Simple thoughts on simple investing

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.

I decided a while back that I could get “good enough” performance by investing in dividend income index funds such as VHDYX, and get some evenings back as a result.

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.

Reason #2…

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.

Next steps

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.

Conclusion

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.

13 thoughts on “Simple thoughts on simple investing”

  1. Sorry to hear you’re going through that and I hope everything works out.

    I can’t really fault you for wanting simplification, especially since there’s always the possibility that something could happen and your wife might not want to deal with the investments. My wife and I still don’t have wills for us which is a shame because it’s something everyone needs to get done. I’ve been eyeballing 1Q 2017 to try and get a lot of just routine maintenance of our financial house in line.

    I don’t know how active a participant your wife is with the investing, but I would encourage you to try and bring her in and encourage her to learn about it if she doesn’t know already. It’ll be much better for her in the long run to know about it and at least figure out a contingency plan in case something does happen to you. I’ve been slowly bringing my wife along although I don’t think she’ll ever want to do the homework to invest in individual stocks like I do. So the likely scenario is selling off the investments whenever I pass, hopefully at least 40 years from now, and moving to index funds and maybe some of the dividend funds should they still be around.

    All the best and hope you can enjoy this week.

    1. Thanks for the support JC. I think I get access to a free will writing service as part of my company benefits (linked to life insurance I think); despite that we’ve just never gotten around to it.

      Ms DL. has some interest in investing and we plan on opening an account soon so she can start. Until now, she’s mostly been involved in helping with the budget and tracking spending. I don’t see her wanting to spend a lot of time on investing though, but I agree with you that’s it good for her to learn about it.

      Best wishes,
      -DL

  2. Ciao DL,

    Don’t you dare get cancer or any other shitty disease!!! Really sorry to see that you have a “predisposition” to that shitty illness, but as you wrote you are fine now and you are being “watched”, so you are one step ahead of someone who doesn’t know about it and doesn’t get screened.

    As you are not in a life threatening condition, I’d skip over the will-writing part, it seems really “drastic”.
    Nothing has really changed since you did not know of the genetic issue, but I think that planning for something that might happen is fair enough, but you are already doing it because reducing stocks for funds frees up time that you can spend with your family and worry less about the investments that you have rolling.

    If anything changes, and we hope only for the best, then you can assess other actions that might be needed. I was talking to a friend, who’s in a different situation than you, and he’s stressed about the fact that his parents are quite rich and in his opinion they need to put everything in a trust fund so that he and his sister do not have to pay inheritance tax when they pass away… I told him exactly the same, maybe he can gather information at this stage, but moving all resources now that his parents are well it seems a bit like overdoing it…

    Teaching Ms.DL is a great idea on the contrary, I have a lot of troubles to get Ms.Stalflare interested in finance, but little by little she is coming my way, at least she can understand what’s under the “hood” and maybe she can help you out with different opinions and ideas, who knows!

    Ciao ciao

    Stal

    1. Hi Stal,
      Thanks! It’s certainly not part of the plan – I’ll know more next month when I see the specialist again, but hopefully they can manage it in the short to mid-term with more frequent biopsies and I won’t need more drastic surgery.

      The thing about the will isn’t really that drastic; it’ll just state what I want done with my estate to avoid any issues. Since Ms. DL isn’t a US citizen yet and since the rest of my family is back in the UK, I want to make sure that there’s no issue with anything. Ms. DL has also been wanting to do this too. Although consulting with a professional estate planner is something I might do at a later date, in terms of structuring investments for international recipients but I think I can probably research some of that myself as you mention.

      I’ve not looked into trust funds as I don’t think I’ll ever have enough money where they become worthwhile, so I don’t know much about them. But it certainly sounds like something requiring lots of research, if not professional help, to determine a suitable solution.

      Ms. DL has expressed an interest to start investing outside her 401k, so that should certainly help and we’ll have some time over the Christmas break to work on that.

      Best wishes,
      -DL

      1. Ciao DL,
        I see… The fact that you have a multinational family makes things a little bit different to manage, so the will in that case makes total sense. As to the trust fund, my friend’s family is rather rich so to them it totally makes sense. Apparently, as they have a lot of properties, he was explaining to me that all assets are pooled into the trust funds and basically it gets split like “stocks” among the beneficiaries. Of course it requires a centralised management, and that it’s where I guess it becomes expensive…
        Anyways, step by steps, as I always said, first it’s very good that Mrs.DL wants to learn something new, so it’s time to get those lessons planned (you going to post them? ATL, a belgian blogger has been posting his lessons to the kids for example)!
        As to the health checks, as long as you have people being on watch I think you have done the best you could. It will require a bit of time and certainly stress, but the main point is to be aware and plan the steps that you want to take.
        Ciao ciao,
        Stal

        1. Hi Stal,
          Your friend’s case certainly sounds complicated! Governments try to stop wealth from being handed down indefinitely, but there are always creative ways around it.

          I’ve been asked a couple of times about “how to get started” so I may end up posting lessons with Ms. DL. The trouble is so much depends on individual situation and objectives. But we’ll see, hopefully I can figure something out.

          Yes, I’m in a lot better shape than some of my parents family who found out much too late; that’s what triggered my testing since it’s hereditary.

          Best wishes,
          -DL

  3. I am a huge fan of passive index funds. Especially when you set up a DRIP and then leave it alone. My wife isn’t much into investing but she knows if something were to happen to me that everything is set up so she doesn’t have to worry about the future.

    Thanks for sharing and I hope it ends up that you’re being overly prepared then under prepared 🙂

    1. Hi MSM,

      I totally agree about the passive index funds and reinvesting the dividends. As long as the expense ratio is cheap, I think their overall benefits more than cover any management fees.

      I guess I’m not as much worried about the diagnosis per se; it’s more the realization that I’m not as immortal as I once thought I was. Anything can happen, even tomorrow. So keeping it simple and having a plan makes sense I think.

      Best wishes,
      -DL

  4. I hope the turkey is piled high at the hospital for you my friend. Funny I should read this post today on the anniversary of my son’s passing. Time is precious. Do what matters the most to you and enjoy the time with loved ones. PS I don’t have a will yet either and have been totally slacking on succession planning too.
    Peace,
    DFG

    1. Hi DFG,
      Sorry to hear about your loss. Time is the most valuable currency and it can only be spent once as you mention.
      I hope you have a great Thanksgiving tomorrow surrounded by your family and look forward to hearing about it in one of your updates!
      Am back from the hospital now – I’ll know more next month. Turkey will be tomorrow 🙂
      Best wishes,
      -DL

  5. Good luck in the hospital over thanksgiving! Congratulations on the year to date dividend income. Good job!
    I think the key to becoming rich via long term investing lies in the periodic contributions and not so much in the returns that you can make. In the long run equities do not make much more than a compounded annual growth rate of 6-8% I think. If you’re lucky you can buy at fantastic moments like early 2009 and make much better returns but unless you are a great market timer, you probably would have also bought in 2007. The higher the (1) annual rate of compounding, the higher your (2) periodic contributions and the (3) longer your remaining runway the better for your future wealth. That is at least what I tell myself.

    1. Hi DividendIncomeBuilder,
      Thanks. I completely agree with your three factors. You’re right about the 6-8% CAGR for stocks too – Jeremy Siegel has it at 6.6% (after inflation) since 1802. There’s plenty of proof that time in the market is better than timing the market.
      Congrats on starting your blog and I look forward to following along!
      Best wishes,
      -DL

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