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Hi, I'm 27 and have made about $2 million dollars (after tax). I would like to quit my current job and take a break to travel the world and figure out what I want to be when I grow up. I want to do this living only on the dividend income and not touch the principle.
I was wondering if you guys could critique this portfolio. When I buy this portfolio I intend on mentally starting my life from scratch as I have no family or responsibilities. By this I'm saying that my risk tolerance is huge, I will basically pretend as if I'm starting my financial life from scratch, I will forget about all the money I made and the dividend income is just a bonus to fund my lifestyle.
Annual income will be about 50k a year plus principle increase. If the market crashes, and dividends are slashed to 25k a year, I'll figure out a way to ride it out. (get a job, bum it out, freelance, etc).
The current set up is about a million in individual stocks diversified via sector, and another million in ETFs, covering various sectors and geographic locations.
*The symbols highlighted in green are stocks that have never lowered their dividend, even through the 2008 crash.
What do you guys think?
Last edited by cancerous; 03-23-2015 at 10:03 PM..
Damn, I wish I had your portfolio. Two million is enough to live off of comfortably.
Honestly though, I think it's too risky. You have a lot of tech stocks, for example. I'd look into converting 40% of the portfolio into government bonds and THEN live off the income. You have very little to lose (maybe 1-2% less in returns per year) but much more to gain (instead of losing 50%+, you'll lose only 25% in a bad financial crisis). My portfolio includes currency-hedged government bonds from around the world to minimize US Fed interest rate risks. High quality government bonds are not merely dead weight as some people imagine. During the 2008 crisis when the S&P dropped 35%, long-term US Treasuries appreciated 27%. This means that a 60-40 portfolio would have witnessed a loss of merely 10% in 2008, assuming that all the 40% was in long term treasuries. Of course, those would fare bad when the Fed hikes rates, so I would keep a diversified portfolio of bonds. But stay away from corporate bonds because you have plenty of risk and return on the equity side.
Keep in mind that ALL your $2 million is in equity. ETFs are merely an investment vehicle and all your ETFs are equity ETFs. REITS are also a form of equity.
Converting part of your portfolio into bonds would save you the need to "bum around" or freelance, for a small reduction in annual return. I would particularly focus on trimming back all the tech stocks, and also the REITS to some extent. REITS are highly volatile.
Last edited by arctic_gardener; 03-23-2015 at 10:14 PM..
Damn, I wish I had your portfolio. Two million is enough to live off of comfortably.
Honestly though, I think it's too risky. You have a lot of tech stocks, for example. I'd look into converting 40% of the portfolio into government bonds and THEN live off the income. You have very little to lose (maybe 1-2% less in returns per year) but much more to gain (instead of losing 50%+, you'll lose only 25% in a bad financial crisis). My portfolio includes currency-hedged government bonds from around the world to minimize US Fed interest rate risks. High quality government bonds are not merely dead weight as some people imagine. During the 2008 crisis when the S&P dropped 35%, long-term US Treasuries appreciated 27%. This means that a 60-40 portfolio would have witnessed a loss of merely 10% in 2008, assuming that all the 40% was in long term treasuries. Of course, those would fare bad when the Fed hikes rates, so I would keep a diversified portfolio of bonds. But stay away from corporate bonds because you have plenty of risk and return on the equity side.
Keep in mind that ALL your $2 million is in equity. ETFs are merely an investment vehicle and all your ETFs are equity ETFs. REITS are also a form of equity.
How did you buy your long term government bonds? Do you do it via an ETF?
Converting part of your portfolio into bonds would save you the need to "bum around" or freelance, for a small reduction in annual return. I would particularly focus on trimming back all the tech stocks, and also the REITS to some extent. REITS are highly volatile.
I'm looking at the chart between TLT (iShares 20 year Gov bond), and the only scenario where the bonds perform better is if you happen to buy RIGHT before a major crash (like the one in 08). Any other the scenario, the S&P kills the TLT. Anytime between 2009 and now, the S&P outperforms TLT by 20-40% percentage points. Though since December 2014 to now, the TLT has been outperforming or at least keeping up with the S&P. Either way, 40% still seems like a lot?
I'm not sure why you'd want to pick individual stocks. I would have 60-70% in the Vanguard Total World Stock ETF (VT) and 30-40% in a bond fund (one with a much shorter duration than TLT because interest rates will probably go up sooner or later). If you want to get fancy, overweight non-U.S. equities because the U.S. market has gotten expensive; and add some income-oriented securities like REITs and MLPs. But most stock pickers don't beat the market.
Congratulations on making so much money at a young age. It sounds like you could do it again if you had do.
I'm not sure why you'd want to pick individual stocks. I would have 60-70% in the Vanguard Total World Stock ETF (VT) and 30-40% in a bond fund (one with a much shorter duration than TLT because interest rates will probably go up sooner or later). If you want to get fancy, overweight non-U.S. equities because the U.S. market has gotten expensive; and add some income-oriented securities like REITs and MLPs. But most stock pickers don't beat the market.
Congratulations on making so much money at a young age. It sounds like you could do it again if you had do.
Owning individual names allows you to have better tax control, actual company ownership and with low turnover you could have lower costs than etfs
I'm looking at the chart between TLT (iShares 20 year Gov bond), and the only scenario where the bonds perform better is if you happen to buy RIGHT before a major crash (like the one in 08). Any other the scenario, the S&P kills the TLT. Anytime between 2009 and now, the S&P outperforms TLT by 20-40% percentage points. Though since December 2014 to now, the TLT has been outperforming or at least keeping up with the S&P. Either way, 40% still seems like a lot?
The equities will always outperform 80-90% of the time. But when they don't, they underperform terribly. It's those times that you have to watch out for. That's why, because you have to average out the good and bad times, a 60/40 doesn't return 40% less than a 100% stock portfolio.
And yeah, I would go for short-term bonds right now, but who knows when the Fed will actually raise rates. They've been saying that every year now.
Owning individual names allows you to have better tax control, actual company ownership and with low turnover you could have lower costs than etfs
Tax control is a valid point. But the OP is 27, and if he only sells stocks with small gains (or else losses) to minimize taxes in the near term, he'll wind up with a portfolio of stocks with very low cost bases, which will maximize taxes later on.
Company ownership isn't worth a damn.
The lower costs of individual stocks as compared with ETFs is probably overshadowed by the increased diversification of ETFs.
Don't even hold individual stocks in your portfolio.
I agree. Having more than $1M gives you a lot of options to buy the relatively inexpensive "institutional" share classes of various mutual funds. I'd get something globally diversified such as:
First Eagle Global I....Charges .86%. Not cheap, but not a rip off, either. Doesn't really have an income focus, though. Even the more expensive "A" shares of First Eagle Global has actually beaten the S&P 500 Index over the last 20 years with less volatility.
Another option might be something like Franklin Income, especially if you can get the cheap "Advisor" shares, which charge .46%. The "A" shares still charge a reasonable .61% and I'm sure you can avoid the load with a $1M purchase. It spits out plenty of dividends and has solid long term returns. It's a "conservative allocation" fund but is aggressive for the category.
Another thought for a global portfolio, if you would mind going with 2 funds, would be 65% Dodge & Cox Global Stock with 35% Dodge & Cox Global Bond. Both are cheap funds, charging .65% and .60% respectively. The global bond fund is new but all of D&C's other funds have great long term track records and low expenses.
The tax issue is a conundrum I don't have an answer for. I really do think you should simplify your holdings into just one or a few mutual funds....but you might need to consult a tax adviser or financial planner to do it in the most strategic and tax efficient way.
Last edited by mysticaltyger; 03-26-2015 at 12:58 AM..
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