Age-Sensitive Safe Withdrawal Rate Strategy? Age Divided By 20

Posted on June 12, 2018 // 8 Comments

Should a person who retires at age 70 withdraw the same amount of money from their portfolio as someone who is age 40? You’re talking about a retirement period that is likely twice as long as the other. In an article titled The “Feel Free” Retirement Spending Strategy [pdf], Evan Inglis of Nuveen Asset Management and a fellow of the Society of Actuaries proposed a safe withdrawal strategy that adjusts for age.

To determine a safe percentage of savings to spend, just divide your age by 20 (for couples, use the younger spouse’s age). For someone who is 70 years old, it’s safe to spend 3.5 percent (70/20 = 3.5) of their savings. That is the amount one can spend over and above the amount of Social Security, pension, employment or other annuity-type income. I call this the “feel free” spending level because one can feel free to spend at this level with little worry about significantly depleting one’s savings.

You can think of this is as a lower bound. He also proposes an upper bound:

At the other end of the spectrum, divide your age by 10 to get what I call the “no more” level of spending. If one regularly spends a percentage of their savings that is close to their age divided by 10 (e.g., at age 70, 70/10 = 7.0 percent) then their available spending will almost certainly drop significantly over the years, especially after inflation is considered.

Therefore, the lower and upper bounds for a person retiring at 70 would be 3.5% and 7%. The lower and upper bounds for a person retiring at 40 would be 2% and 4%.

Note that he also admits that spending 3% of your assets each year is an even simpler rule of thumb:

Even though there are lots of things to think about, for the vast majority of people, very simple guidelines will be most useful. My simple answer to the questions “How much can I spend?” or “Do we have money enough saved?” is that if someone plans to spend less than 3 percent of their assets in a year (over and above any Social Security or other pension, annuity or employment income), then they have enough money saved and they aren’t spending too much. This is a fairly conservative estimate, but people tell me they want to be conservative with their retirement spending. They would rather feel safe than spend a lot of money, and I think that is very appropriate in our current economic environment.

Another idea to add to your knowledge banks. Basically, if you are young you have to be sensitive about permanently damaging your portfolio early on with the double-whammy of negative returns and high spending.

Others will say that you should spend more when you’re young, as you’ll be able to enjoy it more. That may be true if you have long-term care insurance. I know lots of people who are still quite active and traveling at 70. I’m also at that age where I have checked out some of those “nice” assisted-living facilities for my parents, and they cost serious bucks.

Filed Under: Investing, Retirement //

My Money Blog Portfolio Income – June 2018

Posted on June 11, 2018 // 2 Comments

dividendmono225When it comes to making your portfolio last a lifetime, you may be surprised at how long that might be. According to this Vanguard longevity tool, for a couple both age 40 today, there is a 50% chance that one will live to 88. That’s 48 years.

For a young person making a plan to reach financial independence at a very early age (under 50), I think using a 3% withdrawal rate is a reasonable rule of thumb. For someone retiring at a more traditional age (closer to 65), I think 4% is a reasonable rule of thumb.

In addition, I track the dividend yield of my portfolio. This is not necessarily my spending target, but more of a very safe benchmark number. Having lived through a crisis like 2008, I know that it can be hard to appreciate “very safe” things until the poo hits the fan. The analogy I fall back on is owning a rental property. If you are reliably getting rent checks that increase with inflation, you can sit back calmly and ignore what the house might sell for on the open market.

Specifically, I track the “TTM Yield” or “12 Mo. Yield” from Morningstar, which the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. I like this measure because it is based on historical distributions and not a forecast. Below is a very close approximation of my most recent portfolio update (66% stocks and 34% bonds).

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 6/11/18) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)		 25% 1.69% 0.42%
US Small Value
Vanguard Small-Cap Value ETF (VBR) 		5% 1.82% 0.09%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX) 		25% 2.75% 0.69%
Emerging Markets
Vanguard Emerging Markets ETF (VWO) 		5% 2.42% 0.12%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX) 		6% 3.48% 0.21%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX) 		17% 2.86% 0.49%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX) 		17% 2.64% 0.45%
Totals 100% 2.47%

 

Our overall plan is still based on a 3% withdrawal rate. This calculation tells us that 2.5% will come out as income “naturally”, and we would have to take the remaining 0.5% by selling shares. Living off a portfolio is an area of ongoing debate, so don’t let anyone convince you that there is a “right” answer. I’m not a financial firm convincing you to let me handle your money. I’m not here to pitch you an easily-achievable dream lifestyle. Even if you run a bunch of numbers looking back to 1920, that’s still trying to use 100 years of history to forecast 50 years into the future.

Your life is not a Monte Carlo simulation, and you need a plan to ride out the rough times. We are a real 40-year-old couple with three young kids, and this money has to last us a lifetime (without stomach ulcers). Michael Pollan says that you can sum up his eating advice as “Eat food, not too much, mostly plants.” You can sum up my thoughts on portfolio income as “Spend mostly dividends and interest. Don’t eat too much principal.”

Filed Under: Goals, Investing, Retirement //

Stock Market Game: Buy & Hold vs. Market Timing

Posted on June 4, 2018 // Leave a Comment

Here’s an interactive “game” at Engaging-Data.com where you can test out your stock market timing skills based on actual historical returns. You’ll be given a randomly-selected 3-year period of the S&P 500 from 1950-2018. You start out fully invested, but you can sell or buy at any time. The simulator tracks your returns vs. just holding on through the entire period. Can you consistently pick the right times to jump in and out?

I like the WarGames reference. The only winning move is not to play.

While the game is interesting, I think a crucial thing missing is the emotion of the moment. (Not that this is the fault of the programmer.) In my experience, casual investors tend to get caught up in market timing due to one of two emotions: the fear of missing out (FOMO), and the fear of losing everything. The housing bubble was all about FOMO. The “smart” move was to get on that property ladder at any price, with any time horizon, with any loan terms. Then in the 2008 stock crash, I was getting every variation of the “why not sell and wait for the dust to settle???”. The “prudent” move became sitting it out. As of early 2018, things have been pretty comfortable for while, and “buy and hold” looks both smart and prudent again.

I think buy and hold is a valid strategy, but simple is not easy. It will be hard again soon enough. When the next crisis eventually occurs, I hope that I can be a boring example of buy and hold. In the meantime, hopefully this game will at least keep you on your toes.

Filed Under: Investing //

Personal Capital Review: Automatically Track Net Worth and Portfolio Asset Allocation

Posted on May 31, 2018 // 45 Comments

Personal Capital is free financial website and app that links all of your accounts to track your spending via bank and credit cards, investments, and net worth. You provide your login information, and they pull in the information for you automatically so you don’t have to type in your passwords every day on 7 different websites. Personal Capital’s strength is in investments, including portfolio tracking, performance benchmarking, and asset allocation analysis.

Net worth. You can add your home value, mortgage, checking/savings accounts, CDs, credit cards, brokerage, 401(k), and even stock options to build your customized Net Worth chart. You can also add investments manually if you’d prefer. I have a habit of accumulating bank and credit union accounts, so I find account aggregation quite helpful.

Cash flow. The Cash Flow section tracks your income and expenses by pulling in data from your bank accounts and credit cards. This chart compares where you are this month against the same time last month. If you hate budgeting, you may find it easier to view a real-time snapshot of your spending behavior. Their expense categorization tool is pretty accurate, and if it isn’t you can change it manually. However, it isn’t quite as advanced as Mint.com, where you for example you can make a rule to always classify “Time Warner Cable” as “Utilities” and not “Online Services”.

Portfolio. This is where Personal Capital is better than many competing services, by analyzing my overall asset allocation, holdings, and performance relative to benchmarks. If you’re like me, you have investments spread across multiple custodians. I now have investments at Vanguard, Fidelity (401k), Schwab, TransAmerica (401k), and Merrill Edge. It’s nice to be able to see everything together in one picture. They can also analyze your retirement accounts fees to see if you are quietly getting charged too much.

For comparison, Mint did not allow manual input of investments and it did not break down my asset allocation correctly based on my linked accounts. In fact, all it shows is a big orange pie chart with “99.9% Not Sure” and “0.00 Other”.

Personal Capital considers the major asset classes to be US stocks, International stocks, US Bonds, International Bonds, and Cash. The “Alternatives” classification includes Real Estate, Gold, Energy, and Commodities.

If you have one bank account, one credit card, and a 401(k), you may not need this type of account aggregation service. Life tends to get messy though, and this helps me maintain a high-level “big picture” view of things.

Security. As with most similar services, Personal Capital claims bank-level, military-grade security like AES 256-bit encryption. The background account data retrieval is run by Envestnet/Yodlee, which partners with other major financial institutions like Bank of America, Vanguard, and Morgan Stanley. Before you can access your account on any new device, you’ll receive an automated phone call, email, or SMS asking to confirm your identity. Their smartphone apps are compatible with Touch ID/Face ID on Apple and mobile PINs on Android devices.

In terms of the big picture, my opinion is that by making it more convenient, I am able to keep a closer eye on all my account and thus actually make myself less likely to be affected by a security issue.

How is this free? How does Personal Capital make money? Notice the lack of ads. Personal Capital makes money via an optional paid financial advisory service, and they are using this as a way to introduce themselves. (People who sign up for portfolio trackers tend to have money to manage…) They are a hybrid advisor, combining their online tools with real human access. Their management fees are 0.89% annually for the first $1 million, with slightly lowered pricing as you go past $1 million in assets. As an SEC-registered RIA fiduciary that now manages over $7 billion, I think this improves their credibility as a company built to handle sensitive information.

Note that if you give them your phone number, they will call you to offer a free financial consultation. If you answer the phone or e-mail them that you don’t want to be contacted anymore, they will honor that request. Or you could ask them your hardest financial question and see how they respond. However, if you simply ignore the phone calls, they will keep calling. Now, you can keep using the portfolio software for free no matter what happens. But, if you aren’t interested, I would highly recommend simply being upfront with them. A simple “no thank you” and you’re good.

If you’re upfront with them, they’ll be upfront with you. I’m still a DIY guy when it comes to my money, and they have been happy to keep monitoring my accounts for free, without any additional phone calls over the last 5 years.

Bottom line. It’s not what you make, it’s what you keep that counts. The free financial dashboard software from Personal Capital helps you track your net worth, cash flow, and investments. I recommend it for tracking stock and mutual fund investments spread across different accounts. I’d link your accounts on the desktop site, but interact daily through their Android/iPhone/iPad apps for optimal convenience (log in with Touch ID or mobile-only PIN).

Filed Under: Investing, Retirement, Reviews //

Jack Bogle Profile & Vanguard Historical Chart in Barron’s Magazine

Posted on May 23, 2018 // 1 Comment

barr_boglecoverThe Barron’s magazine cover article* this week is a profile of Jack Bogle, founder of Vanguard. It covers a lot of things that Bogle fans may already know (origin story, dislike of ETFs), but there were several bits that were new to me. I look forward to reading his last book that includes an “anecdote-rich history of Vanguard” and personal reflections.

(*Barron’s has a paywall, but usually allows limited access to Google search visitors. Try searching “Jack Bogle’s Battle” in a private window.)

Here’s a chart of how Vanguard has changed since 1974:

vanguardbarr

The article brings up the argument that index funds are becoming too popular and now bad for the world. I don’t worry about this at all. If inefficiencies become easy to take advantage of, things will naturally swing back. The loudest complainers always seem to be high-fee managers who are getting paid less lavishly for their services:

His favorite punching bag remains the mutual-fund industry. He likes to point out that closet indexing is pervasive with actively managed funds, and that traditional funds haven’t passed along economies of scale until pressured by Vanguard’s fees. There have been few casualties yet among asset managers, even as active stock funds suffered outflows nine of the past 10 years. And the industry has surely improved: Investor outcomes are better, costs are lower, information is better, thanks in part to Bogle.

Says Bogle, paraphrasing Martin Luther King Jr., “the arc of fiduciary duty is long, but moving in the right direction.” Bogle intends to see that it keeps doing so. “I have no corporate power,” he continues. “But I believe I still have more ethical and intellectual power. And that is good enough for me.”

Bogle is one of those rare authentic voices who say what they think and don’t care if others agree (even the rich and powerful). The adjective “cantankerous” is used – I hope to be called that eventually!

Filed Under: Investing //

Principles by Ray Dalio – YouTube Summary For Short Attention Spans

Posted on May 9, 2018 // Leave a Comment

dalioPrinciples: Life and Work by Ray Dalio is a bestselling book by the billionaire investor and founder of Bridgewater Associates. The book outlines both his personal development and investment philosophies and has been on my reading list for a while. If you’re like me and haven’t quite gotten around to reading it, you might be in luck.

Mr. Dalio just released a series of animated YouTube videos where he breaks down his “Principles for Success” into 8 videos at about 4 minutes each. Instead of reading a review or even paying for an “executive summary”, you can get a 30-minute version straight from the source. Here’s the trailer (embedded below) and first episode:

The YouTube channel also contains a few other longer videos dealing with the book content.

Filed Under: Investing //

Barron’s Best Stock Brokerage Rankings 2018

Posted on May 2, 2018 // 9 Comments

barrons2018Barron’s has released their 2018 online broker rankings. The considerations include trading experience/technology, usability, mobile trading, range of offerings, research tools, customer service, and cost.

The Barron’s list always comes from the perspective of their subscriber base – high-net-worth active investors – which may or may not describe you. The overall winner this year was Interactive Brokers. Last year’s winner Fidelity Investments was pushed back to #2. Thankfully, Barron’s also supplied separate rankings for novice investors, long-term investors, and those that value in-person service:

Top 5 Brokers for Novice Investors

  1. TD Ameritrade.
  2. Fidelity
  3. Merrill Edge
  4. Charles Schwab
  5. Ally Invest

Top 5 Brokers for Long-Term Investing

  1. TD Ameritrade.
  2. Fidelity
  3. Charles Schwab
  4. Merrill Edge
  5. E-Trade

Top 5 Brokers for In-Person Service

  1. Merrill Edge.
  2. Charles Schwab
  3. Fidelity
  4. TD Ameritrade
  5. E-Trade

Commentary. A few thoughts on the rankings and other overlooked brokers:

Interactive Brokers is hard to argue against for very active traders. Their average account made 476 trades last year! However, they have a minimum commission of $10 a month for accounts under $100,000, or a minimum commission of $20/month under $2,000. You must pay them $120/$240 a year no matter what. That doesn’t work out for me, as some months I don’t trade at all. IB is not for newbies.

TD Ameritrade recently showed a lack of commitment to their commission-free ETF list and went for quantity over quality. The free ETF list is still decent, but that move didn’t scream “long-term” in my book. I think the customer service is solid, and some people may feel better knowing that they merged with Scottrade and their physical branch network. (E*Trade ate OptionsHouse. Schwab ate OptionsXpress. TD Ameritrade ate Scottrade. Ally ate TradeKing, now Ally Invest.)

Vanguard was included this year for the first time in recent memory, and they were promptly knocked to the bottom for being the most expensive broker due to their high trading costs on non-Vanguard ETFs and mutual funds. Vanguard doesn’t court active traders, and active traders probably won’t like it at Vanguard.

Robinhood was ignored again this year, despite the fact they have free trades and recently added a web interface for trading and free options trading. They probably would have also ranked low due to limited feature set.

M1 Finance is another free investing app that just popped on my radar. It lets you pick a customized basket of individual stocks (or ETFs) and then lets you buy them with zero commission. I used to worry that Robinhood was alone, but now there is competition. Maybe Barron’s will notice one day.

I keep most of my long-term assets directly at Vanguard along with a Solo 401k at Fidelity. My (much more modest) individual stock trading is done through Merrill Edge. I’m happy with them so far. If you have $50,000 in assets across Merrill Lynch, Merrill Edge, and Bank of America accounts, you get 30 free trades per month. That’s already more trades than I need, but $100k in combined assets gets you 100 free trades per month.

Disclosure: I am now an affiliate of M1 Finance and TD Ameritrade, and may be compensated if you click through my referral link and open a new account. I am not an affiliate of Interactive Brokers, Fidelity, Merrill Edge, or Vanguard.

Filed Under: Deals & Offers, Investing //

Savings I Bonds May 2018 Interest Rate: 2.22% Inflation Rate, 0.30% Fixed Rate

Posted on May 1, 2018 // 21 Comments

sb_poster

Update 5/1/18. The fixed rate will be 0.30% for I bonds issued from May 1, 2018 through October 31, 2018. The variable inflation-indexed rate for this 6-month period will be 2.22% (as was predicted). The total rate on any specific bond is the sum of the fixed and variable rates, changing every 6 months. If you buy a new bond in May 2018, you’ll get 2.52% for the first 6 months. Not bad. See you again in mid-October 2018 for the next early prediction.

Original post 4/11/18:

Savings I Bonds are a unique, low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. You could own them as a replacement for cash reserves (they are liquid after 12 months) or bonds in your portfolio.

New inflation numbers were just announced at BLS.gov, which allows us to make an early prediction of the May 2018 savings bond rates a couple of weeks before the official announcement on the 1st. This also allows the opportunity to know exactly what a April 2018 savings bond purchase will yield over the next 12 months, instead of just 6 months.

New inflation rate prediction. September 2017 CPI-U was 246.819. March 2018 was 249.554, for a semi-annual increase of 1.11%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be 2.22%. You add the fixed and variable rates to get the total interest rate. If you have an older savings bond, your fixed rate may be very different than one from recent years.

Tips on purchase and redemption. You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. It’s best to give yourself a few business days of buffer time. If you miss the cutoff, your effective purchase date will be bumped into the next month.

Buying in April 2018. If you buy before the end of April, the fixed rate portion of I-Bonds will be 0.1%. You will be guaranteed a total interest rate of 2.58% for the next 6 months (0.10 + 2.48). For the 6 months after that, the total rate will be 0.10 + 2.22 = 2.32%.

Let’s look at a worst-case scenario, where you hold for the minimum of one year and pay the 3-month interest penalty. If you theoretically buy on April 30th, 2018 and sell on April 1, 2019, you’ll earn a ~2.04% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. If you held for three months longer, you’d be looking at a ~2.10% annualized return for a 14-month holding period (assuming my math is correct). Compare with the best interest rates as of April 2018.

Buying in May 2018. If you buy in May 2018, you will get 2.22% plus a newly-set fixed rate for the first 6 months. The new fixed rate is unknown, but is loosely linked to the real yield of short-term TIPS, which has been rising a bit. The current real yield of 5-year TIPS is ~0.56%. My best guess is that it will be 0.20% or 0.30%. Every six months, your rate will adjust to your fixed rate (set at purchase) plus a variable rate based on inflation.

If you have an existing I-Bond, the rates reset every 6 months depending on your purchase month. Your bond rate = your specific fixed rate (set at purchase) + variable rate (minimum floor of 0%).

So, which one? Buying in April 2018 would lock in a 11-14 month return equal to the top 12-month CD rates, which isn’t bad (plus the interest is exempt from state and local income taxes). If inflation picks up in the next year, you could still keep the bond and have potential upside. I would choose this option if I was treating savings bonds as short-term CD alternatives. However, if you buy in May 2018, your (real) fixed rate may be higher. This helps in the long run if you intend to keep these savings bonds indefinitely. I am a long-term holder (see below), so I am waiting until May.

Unique features. Due to their annual purchase limits, you should still consider their unique advantages before redeeming them. These include ongoing tax deferral (you don’t owe tax until redemption), exemption from state income taxes, and being a hedge against inflation (and even a bit of a hedge against deflation). There are also potential benefits when using the proceeds for college.

Over the years, I have accumulated a nice pile of I-Bonds and now consider it part of the inflation-linked bond allocation inside my long-term investment portfolio.

Annual purchase limits. The annual purchase limit is now $10,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. Buy online at TreasuryDirect.gov, after making sure you’re okay with their security protocols and user-friendliness. You can also buy an additional $5,000 in paper bonds using your tax refund with IRS Form 8888. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number.

For more background, see the rest of my posts on savings bonds.

[Image: 1946 Savings Bond poster from US Treasury – source]

Filed Under: Banking, Investing, Savings Bonds //

Betterment Review: Customized Asset Allocation, Human Financial Advisors

Posted on April 26, 2018 // 5 Comments

bment1707_0Updated April 2018 with custom ETF allocations. Betterment is an independent hybrid digital/human advisor that will manage a diversified mix of low-cost index funds and help you decide how much you’ll need to save for retirement. (By independent, I mean that they are not tied to a specific brand of funds like Vanguard or Schwab). Betterment is also an RIA, which means they have a legal fiduciary duty to keep client interests first. They frequently announce new features and improvements, so I will work to keep this feature list updated.

Diversified portfolio of high-quality, low-cost ETFs. Their portfolios are a diversified mix of several asset classes including: US Total, US Large Value, US Mid Value, US Small Value, International Developed, Emerging Markets, US Corporate Bonds, US Total Bond, Inflation-Protected Treasuries, Muni Bonds, International Bonds, and Emerging Market Bonds. For the most part, Vanguard and iShares ETFs are used.

The traditional Betterment portfolio has a more pronounced tilt towards the size premium and value premium than the cap-weighted indexes. You could argue the finer points of whether this will really create higher risk-adjusted returns, but overall it is backed by academic research. Betterment has also added a Socially Responsible Investing (SRI) portfolio option.

In April 2018, Betterment added Flexible Portfolios which lets you manually adjust the percentages of each asset class. As a DIY investor with assets spread across multiple accounts, this customization has been something I’ve been waiting for. This option is currently available only to clients with $100,000+ in assets.

betterment_flex

Both the SRI and Flexible Portfolio options will work with Tax Loss Harvesting and Tax Coordination features (see below).

Free access to human advice for everyone. In July 2017, Betterment announced that all of their customers can message a licensed financial experts. Digital members (0.25% annual fee) can ask questions any time via their mobile app. Digital members should expect an answer in approximately one business day. Betterment Premium members (0.40% annual fee) have unlimited e-mail and direct phone access to “Certified Financial Planner professionals”. From their press release:

Our experts can assist with deciding which funds to move to Betterment, setting goals (like saving for college, a house, or retirement), and identifying which Betterment tax features may be right. They can also help you make important investment decisions, like choosing risk levels, amounts to invest, and types of accounts.

Reading between the lines, Digital members get “licensed financial experts” while Premium members get “Certified Financial Planner professionals”. This suggests that while Digital members will still get fiduciary (client-first) advice, Premium members will get priority access to the more-experienced advisors in exchange for paying their higher fee.

bment1707

Retirement planning software with external account balances. RetireGuide is Betterment’s retirement planning software, first launched in April 2015. This service links your external accounts from other banks, brokerages, and 401k plans (similar to Mint and Personal Capital) in order to see your balances without having to manually input them. According to their methodology guide [pdf], they don’t analyze your transactions to estimate savings rate, they are just pulling in balances.

Example questions: How much do I have invested elsewhere? Am I saving enough money? How much estimated income will I have in retirement? Your future Social Security income is estimated for your based on your chosen retirement age and birthdate. You can change many of the variables as you like.

Account types. Betterment now supports taxable joint accounts, trust accounts, 401k rollovers, Traditional IRAs, Roth IRAs, SEP IRAs, and Inherited IRAs.

Tax-efficent asset location. Tax-Coordinated Portfolio will place different asset classes in your taxable accounts vs. tax-deferred accounts (IRAs, 401ks) for a higher after-tax return. In addition, if you have multiple types of accounts at Betterment (i.e. both IRA and taxable), it will manage multiple accounts as a single portfolio, placing assets that are taxed more into more favorably taxed accounts (like IRAs). Note that this only works across accounts that are held at Betterment. It does not adjust for non-Betterment accounts. This is called their Tax-Coordinated Portfolio (TCP).

Use dividends and new contributions to rebalance. They will use your dividends and new contributions to rebalance your asset classes in order to minimize sells and thus minimize capital gains.

Daily tax-loss harvesting. Betterment’s Tax-loss Harvesting+ (TLH+) software monitors your holdings daily and attempts to find opportunities to harvest tax losses by switching between “similar but not substantially identical” ETFs. If you can delay paying taxes and reinvest them, this can result in a greater after-tax return. The exact “tax alpha” of this practice depends on multiple factors like portfolio size and tax brackets. You can read the Betterment side of things in their whitepaper. Here is an outside viewpoint arguing for more conservative estimates.

My opinion is that there is long-term value in tax-loss harvesting and especially daily monitoring to capture more losses. However, I also think it’s wise to use a conservative assumption as to the size of that value. (DIY investors can perform their own tax-loss harvesting as well on a less-frequent basis. I do it myself, but it’s rather tedious and I’m definitely not doing it more often than once a year. I would gladly leave it to the bots if it was cheap enough.)

Invest your excess cash automatically. Automatic contributions are good, but perhaps you don’t want to commit to a set amount each month. (Ideally, you do commit to a set amount, and this service invests more money on top of that.) Called SmartDeposit, you link your checking account and choose your Checking Account Ceiling and Max Deposit amount. If your checking account balance goes above the ceiling, Betterment will automatically sweep over money and invest it for you. Betterment will account for future scheduled deposits so you don’t over-contribute.

Fee schedule. Betterment has a fee structure with two tiers.

  • Betterment Digital. No minimum balance. Digital portfolio management and guidance. Unlimited access to “licensed financial experts” via mobile app with ~1 business day turnaround time. Flat fee of 0.25% of assets annually. The management fee on any assets over $2 million is waived.
  • Betterment Premium. $100,000 minimum balance. Digital portfolio management and guidance. Unlimited access to “CFP professionals” financial experts” via e-mail or phone. Includes more in-depth advice on investments outside of Betterment. Flat fee of 0.40% of assets annually. The management fee on any assets over $2 million is waived.

In my opinion, the main concern of any outside advisor is the same: you are handing over control to someone else. Betterment could change their investment philosophy, their pricing structure, and feature set in the future. Digital advisors are constantly changing, and some of their new features could be great or it could just be a fad.

Bottom line. Betterment is an independent digital advisory firm with nearly $10 billion in assets, which means they aren’t tied to any specific brand of funds like Vanguard, Fidelity, or Schwab. Their main differentiators from the other independent firms (see my Wealthfront review) are (1) access to human advice available to all customers and now (2) the ability to customize your target asset allocation ($100k+ in assets). Other notable features include: Retirement planning software that syncs with external accounts, tax-loss harvesting, tax-coordinated portfolios (when you have both IRA/401k and taxable at Betterment), and SmartDeposit which automatically invests excess cash from your checking account.

Filed Under: Investing, Reviews //

Reader Question: Tracking Asset Allocation Across Multiple Investment Accounts

Posted on April 24, 2018 // 12 Comments

portpie_blank200Here’s a reader question regarding my most recent portfolio asset allocation update. It has been edited for clarity and to remove personal details by request:

Thank you for posting the quarterly finance updates. I would like to do something similar to track the returns by asset class but unfortunately, I have my funds across multiple accounts. Some of my funds are in Roth, Rollover IRA and a 401k from current employer. My wife has her funds in similar retirement accounts. How do I consolidate all my investment funds to get a holistic view and correct asset allocation? Also, how do I get Vanguard funds when my 401k options are limited?

First of all, everything may look neater in my updates, but I also have my funds spread across multiple accounts. My wife and I have funds spread across Roth IRA, Traditional IRA (at least temporarily), 401k/403b, Self-Employed 401(k), taxable brokerage accounts, savings bonds, and bank CDs.

Here are the details on how I do my quarterly update.

1803_pc2b

  1. I pull up my custom Google Spreadsheet and make a fresh duplicate of the most recent worksheet. I change the label to a brief datestamp so the labels aren’t too wide. “17.12” indicates December 2017, “1803” indicates March 2018, and so on. I keep all my old snapshots as tabs. This is handy because I can go back and remember what my portfolio looked like back in March 2009, for example.
  2. I log into each individual account one-by-one directly at the provider website. I could use an aggregator, but I do this just to make sure my addresses/passwords are correct in my trusty password manager and everything looks right. No new sub-accounts, no errors, new secure messages, etc. I pull up my holdings and type in the balances manually into the proper asset class cell. The spreadsheet adds them up.
  3. For most of my funds, the asset class is readily available. For example, I know that the Vanguard Emerging Markets Stock Index fund is going under “Emerging Markets”. If you aren’t sure or if the fund includes multiple asset classes (Target Retirement fund, LifeCycle fund, etc), you can either use a service like Personal Capital (free registration required) for a quick-and-easy analysis or Morningstar X-Ray (free TRP registration required) for a manual-but-deeper analysis.
  4. For the most part, the spreadsheet does the rest. The pie charts automatically update to show me my overall holistic breakdown. It shows me how far off I am from my target values, both in terms of percentage and dollar amounts.

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When your 401k options are limited, here’s how I would pick the best choice available. I would start by narrowing it down to the cheapest index funds available. Look at all the expense ratios. These days, at least one should be under 0.30%. You can verify using the ticker symbol on Morningstar. For example, for a while my best 401k option was a proprietary S&P 500 index fund. So I bought that, and adjusted my holdings elsewhere. Later on, they added Vanguard Total International Stock index fund and a Schwab brokerage window. There are probably 10-15 other funds on the menu that I have no interest in owning. A Target fund might be the most reasonable choice. Remember to roll your 401k over to an IRA when you switch employers.

Filed Under: Investing, Retirement //

Firstrade Commission-Free ETF Program Review – Includes Vanguard, iShares Core, Schwab Index ETFs

Posted on April 17, 2018 // 7 Comments

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Online brokerage Firstrade just announced a new Commisssion-Free ETF program that includes 700+ ETFs from 40 fund families. This is a bold move as it includes both a lot of ETFs (quantity) but also the best ETFs (quality) from providers like Vanguard, iShares, WisdomTree, SPDR State Trust, and Schwab.

Firstrade already cut their standard trade commission to $2.95 per trade in 2017. The program is designed for long-term investors and the ETFs must be held for at least 30 days (if less than 30 days, the commission is the standard $2.95). Leveraged ETFs are not included. There is no need for any special enrollment for this ETF program.

Low-cost, broadly-diversified ETFS across major asset classes. Here is a partial list of ETFs that I noticed:

Vanguard (52 ETFs total)

  • Vanguard S&P 500 ETF (VOO)
  • Vanguard Total International Stock ETF (VXUS)
  • Vanguard Dividend Appreciation ETF (VIG)
  • Vanguard Small-Cap Value ETF (VBR)
  • Vanguard FTSE Developed Markets ETF (VEA)
  • Vanguard FTSE All-Wld ex-US ETF (VEU)
  • Vanguard Global ex-US Real Est ETF (VNQI)
  • Vanguard FTSE Emerging Markets ETF (VWO)
  • Vanguard Short-Term Infl-Prot Secs ETF (VTIP)
  • Vanguard Total International Bond ETF (BNDX)

Notably absent: Vanguard Total Stock Market ETF (VTI)

iShares (173 ETFs total)

  • iShares Core S&P Total US Stock Mkt ETF (ITOT)
  • iShares Core S&P 500 ETF (IVV)
  • iShares Core MSCI Total Intl Stk ETF (IXUS)
  • iShares Core US REIT ETF (USRT)
  • iShares Core MSCI EAFE ETF (IEFA)
  • iShares Core MSCI Emerging Markets ETF (IEMG)
  • iShares Core Dividend Growth ETF (DGRO)
  • iShares Core US Aggregate Bond ETF (AGG)
  • iShares Core International Aggt Bd ETF (IAGG)
  • iShares Short Maturity Bond ETF (NEAR)

Schwab (20 ETFs total)

  • Schwab US Broad Market ETF (SCHB)
  • Schwab US Dividend Equity ETF (SCHD)
  • Schwab Emerging Markets Equity ETF (SCHE)
  • Schwab International Equity ETF (SCHF)
  • Schwab US REIT ETF (SCHH)
  • Schwab US TIPS ETF (SCHP)
  • Schwab US Aggregate Bond ETF (SCHZ)

With this move, they take the title of “Largest Commission-Free ETF Program” from TD Ameritrade. Here’s their comparison chart.

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My take. Overall, competition is good and I always like to see lower prices for long-term ETF investors. Additional considerations:

  • Sustainable? This list is very similar to what TD Ameritrade used to offer commission-free, at least in terms of offering the most popular ETFs. However, TD Ameritrade eventually went for quantity over quality, dropping most of their widely-held ETFs and replacing them with niche ETFs and index ETFs from SPDR. One can only assume this is a loss-leader offering for Firstrade. Will it last?
  • Truly simple portfolios can just stick to the source. If you really want to construct a simple portfolio, you can open an account at Vanguard, Fidelity (iShares), and Schwab and buy ETFs (limited to their family) with no commission. The benefit is that in-house discounts are much more likely to stay free.
  • Tax-loss harvesting. A potential benefit of using a brokerage account is if you do tax-loss harvesting with ETFs. For example, you could sell iShares Core S&P Total US Stock Mkt ETF (ITOT) and buy Schwab US Broad Market ETF (SCHB), all commission-free and in the same account. With the big list above, ETF pairing for almost every asset class are available.

New account promotions. Firstrade is also offering the following new account cash + free trades promotions based on opening deposit. You can get up to $300 cash and 500 free trades. They will also cover up to $200 in account transfer fees when you switch from another broker and $25 in wire fees when you wire money to Firstrade.

Bottom line. Firstrade has a new Commisssion-Free ETF program that offers both quantity (700+ ETFs from 40 fund families) and quality (top-rated and popular ETFs from Vanguard, iShares, and others) for long-term investors (30-day minimum holding period). The standard commission on other stocks and ETFs is $2.95. This sure looks nice, but I hope it is sustainable. We recently saw TD Ameritrade cut back on their Commisssion-Free ETF program.

Filed Under: Deals & Offers, Investing //

My Money Blog Portfolio Asset Allocation, March 2018

Posted on April 11, 2018 // 8 Comments

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Here is a First Quarter 2018 update for my primary investment portfolio. These are my real-world holdings, not a recommendation. It includes tax-deferred 401k/403b/IRAs and taxable brokerage accounts and excludes our primary home, cash reserves, and a few side investments. The goal of this portfolio is to create enough income to cover our regular household expenses. As of 2018, we have started the phase of “early retirement” where we are spending some of the dividends and interest from this portfolio.

Actual Asset Allocation and Holdings

I use both Personal Capital and a custom Google Spreadsheet to track my investment holdings. The Personal Capital financial tracking app (free, my review) automatically logs into my accounts, tracks my balances, calculates my performance, and gives me a rough asset allocation. I still use my custom Rebalancing Spreadsheet (free, instructions) because it tells me where and how much I need to direct new money to rebalance back towards my target asset allocation.

Here is my portfolio performance for the year and rough asset allocation (real estate is under alternatives), according to Personal Capital:

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Here is my more specific asset allocation, according to my custom spreadsheet:

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Stock Holdings
Vanguard Total Stock Market Fund (VTI, VTSMX, VTSAX)
Vanguard Total International Stock Market Fund (VXUS, VGTSX, VTIAX)
WisdomTree SmallCap Dividend ETF (DES)
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
Vanguard Small Value ETF (VBR)
Vanguard Emerging Markets ETF (VWO)
Vanguard REIT Index Fund (VNQ, VGSIX, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt Fund (VWITX, VWIUX)
Vanguard High-Yield Tax-Exempt Fund (VWAHX, VWALX)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

Target Asset Allocation. Our overall goal is to include asset classes that will provide long-term returns above inflation, distribute income via dividends and interest, and finally offer some historical tendencies to balance each other out. I personally believe that US Small Value and Emerging Market will have higher future long-term returns (along with some higher volatility) than US Large/Total and International Large/Total, although I could be wrong. I don’t hold commodities futures or gold (or bitcoin) as they don’t provide any income and I don’t believe they’ll outpace inflation significantly. I also try to imagine each asset class doing poorly for a long time, and only hold the ones where I think I can maintain faith.

Stocks Breakdown

  • 38% US Total Market
  • 7% US Small-Cap Value
  • 38% International Total Market
  • 7% Emerging Markets
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 50% High-quality, Intermediate-Term Bonds
  • 50% US Treasury Inflation-Protected Bonds

I have settled into a long-term target ratio is 67% stocks and 33% bonds (2:1 ratio) within our investment strategy of buy, hold, and rebalance. With a self-managed, simple portfolio of low-cost funds, we minimize management fees, commissions, and income taxes.

Real-world asset allocation details. For both simplicity and cost reasons, I am no longer buying DES/DGS and will be phasing them out whenever there are tax-loss harvesting opportunities. New money is going into the more “vanilla” Vanguard versions: Vanguard Small Value ETF (VBR) and Vanguard Emerging Markets ETF (VWO).

I’m still a bit underweight in TIPS and REITs mostly due to limited tax-deferred space as I don’t want to hold them in a taxable account. My taxable muni bonds are split roughly evenly between the three Vanguard muni funds with an average duration of 4.5 years. I have been seriously thinking of going back to US Treasuries due to changes in relative interest rates and our marginal income tax rate.

My stock/bond split is currently at 69% stocks/31% bonds. I continue to invest new money on a monthly basis in order to maintain the target ratios. Once a quarter, I also reinvest any accumulated dividends and interest that we did not spend. I don’t use automatic dividend reinvestment. First of all, we spend some of our dividends now. In addition, I can usually avoid creating any taxable transactions unless markets are really volatile.

Performance and commentary. According to Personal Capital, my portfolio has basically broken even so far in 2018 (-0.70% YTD). I see that during the same period the S&P 500 has lost 0.63% (excludes dividends) and the US Aggregate bond index has actually lost 1.55%.

An alternative benchmark for my portfolio is 50% Vanguard LifeStrategy Growth Fund (VASGX) and 50% Vanguard LifeStrategy Moderate Growth Fund (VSMGX), one is 60/40 and one is 80/20 so it also works out to 70% stocks and 30% bonds. That benchmark would have a total return of -0.98% YTD (as of 4/9/18).

In a separate post, I’ll share about more about the income aspect.

Filed Under: Goals, Investing, Retirement //
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