My portfolio – October update

It’s October already and I’m fresh off an extended weekend vacation where I ate some great food and had some good times with the girlfriend. The colors of the leaves are starting to turn and the weather is getting colder and colder in the mornings. We’re also getting close to one of my least favorite times of the year; winter. I’m certainly not looking forward to the cold dark days that are ahead of us(and I’m not talking about the stock market). It’s never fun to leave for work when it’s dark and then see nothing but darkness when you leave work as well.

The stock market hasn’t done much lately. The fear of interest rate hikes put the kibosh on the few months of solid performance we saw since the 2016 bottoms in February. The market can’t seem to decide what it wants these days and Friday was the perfect sign of that. The lackluster job numbers were first seen in a positive light in terms of market performance since it makes an interest rate hike less likely but later were talked about in a negative light due to what they say about our economy.

In my mind all this talk around small interest rate hikes and the effect they’ll have on market performance makes it pretty clear what’s been driving market performance in the past few years and it hasn’t been stellar earnings growth. It’s been the search for yield that caused movement into stocks and drove the P/E expansion as prices soared and earnings stayed rather flat. That’s why we’re seeing negative market returns in the last few months as those who followed the search for yield strategy may be getting seconds thoughts with an upcoming potential interest rate hike. There’s a fear that as interest rates rise, the need for yield that drove recent P/E expansion will vanish and stock prices will retreat so a small sell off followed.

That’s why REITs and common high yield names have struggled a bit in the past few months. VNQ, a good proxy for the REIT market is down 8% in the last month and other dividend payers like T are down 5%+. I think the potential for continued price drops in some of these names is there as we get closer to December and nearer a likely rate hike. There are certainly other factors like the aforementioned jobs report which may show some underlying economic issues and the upcoming presidential election that have had an impact but the interest rate hikes are certainly a big part of it.

As an investor, it’s never nice to see the market take small dips like this and to see high yield names which have shown strong performance since 2008 finally start to show weakness. It speaks to some cracks finally starting to show in the recent bull market and I wouldn’t be surprised if we saw some near-term poor performance in the next 12 months.

The S&P 500 saw a 1.48% reduction in the last month and that’s after dipping 2.47% in the preceding month. Despite those small dips the S&P 500 still has a P/E ratio of about 25 against a historical mean of 15. Historical means don’t mean much in this type of low interest rate environment but they can certainly speak to what could happen if interest rates start rising and earnings growth isn’t as robust as it has been in the past. There could be some carnage ahead.

However as a long term investor, I’m not overly concerned about near-term poor performance as it allows me to buy at lower price. I continue to hold a bit of cash on the side and am ready and looking for any potential values that emerge.

Unfortunately, I’ve had some expenses in the recent weeks that have limited my ability to invest in the market. I’m still contributing my usual paycheck contributions as well as any additional cash I can find. I’m also still far from maxing out my Roth IRA for 2016 which will all go into my REIT fund so any price reduction there doesn’t bother me as I can increase the effective yield I’m buying at and improve long term returns by buying at a cheaper price.

Let’s take a look at where my portfolio stands today!

We’re back to growth after a small dip in September but I’m still behind where I was in August. It’s never great to see lackluster growth like this but at least I’m buying at lower prices in those shrinking portfolio months. Remember this is growth or lack of growth despite continued contributions into my various accounts in those months so it speaks to the lack of performance in the market since August.

My overall portfolio now sits at $347164.19.

That’s an improvement of 1.06% over last month. My tax-advantaged accounts were up 3% as most of my contributions were directed that way and my taxable accounts were up by 0.5% driven by strong performance of some of my individual holdings like Apple.

REITs have struggled quite a bit lately and have a been a big drag on my portfolio performance. The other asset classes have spent the last two months drifting between being up 1% or down 1% depending on the day.

My cash pile has shrunk a bit as I continued buying some ETFs every week but it still remains at 8.9% or near the top end of the 10% cash maximum set by my asset allocation plan. I’ll continue buying a few shares of ETF on a consistent basis but don’t expect any massive individual buys unless we see a small 5-10%+ correction in the next few months. The market is a bit frothy and I feel more comfortable with having some cash on the side to prevent any emotional moves if a big correction happens.

This can potentially harm my long term returns if the market continues to rise but I really like the piece of mind cash offers in times like these where the market feels overpriced. That’s one of the main reasons I have a cash allocation within my asset plan. The other is to allow me some fun with individual stock selection and allow me to flex my stock analysis muscle. However, since time in the market beats timing the market, I make sure to only max it out at 10% and keep the majority of my money in the market at all times.

September dividends were nice to see as I was above $1000 again this quarter. Those were reinvested into the various securities that spawned them in order to continue growing in the future.

Let’s take a look at my asset allocation.

Market volatility will always skew this graph but that’s why asset allocation tracking is so useful. It allows me to direct cash and contributions towards areas that are under-performing as their asset % will decrease any given month if that’s the case. Most my contributions lately have been towards large cap and REITs which were both under represented in my portfolio. REITs are only available in two of my accounts and those accounts haven’t gotten a huge amount of love in the past few months so that combined with the poor performance in REITs means they’ve fallen behind even more compared against last month.

Here’s a breakdown of my asset allocation this month against target.

  • US Large Cap at 41.3% versus 42.5% target(-1.17%)
  • US Mid Cap at 10.7% versus 10% target(+0.67%)
  • US Small Cap at 10.2% versus 10% target(+0.22%)
  • US REIT at 8.5% versus 10% target(-1.53%)
  • International Developed at 16% versus 15% target(+1.00%)
  • International Emerging at 4.8% versus 5% target(-0.2%)
  • US Bonds at 8.5% versus 7.5% target(+1.00%)
US large cap is getting closer and closer to target but REIT keeps drifting away. I can see REIT being an issue in the near term as most of my REIT holdings are in my ROTH IRA. I’m far from my max for 2016 on ROTH IRA contributions and while I make those monthly, I’m a bit behind on that front due to my higher expenses this month. However once I max out my ROTH IRA for 2016 in the next few months, the REIT allocation should start to catch up.
I feel good about the progress I’m making here. Last month more than 4 assets were more than 1% out of line and one was 2% out of line. This month, there are no assets more than 1.5% out of line and two more have drifted to within 1%. The goal was to get this fixed up by the end of the year and it’s possible I can do that soon with some additional contributions.
The plan to get that done for the next month will be:
  • 401k contributions fully into US Large Caps
  • ROTH IRA contributions fully into US REIT
  • Move some additional bond money into REIT
  • Cash pile at 8.9%. Invest in ETFs and continue looking out for fair individual values.

There’s still some work to be done on the asset allocation front but I’m certainly getting there so that’s good to see.

That’s it for this update – I’ll have another savings rate update in a few weeks so see you all then!

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