(Re)balancing (photo credit)

(Re)balancing (photo credit)

A year ago, I was evaluating moving our portfolio to 100% equities. Posterity will appreciate it.

A lot has changed since then, so I wanted to share an update.

Year-End House Cleaning

While reviewing our taxes in December 2015, I executed a good number of trades:

  • Sold all of our individual stocks. We now have only index funds.
  • Moved all International Equities from VEU to VXUS
    • VXUS = VEU + International small-cap
  • Rebalanced our US / International Stock allocation
  • Reduced Bond & REIT holdings / Increased equities
  • Harvested Capital Gains for long term tax minimization
  • Rebalanced portfolio to target asset allocation
  • Reduced total portfolio expense ratio

GCC Asset Allocation

As of last night (March 20th, 2016) this is how our portfolio appears on the Personal Capital Portfolio Allocation page.

2016 GCC AAUS Stocks: 71% (82% VTI / VTSAX, 13% S&P500, 5% Small-cap )
International Stocks: 20% (93% VXUS, 7% VWO)
US Bonds: 4% (67% MUB, 33% IEI)
Alternatives (REITs): 4% (100% VNQ)
Cash: <1% (We keep only 3 months cash on hand.)

The Cash shown here is held by the individual ETFs and in our brokerage account. Most of our cash is held in our Capital One 360 savings account, but the total is less than 1%.

Not shown in this chart are some legacy I-bonds and a private seller-financed mortgage contract, which are less than 5% of total assets. When included, total weight of US Bonds is ~8% and total stock is ~87%.

As soon as I can off-load these assets in a tax-friendly way, the proceeds will be added to the stock pile. (haha)

Real Estate

A lot of people keep a portion of their net worth in Real Estate, either in a home they live in or rental properties.

We have no Real Estate other than a token amount of REITs. We are Renters for Life.

US vs International

When looking only at equities, 78% is invested in US stocks and 22% invested Internationally.

This is lower than a true market weighting, as US Equities at present comprise ~50% of total global market capitalization. Someday I will write a post about why we aren’t globally weighted, and that post will include phrases such as fees, currency risk, rule of law, shareholder rights, demographics, and immigration.

In the mean time, I like that our portfolio sits at roughly the historical sweet spot balancing volatility and total return.

Taxable / Traditional / Roth / HSA

While working and accumulating, we favored Traditional (pre-tax) IRAs over Roth (post-tax.) Savings above and beyond the legal contribution limit to 401ks and IRAs were saved in a brokerage account.

By prioritizing in this way, we minimized taxes / maximized savings while working. Now we are building a 30+ year long Roth IRA conversion ladder, which will minimize taxes in retirement.

Our assets are spread between these 3 account types:

Brokerage (taxable): 74%
Traditional (pre-tax): 23%
Roth (post-tax): 3%
HSA (pre/post-tax): <1%

We hold mostly stocks in the Brokerage account, to take advantage of the 0% tax rate on Qualified Dividends and Long Term Capital Gains. International stocks are primarily held in the brokerage account, to allow use of the Foreign Tax Credit.

We hold REITs and Bonds in the Traditional accounts, which defers any taxes on these assets until withdrawal. Held in a brokerage account, dividends and interest from these assets would be taxed unfavorably as normal income.

Finally in the Roth account we hold equities, including some small-cap stocks, with the goal of having the greatest growth in accounts that are tax-free forever.

Dividend Income

Selling all of our individual stocks and purchasing more index funds will result in a reduction in both qualified and unqualified dividends.

While this will impact our cash flow somewhat, dividends paid in March 2016 are still 13% higher than we received in March 2013. (Total dividends in 2015 were 30% higher than 2013.)

The reduction in nonqualified dividends is welcome, since they are taxed as regular income unlike qualified dividends which are taxed at 0%. Lower nonqualified dividend income will make it easier to do Roth IRA conversions at low/zero tax.

Portfolio Expense Ratio

ETFs and Mutual Funds have management fees paid by the fund on an ongoing basis. This is usually expressed as a percentage called an expense ratio.

Low fees are key to long term portfolio growth. Great funds like Vanguard’s VTI / VTSAX currently charge 0.05% annually. Terrible funds (like those used in many 401k plans) charge 1.0% or more, 20x+ higher.

I used Personal Capital’s 401k Fee Analyzer as a quick check, and thanks to choosing low cost Vanguard funds, our portfolio expense ratio is an incredibly low 0.06%. (Even lower than last year’s 0.08%.)

Trading fees are also a real expense. I executed several trades this year, which increased our total load to ~0.0636%.

2016 GCC erThe reduction in total portfolio expense ratio was largely a result of:

  • Replacing bond fund (TIP, 0.2%) & REIT (VNQ, 0.12%) with VTI (0.05%)
  • Taking advantage of new trust funds in my old employer’s 401k
    • S&P500 Trust Fund e/r = 0.0113%
    • Russell 2000 (small-cap) Trust e/r = 0.0304%

I am evaluating if I can roll some of my Traditional IRA back into the 401k to take further advantage of these low fees.

Reward Points

Not a true asset class, I still think of the points from airline & hotel customer loyalty and credit card rewards programs as part of our total assets. We can spend them instead of cash for flights and hotels, as we intend to do during our trip to Europe.

Per the valuation guide from The Points Guy, the combination of our hotel points and airline miles is worth more than $13.5k.

Final Thoughts

I reduced total fees, eliminated individual stocks (increased diversification), reduced nonqualified dividend income for better tax management, and put the portfolio back to the target asset allocation. Mission accomplished. (See last year for comparison.)

It feels good to have the portfolio rebalanced and tidy once again.

I don’t plan to touch the portfolio again until tax prep in December, which means I will completely ignore stock prices until then.

If you like the asset allocation and fee analyzer tools, they are available for Free from Personal Capital. If you use their services via this link, we may receive a small fee.

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