Q2 2019 Portfolio Update: The Equity Glidepath

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Well this was an exciting quarter – I officially left my job after turning in my retirement notice, turned the ripe old age of 37, and have been working tirelessly on selling a house and pulling off  geographic arbitrage.  Moving isn’t easy, but thank goodness I’m not dealing with moving and holding down a full time job.  Most importantly I’m fortunate to have a supportive spouse who’s helped us both keep our sanity managing the move.

I sat down and put together an Investment Policy Statement earlier this year and posting this quarterly helps keep me accountable to the investment policy statement.  

So what is our total asset allocation in the first quarter of early retirement?  

Total Equity:  61%

Total Cash/Bonds: 39%

Sounds simple, right?

The Equity Glidepath:  You’ll notice a substantially higher cash and bond allocation than in previous quarters. With the good run in the market, we are above our target portfolio number, and preservation of capital just became really important. We have subscribed to the Equity Glidepath strategy and targeted a 40% cash and bond allocation to go with our 60% equityies.   The market’s increase has already moved us 1% above and we hope it continues doing this in the future.  Missing the run up in the market over the weeks after doing this have hurt, but it doesn’t hurt as much as if the market tanked for an extended period of time and I was shoved back into the job market.   Depending on if there is any outside income coming in, I’ll setup a frequency to reallocate the cash into equity  slowly over the next five years.

*Disclaimer:  The information contained in the post is for entertainment purposes only.   Please see our disclosures and disclaimers for more details.

Mutual Funds vs. Individual Stocks:   We currently have 20% of our net worth in individual stocks and another five percent in individual REITs.   The rest sits in various mutual/index funds.   I’ve always enjoyed investing some in individual stocks and will continue this in the future, but I have reasonable expectations that my gains may be less than the market.  I can’t predict the next Amazon, Netflix, or Ulta Beauty…and if I could then I’d probably make a bunch of money working for some hedge fund.  I am hoping individual stock selection gives us some downside protection.  

I am unsure about the lofty valuations buried inside the technology heavy S&P 500 and total stock market index funds.   I may not make as much as the market, but I find comfort in buying good companies that generate positive cash flow.  I like companies that can pay a portion of that cash flow to me through dividends or stock buybacks during both good times and bad.  I’ll accept a lower return in exchange what should be lower volatility when times get tougher.  

What would cause changes in the asset allocation?

  • A significant drop in the market.   If we see a 20% or more drop from these asset prices, I would likely move some of the cash/bonds into stocks.  I keep a target list of good companies I would like to buy if their prices improve (go on sale!)
  • Outside Income.   I currently have no earned income and am early retired without risk of the early retirement police coming after me.  I’ve had a number of opportunities come up and may see an intersection between what I would do as a hobby and money.
  • Real Estate Purchases:  I am against owning a primary residence this point in time.  (another post coming about this in the future).  However I am open to investing in real estate for diversification.   I could see part of the cash/bond allocation going towards a real estate transaction in the future.

Detailed Holdings: Inspired by Physician on Fire‘s skills, attached is a list of our full holdings common sizing the portfolio to $1,000,000. This list is long and I’m hopeful I can consolidate some once a remaining 401k deposit comes through and I can complete a rollover. Optimizing our investments is one of the many to-do list items once the chaos from geographic arbitrage slows down.

Holdings$1,000,000


Individual Stocks$199,996
BOH$33,541
CBRL$41,259
CCL$8,426
COST$58,084
DIS$23,643
FITB$4,833
HD$1,508
IP$3,017
JPM$585
KEY$4,796
KHC$2,457
KMI$1,074
KRE$2,684
RF$3,888
STI$4,828
WRK$5,373


Other$617
Lending Club$617


REITs$52,749
EPR$33,033
STAG$19,716
RLJ$1,004


Mutual Funds / ETFs$516,682
VWELX (1/3 Bond)$64,282
VTI$10,371
VXUS$13,774
IJH$20,752
IJR$20,874
IJS$5,202
IXUS$1,713
FZROX$13,307
FXNAX (Bond)$8,376
Sterling Capital Bond$132,867
Vanguard Mid Cap$19,171
Vanguard Small Cap$18,646
VIIIX$106,934
VTSMX$80,412




Cash$228,952
Cash$228,952

Now lets look a little bit deeper and give some background on many of these holdings:

Individual Stocks

The Big Three. Costco, Cracker Barrel, and Bank of Hawaii are our largest individual stock holdings. Costco has been a great stock for us for a long time and we have a relatively low cost basis in it. What does a banker do on vacation? Apparently research the local bank’s financials because Bank of Hawaii was a vacation purchase at least seven years ago years ago that I’ve occasionally added to. It seems like a nice protected business and the company is a stock buyback machine. Every year our ownership percentage in the company creeps up and they pay us a nice dividend. Cracker Barrel was a follow the activist investment idea which now pays a nice dividend, a special dividend each year, and recently instituted a share buyback program. Our basis in this one is also pretty low.

Bank Stocks: 10% of our holdings are in financial stocks. The main reason for these holdings is I used to work in banking and would receive a nice chunk of restricted stock each year. This past year’s chunk was substantial. It vested and fell by 10% before I could transfer the shares to my brokerage and sell it. (I was trying to save $75 in commissions by moving it to my discount broker instead of letting the Bank’s agent sell it). Instead of whining about my cheapness getting the best of me, I sold all of my former employers stock, realized the tax loss, then bought peer institutions and have yet to sell to realize the gain.

There’s a lot of doom and gloom on the outlook for banks and I have some concern about the sector. We have way too many banks in this country relative to the amount of management talent out there to run them. The stock prices look like near-crisis style values. There are issues in this sector, but I don’t think we’re at crisis levels yet. These companies are buying back 4% or more of their stock a year while paying their shareholders another 3-4% in dividends. I believe the loan portfolios are a lot better than they were in 2008 and I think EPS growth due to buybacks will outpace overall earnings going flat to slightly declining. The banks could always start combining up to reduce costs, but that’s unlikely to happen due because a lot mediocre executives would loose their jobs.

We will consider selling these holdings next year once they season into long term capital gains and we may be able to navigate ourselves into a zero percent capital gains rate bracket.

The Paperboard Companies: WRK and IP are recent additions to the portfolio. These companies also look like they are selling for deep discounts due to fears about global trade slowing down. Will there be a slowdown? Maybe. Will less cardboard be used if this happens? Probably. Does it constitute a 50% decline in value for these companies? My bet is no. They also pay 4% or better dividends which earnings cover well while I wait for the business cycle to change.

The Cruise Benefit: You’ll notice a few hundred shares of CCL showed up in our account. For those of you who don’t know, if you own 100 shares of any of the three major cruise line’s stock, you get on-board ship credit when you sail. I bought some when the price was low in early January then bought some more recently. They are usually boring dividend paying stocks but the on-board benefit can juice your yield if you are a regular cruiser. We’ll transfer 100 shares over to my in-laws who like to cruise so they can get $250 on their upcoming 14 night cruise. It doesn’t hurt that the CEO of this company is so confident he’s out making open market purchases of the stock when it gets to $45/share. Executives have hundreds of reasons to sell stock, but only one reason to add to an already concentrated position: Confidence the business is trading at a discount.

Speaking of Concentration Risk – The biggest concentration in our portfolio is only 5.8% of our overall portfolio. I do not recommend taking significant single stock risks and do not risk your financial independence by doing this. We are in the fortunate situation where we could afford loosing everything invested in our largest stock position and still be on track with our financial independence and early retirement.

Today I am comfortable with the single stock risk in our largest position, Costco. The company has $40bil in total assets while only owing $27bil in liabilities. All of their assets are real items like cash, inventory, and real estate (not goodwill) and they have 1.5 times assets. This plus 51 million people pay a membership fee each year for the privilege of using Costco’s services. If you’ve seen the line in front of most Costco locations before they open on Saturday, I’m not concerned about their business going away.

REITs: My two long term REIT holdings have been Entertainment Properties Trust and Stag Industrial. I believe in owning individual REITs instead of the Index – you are already buying a fund when you buy a REIT and the spectrum of risk varies greatly from company to company. I consider Stag Industrial a low risk REIT while Entertainment Properties is more of a mid-tier risk. One recent addition was RLJ, but I will be selling this shortly since I would rather not be exposed to the hotel industry directly.

Mutual Funds / ETFs: This section is a bit of a cluster due to the different holdings available in three former employer sponsored plans. I plan on consolidating down and simplifying this as I have the opportunity. We are generally passive investors with one exception, the Vanguard Wellington Fund. This is Vanguard’s flagship actively managed balanced mutual fund. Its a great one-fund portfolio for someone nearing retirement and we haven’t felt the need to disturb it.

Home Equity = Cash: At the time of publishing our house sale should have closed and the proceeds are lumped into our cash reporting. We had originally planned on buying and taking a mortgage into early retirement, but we couldn’t make up our minds on exactly where we wanted to live long term and didn’t want to make that large of an investment. We needed/wanted to move from our working location for cost and lifestyle, but decided it was less risky to cap our home occupancy cost over the next twelve months with rent instead of committing to a purchase. I’m sure I’ll be posting more about our adventures in real estate in the future.

Final Thoughts: Selling a house and moving is a pain, we are two and a half months into early retirement and outside of a few trips, have not yet really felt retired. The market has performed better than expected and its nice to see balances above our targets even while we get used to having cash outflows each month. De-risking our portfolio and not doing anything incredibly stupid in the first six months of retirement has been the plan and so far we are sticking to it. I hope to be able to tell you about the life of leisure and travel between now and the update at the end of Q3.

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