My personal investments can be divided up into multiple portfolios that work together to meet my long-term, intermediate-term, and short-term financial goals.
My short-term and emergency savings are in cash-linked, high-liquidity accounts. My intermediate-term savings are in an online brokerage account of conservative dividend-focused securities. These assets could be fairly quickly liquidated in an emergency, but I will take many steps to avoid using these funds until about 8 years down the road.
My Roth IRA is a small account where I can make some more higher risk (and hopefully higher return) investments to build toward my retirement. Most of the stocks currently in this account are deeply undervalued companies that may take years to reach their intrinsic values. Some may be short-term speculative plays as well. These assets are slightly less accessible than those previously mentioned and are intended to be saved for retirement.
My pension and 403(b) are invested in exchange-traded funds on an aggressive long-term strategy. These funds are off limits until retirement.
Let’s take a closer look at each of the 4 levels of the pyramid, staring from the top.
Cash-based accounts, such as a savings account or CD, pay interest rates that are lower than inflation, so they are not great for long-term savings. I currently am more focused on long-term investing, so my cash-based saving is limited to a standard savings account that I can use for emergencies. I keep that account above a certain balance that masks my risk profile, then I put any additional savings into my investment portfolios, which are designed to outpace inflation.
Dividend Portfolio (Robinhood) – updated April 1, 2017
This portfolio is based on principles of dividend growth investing on purchasing securities with high dividend yields at prices below their intrinsic values. My objective here is growth and preservation of capital over an intermediate term of 10 years. This portfolio is much diversified across industries to reduce risk, and I plan to add more diversity among asset gradually over the next several years.
As of March 30, 2017, this fund has a dividend yield of 6.5% on the original investment costs. I intend to reinvest all dividends for compounding returns, but not necessarily into the same securities (DRIP investing). They are paid to cash (into the brokerage account), where they will be applied–along with continuing contributions–to purchasing more dividend-paying securities, including common stocks, preferred stock funds, and bond funds. This is not a popular investment strategy because most investors would lose too much money to transaction fees and/or capital gains tax. However, I work with a transaction-free broker (Robinhood), and I am in a low enough tax bracket that capital gains tax isn’t a concern. I also like this strategy because it avoids the issue of overpaying for shares when the price of a stock in a DRIP gets too high. I can reinvest all dividends into securities that are on my watchlist, fit my allocation strategy, and are priced below their intrinsic value.
Apollo Commercial Real Estate (ARI) and Omega Healthcare Investors (OHI) are real estate investment trusts (REITs) with high-yield dividends and lower price volatility than the overall stock market. Target (TGT) and Cisco (CSCO) are dividend growth stocks. ScotiaBank (BNS) pays a decent dividend yield, and I was able to purchase it at a price I believe to be notably lower than intrinsic value. 8point3 Energy (CAFD) is a utility company that I bought for its high dividend yield and because I believe strongly in the long-term economic and environmental benefits of investing in solar power. CAFD announced a dividend increase on March 28, 2017, increasing the value and yield of my shares. Here are my current yields on original investments:
- ARI – 10.80%
- CSCO – 3.85%
- TGT – 3.77%
- OHI – 7.80%
- BNS – 3.88%
- CAFD – 7.87%
- JPS – 7.71%
In March, I also opened a position in the Nuveen Preferred Securities Income Fund (JPS). JPS is a closed-end fund (CEF) that pays a high-dividend yield from the ownership of preferred stocks. I bought it at a price below net asset value (NAV). I am currently researching other CEFs and ETFs to add business development companies (BDCs), preferred stock funds, and bond funds to expand my allocations.
Value Portfolio (Roth IRA) – updated April 1, 2017
The goal of this portfolio is long term capital appreciation for my retirement through a value investing strategy. I seek common stocks that are undervalued in multiple metrics, including ROE valuation, P/E multiple, book value, dividend value, and discounted cash flow. I also make small investments of a more speculative nature.
Currently, my largest holdings are Gilead Sciences (GILD) and GameStop (GME), which are companies with a strong history of profitability that have had major price pullbacks within the last year. I believe these to be temporary setbacks. While impatient investors have been backing out, I have been purchasing shares that I anticipate will have significant long term growth. If the prices continue to struggle for awhile, I will at least collect a solid dividend yield from both companies.
PDL Biopharma (PDLI) and Mirna Therapeutics (MIRN) are small-cap biotechnology companies. These are more speculative plays, hence the smaller allocations. PDL’s “Queen et al.” patents expired in 2016, causing a significant decrease in earnings and a discontinuation of the company’s dividend. This lead to a significant price drop that I believe has gone below the company’s intrinsic value. PDL’s management has made many smart investments and is committed to creating value for shareholders. They are in a similar situation to GILD, waiting for pipeline development or acquisitions opportunities to create earnings growth. MIRN is an interesting company focused on micro RNA-based oncology. It took a hit from a failed phase 2 trial on one of its treatments, allowing me to scoop up shares priced well below book value. If the stock price returns to book value, I will nearly double my investment. However, a return to book value is no longer likely to come from MIRN’s micro RNA research. The company is shifting strategies, looking for a merger opportunity. With no debt and plenty of cash on hand, a merger is certainly possible and could result in a profitable sail of my shares.
Index Funds (403(b), Roth 403(b) and pension) – updated April 1, 2017
My index funds are divided between a 403(b) from a former employer, a Roth 403(b) with my current employer, and my state teacher pension. I have not elected to rollover my 403(b) from the former employer because I am content with its current placement in the Vanguard Target 2050 Fund, which has nearly doubled the value of my contributions.
My Roth 403(b) is with Valic, which offers a long list of fund options. I was not happy with Valic’s target fund options, so I spent a few hours sifting through funds–many unfortunately of poor quality and/or high expense–to find a combination that would meet my requirements. I settled on the Vanguard Wellington Fund (50%), Vanguard LifeStrategy Growth Fund (40%), and the VALIC Small Cap Special Values Fund (10%). The Vanguard funds offer diversification along with great MorningStar ratings and low expense ratios. Those two funds are very large-cap heavy, so I added a small allocation to a small cap value fund, an idea I got from reading All About Asset Allocation by Richard A. Ferri.
The Indiana Public Retirement System offers a much more limited selection of funds (still better than some public pension plans). These include an S&P 500 index fund, a domestic small cap stock fund that is actually a composite of 3 small/mid-cap index funds, an international stock fund that is a composite of a 1 MSCI index fund and 3 ACWI index funds, an aggregate bond fund, a TIPS fund, and a “stable value” fund. These can be combined into a target fund or organized into your own configurations. I was in a custom allocation for awhile, but switched to the Target 2050 Fund once I had my Valic funds in a better configuration.
With the 2 accounts that offer the fewest options invested in target funds, about 80% of my funds do not need regular attention. The remaining 20%, in the account that has the most investment options, can be reallocated as needed to fill any discrepancies in the target funds. I wanted more small value stock exposure and more real estate exposure than the target funds offer, so I put 10% of my Valic allocations into the Small Special Values fund. Valic only has one real estate fund option, and I do not care for it, so I plan to add direct REIT investments to my Roth IRA.
The chart to the right shows the allocations of all of my investment accounts, including my Robinhood, Roth IRA accounts, and employer-based accounts. It is an aggressive allocation of 82% common stocks, 15% bonds and preferred stocks, and 3% real estate. This is slightly more stock-heavy than I would like to be. The employer-based accounts do not offer great options for real estate, bonds, and preferred stocks, so I will be adding more exposer to these types of assets through my personal brokerage accounts.
Disclaimer: I am an individual investor. I would not call myself a professional investor, and I am not a certified financial advisor. I share my ideas for educational purposes, as writing down my thoughts and strategies helps me learn just as much as it probably helps those who read it. This article is not intended to encourage you to invest in any particular way. Please consider your own risk profile, do your own research, and/or consult with a financial advisor before making financial decisions.