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It’s time to make some changes to my investment portfolio!
I wrote a post last month called We Have a Lot of Cash in Hand Now… Too Much! that discussed how too much of our portfolio is sitting in cash. Apparently, that’s not uncommon right now as I received a lot of feedback in the comments and replies back from my mailing list (which I recommend you sign up for on the sidebar!).
So I decided to write a post to discuss the changes I’ve decided to make to get things straightened up over here.
Some of this might help you in thinking your way through any extra cash your sitting on. But as always…
Remember that I’m not a financial advisor. Any changes you make to your investment portfolio are at your own risk. Contact a professional to help you make the right decisions for your investments.
My problem… too much cash?
Just to bring you back a little to my post last month, the biggest problem I have in our investment portfolio is too much cash.
That feels weird to even say – is too much money a bad thing? It is when you know that over time it can easily be eroded to nothing by inflation! And with interest rates likely rising over time, long-term bonds don’t feel like the smart bet as a place to shift our extra cash.
Here’s the chart I shared from Personal Capital in that post showing my asset allocation in my investment portfolio…
I love Personal Capital and use it religiously to help manage my investments. If you aren’t already using it, you can create a free account for Personal Capital here.
But there’s one thing I noticed in the chart that was throwing me off a little. The numbers you see are only from my investment accounts – they don’t include information from my other linked accounts such as my bank accounts. That can skew the information presented if you’re not keeping that in mind. A perfect example of this is the cash we had from selling our duplex a few months ago – when all was said and done, that’s about $86,000 that wasn’t counted at all!
I don’t think it’s a bug because Personal Capital is showing you your asset allocation for your investment portfolio, which I would imagine is their primary focus here. It would be nice though if it included all the cash in your bank accounts and possibly subtracted out any short-term debt like credit cards as well. Otherwise, you’re not getting the full picture.
And we need that full picture, so we’ll get to what that looks like in a little bit.
Discussing my investment portfolio with Fritz
Fritz who? What the what?! Fritz is the brains behind The Retirement Manifesto and he’s one smart guy. Lucky for me, we met and became good friends at a FinCon convention in 2017. It’s good to have smart friends!
I reached out to him to see if I could bounce some ideas off him about making some changes to my portfolio. He was nice enough to agree and it was good to talk to him and also get some good feedback on my investments.
And again, bear in mind, Fritz’s opinions are strictly that – his thoughts on my specific investment portfolio. Please don’t take any of this information and try to run with it without understanding the ramifications. Talk to a professional before making any big changes you don’t understand.
Here a small recap of some of what we discussed…
The first suggestion was to update my asset allocation chart to include all cash. As I mentioned, seeing the full picture is critical in making smart decisions. From there, it’s important to determine where I want my investment portfolio to be as far as asset allocation goes. That’s going to be unique for each of us.
Fritz mentioned that he feels that in today’s times, sitting on less than 10% cash is not that big of a deal. Even 15% isn’t necessarily the end of the world. That cash can be fantastic to be able to jump on opportunities when they creep up. A great example is that both Fritz and I made out like bandits when the market took a dive last March. I simply did a rebalancing of my portfolio and brought my desired allocation back to where it needed to be. That worked out excellent for me!
Fritz likes to have about 10% in alternative investments (i.e. real estate, precious metals, P2P lending, etc.). These not only provide a hedge against the stock market, but they can help protect against inflation. He talks about his thoughts on this subject in his post Investment Options To Protect Against Inflation.
Inflation and the Bucket Strategy
Speaking of inflation, that’s a big point of this post. My goal with this cash isn’t necessarily to make a fortune off of it (though that wouldn’t hurt!) but to simply earn at least enough on it to protect against inflation without posing the risk you inherently have when invested in stocks.
I’m comfortable with having 70% invested in stocks. I’m only 45 and need our investment portfolio to carry us for quite a long time. That means we need growth out of our investments. But I don’t feel comfortable going all-in and need a little balance on this ride.
That’s where other concepts come into play such as having a bucket strategy with some cash or other low-risk investments on hand. Fritz discusses the bucket strategy in his post How to Build A Retirement Paycheck From Your Investments and why this can be very helpful in retirement planning. I talk about our strategy here in The Breakdown of Our Net Worth Savings & Investments and The Drawdown on Investments – Our Game Plan.
So the plan and foundation are there – now I just need to re-align to get our investment portfolio back in check.
Fritz and I brainstormed quite a bit – it’s hard to organize and put everything down in this post, but I’ll give you some of the ideas we talked about…
He liked my thought of putting more money into REITs. With the duplex, I had a nice hedge against the stock market. Now that I sold that, I lose that hedge but REITs can give a lot of that back. They also help build up my alternative investment allocation a little more. We talked about investing anything from the $86k I have from the sale of the duplex up to maybe $120k in REIT funds.
He’s a fan of precious metal ETFs as well. One idea was to take a small amount ($20k or so) and invest it accordingly. This just serves as another asset class to have in our investment portfolio.
Short-term bond funds
I’ve mentioned that I’m not as versed in bonds as I should be. My understanding was that you invest in bonds and if the interest rate climbs, you’re going to be in for a little hurt. After talking to Fritz more though, I now understand that there’s a difference between short-term and long-term bonds.
Because we shouldn’t have much fluctuation in interest rates over the short-term, short-term bond funds can still be a smart move for an investment portfolio. In our case, we’d be looking at Vanguard Short-Term Investment-Grade Fund Investor Shares (VFSTX).
If we’re aiming to just keep up with inflation, Treasury Inflation-Protected Securities (TIPS) definitely fit that bill.
Treasury inflation-protected securities (TIPS) are a type of Treasury security issued by the U.S. government. TIPS are indexed to inflation in order to protect investors from a decline in the purchasing power of their money. As inflation rises, TIPS adjust in price to maintain its real value.Investopedia – https://www.investopedia.com/terms/t/tips.asp
Fritz said that he’s a big fan of TIPS and buys some of these through the U.S. Treasury site every year.
I also mentioned the thought of investing money in a Panamanian CD. The banks here in Boquete are offering around 3% for CDs – that’s a much bigger jump from the banks in the U.S. right now. If I did a one-year CD right now, we’d be able to pull the money out right before we leave next May.
There are some details that we’d want to take into consideration for this though. There is no FDIC insurance here, so if the bank folds, that could be problematic. And, if you put $10k or more in a foreign bank account, it becomes somewhat of a hassle because you need to report it to the IRS. We could do just under $10k, which would put less of our money at risk and we wouldn’t have to report anything.
The other point we discussed was dollar-cost averaging. Instead of investing everything all at once, it might make sense to break it down and spread it out over a year or possibly even longer. The research states that you’re generally better off with lump-sum investing over dollar-cost averaging.
However, if the market crashes the day after you put in all your money, you’re not going to be a happy camper. Dollar-cost averaging is a little better for the psychological side of things.
The changes I’ve decided to make in my investment portfolio
I took Fritz’s advice about updating my asset allocation first and including the cash from my bank accounts. I did this using Google Sheets and created “before” and “after” sections in the spreadsheet.
The “before” section matches what I show in Personal Capital…
But then I created a new section to include where we stand in total on the cash front. I added in the money from our bank accounts and subtracted out what we currently owe on credit cards (we pay these off in full every month).
If you look at the difference between the two, you’ll see that what I have in cash is actually just over 16% of our net worth. Yikes – that’s a little too high for my liking!
But an interesting change to note is that my asset allocation really only holds 64.41% of stocks. My goal is to keep us at around 70% equities, which is where we were when I wasn’t including our cash in the bank. Wow, that’s @#$%^ a lot of “w’s” in that sentence… alliteration at its best!
Anyway, that means consequentially that I should be buying some more stock (Vanguard Total Stock Market ETF (VTI) in my case). And guess what – that little detail becomes the fundamental piece to everything else that’s about to follow. I’ll talk about that in a second, but first, there’s another important detail…
In my post, We Have a Lot of Cash in Hand Now… Too Much!, I mentioned something important. I talked about how I don’t want to have the REIT investments in my taxable account because it’s a less tax-efficient investment. Instead, I’d prefer to have that in one of our retirement accounts where we don’t have to worry about the taxes associated with the dividend payouts.
The problem is that I’m not working so I can’t put the money into any of our retirement accounts. So the way I planned to handle this was to fund my taxable account with the $86,000 from the sale of our duplex. I’d then buy $86k of VTI in that account with the money. Finally, I’d sell $86k of VTI in a retirement account and buy $86k of the REIT fund Vanguard Real Estate Index Fund Admiral Shares (VGSLX). By doing this, I’d essentially be just shifting where I owned the funds in my investment portfolio… make sense?
So here’s where things get a little funny and eerily simple. Remember how adding in all that cash we’re sitting on threw our asset allocation out of whack from where I want it to be?
Based on my total portfolio and the numbers I’ve shown you, I need $84,964.40 more in stock (VTI) to get the percentage back to my desired 70%. And I’m going to be injecting $86k into my taxable account from the sale of the duplex. BOOM, I can buy VTI right there and my stock allocation will be back on track.
So that leaves the REITs. The plan was to sell about $86k of VTI in my retirement accounts to buy the funds in those protected accounts. Would you believe though that I’m currently sitting on $82,094.42 in cash between my rollover IRA, my Roth IRA, and Lisa’s Roth IRA? That’s pretty darn close! If I buy up VGSLX with all that spare cash in the retirement accounts, I’m just about right where I need to be.
Look at my updated projection after making those few changes…
Our stock allocation will be at 70.07%… perfect! Because of the REIT fund purchase, our alternative investments will be a much more respectable 8.34%.
And finally, our cash on hand moves down to under 5% at a little over $75k. Don’t forget that the cash number includes our living expenses in the bank for this year so that brings down our “extra” cash to a little under $39k. That little bit of cash is good for emergencies, investment opportunities that creep up, etc.
As freaky as this is, everything just fell into place. By simply fixing our asset allocation to include our cash, we essentially only needed to make two strategic changes:
- Re-balance to get our stock allocation where I want it
- Take the proceeds from our duplex sale and buy the REIT fund, VGSLX
I’ll be dollar-cost-averaging these investments as well so it’ll take a while to get everything where it needs to be.
The downside is that a lot of the hour-long conversation Fritz and I had turned out to be irrelevant… for now. Because the numbers simply worked out, I don’t need to start investing in some of the other investments we discussed.
However, things change. For instance, if the market continues to climb and I end up rebalancing again to get my stock percentage back down, I’ll need a place in my investment portfolio for the cash I get from the stock sale. I’ll be referring back to this post myself if/when that happens!
And, on the upshot, Fritz and I got to have a nice video chat – it was great to talk to him again. It was also a good opportunity for me to learn some things and to get some reassurance on what I’m doing right. It’s always nice to get a second set of eyes on something as important as this.
Besides that, I do hope that if you’re in a similar position, this gives you a few ideas as well… team effort, my friends!
One last note – the numbers I based everything on are from 4/4. Things change – that’s how the stock market works. In fact, it’s gone up quite a bit as I wrap this up on 4/9.
So it’s probable that this plan with our investment portfolio isn’t going to work as seamlessly as it looks in this post. However, it should still be relatively close and I’ll make any adjustments as needed along the way.
Thanks for reading!! And muchas gracias for your help, Fritz! You can check out more of Fritz’s geniusness (I made that word up) at The Retirement Manifesto.
Plan well, take action, and live your best life!