April 2021 Personal Finance Update
I started to share my personal finance last month. Time flew quickly and we will go over some updates today. For those who are new to this website, I am on my journey to FIRE (Financial Independence, Retire Early). Although retirement is still several years away, it is critical to prepare myself both financially and mentally for this big milestone. If you are interested in finding out more about my journey, please like my Facebook, Twitter page or put your comment below. You will be notified when I post any new content.
The account that I am sharing is my M1 Finance portfolio. This is one of several of my accounts. It was opened in August 2020. This is not my entire investment. But the investing strategy used in this account represents my overall investment philosophy.
As of the end of April, the portfolio grew to over $254,000, which is an increase of $24,000 from March. Majority of the increase was due to the daily $1000 deposit into the account. M1 Finance automatically purchases additional shares based on the target allocation. If a stock falls in price and becomes underweighted, M1 Finance purchases more shares of it. On the other hand, if a stock is overweight, it skips the purchase. This way, I purchase shares on a daily basis to achieve dollar cost averaging.
If you are interested in opening an account on M1 Finance, please use my referral link and you will get $30 from them when you deposit $1000 into your account.
According to M1 Finance, the money-weighted return in April was 3.64%, which is not bad at all, given that my portfolio is concentrated in technology and growth companies. They were under a lot of selling pressure recently due to the concerns of inflation and rising interest rates.
What investments do I have?
In anticipation of rising interest rates, I am shifting my asset allocation to favor finance, value stocks and dividend growth companies. The idea is that financial institutions are more likely to benefit in this environment because there is more room for them to make money with higher interest rates. On the other hand, most growth companies are less established and they rely on borrowing money to fund their growth. They will slow down if it is more difficult or costly to borrow.
My portfolio consists of the followings:
|% of my portfolio||Target %||Ticker||Stock/ETF|
|35.2%||1%||Growth portfolio (39 companies/ETFs)|
|11.8%||12%||Technology portfolio (13 companies/ETFs)|
|10%||1%||ARKK||Ark Innovation ETF|
|8.3%||8%||XLF||Financial Select Sector SPDR Fund (XLF)|
|8.1%||1%||Recovery Stocks (11 companies/ETFs)|
|6.8%||1%||XLE||Energy Select Sector SPDR Fund|
|5%||24%||VBR||Vanguard Small-Cap Value ETF|
|3.6%||12%||Health Care portfolio (4 companies/ETFs)|
|3.4%||16%||VFH||Financial portfolio (1 ETF)|
|2.5%||1%||ARKQ||ARK Autonomous Technology & Robotics ETF|
|2.5%||12%||SCHD||Dividend Growth portfolio (1 ETF)|
|2.2%||11%||CQQQ, EMQQ||Emerging Market portfolio (2 ETFs)|
My target allocation
Below is my target allocation that I would like to invest my new money in. As you can see, this is a more defensive portfolio compared to what I have been investing in the last 7 months. This is in response to the change in the economy and market conditions. Growth and technology companies are simply too expensive to buy in my opinion.
25% – Financial
25% – Small cap value
12.5% – Technology
12.5% – Dividend Growth
12.5% – Health care
12.5% – Emerging market
What do I do with the existing stocks/ETFs?
Despite the shift in the market condition, I try to hold onto the shares that I already acquired as much as possible because I do believe that they will do well in the long run.
I did, however, sold some of them so that I could shift to the new allocation more quickly. For example, I sold 3 ETFs from Ark Invest:
- 4.4% ARK Genomic Revolution ETF (ARKG)
- 2.6% ARK Fintech Innovation ETF (ARKF)
- 2.6% ARK Next Generation Internet ETF (ARKW)
They used to make up 9.6% of my M1 Finance portfolio. I made a slight profit out of them. By using a technique called ‘tax loss harvesting’, capital gain tax is avoided. Essentially, I sold some of the stocks that declined in value to realize capital loss to offset the gain. The proceeds (about $52000) are used toward funding the new allocation. I felt that it was a good move as I reduced the risk and also increased the yield. Once the target allocation is achieved, the yield should be about 1.4%, which is inline with S&P 500.
Why did I choose them?
As you can see, 50% of the new money will be invested in financial companies and small cap value stocks. The reason is that they are likely the biggest beneficiaries of the re-opening of our economy. The valuation is relatively low comparing to other sectors.
It doesn’t mean that I don’t like technology and growth companies any more. I will continue to purchase and own them. But my strategy now is to purchase them through ETFs instead instead of individual companies unless they are very attractive. In addition, I also started to buy the growth companies with dividend (hence Dividend Growth Companies).
In my financial update in March, I mentioned that I sold most of the Chinese companies, like Alibaba, Bidu and etc. My concern was more about the risk of delisting these companies in the US. It was not because of the prospect of them. In order to benefit from the booming/recovering economy overseas, I decided to add emerging market ETFs to my portfolio. This way, I get exposure in those markets while minimizing the risk of individual companies being delisted.
I have a rental property in a suburb near silicon valley. It has been a boring investment. The income and expenses are very predictable.
I receive about $2200 a month of rent each month, of which $1000 goes to the HOA and property tax. Since I refinanced my main residence to pay for this investment property in full through an LLC, there is no mortgage payment paid by the LLC. It pockets about $1200 a month before other expenses.
As I mentioned in my previous post, I was thinking about selling it. But before I pull the trigger, I continue to collect monthly rent and enjoy the appreciation in property value.
Since I pursue FIRE, I try to minimize my expenses so that I can quit the rat race earlier. During the pandemic, my wife and I both work from home and my kid studies through online classes. All the traveling expenses, gasoline, entertainment and after school expenses are almost gone.
Overall, non-mortgage related expenses were $3415 in April, which is higher than the 3-month average. The big jump in “bills and subscriptions” was mainly due to the auto insurance for our car. Also, $239 in the “gasoline and automotive related expenses” was for DMV license renewal. The water bill of $140 may seem high. However, it is because the water company charges us every 2 months.
|April 2021||Average over first 3 months in 2021||Category|
|$4500||$4500||mortgage payment (principal + interest) and property tax withholding|
|$1139||$1130||groceries and takeouts|
|$932||$130||bills, subscriptions (cell phone, software, Disney+ , Amazon, etc.)|
|$270||$200||Electricity and Gas (PG&E)|
|$44||$136||health and wellness|
|$0||$312||travel (we did not travel, but need to pay the annual HOA fee of my timeshare.)|
|$315||$85||gasoline and automotive related expenses|
Otherwise, the spending was inline with the average over first 3 months. My goal is to keep the monthly non-mortgage related expenses to be less than $3300 (excluding travels). So far we are within our budget this year. We have a separate budget of $5000 for travel this year and we hope to take a couple of trips later.
Our FIRE goal
My wife and I hope to retire as soon as possible. Hopefully, in the next few years, we will accumulate enough investments (stock, ETFs, real estate, etc.) and reduce our expenses so that we can comfortably live off of dividend and rental incomes. If you want to follow our FIRE journey, please like my Facebook, Twitter page or comment below to get the latest updates. Later.