Finding portfolio gaps for a balanced portfolio

Since the end of 2016 is almost here, I wanted to see if there are any gaps in my investment portfolio used to produce passive income. If I did find some gaps, then I want to close them out to have a better balanced portfolio. I did some research and found that there are a few ways to find gaps in your portfolio.

Vanguard Portfolio Watch

If you have a Vanguard account and have all your investments in Vanguard, then Vanguard provides a tool called Vanguard Portfolio Watch. This tool will give you recommendations like the following:

  • OK: Your investments in foreign stocks add diversification to your portfolio.
  • CAUTION: The proportions of large-, mid-, and small-capitalization stocks in your portfolio differ from those of the market.OK: Your portfolio is tax-efficient.
  • CAUTION: Your portfolio emphasizes value stocks which puts you at risk of under-performing the market when growth stocks perform well.
  • CONSIDER: Holding more foreign bonds can potentially increase the level of diversification in your portfolio. Allocating up to 20% to 50% of your bond portfolio to foreign bonds is a reasonable amount to capture the diversification benefits.
  • CAUTION: Sectors indicated with a red arrow vary substantially from the benchmark weightings.

You can use the above analysis results to identify gaps in your portfolio and then invest accordingly. If you want to just see the effect of adding a new investment to your portfolio, you can use a tool called Portfolio Tester….also provided free by Vanguard.

Personal Capital Investment Watch

Personal Capital is a wonderful free tool that anybody can use for tracking their investments, spending and a whole bunch more.

  • The one feature I really like is that it breaks down all the funds in your portfolio into the following categories, JUST by taking the names of the different funds like VDIGX, VTCLX, etc. For example,
    • Large cap, mid cap, small cap split
    • Cash and bonds split
    • Alternatives (real estate, etc)
    • US and International split
  • Personal capital pointed out a weakness in my portfolio diversification w.r.t. lack of investment in Alternative Investments like Real estate, hedge funds, commodities, etc. Hence I started looking at how to add a real estate dimension to my portfolio.
  • I wrote about how I found this portfolio gap here.

This tool has something called Investment watch and that is what I use often to see the composition of my portfolio. Take a peek at it and see if it is useful.

Correlation Analysis

Whether you have none of the previous two ways OR you have it and still want to still find portfolio gaps, Correlation Analysis is a super-wonderful way to do it.

  • Two mutual funds (or stocks or any of the asset classes) are correlated means that the investments behave similar to each other i.e. they both reach the same way in the same market cycles…both go up OR both go down. Lets use the following tool to find correlation co-efficient (Asset Correlation Tool)
    • Example 1:
      • Correlation coefficient of VDIGX and VDAIX is 0.98 (98%)
      • This means that VDIGX and VDAIX behave 98% similarly
    • Example 2:
      • Correlation coefficient of VDIGX and VTMGX (International) is 0.77 (77%)
      • This means that VDIGX and VTMGX behave 77% similarly
  • Two mutual funds are not-correlated means that the investments behave differently in diff ways i.e. both react differently in the same market cycle….if one fund goes up, then one goes down. Lets use the following tool to find correlation co-efficient (Asset Correlation Tool)
    • Example 1:
      • Correlation coefficient of VDIGX and VCADX (CA MUNIs) is -0.13
      • This means that VDIGX and VCADX behave totally opposite to each other i.e. they have negative correlation.

A portfolio is a balanced one if it has assets in it that are correlated in different ways i.e. all the assets should not behave the same way. If we are in a bull market, some assets should go up and some may go down….if we are in a bear market, the same should hold true. If you think this does not make sense, go watch this awesome video titled Asset Allocation: Building a Better Balanced Portfolio The video is a long one but worth the time…and quite entertaining too 🙂

Tool for Correlation Analysis

A wonderful and free tool (no login required) for Correlation Analysis of your portfolio is a tool called Correlation Tracker. I chose the option where I type in all my portfolio values and I get a recommendation of different SPDR funds/etfs that correlate positively (same behavior) and correlate negatively (different behavior).

  • I punched in all my mutual funds that generate passive income for me. They are: VCADX, VWIUX, VTMFX, VWELX, VDIGX, VDAIX, VHDYX and VTMFX.
  • Funds that correlate positively:
    • SPDR Select Sector Fund – Industrial                            XLI        Correlation = 0.882
    • SPDR Select Sector Fund – Consumer Discretionary XLY       Correlation = 0.874
    • SPDR Select Sector Fund – Technology                         XLK        Correlation = 0.805
  • Funds that correlate negatively:
    • SPDR Select Sector Fund – Utilities                                XLU        Correlation = 0.311

The last one (XLU) surprised me. The main reason I own so many different Vanguard funds is to diversify risk by acquiring different asset classes and within each asset class, have multiple managers competing for my money. But, a correlation coefficient of 0.311 for XLU indicates to me that my portfolio has a gap with utilities.

Verifying what the Correlation Tool said ….

To verify the gap of utilities in my portfolio, I tool 4 of the stock Vanguard funds I own (VDIGX, VDAIX, VHDYX, VWELX and VTMGX) and plugged them into Vanguard’s fund compare web page: Vanguard Fund Compare.

Fund          VDIGX     VDAIX      VHDYX      VWELX       VTMGX
Utilities     0.00%     2.81%        8.01%         4.23%         3.10%

The above is a clear clear vindication that the percentage of utility stocks in my passive income portfolio is low. The maximum is 8% but that fund does not have the most money. So, the correlation analysis tool correctly predicted a gap of investment dollars in Utilities in my portfolio.


Granted, utilities is not the most sexy of the stock picks, but it is a rock solid foundation on which passive income streams of many other people are built upon. And more importantly, it balances out my portfolio by adding an asset that correlates less with all my existing mutual funds.

I found one Vanguard utilities mutual fund (VUIAX) but minimum is $100K 🙂 No way that I have that kind of money. But there is a corresponding ETF called VPU. I just invested one share in this ETF….hopefully, I can save some more money and add a few more shares to my portfolio. I am happy to have added an asset that has only 30% correlation (0.311) with my existing funds. Wish me luck for some awesome passive income for years to come via this new asset vehicle called Vanguard Utilities ETF (VPU).


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 🙂

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 🙂

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?

    • 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.
    • 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.
    • 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 May 2016

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.

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, ….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.

Capital Gains Investing…a gut check

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 😉

Financial Independence Progress Report for March 2016

March is the first quarterly dividends month i.e. month of good news. And some more good news on the job front….I got one 🙂 After a month of hard fought interviews, I have started on a new job. Learnt a lot of lessons in the period of unemployment…will put these lessons to work this year. But, March has been a super positive month for me!!

Lets look at the numbers now.

Emergency Fund ($72K) 100.0% 100.0%
College Fund (80K) 37.11% 39.33%
Passive Income Streams ($4000 pm) $744.05 pm (03/2015)% $1016.87 pm (3/2016)
Retirement Fund ($900K) 57.76% 57.96%
Roof for our Family($750K) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance payments initiated)

Main Takeaways this month

  • Unemployment Induced portfolio changes
    • Unemployment lead to almost two months of no income 😦 But, some good came from this. I had almost $40K invested in one company stock…part of an Employee Stock Purchase Plan from one of the companies I had worked in the past.
    • I wanted to de-risk this  investment by selling it and moving it to a fund of many different stocks but could not for fear of capital gains and resulting tax inefficiency.
    • In the two months of no income, I sold half of the $40K bundle. This keeps the total income the same. I distributed the money into a couple different mutual funds and hence reduced the risk of $40K riding on one company’s stock.
  • New investment vehicle
    • I took part of the de-risking money from my ESPP sale and put some unused money in my checking account into Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX).
    • My design of passive income streams is based on 6 key design principles. The second of the five is: For each risk bucket, have a minimum of two investment vehicles….get some competition going you know 😉
    • For the MUNI bucket, I already have an investment in VCADX, the California only muni fund. I wanted to add some competition and also diversify the MUNI bucket by adding a National MUNI fund (no federal tax). I would still have to pay CA state tax for VWITX, but the CA munis  have gotten so expensive that it is crazy to invest in it now. So, I am diversifying with a National MUNI fund.
  • 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 (anguard 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 March 2016 ($1016.87) continued the winning trend vs March 2015 ($744.05).
    • 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.
      • March Passive Income = (total passive income in this year) / 12 == $156.62
      • 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 🙂

Financial Independence Progress Report for January 2016

Happy new year everyone! May 2016 bring you closer to all your goals, with a good helping of peace and prosperity.

Emergency Fund ($72K) 100.0% 100.0%
College Fund (80K) 38.08% 37.11%
Passive Income Streams ($4000 pm) $557.78 pm (01/2015)% $592.90 pm (1/2016)
Retirement Fund ($900K) 57.76% 56.02%
Roof for our Family($1 mil) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance payments initiated)

Main Takeaways

2016 started off with a bang huh…;-) Yes…just like the whole world, my entire stock portfolio took a beating in January…college fund, retirement fund, and passive income mutual funds…all of them got beat.

In addition, the company I worked in got bought over and the buyer decided to conduct a massive layoff. I was impacted as well. Losing to job to start the new year, with no severance to boot, is definitely not the way I wanted to start the new year….but, hey, life has to move on right? Onto the next job. Thankfully, I had two weeks of vacation left over and I got paid for that. This event has reinforced my decision to reach for Financial Independence and I am now more motivated to reach FI now.

Now, for some good news.

  • Surprise winner for January
    • The only surprise winner that stayed positive in all of this, inspite of the Fed raising interest rates, was VCADX…my California MUNI bond fund that is part of my tax efficient passive income streams. Looks like the fear of stock market tanking is driving the bond fund up. Anyways, I am not selling this fund now but if I did, I would get decent capital gains 😉
  • Dollar Cost Averaging
    • Since the market had huge dips of multi-hundred points on many days, I took full advantage of this and boosted my investments to dollar cost average VDIGX, VHDYX and VTMGX. I contributed all of my vacation payout from my job loss towards this. Infact,   I contributed more towards 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 a bit from Canada.
  • Passive Income Streams
    • Passive income for January 2016 ($592.90) continued the winning trend vs January of last year ($557.78).
    • 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.
      • January Passive Income = (total passive income in this year) / 12 == $49.41
      • 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 FI goal for passive income is $4000 per month (pm). This is going to take a while. So, my intermediate goal is to get $1000 pm in passive income first. How close am I to $1000 pm?
      • I ended last year with a monthly passive income of $621 (averaged out).
      • Assuming a 3% dividend return and a conservative 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 🙂
      • Imagine taking the $1000 passive income per month and investing it back into the passive income streams….income compounding will kick start in a hurry….eagerly waiting for that day!

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.


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  😉

Risk analysis of my Mutual Fund Investments (Beta Coefficient)


I recently wrote about my plan to prepare for the next recession which, in my opinion, is due soon. While thinking about that, a question that came to my mind was: how will my mutual fund portfolio deal with the upcoming recession? To answer that, I wanted to do a risk analysis of the mutual funds that I am using to generate Passive Income Streams. I wrote about my implementation of passive income streams here.

The mutual funds and/or cash driving my passive income streams are listed below for reference. Before I do a risk analysis of my portfolio, we need to understand some terminologies. Lets dive into that next.

Investment Vehicles (Last Updated on 10/18/2014)
Risk Bucket Name Investment Vehicle 1 Investment Vehicle 2
Risk 1 (Cash in banks) Smarty Pig (online) Credit Union (brick & mortar)
Risk 2 (Bonds) VCAIX (ca munis) N/A
Risk 3 (Balanced Funds) VTMFX (has natl munis) N/A
Risk 4 (Dividend Investing) VDIGX (div growth) VHDYX (high curr div)
Risk 5 (Capital Growth) VTCLX (large+mid cap) VTMSX (small cap)
Risk 5 (International Funds) VTMGX (large blend) N/A


Risk of a mutual fund

When we talk about the risk analysis of a mutual fund OR the volatility of a mutual fund, we often compare it to the market as a whole. For example, if the market goes through a volatile phase, will the mutual fund also be volatile OR will it be stable OR will it reach inversely to the market?

Consider one example. In a recession OR a down market, most people will conserve money and not buy new cars. Most people will repair their current cars and postpone purchase of a new car to when the market is up.

  • If you own stocks of companies that manufacture new cars, when the market goes down, such stocks will also go down.
    • Greater risk in a down market, but greater reward in an up market
  • If you own stocks of companies that manufacture automotive replacement parts, then when the market goes down, replacement parts companies make money and hence such stocks will go up.
    • Greater risk in an up market, but greater reward in a down market.
  • If you own stocks of companies that provide water supply to people, such stocks remain calm when the market goes up or down.
    • Low risk, Low reward.

A metric used by many investors to compare a mutual fund/stock/portfolio to the entire market is called the Beta Coefficient.

Beta Coefficient

If you had asked me last year, I would have said that “beta coefficient” looks like a very geeky mathematical name i.e. something I had ignored often as too complicated. It is complicated math but I have found a nice and easy way to understand it. Lets define it my way.

Beta Coefficient of a mutual fund/stock/portfolio is a measure of the risk that shows up when the mutual fund/stock/portfolio is exposed to different types of market conditions like an up market, down market, recession, etc. 

Some common values of Beta Coefficient will help make it clearer:

  • A beta of less than 1 means that the mutual fund/stock/portfolio will be less volatile than the market.
    • The water company example above
  • A beta of greater than 1 indicates that the price of the mutual fund/stock/portfolio will be more volatile than the market.
    • If a stock’s beta is 1.5, it’s theoretically 50% more volatile than the market.
    • For example, the new car company stocks.
  • A negative beta indicates a counter-cyclical sector that moves inversely with the broader market.
    • The replacement auto parts company example.

My portfolio’s Beta Coefficient

I gave the search “VCADX beta coefficient” on google and google finance displays the beta coefficient for VCADX so easily that I repeated the same procedure for the remaining mutual funds in my portfolio and here are two tables.

Table 1: Income Portfolio

  • Mutual funds that primarily generate dividends, capital appreciation is secondary
  • 64% of my passive income streams portfolio is in this category
Beta Coefficient of my Income portfolio (updated 03/31/2015)
Investment Vehicle 1 year Beta 3 year Beta 5 year Beta 10 year Beta
VCADX (CA Munis) 0.93 0.93 0.96 0.93
VTMFX (Balanced fund) 0.69 0.73 0.72 0.76
VDIGX (Dividend Growth) 0.87 0.90 0.81 0.80
VHDYX (Current Dividend) 0.93 0.92 0.84 n/a
Average 0.86 0.87 0.83 0.83


Table 2: Capital Appreciation Portfolio

  • Mutual funds that primarily invest for capital appreciation, any dividends are secondary.
  • 36% of my passive income streams portfolio is in this category
Beta Coefficient of my Capital Appreciation portfolio (updated 03/31/2015)
Investment Vehicle 1 year Beta 3 year Beta 5 year Beta 10 year Beta
VTCLX (Capital Appreciation) 1.04 1.02 1.04 1.03
VTMSX (Small Cap) 1.32 1.13 1.19 1.18
VTMGX (International) 0.99 1.03 1.02 0.97
Average 1.12 1.06 1.08 1.06


Consider the Average beta values for both the income and cap appreciation portfolios:

  • Income portfolio
    • Average beta is less than 1 => my Income portfolio will be less volatile than the market.
  • Capital Appreciation portfolio
    • Average beta is greater than 1 => my Capital appreciation portfolio will be more volatile than the market.

Based on the above numbers, I can conclude that when the next recession comes, my Income Portfolio should continue to generate approximately the same amount of income (give or take a few percent) because it is less volatile OR less risky that the overall market.