VWELX

Financial Independence Progress Report for December 2016

/ humblefi / 8 Comments

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 🙂
  • 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!
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Financial Independence Progress Report for October 2016

/ humblefi / 8 Comments

October was a big down month! There was enough volatility in the month to show some RED in the nos. There were deals to be had in the early part of the month and I thought I made out good….until the later part of the month wiped out the gains 🙂 Let us see what the numbers say for October.

09/03/2016
Emergency Fund $60K 100.0%
College Fund (80K) 45.65% 47.95%
Passive Income (2015 vs 2016) $628.60 (10/2015) $551.80 (10/2016)
Retirement Fund ($900K) 66.36% 63.44%
Roof for our Family($750K) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance payments initiated)

Main Takeaways this month

  • College Fund Portfolio Increase (in green above)
    • I got some extra money left over after September and pushed that money  into the college fund. Even though October was a down month, the additional cash offset it.
  • Retirement Fund
    • This portion of my portfolio took a good solid hit in October. I lost almost 3% and the way early November is looking, it is not done going down.
    • Major reason is the increased uncertainty from US elections and the interest rate increase/decrease uncertainty from the FED.
    • I am definitely continuing to invest and am picking up stocks at lower cost i.e. Dollar Cost Averaging full speed ahead! So, all good for now.
  • Passive Income Stream
    • Passive Income for October 2016 ($551.80) is appx 14% lower than October 2015 ($628.60). This is a big reduction but an expected one.
      • I sold some stocks from a previous company’s ESPP and spread the money into different funds. These funds do not distribute dividends like my ESPP stocks in Jan, April, July and October. So, all these months will show a reduction in 2016. But, the overall dividends for 2016 will increase and will show up in December of 2016 when all the other funds declare their dividends.
    • Additional Investments
      • VTMGX (Developed markets across Europe, Canada and Australasia)
        • Just like last month, I continued to increase my exposure outside the US using VTMGX. Definitely lowered my cost per share via Dollar Cost Averaging this October.
        • If you want more details on VTMGX, please get it directly from the horse’s mouth: VTMGX.
      • VWELX (Vanguard Wellington Fund)
        • Bought into this fund also quite a bit this month.
        • I already have another balanced fund in my portfolio: VTMFX: 50% stocks and 50% tax-efficient bonds. VWELX is another competitor for my balanced fund dollars…I always have atleast two funds competing in the category…manager diversification and hence risk diversification as well. 
        • VWELX is not as tax efficient as VTMFX since the bond portion is not tax-efficient. But I want risk diversification more….
    • My 2016 goal is to reach $750 pm in passive income by end of 2016…October is done…and my per-month dividend is at $603.04 pm.
      • Target Dividend: $9000 pa
      • Current Dividend (year to date): $7321
      • Balance to make up in the next 3 months
        • $9000 – $7321  => $1679 over the next 2 months
      • Unless a black-swan event happens in the next two months, it looks like I will make it…hurrah!!
    • I had kept some cash aside to invest in a dip….the temptation to get to $750 in passive income per month was very high in September and I could could not resist and burnt some of it. In October, I used up the rest of the money to buy the dip. October is historically volatile…and it did not disappoint this time…so, the purchases this month will help in the coming year!
    • I anticipate another volatile month in December 2016…post the FED’s decision on interest rates….scrambling to accumulate some cash for that. Lets see…

Finding portfolio gaps for a balanced portfolio

/ humblefi / 5 Comments

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.

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 🙂 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 September 2016

/ humblefi / 6 Comments

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

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

Main Takeaways this month

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

Financial Independence Progress Report for July 2016

/ humblefi / 6 Comments

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

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

Main Takeaways this month

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

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

/ humblefi / 1 Comment

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

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

  • Investment philosophy diversification
  • Investment manager diversification.

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

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

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

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

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

  • Bonds
  • Balanced Funds
  • Dividend Investing

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

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

Why did I choose those specific funds?

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

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