Thursday, April 25, 2013

Rebalancing 457 Account

El Greco is my 457 account with a decent balance of about 12 Units now. I have decided to keep this account as my test bed for active investing - I keep actively managed mutual funds here. However, my current asset allocation in this account has some pretty significant problems:

  • I have both EFA and the Euro Pacific Growth Fund - they essentially replicate each other. Keeping with the account's focus on actively managed MFs - I will get rid of EFA from here.
  • I have reduced my Bonds allocation too low in here. I am coming around to a 70-30 Stock-Bond split as a minimum. So I will increase allocation for the bond fund here.
With the above in mind, I expect the following asset allocation in this account when I rebalance at the start of May:

Fidelity Contrafund                       25%  ER 0.74%
Vanguard Wellington                       25%  ER 0.17%
American EuroPacific Growth               25%  ER 0.50%
Vanguard Long Term Investment Grade Bonds 25%  ER 0.12%

Some thoughts on above:
  • Since Wellington is a balanced fund with some 33% bond allocation - the portfolio above is about 25 + (0.33 * 25) = 33% bonds. This is fine with my 70-30 asset allocation.
  • I am not happy with 0.74% ER for Contrafund. I am going to watch its performance closely to see if its worth its expense.
  • Pleasantly surprised with the low ER for Wellington. Vanguard is earning my trust.
  • The range of investment choices in this account is really poor - I really need a decent Emerging Markets choice here. Well - I will have to make that deficit up in a different account.
Today's art is the Duomo di Milano - or the Milan Cathedral. I might get an opportunity to visit Milan later this year and see this in person.


Wednesday, April 24, 2013

Rebalancing Fidelity Funds

Fidelity is my largest platform. My largest account - Van Gogh, 13 Units, is with Fidelity. I have adopted a passive, index fund based approach to this account. Put an asset allocation, rebalance every quarter and then forget until the next rebalance date.

It is time again to rebalance - and also an opportunity to evaluate my fund choices. Recently, I have been reading Bogleheads and have started putting a lot more focus on Expense Ratios of mutual funds. So here goes the current state of affairs:

Spartan International Index         20%    ER 0.17%
Spartan Emerging Markets Index      20%    ER 0.35%
Spartan Extended Market Index       10%    ER 0.07%
Spartan 500 Index                   10%    ER 0.05%
Fidelity NASDAQ Composite Index     10%    ER 0.58%
Fidelity Long Term Treasuries Index 10%    ER 0.10%
Fidelity Investment Grade Bonds     10%    ER 0.45%
Fidelity New Markets Income         10%    ER 0.87%

As we can see above, most of the fund choices are reasonable in their Expense Ratios. The only one that seems quite out of line is the Fidelity New Markets Income and to some extent, the Fidelity NASDAQ Composite Index. Really, there is no reason why an index fund should cost more than 0.50%. So I need to look for replacements for these two.

Fidelity makes it really difficult to find low cost funds. The list of funds do not show their ERs - you need to go to the specific fund's page to find that out. There is no way to sort funds by their ERs. You can screen funds by a maximum ER threshold - if you can find your way to the advanced screening option. Well - these are small roadblocks - I don't know why Fidelity bothers putting them up (just bad design perhaps) - but half hour on the website is enough to unravel these. I have spent the time - and have emerged with the following conclusions:


  • Fidelity New Markets Income is gone. I will replace it with Spartan Real Estate Index Fund (FSRVX). This fund has an ER of 0.20%  and it follows the DJ Real Estate Index - the corresponding ETF is IYR. I did want to have an exposure to RE.
  • Fidelity Investment Grade Bonds is gone. I will replace it with Fidelity Corporate Bond Fund (FCBFX). The two funds have the same ER - but I get bonds with much longer duration (and hence higher yield) with FCBFX.
  • Remove NASDAQ Index Fund. Its 10% allocation will be taken by the REIT fund. 
  • To continue to have a 70-30 Stock-Bond split, the two bond funds will now have 15% allocation each.
So, the new asset allocation for the upcoming rebalancing is as follows:

Spartan International Index         20%    ER 0.17%
Spartan Emerging Markets Index      20%    ER 0.35%
Spartan Extended Market Index       10%    ER 0.07%
Spartan 500 Index                   10%    ER 0.05%
Spartan Real Estate Index Fund      10%    ER 0.20%
Fidelity Long Term Treasuries Index 15%    ER 0.10%
Fidelity Corporate Bonds Fund       15%    ER 0.45%

That looks reasonable. I wish I had another bond fund candidate so that all three could have a 10% allocation.

Update: I have another candidate fund - Spartan Global ex-US Index Fund - has a low ER 0.28%. It is about 78% Developed ex-USA and 22% EM. I can put 10% here and bring down the two bond funds to 10% each.

Thursday, April 4, 2013

Generating Consistent Income From Investments

One of my accounts (Da Vinci, 2 Units) is an HSA account. I want to invest these funds in a way that they generate consistent income so that I can use the income to fund small medical bills. So far, I have relied on JNK for the purpose - a nice 6.7% yield. However, dividend payouts in JNK has been dropping every month; there is talk of a bubble in junk bonds - and I think I am losing the opportunity for capital growth by keeping JNK long term. So I want to diversify my holdings here.

I have four constraints while diversifying here. First - I would like to get some emerging markets exposure since I think I am under-invested in emerging markets currently. Second - I would like to get some real estate in the mix since right now I don't have any. Third - I would like all assets in this account to be high yield with preferably monthly dividends. Lastly, to avoid trading costs, I would like to only include ETFs from TD Ameritrade's commission free ETF list, as far as possible.

After searching far and wide - this is my tentative list:

1. JNK - nothing beats the high yield and monthly payout. I will reduce the size of this holding significantly and focus on building it back up using dollar cost averaging so as to minimize capital risk.
2. RWX - International real estate. Very high yield (6.49%) and emerging markets plus REIT exposure.
3. DEM - International dividend paying stocks. This is not part of TD's commission free ETFs - so I would make a one time significant purchase of DEM and then let that be.
4. VYM - US dividend paying stocks.

I will start by re-allocating my portfolio to have JNK 10%, RWX 10%, DEM 40% and VYM 40%. Any dividend will be pushed into JNK or RWX, unless they are needed for current medical bills. Holding in DEM and VYM will be left along for long term portfolio. VYM will be sold first in case of larger medical bills (no-commission) and DEM will be the last to be sold, if needed.

I think this is a good plan. I will implement is around end of the month when JNK moves out of the 30-day window for commission free trades.

Today's art is another of Rome's spectacles - The Trevi Fountain - a sight to behold, especially at night.

Wednesday, April 3, 2013

Pre-Paying Mortgage: Pros and Cons

I have read all the pros and cons of pre-paying your mortgage. I had been a convert to the pay-it-quickly mindset - and have been typically putting in double the principal payment each month. However, I have now reconsidered. I am now putting just the regular payment (rounded up to the nearest hundred - old habits die hard!). The argument that won me over was in a blog comment (unfortunately I don't recall which - perhaps Get Rich Slowly). The argument goes as follows (paraphrased in my words):
The problem with mortgages are that they essentially reset every month. The fact that you prepaid thousands of dollars of principal this month does not mean anything as far as the next month's payment is concerned. If you miss the deadline next month - you are in default and are soon looking at foreclosure. We don't know the future - shit can and will happen. Instead of pre-paying the mortgage, put that additional payment into a dedicated investment account with a low risk interest bearing instrument. You will get the same or more in return as the after-tax mortgage rate - so you are not losing money. But - now you have the flexibility of continuing to make your payments. If this reserve gets too big then take a portion and make a lump-sum payment to your mortgage. Best of both worlds!
I completely agree with the argument above. I am growing more risk-averse as I am growing older - and this fits with my evolving risk taking profile. Mitigate the risk of future default by keeping aside the mortgage prepayment money. It will still go to the mortgage - but at a later date of my choosing and after working as a foreclosure insurance.

Since I just got back from Rome, here is, in my opinion, the best sight in Rome. The Sistine Chapel Side Frescos. Yes - the ceiling by Michelangelo is great - but I found the side frescoes to be the real star. The one below by Botticelli, called "The Temptation of Christ" is my favorite.

Taking Stock: March 2013

Another new month and with it - another Taking Stock post. Mar 2013 has been good - markets have done well - so I expect my nest egg should have grown a bit. Lets take a look:

Total Portfolio Value: 52.2 Units

Van Gogh:  13
Bernini: 12
El Greco: 11
Klimt: 5
Durer and Bruegel: 3 each
Monet and Da Vinci: 2 each
Renoir and Turner: 1 each

Change Over Last Month

The last Taking Stock had the total portfolio value at 50.2 Units - so we have a net 2.0 unit change in a month. That represents a 3.98% monthly growth including new contributions. Considering that the total portfolio value at the start of the year was 46.6 Units, we have a YTM growth of 12.02%. Not too shabby!