My Money Blog Retirement Portfolio Update – January 2013

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AppId is over the quota

Here’s a belated 2012 year-end update of our investment portfolio, including employer 401(k) plans, self-employed retirement plans, Traditional and Roth IRAs, and taxable brokerage holdings. Cash reserves (emergency fund), college savings accounts, experimental portfolios, and day-to-day cash balances are excluded. This is the portfolio that we are depending on to create income and thus financial freedom.

Here is my current actual asset allocation:

The overall target asset allocation remains the same:

Put simply, I pick asset classes that are likely to provide a long-term return above inflation, as well as offer some historical tendencies to be less correlated to each other. I don’t hold commodities futures or gold because I am not confident in them enough to know that I will hold them through an extended period of underperformance (and if you don’t do that, there’s no point). Our current ratio is about 75% stocks and 25% bonds.

For the last decade, I have stuck to buy, hold, and rebalance. I also keep costs at a minimum in terms of fund expense ratios, commissions paid, and tax-efficiency. A list of specific holdings is below.

Stock Holdings
Vanguard Total Stock Market Fund (VTI, VTSMX, VTSAX)
Vanguard Small-Cap Value Index Fund (VBR, VISVX, VSIAX)
Vanguard Total International Stock Market Fund (VXUS, VGTSX, VTIAX)
Vanguard Emerging Markets Fund (VWO, VEIEX, VEMAX)
Vanguard REIT Index Fund (VNQ, VGSIX, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard High-Yield Tax-Exempt Fund (VWAHX, VWALX)
PIMCO Total Return Institutional* (PTTRX)
Stable Value Fund* (2.6% yield, net of fees)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities

The only significant change from last time is that I have moved some money over to the Vanguard High-Yield Tax-Exempt Fund. If you look at the holdings, it’s actually a relatively high-quality, intermediate-term municipal bond fund. Over 80% of the bonds are rated A-AAA, and the duration is only 6 years. Compare this with the popular Vanguard Total Bond Market Index Fund that is 90% A-AAA (tons of US government-backed debt at very low rates), and a duration of 5 years. I like mixing this fund with the Limited-Term muni fund to replace a Total Bond fund for my bonds in taxable accounts as my income tax bracket is high. I admit that I am reaching for yield, but I don’t think I’m reaching very much overall and I’m getting enough incremental yield in return. Inflation-linked bonds and the rest are in tax-deferred accounts.

A future change that I am looking to implement is to swap out Vanguard Small-Cap Value Index Fund for probably the iShares Russell 2000 Value ETF (IWN) as it holds even smaller, more-value oriented stocks than the Vanguard ETF. Also, I want to swap out Vanguard Emerging Markets Fund for the WisdomTree Emerging Mkts SmallCap Dividend ETF (DGS) as if focuses on small, dividend/value-oriented stocks in emerging countries. Why? The whole point of those small 5% allocations is to add some spice and risk to my portfolio while reaching into areas not well-covered by the broad index funds.

The overall expense ratio for this portfolio is in the neighborhood of .20% annually, or 20 basis points, which is much lower hurdle to overcome than the average mutual fund expense ratio of over 1% annually. PTTRX and Stable Value fund are the best of limited choices in a 401k. This is all DIY, so I don’t pay portfolio management or financial advisor fees.

I usually don’t bother calculating the actual rate of return because doing it properly involves accounting for the dates and amount of all new contributions. In addition, most of my investments are passive so you can find the performance easily by looking at individual index and/or fund returns. But doing some rough calculations for 2012:

Total US +16.4%
Total International +18.2%
US Small Cap Value +18.6%
Emerging Markets +18.8%
REIT +17.7%
Total US Bond +4.0%
TIP +6.8%
————
Weighted average = 14.5%

To measure our progress towards total financial independence, I use a 3% theoretical withdrawal rate and compare that with our expected future expenses. This is lower than the common 4% withdrawal rate because we intend to retire early and our money may have to last much longer than most (50+ years). This results in a goal of 33 times our expected annual spending. Currently, our portfolio would theoretically cover 66% of our expected expenses.

The 3% withdrawal rate is simply a rule-of-thumb, although I’d like if the dividends and interest payments from our holding would create a 3% yield. Currently, our overall income yield would be somewhere between 2-3%. We may also add a rental property to the mix which would increase yield but also increase potential headache.

Find more in Goals, Investing, Retirement | 1/23/13, 5:11pm | Trackback

$10,000 Benchmark Portfolio Update – January 2013

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AppId is over the quota

Time again for a Beat the Market Experiment monthly update, for the first of three portfolios started on November 1st, 2012:

$10,000 Passive Benchmark Portfolio that would serve as both a performance benchmark and an real-world, low-cost portfolio that would be easy to replicate and maintain for DIY investors.$10,000 Beat-the-Benchmark Speculative Portfolio that would simply represent the attempts of an “average guy” who is not a financial professional and gets his news from mainstream sources to get the best overall returns possible.$10,000 Consumer Loan Speculative Portfolio – Split evenly between LendingClub and Prosper, this portfolio is designed to test out the alternative investment of peer-to-peer loans. The goal is again to beat the benchmark by setting a target return of 8-10% net of defaults.

$10,000 Benchmark Portfolio as of January 1, 2012. I chose to open an account at TD Ameritrade due to their 100 commission-free ETF program, including the best low-cost, index ETFs from Vanguard and iShares. I funded it with $10,000 and bought all the ETFs required to be fully invested on 11/1/12. All trades were commission-free. My target asset allocation is below.

Due to simplicity and small portfolio size, for now I am going with 100% stocks and no bonds. This is meant to be appropriate for young investors, who should try to get a long horizon for stocks and can add more bonds later on. According to popular glide paths, a rule-of-thumb is having your age minus 20% in bonds. Here are the ETF components that represent each asset class:

Here’s a screenshot from my account showing exact holdings and their market value as of the end of day 1/1/13:

(click to enlarge)

Here’s the asset allocation pie chart, tracked with a simple Google Docs spreadsheet:

No new trades over the past month as the allocations are still close to targets, just a few dividend distributions.

Total value of stocks: $10,206.08
Cash balance: $134.57
Total portfolio value: $10,350.65
Total return since inception (11/1/12): 3.5%

Find more in Investing, Monthly Updates | 1/8/13, 12:07am | Trackback

$10,000 Beat-the-Benchmark Speculative Portfolio Update – January 2013

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AppId is over the quota

Here’s another piece of the monthly update for my Beat the Market Experiment, a set of three portfolios started on November 1st, 2012:

$10,000 Passive Benchmark Portfolio that would serve as both a performance benchmark and an real-world, low-cost portfolio that would be easy to replicate and maintain for DIY investors.$10,000 Beat-the-Benchmark Speculative Portfolio that would simply represent the attempts of an “average guy” who is not a financial professional and gets his news from mainstream sources to get the best overall returns possible.$10,000 Consumer Loan Speculative Portfolio – Split evenly between LendingClub and Prosper, this portfolio is designed to test out the alternative investment of peer-to-peer loans. The goal is again to beat the benchmark by setting a target return of 8-10% net of defaults.

$10,000 Beat-the-Benchmark Speculative Portfolio as of January 1, 2012. Many people speculate with their money, buying and selling stocks now and then, but they rarely track their performance even though they may brag about their winners. Honest tracking is the primary reason for this “no-rules, just make money” account. I am using a TradeKing account for this portfolio as I’ve had an account with them for a while and am comfortable with their simple $4.95 trade structure and free tax-management gain/loss software. Here is a screenshot taken from my TradeKing home page as of market close 12/31/12:

(click to enlarge)

Snoozefest… nothing new since last month. You can see the cost basis and rationales for my current holdings in the December 2012 update. With an infant, the holidays were a crazy, hectic blur and I didn’t get around to making any trades. I do have some short ideas floating around that I may try out this month, or I may use options instead. A small note that the cash balance was inflated by $200 due to referral bonuses finally being credited from months and months ago, but I will withdraw it and won’t include it in calculating returns.

Here’s a pie chart of my holdings, tracked with a simple Google Docs spreadsheet (2nd tab):

Total value of stocks $7,477.49
Cash balance: $2541.71
Total portfolio value: $10,019.20
Total return since inception (11/1/12): 0.2%

Find more in Investing, Monthly Updates | 1/8/13, 10:40pm | Trackback

P2P LendingClub and Prosper Loan Portfolio Update – January 2013

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AppId is over the quota

Here’s the last part of the monthly update for my Beat The Market Experiment, a set of three real-money portfolios started on November 1st, 2012. See also my $10,000 Benchmark and $10,000 Speculative portfolio updates for January 2013.

On 11/1/12, I deposited $10,000 split evenly between Prosper Lending and Lending Club, and went to work lending other people money and earning interest with an 8% target net return.

$5,000 LendingClub Loan Portfolio, January 2013 Update. (A little late on the update, although only about $9 in extra interest was accrued since 1/1.) Below is a screenshot of my LendingClub account as of 1/9/12. Keep in mind that I had loans before, but sold them all on the secondary market and started fresh for this tracking experiment.

(click to enlarge)

Since last month, I invested another $400 for a total of 191 active and issued loans. I used simple loan filters based on my LendingClub filters post as well as my Prosper filter research noted below, and haven’t spent any time looking through any individual loan descriptions. The portfolio is very young, but so far all loans are current (16 days past due is considered late).

LendingClub.com account value: $5,082.51 (includes principal, accrued interest, net of fees)

$5,000 Prosper.com Loan Portfolio, January 2013 Update. Below are screenshots of my Prosper account page as of 1/9/12.

(click to enlarge)

Since last month, I invested another ~$1,500 for a total of 201 loans after activating the free Quick Invest feature which automatically invests in loans that satisfy my preset criteria. The convenience is great so far. Again, I used loan filters very similar to those suggested in my Prosper loan filters post. I did manage to already have one loan that is 3 days late. After peeking at that individual loan description, and it must have slipped through when I was tinkering with my filters because the borrower listed themselves as unemployed and I filter those out now. Hopefully it will go current again, but this is why you diversify.

Prosper.com account value: $5,033.55 (includes principal, accrued interest, after fees)

Total P2P loan value: $10,116.06 (includes principal, accrued interest, after fees)
I know this isn’t the same as the actual liquid value of the loans, but it’s the best I can do for now. In the future, I plan to assume that any loan past 30 days late will be a full default of all remaining principal.

Find more in Investing, Monthly Updates | 1/9/13, 10:36pm | Trackback