I’ve been slowly simplifying my investment strategy for a while now. Not just the asset allocation, but also in automating payments and streamlining my account structure. Mostly because I wanted to save “Time” but there’s another reason behind my simple thoughts on simple investing.
Reason #1: Saving Time
Investing in individual stocks takes more effort than managing a simple stock:bond passive-indexed portfolio. Once set up, a passive portfolio may only require a yearly checkup to check if it needs to be re-balanced. But with individual stocks there are decisions in what to buy (and potentially what to sell). And also monitoring any portfolio drift as companies held are taken private or acquired.
There are always trade-offs
One of the disadvantages of mutual funds is the Expense Ratio, or the fees that you pay. Over the long-term these will be higher than the fees incurred from buying and holding individual stocks. But you also get much more diversification, plus someone buying and selling stocks per the index / fund goals. In the case of VHDYX, the focus is on higher yielding stocks for income, rather than dividend growth. Stocks with lower dividend yields may be sold off, and stocks with higher yields may be bought.
I’m also giving up some Total Return as a result of focusing on Income, not to mention a higher tax drag. But I suspect that’s true for any dividend-oriented portfolio. In the last decade or so small-cap stocks have out-performed the large-cap value stocks that dividend champions tend to be.
On the other hand, I can set up automatic payments to buy regularly and I weigh VHDYX against VIHAX (for international stocks) to buy more of the lower performing one each month. I don’t need to worry about valuation either since, in the long-term, time in the market is better. My Income Fund is almost fully invested now so I just make new purchases as soon as I have the cash. And dividends, even from stocks, can be automatically paid via ACH transfer to a bank account.
Reduction in individual stocks
As part of my simplification trend, I’ve reduced my target allocation of individual stocks. So although I still buy some stocks from time to time, I’m buying less. This might be a little irrational, but I like the idea of owning companies, especially those whose products or services I use regularly.
I am also comfortable holding a smaller number of companies too. I was originally aiming for ~50 but am content with 20-30 now. This is because the mutual funds do the heavy lifting of diversification. I’m also gradually consolidating assets into one brokerage at Vanguard, which has several advantages compared to Capital One and also makes for an easier time when filing Taxes.
But there’s another reason that’s behind this simplification trend; it’s still related to Time but in a different way. It’s been creeping up on me slowly over the last year or so.
I’m going into hospital (again) over Thanksgiving. I’ve been diagnosed with a genetic defect, something similar to what Angelina Jolie went through with her BRCA gene. This visit is just another internal examination so not a big deal by itself; I’ll likely be having yearly exams from this point forward though.
On the plus side; I don’t have Cancer yet, am otherwise in good health, will get to be pampered by nurses at the hospital and also enjoy a nice meal with Ms. DL ❤. So it’s not all bad! However, I can’t help but think about the impact of being unable to manage a more complex portfolio as I age (I’m already absent-minded enough!). Or worse, not being around to manage it in the first place.
So it’s become more important to me to have a portfolio that’s simple to mange to the point where it doesn’t really need to be managed at all. This allows Ms. DL ❤ to continue to take distributions without any hassle in the event that I can’t manage it. I suppose she could just liquidate everything too, but that would come with a big tax burden.
I’m not planning to make any drastic changes right now although I will be reviewing my Income Fund bond allocation and my 401k asset allocation next month to simplify them some more. But I do think it’s important to consider a succession plan. Especially since a dividend-oriented strategy means that you’ll end up with a larger amount of capital at the end of retirement because the withdrawal rate is limited to the dividend yield.
The steps I’m planning to take in the shorter-term are:
1) Write up a will since I don’t have one currently.
2) Create a succession plan with account details & instructions in case of unforeseen circumstances / disability.
3) Teach Ms. DL ❤ more about investing and her 401k.
4) Set a goal next year to open up a Donor Assisted Fund for charitable donations.
The thing about buy and hold investing is that it won’t really make you super-rich, but it should prevent you from being poor. I’m certainly never going to try to “juice” my investments by trading options or taking on significantly more risk, although I wish only success to any readers that do that.
My simple investing approach is really just to put as much money into my portfolio as I can and rely on that to create wealth and additional income. If I lose a few basis points in performance by keeping things simple then so be it, but I think keeping things simple will be “good enough”. It’s earned ~ $6,500 income so far this year after all.
Do you have a succession plan worked out? Am I being irrational? Let me know! 🙂
Quote of the Day
Experience is a hard teacher because she gives the test first, the lesson afterwards.