Financial Independence Progress Report for December 2017

December is here and time to party ūüôā My best wishes for a wonderful holiday season! Hope everyone is geared up for a relaxing holiday break. My break starts this weekend and I am looking forward to a couple days off from the rat race.

December is the second highest dividend producing month of the year for me…..June takes the crown for the most dividend producing month. But, add the dividends to the good feelings of Christmas holidays and it sweetens the pot a bit in favor of December. So, I like December more than June ūüôā

It is also a time of introspection regarding the goals set at the beginning of the year. But, yearly review is for another post. For now, lets look at how the numbers look for¬†December 2017. Bit early in the month, but most of the dividends are in….

12/22/2017
Emergency Fund $60K Done
College Fund (80K) 61.36% 62.50%
Passive Income (2016 vs 2017) $2007.76 (12/2016) $2098.37 (12/2017)
Retirement Fund 80.86% 81.03%
Roof for our Family($750K) 00.00%
Medical Fund (via HSA) 6.17% 6.17% (login fails to new provider)
Life Insurance Done (term life insurance policy)

Main Takeaways this month

  • Passive Income Stream
    • My passive Income for December 2017 is approximately $100 higher¬†than December 2016. Not much of an increase, but my total dividends for the year are almost $2000 higher in 2017 compared to 2016. I.e. the dividends are distributed to me differently on 2017 due to some investment changes.
  • Additional Investments
    • Investments int taxable accounts
      • I invested the last of my cash fund into purchasing MUNIs (VCADX and VWIUX). Basically, I emptied my money market funds in a final push for 2017. This will pay dividends in 2018….especially VCADX since it is both federal and state tax free.
    • Investments in tax-deferred account (IRA)
      • I captured some gains in two target date funds in my IRA and moved the money into a money market fund for now. I want to have a cash fund set up to take advantage of the next investing opportunity. But where? See next point.
      • In my IRA, the percentage of International stocks is more than that of US stocks….by a slight margin. The reason for this strategy is that US stocks have extremely high valuations. So, my theme for 2018 is to add to US stocks when their valuations become more reasonable. How will I achieve this?
      • I will pile up on US stocks over time in the following ways:
        • Tax deferred accounts
          • Periodic 401K investments are always dollar cost averaging into US stocks (70% of money goes into US funds)
          • I will use my cash fund that I have accumulated in the last few months (via capturing gains) into mainly US stocks and pick them up at cheaper valuations.
        • Taxable accounts:
          • Dollar Cost average into dividend funds that mainly buy US securities….
            • VHDYX (current dividends),
            • VDADX (dividend growth),
            • VDIGX (bit of both)
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Financial Independence Progress Report for December 2016

Hope everyone had a wonderful holiday season! Here is wishing you a happy and prosperous 2017. May all your dreams and aspirations come true!!

December is a happy month for all dividend investors and so it was for me too! Passive income coming into my account is validation for the FI path and also motivation to continue the FI journey with even more vigor! Lets look at the numbers for Dec 2016.

12/30/2016
Emergency Fund $60K 100.0%
College Fund (80K) 47.95% 47.95%
Passive Income (2015 vs 2016) $1281.58 (12/2015) $1983.06 (12/2016)
Retirement Fund ($900K) 63.44% 64.27%
Roof for our Family($750K) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance policy)

Main Takeaways this month

  • Passive Income Stream
    • Passive Income for December¬†2016 ($1983) is appx 54% higher¬†than December¬†2015¬†($1281.58).¬†This is a big increase and a totally unexpected one.
    • The positive surprise was due to more than expected capital gains distribution from VDIGX and VWELX. I will take it…however they come ūüôā
  • Additional Investments
    • VEIEX(Vanguard Emerging Markets Stock Index Fund))
      • Just like prior¬†months, I continued to increase my exposure outside the US. Stocks in United States are way to overvalued and frothy in my opinion. So, I have continued to increase my exposure to countries outside the US. I want my passive income stream to come from many countries all over the world as a good means of diversification.
      • ¬†This time, I invested in a new fund:¬†an Emerging markets fund called VEIEX. This fund invests in many emerging market countries like¬†Brazil, India, Russia, China, Taiwan and 20 more countries around the world.
      • If you want more details on VEIEX, please get it directly from the horse’s mouth: VEIEX.
  • Passive Income Goal
    • My 2016 goal was¬†to reach $750 pm in passive income by year end.¬†December¬†is done…and my per-month dividend stands at $801.99. Hurrah!
    • 2016¬†had lots of ups and downs…including a phase of unemployment¬†and no salary for a month at least, a¬†nasty health issue and what not. So, achieving this goal and exceeding it by a small amount of $50 makes me very¬†happy.
    • Sometime back, I wrote an article called How much freedom did I buy today?¬†I read that article again today and decided to compute the number of hours of freedom I have bought with $801 of passive income per month.
      • My Passive Income goal is
        • $4000 per month (Why $4000 pm?)
        • $48000 per year
        • $131.5 per day ($48K/365)
      • It is the end of 2016 and my passive income is $801 per month.
        • How much freedom will $801 pm buy me?
          • $801/$131.5 ¬†=> ¬†6.09 days per month => 146 hours per month => 4.7 hrs a day (31 day month)
        • To put this in perspective, here is the amount of freedom¬†$801 of passive income will buy me:
          • 4.7 hours ¬† ¬† ¬†of absolute freedom every day!
          • 6.09 days ¬† ¬† of absolute freedom every month!
          • 73.08 days ¬† ¬†of absolute freedom every year!
          • 2.35 months of absolute freedom every year!
    • For 2017, I will aim for a challenging¬†monthly¬†passive income target of $850 pm. Wish me luck!

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 ūüôā

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.

Conclusion

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 ūüôā 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).

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 May 2016

If April was the slowest month year-to-date, May was¬†not that far behind ūüôā 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 ūüôā 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 ūüôā 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 ūüôā

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 ūüôā
  • 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 ūüėČ

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 ūüôā 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.

03/31/2016
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 ūüė¶ 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 ūüėČ
    • 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 ūüôā

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.

01/31/2016
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 ūüėČ
  • 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 ūüôā
      • 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!

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