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.
- 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.
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)
United Airlines: 18,399
Total value: $7,000+
Not included here: all of the credit card and bank cash bonuses.
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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