-cost, diversified DIY portfolio.

“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
Here’s how I track my portfolio across multiple brokers and account types. There are limited free advanced options after Morningstar discontinued free access to their portfolio tracker. I use both Empower Personal Dashboard (previously known as Personal Capital) and a custom Google Spreadsheet to track my investment holdings:

  • The Empower Personal Dashboard real-time portfolio tracking tools (free) automatically logs into my different accounts, adds up my various balances, tracks my performance, and calculates my overall asset allocation daily. Formerly known as Personal Capital.
  • Once a quarter, I also update my manual Google Spreadsheet (free to copy, 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 a personal archive of my holdings dating back many years.

2024 Q3 Asset Allocation and YTD Performance
Here are updated performance and asset allocation charts, per the “Holdings” and “Allocation” tabs of my Empower Personal Dashboard.

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 businesses worldwide, as well as the stability of high-quality US Treasury debt. I let my stock holdings float with the total world market cap breakdown, currently at ~62% US and ~38% ex-US. I do add just a little “spice” to the broad funds with the inclusion of “small value” factor ETFs for US, Developed International, and Emerging Markets stocks as well as diversified real estate exposure through US REITs. But if you step back and look at the big picture, this is my simplified target portfolio:

By paying minimal costs including management fees, transaction spreads, and tax drag, I am trying to essentially guarantee myself above-average net performance over time.

The portfolio that you can hold onto through the tough times is the best one for you. Every asset class will eventually have a low period, and you must have strong faith during these periods to earn those historically high returns. 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. You’ll usually find that whatever model portfolio is popular at the moment just happens to hold the asset class that has been the hottest recently as well.

I have settled into a long-term target ratio of roughly 70% stocks and 30% bonds within our investment strategy of buy, hold, and occasionally rebalance. My goal has evolved to more of a “perpetual income portfolio” as opposed to a “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 asset allocation along with my primary ETF holding for each asset class.

  • 35% US Total Market (VTI)
  • 5% US Small-Cap Value (VBR/AVUV)
  • 20% International Total Market (VXUS)
  • 5% International Small-Cap Value (AVDV)
  • 5% US Real Estate (REIT) (VNQ)
  • 15% US “Regular” Treasury Bonds or FDIC-insured deposits
  • 15% US Treasury Inflation-Protected Bonds (or I Savings Bonds)

Performance details. According to Empower, my portfolio is up about 12.7% so far in 2024. The S&P 500 is up about 19.5% YTD, while the US Bond index is up around 4.8%. I hold bonds and international stocks so that I’m always going to be lagging the hottest sector, but I really can’t complain. International stocks actually had a really good Q3, even though nobody seemed to notice.

I didn’t make any significant buys, just some 401k contributions and reinvested dividends/interest. Peeled off some to pay quarterly taxes. No sell transactions. Owning stocks continues to reward long-term investors. Out of curiosity, I generated a Morningstar Growth of $10,000 Chart for the Vanguard LifeStrategy Growth Fund (VASGX) which holds a static 80% stocks and 20% bonds and most closed mimics my portfolio since 2005, roughly when I started investing more seriously and started this blog. A *very* rough approximation is to expect your money to double every decade (Rule of 72). The money that I invested 20 years ago has indeed roughly doubled twice (4X).

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

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

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Vanguard Digital Advisor: Estimating the Benefit of Tax-Loss Harvesting

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One of the features of Vanguard’s Digital Advisor Services (VDAS) that is hardest to replicate on your own is the automated tax-loss harvesting (TLH). VDAS will monitor the prices of each of your stock ETFs daily, sell some or all of them at a loss when they deem appropriate, purchase a surrogate replacement ETF at the same time to avoid IRS wash rules, and keep track of what could be hundreds of different tax lots on an ongoing basis. A DIY investor could perform a similar version of this, but it would definitely be higher on the continuum of effort and skill required.

Therefore, a potential customer might want to estimate the benefit from TLH, and compare that with the VDAS fee of ~0.15% annually. It is possible that the TLH feature could completely offset the cost of the entire service. I dug around and found the following resources that explain everything from the general background behind TLH to how VDAS implements them specifically.

I especially appreciate the intellectual honesty of the research whitepapers because it is one of the few articles from a robo-advisor that actually admits that TLH can actually lower your after-tax return if your personal situation is not ideal. Most other robo-advisors quote some pretty idealistic assumptions to get their numbers. Here’s a quote:

In recent years, tax-loss harvesting (TLH) has been aggressively advertised as a near-certain way to increase after-tax returns by anywhere from 100 basis points to 200 basis points—in some cases even 300!—annually. […] But many individual investors do not fit this mold or should first focus on other more valuable options such as investing in tax-advantaged accounts. These investors will eventually be disappointed with the size of their TLH benefit if they set their expectation at 100 to 200 basis points.

Here are the many factors that will affect the actual benefit from tax-loss harvesting, along with a brief description and how VDAS handles it.

  • Future stock price volatility. You need losses to harvest them, and the bigger the losses, the bigger the harvest. You then need the stock price to bounce right back, preferably quickly after you harvest them. Stable and steadily-growing markets aren’t helpful in creating TLH alpha.
  • How often will you keep making new investments. If you have frequent regular investments of new cashflows, this creates more tax lots where a loss could result, and then harvested.
  • Future time horizon. Markets tend to go up over time. As time goes on, the benefit of TLH will decrease because there will be fewer losses left to harvest.
  • How often will they check for losses. Monitoring the situation daily should help find more opportunities to harvest losses. Vanguard Digital Advisor states they will check daily.
  • Number of different portfolio securities held. The more different things you can sell to create losses, the more TLH opportunities there are. Expect “direct indexing”, where you own a tiny bit of every stock instead of a pooled ETF, to be marketed more and more heavily in the future. Vanguard Digital Advisor holds ETFs, not individual securities.
  • Do you have external capital gains to offset losses? Tax savings are generated by using harvested losses to offset capital gains elsewhere. Without capital gains, taxable ordinary income can only be reduced by up to $3,000 a year. Therefore, people with small businesses, private equity, real estate, or other investments that generate a lot of capital gains are more likely to benefit from harvesting losses.
  • Your current and future tax brackets. Tax savings are generated now by offsetting capital gains and income at your current tax rate. However, you are lowering your cost basis and thus deferring those capital gains to the future. If your future tax bracket is higher, then you may actually end up paying more in taxes later. Note your future tax bracket may be higher due to legislation, not only due to income changes. Others expect to defer “indefinitely” and use the step-up in basis upon death or make a qualifying charitable donation.
  • Reinvesting tax savings. A significant part of the theoretical TLH benefit comes from investing any tax savings so that you are taking advantage of those deferred taxes and growing them further.
  • Future stock market return. This effect from the compounding of reinvested tax savings depends on the size of the market return, obviously.

As you can see, many of these factors depend on your personal situation. Vanguard introduces two imaginary model investors to explain the potential differences. This is my own abbreviated summary.

Robin is a doctor in her early 30s. She is currently in the 22% income tax bracket. But after she finishes her residency in two years, she expects to spend most of her career in the 32% bracket or higher. She mostly saves in tax-deferred accounts, so she doesn’t expect to generate significant capital gains. Due to fact that her future tax rate is higher than now, and her low expectations for capital gains, her likely benefit is low, possibly zero or even negative.

Bruce is in his late 50s and a partner at a large consulting firm that regularly realizes capital gains when new partners buy into the partnership and when he eventually sells all his shares for ~$4 million. Essentially, unlimited capital gains to offset losses. He is currently in the 35% bracket, but, based on his plans for a frugal retirement lifestyle, he aims to be in the 24% income tax bracket throughout retirement. Due to the fact that he expects his future tax rate to be lower than now, and his high expectations for capital gains, his likely benefit is high, with a median projected benefit of 0.47% annually.

These appear to be reasonable estimates for the real-world benefit of TLH at two relatively extreme examples. I think most people will be somewhere in between. So a median expectation of 0% to 0.50%, but just as important, a wide possible range of actual results! Many other robo-advisor presentations do not adequately disclose their assumptions, including the possibility of negative “alpha” if your tax rates end up being higher in retirement. (Many people feel that higher tax rates will eventually be coming due after years of deficits.)

I hope that this information will allow a potential VDAS/VPAS customer to manage their own expectations of the benefits of TLH, based on their own individual factors – most importantly, having sizable new investments that may result in temporary losses, the expectation of lower tax rates in the retirement/withdrawal phase, and having enough capital gains from other activities to offset any harvested losses.

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. 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.


Vanguard Digital Advisor Robo-Advisor Review (Updated September 2024)

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(Updated September 2024. If you’re wondering about the future of Vanguard, take note that they have been actively tinkering with their robo-advisor service, Vanguard Digital Advisor Services (VDAS). In June 2024, VDAS added the ability to include a spouse/partner in your plan, such that the portfolio is managed on a household level. In August 2024, VDAS started using fractional shares to invest every last dollar. In September 2024, they lowered the minimum requirement to $100 (formerly $3,000). I decided to wade through the 119-page Client Relationship Summary and VDAS/VPAS Brochure & Supplement again for the third time and completely re-write this review.)

Here are my notes on the robo-advisor service Vanguard Digital Advisor, current as of September 2024:

What is Vanguard Digital Advisor Here’s what they say:

In our robo discretionary offers we provide online financial planning tools designed to help you create a goal-based financial plan, and the service will create an investment strategy aligned with your personal inputs. We’ll monitor your enrolled accounts frequently using an algorithm. We’ll have full investment discretion in order to transact as necessary to align your account(s) with your goal(s).

My interpretation is that they will manage a portfolio of Vanguard ETFs for you based on your inputs into their website. There is also online software to help you create a financial plan towards multiple goals (i.e. they tell you how much you need to save each month). With VDAS, you don’t get access to a human advisor.

Types of Vanguard accounts available to be managed. VDAS can manage Vanguard 401(k) and the following retail accounts held at Vanguard Brokerage, (although you may need to sell your existing investments). They will consider all of the accounts together for purposes of tax-efficient asset location.

  • Individual or joint tenants with rights of survivorship (JTWROS) taxable accounts.
  • Traditional IRAs.
  • Roth IRAs.
  • Rollover IRAs.
  • Inherited IRAs owned by natural, adult investors.
  • Single-participant SEP-IRAs.

Their wording suggests that Vanguard will let you link other ineligible Vanguard account and external non-Vanguard account balances and include them into your long-term goal projections, but they won’t analyze their asset allocation and adjust your Vanguard asset allocation in response.

Existing outside portfolio? You will likely need to sell your existing investments if you want them to manage that money. VDAS wants a clean slate. They say they will analyze your existing holdings, including how much capital gains you have built up, and either recommend that you don’t sell them (but not enroll in VDAS), or sell them and enroll in VDAS where they will re-invest your funds for you.

Factors used to personalize your portfolio. The #1 competition for this product is probably Vanguard’s own series of Target Retirement Funds. Those are based on a goal retirement year, in 5 years increments, and now only cost 0.08% all-in for younger investors. So if you’re 25 years old, you basically have maybe 4-6 possible glide paths available.

In contrast, VDAS says they have “over 300 personalized glide paths” available. Here are the factors that they consider, based on their documentation:

  • Taxable income/salary
  • Anticipated spending needs
  • Current savings/savings rate
  • Risk attitude (Very Conservative, Conservative, Moderate, Aggressive and Very Aggressive)
  • Current age
  • Marital/partner status
  • Expected retirement age
  • Significant single-stock exposure

To be honest, I’m not sure how many users will end up with a vastly different glide path than one of the Target Retirement funds, especially considering they will most likely be constructed with the same four underlying ETFs that underpin them (more on that later). But if you have a unique situation, this personalization could be attractive.

Now available in 100% index, index/active mix, and ESG flavors. In addition to the original all-index portfolio, you can now also chose a (slightly more expensive) option that includes some actively-managed Vanguard funds or an all-index portfolio that has an environmental, social, and governance (“ESG”) filter.

But for most people picking the traditional 100% index option, your portfolio will consist of the “Four Totals”:

  • Vanguard Total Stock Market ETF (VTI)
  • Vanguard Total International Stock Market ETF (VXUS)
  • Vanguard Total Bond Market ETF (BND)
  • Vanguard Total International Bond ETF (BNDX)

As noted, these ETFs are simply different share classes of the exact same funds that underpin the Vanguard Target Retirement Funds.

Pricing and fees. How much does VDAS cost? VDAS has an all-in cost of 0.20% of assets managed annually for their all-index option, but that includes the cost of underlying ETFs. (I’m focusing on the all-index option here, there is a 0.25% all-in cost on their active/index mix option.) Your portfolio of ETFs will probably have their own expense ratio of ~0.05%, so the cost of VDAS itself will effectively be ~0.15%. That works out to $15 a year for every $10,000 invested.

In comparison, Vanguard Target Retirement Funds as of September 2024 have average expense ratios of only 0.08% all-in. The Vanguard Target Retirement Funds got a lot cheaper when finally switched to holidng Institutional shares of their underlying component funds instead of the most-expensive Investor shares. I thought that the gap between the costs would only narrow over time, but they kept the cost of VDAS the same for a gap of 0.12%.

As DIY person, I would remind folks that you can always buy the exact same four ETF building blocks at any low-cost broker (including Vanguard itself). That would make your all-in cost just the ~0.05%. However, DIY investors won’t have automatic rebalancing or automatic tax-loss harvesting.

If you have over $50,000 in assets, you can “upgrade” to Vanguard Personal Advisor Services (VPAS) where you can talk to humans for a higher all-in cost of 0.35% for the all-index option. However, I’m really not sure what actually VPAS has to offer beyond a human voice because they don’t appear to guarantee well-informed advice from a Certified Financial Planner or anything. Essentially, you seem to get some additional hand-holding from a rep who is familiar with the software.

If you have over $500,000 in assets, you can upgrade again to Personal Advisor Select, which does include a dedicated CFP. This costs a flat advisory fee of 0.30% annually (on top of the expense ratio from investments). This might actually be worth the upgrade for those that start with VDAS but over time their financial situation becomes more complicated.

Automated rebalancing: VDAS will check daily and rebalance within 5% bands. Rebalancing will be done in a tax-sensitive manner. Here’s the official text:

On each day that the markets are open for trading, we will typically look to assess Portfolios for whether a rebalancing opportunity exists consistent with our investment strategy and the following criteria (“Rebalance”). Under normal circumstances, if any asset class (stocks, bonds, or cash) is off the target asset allocation by more than 5%, the Portfolio will be rebalanced to its target allocations (asset and sub?asset) or, in the future, within allowable guardrails pending embedded tax cost.

I believe that automated rebalancing is an important and sometime under-appreciated benefit of a managed portfolio over a DIY portfolio. Us DIY folks all think we’ll rebalance the same way without emotion, but sometimes… in times of stress… we don’t. It’s hard to assess the benefit in terms of excess performance, because you are really adjusting risk and any “rebalancing bonus” tends to come and go depending on the historical period.

Automated tax loss harvesting (TLH). VDAS includes tax-loss harvesting on taxable brokerage accounts. This is the practice of selling equity ETFs at a loss to “harvest” them and replacing them with similar securities to maintain market exposure. If done correctly, this can improve your after-tax return. They will now consider the tax effects across an entire household (when filing joint tax returns). Here is their language:

The Services offer a tax loss harvesting service (“TLH Service”) election for taxable individual and joint brokerage accounts. TLH involves selling a security at a loss and purchasing another security to maintain your asset allocation. Depending on your personal circumstances, a TLH strategy can add value in the form of reduced taxes when harvested losses are used to lower your tax bill and potentially grow your savings if you are able to reinvest those tax savings. For Enhanced Households the TLH Service applies to all eligible Enrolled Accounts in the Portfolio.

From their other documents, Vanguard performs their TLH using only other Vanguard ETFs as the “surrogate” ETF pair to claim the loss but also avoid wash sale rules.

The actual benefit of tax-loss harvesting can vary widely based on individual factors. Most importantly, how much of your portfolio is actually in taxable accounts, and how much of that is stocks? Not to mention, TLH can actually lower your return in certain situations by deferring the tax bill to a future period when your tax rate is higher. This is complicated topic with no single answer. TLH could be a net positive, though, that helps offset the VDAS fee and maybe even then some.

Multiple goal support. VDAS now supports multiple goals in its software. For example, you might have a house downpayment as a short-term goal and retirement as a long-term goal.

Fractional shares of ETFs now included. This is a new feature that they basically had to add if since they wanted to lower the minimum balance to $100. Otherwise, there would be no point as VTI is over $250 for a single share.

My take. Vanguard is obviously focusing a good deal of their energy on Digital Advisor, and I think this is probably a smart move for them. The Vanguard ETFs themselves continue to be well-run and cheap, but I believe their “at-cost” structure has incentivized Vanguard to minimize customer service costs at their in-house brokerage and instead quietly push folks to hold Vanguard ETFs at outside brokers (it’s cheaper for them this way). However, Digital Advisor allows them to charge another layer of fees for management services, hopefully justifying and paying for better service for those customers. If they can keep improving this product technology while also lowering the price as it scales, I believe it can grow in popularity.

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. 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.


Stock Valuation Methods – Are They Historically High in 2024?

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US stock returns have been doing quite well, and my brokerage statement numbers keep going up. Should I be worried? Here are some ways that people try to measure whether stock valuations are cheap or expensive, along with some current numbers as of September 2024.

Quick background. Value is often said to be “what you pay” versus “what you get”. For the stock market, you divide price by earnings and get the “P/E ratio”. If a business costs $100 a share and that share earns $100 in profit every year, you get a P/E ratio of 1, which is usually considered very cheap. If another business at the same price earns only $1 per share every year, you get a P/E ratio of 100, which is usually considered very expensive. The inverse of P/E ratio is earnings yield, for example a P/E ratio of 100 is the same as an earnings yield of 1% (1/100).

Cyclically-Adjusted Earnings Yield vs. TIPS yield. CAPE stands for cyclically-adjusted price-to-earnings ratio, which basically means you use the average earnings over the last 10 years to smooth things out. Some call it PE10, or Shiller PE after Professor Robert Shiller who popularized it. This WSJ article Markets Are Way Out of Line With Reality, According to These Measures (archive) offers some nice charts about CAPE and other valuation methods. As you can see, the CAPE is pretty high right now.

I’m currently reading The Missing Billionaires: A Guide to Better Financial Decisions and they also use the CAPE and it’s inverse to offer a prediction of the future real return of the stock market:

The most popular metric for estimating the expected return of a broad stock market is known as Shiller’s cyclically adjusted price-to-earnings ratio (CAPE).a When the CAPE ratio is high, investors are paying a high price for a normalized stream of earnings, and the prospective return of the stock market is low. This finding makes logical and intuitive sense and is borne out in historical data over a long horizon.

[…] We can say something still more specific and powerful: 1/CAPE is a pretty good, though imperfect, predictor of the inflation-adjusted (i.e., real) return of the stock market over a long horizon. The measure 1/CAPE is known as the cyclically adjusted earnings yield (we’ll often shorten to “earnings yield”) because it’s calculated as earnings divided by price. If you invest in the stock market when the earnings yield is 6%, your best expectation is that you’ll earn a long-term return (after inflation) of 6%.

Here is their evidence, taken from the book:

For example, if the CAPE is 35 as of this writing, that means the cyclically-adjusted earnings yield is roughly 2.9%. That means they predict the long-term real return of the S&P 500 to ~3% as of this writing.

As a form of comparison, they suggest looking at the current real yield of TIPS: 1.7% real yield for the 10-year TIPS and 2% real yield for the 30-year TIPS. The gap between the predicted equity return and that of a “risk-free” bond is known as the (one version of) the equity risk premium (ERP). A 1% ERP is historically pretty low, but at least it is positive!

Fed Model: Current Earnings Yield vs. 10-Year Treasury Yield. Another valuation model from the WSJ article is the Fed Model, which usually takes the current P/E ratio (price divided by expected forward earnings or earnings over the last 12 months) and compares it against the traditional, nominal 10-year Treasury yield:

The Fed Model, named by strategist Ed Yardeni in the late 1990s, attempts to compare stocks with bonds by comparing the earnings yield, or earnings per share divided by price, with bond yields. It is widely used to work out whether stocks are expensive or cheap compared with the safer alternative, Treasurys. At the moment, the Fed Model suggests they are very expensive indeed. They were even more expensive a month ago, before 10-year yields fell sharply, when the S&P 500 was the most expensive relative to bonds since 2002.

You can read some criticisms of the Fed model as a predictive measure on its Wikipedia page.

Using either valuation model, you can see that the prices of US stocks relative to their earnings is high according to historical standards. Turning this observation to action is much harder. When should you jump out? When should you jump back in? How high is too high? According to the timing models suggested in The Missing Billionaires book, right now they would be only about 20% equities. I simply don’t have the confidence in the historical back-tested data to make such drastic moves in my own portfolio. My only “skill” is the lazy tendency to do nothing and letting time work things out.

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Morningstar Target Date Retirement Fund Report 2024: Highlights for DIY Investors

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Morningstar recently released its 2024 Target-Date Strategy Landscape Report (free download with e-mail address). This is mostly targeted at industry professionals as opposed to individual investors, but I still like to read through it each year. Here are a few selected charts and quick takeaways from the report.

Our annual report on target-date strategies delves into the landscape by analyzing target-date flows, asset composition, fees, strategy performance, and more.

Average Asset Allocation Glide Paths. I always like to look at the average asset allocation glide path across all of the different TDFs. Morningstar now separates the them into “To Retirement” and “Through Retirement” types, depending on if they stop changing right at the retirement date or not. On average, most TDFs have an asset allocation close to 90% equity and 10% bonds in the early years, with the equity percentage dropping (and bond percentage rising) as time goes on. At the year of retirement, the average asset allocation is roughly 40% to 50% equity.

Here are all of the TDFs rated Gold by Morningstar. Vanguard, which is the largest by asset size, was rated Silver. Morningstar didn’t really explain very clearly why Vanguard only got Silver alongside some pretty mediocre funds like the original Fidelity Freedom series (not Freedom Index).

But really, the most important factor is whether you are invested and “in the game” or not. The differences between different TDFs are relatively small these days. Most of us can’t change the TDF series that is offered in our 401k plan. We can’t control the returns of those TDFs, either.

Here is a comparison of the returns from 2055 Target Date Funds (younger investors that have 30 years until retirement). I don’t see a huge dispersion in the returns. Higher is always preferred of course, but the same TDF that had returns ranked 89th one year was then ranked 9th the next year.

Here is a comparison of the returns from 2025 Target Date Funds (older investors very close to retirement). The same TDF that had returns ranked 83rd one year was ranked 11th the next year.

I remain a fan of TDFs in general. Most are good nowadays. As DIY investors, the most important decision is to participate in the stock market returns and try to maximize our contributions. The rest is much less important. Over the long run, TDFs have created a lot of wealth for consistent savers.

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Savings Bonds: Converting Paper to Electronic at TreasuryDirect (My Experience)

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After dealing with the estate of a family member, I saw firsthand the benefits of simplifying my financial situation. (They need a better term than “death cleaning“.) If not for me as I get older, definitely for my wife and/or kids in the future. This conflicts with my constant desire to try out new stuff and chase rates, but I’m working on it. Paper savings bonds are definitely something that could easily be lost or forgotten.

Even if they are found, there are vanishingly few banks that will redeem paper bonds anymore. Another option is to physically mail them in with FS Form 1522 and cash them out directly, but that requires a signature guarantee or notary. All more potential work for others.

My ultimate goal is to liquidate all of my savings bonds at TreasuryDirect and replace them with cash or TIPS (thus removing an account to track) in an existing brokerage account, but ideally in a manner sensitive to both the current interest rates being paid and my marginal income tax rate. It is also possible that I may use them for higher education expenses, which would be within the next 6 years.

Therefore, the best option seems to be to convert these paper bonds into electronic format at TreasuryDirect.gov, combining them with my existing electronic savings bonds, and then liquidating them as needed. The conversion process does not require a signature guarantee nor notary. Electronic bonds also provide the option of partial redemptions. The main risk is the hassle of lost paper bonds if something goes wrong in transit.

General conversion directions. Here are the conversion instructions directly from TreasuryDirect:

  1. Go to your TreasuryDirect account.
  2. Select ManageDirect.
  3. In the Manage My Linked Accounts menu, select Establish a Conversion Linked Account. If this option doesn’t appear, you have a Conversion Linked Account already. Skip to step 6 below.
  4. Review the information about conversion linked accounts.
  5. Select Create Account.
  6. In the Manage My Conversions menu, select How to Convert My Paper Bonds.
  7. Follow the instructions there.
  8. When you prepare your paper bonds to submit for conversion, do NOT sign the back of the bonds.

Basically, you have to enter the information on each of your paper savings bonds and they will create a numbered manifest with all of the bond data. You must send in your original paper savings bonds along with this signed manifest. Here is what you must certify with your signature:

By signing below:
1. I certify that I am requesting conversion of the listed savings bonds. I further certify that any bond not registered in my name was purchased by me as a gift to the bond’s registered owner.
2. I acknowledge and accept the terms and conditions set out in the regulations for TreasuryDirect at 31 CFR Part 363.
3. I understand that converted bonds are automatically redeemed upon final maturity and the interest reported to the IRS. I also understand that a Zero-Percent Certificate of Indebtedness (C of I) is
purchased with the redemption proceeds of the bonds.
4. I certify that all information provided is true, correct, and complete.

They state that you will not receive any notifications on the process, but you can check the status online:

You will not receive a notification when we receive the bonds or when the conversion process is complete. However, you may check the status of your bonds at any time, through your TreasuryDirect Conversion linked account. Click ManageDirect, then “View my manifests.” Select the manifest you wish to view and click the Select button. You will see one of the following notations in the Status column next to the bonds on your manifest:

In Progress – processing in progress;
Pending – Customer Service needs additional information;
Returned – Bond returned to you as ineligible for conversion;
Not received – Treasury did not receive the bond listed on the manifest;
Canceled – Bond closed in previous transaction. For example, a replacement bond was issued after being reported lost, stolen, or destroyed; or
Converted – Bond converted. Check your Current Holdings or Gift Box in My Converted Bonds Linked Account, or your Minor Linked Account.

My paper bond conversion timeline. I mailed them both in on July 17th, 2024 using USPS Priority and the default tracking number. . As they were titled in two different names, I sent them in two separate envelopes with two separate manifests. The tracking number confirmed basic delivery.

Roughly two weeks later on July 30th, 2024, I received the following e-mail confirmation, only for one of us (my wife). Apparently there are notifications after all? However, I never received any e-mail confirmation for myself for my own customer number. It’s possible that I overlooked it, but I did search my Junk and Spam folders. Here is the text of the e-mail.

Customer Number: XXXXXXX
Customer Name: Mrs. MMB
Case Number: 1-XXXXXXX

Dear Customer,

This is a system generated email to communicate we received your Savings Bonds/Treasury Marketable Securities materials.

Cases are worked in the order they are received in our office. Your request is important to us and will receive attention as soon as possible. Please be aware of our estimated processing times to process your case which are based on the case type:

Cases requesting to cash Series EE and/or Series I paper savings bonds held in your name, at least 4 weeks.
Cases requesting to cash Series HH savings bonds held in your name, at least 3 months.
Unlocking your TreasuryDirect account, updating bank information in that account, or converting your paper savings bonds into electronic bonds in TreasuryDirect, at least 4 weeks.
Claims for missing, lost, or stolen bonds, at least 6 months.
All other cases, at least 20 weeks.
If we require additional information to process your case, we will contact you. Thank you for your patience.

Please retain the Customer Number and Case Number referenced above to streamline any future actions associated with this request. Also note, you may receive multiple email notifications and Case Numbers depending on the type of transaction(s) you have requested.

If you have additional questions, please use the Contact Us link on TreasuryDirect.gov.

We appreciate your interest in U.S. Treasury securities.

Sincerely,
Treasury Services

Initially, I was a little concerned about my missing confirmation e-mail, but I figured there was nothing I could do until it was either processed or enough time had passed that I could claim it as lost. I told myself that there is a clear process to claim lost or stolen paper savings bonds using FS Form 1048, in case it came to that. I had made copies of everything in order to maintain a record of the serial numbers.

On August 14th, 2024 (two weeks later), I decided to log into my TreasuryDirect account to check on things. Given they stated “at least 4 weeks” above, I was surprised to find that all of the paper bonds (both my and my wife’s) showed in our respective “My Converted Bonds” account. You can also check the status of existing manifests under “ManageDirect” and then “Manifest Information” (screenshot at top of post).

So there you have it. As of later 2024, it took roughly two weeks to get receipt confirmation (maybe) and another two weeks (maybe) to process. Everything worked out in the end, and hopefully this information will help set some reasonable expectations for others.

p.s. I was able to add a new linked bank account using routing and account numbers with no additional security steps. Not even microdeposits. I don’t know if this is a good move overall, but I am personally glad to not have to hunt down a local bank branch that will grant me a medallion signature guarantee like they were requiring several years ago.

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Vanguard How America Saves 2024: 401(k) Retirement Plan Stats

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Vanguard recently released the 2024 edition of their annual How America Saves report, a detailed, 113-page report targeted at industry professionals which looks across millions of their 401k, 403b, and similar defined-contribution retirement plans. Personal finance geeks rejoice! Here are a few select bits that caught my eye.

Median employee contribution rate was 6.2%. Median means that half of people were saving more, while half were saving less. This out of all participants. Average is weighted more by absolute dollar savings. The overall historical trend is rising slowly.

Median total contribution rate was 11%, which includes employer match. Nearly everyone gets some sort of employer match The overall historical trend is also rising slowly.

How much does Vanguard think we should be saving? Vanguard believes that if your income is under $50,000, you should be saving at least 9% total. If your income is $50k to $100k, you should be saving at least 12% total. If your income is over $100k, you should be saving at least 15% total.

About half of workers are “saving effectively” according this definition.

What about the “Super Savers”? Overall, 14% of participants saved the maximum allowed tax-advantaged amount in 2023. Maxing it out was very rare at less than 100k income levels. 53% of those with incomes of $150,000+ maxed out their contributions. Here is the full breakdown by income:

More are going beyond the traditional “maxing out the 401k. Interestingly, 9% of participants used the after-tax contribution option if it was available. 23% of those with incomes of $150,000+ maxed out used this option. I am assuming that many of these people are going for the “Mega Backdoor Roth”.

Asset allocation. This chart shows the trends in asset allocation as the participants age. The increased use of Target-Date Funds (TDFs) and other professional management options has changed it so that young people are less and less likely to hold cash. Asset allocations are becoming more uniform and aligned with TDFs in general.

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S&P 500 Stocks: Are Long-Term Returns Always Above Inflation?

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If you’d like a little bit of comfort as a long-term owner of stocks, check out this chart from Ben Carlson at A Wealth of Common Sense. He looks at every rolling 22-year period (based on a reader request) between 1926 to 2023, and finds that the minimum return during any 22-year period is still 1.4% above inflation. The average is a pretty impressive 7.2% above inflation.

Another interesting takeaway from this chart is that the enemy of after-inflation returns is not necessarily an intensely traumatic event like the Great Depression or World War II or the Great Financial/Housing Crisis, but also an extended period of high inflation. The worst real return period was around the 1970s:

Surprisingly, the worst 22 year period for real returns was not in the aftermath of the Great Depression but rather in the 1970s. The two-plus decade real return ending in the summer of 1982 was just 1.4% per year. That time frame featured an annual inflation rate of nearly 6% which is a high hurdle rate to beat.

Here is the a similar chart, but not adjusted for inflation.

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MMB Portfolio Dividend & Interest Income Update – July 2024 (Post Q2)

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Here’s my quarterly income update as a companion post to my July 2024 asset allocation & performance update. I prefer to track the income produced as an alternative metric to performance. The total income goes up much more gradually and consistently than the number shown on brokerage statements (market price), which helps encourage consistent investing. 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. – Jack Bogle

Here is the historical growth of the S&P 500 total dividend, which tracks roughly the largest 500 stocks in the US, updated after 2024 Q1 (via Yardeni Research):

That is a much smoother ride than the price index. I imagine my portfolio as a factory that churns out dollar bills, or a tree that gives dividend fruit.

Why I like tracking dividends in general. Stock dividends are a portion of profits that businesses have decided to distribute directly to shareholders, as opposed to reinvesting into their business, paying back debt, or buying back shares. They have explicitly decided that they don’t need this money to improve their business, and that it would be better to distribute to shareholders. 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. There is also a growing trend towards buybacks, partially because they are easier to discontinue. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the iShares Core S&P 500 ETF (IVV) via StockAnalysis.com.

European corporate culture tends to encourage paying out a higher (sometimes fixed) percentage of earnings as dividends, but that also means the dividends move up and down with earnings. The starting yield is currently 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).

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.

In the case of REITs, they are legally required to distribute at least 90 percent of their taxable income to shareholders as dividends. Historically, about half of the total return from REITs is from this dividend income.

Finally, the last component comes from interest from bonds and cash. This will obviously vary with the prevailing interest rates, the real rates on TIPS, and the current rate of inflation. In 2024, we are finally back to getting paid a small percentage more than inflation on our cash.

Dividend and interest income from my specific asset allocation. To estimate the income from my portfolio, I use the weighted “TTM” or “12-Month Yield” from Morningstar (checked 7/1/24), 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. My TTM portfolio yield is now roughly 2.65%.

What about the 4% rule? For big-picture 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 (closer to age 50) and a 4% withdrawal rate if retiring at a more traditional age (closer to 65). Too much time is spent debating this number. It’s just a quick and dirty target to get you started, not a number sent down from the heavens!

During the accumulation stage, your time is better spent focusing on earning potential via better career moves, improving your skillset, networking, and/or looking for asymmetrical entrepreneurial opportunities where you have an ownership interest.

As a semi-retired investor that has been partially supported by portfolio income for a while, I find that tracking income makes more tangible sense in my mind. Our dividends and interest income are not automatically reinvested. They are simply another “paycheck”. As with our other variable paychecks, we can choose to either spend it or invest it again to compound things more quickly. 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. You don’t have to wait until you hit a huge magic number. FIRE is Life!

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MMB Portfolio Asset Allocation & Performance Update – July 2024 (Post Q2)

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Here’s my 2024 Q2 update for our primary investment holdings, including all of our combined 401k/403b/IRAs and taxable brokerage accounts but excluding our house and side portfolio of self-directed investments. Following the concept of skin in the game, the following is not a recommendation, but a sharing of our real-world, imperfect, low-cost, diversified DIY portfolio.

“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
Here’s how I track my portfolio across multiple brokers and account types. There are limited free advanced options after Morningstar discontinued free access to their portfolio tracker. I use both Empower Personal Dashboard (previously known as Personal Capital) and a custom Google Spreadsheet to track my investment holdings:

  • The Empower Personal Dashboard real-time portfolio tracking tools (free) automatically logs into my different accounts, adds up my various balances, tracks my performance, and calculates my overall asset allocation daily. Formerly known as Personal Capital.
  • Once a quarter, I also update my manual Google Spreadsheet (free to copy, 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 a personal archive of my holdings dating back many years.

2024 Q2 Asset Allocation and YTD Performance
Here are updated performance and asset allocation charts, per the “Holdings” and “Allocation” tabs of my Empower Personal Dashboard.

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 businesses worldwide, as well as the stability of high-quality US Treasury debt. My stock holdings roughly follow the total world market cap breakdown at roughly 60% US and 40% ex-US. I do add just a little “spice” to the broad funds with the inclusion of “small value” factor ETFs for US, Developed International, and Emerging Markets stocks as well as diversified real estate exposure through US REITs. But if you step back and look at the big picture, my target portfolio is quite boring.

By paying minimal costs including management fees, transaction spreads, and tax drag, I am trying to essentially guarantee myself above-average net performance over time.

The portfolio that you can hold onto through the tough times is the best one for you. Every asset class will eventually have a low period, and you must have strong faith during these periods to earn those historically high returns. 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. You’ll usually find that whatever model portfolio is popular at the moment just happens to hold the asset class that has been the hottest recently as well.

I have settled into a long-term target ratio of roughly 70% stocks and 30% bonds within our investment strategy of buy, hold, and occasionally rebalance. My goal has evolved to more of a “perpetual income portfolio” as opposed to a “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 asset allocation along with my primary ETF holding for each asset class. The reality is of course a bit more messy.

  • 35% US Total Market (VTI)
  • 5% US Small-Cap Value (VBR)
  • 20% International Total Market (VXUS)
  • 5% International Small-Cap Value (AVDV)
  • 5% US Real Estate (REIT) (VNQ)
  • 15% US “Regular” Treasury Bonds or FDIC-insured deposits
  • 15% US Treasury Inflation-Protected Bonds (or I Savings Bonds)

Performance details. According to Empower, my portfolio is up about 6% so far in 2024. The S&P 500 is up about 14.5% YTD, while the US Bond index is down around 1%. I hold enough bonds and international stocks that I’m always going to be lagging the hottest sector, and I’m pretty much used to that now.

As usual, not much action. These quarterly updates are mostly for me to manually log into all my accounts to make sure they still exist. I didn’t sell a single share of anything. I did reinvest some dividends and interest to bring me back towards my target numbers. The US capital markets continue to reward the long-term investors who take on the risk of owning stocks.

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

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. 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.