Portfolio Five Updated Feb 2021

Portfolio Five is 11 1/2 years old. The beneficiary contributed $6000 and the trustee $12,000 for a total of $18,000. The current value is $36,700 for a gain of $18,701 or 104%, which is 10.9% / year when adjusted for the timing of cash flows. Go to the link on the right for details or here.

During 2020 there was a net long term gain of $5592, which mainly came from selling Appian (APPN). Dividends totaled $268.

The portfolio is going well. Big gain stocks include Cloudflare (NET), Nvidia (NVDA), Okta (OKTA), Paypal (PYPL), Infosys (INFY) and Procter and Gamble (PG). There is $7393 in cash to consider re-investing as well.

For capital gains – if your income is under $40,000 (as a single filer) in 2020 the long term capital tax rate is ZERO. Thus this was a good year to sell Appian! The long term tax rate is 15% for income > $40,000 but less than $441,000.

Capital Gains

Under certain circumstances we need to sell individual stocks and move into ETF’s.  If you are at an accounting or auditing firm, they often make you sell stocks of companies that they are auditing and generally ask a lot of questions if you say that you have stocks at all.  Thus it is easier to sell them and go with ETF’s during that period.

When you sell stocks, you typically have to pay tax on your gains.  Long term gains / losses are for stocks that are held > 1 year and short term gains / losses are for stocks that are held less than < 1.

After the 2017 tax changes, there is very favorable treatment for capital gains when you have a low income.  If you have less than $39,375 in income, you have a long-term capital gains tax rate of zero (short term gains and losses are taxed at a different rate, closer to “ordinary income”).

We have these portfolios starting while the beneficiary is in jr. high onward.  Thus we have an opportunity to sell off the stocks with no capital gain taxes paid, which essentially “re-sets” the basis on the amounts invested.  This is very valuable.  The portfolio in question has over $4400 in gains and would have owed perhaps $1000 in taxes under previous methods; instead, the tax bill is zero.

CD’s and Money Market Funds As of June, 2018

For many years’ the USA (and much of the developed world) offered very low interest rates on accounts with low risk (guaranteed accounts).  The policy was known as “ZIRP” or “zero interest rate policy”.

As a result of ZIRP, this author started exploring CD’s purchased through a brokerage, which offered a couple of percentage points more in return (than zero) with the same, virtually zero risk.  These brokerage account CD’s typically offered higher returns than you can get from your local bank or savings accounts.

Over the last couple of years, however, the USA has begun to raise interest rates.  Today, the VMFXX money market from Vanguard offers a return of 1.74% (with an expense ratio of 0.11%).  There is also an expectation of continued increases in the future, although no one knows for certain what will occur.

Since the “base” rate is now effectively about 1.75% (more or less), the CD forward “curve” looks like this:

  • Base rate (no CD, leave in money market) – 1.75%
  • 1 year CD – 2.30%
  • 2 year CD – 2.80%
  • 3 year CD – 3.00%
  • 5 year CD – 3.30%
  • 10 year CD – 3.40%

When you buy a CD, you essentially “lock up” your money for that duration.  If you have a 2 year CD, for instance, you can always buy or sell off that CD, but if interest rates go up you won’t receive back 100% of your investment.  For example, if you have a 2 year CD at a rate of 2.80%, and short-term interest rates move from 1.75% to 2.00%, for example, and you needed to sell your 2 year CD, you might receive 99 or 98 cents on the dollar (it could seem higher because you’d also be getting back interest accrued prior to your next payout, for example if you had a semi-annual payout).  These are really minor “losses” in the grand scheme, especially if you are dealing in the thousands or even few hundreds of thousands.

The future of our interest rate policy is (as always), essentially unknown.  Interest rate policy is also closely tied with the value of our currency, although this takes the entire conversation off into a far more complex direction.

In a time of ZIRP for an extended period (we had it from 2008 to 2015), buying products like CD’s was essentially the only way to get any sort of risk free return on interest at all.  With short term interest rates at 1.75% and (likely?) heading upward, now there are more options on the table, including doing nothing and taking the short term rate or locking up funds for the near term or even medium term.

All of this income is taxable.  Thus the effective rate that you receive is lower, depending on your tax rate.  Tax rates did come down a bit with the 2017 tax changes, with most folks in the 12% / 22% / 24% range.  Thus if you get 2% your return is effectively around 1.5% – 1.6% after taxes.

This blog will also look into the current state of iBonds, another product that is essentially risk free that we reviewed in the past, in an upcoming post.

 

Capital Gains Rates in 2018

Taxes changed significantly with the new tax act for 2018.  Here we will briefly talk about short and long term capital gains under the new law.  This is meant to be a summary please do your own research if you have a significant portfolio or complexity.  Here is a good summary from the Motley Fool.

At a very high level:

  • stocks / ETF’s held > 1 year are considered long term gains / losses and taxed at more favorable (lower) capital gains rates
  • If they are held less than one year, they are treated as ordinary income, which is generally higher

For single filers in 2018, capital gains rates are 0% up to $38,600, 15% $38,600 – $425,800, and 20% over that.  The brackets are higher for joint filers.

Short term gains are treated as ordinary income; these brackets range from 10% to 24% in the likely relevant range.

There are different rules / impacts for minors (“Kiddie Tax”) which we will cover (at a high level) in a different post.

 

Portfolio Eight Updated Feb 2018, and It’s Tax Time

Portfolio 8 is 3 1/2 years old.  The beneficiary contributed $1500 and the trustee $3000 for a total of $4500.  The current value of the portfolio is $5409 for a gain of $909 or 20%, which is 9.5% / year over the life of the portfolio adjusted for the timing of cash flows.  Go here for portfolio detail or use the link on the right.

We had 2 sales this year, Tata Motors (TTM) and Gilead (GILD).  Total long term gains from sales were $55 and dividends were $50.  The portfolio has done OK recently and bounced back from February market activity.

Portfolio Seven Updated Feb 2018, and It’s Tax Time

Portfolio 7 is 3 1/2 years old.  The beneficiary contributed $1500 and the trustee $3000 for a total of $4500.  The current value is $5991 for a gain of $1491 or 33%, or about 14% / year when adjusted for the timing of cash flows.  Go here for portfolio detail or go to the link on the right.

During 2017 we sold Spirit Airlines (SAVE) for a long term capital loss of $84 and had dividends of $40.  The portfolio is doing well, with holdings in BABA (Alibaba) and MA (Mastercard) doing very well.  The portfolio has mostly recovered from early February market activity.

Portfolio Six Updated Feb 2018, and It’s Tax Time

Portfolio Six is 5 1/2 years old.  The beneficiary contributed $3000 and the trustee $6000 for a total of $9000.  The current value is $10,716 for a gain of $1716 or 19%, which is 5% / year across the life of the portfolio.  Go here to see detail, or use the link on the right.

We had $157 in dividends and a sale of TTM for a long term gain of $35.  The portfolio has bounced back from February market activity and is doing OK.

Portfolio Five Updated Feb 2018, And It’s Tax Time

Portfolio Five is 8 1/2 years old.  The beneficiary contributed $4500 and the trustee $9000, for a total of $13,500.  The current value is $16,640 for a gain of 23%, which is 4.1% / year adjusted for the timing of cash flows.  You can see portfolio five details here or go to the link on the right.

This year we sold 2 stocks, TTM and SAVE, for a short term tax loss of ($78) and a long term gain of $24.  We also had $291 in dividends.

The portfolio is generally doing pretty well and came back a bit from the early February market activity.  We are watching JNPR because it may be in play as a takeover candidate.

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

Portfolio Four is 8 1/2 years old.  The beneficiary contributed $4500 and the trustee $9000, for a total of $13,500.  The current value is $18,309 for a gain of 36%, which is 6% / year adjusted for the timing of cash flows.  Go here for details or use the link on the right.

For tax purposes, during 2017 we sold 2 stocks, Devon (DVN) and Spirit Airlines (SAVE) for $465 in long term capital losses, and earned about $297 in dividends.

The portfolio is doing pretty well and has bounced back from recent market losses.

Portfolio One Updated February 2018 – And It’s Tax Time

Portfolio One is our longest lived portfolio, at over 16 1/2 years.  The Portfolio began right after 9/11.

The beneficiary has contributed $2000 (net of withdrawals) and the trustee has contributed $16,000 for a total of $18,000.  The current value of the portfolio is $43,441 for a gain of $25,441 or 141%, which is 7.2% / year adjusted for the time value of cash flows.

Portfolio One is the most advanced in that 1) I’ve transferred the account over to the beneficiary 2) I have switched to an “agent” mode where I can still make transactions like buys or sells (and this still benefits from my free commissions) 3) the beneficiary is starting to “draw down” some of the assets from the portfolio in order to fund purchases (capital assets and the like).

Go here for a summary of Portfolio One or click on the link on the right.

There were three sales last year (BOX, KO, TATA) and one purchase (NVDA).  Generally the portfolio has done well, although we (obviously) sold far too earlier on AMZN and MSFT.  The three sales had a net long term gain of $948, which will be subject to capital gain taxes.

It is important to recognize the positive impact of dividends on a portfolio like this – to date it has earned $6894 in dividends and $805 in 2017.  When you just look at stock prices against original purchase cost you miss the significant impact (over time) of dividends.  One of the major purposes of going through all this work on the portfolio is to align dividends with the stocks that drove the dividends, to see total returns.

The portfolio is generally doing OK; like everyone else we had a scare when the stocks went down in early 2018 but they’ve (mostly) come back since then.  In an earlier post we discussed moving some of the funds into cash / gold to reduce overall portfolio risk.  This is still being considered.

Thoughts on Portfolio One

These portfolios started out as a long run risk taking vehicle that (hopefully) would grow and show the importance of investing. The average person has a net worth of zero (after you take into account debt on cars and mortgages) and has little cash in the bank. With these stock portfolios at least everyone has some core body of savings that they can use for investing or to purchase key capital goods (an initial house, a wedding ring). Now, for some of the participants, the portfolios have moved away from a long term risk vehicle to more of a generalized investment portfolio that should logically be slanted towards equities and higher risk since the participants are young but also has to take into account the possibility of a correction that could reduce equity values 25% – 50% for some extended period of time (years) like it did in 2008. You do not want to be in a position where you sell at a downturn and don’t stay in the market because you have to liquidate remaining stocks to cover necessary investments.

For some of the participants we needed to move out of individual stocks and into ETF’s because their professions make owning individual stocks more complicated. ETF’s, however, share the same mix of risk and return as underlying stocks and during the transition we’ve also shifted some of the money out of equity ETF’s and into CD’s and gold as a hedge and partial hedge.

Our current goal for portfolio one is to take some level of risk out of the portfolio and replace it with a combination of CD (get a return of about 1.5%), gold (generally holds more during a crash), or cash (if you need it in the next few months). Depending on the short term interest rate the brokerage account gives in the cash fund we may just choose to leave it in cash instead of CD’s.

Portfolio One is worth about $45k. We could take out $15k or so which would leave $30k in stocks. This is still a pretty high percent of stock for the market (about 70% equity).

Continue reading “Thoughts on Portfolio One”

Portfolio Eight Updated January 2017 – Tax Time

Portfolio eight is about 1 1/2 years old.  The beneficiary contributed $1000 and the trustee $2000 for a total of $3000.  The current value is $3130 for a gain of $130 or 4% which works out to a bit less than 3% / year adjusted for the timing of cash flows.  There have been no sales and the portfolio is doing fine.  You can see the detailed spreadsheet at the link on the right or download it here.

Portfolio Seven Updated January 2017 – Tax Time

Portfolio seven is a year and a half old, with the beneficiary contributing $1000 and the trustee $2000 for a total of $3000.  The current value is $3448 for a gain of $448 or 15%, which works out to about 10% / year.  The portfolio is doing well.  You can see the details of the portfolio at the links on the right or download the spreadsheet here.  There have been no stock sales to date in this portfolio.

Portfolio Six Updated January 2017 – Tax Time

Portfolio six has been around for about 4 1/2 years, with the beneficiary depositing $2500 and the trustee $5000, for a total of $7500.  The current value is $7917 for a gain of $417, or about 6% or 1.8% / year when adjusted for the timing of cash flows.  You can see the detail at the link on the right or download the spreadsheet here.

During the year we had about $136 in dividends for a yield of about 1.7%.  We had one sale, of Coca Cola FEMSA with a long term capital loss of ($321).  Our sales still look relatively good in hindsight.  For the portfolio as a whole, it has mostly recovered from the fall in oil prices.

Portfolio Four Updated January 2017 – Tax Time

Portfolio Four is a bit over 7 years old.  The beneficiary contributed $4000 and the trustee $8000 for a total of $12,000.  The current value is $13,932 for a gain of $1932 or 16%, which is about 3.3% / year when adjusted for the timing of cash flows.  You can see the detailed spreadsheet at the link on the right or download it here.

The portfolio is generally doing well. We sold LinkedIn (LNKD) because they were bought by Microsoft and gave up on Coca Cola FEMSA (KOF) which was hurt by the decline in the Mexican Peso and recent election results.  We did not sell many of the energy companies which (mostly) held on to their high dividends and have risen recently with the uptick in oil prices.  It is important that you look at the “total return” which includes dividends because some stocks look like they have losses just based on price bought vs. today when in fact they’ve been positive due to dividends.

The portfolio had about $240 in dividends for an average yield of about 1.7%.  This is a good rate but down a bit from last year because we sold Seaspan (SSW) and Garmin (GRMN) which had high dividends.  Most of our sales are still OK in hindsight but Garmin has gone up a bit since we sold it.  We had a long term capital loss of $474 due to sales of LNKD and KOF, above.