Financial Independence Progress Report for June 2017

June is here and welcome to one of the best dividend months of the year! I had both good news and bad news. Good news was all the dividends coming in…bad news was that I could not resist raiding the home down payment fund and putting that money to work for me ūüė¶

Since I have to travel for work next week, I am publishing the report ahead of time….most of the dividends are deposited anyways…so, I am not going to miss anything. So, lets look at the numbers for June 2017.

06/23/2017
Emergency Fund $60K 84.73% 84.97%
College Fund (80K) 53.24% 54.72%
Passive Income (2016 vs 2017) $1741.69(06/2016) $2392.05 (06/2017)
Retirement Fund 74.27% 75.19%
Roof for our Family($750K) 00.00%
Medical Fund (via HSA) 2.6% 2.6% (site down)
Life Insurance Done (term life insurance policy)

Main Takeaways this month

  • Passive Income Stream
    • June is one of the best months of the year for me (and all dividend investors I am sure!). My passive Income for June 2017 is approximately 37% higher¬†than June 2016.
    • I was weak this month also in that I stole some money from the house down payment fund to fund my passive income streams. The longer I delay the home purchase, the higher seems the risk of me stealing from it. In some ways, it is good…the money is employed in the market and working hard for me….but my flexibility w.r.t. home prices is lost. Lets see….
  • Additional Investments
    • International exposure
      • Just like prior¬†months, I have continued to increase my exposure outside the US market. US stocks seem so¬†overvalued that I just can’t bring myself to add to it.
      • I added some more funds to¬†my existing investments in Emerging markets (via VEIEX) and Euro-Pacific Developed Markets (via VTMGX).
    • Vanguard Intermediate Term Tax Exempt MUNIs (VWITX)
      • Dollar cost averaged my existing investment in VWITX.
        • Last June at this time, ¬†the price was $14.61….now it is $14.21. So, lowered my cost basis.
      • This will add to my monthly federal tax free income stream.
    • With this, I am done with monthly automated investments for this year….ran out of money ūüôā Except for the cash fund in case of a dip.
  • Build a tiny cash fund again
    • I want to have a small cash fund accumulated to take advantage of any market¬†dip(s) in the US market. I am done accumulating….no money left to steal anymore ūüėź
    • Now, the waiting game begins for a significant stock dip. What is a big dip?
      • Take a broad based index like the S&P 500. A well known fund that tracks this is¬†SPDR S&P 500 ETF Trust (NYSEARCA: SPY).
      • Compared to October of 2016, this fund is almost 20% more….for no good reason. The market seems to have gone crazy. To get a nice view that summarizes what I feel, take a listen to this wonderful podcast:¬†http://www.financialsense.com/when-things-get-crazy-dont-get-lazy¬†Valuations have truly gone crazy.
    • So, I will wait to employ my cash fund at least until the cost drops down to 10% on any of my passive income streams. Lets see how disciplined I can be on this one.

Financial Independence Progress Report for February 2017

Two months already over in the new year….somehow feels that this year is going faster than last year!

I am still not sure on¬†what should be my yearly goals for 2017. I am carrying forward some goals from last year…college fund, retirement fund, etc. Thanks to valuable comments on a blog post from¬†Vivienne, Baba Joga and AmberTreeLeaves, I am getting close to a decision. By next month, I will decide one way or the other…else quarterly update in in jeopardy ūüôā

Lets look at the numbers for Feb 2017.

02/05/2017
Emergency Fund $60K 100% 83.00%
College Fund (80K) 49.58% 50.57%
Passive Income (2016 vs 2017) $269.65 (02/2016) $408.50 (02/2017)
Retirement Fund 65.07% 68.61%
Roof for our Family($750K) 00.00%
Medical Fund (via HSA) 0.5% 2.6%
Life Insurance Done (term life insurance policy)

Main Takeaways this month

  • Emergency Fund changes
    • It is looking more likely that my next significant goal will be a real estate investment. Before that, I want to seed my passive income streams with as much money as possible to get it as close as possible to my intermediate goal of $1000 pm. My final goal is $4000 pm as documented here.
    • So, to get closer to $1000 pm, one change I made I reduced my emergency fund by appx $10K and pushed the money into a cash fund….to roll this into my passive income streams.
    • I have initiated a per-month contribution towards rebuilding my Emergency fund, but that can happen in the background.
  • Passive Income Stream
    • Passive Income for Feb¬†2017 ($408.50) is appx 51% higher¬†than Feb 2016¬†($269.65).¬†This increase is¬†an¬†expected one.
    • In July of 2016, I welcomed some new members to my mutual fund family.¬†One of the new arrivals was VWITX¬†(Vanguard Intermediate Term National MUNI fund).
    • A good¬†portion of the year-over-year increase in passive income for Feb comes¬†from VWITX. This pattern will repeat the rest of the year as well.
  • Additional Investments
    • International exposure
      • Just like prior¬†months, I have continued to increase my exposure outside the US. Stocks in United States seem too overvalued to my simple mind.
      • And I want my passive income streams to come from many countries all over the world to spread¬†the risk of a single part of the world going through a bad phase.
      • So, I added to¬†my existing investments in Emerging markets (via VEIEX) and Euro-Pacific Developed Markets (via VTMGX).
  • Build a tiny cash fund again
    • I am accumulating some money in a money market fund. I want to have a small cash fund accumulated to take advantage of any market¬†dip(s).

Financial Independence Progress Report for July 2016

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

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

Main Takeaways this month

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

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

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

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

  • Investment philosophy diversification
  • Investment manager diversification.

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

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

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

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

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

  • Bonds
  • Balanced Funds
  • Dividend Investing

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

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

Why did I choose those specific funds?

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

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

Financial Independence Progress Report for April 2016

April is a slow month for dividends in my portfolio. But, after a couple months of no paychecks, seeing regular paychecks in April was such a joy! In celebration of that, I pumped a couple hundred dollars into making sure that future paychecks via dividends are a certainty ūüôā

Lets look at the numbers now.

04/30/2016
Emergency Fund ($72K) 100.0% 100.0%
College Fund (80K) 39.33% 41.25%
Passive Income Streams ($4000 pm) $544.13 pm (04/2015) $509.15 pm (4/2016)
Retirement Fund ($900K) 57.96% 61.08%
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….
    • I wrote about my Capital Gains¬†gut check here. As part of that exercise, I divested all my holdings in VTCLX (Vanguard Tax Managed Capital Appreciation) and VTMSX (Vanguard Tax Managed Small Cap).
  • Additions to my new investment vehicle…
    • Last month, I initiated a position in¬†Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX). I wrote about it in my March Progress Report.
    • I took all the money from the sale of VTCLX and VTMSX and moved them into VWITX.
    • The gains are Federal Tax free and AMT (Alternative Minimum Tax) free as well.¬†I would still have to pay CA state tax for VWITX though.
  • 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 (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 Canada.
  • Passive Income Stream
    • Passive income for April¬†2016 ($1016.87) broke¬†the positive trend of current year month winning over previous year’s month as April¬†2015¬†($544.13). Hmm….
      • ….this was expected as my¬†portfolio changes led to a some days where my money was not working for me…a gap of a couple days between closing of accounts and moving them into new accounts.
    • 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.
      • April¬†Passive Income = (total passive income in this year) / 12 == $201.98 which beat the 2015 April number ($172.40 per month)
      • 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

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