Author: humblefi

How much freedom did I buy today?

/ humblefi / 7 Comments

I was having a very tiring day today…a few tiring days actually and I was totally spent when I came home. I checked my blog emails and found some uplifting comments from readers of one of my blog posts. My spirits got recharged due to those comments. Thanks to Tristan (Dividends Down Under), Ambertreeleaves (ambertreeleaves) and Mister SLM. I decided to put my recharged spirits to good use and write a blog post that I have been thinking about sharing for quite a while. This is my way of paying my dues for the good karma that came my way today from the three wonderful people mentioned above.

Back in mid 2014, I defined what Financial Independence means to me in one of my very early blog posts (link). The plan definitely has changed a bit over the last two years. But, I have been executing this plan with all the motivation and money that I can muster

Along the way, I realized one profound motivational idea that I will share via this blog post. I have spreadsheets that track my monthly dividends going all the way back  a few years and in there, I track which of my monthly needs are funded fully by my current passive income.

One day, while updating that, I realized this profound motivational question. Every now and then, I have a rough day at work or at home and sometimes both 🙂 I keep myself motivated by asking myself this question: How much freedom did I buy today?

Here is my answer.

  • My Passive Income goal is
    • $4000 per month (Why $4000 pm?)
    • $48000 per year
    • $131.5 per day ($48K/365)
  • By end of this year, if all goes well, my monthly passive income will be $750 per month. This has come through a lot of sacrifices…both by me and my family.
  • How much freedom will $750 pm buy me?
    • $750/$131.5  =>  5.7 days per month => 136 hours per month => 4.38 hrs a day (31 day month)
  • To put this in perspective, here is the amount of freedom $750 pm of passive income will buy me:
    • 4.38 hours     of absolute freedom every day!
    • 5.7 days         of absolute freedom every month!
    • 68.4 days      of absolute freedom every year!
    • 2 months      of absolute freedom every year!

When I started working many many years ago, saving was defined as money that I did not spend. I was very aimless and had no idea of Financial Independence. Obviously, money vaporized like water. It took a nasty and depressing curve ball in life to start me on a search to something different and I ended up discovering Financial Independence by accident (my first blog post). Thanks to the wonderful world of FIRE bloggers, I found my “something different” i.e. Financial Independence and Early Retirement. Though, it is not going to be as early for me…but better late than never hey !!

The question that keeps me motivated and fills me with enormous drive is the question:

  • How much freedom did I buy today?
    • My answer is 4 hours a day. 
    • What is yours? 

Hope this question motivates you to keep striving for FIRE!

Financial Independence Progress Report for September 2016

/ humblefi / 6 Comments

September was another slow month. History says that September is more often than not a volatile month. But, I did not see enough volatility and hence no deals to take advantage of. Let us see what the numbers say for September.

09/03/2016
Emergency Fund $60K 100.0%
College Fund (80K) 44.92% 45.65%
Passive Income (2015 vs 2016) $1036.87 (09/2015) $1176.74  (09/2016)
Retirement Fund ($900K) 65.01% 66.36%
Roof for our Family($750K) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance payments initiated)

Main Takeaways this month

  • Portfolio Increases (in green above)
    • As blog readers last month pointed out, many numbers are green this month also! I am thankful for that.
  • Portfolio changes
    • No portfolio changes this month….still adding to the cash fund I set up July. I did spend some of this money on VTMGX and VWELX (Vanguard Wellington) on a small dip in Financials but no major buy as the markets were more or less flat.
  • Passive Income Stream
    • Passive Income for September 2016 ($1176.74) is appx 10% higher that September 2015 ($1036.87). Where is the additional money coming from?
      • A decent portion of the increase is from VTMGX (Vanguard Developed Markets Index Fund) dividend payout.
    • Why VTMGX?
      • I started diversifying my passive income streams across geographies last year and boosted it a lot more this year. The world is much more volatile nowadays and it is hard to predict where the next problem will come from.
      • So, I wanted to spread my portfolio’s risk across many countries of the world. 15% of my passive income investments is outside the US….when I see some good deals, I will increase my exposure outside the US but I will choose a different fund…I want another fund diversify fund risk and fund manager risk as well.
      • But, this will come later. If you want more details on VTMGX, please get it directly from the horse’s mouth: VTMGX.
    • My goal is to reach $750 pm by end of this year…September is done…and my monthly dividends are still at $557 pm.
      • Target Dividend: $9000 pa
      • Current Dividend (year to date): $6770
      • Balance to make up in the next 3 months
        • $9000 – $6770  => $2230 over the next 3 months
      • It all depends  on December being a good month….crossing my fingers!
      • I have kept some cash aside to invest in a dip….the temptation to get to $750 in passive income per month was very high in September and I could could not resist and burnt some of it…..But, I will wait this month for a market dip. October is historically volatile…so, maybe there will be an opportunity.

Financial Independence Progress Report for August 2016

/ humblefi / 7 Comments

August also has come and gone without much fanfare. Another very slow month…so slow that I felt like doing something just to make it less boring. But, I reminded myself that it is the lull before the storm that I anticipate may start in September (historically a rough month). But, lets look at numbers for August.

09/03/2016
Emergency Fund $60K 100.0%
College Fund (80K) 44.30% 44.92%
Passive Income (2015 vs 2016) $297.54 (08/2015) $391.93  (08/2016)
Retirement Fund ($900K) 64.66% 65.01%
Roof for our Family($750K) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance payments initiated)

Main Takeaways this month

  • Portfolio Increases (in green above)
    • Nothing great to talk about…I still think that the positive gains of this year will not stand the test of time…..insane valuations will always come crashing down.
  • Portfolio changes
    • No portfolio changes this month….still adding to the cash fund I set up last month. If there is a good market dip (saw DOW drops 200-300 pts), I will use the cash to buy the dip.
  • Passive Income Stream
    • Passive Income for August 2016 ($391.93) is higher that August 2015 (297.54). This restarts the streak of 2016 dividends being more than 2015 dividends for the corresponding months. The streak got broken last month because I was in the middle of some portfolio changes….happy to get it back this month 🙂
    • My goal is to reach $750 pm by end of this year…it is already August…and my monthly dividends are appx $433 pm.
      • Target Dividend
        • $9000 pa => $750 pm
      • Current Dividend
        • $5593 pa => $466 pm
      • Balance to make up in the next 5 months
        • $9000 – $5593  => $3407 over the next 4 months
        • I have kept some cash aside to invest in a dip….I could invest it right now and increase my chances of making my target of $750 pm dividend income. But, I have chosen to wait a bit for value by waiting for a market dip and then using the cash. September is another big month for dividends. Based on how September does, I will decide.
        • I think I might squeeze through….keeping fingers crossed.

Financial Independence Progress Report for July 2016

/ humblefi / 6 Comments

July has come and gone without much fanfare. After June, one of the two biggest months of the year for dividends, July feels disappointing actually. But, let the numbers speak rather than my emotions 🙂

08/01/2016
Emergency Fund ($72K)$60K 100.0%
College Fund (80K) 42.53% 44.30%
Passive Income (2015 vs 2016) $604.87 (07/2015) $579.61  (07/2016)
Retirement Fund ($900K) 61.64% 64.66%
Roof for our Family($750K) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance payments initiated)

Main Takeaways this month

  • Portfolio Increases (in green above)
    • I cannot believe that any of the positive gains will ever stand the test of time. It is the markets going crazy on us with insane valuations. So, I will not waste my time talking about it.
  • Portfolio changes
    • I did some more portfolio changes….hopefully for the last time this year. The main idea was to capture some gains and move them into a couple of new fund options. And also set aside some money for the cash fund.
    • I wrote about this here. My new mutual fund investments are VWELX and VDAIX.
  • Cash Fund
    • I started a cash fund in May since I anticipated a few days of down market towards the end of June…with the interest rate drama, Britain’s exit from Euro decision, etc. I used the fund completely to buy the Brexit dip.
    • I have started a new cash fund in July again…nothing big..two hundred dollars a month max. And some cash to seed the fund came from capturing some of the gains from some of my mutual funds.
  • Passive Income Stream
    • Passive Income for July 2016 ($579.61) was surprisingly lower than that of July 2015 (604.87). I was wondering why this happened…..and then I remembered on seeing the numbers. When I was jobless early this year, I sold some ESPP stock I had and used the money to buy VWITX (National MUNIs). I got to sell some ESPP without any additional taxes….the espp sale replaced some portion of my salary loss. The ESPP stock dividends are slightly more than the National MUNIs but at tax time, the MUNIs will score because the gains are tax free. I got the diversification I wanted but it came as a surprise.
    • My goal is to reach $750 pm by end of this year…it is already July…and my monthly dividends are appx $433 pm.
      • Target Dividend
        • $750 pm => $9000 pa
      • Current Dividend
        • $433 pm => $5196 pa
      • Balance to make up in the next 5 months
        • $9000 – $5196  => $3804 over the next 5 months
        • I think I might squeeze through….inspite of July’s weak dividends.
      • Lets hope for the best!!

Welcome to new members of my mutual funds family :-)

/ humblefi / 1 Comment

This month (July 2016) ends the changes I have been making to my mutual fund family. This month, I am welcoming two new members to the family. Hearty welcome to VWELX (Vanguard Wellington Fund) and VWITX (Vanguard Intermediate Term Tax-exempt fund). The obvious next question is why 🙂

In October of 2014, I implemented my Passive Income Streams strategy. I wrote about it here. One of the six design principles was: For each risk bucket, have a minimum of two investment vehicles. I like this principle for two reasons:

  • Investment philosophy diversification
  • Investment manager diversification.

My thesis is that both of the above together will provide better risk diversification. Using this thesis, I build the following set of Passive Income streams (as of 10/18/2014).

Table 1: Investment Vehicles Update 10/18/2014
Risk Bucket Name Investment 1 Investment 2 Investment 3
Risk 1 (Cash) Smarty Pig (online) Credit Union N/A
Risk 2 (Bonds) VCAIX (CA munis) N/A N/A
Risk 3 (Balanced Funds) VTMFX (50% stocks and 50% National MUNIs) N/A N/A
Risk 4 (Dividend Investing) VDIGX (div growth) VHDYX (Curr div) N/A
Risk 5 (Capital Growth) VTCLX (large+mid cap) VTMSX (small cap) N/A
Risk 5 (International Funds) VTMGX (large blend) N/A N/A

Over the last couple months, the stock market has been on a tear. I cannot come up with any logical reason to explain why…it seems that no bad news can touch this market….it seems to go up and up and up. For day traders, this is heaven….but for normal folks like me, this seems suicidal…there is no reasonable value to any asset in my mutual fund family. Dollar Cost Averaging (DCA) is supposed to help me deal with this, but I can’t seem to pour money into vehicles which rise up like crazy. So, I have taken a few steps over the last couple months to do the following:

  • Bail out to re-enter at a later date
    • Sold VTCLX and VTMSX
    • Moved some of it to VWITX (National Munis) and some to cash
    • Cash helped me capture valuable stocks big time during the Brexit market dip.
  • Sell a portion of funds that had appreciated to capture gains
    • Sold portions of VTMFX, VDIGX and VHDYX
    • Captured gains accumulated over the last two years
  • Move some of the captured gains into to more solid ground
    • More on this below…..
  • Move the remaining captured gains into cash (Money market funds)
    • Basically fresh powder for the inevitable market downturn….

To redeploy the captured gains, I needed to find new vehicles that will produce passive income for me. I like all the categories I have listed in my original design in Table 1…so no new categories were needed. But some of the mutual funds did not have any competition 🙂 So, I decided to add some competition in two categories:

  • Bonds
  • Balanced Funds
  • Dividend Investing

The changes are listed in Green Color in Table 2 below.

Table 2: Investment Vehicles Update 07/30/2016
Risk Bucket Name Investment 1 Investment 2 Investment 3
Risk 1 (Cash) Smarty Pig (online) Credit Union N/A
Risk 2 (Bonds) VCAIX (CA munis) VWITX (National Munis) N/A
Risk 3 (Balanced Funds) VTMFX (50% stocks/50% National MUNIs) VWELX (60-70% stocks/30-40% bonds) N/A
Risk 4 (Dividend Investing) VDIGX (div growth) VHDYX (Curr div) VDAIX (div appreciation)
Risk 5 (Capital Growth) N/A N/A N/A
Risk 5 (International Funds) VTMGX (large blend) N/A N/A

Why did I choose those specific funds?

  • VWITX
    • In the Bonds category, I had VCAIX (CA Muni bonds). Since this was CA specific only, I bought into VWITX (National Muni bonds). Now mu MUNI bonds are spread across many states in the country. The advantage is that National Munis add better risk diversification. The disadvantage is that I lose the state tax exclusion that VCAIX would have given me.
  • VWELX
    • In the Balance funds category, I already had VTMFX…a fund split into 50% stocks (cap appreciation, low dividends) and 50% National Munis. I wanted to add a bit more aggressiveness into the balanced fund category and I chose VWELX, a fund with modest current income and long term growth. The fund invests across a broad section of the market and is known for stable returns….under performance in  bull markets and lower loss in bar markets but stable returns.
    • The disadvantage is that the turnover is 35% i.e. a bit tax unfriendly but short term capital gains are pretty low. So, I think it is worth it….lets see if my bet pays off in the long run.
  • VDAIX
    • In the dividend funds category, I already had two funds which I am very happy about. VDIGX is turned for future dividend growth (low current income) and VHDYX is tuned for high current income (low future dividend growth).
    • VDAIX on the other hand is a mix of both: companies that have consistently raised dividends for the last 10 years (good current income) and also the same companies have promise to continue growing the dividend stream in future.
    • One can ask….VDIGX is managed by Donald Kilbride, a super star manager who has consistently beaten VDAIX for the past few years. So, why not invest all the money in VDIGX if you do not need current income? Risk diversification and lower turnover.  Donald Kilbride is one person and VDAIX is an index…no more explaining needed 🙂
  • Money Market Fund
    • I want to start accumulating some cash to jump into the market when the markets go down “deep”. I have noticed that when DOW goes 100 pts in the morning, it is back up 200 points by end of market. Looks like a lot of people are investing on a 100 pt dip.
    • My new standard will be to accumulate cash until DOW dips 300 pts. My assumption is that the market will not be able to come back from a 300 pt loss in one day i.e. I can really get some value for money. Lets see how this goes.

Thatz it for now. Join me in welcoming the new members to my mutual fund family!!

Financial Independence Progress Report for June 2016

/ humblefi / 6 Comments

June is finally done! It is one of the two biggest months of the year for dividends. And it did not disappoint me 🙂 Lets look at June’s numbers. In a later post, I will do my quarterly review for the 2nd quarter and see how I am doing for the yearly goals.

07/02/2016
Emergency Fund ($72K)$60K 100.0%
College Fund (80K) 42% 42.53%
Passive Income (2015 vs 2016) $1038.14 (06/2015) $1741.69 (06/2016)
Retirement Fund ($900K) 61.31% 61.64%
Roof for our Family($750K) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance payments initiated)

Main Takeaways this month

  • Dollar Cost Averaging
    • In May, I reduced my Emergency fund and moved some of it into a new Dividend mutual fund (VDAIX). I was keeping the remaining money as a Cash Fund to invest on the next market downturn….and boy…did Brexit provide that for me.
    • Brexit turned out to be a boon for me. The market dropped on two consecutive days in a big way….DOW dropped by 600 points and 300 points on consecutive days. Thanks to the people of United Kingdom for this!
    • I had a couple thousand dollars left over from the emergency fund makeover and pushed all the money (and some) into my passive income streams. Yeah for dollar cost averaging….this cash infusion will make its presence felt over the years via dividend compounding.
  • Cash Fund
    • I started a cash fund in May since I anticipated a few days of down market towards the end of June…with the interest rate drama, Britain’s exit from Euro decision, etc.
    • I used the fund completely and now I am officially out of cash…I mean I am so out of cash that I had to borrow money from my wife to pay the bills for this month. I am never going to hear the end of this for sure 🙂
    • So, for the next 3-4 months at least, I will have to run a very very tight ship 😦 Hey, the sacrifices will pay off in the long run right? And the dividends coming in will hopefully keep me motivated and help me ride out the low-cash situations.
  • Passive Income Stream
    • Passive Income for June 2016 recaptured the increase in dividends over the same period last year. June 2015 had a dividend income of $278.52 and June 2016 has a dividend income of $378.08 …a decent year-over-year increase.
    • My goal is to reach $750 pm by end of this year…considering we are at the half way mark for the year and my monthly dividends are close to $400 pm, I can see now that I am going to reach it….eagerly waiting for the day when this event happens!

Financial Independence Progress Report for May 2016

/ humblefi / 7 Comments

If April was the slowest month year-to-date, May was not that far behind 🙂 But, on the positive front, May 2016 is better than May 2015!  And, I can’t wait for June’s dividends…it is the second biggest month in terms of dividends for me. So, if we are done with May 2016, it is an exciting time for me. Lets look at May’s numbers.

06/05/2016
Emergency Fund ($72K)$60K 100.0%
College Fund (80K) 41.25% 42%
Passive Income Streams ($4000 pm) $235.30 (05/2015) $371.51 (05/2016)
Retirement Fund ($900K) 61.08% 61.31%
Roof for our Family($750K) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance payments initiated)

Main Takeaways this month

  • Portfolio changes continues this month….
    • In April, I made changes to my Capital Appreciation bucket. I wrote about it here. In May, I have strengthened my dividend portfolio with a new mutual fund investment.
    • In May, I reduced my Emergency fund by $12K and moved a quarter of it into another Dividend mutual fund. I am sure Vivienne is smiling on this reduction in cash holding. You can check her out at WellRoundedInvestor.com, ….she is a FI blogger way ahead of the curve!  She has always encouraged me to invest some of the idle cash 🙂 Lo and behold, I did it.
    • The period of unemployment I went through this year has motivated me to generate more dividends and accelerate my journey towards FI. So, I decided to invest some money from the emergency fund and accelerate my financial independence.
  • VDAIX (Vanguard Dividend Appreciation Index)
    • I have initiated a new position in VDAIX…this completes my multi-pronged approach to build a solid dividend platform. More details in another post.
    • This fund invests in many companies that have a history of increasing dividends. If there is a discussion of quality companies, the companies in VDAIX has to be part of that discussion. The fund’s portfolio is listed here.
    • I am going to Dollar Cost Average into this over the next few years and build another solid portfolio investment.
  • Cash Fund
    • I have started a small cash fund to keep handy…I anticipate a few days of down market towards the end of June…with the interest rate drama, Britain’s exit from Euro decision, etc.
  • Passive Income Stream
    • Passive Income for May 2016 recaptured the increase in dividends over the same period last year. May 2015 had a dividend income of $235.30 and May 2016 has a dividend income of $371.51 …a decent year-over-year increase.

Live now vs Save for FIRE….

/ humblefi / 5 Comments

I read a wonderful article today written by my fellow Belgian FI blogger AmberTreeLeaves. The article of his title was “endless doubt on FIRE“. I was behind on my FI blogger reads and read it a week too late. But, the article was very thought provoking and I would really recommend a read.

Since there were already quite a few posts, commenting there was probably not going to be too helpful…hence this new post 🙂 Hope AmberTreeLeaves does not mind stealing an idea for a post from his blog!

That post by AmberTreeLeaves raised a conflict that I often had and continue to have within myself. One sentence from the post captures this conflict very well: The conflict is mainly between travel /live now and prepare FIRE.

I go through the same conflict in my mind….not just with travel, but also things like buying a car, etc. My parents sacrificed a lot in their present and postponed all their enjoyment to the future. And it did not end well. I went through some years where I did the opposite…living for the now..I guess I was running away from my parent’s philosophy. And when I discovered Financial Independence, I swung the other way….live for the future only and my family was none to happy about it 🙂

But, I have now come to a fair medium. I have come up with a decision framework that helps me rationalize live now OR live for the future vs the benefit I am getting. This has helped making sacrifices easier. Let me state two example cases.

  1. Lets assume a family vacation costs $5000 on average and hypothetically our family’s post tax take home salary is $60000. My requirement is that I want to have one vacation each for the next 10 years before my kids head out to college. So, I need roughly $50000 to fund all the vacations. $50000 adds one additional year to my family’s expected FI target. Considering that we will never get that many chances to spend time together as a family after kids head out to college, this addition is worth it to me.
  2. Now consider purchasing a new luxury car like some of my friends have. The car costs $80000 and after financing and maintenance costs, it can rise up to $90000 at least…yes, I could not believe it 🙂 With the same post-tax family salary of $50000 per year, it would add almost 2 years to my expected FI target. For me, getting freedom 2 years earlier is more important than driving a luxury car. Don’t get me wrong…I like the cars…I have sat in them and I think they are awesome….but not awesome enough compared to achieving freedom 2 years earlier…for me.

I am trying to apply this framework for every major decision…it had helped me rationalize family vacations and buying a new car. Next is applying this for buying a home. I am curious how do others deal with this conflict. Lemme know your thoughts please.

And once again, thanks to AmberTreeLeaves for a wonderful and thought provoking post. It took me back in time to a period when I learnt some important lessons.

Financial Independence Progress Report for April 2016

/ humblefi / 3 Comments

April is a slow month for dividends in my portfolio. But, after a couple months of no paychecks, seeing regular paychecks in April was such a joy! In celebration of that, I pumped a couple hundred dollars into making sure that future paychecks via dividends are a certainty 🙂

Lets look at the numbers now.

04/30/2016
Emergency Fund ($72K) 100.0% 100.0%
College Fund (80K) 39.33% 41.25%
Passive Income Streams ($4000 pm) $544.13 pm (04/2015) $509.15 pm (4/2016)
Retirement Fund ($900K) 57.96% 61.08%
Roof for our Family($750K) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance payments initiated)

Main Takeaways this month

  • Portfolio changes continues this month….
    • I wrote about my Capital Gains gut check here. As part of that exercise, I divested all my holdings in VTCLX (Vanguard Tax Managed Capital Appreciation) and VTMSX (Vanguard Tax Managed Small Cap).
  • Additions to my new investment vehicle…
    • Last month, I initiated a position in Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX). I wrote about it in my March Progress Report.
    • I took all the money from the sale of VTCLX and VTMSX and moved them into VWITX.
    • The gains are Federal Tax free and AMT (Alternative Minimum Tax) free as well. I would still have to pay CA state tax for VWITX though.
  • Dollar Cost Averaging
    • Did not have cash to dollar cost average (DCA) my funds this month…but I did boost my investments to dollar cost average VTMGX (Vanguard Developed Markets Index Fund….my non-US exposure mutual fund). I want to have some of my passive income streams to not come from US companies. VTMGX diversifies my passive income streams to include companies from Greater Europe, Greater Asia and Canada.
  • Passive Income Stream
    • Passive income for April 2016 ($1016.87) broke the positive trend of current year month winning over previous year’s month as April 2015 ($544.13). Hmm….
      • ….this was expected as my portfolio changes led to a some days where my money was not working for me…a gap of a couple days between closing of accounts and moving them into new accounts.
    • I compute Passive Income per month as (total passive income in this year) / number of months completed this year.
      • Total passive income is a sum of dividends + capital gains distributions.
      • April Passive Income = (total passive income in this year) / 12 == $201.98 which beat the 2015 April number ($172.40 per month)
      • Doing it this way keeps the monthly passive income more realistic because I can instantly know which of my monthly expenses are covered by this amount. I keep a separate tracker for this which I will write about at a later date.
    • My intermediate goal is to get $1000 pm in passive income first. My estimation for 2016 is that I will reach $750 pm. Lets see if I can push it some more 🙂

Capital Gains Investing…a gut check

/ humblefi / 7 Comments

Kevin O’Leary…

In my on-going search for increasing my knowledge about all things finance, I recently came across Kevin O’Leary of the Shark Tank fame. More precisely, I came across a quote he made in this video. The statement he made was this: I would never buy a stock that doesn’t pay a dividend. Whatever you think of Kevin O’Leary as a person, it is worth thinking about the statement. This post is about my thinking process and what actions I took w.r.t. my portfolio.

My Capital Appreciation investment

When I started my journey towards Financial Independence in late 2014, I wrote about the design principles behind my Passive Income streams and how I implemented the design. One of the design principles is this: Invest some money in Capital Appreciation (high risk) buckets. I called this bucket the lottery ticket investments. The implementation of this bucket was done via two Vanguard Mutual Funds.

  1. Vanguard Tax Managed Capital Appreciation Fund (VTCLX)
  2. Vanguard Tax Managed Small Cap Fund (VTMSX)

If you look at the funds, they are excellent in many ways…

  • both Morning Star gold rated and tax efficient.
  • both minimize dividends and maximize capital gains…hence tax efficiency.
  • both have an awesome track record in prior years

But, for the past four months or so, these two funds stood out whenever I did a Cost Basis analysis in my account. Let us consider VTCLX for example. Since 2014 when I started funding my Passive Income Streams, I have accumulated appx $12,000 in my VTCLX account. If I do a Cost Basis analysis i.e. how much money I invested vs how much is the current market value, here are the nos:

  • Total Investment: $12, 000
  • Today’s Market Value: $12,300
    • All dividends, however small, have been re-invested
    • Includes all capital appreciation
  • Excludes any taxes I paid on the dividends

Damn….Kevin O’Leary time again….

Yes. Only $300 total return i.e. a 2.5% total return, even excluding taxes. Similar numbers for VTMSX. This is where Kevin O’Leary’s statement bugged me. In one of the few interviews I watched of him, he said something like: if I am giving my money to a company, I expect a decent return….a return comparable to the risk I took on.

Painful Questions…

So, I asked myself this question: for the risk of investing in funds whose Beta is > 1.0 i.e. funds that are more riskier that the market, I got a 2.5% total return. This is pathetically low in my opinion. But, lets argue that 2 years (2014 to 2016) is a very small investment window. Then comes the scarier question: what kind of return can I expect in the years going forward? Here is why I think this question is scary:

  • S&P 500 is at historically high P/E ratio (inflation adjusted p/e)
    •  I.e. room for capital appreciation is pretty low
  • Dow Jones Industrial Average is also at historically high P/E ratio (charts)
    • I.e. room for capital appreciation is pretty low
  • Nasdaq composite is also at historically high P/E ration (charts)
    • Higher than the 2000 dot-come bubble!
    • I.e. room for capital appreciation is pretty low

For a moderate risk taker like me, the data is showing me that there is not much room for capital appreciation. Note that Google stock went from $550 per stock to $750 per stock from 2014 to 2016, but also note that VTCLX has google stock 🙂 So, it must be that there were many stocks that dragged it down. But, I do not dabble in individual stocks…I prefer the risk diversification and passive nature of mutual funds.

It gets even worse. I plotted a graph of Vanguard Intermediate Term Tax Exempt MUNI fund (VWITX) and an investment here could have easily beat VTCLX over the last two years. So, if we assume that the room for capital appreciation is low, then it looks like I made a very inefficient investment by choosing capital appreciation vs cash flow. Now for the all important question: Why 🙂

Why why why…

I have realized that I missed a fundamental point in my analysis of investing for capital appreciation and passive income streams.

  • Achieving capital gains implicitly implies that one must identify an under-valued asset that can multiply its asset value over time.
    • For example, if I had bought Google stock in 2014 at $550 for one stock, I could sell it today at $750 per stock i.e. $200 worth of capital appreciation.
  • If every market index (S&P, DJIA, Nasdaq, etc) is at historically high P/E, there is not much room to find value in stocks
    • Vanguard folks are good but they are not magicians hey 🙂
  • If finding under-valued assets is the foundation of capital appreciation, then perhaps I should have invested in a product whose primary focus is Value investing.
    • For example, Vanguard Value Index Fund Investor Shares(VIVAX) is one such fund. But, between 2014 to 2016, the appreciation here too is minimal.
    • If experts who sole job is to find value have not been able to do it, then what hope is there for an amateur like me?

So, my fundamental premise for investing for capital appreciation in my taxable account passive income streams was a broken one.

  • Note that I am not saying that capital appreciation approach is broken. Maybe VTCLX has accumulated many under performing assets whose value will become apparent after a bust-boom cycle. Or maybe a balanced approach across capital appreciation and current income like in Vanguard Equity Income Fund (VEIPX) is the way to go, but this fund is not tax efficient for folks in the higher tax brackets.
  • So, for an investor like me who is in the search for tax-efficient income on the path to financial independence *at this point in my life*, investing in capital appreciation at current high market evaluations does not seem like a wise decision.
  • I have a lot of money riding on a total market strategy in my tax-advantaged accounts i.e. there is sufficient skin in the game riding on a capital appreciation strategy. But the time frame for my tax advantaged accounts is more than 20 years i.e. enough time for a boom+bust cycle. But, in my passive income stream bucket, my time frame is appx 10 years and I do not see a place for capital appreciation investing, at current market evaluations.
  • If markets take a deep and I see value in VTCLX or VTSMX, I will dive right in….lets see what the future holds.

Portfolio Changes

I cashed out VTCLX and VTSMX (teeny weeny gains) and moved the money across the following buckets

  • Vanguard Intermediate Term MUNI fund (VWITX)
  • Vanguard Dividend Appreciation fund (VDIGX)
    • Qualified dividends i.e. taxes capped at 15%
    • Dividend appreciation potential…a conservative investor’s substitute for capital appreciation 😉