The first step in reaching a goal is seeing how far away you are from that goal and then deciding what you need to do to get there. I’ve already outlined my strategy in prior posts but want to revisit it here before we take a look at my current portfolio and how it compares to where I’m supposed to be in terms of my asset allocation. I plan to do this monthly and will try to have a post like this on the 2nd Sunday of every month. This post will be useful in tracking my portfolio total and seeing where I am in relation to my asset allocation and what changes are needed to get us there. I think there might be some large changes needed early on to get my portfolio to where it should be at this point but once we’re there, I think the asset allocation adjustments should be small.
First of all – let’s take another look at my target asset allocation that I’ve mentioned in past posts.
There’s nothing overly complicated here. Heavy US exposure with a larger small/mid cap tilt due to higher risk tolerance and search for larger returns. REIT and Bond exposure for income and diversification and some international exposure split between mainly developed but also some emerging markets. Bond exposure is small but might increase with time as the portfolio size grows and I get closer to my target retirement age. Note that I may also hold cash beyond this portfolio when suitable – for example, if I decide to sell securities and choose not to re-balance at the time for one reason or another that I would explain when and if it happened.
Now that we have the baseline set – let’s take a look at my portfolio split into the various accounts. I’ll list the type of account it is(Taxable, 401k, ROTH, etc.) then the total $$ amount in that account and then the securities/funds/ETFs I hold in that account along with their expense ratios when applicable and a small analysis of the account. I likely won’t do this type of in depth review every week but wanted to get a good baseline for my first portfolio post.
Account #1: 401k – Total – $124366.71
RERGX – AF Euro Pacific Growth Fund – 0.49% ER
VIIIX – Institutional Index Fund – 0.02% ER
VMCPX – Mid-Cap Index Fund – 0.06% ER
VSCPX – Small-Cap Index Fund – 0.06% ER
Analysis: Thankfully there are a lot of great options in my 401k including a large cap, mid-cap and small-cap index fund with ridiculously low expense ratios meaning I get to keep almost all my money! The RERGX is one of the few non-index funds in my portfolio and provides good exposure to developed and emerging markets with a relatively low expense ratio for an actively managed fund. It isn’t the ideal choice due to the relatively high expense ratio but I don’t have another great option within the 401k to get that type of exposure. There is no REIT fund in my 401k and the bond funds are not great either(high expense ratios) so I stomach the ‘high’ expense ratio. I know how lucky I am regarding my 401k with expense ratios as this is about as good as it gets. RERGX is the biggest portion of my 401k as the allocation percentages were set with an overall view in mind and most of my other holdings don’t include a large exposure to foreign securities. This setup of four funds in the 401k gives me a good amount of flexibility when it comes to my overall allocation as all of the US asset sizes are covered which allows me to change my allocations whenever needed to get back to my target allocation.
Account #2: Roth IRA – Total – $42543.50
VBTLX – Total Bond Market Index Fund – 0.07% ER
VGSLX – REIT Index Fund – 0.12% ER
Analysis: Only two holdings here and both are tax inefficient so I choose to hold them in my tax-advantaged account. Both are admiral funds so the expense ratios are relatively low. The fact that this account makes up a much smaller portion of my overall account limits the effect this has on the overall asset allocation as I can only put 5.5k here per year whereas the 401k gets a lot more annual funds.
Account #3: HSA – Total – $13837.48
VEIRX – Equity Income – 0.17% ER
VIMAX – Mid-Cap Index – 0.09% ER
VFIAX – 500 Index – 0.05% ER
VSMAX – Small-Cap Index – 0.09% ER
VWENX – Vanguard Wellington – 0.18% ER
Analysis: This makes up a small portion of my overall portfolio but has some excellent options as well. Once again, I’m very lucky to have great options in my HSA investment portfolio. The account holds some cash as it a requirement to have a minimum amount before investing. The HSA has good options and can be adjusted easily to get back to my target allocation as it has all of the US stocks covered as well as bonds through the Wellington fund.
Account #4 – Taxable 1 – Total – $110711.88
DGRO – Core Dividend Growth ETF – 0.12% ER
DVYE – Emerging Markets Dividend – 0.49% ER
HDV – Core High Dividend ETF – 0.12% ER
IDV – International Select Dividend ETF – 0.50% ER
ITOT – Core S&P Total Stock Market – 0.03% ER
AAPL – Apple
DIS – Disney
MKL – Markel
UNH – United HealthGroup
Analysis: This account is my primary individual account holding along with some ETFs that iether mirror the total market or include dividend payers. The four main individual stock holdings are Apple, Disney, Markel and United HealthGroup and I can discuss what I like about these stocks in separate posts if needed but I think there were all attractively valued at the time I bought them and have good long-term growth prospects. I think they’ve since gotten a bit over-priced and I may revisit them soon as I do my initial portfolio analysis. If it turns out I’m overweight in large caps, one strategy might be to sell off winners in this account. The only issue there is that it would be a taxable transaction but the recent run-up in stocks since the August crash may make that a prudent move if that run-up has gotten me overweight on the stock front. I’ve also mentioned before that I am planning to buy a house in the next 1-3 years so moving some money into cash might also be a prudent move if I decide to head that way. I do have a separate house fund but I may need to take a few dollars from these accounts in case the house purchase is pushed forward. The two higher priced foreign market ETFs make up a very small % of my portfolio and I may look for lower priced alternatives if I need to readjust my international exposure.
Account #5 – Taxable 2 – Total – $16963.23
VIG – Dividend Appreciation ETF – 0.10% ER
VDE – Energy ETF – 0.12% ER
VEU – FTSE All-World Ex. US ETF – 0.14% ER
VSS – FTSE All-World Ex. US Small-Cap ETF – 0.19% ER
VEA – FTSE Developed <Markets ETF – 0.09% ER
VWO – FTSE Emerging Markets ETF – 0.15% ER
VYM – High Dividend Yield ETF – 0.10% ER
Analysis: Another taxable account with a bunch of low cost ETFs. This little exercise has had one good point already as showed me the difference in expense ratios between the funds in these two taxable accounts. There’s really no reason to invest in the 0.5% ER dividend ETF when I could get international exposure for 0.14% here. Yes, it’s not dividend focused but I’m not really dividend focused either and I can’t predict which fund will do better so it makes more sense to go with the cheaper one. Similar situation for HDV versus VYM although those are closer in price and in fund type. In any case, I have some ETFs here that I bought a long time ago like a sector energy ETF which really has no reason to be in my portfolio but I’ve left it in there since it’s sitting on a capital gain and a small cap foreign ETF which isn’t really something I’m targeting but does give me exposure to international markets.
If you’ve been keeping track, the total is right around 308k! That’s not a bad starting point to this journey – not bad at all. I think it’s pretty clear that while I’ve gotten a bit lazy and lax around actually managing my portfolio – my savings rate and savings choices have still been pretty decent. I don’t make a lot of money but I’ve been able to save a solid amount at this stage of my life and I’m hoping that this is only the start of something great. They say that money makes money and it’s certainly easier to get to 1M and above when you start at 300k than if I was starting from scratch. I’m in my 30s now and while I think I could have done more in my 20s when it comes to savings rate – I won’t get hung up on that as what I did was plenty good. With that in mind and before we look at the actual asset allocation – here’s the first of many graphs tracking my portfolio size. Hopefully, we’ll see this thing grow regularly although some market dips here and there will likely send it downward. That’s still OK as I am still heavily in the accumulation phase of my plan so any dips will just mean adding additional funds at lower prizes and more opportunities to get individual securities at attractive valuations.
It’s pretty clear from this picture that the tax-advantaged side of my portfolio is larger and that makes sense. The first dollars I save go into my 401k, HSA and then ROTH IRA and only then do I save in my taxable account which limits the amount of dollars that go into those. Now that my salary is a bit higher than it was when I started, I can save some money in there but it still won’t eclipse what I’m saving in the tax-advantaged accounts for a while – if ever as I don’t expect my salary to grow a ton from where it is now. I do have some cash on the side which is not something I generally do but I did sell some securities recently and haven’t decided what to do with the money yet as I haven’t had a lot of time to research any new opportunities. I also wanted to do a deeper analysis on my portfolio to see where I was overweight before doing anything as well. On top of that, P/E ratios in this market are getting a bit high so while I never really time the market as I always have money going in via 401k/HSA/IRA contributions, if I have taxable cash on the side, I generally just won’t invest it blindly unless I find a good value which is hard to do in this type of price environment.
With all that data collected – I did an in-depth analysis of my actual positions and how they tie back to my asset allocation plan. This was a bit tricky because a lot of the funds and ETFs I own have some unexpected overlap in terms of the securities they contain. My small-cap fund as an example has quite a bit of mid-cap exposure which I was surprised to find and speaks to the difficulty of actually tracking an asset allocation plan effectively. There were others like my euro pacific fund which has some emerging market exposure and a lot of the ETFs which I assumed were mostly large-caps but also had some mid-cap exposure. All these items and my lackadaisical tracking of this in the past few years means that while I was contributing regularly and in a way I thought tracked my asset allocation, I end up being quite a bit off in a lot of areas as the graph below shows.
Yikes – I’m quite a bit off here! I was expecting some fluctuation but I’m surprised at how far my US allocations are simply because I have such good exposure to those three asset classes in my 401k and HSA but the main issue is that the small-cap fund ends up over-weighing mid-cap and under-weighing itself because of its 35% exposure to the mid-cap sector. Large-cap is also overweight simply because of my individual securities which are mainly large-cap stocks as well as my dividend funds which are mainly large-cap securities. Bonds are also too high simply because I haven’t tracked them well enough and keep most of them in my Roth IRA with some lazy Roth contributions year over year with REITs which are held in the same account being a bit under-weight. International developed and emerging are a bit over-weight.
In order to fix this – I need to do the following. I need to reduce my large-cap exposure by 5%, and my mid-cap exposure by 0.9%. Those funds will mostly be diverted into my small-cap exposure which needs to go up by 5.6%. This isn’t as easy as it sounds as the small-cap funds I have access to in my tax-advantaged accounts have mid-cap exposure so I’ll have to account. I could either re-balance in those accounts right now or re-direct future contributions into the small-cap funds to account for that. I might go the second route and get there slowly as I plan some pretty big contributions in the coming months due to a bonus. I could also use some of the taxable funds to purchase some small-cap ETFs to adjust my small-cap exposure. However, small-cap equities are less tax-efficient than large-cap as their dividends aren’t usually 100% qualified so I’d rather keep my small-cap exposure mostly in my tax-advantaged accounts. For now, I went into my tax-advantaged accounts and adjusted my future contributions to be about 70% small cap, 15% large-cap and 15% international. This should start adjusting my small-cap exposure up pretty quickly in the coming months while slightly reducing my mid-cap exposure(small cap funds still have some mid-cap) and reducing my large-cap as well. I may also review my current taxable securities and see if I’d like to retain all of those or sell some to adjust my large-cap exposure a bit down.
On the international side, my developed exposure has to reduce by 1.4% and my emerging exposure has to reduce by 0.6%. Not a huge difference and one that should be covered by the reduction in international contributions mentioned above in my tax-advantaged accounts.
REITs are another category that’s underweight by a big margin with a 4.2% shortfall. They happen to be in the same fund as my bonds which are overweight by about 1.9%. I could sell bonds right now and buy more REITs or simply wait it out and divert any future income from Bonds into REITs. I’m not sure which way I’ll go yet but I do think equities as a whole are due for a correction so I may just leave my bonds alone for a while while making 0 additional contributions to them. Some may call this market timing but I do sometimes go with a gut feeling when it comes to adjustments I make. I also plan to make my 2015 ROTH IRA contribution in the next few months and that’ll all go into the REIT fund which should help with that adjustment.
All in all – not the best news regarding how close I am to my asset allocation but this is what this blog was all about – to find these types of discrepancies and adjust them. I don’t think the changes I’m having to make are huge but this exercise did allow me to dissect my portfolio and realize that I’m overweight in some areas and need to adjust others up. I don’t plan to make these changes ASAP as I’d rather adjust my small-cap exposure through future contributions but with the next update – we should see the portfolio trend closer to where it should be according my target asset allocation.
I think we might be in for some market rumblings in the coming weeks if Friday is any indication as the fed raising rates and low oil prices will definitely add some volatility to the market place. I can’t wait to see what the January update looks like and whether we’ll see a dip or bump in my totals and where we’ll be then in regards to my asset allocation. I’m a good way off this month but hopefully the changes I make this week will get me closer to my target. My future updates probably won’t be this in-depth but I wanted to do a pretty through one at first to lay everything out clearly.
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