A Year of Big Portfolio Moves
As a personal finance blogger, it’s important to be transparent about how I invest my money. I’ve considered writing an annual post describing actions I’ve taken with my investment portfolio.
But I do so little with my portfolio most years that I couldn’t fill a blog post with interesting material. This has been anything but a normal year.
Amidst substantial market volatility this year, I did an abnormal amount of buying and selling. I also changed my asset allocation.
So I’m going to share what I did, how it’s worked out so far, and how my portfolio is positioned to move forward in early retirement. I’ll also share how I managed my parents’ traditional retirement portfolio far differently and how that is playing out.
Disclosure and Warning
Although I may have left my career in the medical field, I will never leave behind the mandate to “First do no harm” that continues to guide my actions. Before discussing the changes made to our portfolio, I want to acknowledge and emphasize that the decisions that are best for me and my family may not be right for you and yours.
This post is written with the intention of provoking critical thinking to help you manage your own portfolios more effectively. It is not meant to be taken as advice that you should take with your investments.
Only you can know what is best for you. If you need specific advice, consult with a CPA, CFP, or other professional who has the expertise to provide the help you may need.
Benefitting from Rebalancing
At the end of 2019, I was pondering taking some risk off the table with our investments. We were coming off a big year. Our year end portfolio value was 22% higher than it was just one year earlier.
Stocks were near all time highs by most valuation metrics. This made me question if it was time to start transitioning to a more conservative portfolio.
However, interest rates were simultaneously near all time lows. Thus inflation risk and interest rate risk of bonds was higher than normal. With bonds looking like an unattractive alternative, I didn’t make any moves at that time.
By mid-March our portfolio had dropped over 23% in less than three months. Our plan called for us to rebalance, but with many pundits predicting the pandemic could cause us to spiral into an economic depression unlike anything we’ve experienced in nearly a century, buying more stocks was scary.
I stepped back and evaluated the arguments for and against rebalancing. Buying more stocks amidst massive uncertainty left a sick feeling in my stomach.
I ultimately decided to stay with our plan, selling a substantial portion of our bonds to buy more stocks. At that time, I wrote about possibly changing our policy on frequency of rebalancing over the coming weeks or months “as life regains some normalcy.”
Taking My Mulligan
Rebalancing worked out far better than I could have imagined in the short term. Before we ever had that period of “normalcy,” our portfolio value increased by a whopping 47% from the mid-March lows to the end of November!
In the process, we drifted back up to 81% equities, substantially higher than our target allocation. Still feeling some regret over not taking risk off the table at the end of 2019, I made a second big move to sell equities from this position of strength, putting us at our 75% target equity allocation.
Going for Gold…Slowly
We didn’t shift our allocation at the end of 2019 because interest rates were near all time lows. Ten year treasuries were yielding about 1.75%. The 10 year real interest rate was essentially 0% at that time.
After rebalancing our portfolio in March, I put more thought into reallocating capital to reduce volatility of our portfolio. Bonds, which were unattractive at the beginning of the year became even less attractive. The ten year rate for treasuries dropped below 1% and the real ten year rate went negative.
Due to extremely low interest rates, I got more serious about investigating alternative asset classes to stocks and bonds. We decided our best option was to allocate some of our portfolio to gold.
By the time we reached this conclusion, gold prices increased considerably as well. We chose to purchase shares of the iShares Gold Trust (IAU) ETF. IAU started the year with a price of about $14.80 per share. By June, when we decided to start allocating some money to gold, the share price jumped to close to $17 per share and quickly peaked at nearly $20 per share by early August.
With another asset class now looking unattractively expensive, we decided to be patient and slowly start dollar cost averaging a few thousand dollars into IAU shares each month. When prices temporarily dropped recently, I purchased some additional shares.
All in all, I’ve been spending more time and mental energy than I would like watching gold prices and fiddling with our portfolio. I still don’t have a strategy for buying into this asset class that I’m completely comfortable with. I’m going with dollar cost averaging because it forces me to take small actions rather than being stuck in paralysis by analysis.
Cash is King
So with all asset classes at or near extreme valuations, where are we putting our money? We’re holding a substantial amount of our portfolio in cash, more than we ever have.
When Kim and I were both working and saving a high percentage of our income, we rarely had more than a few thousand dollars in cash at any time. I’ve always believed in being fully invested, emphasizing time in the market over timing the market.
As we started transitioning to early retirement, we decided (on paper at least) to start holding more cash. In reality, it has been hard for me to park money in a bank account when it could be working for us.
Until this year, we were consistently short of our target allocation to cash. That has changed as well recently.
Target and Actual Allocations
We started the year with the same 80% stocks, 15% bonds, 5% cash target allocation we’ve had for years. This year we decided to shift our target allocation to 75% equities, 15% bonds, 5% cash and 5% gold.
We continue to have an aggressive allocation to stocks. In an ideal world, I would prefer to not be subject to such a high degree of volatility. In my opinion, with a long investment horizon of potentially 50+ years, a healthy allocation to stocks is still our best bet for the long haul.
Within our stock allocation we diversify between domestic and international equities and a domestic REIT fund. Within the bond allocation we diversify between a total bond fund and TIPS.
As of Monday, December 14th, after our second rebalance of the year, our asset allocation is 75% equities, 14.3% bonds, 9.5% cash, and 1.2% gold. In the event gold prices drop dramatically, I have limit orders in place to buy more gold ETF shares. Otherwise, we’ll continue to gradually dollar cost average into gold, buying a couple thousand dollars of shares a month for as long as it takes to reach our target allocation.
How It’s Worked Out So Far
When I shared my portfolio a few years ago, I disclosed that I don’t calculate our annual investment returns. At that time I wrote:
It’s tempting to calculate returns, but I think calculating investment returns would have more potential for doing harm than good. So I don’t do it.
Knowing I beat an arbitrary benchmark may make me feel smarter than I am and lead me to start tinkering with the portfolio. Knowing I applied extra effort and paid more fees to under perform a benchmark may tempt me to bail on our strategy at the wrong time. Either scenario is possible any given year.
I’ve historically done a good job of sticking to this policy. This year I’ve applied a lot of mental energy to our portfolio and spent far more time tinkering with it than I know I should.
For all the thought and effort I put into managing our portfolio this year, our account balances as of December 1st are up 12.5% year to date. In addition to market returns and portfolio moves I’ve made, reflected in our increased portfolio balance is the fact that we ended up being net savers for the year.
We were able to repay cash we took from savings to pay for big purchases earlier in the year. We also added to our tax advantaged investments this year. Throughout the year I used my income to max out an HSA. Kim contributed to her 401(k). We also reinvested our taxable dividends to max out two Roth IRAs.
A Case for Doing Nothing
I’ve disclosed in the past that I also am helping my parents manage their investments in retirement. They have a simple 50% stock, 50% bond portfolio. Our actions with their investments create a stark contrast with my own. We essentially did nothing this year.
This year we didn’t touch their portfolio when the market dropped in March. My dad continued to take RMDs from his IRA. We didn’t stop RMDs even though we could have due to a change in the law this year, because they liked the convenience of this regular “monthly paycheck” to supplement their Social Security checks. They also continued to have all taxable dividends swept to their checking account.
I recently checked their account balances while we were doing year end planning and preparing to rebalance their portfolio. After all the effort we didn’t apply to their portfolio, all the income they took from it, and the additional risk they didn’t take this year, guess where they ended up?
Their portfolio is currently positioned 50.5% in equities, 49.5% bonds. Their ending balance was 8.5% higher than it was at the beginning of the year.
All that was left to do was absolutely nothing. When it comes to being a good investor, doing absolutely nothing is often the best thing you can do.
This is an enviable position. As an early retiree with a long time horizon and much greater uncertainty, I’m not there yet.
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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. You can reach him at email@example.com.]
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Thanks for the great post Chris! You’re very kind to share your decision-making process in this immensely challenging year. I also really appreciated you sharing the contrast between your own rollercoaster ride and your parent’s sanguine “stay the course” journey. At 63 soon to be 64 I should be behaving like them but I’m afraid I’ve done more tweaking than you did!
I think you follow “Portfolio Charts” but I couldn’t help but recall this recent post about year-to-date performance when reading yours:
I think it’s a really useful “bookend” to your post because it gives such a visceral sense of why lower-volatility portfolios are easier to stick with, while also quantifying the effects of rebalancing.
One of the things you and I (along with many others!) have in common is trying to address the unprecedented situation with bonds. They are for ballast now, not return and even Treasuries can no longer save one’s bacon during market crashes. I doubt very much you’d have even considered gold in a more normal interest rate environment (and I wouldn’t be sitting here with ~17% of our nest egg invested in it).
This new-to-me site is the only one I’ve found so far that addresses this bond market situation in a dynamic, real-time way:
At the end of the day I think for a truly early retiree like yourself sticking with a large (70%+), globally-diversified equity allocation with 5-10% in gold for sequence-of-returns risk amelioration along with a few year’s worth of living expenses in safe cash is about the best one can do.
You and your wife are young enough that buying not just your 10K per person annual limit in iBonds but also maxing out EE bonds would seem to be the best possible thing to do on the cash/bond side of things. I’ve done the iBonds thing (too old for EE’s) and moved all the rest of my bond allocation into Vanguard Treasury MM fund and 1-3 year local credit union CD’s paying .50-.65%.
Thanks for all of your great writing this year and I hope 2021 is a much better year for all of us and for our planet.
Thanks Kevin! Excellent comment as usual. Those were both great resources that you shared.
I’m fortunate to have such a knowledgable audience to push me to up my game with content I produce and help me learn as we all figure this out together.
Cheers and Happy Holidays to you!
This has been a test of my investing philosophy this year. My wife and I are in our mid sixties our portfolio is 60% stock about 30% bonds 10% cash. The best move I made this year was in our retirement accounts instead of holding three funds total stock total bond and total international I made a move out of total international and put all the money in those accounts into Vanguards Balanced fund 60/40 but I reserved some of that for short term inflation protected bonds. This helped me not to concentrate too much on rebalancing because it’s done automatically in the balanced fund. The taxable account is a different story, I will be consolidating some of my positions there with an eye on the taxes. But my goal is to make things as simple as possible and tax efficient as possible. The hardest thing to do is nothing at all. I’m a big fan of John Bogle and he once said something to the effect of “Don’t do something just stand there”. If you have your allocation set, truly doing nothing is sometimes very difficult, but I think it would serve most investors well. Thanks for your article it reinforces John’s philosophy! Happy Holidays to everyone and hope 2021 will be better than 2020!
Thanks for reading and leaving such a thoughtful comment Mark. I reread John Bogle’s work periodically and I put a few of his quotes in my book. His philosophy is timeless. I agree that doing nothing can often times be the hardest thing to do. So it is good to remind ourselves of this important wisdom periodically.
Chris – You did not mention taxes… were all these moves performed within a Retirement Account? I sometimes have problems pulling chips off the table when it is inside a taxable brokerage account.
Good question. Yes all rebalancing is done w/in tax advantaged retirement accounts where there are no tax consequences of selling off investments. We do take dividends from our taxable accounts (b/c they’re being taxed whether we spend them, reinvest them, etc) and use that money to fund our Roth accounts if we don’t need it as we didn’t this year. Our cash savings are typically held in a high interest online savings account, but we currently are also sitting on cash in the settlement accounts in our tax deferred retirement investments until we can find a way to deploy it.
It’s worthwhile to keep an eye on what’s happening with US Savings Bonds, in particular I-bonds, and contemplating those vs. how you consider cash or other bond funds. There’s no marketing for Savings Bonds at this point, but they’ve offered a quiet upgrade to baseline/emergency cash over the years. I prefer a broader straddle of more equities and more cash and have little use for bonds in my portfolio.
You make a good point and Kevin mentioned I-bonds in the comments as well. I just loath adding more complexity to my portfolio. Like you, I’m leaning towards the idea of more equities, more cash, and focus on some alternatives (gold, personal business, etc.) until (if?) we get some normalization of interest rates that make bonds more attractive again.
Thanks for reading and taking time to share your ideas.
A follow-up comment on iBonds and cash, for what it’s worth.
I don’t like the hassle of having to have a separate Treasury Direct account either but Jk is right to emphasize why it’s worth it. As it happens, the current iBond rate of 1.68% is exactly what the most recent 30 year Treasury bond is paying – except that the iBond’s rate will be adjusted for inflation for up to 30 years and there are no taxes on it until redemption. iBonds and EE’s are far and away the best cash OR “bond” investment option.
On a more minor note, Vanguard just lowered the minimum investment in their Treasury money market fund (VUSXX) from $50,000 to $3000. With its rock-bottom .09%ER it’s far and away the best Treasury MM fund so well worth parking cash there if you have a Vanguard account.
Thanks for pushing me out of my comfort zone on this Kevin. A few years ago, Darrow wrote this post about getting higher returns on your cash that I honestly thought was a boring topic of minimal importance. It was one of the most read, shared and discussed articles on the blog in the three years that I’ve been here! I suppose I just haven’t put much thought into the topic (or bonds) because I had such a heavy allocation to stocks that it wasn’t very important to me. As I get more conservative as a percentage of my portfolio in bonds and cash and as my portfolio grows, I now see where it makes more sense to pay attention to pick up a percent here and there if it can be done in a risk free way. This is a topic I now plan to explore and write about more in the coming year.
I’m not sure you learned your lesson – doing nothing during market hiccups (your parents) vs. making changes based on emotion (I sensed a lot of the latter applying to you in your post.)
Thanks for reading and taking the time to comment Bob. I’m not sure we know what the big take home lesson is just yet. One lesson that I was trying to convey by sharing my experience is that being a buy-and-hold investor is harder than it seems over a lifetime, particularly in these times of transition that I and many readers of the blog contemplating retirement are in.
It was easy to be a buy and hold investor when we were saving and accumulating. If the market goes up, you see your net worth go up and it feels good. If the market goes down, you’re buying more shares and it feels good.
It is also pretty easy for people in a situation like my parents (after I talked them through a little freak out in March/April). They have SS and a small pension that covers their basic needs. Market conditions and interest rates essentially don’t matter. They’ve won the game. Their portfolio is the icing on the cake.
For people like me, things are different. Volatility that was once easy to tolerate when I didn’t have much to lose, is now much more unpleasant. But we can’t get too conservative either. Bonds produce little to no income. They also currently carry much higher interest rate and inflation risk than they have over the past four decades.
The default for many people is to just work longer and save more. Kick the can down the road while building an ever bigger portfolio value. But we often forget that carries its own risk. Tomorrow is never guaranteed.
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