asset allocation and rebalance

We have been living off our portfolio since late 2012. Along the way I’ve made only minor adjustments – annual rebalancing, minimizing long-term taxes with capital gain harvests and Roth conversions, and adding the occasional small chunk of fresh capital as blog income allowed.

But after ~7 years of the stock market trending upward, and the conscious decision to spend more, in early 2019 we took some money off the table (sold stocks / bought bonds.)

When literally everything went to hell due to COVID-19, we sold some of those bonds to buy stock and increase our cash cushion..

After all of that… This is what our portfolio looks like in 2020.

GCC Asset Allocation

As of early April 2020, according to Personal Capital our portfolio looks like this:

Strangely enough, despite the COVID-19 craziness and 2019 being one of our most expensive years yet, total net worth is a few percentage points higher than last year.

The biggest change over previous years is a larger percentage of bonds and cash. More details to follow.

Data from previous years: 2016, 2018, 2019.

Assets and allocation

US Stocks:  63% -> ~77% VTI, plus 20% S&P500 and 3-4% Small-cap trusts in my old 401k
International Stocks: 17% -> ~93% VXUS, 7% VWO, and small holdings of Vanguard MFs in our HSA
Bonds: 10% -> ~75% Municipal bonds (mostly MUB, some VTEB), 10% intermediate term Treasuries (IEI), 15% I-bonds (not shown in the chart, about 2% of total)
Alternatives: 4% -> 100% VNQ (a REIT.)
Cash: ~6%

Some interesting ratios:
Stock / Bonds-Cash: ~ 84 / 16 (trending away from 100% equities)
US / International equities: ~ 80 / 20
Taxable / Pre / Post-tax: ~ 72 / 21 / 7 (Roth is trending up – was 0% 7 years ago)

Took Money Off the Table

About 1 year ago in March 2019 the Mrs and I were having a chat about our future – should we try one more time to have a second child, will we move back to the US at some point(?), if we end up in California should we buy a house or rent, etc… (The GCC household has amazing pillow talk.)

We also continued a recurring conversation: “Our investments have returned more than we ever expected. The market has gone straight up for 7 year… Should we take some off the table?”

Perhaps being less aggressive with our asset allocation is appropriate – We have consciously increased our spending and our life choices have reduced our geographic arbitrage and budget reduction flexibility. On the other hand, we are a year closer to Social Security income.

By taking $ off the table, worst case we reduce the odds of dying with $1 billion – Best case, we are less likely to require implementing austerity measures if the market goes against us (and wouldn’t you know it…)

Long story short, we sold a bunch of stock – I took what started as a massive capital gain harvest (~$100k capital gain) and just parked it on the side in municipal bonds. This brought our stock/bond split to ~80/20. I then put some of those bonds back into equities during the coronavirus crash, for a current allocation of ~85/15.

Thanks to ~$175,000 of tax free harvested gains from years prior (saving $26,000+ in taxes), an additional $100k gain means a significant chunk of capital with a very small tax bill. (I’ll review this in the near future when I post our 2019 taxes.)

For a step-by-step example of what harvesting a capital gain looks like, I’ve written a template based on the trades I executed in December 2016. Drop your email address in here 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% 7 years ago, to 0.06% 4 years ago to <0.05% last year… and now to 0.03%. 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. I’m looking forward to the days when they start to formally pay us instead.

Retirement Account Fee Analyzer by Personal Capital

Plus, now that many of the big brokerages charge zero trading fees, we also no longer pay $20-$50/year for cap gain harvesting and portfolio rebalancing.

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 (+40,000 after tax season)
Amex: 0
Asia Miles: 1,200
Capital One: 133,232
Delta Airlines: 9,281
Hilton: 27,051
IHG: 37,859 (+140,000 after tax season)
Marriott/SPG: 135,219
Ultimate Rewards: 132,255
United Airlines: 19,789 (+40,000 after tax season)
Total value: $8,933+

Our pile of points will increase in the coming weeks as I make our tax payments for the year.

Yes, I’ll be paying taxes on the $100k capital gain harvest with 3 credit cards (when they are due in July.)

We don’t have any travel planned as we are quickly coming to the 3rd trimester of Winnie’s pregnancy (plus borders are closed anyway) but maybe Jr and I can do a quick ski trip late 2020/early 2021?

For ideas on how to accumulate or redeem award points, check out our Award Travel Series!

Final Thoughts

When you’ve already won the game, you can either let it ride or stop playing.

We are now older and less interesting so in Q1 2019 we did the latter, selling some stock in exchange for some bonds. When the market dropped in Feb/March 2020, I sold some bonds and exchanged it for stock and cash.

Our portfolio now stands at 85% stock / 15% bonds-cash and 80% US / 20% International. This is the least aggressive we’ve been, about a 10% shift in stock/bond ratio. If the market cooperates and tests the lows again, I’ll convert more of those bonds into stock.