On cash, recent sales, the market and the excitement of one extra paycheck in 2015

There’s some good news for some of us savers who get paid bi-weekly and who happen to get paid on Friday’s as New Year’s Day falls on Friday this week. I just found out about this a few days ago after I bumped up my 401k contribution to 50%(the max I can under my plan) and changed my HSA contribution to get closer to max there. I’ll still be a good deal short on the 401k max front but this does allow me to get two contributions at 50% that will apply towards 2015 and lower my tax bill for 2015 as well. I will still unfortunately be a good deal short of my max for the year but inflows of 1000+ per paycheck will certainly help get us there.

I’ve also gone and made some changes to my contribution mix based on my recent portfolio analysis which means I’ll basically be pushing money into small-cap funds for the next few months to remedy the asset shortfall I have there. I’ve got these two 50% contribution paychecks and a bonus check coming in the near future that should remedy that somewhat quickly. I also plan to push my Roth IRA contribution in the next few months into the REIT fund to bump that asset up as it’s a good deal off from where it should be as well. I might also do a small re-balance to help me get there faster by pushing some of the overweight large-cap dollars in my 401k into the small-cap fund and pushing some of the bond dollars into the REIT in my ROTH. Both asset classes are underweight by about 5% which is a relatively large sum when it comes to my portfolio size so redirecting future contributions might not be enough and might take too long to fix it.

On the market side of things, the much ballyhooed rate raise finally came and went with the fed bumping the rates by .25bps as expected. I’m not sure what the market will do from here as the last few days have been volatile with a rise after the change followed by two negative days to end the week. I think the question that comes to mind when I see such volatility is where we’re heading in the short-term and whether some good values will emerge if the market volatility continues to push the market south. For us long-term investors, the day to day movements of the market aren’t much of a concern as I will still continue to contribute into my 401k/HSA bi-weekly whether the stock market is high or low and will continue to push some money into my taxable accounts when available. Days in the red like the one we’re seeing today are actually welcome in my mind especially when they fall on the day of a 401k contribution or allow me to buy an ETF or individual security at a slightly lower price.

Speaking of individual securities, I’ve recently sold some of my UNH(United HealthGroup) stock creating a taxable event and freeing up more cash as you saw in my portfolio analysis. I did this for a few reasons but the main one was to diversify away from the stock as it was becoming too big a portion of my portfolio due to its growth. The other reason is that while I still think managed health care is a good mid-term play, I’ve soured a bit on the long-term aspects of our insurance system. I think the cost of health insurance is nearing an unsustainable level and PPACA hasn’t done much to address that. As such, health insurance is becoming a hot button political issue and I could see government regulations that might affect health care companies like UNH.

I think UNH is the best of the breed with a good balance sheet, solid cash flow and good potential for growth through both it’s managed care unit but mainly through its Optum unit. I continue to hold a good amount of shares of the company but have plans to sell a bit more in 2016 to free up some cash, lower my large-cap exposure and diversify away a little bit from managed health care. I’m not saying that UNH is a bad investment going forward as I will still hold a good amount of shares but my original thesis that made me invest in the company in the first place has changed a bit so I want to lower my exposure to the company.

There are a few things to consider when making a choice to sell a security. One is whether it is the right time to sell? This isn’t easy to quantify but if you invested in a stock for a reason(your investment thesis based on growth prospects, product line-up, etc.) and that has changed then you should probably revisit and see if selling at least a little bit makes sense. Another is whether I’ve considered the taxable impact of the sale and what effect it will have on my taxes. The next is whether I considered the impact of the sale on my asset allocation. Another is whether I have an alternate place to put the money that will allow me to better meet my goals.

I’ve already talked about UNH and what has changed since I invested in it and while I continue to think it’s a solid company with a good story, I just wanted to reduce my position due to some uncertainty in the industry, future regulations and the cost impact of PPACA to the bottom line. I still like some things about the stock like one of the most consistent streams of revenue of any business and the growth prospects of the Optum division but the risks around it have grown since I first opened my position in the last 2000s.

I think the answer to the next two is a yes as the shares sold qualified for the long-term gains rate and while they will increase my taxes for 2015 and likely mean I will have to pay a bit extra, they were a sound sale from a taxable standpoint. It does sometimes make sense to lock in a profit when things with a company changed or better alternatives arise as long as you account for the taxable impact. If selling a stock required me to pay my marginal tax rate(25%) versus the long term tax rate(15%), it might change my position on whether a sale makes sense. Another thing to consider is how the sale will affect your dividend payout rate. In this case, I sold 100 shares which means $200 less per year in dividends. If I were dependent on those or were a dividend based investor, I’d want to make sure to have a suitable replacement. Since I’m not, I was wasn’t worried about the impact of that sale on my dividends.

The next impact is to my asset allocation. Based on my recent review(which was done after the sale mentioned here), I am still over-weight on large-cap stocks so there is no real impact on my asset-allocation. In fact, one thing I can do to remedy this is to sell additional shares of UNH which I may do in 2016.

The last thing to consider is what do with the money after you sell it and this is where it gets even more complicated and I don’t have an answer there yet. I’ve been looking at individual securities lately and the bull market we’ve had for the past few months has made things a bit expensive in my mind with P/E ratios being a bit above where I’d like them to be so I haven’t pulled any triggers yet. I’ve made small investments in some total market/dividend ETFs but have retained a lot of cash on the side for now.

For some this may seem like an odd strategy since after all – time in the market beats timing the market and I agree but sometimes I simply can’t find anything that seems like a good value at the moment so I keep that cash on the side. The bull market in securities has driven P/E ratios to pretty high levels and the recent fed rate hike has put a question mark around what might happen in the near-term. At the same – there’s been a pretty large bear market in commodity stocks which has driven some of those securities to attractive levels on paper. However, it’s also placed a higher risk profile on a lot of these securities as prolonger low commodity prices will put pressure on those companies’ earnings, debt loads and dividends.

At the end of the day, when I look at this market, it just doesn’t look very attractive to me so I’m OK with leaving some of this cash on the side until something attractive comes along. Is this timing the market? I don’t think so since after all – I’m still pouring quite a bit of money into the market via 401k/HSA/IRA contributions and even continue to buy a few commision-free ETF shares every pay period. It’s not like I’m pulling everything out and saying that the world is ending because I still believe that in the long run – staying the market is the end game.

However, that doesn’t mean that in the short run, I can’t take a calculated risk with a small % of my portfolio by keeping some cash on the side because I think values in stock market are hard to find. I think I’m at that point right now and I’m not sure I’ll have a lot of individual purchases in the near term unless something catches my eye. I will still naturally continue pouring money into the stock market and growing my overall portfolio but I think now is as good a time as any to keep some cash on the side in search for deals. I’ve also got a secondary use for that case in case I’m way off as I do want to buy a house in the next year or two and a bigger down payment will always help. I could totally be wrong and the market might keep rising to more unreasonable P/E ratios but even if so, this is a very small % of my overall portfolio that is currently in cash so it is not a big deal. I consider this more like my fun money, my follow a hunch money that might pay off or may not but whatever the case, it won’t hurt my overall long term results much because it’s such a small part of the overall portfolio.


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