Balance

It’s been 3 years since I evaluated moving our portfolio to 100% equities, and 2 years since I last published an update on our overall asset allocation.

What’s changed since?

Updates

Over the past couple years I’ve done the following:

  • Annually: Converted Traditional to Roth IRA
  • Annually: Harvested long term capital gains
  • Early 2018: Sold US stock to purchase Municipal bonds (enough to fund our lifestyle for 1 – 2 years)

I’ll review each in full. But first, an asset allocation snapshot:

GCC Asset Allocation

As of January 31st, 2018, according to Personal Capital our portfolio looks like this:

GCC Asset Allocation

In other words, it’s basically the same as it was 2 years ago.

Assets and allocation

US Stocks:  71% -> ~80% VTI, plus 20% S&P500 and 1% Small-cap trusts in my old 401k
International Stocks: 18% -> ~90% VXUS, 7% VWO, and small holdings of Vanguard MFs in our HSA
Bonds: 6% -> ~85% Municipal bonds (mostly VTEB, some MUB), 15% intermediate term Treasuries (IEI)
Alternatives: 4% -> 100% VNQ (a REIT.)
Cash: ~0% (Emergency Funds are over rated.)

Not shown in the chart above 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 ~10% and total stock is ~90%

Some interesting ratios:
Stock / Bonds: ~ 90 / 10
US / International equities: ~ 80 / 20
Taxable / Pre / Post-tax: ~ 70 / 25 / 5

Roth conversions

A Roth conversion is the act of moving funds from a Traditional IRA to a Roth IRA. It is fully taxable in the year of the conversion, but that tax rate can easily be 0%.

In 2016 I converted ~$6k, and in 2017 I converted ~$24k. Tax paid: $0. Tax free in, tax free growth, tax free out.

When we initially stopped working for the man we had Roth accounts worth $0, and now they comprise a full 5% of our portfolio.

Capital Gain Harvesting

Capital gain harvesting is the process of selling an appreciated asset (e.g. a stock or ETF) and then repurchasing the same or similar. When all is said and done you have the same holdings but with a higher basis.

In 2016 I harvested gains of ~$29k, paying no tax on that gain. In 2017 I wasn’t able to harvest tax free, so I did nothing. This was partially due to blog income being too high.

Our taxable accounts are currently ~70% of the total portfolio, down from ~75% a few years ago. I’ve been able to raise the basis in this part of the portfolio by more than $140k over the previous 5 tax years, so that is $20k in tax we’ll never have to pay (assuming a 15% capital gain tax rate.)

For a real world example of harvesting a capital gain, I’ve written a template based on the trades I executed in December 2016. Fill out this form and I’ll email it to you.


Sold Stock to Buy Bonds

The most recent change to the portfolio is I sold a small chunk of stock and used the proceeds to purchase municipal bonds.

Thanks to previous gain harvesting, this realized only $25k in long term capital gains rather than $55k, which I should be able to fit in our zero tax plan for 2018 unless blog income grows beyond expectations. Capital gain harvesting works.

“Whoa, hold on Mister 100% Equities, what is up with this?! You are betraying your ideology, your principles, and your entire future!”

“Why would you do something like that?!”

For the drama, of course. (wink wink)

OK, no, not really. There are 2 main reasons we took some money off the table:

  1. Build a short term cash buffer for some (potentially) higher expenses this year
    e.g. blog growth spending, Jr’s tuition, probable medical expenses, a potential foreclosure (legal expenses), and overall plush livin’…
  2. Happy wife, happy life
    I’m a firm believer in the 100% equity portfolio. Statistics are a beautiful thing. You might phrase my thinking as, “We’ve won the game, so let it ride! Woohoo!”
    The Missus has a different point of view, more along the “We’ve already won the game, let’s stop playing” persuasion. And persuade, she did.

So…

5 years ago our bonds totaled ~15% of the portfolio, when factoring in I-bonds and private mortgage.
I reduced that to <10% a few years ago.
Now it is back to ~10%.

Will single digit percentage changes have any long term impact on our overall portfolio? Unlikely. But for perspective, the “off the table” dollars are enough to purchase about 1 3/4 houses in my home town or fund 1 – 2 years of our cost of living. It can therefore have minor statistical significance on our portfolio, while having an appreciable impact on emotions and quality of life. Win-win.

Other Noteworthy Updates

Portfolio Expense Ratio

Through absolutely zero effort on our part, the total cost of managing our portfolio continues to fall, dropping from 0.08% 5 years ago, to 0.06% two years ago to <0.05% today. On $1 million, a 0.01% drop is a savings of $100+ per year. Thanks Vanguard!

GCC Asset Allocation

Retirement Account Fee Analyzer by Personal Capital

 

Reward Points

While not a traditional asset class, we have continued to build a healthy amount of airline, hotel, and travel rewards points through credit card signup bonuses. Despite using a ton of points over the past couple years, our point hoard (and credit score) continue to grow.

One example of point usage: $16,000 business class flights to Europe for $300.

Alaska Airlines: 141,338 miles
Amex: 55,962
Ultimate Rewards: 284,926
Delta Airlines: 8,670 (all from Airbnb)
IHG: 160,602 (mostly from Accelerate bonuses)
Marriott: 4,025
SPG: 12,724
United Airlines: 16,168
Total value: ~$11,000

We are currently debating a summer visit to the US or a return to Europe to tour the 1/3 of the continent that we have yet to visit. Or maybe both.

Final Thoughts

Depending on your perspective, this update is either absolutely fascinating or a total yawner.

Not much changed, and that is exactly how investing should be.

Pick a target asset allocation, stick with it, ignore it, and sprinkle a bit of tax management on top.

See you for the next riveting update in a couple years.


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Travel the World.

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