Transition for Portfolio Two

Portfolio Two is transitioning to ETF’s and CD’s.  This is aligned with the “basic plan” that I refer to here.  The portfolio has $28,781 (all in cash) as of December, 2015.

At a high level our investments will consist of:

  • $10,000 in the lowest risk interest rate products (Federally insured CD’s bought through a brokerage, go here if you want to learn more)
  • $9000 low-cost ETF tracking the US stock market
  • $4500 low-cost ETF tracking the non-US stock market, unhedged
  • $4500 low-cost ETF tracking the non-US stock market, hedged

CD Investment:

In the old days you used to need to call a broker to buy a CD or physically visit a bank.  Now you can buy CD’s online through your brokerage account.  To avoid more complicated tax issues with gains and losses I am sticking to “new issue” CD’s which are always issued at par (100 cents on the dollar).  When you are buying existing CD’s (the secondary market) they have gains or losses implied as they do not sell for 100 cents on the dollar and this causes additional tax issues that aren’t significant but I want to keep this simple and at this purchase level it is easier just to buy new issues.  For each CD there is a minimum bid quantity – for the highest yielding 2-3 year CD selected below, the minimum bid quantity is 10 at $1000 or $10,000.

Goldman Sachs bank USA CD 1.55% due 7/6/2018 paid out semi annual (audited by PWC).  Thus it is a CD that will pay back the $10,000 in 2 1/2 years from now.  Here is the link to a page that shows which external firm audits each entity.

The CD is semi-annual so it pays 1.55% * 10,000 / 2 = $78 every 6 months, or $155 / year.

There are no expenses (on buy, sell) and no fees with this holding.  By contrast a money market fund pays about 0.2% (or $20) after fees.

If we need cash we can sell this in the secondary market and there will be a small gain or loss depending on how interest rates have moved since the purchase date, and likely a bit of slippage in the buy / sell.  If for some reason the bank goes bankrupt (highly unlikely since this is Goldman Sachs) the government will pay back our $10,000 and accrued interest through the last date.  This did happen to me back in the 2008-9 time frame when a number of banks were taken over by FDIC as they became insolvent and deposits were guaranteed.


We will put half the remaining in US stocks and half in foreign stocks.  The US stock will be in the Vanguard ETF VTI.   Vanguard is audited by PWC.

VTI has a yield of 1.91% (dividends).  We will invest $9000 in this fund.  It has an expense ratio of 0.05%.

We will put half the remaining in an overseas stock fund.  We will put $4500 in VEU which is the Vanguard all-world index except the USA.  It is not hedged.  The yield is 2.96% and fees are 0.14%.

Will put the other $4500 remaining in a hedged overseas stock fund.  We will put put $4500 in HEFA which is an overseas ETF that is owned by Blackrock (iShares).  It has a yield of 2.35% and fees of 0.36%.

Blackjack (iShares) is audited by Deloitte and Touche.

Hedging the US Dollar in the “Basic Plan”

Recently the US dollar has strengthened against most foreign currencies.  This means that you could buy foreign stocks and they could do well in their local markets (for example, the Japanese stocks were generally up for a time) and yet you would have losses when your ADR or ETF was valued in US dollar terms.

While you cannot generally hedge the currency risk in a single stock ADR (for example, Toyota), they now offer ETF’s that give exposure to foreign markets but also hedge those currencies against the US dollar, so you receive their “actual” return (good or bad) rather than their actual return PLUS the impact of the rising or falling US dollar.

For instance, let’s look at the VEU Vanguard ETF (one of my favorites, the Red line below) against a new ETF I started looking at, HEFA (the Blue line), over the last two years.  You can see that the total return was 1.1% positive in HEFA and 14.2% negative for VEU over that time span.  This difference is due almost totally to the rise in the US dollar against foreign currencies that make up the bulk of those stock indexes (the Euro, the Japanese Yen, the Australian Dollar, and the Canadian Dollar).  You can see that the peaks and valleys of the blue and red lines track together (they move in the same direction) but the red line sinks as the US dollar rises over the last two years.


VEU vs HEFA Last 2 years

VEU vs HEFA Last 2 years

One negative impact of this, all else being equal, is that hedging costs money and this should be expected to drive up fees on your ETF.  The ETF for Vanguard (VEU) is 0.14%, which should be considered somewhere near rock bottom.  The HEFA ETF expense ratio is 0.35%, which is also very low, but higher than the Vanguard product.  This isn’t a perfect comparison because generally the Vanguard ETF’s have the lowest expense ratios due to their member-owned structure.  HEFA is part of iShares which is now owned by Blackrock, a major competitor of Vanguard.

It should be noted that the VEU and HEFA indexes aren’t exactly the same in terms of countries that they cover and weighting of markets but as you can see above they generally move closely in tandem and the majority of the difference is due to the impact of the US dollar against foreign currencies.

This is of interest because the US Federal Reserve is considering raising interest rates soon, which theoretically would cause the dollar to rise which would make holding shares in other currencies less profitable.  Of course this is already priced into the dollars’ current level, which could mean in practice that if the Fed doesn’t move fast enough or make enough moves, the dollar would fall.  If anyone ever tells you that they can predict interest rates or currency moves you should not believe them; there is no reliable way to predict either one although there are mass industries of pundits attempting to do so.

Thus for my “basic plan“, the question is, should you also consider adding currency-hedged ETF’s and not just the two basic ETF’s (VEU and VTI).  The question is whether to replace part of your VEU allocation (how much you buy) with something like HEFA (there are other ETF’s, but this seems to be a pretty good one, with a large base of investors and from a company like Blackrock which isn’t going away any time soon).  Here’s what would happen – if the US dollar falls against major foreign currencies, you are going to make less money than you would otherwise if you hedge it.  If the US dollar rises, you will make more money than you would otherwise with the hedged product.  Also note that the hedging may not be perfect, but would likely shield you from the vast majority of the impact, especially on major currencies like the Euro.

I think that this is getting a lot of play in the financial press right now and I predict that at some point these products will be mainstream.   It took a long time to move from “active” to “passive” investing and it has taken many more years for ETF’s to begin to take a large share of new investments away from mutual funds.  This is another long term trend that started on the margin (there were very few currency hedged funds a couple years ago when I looked, and they were expensive) but is now going mainstream, and the additional expenses for hedging seem quite modest (0.14% vs. 0.35%).

Tax Loss Harvesting

Well, it is that time of year.  While many are thinking about turkey, pumpkin pie, stockings hung by the chimney with care and all that jazz, it is the time of year that I look at tax loss harvesting.

Tax loss harvesting can be done several different ways.  But before we get there, what is it and why would you need to do it?

For those who are still earning a decent income, any short held sales that have capital gains are taxed out at ordinary income levels.  Stocks (I am keeping it simple) held less than a year fall under this short term holding rule.  Lets use for an example someone taxed at the top income bracket, 39.6% for the feds.  If they had a $50,000 short term gain, they would instantly lose $19,800 of that gain to the taxman.  Ouch.

This same person, if the holding is held for more than a year loses $10,000 on the $50,000 gain.  You can see from this math that 20% is the capital gains tax on long term capital gains for top income earners.  Still ouch, but not as bad.

I have sectors in my portfolio where I hire a manager who runs part of my money.  I typically do this in sectors where I want to invest to be diverse, but don’t know anything about.  International is one sector.  These guys are paid to beat benchmarks, not worry about tax gains.  And most of the time, the gains are short term.

To offset any of these gains, I need to look at the portion of the portfolio that I control to see if I can take some tax losses.

As I mentioned earlier, there are few different ways to do this.  You can simply look at a holding if it is down, sigh, sell, and take the loss.  These losses then offset the gains you had elsewhere (I am simplifying but this post can’t be fifteen thousand words).  I don’t typically do this as there are reasons I have holdings and most are long term.

Another thing you can do is sell the holding, and then buy it back.  BUT BE CAREFUL.  There is a 30 day “wash rule”.  So if you are taking a bath on WMT for instance, you can’t sell it and buy it right back that same day and receive the tax loss.  You have to wait 30 days.  This entails a bit of gambling, as you don’t want the holding to skyrocket in the meantime.

I prefer to sell a holding and purchase a different holding in the same sector.  While the Walmart example above isn’t a great one for this, here is one that I just did.

I took a bath on BCX this year, a commodity/energy closed end fund.  When it came to mid November, I carefully checked the ex-dividend date (I always want to make sure I get a payment if I can), sold BCX and then simply purchased a different energy based closed end fund.  That way I am still fully invested in the sector, and have received the tax loss to apply where needed.  In this case, I chose NTG.  While it isn’t the same as BCX, I am big on gas and the timing was right.  It is still an energy sector play and that was good enough for me to not knock out my allocation model.

This same exact strategy can be done with stocks.  As in the WMT example above, if you are high on retail, you can buy TGT, or any of the others in the space.  And if you get a month out (outside of the wash rule) and things aren’t looking the way you want, you can sell back the TGT and re-buy WMT, and get the tax loss and be on your way.  But again, you are gambling just a bit with price, although a month is a drop in the bucket if you are an investor and not a trader.

Portfolio Six After 2015 Purchases and Sales


Attached is an update for Portfolio 6 after fall purchases and sales.  New stocks include Union Pacific (UNP), Tata Motors (TTM) and ConocoPhillips (COP).  Returns do not include the impact of dividends so they are understated.

Portfolio Five After 2015 Purchases and Sales

Screen Shot 2015-11-21 at 9.43.53 AM

Attached is an updated view of Portfolio Five after 2015 purchases and sales.  New stocks include ConocoPhillips (COP), Tata Motors (TTM), and Union Pacific Corporation (UNP).  Returns only include stock price rises and decreases not dividends (so dividend paying stocks are understated).

Portfolio Four After 2015 Purchases and Sales

Portfolio Four With 2015 Purchases and Sales

Attached is a screen shot from Google Finance of Portfolio Four after 2015 purchases and sales.  New stocks include Box (BOX), Novartis (NVS), and Tata Motors (TTM).  Returns are only based on stock prices and do not include dividends (the dividend payers have higher returns).

Portfolio Three After 2015 Purchases and Sales


Attached is a screen shot from Google Finance of Portfolio Three after stock sales and purchases for 2015.  New stocks are Alibaba (BABA), ConocoPhillips (COP), and Facebook (FB).  The returns by stock represent stock price appreciation not dividends so dividend stocks have a higher return than listed.


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