TJ’s Current Portfolio Allocation

TJ's Investment Allocation

I don’t have PersonalCapital monitoring my bank accounts which is where most of my cash is. If i did, it would be way too easy for people to guess my net worth since I plan on sharing my cash savings balance at some point. The cash in this screenshot would be the cash that is embedded inside of my various stock and bond mutual funds.

TJ’s¬†Current Mutual Funds

Core Equity Positions:

Vanguard Equity Income

41% of portfolio – A High Quality Dividend-focused fund. 40% of an investment portfolio in a single fund might seem like a lot, but this fund actually has two similar-but-different strategies. 2/3 of the fund is managed by Wellington Management in Boston and the other 1/3 is run by an equity team at Vanguard.

There is a bit more turnover in the Vanguard managed portion and a big reason why I didn’t want to have too much of this fund in a taxable account. That being said, I can’t imagine why being all in on Vanguard Equity Income would be a terrible long term buy and hold investment for an average joe. It isn’t lacking in diversification. This fund should perform very similar to the Vanguard High Dividend Yield Index, which is the index that it attempts to out-perform. In the past couple years, the high dividend index has been the better performer. It all goes in cycles. So I tell myself I’m buying low. ūüėÄ It’s not like I have 40% of my portfolio in a collection of random penny stocks. Ironically enough, the admiral share version of Equity Income is less expensive than the mutual fund version of High Dividend Index.

 Mairs and Power Growth Fund

18% of portfolio. This one was selected for ¬†two reasons. The first: EXTREMELY Low Turnover. This is a large cap U.S Stock fund with an Upper Midwestern Concentration. They’re located in Minnesota and they definitely like their Minnesota companies. They’ve been a good steward of their client’s capital¬†for over half a century. I like having part of my U.S. equity portfolio intentionally avoiding what I perceive as crazy tech valuations in¬†California, New York, etc. Midwest focus is definitely a convenient way to stay out of that scene.

I definitely do pay a bit of a premium in management fees on this fund vs. a typical Vanguard fund expense. If you’re curious about the overlap between Vanguard Equity Income and Mairs and Power Growth, I’ve created a Google Sheet with all the holdings of each fund by weight as of 9/30/16.¬†Other than both funds having Johnson N Johnson as a top holding (which I have no complaints about, JNJ is a great company.), there’s really not a lot of significant individual holding overlap, and I feel pretty good about the mix of companies that both firms have chosen to invest in.

 Backtested Fun

Below is a backtested table and graph which compares a lazy 50/50 split between Mairs and Power Growth and Vanguard Equity Income starting on January 1, 1989. No rebalancing. Dividends reinvested. 1989 being the first full year that Vanguard Equity Income Fund existed. ¬†If you just skim and look at the ending balances, it looks like you absolutely crushed the 500 index with the active approach. That’s not the point though, and it would be a terrible reason to pick those two funds. If you take a closer look at the graph, you can see what really happened is your fund managers avoided that late 1990’s dot com bubble rise and the subsequent steep crash. Because they are conservatively managed funds ¬†that don’t chase growthy tech stocks with frothy valuations.

When you’re in a cap-weighted index fund, you’re more exposed to bubbles like this and that is just the nature of the game. Index fund investor solution: Work longer! Save more! Lower your Safe Withdrawal Rate! It’s not the only way though. If you have competent active management, you at least have the possibility of a fighting chance. This active mix offered more protection than the index during the more recent financial crisis, but it was still smacked around pretty hard. Still, avoiding 1 crash is better than avoiding none of the crashes, right? Avoiding the dot com bubble is the best explanation I have for why there is such a drastic variation in the two final balances after nearly 17 full years of being invested in primarily large American companies in both strategies. Highly unlikely that the next 27 years turn out exactly the same as the previous 27.

Backtested Portfolio - MPGFX/VEIPX vs VFINX

Image Source: Portfolio Visualizer

Note that the performance was almost identical before the dot com bubble, and very very similar coming out of both crashes. Don’t overlook downside protection in your equity funds, particularly after you shut off your primary income stream. ESPECIALLY if you are 100% equities as many¬†early retirees¬†have chosen to be. I was 100% in index funds in my taxable accounts during nearly all of my working career thus far. That was a time where I could handle more volatility and take advantage of investing¬†regularly where the price of the security may be less important. A mini-retirement or early-retirement is a very different financial circumstance in that you might not be adding to your portfolio. ¬†I’ve scaled back and added roughly 20% bonds for the same reason.

Time in the market with compounded reinvestment is why it’s so important to start investing as early as possible; regardless of which fund you choose.¬†I’ve heard others equate mutual fund investing to gambling. Long term investing is not the same as rolling the dice at a Las Vegas casino.

Income Comparison

I think the following chart does a good job of ¬†showing the potential difference in current income if you go with a dividend strategy. In a high tax bracket, this is the probably last thing you want, but in a low bracket, it’s okay.. This is using the same data as mentioned earlier. Both portfolios have all dividends reinvested and no additional investments. No rebalancing.

Portfolio Income

Image Source: Portfolio Visualizer

The massive income in 2015 is because of the Covidien/Medtronic merger last year. Mairs and Power had owned a lot of shares of the Medtronic stock for a long ass time. ¬†That’s obviously not a typical income year for Mairs and Power Growth Fund. Though I’m sure Medtronic won’t be the last acquisition that forces a steep taxable gain distribution, it’s not a reason to avoid the fund in my opinion. Is the potential downside protection worth the potentially higher taxes? That’s an individual decision of course.

What about International?

It’s definitely a big hole in my portfolio. But plenty of people permanently stick to American equities. And, since I’m more focused on income than growth in the near-term, I’m mostly okay with it. ¬†I also don’t anticipate doing much (any?) spending in other currencies any time soon.

Equity Exploration/Diversifiers:

Mairs and Power Small Cap Fund

10% of portfolio. My most expensive fund for sure. ¬†They’ve had to close it to new investors because it has done so well. I guess they ran out of good small cap investing ideas in the Midwest. Sounds like responsible fund managers to me. I do not plan on adding any additional funds to this position.

Vanguard REIT Index Fund

10% of portfolio. I assume that these are the alternatives in the PersonalCapital graphic. I guess it’s slightly less than 10% now.

Bond Portfolio

Baird Core Plus Bond Fund

21% of portfolio. One of the lowest cost Actively Managed Bond funds (30bps) that I’ve ever seen. Mostly investment grade corporate bonds with some mortgages, car loans, credit cards, high yield bonds, and treasuries mixed in. Looking at the PersonalCapital allocation graphic, it appears there is a tiny sliver of foreign bonds too. I don’t have any issues with that.

Baird is in Wisconsin. They are no more expensive than what Vanguard charges for an actively managed bond fund.¬†I could try to duplicate what Baird Core Plus is doing with a handful of Vanguard bond index funds. But that seems like a lot of extra work. Especially when there is a perfectly good mutual fund that already exists. ¬†I also like that Baird doesn’t “make guesses” on duration, as I learned¬†here. I know Dodge & Cox intentionally has a shorter duration than the index.

Originally, I was going to use Dodge and Cox Income for my bond exposure. But then I figured I might as well save the 13 basis points on the management fee. The two funds are incredibly similar.

This is a pretty boring vanilla bond fund. You’re probably not going to lose your shirt in any diversified bond fund. If interest rates go up, your portfolio value will go down. But, you’ll recover that much faster if you reinvest the higher interest payments. I struggle with people who worry about losing value in their bond funds, but have no concerns about stock funds which are so much more volatile.

Also a completely random and useless fun fact, but during yesterday’s surprising stock market rise, my REITs and Bonds got comparatively shellacked. ¬†But The Baird fund didn’t go down as much as the intermediate treasury and corporate bond index ETF’s that are inside of my Wellington Motif.


 My Weighted Expense Ratio

Just under 37 bps. Or basically right about what you’d pay in total for a robo-advised portfolio when you add in the cost of the robot to the cost of the underlying ETF’s. I’ll take my portfolio over the Robo’s any day.

Unfortunately, I don’t have any secret sauce investing advice to offer. My best advice is to do your own due diligence. ¬†I’ve made a lot of mistakes over the years. I’m just not a fan of the “one size fits all” approach we hear a lot about in this corner of the internet. Good luck to all.