Portfolio Three Updated June 2020

Portfolio 3 is 12 1/2 years old.  The beneficiary contributed $6500 and the trustee $13,200 for a total fo $19,700.  The current value is $26,476 for a gain of $6776 or 34%, which is 4.2% / year adjusted for the timing of cash flows.  See the summary here or at the link.

This portfolio, like portfolio 2, switched to ETF’s.  This portfolio has less cash and a higher proportion in BND, which is good since the yield on cash has dropped to a low 0.3% with the return of ZIRP.

Portfolio Two Updated June 2020

Portfolio Two is 15 1/2 years old.  The beneficiary contributed $8000 and the trustee $16,200 for a total of $24,200.  The current value is $44,019 for a gain of $19,819 or 81%, which is 6.7% / year adjusted for the timing of cash flows.  Go here for a summary or click on the link.

Last year we bought ~ $5000 worth of BND and that has returned 9% dividends & share price appreciation (annualized) which is better than the return on cash itself which has dropped from 1.7% a couple of years ago to 0.3% with the (near) return of ZIRP.  May want to move more from cash to BND (or even IAU) with the return of ultra low interest rates and the Fed even buying some debt instruments from corporations.

Portfolio Two Updated February 2020

Portfolio 2 is 15 1/2 years old.  The beneficiary contributed $8000 and the trustee $16,200 for a total of $24,200.  The current value is $46,438 for a gain of $22,438 or 93%, which is 7.3% / year adjusted for the timing of cash flows.  See a summary here or at the link on the side.

The ETF’s in the portfolio are doing well.  We sold the ETF IBB this year for a $200 gain, and had some small gains paid out from the ETF HEFA (Vanguard ETF’s don’t pay out gains or losses) as well as dividends.

There is a lot of cash at $12,799 with $5100 in the bond fund (BND).  May want to consider putting some of it back in the market or in the gold ETF (IAU).

Portfolio Two Updated December, 2019

Portfolio two is over 15 years old.  The beneficiary contributed $8000 and the trustee $16,200 for a total of $24,200.  The current value is $45,377 for a gain of $21,177 or 87%, for an annualized return of 7.1% adjusted for the timing of cash flows.  You can see a summary at the link on the right or here.

This is an ETF portfolio, with 28% in cash, 11% in bonds (the BND ETF), and the remaining in US and worldwide equities.

2019 was a good year for the markets and this portfolio as well.

ETF Portfolios and Fall 2019 Selections

We have two ETF portfolios because it is difficult for these beneficiaries to hold individual stocks because of their professions.  We moved Portfolio 2 to ETF’s several years ago and just sold the individual stocks in Portfolio 3 so that we can invest for Fall 2019 in “ETF mode”.

Portfolio two has the following ETF’s:

  • VTI – the Vanguard all US market ETF
  • VEU – the Vanguard all non-US market ETF
  • HEFA – the “hedged” non-US market (so that it is not exposed to changes in currency rates)
  • IAU – the ETF that tracks the price of gold
  • Cash – the remaining dollars (40%) are in the Vanguard money market (VMMXX), which currently returns 2% / year

The decision for Fall 2019 is whether to keep this high cash allocation or to increase the allocation for equities.

Option One – keep current allocation

Option Two – add a bond ETF.  Bond ETF’s go up when interest rates go down (as they have been doing).  We could put $5000 in BND (Total bond market ETF)

Option Three – add $5000 to VWO which is the Emerging Markets ETF (broad) from Vanguard

Option Four – add an additional $5000 to VTI, which is the US stock market ETF

Options Two – Four can all be done since there is $17,367 in cash.

Portfolio Three:

Portfolio Three has $24,561 in cash.  We need to set up ETF’s for this portfolio and can broadly follow the same model as portfolio two.

Base model:

  • VTI – US market -30% of investment
  • VEU / HEFA – 15% each (non US markets, with half hedged) for a total of 30%
  • IAU – optional, could be 10%
  • Cash or BND – could be 30%

These percentages could be changed as needed.

Portfolio Two Updated May 2019

Portfolio Two is almost 15 years old.  The beneficiary contributed $7500 and the trustee $15,200 for a total of $22,700.  The current value is $40,221 for a gain of $17,521 or 77%, which is 6.9% / year when adjusted for the timing of cash flows.  Go here or to the link on the right for details.

Portfolio two has switched to ETF’s which mostly track the US and world wide markets.  This portfolio also has $12,932 in cash, which is almost 1/3 of the portfolio.

For this portfolio, the NASDAQ biotech index (IBB) is on watch.

Portfolio Two Updated December, 2018

Portfolio Two is over 14 years old.  The beneficiary contributed $7500 and the trustee $15,200 for a total of $22,700.  The current value is $38,227 for a gain of $15,527 or 68%, which is 6.3% / year when adjusted for the timing of cash flows.  Go here or to the link on the right for details.

Portfolio two has switched to ETF’s which mostly track the US and world wide markets.  This portfolio also has $12,568 in cash, which is almost 1/3 of the portfolio.  The portfolio is doing OK in the current market downturn.

Portfolio Two Updated July, 2018

Portfolio two is almost 14 years old.  The beneficiary contributed $7000 and the trustee $14,200 for a total of $21,200.  The current balance is $39,012 for a gain of 84% or ~8% / year when adjusted for the timing of cash flows.  You can see the detail here or at the link on the bottom.

This portfolio is unique because it has moved to ETF’s and ~ 25% cash position.  The ETF’s have been doing well, with a large position in VTI (total US market) and a split between VEU (all world non US) and HEFA (all world non US hedged against the US dollar to get local market performance).  There also is a small biotech position (IBB) and gold ETF position (IAU).

When we moved to ETF’s from individual stocks in 2016, we also purchased a 2 year CD which paid 1.55% interest, because our money market fund was essentially offering “zero” interest on our money and we wanted to keep about $10,000 or so in cash and yet get some sort of return on the money.  This CD recently redeemed into cash in the account.  We could buy a new CD, but we are currently getting 1.85% return in our money market so we can just leave it there because the 2 and 3 year CD’s aren’t offering much more than that, and interest rates seem more likely to go up than down.  Thus we are planning (for now) to just leave cash in the money market instead of buying a CD because the incremental interest is negligible.

I want to have the beneficiary contribute now and have the trustee match, make our investments for summer 2018, have everything clear, then move the fund out of UTMA status and to the beneficiary (like we did with Portfolio One).  Then we can give the (technically former) trustee “agency” capabilities so that we can still take advantage of my free trades (which apply to the accounts that are under me or I have agency capabilities for).

 

Portfolio Two Updated February 2018, and It’s Tax Time

Portfolio Two is our second longest lived portfolio, at 13 1/2 years.  This portfolio is unique because the individual stocks have been sold off and replaced with ETF’s and a CD.  See the details here or at the link on the right.

The beneficiary has invested $7000 and the trustee $14,200 for a total of $21,200.  The current value is $38,428 for a gain of $17,228 or 81%, which is 7.7% a year when adjusted for the time value of cash flows.

Walking through the detailed transactions often helps you to find items you’ve overlook – we noted that the biotech ETF IBB had a stock split (3-1) in December 2017 so I have been understating the value of this portfolio by almost $2000 since that time on my consolidated view.

There were no stock sales last year so the only tax impacted item is dividends which were approximately $632 during 2017.

The portfolio is doing well.  It is interesting to see that the VEO ETF has returned 33% including dividends since we’ve owned it but the HEFA ETF has returned 19% including dividends… the difference is due to the 10% or so fall in the US dollar vs a basket of other world wide currencies.  HEFA is hedged so you get returns in original currencies while VEO also includes the net effect of the dollar on returns (which magnified returns in this case).

 

Portfolio Two Updated August 2017

Portfolio Two is our second longest lived portfolio.  This portfolio has been converted to ETF’s and a CD.  Beneficiary investment is $6500, trustee investment is $13,000 for a total of $19,500.  Current value is $34,290 for a gain of $14,790 or 76%, which is 7.8% over the life of the fund annualized.  Go here or to the link on the right for the portfolio detail.

This portfolio is different from the others in that there is a 1.55% CD for $10,000 and the rest are ETF’s.  The largest ETF is VTI (US total index) with VEU (all world ex US) and HEFA (non US, hedged).  We also have a small position in IBB for biotech.  All seem to be doing well.

It is a symptom of ZIRP that our CD returns less than the US or European stock funds, which are around 2.5% / year.

Portfolio 2 Updated April 2017

Portfolio Two is 12 1/2 years old.  The beneficiary contributed $6500 and the trustee $13,000 for a total of $19,500.  The current value is $33,334 for a gain of $13,834 which is 71% or 7.4% / year when adjusted for the timing of cash flows.  You can see the portfolio detail here or go to the links on the right.

This portfolio is different than the other portfolios because it has shifted to ETF’s and CD’s.  The ETF’s are broadly tied to the US and non-US stock indexes.  There is also a CD that returns 1.55% / year for $10,000 in the portfolio.

Since markets have gone up over the last year, this portfolio has done well (it tracks the market).  All of the ETF’s are near 100% of their 52 week high, which means that they are at or near their highs and the indexes have been rising continually over this time period.

Unlike the other portfolios, which are invested in individual stocks, these ETF’s do have annual expenses.  You can’t “see” the expenses because you receive the returns “net” of expenses, but this is disclosed.  Over the 1 1/2 years that we’ve had this portfolio the low cost ETF’s cost $86, which is very low for a portfolio of over $30k.  If you go back ten or fifteen years ago mutual funds would routinely cost 2% or more each year which would be $600 / year on a portfolio of this size.  It is a testament to the efficiency of ETF’s (which drove competition in the mutual fund markets, mutual fund expenses have been driven down proportionally, as well) that these sorts of rock bottom expenses are now commonplace if you know where to look.

In a technical note, the CD does fluctuate in value (a bit), but I record it at cost ($10,000) since we intend to hold it to maturity.  The cost fluctuations thus do not matter.

Finally, in another note, when I moved this portfolio over to Google Sheets, I noticed that I had been overstating the contributions in the “cash flows” calculation since 2012.  Thus the recorded return since inception now looks higher.  The value of the fund was always correct it was just the calculation of total gains to date that was incorrect.

 

Portfolio Two Updated January 2017 – Tax Time

Portfolio 2 is our second longest lived fund, at over 14 years.  This fund has transitioned from individual stocks to an ETF and CD mix.  The beneficiary contributed $7000 and the trustee $14,000 for a total of $21,000.  The current value is $32,151 for a gain of $11,151 at 53% or about 5.5% / year when adjusted for the timing of cash flows.  You can see the spreadsheet supporting this at the link on the right or download it here.

The fund contains 4 ETF’s and one CD.  The $10,000 CD earns 1.55% and will redeem in July, 2018.  This investment is essentially risk free (if the issuer goes under the FDIC will pay out the accrued interest and return the principal).

The largest ETF is VTI, which covers the US stock market on a capital weighted basis (that is to say that the largest market capitalization stocks comprise a larger portion of the index).  Since we have had a rally in Technology (prior to the election) and financials and commodities (mostly since the election), this ETF has done well.

There are two non-US ETF’s, the VEU (all world non-US, unhedged) and HEFA (major non-US markets, hedged against the dollar).  Surprisingly, these two funds mostly performed alike in terms of returns, even though the dollar rose during this period.  This is something I will investigate further in the future when I have some more time.

The fourth ETF is IBB, a NASDAQ bi0technology ETF.  This one was kind of a bet on future growth since it had been pummeled in the period before we purchased it.

In general, these ETF’s are low expense and overall the portfolio has a decent yield at 1.9% comprised of dividends and interest on the 1.55% CD.  This is a nice cash addition in an era of zero yields on short term cash and when even some large issuances have negative yields over a ten year span (in Europe).

I noted that the ETF HEFA (the hedged fund) had a small capital gain.  This is rare for ETF’s (they are common for mutual funds).  Since it is immaterial it is listed as a dividend on the report.

Due to the fact that these trust funds are “subsidiaries” of my account, typically they don’t pay any fees on transactions for individual stocks (essentially zero expenses every year).  Since ETF’s do have expenses, this portfolio will incur implicit expenses (they come out of the returns of the ETF’s so you don’t see them directly).  About $70 in implicit expenses hit the portfolio during 2016 (the CD is free of all expenses).

Portfolio Two Updated March 2016 – Tax Time

Portfolio Two is our second longest lived portfolio, at 11 1/2 years old.  The beneficiary contributed $6500 and the trustee $13,000 for a total of $19,500.  The current value is $27,814 for a gain of $8,314 or 43%, for a rate of return of 5.2% adjusted for the timing of cash flows.  You can see the detail here or on the link on the right side of the page.

Portfolio Two is now unlike all the other portfolios.  Our goal is to have about 1/3 of the value in interest rate products (CD’s), about 1/3 in US stocks (VTI) and 1/3 in international stocks (VEU and HEFA).  This portfolio will invest only in CD’s and ETF’s going forward.  This is similar to the “basic investing plan” listed on the site header.

In 2015 we sold all the individual stocks in the portfolio, for a net long term gain of approximately $7300.  In the past, figuring out the cost basis for your stocks was difficult but today the brokerage firm put the cost basis on each of the sales along with the trade date (to determine whether it is a short or long term trade) which makes it easy to calculate (if a little bit tedious, unless you can download your brokerage account directly to your tax software).  It depends on how it comes out but we are hoping that this goes under the tax rate at 15% or about $1100 but it will depend on the net calculation and other earnings of the beneficiary and the parent.

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.

Stocks:

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.