Financial Independence Progress Report for July 2016

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 ūüôā

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 :-)

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 ūüôā

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 ūüôā 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 ūüôā
  • 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

June is finally done! It is one of the two biggest months of the year for dividends. And it did not disappoint me ūüôā 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 ūüôā
    • So, for the next 3-4 months at least, I will have to run a very very tight ship ūüė¶ 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 December 2015

12/25/2015
Emergency Fund ($72K) 100.0% 100.0%
College Fund (80K) 38.05% 38.08%
Passive Income Streams ($4000 pm) $297.68 pm (12/2014)% $621.24 pm (12/2015)
Retirement Fund ($900K) 58.31% 57.76%
Roof for our Family($1 mil) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance payments initiated)

Main Takeaways

I am going to wrap up a little early in this last month of 2015. I want to gain some time to plan for 2016. There is both good news and bad news in this last month of 2015. Lets tackle the bad news first.

  • Retirement Fund
    • Lost almost 0.5% of my portfolio this month.
    • In the same interval,
      • S&P 500 lost 0.16%
      • DOW Jones lost 0.29%
    • Nevertheless, looks like there is no Santa Claus boost for my retirement fund this month. The astute reader may notice that there are ¬†still 3-4 market days left in December…miracles can happen you know ūüėČ
  • 529 plan
    • Last month, through my kid’s graciousness, money set aside for the birthday party went unused and that went into the college fund. Inspite of that, the 529 barely eked out a positive gain. So, overall,¬†no Santa Claus rally for this investment¬†too.

Now for the good news.

  • Dollar Cost Averaging
    • Around Dec 21st, DOW had a nice dip of 300+ points. I¬†took¬†advantage of this and boosted my investments to dollar cost average VDIGX, VHDYX and VTMGX.
  • Passive Income Streams
    • Passive income for December¬†2015 continued the winning trend vs December¬†of last year.
    • 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.
      • December¬†Passive Income = (total passive income in this year) / 12 == $621.24
      • 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 final goal for passive income is $4000 pm. This is going to take a while. So, my intermediate goal is to get $1000 pm in passive income first.
      • At the end of November, passive income was at $515 pm.
      • A nice amount of dividends from Dec 2015 has led me to $621 pm.
      • Assuming a 3% dividend return and 0% dividend growth, it will probably take me at least 3 more years to reach $1000 pm with a chunky sized investment each year.¬†After reaching that, I plan to pretty much leave the investments on auto pilot. Wish me good luck ūüôā

Dollar Cost Averaging…my way :-)

I was reviewing the performance of my portfolio for 2015 when I realized that I had used Dollar Cost Averaging (DCA) quite a bit this year. The markets have fluctuated wildly in the last few months and my anticipation is that it will be the same in 2016 as well. Dollar Cost Averaging (DCA) is what I used to smooth out the fluctuations in 2015. I have a couple different ways of implementing¬†DCA…so, I thought it would be nice to write about it and see if my blog friends have any input.

DCA Type 1

My path to Financial Independence is to generate multiple passive income streams using a diversified set of mutual funds (link). For example, VCADX, VTMFX, VDIGX, VHDYX , VTMGX, VTCLX and VTMSX. Investments into the different funds are automated and are withdrawn on the first of every month. Regular investments, irrespective of the short term market fluctuations was my initial plan for DCA.

But, I realized that when the market went through downward dips, my DCA plan was found a bit lacking. For example, if the dips were spread across many days in the month, my DCA plan of investing at the beginning of every month would miss out on loading up quality investments at lower prices.

So, I spread my mutual investments into two pieces for each mutual fund, and spread across many non-overlapping days in the month. Since Vanguard does not charge me a fee to invest into mutual funds, I felt that this spread captured the market ups and downs better. For example

  • VCADX ¬† ¬† ¬† ¬† ¬† 9th and 28th
  • VTMFX ¬† ¬† ¬† ¬† ¬† 6th and 27th
  • etc

DCA Type 2

But, I saw one more pattern in the  market. Market dips in the downward directions were followed by upswings the next couple of days. For example, if DOW dropped 300 points on one day, it is rare to have a similar drop on the next day as well i.e. consecutive market dips were rare. On the days the DOW (or S&P) dipped badly, there were opportunities to invest in my chosen high quality mutual funds at a lower price.

Every month, there used to be some leftover money in the budget for unused items. For example, if we did not use the entertainment portion of the budget completely OR if my kids school was off leading to less frequent visits to the gas pump, etc. I decided to pool up the leftover money and keep the cash ready. When ever the DOW dropped, I pushed the money into one/many of my investments. Here is the algorithm I followed:

  • DOW drops 100 ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† Invest $100
  • DOW drops 200 ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† Invest $250
  • DOW drops 300 ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† Invest $500
  • FTSE 100 drops 100 ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† Invest $200

Since I invest in mutual funds, the smart reader may ask how do I know what the NAV will be before the marker closes on that day? An ETF or a raw stock trade will guarantee as close to the instantaneous market price as possible…a mutual fund cannot. Here are some lessons I learnt assuming the¬†Market closes at 100pm Pacific Standard Time

  • DOW dips 100 at 900 am, I invest $250 and DOW rises by¬†200 by 100 pm i.e. I invested $250 at a higher price than what my intention was.
  • DOW dips 300 at 1100 am, I invest $250 and DOW rises by 200 by 100pm i.e. DOW is still down -100 and my investment pays a lower price.

The reader might have guessed. My basic idea is that “higher the DOW dip, the earlier in the I can invest and still come out with a lower NAV¬†price than the previous day”. I.e.

  • If DOW is only down 100 points, I buy¬†late say around 1200 pm.
  • If DOW is¬†down 300 points, I buy earlier say around 1100 am.
  • Any investment after 1230pm or so is moved to the next day.

This method of DCA has proven very beneficial to me to acquire quality assets at much lower prices…inspite of using mutual funds.¬†Some people might say that I am using market timing and it is bad. But, since my investments are¬†quality investments, chosen conservatively, I do not lose even if I paid a higher price because my purchase timing did not meet my expectations.

Conclusion

As per my 2015 Goals (link), ¬†my Passive Income Streams¬†goal for 2015 was $16000 with a stretch goal of $24000. Using a combination of DCA types 1 and 2, I have managed to¬†exceed the stretch goal also with a total investment of¬†$28,000 approximately. Believe it or not, I did not know that all the DCA Type 2 investments would add up to so much more money at the end of the year. This indirectly¬†means that my budget is tuned for the worst case money consumption and some more fat can be extracted from it. But, hey, who is complaining ¬†ūüėČ