Q3 Recap and Asset Allocation

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The third quarter is in the books for 2018, which is also the completion of the first third of my “work nine more months” plan.   More on how that’s going later….but first an update on our asset allocation and investments.

There was a lot of tinkering on the portfolio in this quarter and posting these updates are as much about personal discipline to evaluate this as it is to share with the handful of visitors.

Related Content:

Q2 Investment and Asset Allocation Update

Net Worth

Mutual Funds:  64.7%.   This comprised of 57.39% low cost, passive index funds and 7.47% in one active Vanguard mutual funds (Vanguard Wellington).   We eliminated a small position in one of the two active funds I owned, the Vanguard Dividend Income Fund (VIG) and didn’t see a reason to keep paying 0.2% for essentially the same performance as an index fund.    The passive funds were split well between small cap, mid-cap, large cap, and international index funds.  The exact percentages by sector will be easier to get to once everything is consolidated into a single brokerage firm, but little has changed from the last update.

For the specific quarter, the Large Cap and Total Market Funds were the best performers,  while the small and mid cap index funds cooled off.  International continues to limp along, as it seems to do year after year.

Individual Stocks:  20.7%.  This allocation moved up by 4% for the quarter, there were a  number of small changes that added up for the quarter:

Long term holdings of Disney and Costco had outstanding quarters, accounting for more than 1% of the increase.   Costco cracked the six figure mark in our portfolio for the second time and I don’t plan on selling it down.     Costco was declared dead in June of 2017 when Amazon announced it was purchasing Whole Foods, the company is now up 30%+ since then and churns out a big special dividend every three years.    I still drive past Whole Foods to get to either Costco or the local HEB Central Market.

2% of the increase came from adding the “War on Cash” basket (Credit to Jason Mosier @TMFJMo for this term/idea).   This involves owning a combination of Visa, Mastercard, Paypal, and Square.

I’m in banking and I see the long-term declining trend in the use of cash in the world.   There are huge changes in these companies favor due to changes in demographics, the improvement in technology, and enforcement by various governments on the shadow (non-taxed) economy.   I should have purchased this earlier, but the industry is under such disruption, it its difficult to figure out who are the winners and losers.

I also added to a specific position when the stock hit a 52 week low and will pay me a 6% qualified dividend annually when accounting for its special dividend payouts.  This accounted for the last 1% of the increase.   At the current dividend rate, I’m willing to accept modest capital appreciation.

There will be some continued tinkering with individual stocks, but I plan on keeping it to 20% or less and with the hopes I can reduce volatility compared to an index fund only portfolio.

REITs:  6.8%.    I trimmed down the REIT exposure this past quarter to where it was in February of 2018.  I’ve followed two of my favorite REITs for a while and made a few opportunistic purchases purchased a significant amount when they were near 52 week lows in the first quarter of 2018.  The stocks had recovered 20%+ and thought it was time to trim that allocation back and deploy the funds elsewhere, including building some cash into our asset allocation.

Cash: 7.8%.   I don’t call myself doom and gloom, but it was time to start managing sequence of return risk and add some cash to our asset allocation.   There are some incredible bank (or former) bank statisticians out there pointing out just how high the market is and what sequence of returns can do to you early into retirement (here’s looking at you Karsten and Erik).    The best “cash” option available to us for short-term bonds is an option inside my 401k/Deferred Comp plan, which provides a guaranteed return equal to the 1 Year US Treasury plus 0.50% (Currently 2.58% + 0.50%). Comparable short-term bond funds pay around 2.5% – 3%, which I will utilize after a rollover.


So where do we go from here?  

Investment Real Estate: Our only real estate exposure has been owning personal residences and investing in REITs.  Acquiring one to three rental units over the next couple of years would diversify our cash flow and remove some of the sequence of return risk.   Depending on where we move initially during early retirement, there should be better options for rentals with less competition than my current location.   We’ve avoided this in our asset allocation because the rentals that require minimal work seem to have comparable returns to a REIT, while the ones requiring work look more like a part-time job.  We can tolerate the latter once the full time job goes away.

I’ve got a (good) tax problem:  There are certain moves I’d like to make, but do not want to realize the gains in this tax year.  I’m at a slight negative cash position in my regular brokerage (ie margin borrowing) and am getting precariously close to breaking past the income limits for our Roth IRAs.  This is going to force me to wait until January to make a few changes.   To help replenish the cash, I’ve turned off dividend reinvestment and it has the added benefit of making some of our internal spreadsheets a lot easier to use.

What to do about housing?   The next three to five months will require some attention regarding housing.  We’re still not closer on our first or final early retirement destination, but we know we can’t tolerate another summer where we’re living and its not economical to stay in the current spot (high property taxes).    Geographic arbitrage sounds great, but its a big undertaking to move at the same time you turn your world upside down with quitting your job and selling/moving from the place you’ve called home for the last few years.  That’s a big unknown expense and its time to manage the portfolio accordingly to be able absorb this cost.

Only two more working quarters remain, it’ll be interesting to see how the market holds up before I ease into early retirement.

2 Replies to “Q3 Recap and Asset Allocation”

  1. Thanks for the shoutout and link back to my article! With the level of assets you have, that’s a lot of cash… but also with yields where they are, arguably they are a lower risk, relatively decent rewarding asset to consider.

    Thanks for sharing your allocation in this recap 🙂 Hope q4 goes well for us.

    1. That’s way more cash than I’ve ever held, but it also seems like a small percentage for the bond/cash allocation. I might creep it up more if the S&P touches another all-time high. Its easy to get lulled to sleep by a long bull market, not everyone remembers the market being down 50% and the front page of every newspaper and CNBC having “experts” on it telling everyone how “This time is different!”. Staying the course sounds easier than it is

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