Over the past several years, I’ve made minor annual adjustments to our investment portfolio – harvesting capital gains, rebalancing, and adding fresh capital.
This is what our portfolio looks like as of early 2019.
Updates:
- Mid 2018: Seller financed mortgage ballooned out (A bond became a bunch of cash)
- Late 2018: Sold some bonds, bought equities (unwinding last year’s change)
- Late 2018:
- harvested long term capital gains
- rebalanced portfolio to target asset allocation – Stocks were down, international more so than US, so added funds to international stocks
I’ll review all of these bullet points, but first an asset allocation snapshot:
GCC Asset Allocation
As of mid-January 2019, according to Personal Capital our portfolio looks like this:
Total net worth declined about 5% for the year, as the overall market declined.
Assets and allocation
US Stocks: 72% -> ~80% VTI, plus 15% S&P500 and 2-3% Small-cap trusts in my old 401k
International Stocks: 19% -> ~93% VXUS, 7% VWO, and small holdings of Vanguard MFs in our HSA
Bonds: 3% -> ~65% Municipal bonds (mostly VTEB, some MUB), 35% intermediate term Treasuries (IEI)
Alternatives: 4% -> 100% VNQ (a REIT.)
Cash: ~1% (Emergency Funds are over rated – holding this to contribute to 2018 solo 401k / IRAs)
Not shown in the chart above are some legacy I-bonds which are less than 2% of total assets. When included, total weight of US bonds is ~6% and total stock is ~94%.
Some interesting ratios:
Stock / Bonds: ~ 95 / 5 (trending towards 100% equities)
US / International equities: ~ 81 / 19
Taxable / Pre / Post-tax: ~ 72 / 23 / 6 (Roth is trending up – was 0% 6 years ago)
Sold Bonds to Buy Stock
Earlier in 2018 I sold a bunch of stock. We needed a cash reserve for planned medical expenses, and I parked that money in municipal bonds. In December, I sold most of these bonds and used the proceeds to buy both US and International stocks for portfolio rebalancing. By coincidence, we came out about $20k ahead on this shift thanks to the general market decline in December.
I definitely wasn’t doing any market timing, no siree.
In mid-2018, our seller financed mortgage ballooned out, giving us a bunch of cash worth about 2% of our portfolio. In December I used most of this to buy stocks. This brings our total portfolio stock/bond ratio to it’s highest point of our retirement, continuing to trend towards 100% equities.
I am still holding onto some of this cash, which I’ll use to make 2018 solo 401k and IRA contributions once I figure out our final tax situation.
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 2018 I harvested gains of ~$25k, and most likely will pay no tax on that gain. Over the past 6 years, I’ve been able to raise the basis on our taxable portfolio by ~$175k, so that is $25k+ in tax we’ll never have to pay (assuming a 15% capital gain tax rate.) Nice.
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.
Portfolio Expense Ratio
Through absolutely zero effort on our part, the total cost of managing our portfolio continues to fall, dropping from 0.08% 6 years ago, to 0.06% 3 years ago to <0.05% today. On $1 million, a 0.01% drop is a savings of $100+ per year.
Some of this is because my old work 401k continues to negotiate lower prices on the asset trusts they use, and part is from Vanguard continuing to drop expense ratios.
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) continues to be worth a healthy chunk of change.
One example of point usage: $16,000 business class flights to Europe for $300.
Alaska Airlines: 119,663 miles
Amex: 0 (used all of them this summer)
Ultimate Rewards: 175,363
Delta Airlines: 2,795 (all from Airbnb)
IHG: 71,689 (mostly from Accelerate bonuses)
Marriott/SPG: 65,336
United Airlines: 18,399
Total value: $7,000+
Not included here: all of the credit card and bank cash bonuses.
Final Thoughts
Depending on your perspective, this update is either absolutely fascinating or a total yawner.
When we came into a big chunk of cash when our seller financed mortgage ballooned out, we just funneled that into our existing asset allocation. 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 year or so.
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Did that balloon payment that came in result in a taxable event? If so then how much please?
Return of principal only
What’s the total dollar value of the portfolio?
Dude
Haha this is hilarious.
Thanks for the update, and congrats on that cheap buy of stocks in December.
Hahaha. perfect reply!
Good job accidentally timing the market! We added a bit to bonds in 2017 into 2018 and did not switch back to equities in late 2018 like you. Perhaps if stocks get stupid cheap again I’ll make a little effort to time the market, but for now it’s a 10% “sleep at night” asset allocation!
Happy 2019 to you, Winnie and the little dude!!
Heh, happy new year to y’all as well. Should be a good one.
I’m sure I’ll accidentally time the market on the way down too. Single digit percentage changes in asset allocation probably make no difference in the long run anyway.
I suppose mentally I’ve been thinking of blog income as our fixed income allocation, since I’ve yet to really sell any stock this many years into our leisure over labor experiment.
Thanks for sharing, I’ve been an avid reader since 2016. I’m curious your opinion on US/international allocations. I see you are ~80% US / 20% International. with VXUS and VWO as the majority of your International holdings.
If I plug these into Morningstar’s Instant portfolio X-ray tool, it shows these two ETFs combined based on your allocations are:
~38% UK & Developed Europe
~18% Japan
~10% Developed Asia
~15% Emerging Asia
~10% Americas
~5% Emerging EU & Africa
~4% Australasia
So basically, a little over half of the International stocks are in traditionally lower growth markets such as Europe and Japan. Do you think this is sufficient diversification? Have you looked at alternate way to capture higher growth markets like China (higher than 10% allocation), India, Indonesia, Brazil, Russia, Mexico, and Turkey.
I have looked at adding some single country ETFs (like FLRU for Russia or FLBR for Brazil)?
>Do you think this is sufficient diversification?
I do.
I don’t recall you writing about why you picked 80/20 US/International. Did I miss it? What is your thought there. I am at 60/40 US/International (with 80/20 equities/bonds if it matters) based on wanting to be closer to effective world wide market caps, aiui. What do you think?
Saw that Vanguard recently recommended increasing international allocation to 40%: https://investor.vanguard.com/investing/investment/international-investing
Yes, it’s been their standard recommendation for several years now. (nearly real market weight)
I touched on it in the 2016 asset allocation post
(See US vs International section)
“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.”
I’ll write up something soon.
Not a yawner.
I’d be interested in that also. I feel like vanguard is pushy—at least when their website shows me an annoying arrow meaning I’m off track. A significant portion of large cap sales are international, the markets seem to move in tandem with ours and you pay more? What’s to love? I’m still 30 percent international.
Looking forward to your article, you always manage to convince me to change my mind on these things. Also in the 60:40 camp currently.
Looks like a good asset allocation to me. Having the balloon payment behind you will allow you to increase your Roth conversions (all else being equal), right?
Although, I suppose the increase in your blog income will offset the lower taxable interest.
In theory, yeah. We no longer have several thousand dollars in annual interest income. All else being equal, that could be allocated to Roth conversion tax space.
Not a yawner, at least to me. Always enjoy reading others strategies in this regard.
Also have seen costs going down due to three different scenarios – our work 401Ks that we left in place when we retired have excellent choices and cost structures, all our Vanguard accounts continue to drop their charges, and I now do some of my options trading in a Vanguard account that oftentimes charges $0 per transaction (I don’t have that same luxury with TD Ameritrade).
True story on timing the market. Had a friend from a former employer that I met up with years later. He was thinking of moving to Belize from FL and he had sold everything just before the 2007-08 crash, so he was in good shape. Said he was traveling home one night and listened in on a stock market conversation that had already started, where the “expert” sounded so knowledgeable and was encouraging everyone to get out of the markets. The next day this friend sold everything and went to cash, averting the worst of the downturn. Told me he found out later that the so-called expert was a psychic and if he knew that my friend would have discounted everything he said. Sometimes it is better to be lucky.
I timed the Great Financial Crisis in the other direction… put a ton of money in the market in summer 2007.
Consider ixus as a replacement for vxus in taxable accounts. Higher FTC per share and higher QDI ratio. (https://www.bogleheads.org/forum/viewtopic.php?t=242137)
Although in low marginal tax brackets, it’s probably a wash :)
Interesting, thanks. Some improvement in QDI Ratio could be nice, for more tax free Roth conversion space.
When I change the tax rates in the spreadsheet linked to zero (never pay taxes again), I get negative tax efficiency. So mostly a wash
Do you keep VTEB in taxable account or pre-tax? Thanks
Taxable
I always enjoy your deep dive articles like this with real numbers. Please keep it up. And, as usual, love that GCC goes his (and her) own way with your own super-aggressive cash allocation. Go GCC!
To clarify, meant to say super aggressive allocation to stocks! My bad.
Just out of curiosity, why do you keep your old 401k instead of rolling into a traditional IRA ?
low e/rs so no need to move it anywhere
Do you plan on keeping your current 80/20 US/International?
I do
So when you talk with the Personal Capital folks, how do they assess your US Sector allocations? Do they encourage you to move toward leveling out or balancing the sectors evenly?
I don’t talk to the PC folks
Do you think you might have something to learn, or at least explore, from their perspective? I’m not advocating buying into their program — but is it possible their ideas might be worth tinkering with a spreadsheet for few hours? The worst you can do is use a hour of your life listening to their sales pitch.
>Do you think you might have something to learn, or at least explore, from their perspective?
I don’t.
Lol, love the straight forward answer. I too just keep ignoring the PC advisor notifications.
Ha I looked at my allocation today (still in accumulation mode). 93% total stock market index, 7% cash.
I find it funny that even people who know market timing is impossible, get all excited when the market goes down or try to invest on the dips. I couldn’t care less.
I find investing boring and just put money into the market through automatic contributions, my IRA on january 1st, and whenever my emergency fund gets above a certain threshold. My favorite part of your investing posts are how bored (unreactive) the tone sounds.
I don’t mind a 20% off sale when doing the things I was going to do anyway.
Sounds like you are doing all the right things.
If VTI declined by 50% in 2019 are you confident you would rebalance keep your allocation and stay the course (work wise, lifestyle wise)?
(I asked myself this question and lowered my own equity allocation. Curious for your answer).
:/
Wow impressed with the total fee cost of the portfolio. I’ve noticed a trend though in my experience, the higher the cost of a fund the greater the dividend and sometimes it pays to ignore the fee percentage if your getting a higher kick on the income. Let me know your thoughts. I try to focus on a bit of mix between low cost and high dividend funds.
>sometimes it pays to ignore the fee percentage if your getting a higher kick on the income
Total return = capital growth + dividends – fees – taxes
Higher fees = lower total return
There is no reason to prefer dividends. I wouldn’t mind fewer of them. Check out a total return chart on Morningstar of VTI vs VYM
Thanks for sharing some extra info on raising your basis. I had asked in an older post about how you went about this. Do you see yourself getting back into real estate now that the seller backed mortgage is paid off?
No, no more real estate for me.
Hi GCC!
Once in awhile, you NOT only see an investing “guru” veer away from a 90/10 or 100/0 stock allocation (to something more conservative), but a financial trader who disputes long-term investing in index funds altogether in hopes that they can predict the market when a recession hits, and move money from stocks to bonds during this time…
What are your thoughts on this, does he have a point? https://seekingalpha.com/article/4249543-2-greatest-bull-markets-u-s-history-boomers-broke?ifp=0
It makes sense that people aren’t saving enough, but does he have a point that if you keep your money in mostly stocks during a recession, it takes a long time to recover capital and therefore, you don’t actually make your “7-9%” over the long term in the market but much less?
Always love to hear your take! Long-term index investing is the undisputed champ and I don’t agree that one can predict the market that easily :) I also don’t think the author took into account dividends that are also a large part of one’s portfolio.
Sure, there is sequence of returns risk during the accumulation phase as well.
For somebody saving a high percentage of income, the actual return during this period isn’t the most important factor, however. If you get a bad run, you just work a few years longer.
But for those saving 5%, return matters a whole lot.
(Sorry, I didn’t read the linked article.)
Ah, this makes sense GCC. Thanks for linking the article you wrote.
Even saving 50% of one’s income though, if you time the market poorly, it looks like you wouldn’t just be working a “few years longer”, you could be working up to 10 years longer which is a helluva long time lol (i.e. looking at late 1950’s era in both 25% savings and 50% savings charts).
It is unreasonable for me to save 75% of my income, and in all honesty, I simply wouldn’t want too but that’s just me – different strokes for different folks I guess.
Other than making more money (I work in tech and make a nice salary as it is), what are your thoughts on this? My current allocation is 100% stocks (i.e. I use low fee index funds such as Vanguard VTI) so I don’t mind the volatility. I currently save 25% of my income for early FI.
Thanks!
What are my thoughts on what?
Save as much or as little as you feel is right for you.
Sometimes becoming FI takes longer than other times, but the worst possible outcome is you have a lot of money.
Sorry for not asking my question a little clearer :)
I guess what I’m saying is that I’m wondering if there is anyway to hedge your $$$ in order to reduce your losses and capitalize on your gains regarding the market. For example, during a downturn moving more assets to cash and changing your allocation and then during an upswing moving the cash back into stock.
You won’t catch the high highs and the low lows as predicting the market is well, unpredictable. But I’m wondering if putting enough research in to watch the market periodically will allow one to follow the larger trends and in effect, have them reach FI quicker.
It’s less about predicting the timing of the market and more about managing risk. If I can reach FI quicker (the amount saved needed for a 4% withdrawal rate) without having to work 5 years or more due to a bad run, this would be great!
You could save more. That’s it.
Understood, thank you
Thanks for the tip on IXUS. Useful.
I just discovered your blog! You have amazing insight and given me much to think about.
Regarding capital gains harvesting: Did you sell something that was throwing off qualified dividends? My concern is if I sell my SCHB (ETF) after I have spent a year in it and now the dividends are taxed at the lower capital gains rate…then I buy the same or similar, I am now paying the short-term capital gains rate on the dividends..>
I’m not even sure how I would crunch the numbers to see if it would be worth it for me.
You may be conflating long-term capital gain taxes and dividend taxes.
If you hold the ETF for a year such that a gain is considered long-term, then you also meet all holding period requirements and all dividends are qualified whether you harvest gains or not.
Are the authors of GCC familiar with the concept and practice of a pre-mortem? Annie Duke (and others) have written convincingly on the value of this type of analysis. It would be an interesting, honest, and insightful blog post to see the pre-mortem analysis of this retirement plan. To briefly summarize what this is: you start with the conclusion that the strategy has failed, and then you ask – what caused the failure?
If I were doing a pre-mortem of this strategy, I would look at this portfolio is years 2000 – 2009. 10 years CAGR = 0.48%. Subtract fees and inflation and the portfolio lost 2% real value PER YEAR for 10 years. Were you able to maintain your lifestyle in retirement during this time?
I predict that the results of a pre-mortem on this retirement strategy will have dramatic affects on the GCC allocation.
What might those dramatic effects be, do you think?
I happen to have already done a review of the years 2000 – 2019. Here you go.
Another interesting “pre-mortem” is the 1965 starting point: The worst retirement ever.
Thanks for sharing those articles. That’s a great start, and you can definitely use that as a basis to begin the pre-mortem of your strategy. One observation: It looks like you consistently use % withdrawal rates quantitatively in your analyses, while your explanations make it clear that qualitatively this is not always an acceptable solution (due to inflation and shrinking portfolio). I have a suggestion to marry these two.
I love what you did in your Worst Retirement Ever post, so let’s start here. What I would do is define up front your annual spend goal in 2019 dollars, then generate an Excel table showing per year portfolio value in 2019 dollars, per year total expense in 2019 dollars (a second expense column for unexpected expenses may be a good idea), yearly withdrawal amount in 2019 dollars, annual withdrawal rate %, and supplemental income required. This would show in one picture the various factors you’re balancing in your writing . Rinse and repeat for 1929 & 2000.
This analysis will reveal how frequently and to what extent you are experiencing lean years. You will also see how prepared you are for unexpected expenses and increased medical bills in old age.
Next step: Set supplemental income to zero and annual spend to your dream retirement amount (maybe add a little extra expense here and there for unexpected medical bills) and you will likely kill your portfolio in all three of these scenarios. Now you can begin the pre-mortem! What killed the strategy? This analysis is, by definition, the pre-mortem. This analysis is what you have not done, at least not that I can see.
I’m just guessing since I have not done the analysis either. But here are some of the things I would be looking at.
Unanticipated or misunderstood risks. You have built currency and geography risks into your plans that should be acknowledged (e.g. we’ll just move to Brazil for a couple years…). How much dollar devaluation can your retirement plan withstand? How does international war affect your retirement plans? You don’t feel comfortable investing in EM nations in your portfolio, but you are heavily invested in EM nations providing your stable, safe, tax-sheltered, permanent home environment throughout retirement. (This would be big red blip on my risk radar.)
Portfolio concentration risk. (Here is where I think the dramatic change happens). Can we save the strategy by making use of a different portfolio allocation? (I think the answer is yes). Let’s grab a free copy of Meb Faber’s Global Tactical Asset Allocation book and see what we can learn. Lots of allocations (some as low as 20% equities) promise the same long term returns throughout retirement as our 100% equity portfolio, but they do so with a vastly higher sharpe ratio, which might mean we didn’t kill our retirement during prolonged drawdowns and inflation. We can also look to mitigate inflation, currency, and geography risks through the tool of asset allocation.
Now let’s go back to that Excel table and re-create it using a few different portfolios. Did we survive by changing our allocation? How did we minimize our need for supplemental income and maximize our cushion for medical expenses?
Bottom Line: If you haven’t killed the strategy, then you haven’t begun the pre-mortem. And if you haven’t killed *this* strategy, then you’re just not trying.
On an unrelated note – my friend Ryan Krilin at Alpha Architects just posted something about portfolio fees that you are probably going to love. Short version: You are paying way too much in fees for the allocation you have chosen. You can even reduce your total fee by over 50% while dramatically increasing your diversification, if you choose. Take a look – [spammy link deleted]
lol
Hi great blog, really enjoy reading and learning from everyone here. I have a question about capital gains harvesting that i haven”t seen addressed. I understand the benefits of upping your basis for tax optimization. But my question is related to whether gains harvesting may result in lower compounding? If you up your basis aren’t you buying back fewer shares, and therefore missing out on greater returns when / if share prices go up? Am I thinking about this wrong? Appreciate any thoughts you might have on this. Thanks very much.
Why choose to buy back fewer shares?
Sell some shares. Buy back same number of shares at same price as you sold. The only thing that changes is the basis.
Face palm. Thanks for clarifying.
Hi, I am currently in the 15% bracket for long term capital gains. Is this method of long term capital gains harvesting only advisable for people who have income of less than $40,000?
Yes – do it when you are in the 0% ltcg bracket.