BONUS: My Investment Portfolio…From Stocks to Bonds to Cash

Transcript

Hey, thanks for tuning in to this bonus segment!

After the first two seasons of my podcast Invested Poorly: Sad Tales of FInancial Fails, I heard from listeners who were curious as to how my money is invested. So, I thought it would be a good idea to not only provide this information, and release it along with Season 3, but also explain exactly how I got to where I am today.

Heads up, this audio segment is intended to explain a table supplement that outlines my investments; this is linked in the show notes of this bonus segment. If you’re listening without access to a screen, feel free to stay tuned in, but you’ll probably want to return to this audio clip when you can follow along. With that out of the way, let’s dive in.

If you’ve listened to my podcast, Invested Poorly, you know that I’m a huge proponent of passively managed index funds and ETFs. If I had to choose one provider for all of my investments, it would be Vanguard, no question about it. But, if you are looking at the table of my investments, you might be asking why everything isn’t with Vanguard. The short answer is, real life. The long answer is what I’m going to try and explain.

First, from a big picture standpoint, as the table illustrates, my overall asset allocation is around 60% stocks, and 40% bonds and cash. This is a standard allocation for an individual after reaching financial independence or FI, but as you are about to see, my allocation isn’t exactly standard. I’m going to go through each account type, one by one, and explain how every investment got into my portfolio and why it is located in that specific account type.

We will start off with the taxable brokerage account. I have a portfolio of individual large cap stocks that represents over 10% of my total investments. I discussed my individual stock portfolio in Invested Poorly, Season 3, Episode 3. I also own the iShares Core S&P 500 ETF to provide me with the remaining exposure I’m looking for in the large cap space.

As a side note, the reason I own the iShares ETF instead of a Vanguard ETF is because when I started this account at Schwab, stock and ETF transactions were not free. If I was starting all over, my preference today would be to use the Vanguard S&P 500 ETF, symbol VOO. But, if I were to swap ETFs, it would result in a huge tax liability because I have a large unrealized gain, and that is definitely not worth it since the difference between the ETFs is miniscule.

However, Schwab did offer free trades for their own Schwab ETFs when I started purchasing mine many years ago, and since they did not offer an S&P 500 ETF they managed themselves, Schwab also allowed clients to purchase the iShares S&P 500 ETF with no fee at that time.

This is important to understand because you may already own some investments that are very similar to the ones you want to purchase. As long as the difference between them is minimal, you are likely better off just keeping what you already own.

So with all that said, as shown in the table listing my investments, I have almost 30% of my overall portfolio invested in three Schwab ETFs. These three ETFs capture my desired exposure to mid, small, and international stocks. Again, if I were starting today, I’d prefer to use Vanguard ETFs to gain exposure to all three of these asset classes, but large unrealized gains prevent me from doing so.

My taxable brokerage account gets rounded out with a high-yield municipal bond mutual fund and ETF. What I want you to recognize is the reason I have individual stocks, US stock ETFs, and tax-free bond funds in this account is due to taxes. The US stock ETFs are the most tax-efficient ETFs I own, and the tax-free bond funds allow me to better control my taxable income every year, while still providing me with the target stock to bond ratio I want.

Now before I move on, quick note, for simplicity, I’ve combined the total value of my and my wife’s traditional IRAs, Roth IRAs, and HSAs, respectively, within the table.

So starting with the traditional IRAs, you will notice I have the Vanguard emerging market ETF in these accounts. This is because emerging market ETFs are one of the least tax-efficient stock ETFs you can own, making it better suited for a tax-sheltered account like a traditional IRA. The rest of my IRAs are invested in high-yield bond mutual funds. I have one from Vanguard and the other from Artisan.

The Vanguard mutual fund offers exposure to the high-yield bond asset class at a very low price, while the Artisan mutual fund is run by a portfolio manager who I have tremendous confidence in. I was fortunate enough to get into the Artisan mutual fund before it closed because at the time of this recording it is not available to new investors. I discuss why I’m a huge fan of high-yield bonds in Episode 5 of Season 3. Please listen to this to help determine if high-yield bonds are right for your portfolio.

Next are the Roth IRAs. I have these invested in the Vanguard Real Estate ETF and an actively managed mutual fund from T. Rowe Price. The Vanguard ETF is a cost-effective way of gaining exposure to real estate. It is in the Roth IRAs because the income it produces is fully taxable; thus, placing an investment like this in a tax-sheltered account is optimal. The T. Rowe Price fund is a different animal. This mutual fund is the only investment I have ever made where I felt comfortable allowing a portfolio manager to pick stocks. This is also a mutual fund that is closed to new investors as of this recording. Since it is actively managed and less tax-efficient than an ETF or index mutual fund, it makes sense to hold it in the Roth IRAs.

My HSAs are at HealthEquity, a health savings account administrator which offers a number of Vanguard investment options. I wanted my real estate exposure to be a little bit higher than what I had in my Roth IRAs, so this is why I opted to put all of my HSA money into the Vanguard Real Estate Index mutual fund.

Finally, let’s look at what I refer to as my cash equivalents. My money market and short-term investment vehicles come in three forms. The bulk of my cash at the time of this recording is in a Schwab money market mutual fund because the yield offered is higher than most savings accounts.

Years ago, the Marcus savings account had most of my short-term savings, but as the interest rate environment changed, so did where I keep my cash reserves. In time this could change again, which is why I keep the Marcus account open. I also have some money in iBonds. These are government securities that offer a variable interest rate based on inflation. These three investments—the Schwab money market mutual fund, a Marcus savings account, and the iBonds—comprise my cash equivalents.

When you analyze my portfolio from an overall standpoint you will see that I am well diversified amongst all the asset classes I want to have exposure to, but what you should also notice is that none of my accounts are diversified on their own. This is due to my asset location strategy designed with taxes in mind. I have placed my high-income, less tax-efficient investments in my traditional IRAs, Roth IRAs, and HSAs. The more tax-efficient investments, such as individual stocks, US stock ETFs, and municipal bond funds, are in my brokerage account.

I discuss the value of asset location in Season 2, episode 5, and for your benefit, I’ve included links in the show notes to all of the related episodes I referenced.

Again, thanks for tuning in. I hope this explanation of my investments has been helpful and you can use it as a guide to invest your own portfolio wisely, using the principles I discuss throughout each season of Invested Poorly.

Invested Poorly: Sad Tales of FInancial Fails was created for informational purposes only and should not be relied on for specific tax, legal, or investment advice. You should consider consulting a qualified professional to review your situation before engaging in any transactions. Investing involves risk, including loss of principal and past performance is no guarantee of future results.

This podcast was produced by Ted Cragg. Learn more about creating podcast mini-series like this by visiting QuickEditPodcasts.com.