Financial Independence Progress Report for October 2015

10/31/2015
Emergency Fund ($72K) 100.0% 100.0%
College Fund (80K) 33.94% 36.52%
Passive Income Streams ($4000 pm) $214.08 pm (10/2014)% $492.51 pm (10/2015)
Retirement Fund ($900K) 54.62% 58.03%
Roof for our Family($1 mil) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance payments initiated)

Main Takeaways

Markets made a reasonably noticeable turn towards the positive side and the following portions of my portfolio definitely saw some benefit from it.

  • Retirement Fund
  • 529 plan

I did take advantage of some down days in the market and boosted my investments to dollar cost average some of my mutual fund investments (another post on this coming up on how). But, October has been a super busy month for me, including a couple days spent in the hospital for a freakish accident of cause unknown. So, I am happy to see a positive gain without putting in any serious effort…..the precise definition of passive income ūüėČ

The passive income portion of my portfolio is chugging along nicely. I am aggressively funding¬†my passive income portfolio and (try to) make use of every down day in the markets. My funding sometimes is as low as $100 and as high as $500. Most of the days, I have gotten lucky and dollar cost averaged down my mutual funds….a tiny bit, but hey, each bit matters right ūüôā

Passive income for October 2015 continued the winning trend vs 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.
    • October¬†Passive Income = (total passive income in this year) / 10 == $492.51 ¬†pm.
  • 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.
  • I did take advantage of the down markets and added to my investment in VDIGX , VTMFX and VTMGX (developed markets ex-north america). All¬†these investments have hovered around their respective¬†52 month lows These new investments will contribute towards dollar cost averaging my holdings.
  • November will be a slow month for me as usual…but looking forward to December for the next big dividend income month.

Financial Independence Progress Report for September 2015

09/30/2015
Emergency Fund ($72K) 100.0% 100.0%
College Fund (80K) 33.77% 33.94%
Passive Income Streams ($4000 pm) $178.58 pm (08/2014)% $439.96 pm (08/2015)
Retirement Fund ($900K) 54.66% 54.62%
Roof for our Family($1 mil) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance payments initiated)

Main Takeaways

Markets are continuing the roller-coaster ride…the DOW Jones index lost more than 200 points more than once this month. I did take advantage of this down market (another post on this coming up on how).
I expected a downturn and planned for it (here)…but, that did¬†not soften the blow much. At the end of August, my portfolio had taken a beating….so, how did September do?

  • September was a much better month for markets than August.
    • College fund stayed even
    • Retirement funds stayed even.
  • Passive income for September 2015 continued the winning trend vs 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.
    • September Passive Income = (total passive income in this year) / 9 == $439.96 pm.
    • 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.
  • I did take advantage of the down markets and added to my investment in VDIGX and VTMFX. Both these investments dipped to their 52 month lows when the DOW Jones index dropped more than 200 points. These new investments will contribute towards dollar cost averaging my holdings. Yeah for that!

VDIGX….an investment decision validated.

When I was travelling last couple weeks, I got time away from the day-to-day chores of family life. I kind of enjoyed this break….ssshhhh….don’t tell this to my wife ūüôā I used that time to read up on different articles related to my current investments. When the markets went down, I wanted to feel good about my investments!

One of my investments is in VDIGX (Vanguard Dividend Growth funds). I have talked about various dimensions of this fund in this blog.

  • My original rationale on picking this fund is documented here.¬†Don Kilbride, the manager of VDIGX, is a recognized name in the industry and has done a wonderful job with VDIGX.
  • VTSMX is Vanguard Total Stock Market fund.¬†I compared VDIGX vs VTSMX here. I wrote that both VDIGX and VTSMX have their rightful place in my portfolio.
  • I definitely see a recession coming and wrote about it here. As part of that, I did a¬†Risk Analysis of all my investments here. VDIGX had the second lowest Beta Coefficient of all my investments….only VTMFX (a tax managed balanced fund) did better. A low beta coefficient means that my investments will be less volatile than the market i.e. income¬†stability will be much better.

In addition to what I thought about, some other smart people have thoughts on VDIGX too. I read one such article from Morning Star while travelling and I really liked the content enough to post a link here.

This article argues that a fund may¬†not provide the greatest current yield (usually, this implies¬†less risk) but if the fund holds¬†quality holdings, it will provide a more stable income stream and potentially lead to more capital growth in the longer term. Read more directly from Morning Star link above…it is worth it.

PS: There is good marks for VHDYX (Vanguard High Dividend Yield) also…this makes me more happy because I have invested in this also. Wish me luck for continued good success in picking good investments.

Financial Independence Progress Report for August 2015

09/05/2015
Emergency Fund ($72K) 100.0% 100.0%
College Fund (80K) 35.00% 33.77%
Passive Income Streams ($4000 pm) $148.74 pm (07/2014)% $353.74 pm (07/2015)
Retirement Fund ($900K) 58.51% 54.66%
Roof for our Family($1 mil) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance payments initiated)

Main Takeaways

I came back after a two week travel on work related matters and every day of that trip was a emotional roller coaster. Markets up and markets down…sometimes, within the same day. I expected a downturn and planned for it (here)…but, that did¬†not soften the blow much. At the end of August, my portfolio has taken a beating….but so did a lot of people. So, what were my main takeaways this month?

  • August is a soft month for dividends…so, not much cushion to soften the blow from the down markets. September is a much better month for dividends…so, looking forward to next month.
    • College fund took a hit
    • Retirement funds took a bigger hit.
    • Last month’s zero gain is looking good now ūüôā
  • Passive income for August¬†2015 continued the winning trend vs 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.
    • August¬†Passive Income = (total passive income in this year) / 8 == $53.74 pm.
    • 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.
  • I did take advantage of the down markets and added to my investment in VDIGX. My cost basis was close to $23 per stock before¬†the market hit a downturn…but I invested about $1500 at an average of $21.50 per stock. This new investment will contribute towards dollar cost averaging my holdings. Yeah for that!

VDIGX vs VTSMX: Which is a better investment?

VTSMX is a total market fund.¬†VDIGX is a Dividend Growth fund…primary a¬†large blend (value+growth) fund. In a recent discussion that I participated on MMM foum, I did some analysis on where VDIGX is w.r.t. VTSMX and learnt some new things. Based on that, the answer is: it depends ūüôā Hey, don’t try to kill me for this…I will try and justify my answer!

Is VTSMX (total market index) better than VDIGX?

1.

Comparing VDIGX vs VTSMX in Morningstar over a 10 year period, here is what I get when I plot the growth chart: Link. According to this chart, I see two wins for VDIGX:

  • VDIGX seems to outperform VTSMX
  • VDIGX seems to have a smaller loss than VTSMX in the 2008 downturn.

2.
Comparing VDIGX vs VTSMX in Morningstar over a 5 year period, here is what I get when I plot the growth chart: Link. According to this chart, I see one win for VTSMX:

  • VTSMX seems to outperform VDIGX

Note that this is a total return comparison for a fixed amount…i.e. total return == dividends+capital gains.

3.

Just to cross verify this result, I went to Vanguard site itself and compared the two funds. The above conclusions seem to hold up. In the last 3-5 yr range, VTSMX is better; in the last 10 yr range, VDIGX is better.

4.

Past performance is not a predictor of future performance, but Wellington family (VDIGX manager Don Kilbride comes from here) has a good reputation. So, assuming there is some meaning in past performance, here is what I see:

  • In the Bull market of last 5 years, VTSMX has performed much better.
  • In the market dip of 2008, VDIGX seems much better
  • In the dip+bull market over the last 10 years, VDIGX seems to come out ahead.

Is VDIGX a better fund for a taxable account than VTSMX?

Lets me see what the answer is to the second question of VDGIX/VTSMX for a taxable account. Coming down to brute force numbers, here is the dividend distribution for the last year.

VTSMX
Distribution    Most Recent
Type            Distribution    Record Date    Reinvest Date    Payable Date    Reinvest Price    Distribution Yield    SEC Yield
Dividend ¬†¬†¬†¬† ¬†$0.25800 ¬†¬†¬†12/18/2014 ¬†¬†¬†12/19/2014 ¬†¬†¬†12/22/2014 ¬†¬†¬†$51.75 ¬†¬†¬†‚ÄĒ ¬†¬†¬†1.76%¬† B
Dividend ¬†¬†¬†¬† ¬†$0.21100 ¬†¬†¬†09/22/2014 ¬†¬†¬†09/23/2014 ¬†¬†¬†09/24/2014 ¬†¬†¬†$49.58 ¬†¬†¬†‚ÄĒ ¬†¬†¬†‚ÄĒ
Dividend ¬†¬†¬†¬† ¬†$0.19000 ¬†¬†¬†06/20/2014 ¬†¬†¬†06/23/2014 ¬†¬†¬†06/24/2014 ¬†¬†¬†$49.49 ¬†¬†¬†‚ÄĒ ¬†¬†¬†‚ÄĒ
Dividend ¬†¬†¬†¬† ¬†$0.19200 ¬†¬†¬†03/21/2014 ¬†¬†¬†03/24/2014 ¬†¬†¬†03/25/2014 ¬†¬†¬†$47.08 ¬†¬†¬†‚ÄĒ ¬†¬†¬†‚ÄĒ
——–
$0.851
tax = $0.851 * 15% = $.12765

VDIGX
Distribution    Most Recent
Type                Distribution    Record Date    Reinvest Date    Payable Date    Reinvest Price    Distribution Yield    SEC Yield
Dividend ¬†¬†¬†¬† ¬† ¬† ¬† $0.21800 ¬†¬†¬†12/19/2014 ¬†¬†¬†12/22/2014 ¬†¬†¬†12/23/2014 ¬†¬†¬†$23.37 ¬†¬†¬†‚ÄĒ ¬†¬†¬†2.10%¬† B
ST Cap Gain ¬†¬†¬†$0.07300 ¬†¬†¬†12/19/2014 ¬†¬†¬†12/22/2014 ¬†¬†¬†12/23/2014 ¬†¬†¬†$23.37 ¬†¬†¬†‚ÄĒ ¬†¬†¬†‚ÄĒ
LT Cap Gain ¬†¬†¬†$0.24700 ¬†¬†¬†12/19/2014 ¬†¬†¬†12/22/2014 ¬†¬†¬†12/23/2014 ¬†¬†¬†$23.37 ¬†¬†¬†‚ÄĒ ¬†¬†¬†‚ÄĒ
Dividend ¬†¬†¬†¬† ¬† ¬† ¬† $0.19900 ¬†¬†¬†06/19/2014 ¬†¬†¬†06/20/2014 ¬†¬†¬†06/23/2014 ¬†¬†¬†$22.18 ¬†¬†¬†‚ÄĒ ¬†¬†¬†‚ÄĒ
Dividend ¬†¬†¬†¬† ¬† ¬† ¬† $0.02300 ¬†¬†¬†03/20/2014 ¬†¬†¬†03/21/2014 ¬†¬†¬†03/24/2014 ¬†¬†¬†$21.40 ¬†¬†¬†‚ÄĒ ¬†¬†¬†‚ÄĒ
ST Cap Gain ¬†¬†¬†$0.01200 ¬†¬†¬†03/20/2014 ¬†¬†¬†03/21/2014 ¬†¬†¬†03/24/2014 ¬†¬†¬†$21.40 ¬†¬†¬†‚ÄĒ ¬†¬†¬†‚ÄĒ
LT Cap Gain ¬†¬†¬†$0.01600 ¬†¬†¬†03/20/2014 ¬†¬†¬†03/21/2014 ¬†¬†¬†03/24/2014 ¬†¬†¬†$21.40 ¬†¬†¬†‚ÄĒ ¬†¬†¬†‚ÄĒ
——–
$0.788
tax = $.703*15% (div + long term cap gains portion) + .085*33% (short term cap gains)
= $.10545 + 0.02805
= $.1335

Here is my conclusion:

  • Just based off of the dividends and capital gains distribution over the last year, VDIGX pays a bit more tax, assuming short term cap gains max bracket of 33%.
  • Note that the .31% expense ratio also is a downer for VDIGX.

Based on the taxes paid over the last year, VTMSX wins this round.

I have VDIGX in my taxable account portfolio for the past year…it seems like I invested in a lossy investment, but understanding the context of my investment is probably important as well. Let me tackle that next.

Why do I invest in VDIGX and not VTSMX then?

I split my retirement into two kinds of retirement:

  • Early Retirement funded by Passive Income Streams from my taxable account
  • Real Retirement funded by my tax-advantaged accounts like 401K, IRA, etc.

Details on the funding design for my retirement are in this post.

In my tax advantaged accounts (401K and IRA), almost all the money is invested in Vanguard Target Retirement Funds. Each of the target retirement fund invests in VTSMX. So, I have enough money riding on a total stock market strategy.

For my taxable account, I invest in a different strategies, with two separate buckets/funds for each strategy…to spread the risk a bit more. The strategies I have invested in¬†are:

  • MUNIs…VCAIX…federal+state tax free
  • Balanced fund….VTMFX…capital appreciation + national munis…federal tax free + some state tax free
  • Dividend Investing: current dividends (VHDYX) and Dividend growth (VDIGX)….100% qualified dividends (15% tax) + AMT free
  • Capital growth large and small cap (VTCLX, VTMSX)..does generate some capital gains
  • International (VTMGX)…does generate dividends…almost 100% qualified dividends (15% tax), gets some foreign tax deduction. And hopefully, some capital gains.

So, VDIGX takes the place of a dividend growth fund in my portfolio in my taxable account. The advantages that I considered before investing were:

  • 49 stocks appx…less diversification…but a longer term approach…almost a buy+hold strategy…i.e. limits short term capital gains
  • good fund family…Vanguard/Wellington
  • Considered a solid fund for a down market
  • Appx 10% is foreign market…so, some diversification across geographies (VTSMX has 0% foreign stocks)
  • A little better return¬†than bonds, but a little less risk than capital appreciation/growth stocks.

So, would I change my VDIGX fund investment? Not now for two reasons:

  • It is a portfolio diversification for me in the dividend growth bracket…all companies in VDIGX are not in the index.e.x, 10% is foreign inv unlike VTSMX.
  • It is a less volatile fund…a good fund to keep during market dips…if you consider the last 5+ years of bull market, then a market dip is logical in the next year or two. Lets hope VDIGX earns its expense ratio ūüôā

VDIGX vs VTSMX: Which is better?

VTSMX seems like a good fund to hold for its low expense ratio and the tax efficiency of an index fund. If you do not mind drops in value during a market dip and can hold it through the dip, pick VTSMX.

VDIGX is a more conservative fund, with better performance during a market downturn w.r.t. VTSMX and a comparably less performance in a bull market than VTSMX. If you want something better than a bond fund return with a little bit of additional risk, pick VDIGX.

Hope that shows that both VDIGX and VTSMX can be winners in the right circumstances.