MMB Portfolio Update July 2021: Dividend and Interest Income

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While my July 2021 portfolio asset allocation is designed for total return, I also track the income produced quarterly. Stock dividends are the portion of profits that businesses have decided they don’t need to reinvest into their business. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation. Here is the historical growth of the S&P 500 absolute dividend, updated as of 2021 Q2 (source):

This means that if you owned enough of the S&P 500 to produce an annual dividend income of about $13,000 a year in 1999, then today those same shares would be worth a lot more AND your annual dividend income would have increased to $50,000 a year, even if you spent all that dividend income every year.

I track the “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 over the same period. I prefer this measure because it is based on historical distributions and not a forecast. Below is a rough approximation of my portfolio (2/3rd stocks and 1/3rd bonds).

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 7/19/21) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
25% 1.26% 0.36%
US Small Value
Vanguard Small-Cap Value ETF (VBR)
5% 1.60% 0.08%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
25% 2.44% 0.53%
Emerging Markets
Vanguard Emerging Markets ETF (VWO)
5% 1.98% 0.09%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 2.34% 0.24%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Treasury ETF (VGIT)
17% 1.26% 0.26%
Inflation-Linked Treasury Bonds
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
17% 1.35% 0.20%
Totals 100% 1.69%

 

Trailing 12-month yield history. Here is a chart showing how this 12-month trailing income rate has varied since I started tracking it in 2014.

Portfolio value reality check. One of the things I like about using this number is that 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.

Absolute dividend income history. It was more difficult to track the absolute income produced as I’d have to remove the effect of additional investments, reinvestment of dividends and interest, rebalancing, and capital gains distributions. To get a general idea, I looked at the Vanguard LifeStrategy Growth Fund (VASGX) to see what kind of income that $1 million back in 2014 would have generated up until today. This is not exactly my portfolio, but is somewhat close at a steady 80% stock/20% bond ratio with some international stock exposure. For example, it’s current 12-month yield is 1.59%.

During 2014, VASGX distributed about $0.61 of income per share, at an average price about $29 per share. That’s a yield of about 2.1%. So $1,000,000 of VASGX in 2014 would have distributed about $21,000 of annual income (about 34,482 shares).

Those same 34,482 shares would be worth about $1,510,000 currently (as of 7/16/2021 at $43.79 per share). In 2018, the income produced was roughly $27,500 a year (80 cents per share). In 2019, the income produced was $29,000 a year (84 cents per share). In 2020, the income produced was $23,000 a year (67 cents per share ).

Putting it all together. This quarter’s trailing income yield of 1.69% is the lowest ever since 2014. It is almost exactly 1% lower than what it was in late 2018. At the same time, both the portfolio value and the absolute income produced is higher than in 2014. If you retired back in 2014 and have been living off your stock/bond portfolio, you’ve been doing fine.

However, this is not necessarily good news going forward. There are countless articles debating this topic, but I historically support a 3% withdrawal rate as a reasonable target for planning purposes if you want to retire young (before age 50) and a 4% withdrawal rate as a reasonable target if retiring at a more traditional age (closer to 65). However, nobody is guaranteeing these numbers and flexibility may be required to make your portfolio reliably last a long time.

If you are not close to retirement, there is not much use worrying these decimal points. Your time is better spent focusing on earning potential via better career moves, investing in your skillset, and/or looking for entrepreneurial opportunities where you own equity in a business asset.

How we handle this income. Our dividends and interest income are not automatically reinvested. I treat this money as part of our “paycheck”. Then, as with a real paycheck, we can choose to either spend it or invest it again. Even if still working, you could use this money to cut back working hours, pursue new interests, start a new business, travel, perform charity or volunteer work, and so on.

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 Update July 2021: Asset Allocation & Performance

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Here’s my quarterly update on my current investment holdings as of July 2021, including our 401k/403b/IRAs, taxable brokerage accounts, and savings bonds but excluding our house, cash reserves, and a small portfolio of self-directed investments. Following the concept of skin in the game, the following is not a recommendation, but a real-world example of a mostly low-cost, diversified, simple DIY portfolio with a few customized tweaks. The goal of this portfolio is to create sustainable income that keeps up with inflation to cover our household expenses.

Actual Asset Allocation and Holdings
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. 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.

Here are updated performance and asset allocation charts, per the “Allocation” and “Holdings” tabs of my Personal Capital account, respectively:

Stock Holdings
Vanguard Total Stock Market (VTI, VTSAX)
Vanguard Total International Stock Market (VXUS, VTIAX)
Vanguard Small Value (VBR)
Vanguard Emerging Markets (VWO)
Vanguard REIT Index (VNQ, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt (VWITX, VWIUX)
Vanguard Intermediate-Term Treasury (VFITX, VFIUX)
Vanguard Inflation-Protected Securities (VIPSX, VAIPX)
Fidelity Inflation-Protected Bond Index (FIPDX)
iShares Barclays TIPS Bond (TIP)
Individual TIPS bonds
U.S. Savings Bonds (Series I)

Target Asset Allocation. 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.

I believe in the importance of doing your own research and owning productive assets in which you have strong faith. 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.

Personally, I try to own broad, low-cost exposure to asset classes that will provide long-term returns above inflation, distribute income via dividends and interest, and finally offer some historical tendencies to balance each other out. I have faith in the long-term benefit of owning publicly-traded US and international shares of businesses as well as high-quality US federal and municipal debt. I also own real estate through REITs.

Again, personally, I simply don’t have strong faith in the long-term results of commodities, gold, or bitcoin. I own my own house, but I choose not to participate in the higher potential gains but also higher potential risks (of both requiring more time and money) of rental real estate.

My US/international ratio floats with the total world market cap breakdown, currently at ~58% US and 42% ex-US. I’m fine with a slight home bias (owning more US stocks than the overall world market cap), but I want to avoid having an international bias.

Stocks Breakdown

  • 43% US Total Market
  • 7% US Small-Cap Value
  • 33% International Total Market
  • 7% Emerging Markets
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 33% High-Quality Nominal bonds, US Treasury or FDIC-insured
  • 33% High-Quality Municipal Bonds
  • 33% US Treasury Inflation-Protected Bonds

I have settled into a long-term target ratio of 67% stocks and 33% bonds (2:1 ratio) within our investment strategy of buy, hold, and occasionally rebalance. I use the dividends and interest to rebalance whenever possible in order to avoid taxable gains. I plan to only manually rebalance past that if the stock/bond ratio is still off by more than 5% (i.e. less than 62% stocks, greater than 72% stocks). With a self-managed, simple portfolio of low-cost funds, we can minimize management fees, commissions, and taxes.

Holdings commentary. The world seems to have stabilized since the March 2020 market drop and overall panic, but I try not to get too attached to these numbers. They seem too good to be true, even as things continue to open up. All I can do is listen to the late Jack Bogle and “stay the course”. I remain optimistic that capitalism, human ingenuity, human resilience, human compassion, and our system of laws will continue to improve things over time.

I would like to note that when few people were paying attention, TIPS have had a pretty good run for an insurance-like investment. The iShares TIPS ETF (TIP) went up 8.3% in 2019 and 10.9% in 2020. The 10-year breakeven inflation rate between TIPS and Treasury is currently about 2.3%. I’m still happy owning a chunk of my bonds as TIPS.

Performance numbers. According to Personal Capital, my portfolio is up +9.4% for 2021 YTD. I rolled my own benchmark for my portfolio using 50% Vanguard LifeStrategy Growth Fund and 50% Vanguard LifeStrategy Moderate Growth Fund – one is 60/40 and the other is 80/20 so it also works out to 70% stocks and 30% bonds. That benchmark would have a total return of +8.2% for 2021 YTD as of 7/18/2021.

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

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Buffett & Munger Wealth of Wisdom on CNBC: Full Video and Transcript

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Update: Apparently there was a lot of the interview that wasn’t shown in the CNBC video below, but is being released in a four part series on their podcast, Squawk Pod. Let me know if you find a transcript.

Original post:

For the Buffett and Munger fans out there, Becky Quick had another CNBC special interview with the pair about their longtime friendship and partnership, called Buffett & Munger: A Wealth of Wisdom on June 29th, 2021. Thankfully, you can watch the full video online and/or read the full text transcript.

All in all, this interview didn’t offer a lot of new insights if you already listened to the 2021 Berkshire Hathaway shareholder meeting and 2021 Daily Journal shareholder meeting (Robinhood still promotes gambling and Bitcoin is still a delusion), but it did provide a little more background into their personal histories.

Here is my single favorite quote from the interview (emphasis mine):

BUFFETT: And we’re still doing it, yeah. We made a lot of money. But what we really wanted was independence. And we have had the ability since pretty much a little after we met financially we could associate with people who we wanted to associate with. And if we had, if we associated with jerks, that was our problem. But we didn’t have to. We’ve had that luxury now for, you know, 60 years or close to it. And, and that beats 25-room houses and, you know, six cars or that stuff is, what really is great is if you can do what you want to do in life and associate with the people you want to associate with in life. And, now, it, it’s and, and we both had that, that spirit all the way through.

These two friends may be famous because they are rich, but they are happy because they are able to spend their time with people that they enjoy.

Buffett and Munger explicitly wanted to get rich, so they could be independent. True freedom is the ability to control how you spend your time. But that usually takes a certain amount of money, so we have the term “financial freedom”.

I think it’s okay to say “I want accumulate a lot of money for the next X months or years”, especially if you’re in debt. As Munger has also stated, the first $100,000 is the hardest. If you really want independence quickly, then you need to embrace some pain and sacrifice to earn your freedom. This is why I try not to criticize anyone taking “extreme” measures to improve their savings rate. Some people are willing to endure a very spartan lifestyle for independence sooner, while others aren’t, or they may have a higher income and not need to give up much.

At the same time, after reaching a certain level of financial stability, we then need to figure how what game we really want to play with our limited time on this planet, beyond simply buying more luxurious stuff. Buffett enjoyed the game of capital allocation and accumulating more dollars; that was his idea of fun. He even had a partner to play the game with him. For most people, I think continuing to make more money involves more stress and hard work.

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.

Vanguard: Improving Portfolio Safe Withdrawal Rates for FIRE

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Vanguard Research has published a new whitepaper titled Fuel for the FIRE: Updating the 4% rule for early retirees, which discusses its assumptions and how different factors can hurt or improve your odds of success. Many of these topics have been discussed at length elsewhere, but as always I appreciate the power of concise definitions and simple charts to help with understanding.

Here is a nice, concise definition for FIRE:

FIRE stands for “Financial Independence Retire Early.” FIRE investors save as much of their income as possible during their working years, hoping to attain financial independence at a young age and maintain it through the rest of their life—aka retirement.

Here is a nice, concise history of the 4% Rule:

Bengen (1994) calculated the maximum percentage that retirees could withdraw annually from their portfolio without running out of money over 30 years. Advisors refer to this percentage as the safe withdrawal rate. Bengen summarized his findings as follows: “Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal rate of 4 percent, followed by inflation-adjusted withdrawals in subsequent years, should be safe.” And the 4% rule was born.

Here are the potential issues with the assumptions embedded within the 4% rule:

  • The use of historical returns as a guide for future returns
  • A retirement horizon of 30 years
  • Returns equal to those of market indexes, without accounting for fees
  • A portfolio invested only in domestic assets (“home bias”)
  • A fixed percentage withdrawal in real terms (“dollar plus inflation”)

Here are suggested adjustments. Additional, helpful details are in the paper.

Don’t assume historical averages will hold for the future. Vanguard calculates their own forward-looking estimates based on factors like stock P/E ratios, current bond interest rates, and recent inflation statistics. They are a lot lower than historical averages, as seen in the graphic above (at the top of this post).

Understand that your retirement horizon may be much longer than 30 years. The longer a portfolio has to last, the more likely it can fail.

Minimize costs. Advisor fees, mutual fund and ETF fees, taxes, and other fees will cut directly into your net income. 1% in investment fees makes a big impact.

Invest in a diversified portfolio. Vanguard believes that adding some international assets will improve your chances of success. Right now, international stocks have lower valuations (P/E and related) as compared to US stocks.

Use a dynamic spending strategy. As you can see below, this is one of the most powerful ways to improve your odds of success. If you can spend less during a bear market (while also getting to spend more in a bull market), your portfolio’s chances of survival improve dramatically. Either your budget has enough “padding” such that cutting back won’t hurt much, or it hurts but you are willing to endure that temporary pain, or you maintain the option to work a little to earn some additional income if needed.

Vanguard doesn’t give any hard numbers when it comes to replacing the 4% number, but the lower expected future returns, longer time horizon, and fee impact all point to a lower number. However, being flexible with your portfolio withdrawals can raise the number.

I enjoy thinking about these sorts of variables and ways to optimize, but the fact is that nobody knows the future “safe” withdrawal rate, even within a percentage point. You have to let go of the idea of 100% certainty. Planning for flexibility (identifying areas to cut back temporarily, maintaining backup work options) and having belief in your ability to adapt is critical for pulling off FIRE at any reasonable withdrawal rate (say 3% to 4%). FIRE is about balancing the fear of running out of money with the fear of running out of time.

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.

DIY Inflation-Protected Pension: Fewer Retirees Claiming Social Security at Age 62

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An important lever in building your retirement income is timing when you start claiming your Social Security benefits. While you can start as early as age 62, your monthly benefit increases each year that you delay claiming (up until age 70). For example, here is what my payout would be at various claiming ages if I stopped working today*:

By forgoing the potential income during those initial years, I can “buy” a larger Social Security benefit for the rest of my life – essentially an inflation-adjusted lifetime annuity that happens to be backed the US government, as opposed to an insurance company that has a small-but-nonzero chance of failure. There is a big different between $100 a month and $100 month always adjusted for CPI inflation for the next 30 to 40 years. From this WSJ article:

“The very best annuity you can buy is to delay Social Security,” says Steve Vernon, an actuary who is a consulting research scholar at the Stanford Center on Longevity. Mr. Vernon, 67 years old, is himself working part time so he can delay claiming Social Security until age 70.

Did you know that there are now zero insurance companies that sell new annuities that pay lifetime income linked to inflation (CPI)? You can find some with fixed annual increases, but none will guarantee the increases to track inflation. Not a single for-profit company wants to take on the risk of future inflation. Think about that.

For a long time, the most common age of claiming was age 62, as soon as possible. However, this chart from the Center for Retirement Research at Boston College shows that the current trend is that fewer and fewer people are doing that, especially in the last 10 years (hat tip Abnormal Returns). The curve tracks the percentage of people turning 62 that start claim age 62. (This is different than percentage of all claimants, because there is a growing number of 62-year-olds overall.)

I haven’t found any official surveys about the reason for this trend, but here are some possibilities:

  • Fewer people “need” Social Security income right away, because they are healthier and/or able to find work for longer.
  • The stock market has been going up pretty consistently over the last 10 years, so fewer people need the income to start right away.
  • Fewer people “want” Social Security right away, because they expect to live longer or have been educated about the potential benefits of delayed claiming. They want the higher paycheck and are willing to wait.

There are definitely more free tools out there to help you make this decision. My payout chart above was based on mySocialSecurity.gov and SSA.tools and other free calculator is OpenSocialSecurity.com. OpenSocialSecurity actually told me that the optimal choice was for one of us to claim at 62 and the other to wait until 70, so early claiming isn’t always a bad thing.

* Wait, I’m less than 20 years from being able to claim Social Security?! 😱

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Sample Household Budget For Early Retirement: 85% Savings Rate!

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The Hustle has an article on 30-year-old early retirees and it serves as a quick introduction to the concept of FIRE (Financial Independence Retire Early). For the most part, it profiles young tech workers and engineers with very aggressive savings rates. Here is the budget of a 28-year-old computer programmer in San Francisco who saves 85% of his take-home pay (over 91% of gross pay):

At first glance, isn’t the budget missing a few lines? Health insurance? Paid by employer, I assume. Transportation? No need for a car in the city, I assume. Utilities? I guess renting a room in a 5-bedroom can become quite a deal when splitting things that many ways.

On the other hand, how does $165,000 gross salary end up as only $91,000 take-home pay, even in California? His true saving rate might be even higher than stated.

Let’s forget the details. He makes a big salary, and spends very little. That’s all you really need to know. I don’t question the overall spending numbers because I also lived on less than $20,000 a year as a 20-something single person in a budget apartment shared with a roommate. Even that 165k income is simply about average for a tech worker, per Statista:

(If you are prone to salary envy, don’t poke around the tech worker salary comparison site Levels.fyi.)

I’m happy for Kevin, but is frugality only for the rich? No, I don’t think that is a fair statement. Now that I am older, I can estimate the income of my parents and can appreciate the lengths that they went to in order to manage our family without going into debt. You have to to believe that you can make a difference. I hate the suggestion that there is no point in trying, and that we have to wait for the politicians to save us.

Now, I would agree if you are a household that is earning significantly over the median income, then yes, you have the power to quickly build a pile of money that is big enough to change your life. “Financial freedom within 10 years is for the rich” isn’t quite as catchy. A positive aspect of the FIRE movement is that it is showing people an alternative way. You don’t have to save 85% of your income, but you should realize what you are giving up if you’re just spending it all.

My overall message? Personal finance still matters. You can make a difference. You can raise your income. You can prioritize your spending. I avoid the acronym FIRE acronym because the words are confusing for too many people. The vast majority are not going to “retire” completely from paid work in their 30s or 40s (even if they technically could). However, you can still read about the examples of others in order to find inspiration. Take what works for you, and leave the rest.

The fact is, if you are able to use your saved money in order to lead a life with less stress and more meaning, then you are winning the game as far as I am concerned. Different job/same place, same job/different place, less hours, more flexible hours, better hours, there are countless possibilities to improve your daily life.

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.

Practical Portfolio Rebalancing Tips from Vanguard (+My Rebalancing Strategy)

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Are stocks too overpriced? Is inflation coming to crush bonds? The media is not incentivized to tell you what is often the best advice: do absolutely nothing. If you still want to take action, consider rebalancing your portfolio. If you’ve stayed invested throughout the last several years, your portfolio may have shifted as in the scenario above:

For example, imagine you selected an asset allocation of 50% stocks and 50% bonds. If 4 years go by during which stocks return an average of 8% a year and bonds 2%, you’ll find that your new asset mix is more like 56% stocks and 44% bonds.

Here are some quick tips about rebalancing your portfolio back towards your target risk level, taken from Vanguard article #1 and Vanguard article #2.

Here are three possible rebalancing strategies:

  • Time: Rebalance your portfolio on a predetermined schedule such as quarterly, semiannually, or annually (not daily or weekly).
  • Threshold: Rebalance your portfolio only when its asset allocation has drifted from its target by a predetermined percentage.
  • Time and threshold: Blend both strategies to further balance your risk.

Here are three practical tips from Vanguard to rebalance with minimal tax drag:

  • Focus on tax-advantaged accounts. Selling investments from a taxable account that’s gained value will most likely mean you’ll owe taxes on the realized gains. To avoid this, you could rebalance within your tax-advantaged accounts only.
  • Rebalance with portfolio cash flows. Direct cash inflows such as dividends and interest into your portfolio’s underweighted asset classes. And when withdrawing from your portfolio, start with your overweighted asset classes. (If you’re age 72 or over, take your required minimum distribution (RMD) from your retirement account(s) while you’re rebalancing your portfolio. You can then reinvest your RMDs in one of your taxable accounts that has an underweighted asset class.)
  • Be mindful of costs. To minimize transaction costs and taxes, you could opt to partially rebalance your portfolio to its target asset allocation. Focusing primarily on shares with a higher cost basis (in taxable accounts) or on asset classes that are extremely overweighted or underweighted will limit both taxes and transaction costs associated with rebalancing.

These tips are very closely related to my own simple rebalancing system. Here’s what my process looks like these days:

  • Only peek once a quarter. I update my Google portfolio spreadsheet and log into Personal Capital once a quarter. Otherwise, try not to track daily movements in my portfolio or the stock market in general. Consuming more information is not always better, as you start to confuse noise vs. signal.
  • Rebalance first with available cash. In my Solo 401k and taxable brokerage accounts, this includes bond interest, dividends, and capital gains distributions. During the accumulation stage, this included regular savings from job income.
  • If the stock/bond ratio is still off by more than 5%, then rebalance more using tax-advantaged accounts. I have multiple asset classes, but for triggering rebalancing, I focus on the overall stocks/bonds ratio during my quarterly check-up. My equities are all “risk on” (including Small Cap Value, Emerging Markets, and REITs) and my bonds are all “risk off” (US Treasuries, TIPS, and FDIC/NCUA-insured CDs only). I can use my 401k balance (including brokerage window), IRAs, and Solo 401k brokerage plan to make adjustments with no capital gains.
  • If absolutely required in a rare case, make taxable sale using specific ID of tax lots. I select the “Specific ID” method at Vanguard to identify the tax lots when selling. I can thus choose to realize a bigger gain when my tax rates are low, and a lesser gain when my tax rates are high.

Rebalancing should be a relatively minor adjustment, but selling 5% can be enough to feel like you took some positive action. (I try to avoid large, sudden changes for any reason, even though I do feel the fear at times.) If stocks go down, you can be happy you sold some stocks while they were “up”. If stocks keep going up, you’ll still be mostly invested and participating in those gains.

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.

Morningstar Target Date Retirement Fund Report 2021: Getting Better But Still Under-Appreciated

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There are now trillions of dollars held by Target Date Funds (TDFs) inside employer-sponsored retirement plans like 401k’s and 403b’s, but you still don’t see much coverage on them in the financial media. Perhaps they are too boring to grab clicks or too unprofitable to market to individuals. Morningstar just released their 2021 Target-Date fund report (email required), and this year it seems even more focused on the employer institutional side and less on the actual employees that use it. However, Christine Benz (also of Morningstar) makes up for this with her article In Praise of Target-Date Funds.

Oftentimes, target-date critics are selling some type of investment advice themselves; they may not admit it, but they view target-date funds as competition.

My second thought when I see target-date funds coming in for criticism is to wonder: Are you seeing what I’m seeing? Because from where I sit, target-date funds have been nothing short of the biggest positive development for investors since the index fund.

Here is a summary of the benefits of Target Date funds:

  • TDFs take advantage of the behavioral inertia that encourages inaction during times of crisis. There was relatively little TDF selling activity during the March 2020 market drop. In fact, the automatic rebalancing may have improved returns compared to self-directed investors.
  • TDFs provide reasonable investment advice for a very low cost, and investors actually follow it. You get an age-appropriate asset mix which gradually gets more conservative over time, and the default is that people follow the advice. Many people would otherwise not be able to afford or seek out similar quality advice, and many people who can afford it don’t follow it.
  • TDFs will automatically improve over time, thanks to the trend toward lower costs over time and the accessibility of new asset classes as technology and costs also decrease.

Here are some broad takeaways from the Morningstar industry report:

  • The COVID-19 pandemic lowered overall retirement savings contributions by an estimated 60% when you compare 2020 net contributions vs. 2019 net contributions. This unfortunate result was due to a combination of company’s suspending or lowering employer contributions and workers lowering their salary deferrals.
  • Assets continue to flow from higher-cost TDFs to lower-cost TDFs. For example, Fidelity Freedom Index funds have gained about $50 billion in assets over the last five years, while the more expensive, actively-managed Fidelity Freedom funds have lost $35 billion during those same five years.
  • Competition is good. The BlackRock LifePath Index series collected the most net new money among target-date series. 2021 is the first year since 2008 that Vanguard Target Retirement hasn’t won that title. There is now a lot of competition in the low-cost, well-diversified, index-based TDF arena.

Curious what’s inside your Target Date fund? Here is the average glide path across 53 different TDF series. (M* didn’t update this chart for 2021 again, so this is taken from 2019 report.) 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 45% equity and 55% bonds.

One important option to remember is that you don’t have to choose the TDF corresponding to the date that you turn 65. If you wish, you can pick a different year to somewhat adjust your risk level.

Gold or Silver-rated Target Date Funds. A detailed explanation and full rankings are in the report. Here are the gold/silver-rated funds for 2021:

  • Blackrock LifePath Index
  • Blackrock LifePath Dynamic
  • PIMCO RealPath Blend
  • JPMorgan SmartRetirement Blend
  • JPMorgan SmartRetirement
  • T. Rowe Price Retirement
  • MassMutual Select Retirement
  • Fidelity Freedom Index
  • Fidelity Freedom
  • State Street Target Retirement
  • Vanguard Target Retirement
  • American Funds Target Date

Bottom line. Target Date funds (TDFs) are probably under-appreciated for the benefits that they provide. For the most part, workers don’t get to choose which TDF series they can invest in, so there is little point worrying about slight differences in glide paths, recent performance, or Morningstar ratings. As long as you have one from a reputable firm with reasonable costs, you are receiving the major benefits of TDFs listed above. People who “satsifice” by settling for “good enough” tend to be happier in life than “maximizers”, so perhaps that extends here as well.

(If your fund is one of the bottom-dwellers, you may want to send this report to the HR department. Employee activism are part of the reason that these options are getting better over time.)

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.

Savings I Bonds May 2021 Interest Rate: 3.54% Inflation Rate

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May 2021 predictions confirmed. The fixed rate will indeed be 0% for I bonds issued from May 1, 2021 through October 31st, 2021. The variable inflation-indexed rate for this 6-month period will be 3.54% (also as predicted). See you again in mid-October for the next early prediction for November 2021. Don’t forget that the purchase limits are based on calendar year, if you wish to max for 2021. (I’m going to max out by the end of May.)

Original post:

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Savings I Bonds are a unique, low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. With a holding period from 12 months to 30 years, you could own them as an alternative to bank certificates of deposit (they are liquid after 12 months) or bonds in your portfolio.

New inflation numbers were just announced at BLS.gov, which allows us to make an early prediction of the May 2021 savings bond rates a couple of weeks before the official announcement on the 1st. This also allows the opportunity to know exactly what a April 2021 savings bond purchase will yield over the next 12 months, instead of just 6 months. You can then compare this against a May 2021 purchase.

New inflation rate prediction. September 2020 CPI-U was 260.280. March 2021 CPI-U was 264.877, for a semi-annual increase of 1.77%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be 3.54%. You add the fixed and variable rates to get the total interest rate. If you have an older savings bond, your fixed rate may be up to 3.60%.

Tips on purchase and redemption. You can’t redeem until after 12 months of ownership, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A simple “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month – same as if you bought it in the beginning of the month. It’s best to give yourself a few business days of buffer time. If you miss the cutoff, your effective purchase date will be bumped into the next month.

Buying in April 2021. If you buy before the end of April, the fixed rate portion of I-Bonds will be 0%. You will be guaranteed a total interest rate of 0.00 + 1.68 = 1.68% for the next 6 months. For the 6 months after that, the total rate will be 0.00 + 3.54 = 3.54%.

Let’s look at a worst-case scenario, where you hold for the minimum of one year and pay the 3-month interest penalty. If you theoretically buy on April 30th, 2021 and sell on April 1, 2022, you’ll earn a ~1.88% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. If you theoretically buy on April 30th, 2021 and sell on July 1, 2022, you’ll earn a ~2.24% annualized return for an 15-month holding period. Comparing with the best interest rates as of April 2021, you can see that this is higher than a current top savings account rate or 12-month CD.

Buying in May 2021. If you buy in May 2021, you will get 3.54% plus a newly-set fixed rate for the first 6 months. The new fixed rate is officially unknown, but is loosely linked to the real yield of short-term TIPS, and is thus very, very, very likely to be 0%. Every six months after your purchase, your rate will adjust to your fixed rate (set at purchase) plus a variable rate based on inflation.

If you have an existing I-Bond, the rates reset every 6 months depending on your purchase month. Your bond rate = your specific fixed rate (set at purchase) + variable rate (total bond rate has a minimum floor of 0%).

Buy now or wait? The question is, would you rather get 1.68% for six months and then 3.54% for six months guaranteed, or get 3.54% for six months plus an unknown value? If you think the next inflation adjust will be greater than 1.68%, then you may choose to buy in May. Either way, it seems worthwhile to use up the purchase limit for 2021 as the total rates will at least be higher than other cash equivalents. You are also getting a much better “deal” than with TIPS, the fixed rate is currently negative with short-term TIPS.

Unique features. I have a separate post on reasons to own Series I Savings Bonds, including inflation protection, tax deferral, exemption from state income taxes, and educational tax benefits.

Over the years, I have accumulated a nice pile of I-Bonds and now consider it part of the inflation-linked bond allocation inside my long-term investment portfolio.

Annual purchase limits. The annual purchase limit is now $10,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. You can only buy online at TreasuryDirect.gov, after making sure you’re okay with their security protocols and user-friendliness. You can also buy an additional $5,000 in paper I bonds using your tax refund with IRS Form 8888. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number.

Bottom line. Savings I bonds are a unique, low-risk investment that are linked to inflation and only available to individual investors. Right now, they promise to pay out a higher fixed rate above inflation than TIPS. You can only purchase them online at TreasuryDirect.gov, with the exception of paper bonds via tax refund. For more background, see the rest of my posts on savings bonds.

[Image: 1946 Savings Bond poster from US Treasury – source]

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.

Be Guaranteed to Own the World’s Most Valuable Companies in 2051

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The 2021 Berkshire Hathaway Annual Shareholder Meeting was on May 1st, 2022 and is now available as a recorded video on Yahoo Finance and a handy Rev.com transcript. I expect the podcast version to be updated shortly. I recommend listening or reading on your own, as I always find valuable tidbits outside the media highlights.

Buffett started out with the 2021 version of his annual advice for the average investor that doesn’t read 10-K SEC filings, shareholder annual reports, and multiple newspapers in their entirety every day: buy index funds. Buffett created a few slides for those “new entrants” who might think stock market investing means trading 25 times a day on Robinhood.

Here are the 20 most valuable companies in the world as of March 31st, 2021. The list includes 13 from the United States, three from China, and one each from Saudi Arabia, Taiwan, South Korea, and France.

He then asks “How many of these companies do you think will be on this same Top 20 list in 30 years? (2051)”

8?

5?

Once you have the answer in mind, you can consider this list of the 20 most valuable companies in the world from ~30 years ago (1989).

There is zero overlap in the two lists in regards to actual companies. Some names might be familiar, but not a single company stayed in the top 20. The 1989 list includes 13 from Japan, 6 from the United States, and one from the Netherlands.

In 1989, the most valuable company was worth $100 billion. (That company, the Industrial Bank of Japan, later merged with another business and that new company is only worth $37 billion in 2021.) Meanwhile, the most valuable company of 2021 is worth over $2,000 billion, a 20X increase.

If you are under the age of 50, you are a time billionaire. Your time horizon is a billion seconds (30 years) or longer. Many things will change over that period. Hopefully you will enjoy a happy, fulfilling life. But if you own a low-cost, market-cap weighted index fund, you will be guaranteed to own the world’s largest companies in 2051. As the late Jack Bogle told us: “Don’t look for the needle in the haystack. Just buy the haystack.” He might have added “…and get on with your life!”.

This comparison also shows why I remain diversified internationally, even though it hasn’t paid off recently. Does anyone really know that the future holds in regards to world geopolitics? It’s possible the US companies will continue to outperform for another 30 years. I hope so, and if that happens then I’ll hold a large majority of US stocks in the future. It will work itself out.

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 Intriguing History of the 30-Year Fixed Rate Mortgage

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As part of a complete personal finance education, I submit that the longread article Financing the American Home by Marc Rubenstein should also be required reading. I learned a lot of important facts about the history and meaning behind the 30-year fixed-rate fully prepayable mortgage:

From the consumer’s perspective, it’s an amazing product. It’s a simple loan that offers stable repayments, kept low because they are spread out over such a long period of time. Its kicker is a free option to prepay, which shields the borrower from interest rate risk. If rates go up, borrowers can commend themselves on a great bargain; if they go down, stay calm—the loan can be refinanced without penalty. Win/win.

You’ll only find it in the United States (except for one small European country):

Yet, with the exception of Denmark, it doesn’t exist anywhere else in the world. Even baseball exists in more countries.

Which leads to an interesting observation:

To many, the idea that the US, a beacon of the free market, should support its mortgage market so directly seems odd. The former Governor of the Bank of England, Mervyn King, once remarked: “You Americans are so strange. Most countries have socialised healthcare and a private market in mortgages. You have socialised mortgages and a private market in healthcare.

The article goes on to explore how individual homeownership as a widespread goal has been widely accepted in the US for hundreds of years. Yet, every time the US government tries to shift the mortgage market back towards free-market capitalism, there are no takers. The 30-year fixed mortgage is a clear example of government subsidization (even though they try to obscure it). If the government were to exit the market today and remove their backstop guarantee, mortgage rates (and home values) would have to find a new market-based equilibrium. In other words: tighter lending standards, higher interest rates, and thus at least somewhat lower home values.

So we should be really happy that we have the 30-year fixed mortgage and never pay it off, right? Cheap, dependable leverage forever! I happen to also be reading the book How I Invest My Money by Joshua Brown and Brian Portnoy, where “25 finance experts reveal how they save, spend, and invest”. I’m only about six interview in, but you know what every. single. person. has in common so far? They own their primary home, outright with no mortgage! So even with all of the potential financial benefits of low interest rates, tax deductions, and refinance optionality, they felt the psychological benefits outweighed all of that. Wow. These familiar names that I’ve read and linked to many times, including Joshua Brown, Morgan Housel, Christine Benz, and Bob Seawright (with more to add I’m sure) – they’ve all gotten “the letter” that we got when we paid off our mortgage:

So what’s the best move? Here’s my two cents. If you want to own a home and live in it for the foreseeable future, then buy one for both psychological and financial reasons. Use that nifty 30-year fixed mortgage, but don’t necessarily borrow the max that they’ll allow. Then roughly time the mortgage payoff with your retirement date. Love your awesome job and want to work until 65? Then take your time. Serious about early financial independence? Then refinance or prepay principal to shorten the term, and pay it off as part of one of your final retirement goals. I have to agree that a paid-off primary residence offers well-being benefits that are hard to put a price upon.

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 Spire App $100 Bonus, Fidelity Go Roboadvisor Warning

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Updated, including new bonus and tax warning. Fidelity Spire is Fidelity’s new mobile app, which adds fintech-y features and is separate from their main Fidelity app. You can link your external accounts, track balances, and set financial goals. (Fidelity acquired fintech startup eMoney in 2015, and is using that technology for account aggregation.) You can also link up “real” Fidelity accounts like their brokerage accounts and perform commission-free trades within the app.

New $100 Fidelity account bonus. If you open a new, eligible Fidelity account via the Spire app or fidelity.com/spire and maintain an automatic monthly deposit of $25+ for 6 months, you can get a $100 bonus. Hat tip to DoC.

  • You must open via the Fidelitiy Spire app or specific link above, not anywhere else.
  • Eligible accounts include The Fidelity Account®, Fidelity® Cash Management account, Fidelity Roth IRA, or a Fidelity traditional IRA.
  • You must establish a monthly Fidelity Automatic Account Builder (FAAB) plan, an automated deposit feature, on your newly established account for at least $25. First deposit must be within 45 days of opening, and must come from an external, non-Fidelity source. The automatic monthly deposit must remain in effect for at least 6 months (or 6 monthly deposits of at least $25).
  • Bonus limited to $100 per individual in 2021.

Fidelity doesn’t offer bonuses very often, so even though it is not that big, it’s still something if you were planning on opening an account anyway.

While not eligible for the bonus, they are also offering their new Fidelity Go robo-advisor service that automatically invests for you, with no minimum to start and the following fee structure:

  • $10,000 or less: No advisory fee
  • $10,000 to $49,999: Flat $3 a month
  • $50,000 or more: 0.35% annually

The flat fee structure for assets under $50,000 is interesting. At $10,000 in assets, $36 dollars a year = 0.36% annually. At $49,999 in assets, $36 dollars a year = 0.07% annually.

In addition, the underlying mutual funds also offer zero expense ratios. Fidelity actually created a new line of mutual funds called Fidelity Flex Funds for their managed accounts, similar to their other passive and actively-managed mutual funds but with zero expense ratios. For example, there is a Fidelity Flex 500 Fund and a Fidelity Flex International Index fund. However, this special also comes with a drawback.

As with other roboadvisors, the portfolio they choose will be based on you filling out a relatively short online questionnaire. If you aren’t sure about the resulting asset allocation, I recommend going back and change your answers to see the effects. With Fidelity Go, you do not gain access to financial advice from a human advisor. However, you will still gain access to their phone/live chat customer service, which has traditionally been rated highly.

Warning: If you decide to move your money out of Fidelity Go in a taxable account, they will force you to sell all your proprietary Flex fund shares and potentially incur capital gains taxes. If you just owned regular ETFs or mutual funds, you should be able to export the shares “in-kind” without selling and maintain your cost basis. I know you can do this with Betterment and Wealthfront. Depending on how much your account grew, you could consider this a significant “exit fee”.

This is why I still prefer to DIY and construct a portfolio using “high-quality interchangeable parts” that I can keep forever. You can still use Fidelity as I think they are reputable firm with overall good customer service, but instead just buy something like Vanguard Total US Market ETF (VTI) or iShares Core Total US (ITOT).

With free trades now available nearly everywhere, the primary “cost” is the hassle of doing the trades yourself. This is why I recommend also looking at M1 Finance, as they will maintain your target asset allocation for free while still allowing your the ability to port out your investments at any time.

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.