51 – My Life Event Fund Portfolio

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Episode Overview:

Now that Ken has shared with us his plan for retirement, it’s time to take a look at how he accrues funds for life events. You notice in this sheet, the portfolio is balanced 60% stocks and 40% bonds. It’s less risky than last week because these funds may be called into use much sooner. As always, your financial situation is unique to you and you may want to adjust this to suit your needs. Follow along as Ken explains his allocation using the provided Google Sheet: http://bit.ly/NWHLifeEvents This podcast episode is merely the personal experiences and opinions of Ken Kaufman and not a guarantee of returns. Ken is not liable for any financial decisions you make as a result of this podcast. It is advised that you consult a certified financial adviser and be aware of the risk involved before entering the Stock Market.

Transcriptions are auto-generated, please excuse grammar/spelling!

Link to Google Sheet Referenced in this Podcast: My Life Event Fund Portfolio

Happy day to you. This is Ken Kaufman and I’m thrilled you’re here for episode number 51, “Life Event Fund Portfolio.” Now, in the last episode, I went through quite a bit of detail in a Google Sheet where I showed you exactly how we think about our retirement investing, at least as of right now, as of today. It will certainly change year by year as we move on our glide path toward getting closer and closer to the time where we may need that money. But, we got into all those nitty-gritty details. And today, I wanted to do something similar but with how we currently think about investing on the taxable side, so not in retirement accounts but on an after-tax basis and where the taxes are gonna be paid as we go in terms of any capital gains, or dividends, or interest that’s earned in the various investments.

So, as we take a look at this, right in the show notes, there will be a link to a Google Sheet that you will be able to view, and it will be called “My Life Event Fund Portfolio.” And I would encourage you to pull that up so you can take a look at that as we go through and we talk about the Life Event Fund and the strategy that we have taken for that. So, we’ll just go ahead, and I should probably get started again also with the disclaimer. This is, you know, one family’s perspective. We’re not offering investment advice, not trying to tell you what you should or shouldn’t do or even make recommendations to you about what you should do. This is how we’ve approached it. This is our thought process and philosophy. I don’t know anything about you individually and therefore I’m not in any position to make any type of recommendation as to what would be good for you, or what would be bad for you, or what would be smart in terms of how you should be investing your money.

So, with that as the disclaimer, we’ll go ahead and jump in here. The sheet starts up at the top where it’s breaking down what our asset allocation target is. And in this instance, we are 60% stocks and 40% bonds. Now, you’ll remember over on the retirement side that we talked about last week, we’re currently 90% stocks and 10% bonds. The reason why we’ve done this is because the retirement funds, we know those are something we’re waiting to use down the road quite a bit. Whereas these are funds that we may potentially wanna start using fairly soon. And in fact, some of the money that’s in here is really earmarked and set apart or set aside for expenses that are gonna be coming within the next one to five years. And within that framework, we’re hoping that we don’t have to pull money from this. We’re hoping that our cash flow will be good enough from income and other places that we’ll be able to not have to go to this fund. But in case we do, this fund is here and it’s exactly what it’s designed for, and we’re not willing to be as risky and put as much in stocks as we were when it comes to retirement. And so, that’s why we’re 60% stocks and 40% bonds.

And then you’ll see this layout is gonna look a lot like last week on the retirement portfolio only there’ll be a couple of differences, and I’ll highlight those and call those out. Under the “U.S. Equities versus International Equities,” we’re also still targeted at 70% U.S. and 30% international. So, that means of the 60% stocks, 42% are in U.S. equities, 18% are in international equities, and then the remaining 40% are in bonds.

The way that we’ve broken this out is we are not investing in REITs, first of all, on the U.S. equity side. We are focused just on large-cap blend, large-cap value, small-cap blend, and small-cap value. You’ll notice that everything is the same in terms of the fund options here except for the SmallCap value option. Instead of the Spider 600 Pure Value, we instead are using the iShares S&P SmallCap 600 Value ETF for small-cap value. And the reason why is because this tends to have a little bit lower turnover, which means there is less potential capital gains, or dividends, or income that will be generated off of the portfolio. We have to think about because this is a taxable account, we have to think about taxable consequences and do the very best we can to minimize tax. Because if we’re having to pay tax on the earnings of this portfolio, that’s less earnings that are getting reinvested for ongoing and continued growth over time to drive the compounded overall return of the portfolio.

So, as you go across and look, you’ll see large-cap blend were 10%, large-cap value, 11%, 10% in small-cap blend, and 11% in small-cap value getting us to 42%. And so, we have that extra 1% on the large-cap value and small-cap value side, in essence, still saying, we are exposing ourselves and want a little bit more exposure to the value side of this proposition because we think there’s some potential more return there. It does mean that the portfolio would be more volatile than if we even those out just across the board. The exposure, you know, companies and the expense ratios, all of those things run fairly similar here. The only difference is because of the 40% bonds you’ll see instead of an overall 0.2% expense ratio, we’re gonna end up at a 0.17% expense ratio in this portfolio.

Now, if we take a look at the international equity side, you’ll see we’ve got the five asset classes that were used in the retirement portfolio, only in this one, we just have 4% going towards the large-cap blend, 4% to the large-cap value, and then 3% to small-cap blend, 4% to small-cap value, and 3% to emerging markets. So, really I see the small-cap portion of this is 10%, whereas the large-cap is at 8%. So, we’re weighted more towards small-cap. And then on the value side, I am doing the best I can here on the large-cap value, keeping that at 4% and then 4% in small-cap value. And that rounds it out to where we have 18% total of the portfolio’s assets in international equities.

So, not a ton but still trying to get that exposure and trying to make sure that we’ve got some good growth potential where it makes sense to try to have growth and not overexpose ourselves to risk. And then on the bond side, broken up at 40%, we have that broken out between just four different bond ETFs. Three of them are familiar to you from the last time where we’ve got short-term government bonds, the international government bonds, and then… Not international, I’m sorry, the intermediate government bonds, and then the treasury inflation-protected bonds. We also have the BND fund from Vanguard, called the Vanguard Total Bond Market Fund. And one of the reasons I like this is because it’s just a really nice blend of the overall bond market. It has a ton of different issuers in it, over 17,000. And the expense ratio is very low, and it pushes out. The total duration on this is out at six and a quarter years versus five years on the intermediate government side. And this also is exposed to more corporate bond, it’s got some high-yield things in it. Well, no, actually stays investment-grade, so everything is investment-grade and better. But it’s got corporate side as well as some exposure on the treasury side or the, you know, U.S. government side.

And so, as a result of that, the duration, with 10% going in each of these buckets, the average duration on this portfolio is right about four years on the bond side. And so, not that that’s super long, but, I mean, it’s even longer than what we have over on the retirement side. That gives us a little bit more room for some potential return to be able to develop. And again, with 40% of our portfolio allocated here, we do want bonds to play defense for us, but we also want them to be generating some type of a decent return as well. So, hopefully, that gives you a little bit of an overview and oversight on 42% U.S equities, 18% international equities, 40% bonds.

When you look at all of the numbers here, the difference between a 50-50 portfolio versus a 60% stock and a 40% bond, it’s very small in terms of the variance in return, yet the risk changes almost none, meaning you know, the standard deviation doesn’t really move much. And so, as I looked at this and got more and more comfortable with how should we be structuring this, even though we may need some of this money relatively soon, all things considered and depending, the 60-40 split is where we got the most comfortable. And then we just have an appetite for the international markets as well as the U.S. I know some people really like to focus on just U.S. That would definitely be called a bias. And I tried to do everything I can to remove bias out of our decision-making process when it comes to investments. And so, we try to make sure we have that international exposure as well.

The bonds act very nicely as defense if the equity side is getting hurt. This is something where it’s hard for this portfolio to go down significantly because there’s so much weighed in on the bond side. Now, you know, bonds and stocks can both go down at the same time, and it’s certainly possible, but the total drawdown risk of this portfolio was much less than the 90-10 portfolio that I was showing before, even though the actual asset classes were using the same ETFs in almost every instance because of that stock and bond ratio, that potential drawdown from year to year. And so, the risk is less, the volatility is less, the risk is less, but, you know, the overall potential return is less as well.

And so, we’ve come to that place of we don’t want to take any more risk than we’re taking because of a potential drawdown that would be, you know, larger than the potential that we’re exposed to at this point. Just, it wouldn’t make sense. And so, again, that’s why we gotten very comfortable with the way this portfolio is set up. I will tell you also, we use M1 for this setup and structure. It is so nice and easy to use to do rebalancing even when we… Because we’re constantly adding money, I forgot to say this, every week we’re adding money into this fund, not a lot, but it’s a decent amount and it’s growing every week, and with our own contributions and then hopefully with the returns, it’s gonna be growing on a regular basis as well. But what M1 does is as the portfolio even gets out of balance before, it would try to rebalance by selling some and buying, you know, some of another fund to get it rebalanced. They actually target where if it gets out of balance, they will put the incoming funds toward the ETFs that are currently underweighted relative to the target.

And so, that’s been really nice to be able to just see that happen. And because we’re putting those funds in annually, when we rebalance, most likely there’s gonna be very little activity because we’ve had new dollars coming in that are, for the most part, keeping the overall portfolio very balanced according to what our target is. And I don’t see… Not like retirement where we’re gonna be potentially making it more and more conservative over time, bringing more bonds in, moving more away from the small on the value side, more towards the large and the growth side of the asset class spectrum. But this is one where most likely we’re going to stick with this 60-40 split probably for a while. I could see us moving maybe more toward a 50-50 in another 10 or 15 years. Certainly, we’ll have to see no, you know, promises or guarantees there.

Again, hopefully, this has been helpful. This gives you one piece of visibility as to how, you know, one person takes this on and thinks about it. I wanna encourage you to download this and save a copy for yourself, and you can play with it and make changes and do whatever you wanna do to think about it. Also, ask me any questions you’ve got. I’d be happy to answer them. And I do attribute a lot of the learning I’ve had here to Paul Merriman and to another gentleman there who’s helped him a great deal, his name’s Chris Peterson with doing research around these ETFs and trying to build out these nice, well-balanced options within a portfolio that’s split between the blend and the value options, both large and small-cap on both the U.S. and the international side.

So, many, many thanks to you for joining today. This is a wrap for episode 51. And before I send off, next week is gonna be episode 52, and that will mark one year since the launch of this podcast. So, look forward to some fun things to celebrate that, coming next week. Happy day.

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Join Chief Financial Officer Ken Kaufman as he helps you track and hack your net worth. For those seeking financial independence, your net worth is one of the most significant measurements of success. Using his two decades of financial experience, Ken Kaufman helps you overcome your financial obstacles and look onward towards a better, brighter financial future.

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