“No empire lasts forever.” -a sign on a co-workers desk
“There have been thousands of American car companies. Almost all of them are now gone. When the car came out, instead of investing in a car company, a better idea would have been to short horses.” -Warren Buffett at the 2013 shareholders meeting.
What do those quotes mean? More on that in a moment. First of all, I need to show you the rest of my portfolio* including my single largest holding :
- Fidelity Contrafund (FCNTX), $247,519: I’m not a big fan of this fund, but it happens to be the least evil option in my 401k. The fees aren’t terrible, but they aren’t great either. However, the company match ($2000/year) and the incredible tax benefits of a 401k make it worthwhile.
- Vanguard S&P 500 (VFIAX), $108,322: This is my first move towards a rational investment strategy! When I started this blog, I didn’t really know much at all about index investing. MMM and Jim Collins set me straight, although I probably should have purchased VTSAX instead.
- Vanguard Technology (VGT), $69,411: I’ll always have a soft spot in my heart for technology stocks. This Vanguard, sector-specific index fund allows me to invest in technology, but be a bit diversified.
No Empire lasts forever
Investing in individual stocks is dangerous business. Most companies that have ever existed are now long gone. Incredibly, according to this article, most businesses now only last 15 years. It’s easy and fun to ride a hot stock up, up, up. It’s much harder to know when to sell. Back in the Internet boom around 2000, I was jumping up and down when an Internet mutual fund I bought went from $10 to $120. I wasn’t jumping up and down when it sank back below $10. Just a short time ago, Blackberry and Nokia were on top of the world. Now Apple, Samsung and Google have toppled their empires. Amazing.
What if the Apple or Google or facebook that I hold now is at the top of its apogee? I could be in for rough times. On the other hand, what if I sell and the apogee is still 2 decades away?
Holding stocks is like holding lit sticks of dynamite with fuses of unknown length. Apple could continue to do great for 25 years. On the other hand, companies like Samsung, Xiaomi and Google could bury Apple before the decade is up. No one knows.
So, as long as I hold these stocks in such large quantities (Apple and facebook are almost 1/3 (!) or my portfolio), I’m asking for trouble. Technology stocks are especially dangerous because of the intense competition and amazing rate of innovation. Think what phones looked like 10 years ago!
The Future
The solution is to lessen my exposure to these stocks. The one big problem I have is taxes. If I sold now, I’d be hit with a hefty tax bill due to capital gains. If I sell them in retirement, I probably won’t have to pay a dime in capital gains because our income will be much lower. I’m at least another year from retirement, so I need to hold out for a bit longer. One compromise may be to hit the sell button on some shares on 1/1/2015 and then again on 1/1/2016. Another idea would be to set up a stop-loss order (thanks reader suggestion!).
In any case, here is what I’ll put future money into:
- Index funds: It’s no secret that active fund managers have a very difficult time beating the indices. Add in their high fees and an actively managed fund usually performs poorly. Again, MMM and Jim Collins have explained it all very eloquently, so I defer to them.
- Peer lending: I’ve been on Lending Club and Prosper before they were cool (4+ years). I like these platforms as an income stream.
- Berkshire Hathaway: This is the one stock I’ll consider holding in large quantities far into the future. See discussion below.
- Dividends: Only 2 of my holdings pay dividends, Apple and Costco. I’ll probably increase my dividend holdings in the form of a Vanguard fund.
- Real estate and REITs: I don’t want to be one of those people who have 20+ rental homes. However, a couple would be really nice.
- Home flips: We were pretty good flippers. We’d buy an ugly home, make it beautiful, and sell it for a fat profit. I need to write a post on this. I wouldn’t mind doing a couple more should the right opportunity present itself.
My ideal mix in a $1,000,000 portfolio would be the following:
- $600,000 in the stock market, made up of mostly index funds
- $300,000 in 2 rental properties or one multi-family
- $100,000 in peer lending
With the above mix, the peer lending and rental income would generate most of the income I need for day to day life.
For Steve over at the Kapitalust; why I still like Berkshire Hathaway post Buffett and Munger
Steve asked me recently about my thoughts on Berkshire Hathaway post Buffett and Munger. Buffett is 83 (wish him a happy 84th on 8/30!) and Munger is 90, so their time on our blue-green sphere is almost up. Sigh. This worries some people and it used to worry me too, but not anymore. Here is why:
- There are other brilliant people at Berkshire: Ajit Jain is one of them. Many of these folks have worked with Buffett for years and understand what makes Berkshire tick.
- The culture is established and strong: I believe that the people who work at Berkshire won’t spoil the culture. I don’t think that any successor to Buffett is going to start playing with crazy derivatives or buy an NFL team.
- The holdings are strong: Berkshire owns very solid companies like BNSF. Other big investments include Coke, American Express and Wells Fargo. These are businesses that aren’t going away any time soon. It would take a long time to drive Berkshire into the ground.
- Buffett has installed a safety mechanism: Buffett’s son Howard has one role in Berkshire after Buffett dies, to guard the culture. If someone at Berkshire were to behave in a way inconsistent with Berkshire values, Howard has the power to hit the eject button, James Bond style.
This isn’t to say that everything will be roses. One of Berkshire’s greatest assets is the Buffett name. I’d bet that a lot of people all over the world know who Warren Buffett is. Ajit Jain or Ted Weschler, not so much. There will never be another Buffett or Munger, but I expect Berkshire Hathaway will be strong for decades to come.
Phew, glad that’s over
I’m happy I got that over with. If you read parts 1 and 2, you know where the rest of my money is. If you read this one carefully, you know that my portfolio has a lot of speculative investments that could very will burn me at some point in the near future. While I hope that doesn’t happen, it would make for some good blog drama.
*Astute readers will notice that my numbers don’t match the number on my column at the right. Besides the stuff I’ve mentioned, I also have money in peer lending, cash and several other small funds in my 401k. Because each of these is around $10,000 or less, I didn’t think they were worth mentioning.
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Mr. 1500,
Nice three part on your holdings. Your big tech stocks have certainly been winners, but I was surprised how heavily weighted you are in those big companies. I like your plan to move more toward index funds for income. I too have been stuck with Fidelity Contrafund as the least bad choice of stock funds in retirement accounts, but the fees are pretty low considering, and performance has been good. I’ve left some in there while moving some to index funds. Thanks for sharing your portfolio.
-RBD
Retire Before Dad recently posted…What Can Go Wrong Buying Condo Rentals?
Keep in mind that the big tech stocks didn’t start out that way. They have outpaced the rest of the portfolio by far, so now I have to rebalance.
It seems that half the people in the world own some Contrafund! It did well for a while, but it’s been underperforming the indices lately.
Interesting post. I am curious about VFIAX. I’m in VFINX – what is the difference between the two? Why did you buy VFIAX over the other? Aren’t they both S&P 500 indexes?
Hey Scooze,
VFINX and VFIAX are the same fund, just “Investor Shares” (VFINX) and “Admiral Shares” (VFIAX).
-VFINX has a $3,000 minimum initial investment.
-VFIAX has a $10,000 minimum initial investment and a slightly lower expense ratio.
Once you get to $10k invested in VFINX, it should automatically convert to VFIAX but you might want to check to make sure.
Big Guy Money recently posted…A Choice We Must All Make: Your Money Or Your Life
Thanks for the info. I actually have my IRA in Tradeking – and far more than $10k in VFINX. It hasn’t converted to VFIAX…. perhaps I should look into it. They have good customer service.
Thanks again!
Thanks for sharing. This is extremely useful for a young person like me starting out. I think the only individual stock I want to invest is Berkshire Hathaway. Hopefully by the end of the year. All other investments are currently in index funds. One of the things I’ve been debating is the timing of investments. Should I fully fund our ROTH and Traditional IRA ($11K) at the beginning of the year and then, tackle our after tax funds? Right now, I have an automatic monthly contribution going to 401K, ROTH IRA, and Traditional IRA (hubby) that will max out the accounts at the end of the year.
We want to purchase a rental property in the next two years. I’m setting a goal of saving up a hefty down payment for the rental property in the next two years. I also think it might be a good idea to get a Realtor license like you.
So many ideas, plans, and thoughts! 🙂
SavvyFinancialLatina recently posted…How to Succeed in Corporate America
SFL could also stand for Smart Financial Latina. Sounds to me like you have some very high functioning grey matter. If you do buy Berkshire, come to the meeting in May. You won’t regret it.
Hey Mr. 1500…
Thanks for the links!
Nicely done post and it reminds me a bit of my own process of unwinding my individual stocks and actively managed funds once I finally saw the index light.
If you’ll permit me one word of caution, I’d be more wary of Berkshire post Buffett and Munger. Outperforming the market, as they have, is extremely rare.
Back in the 80s I owned an actively managed fund called Mutual Shares run by a guy named Michael Price. For the years I owned it, as sometimes happens, Price did a brilliant job of outperforming the market. I made a nice chunk and as it was in a taxable account, found myself sitting on a fairly sizable capital gain. Then Mr. Price decided to sell out to Franklin Templeton for half a billion dollars. I could hardly blame him, but it left me with a dilemma.
Leading up to the sale, FT and Mr. Price mounted a major PR campaign designed to keep people on board after the change. Suddenly Mr. Price wasn’t a star, but rather the success had been a team effort. The bench was deep and would still be there after he left and that’s what really counted, right?
As it turned out, nope. And one of my better investment calls from those days was to recognize that the magic that had been Mutual Shares was walking out the door with Mr. Price.
For what it’s worth…
jlcollinsnh recently posted…Stocks — Part XXVI: Pulling the 4%
jlcollinsnh, I’ve lurked over on your site for years and learned more from you than you know! You were one of my major influences on moving towards portfolio/investment simplicity through broad-based index funds.
Thanks for the critical view on BRK, cause I know I can get blinded a bit from my affinity with BRK and slack a little sometimes in my critical eye of the business.
From my (and ongoing) quantitative and qualitative analysis, BRK is an exceptionally strong business. In my view, they are long past the days of exceptional growth; but I believe there is still value wherein they can act as a stabilizer in a portfolio of mostly broad-based index funds. Because of their exceptionally strong business, I see them as a steady producer through good times and bad.
But as you stated, the unknown unknown is post-WB+CM. I guess I need to think long, deep, and hard on how that post-Buffett landscape is going to affect the business.
Steve recently posted…Are Markets Efficient?
Hey Steve…
Thanks for the kind words and I’m honored to have you as a reader.
jlcollinsnh recently posted…Stocks — Part XXVI: Pulling the 4%
I definitely agree that Berkshire’s big growth days are over. As Munger and Buffett have said many times, it’s very hard to move the needle when they are so big.
Even with Buffett/Munger at the helm, they have failed to beat the S&P 500 for the past 5 years. This is the first time this has ever happened, but it’s also been a period of crazy-ass growth. Berkshire is more likely to beat in down times.
In any case, I’ll probably hold Berkshire for decades to come, but it will be a relatively small percentage of my portfolio.
VGT: Actually instead of being diversified you may be over bought since Apple, Google, and Facebook are in the top 7 major holdings of VGT. But like you I have a Vanguard sector specific fund, Vanguard Health Care. Health care costs continue to go up.
Yeah, I was thinking the same thing earlier this week. What will probably happen is that I’ll eventually sell all of my individual shares, but hold VGT so I can still stay in the tech stock game a bit.
Just like that guy in Napoleon Dynamite, I love technology (wait until the credits are over).
Very interesting – thanks for the inside look!
I think of a quote from William Bernstein, author of The Four Pillars of Investing and The Investor’s Manifesto among others…
“When you’ve won the game, stop playing.”
Good job in recognizing that you’re SO close to winning the game, and deciding to de-risk a bit.
Big Guy Money recently posted…A Choice We Must All Make: Your Money Or Your Life
Yes, I just with there was some way around the taxes. Hopefully, I can hold on to Apple and facebook for a couple more years without them blowing up in my face.
First: you’ve seen the light and are moving to a simpler way of staying invested in the market! In our RRSP (Canadian version of 401k) we’re building up VUN (Canadian version of VTI) and VXC (Canadian version of VXUS). Might eventually swap the VUN for VTI when the accounts get into the high tens of thousands for tax optimization purposes. But swapping VUN to VTI would add an additional layer of complexity that I’d rather not have to deal with. Up in the air on VUN/VTI swap in the future.
Second: I concur with a lot of what you have to say about Berkshire. It’s a boring enough business already (in the sense it’s no Apple or Google) but that’s just the way I like businesses to be. I imagine it will become even more boring with the celebrity Buffett and Munger carry around with them gone. I can’t imagine WB hasn’t taken the necessary steps to make sure his life’s master work continues chugging along after he is gone; reading The Snowball really gave me a picture of the love he has for BRK and what he has built.
Perhaps they will finally issue dividends in the future if they come to the conclusion that the profits are better off in the hands of the owners rather than for them to invest and compound further. That would be sort of a ‘worst case’ scenario for me and it would be totally fine. BRK is well diversified and I see them as sort of a ‘niche quasi index fund’. Potentially great buying opportunities would be after the deaths of WB and CM and if a super cat hit the insurance industry hard. Anyways, enough rambling on BRK – great post, as always!
Steve recently posted…Are Markets Efficient?
Ha, dividends! Buffett certainly hates that, but they seem to have a very hard time finding ways to deploy their massive cash pile. I don’t think we’ll see it as long as Buffett is around, but maybe in a decade or so.
With your dream scenario listed below, you mention you would live off rental and peer lending, i’m curious how that would work out for the numbers and expected return, would this negate any 4% rule from the 600K or how would that work?
My ideal mix in a $1,000,000 portfolio would be the following:
$600,000 in the stock market, made up of mostly index funds
$300,000 in 2 rental properties or one multi-family
$100,000 in peer lending
Even Steven recently posted…Guys with Beards are Secret Frugal Mofos
Good question. I’d be curious to know the end game draw down strat for the various investments. Lots of theories there (but very far out for me) that i havent looked into very hard.
EX: Keeping 1+ years of cash so you don’t tank your draw down your total return stocks in bad years. Mixing dividend paying stocks in with growth stocks. Rentals/REITS for higher yield in your dividend portion. Peer lending for high per month but high risk yield.
It’s awesome though when people focus on debt first like you did. Subtract that debt load (house, car, cc’s) from the monthly budget and “holy crap” you don’t really need that much to live on! *happy dance saving time every paycheck*
“Keeping 1+ years of cash so you don’t tank your draw down your total return stocks in bad years.”
I love it and this is exactly what I’ll do. If I were retired now, I’d be cashing in stocks for cash. In a recession, I’d be burning through the cash pile.
This is a great post. It is great to see other’s investment strategies. Even though I’m a few years away from FIRE, I’ve been thinking more and more about how to move around investments and such, and especially how much cash to have on hand. I was planning on at least 2 years of cash (maybe some of that in CDs?). My thinking is that we are retiring in our early 40s, it is very important early on not to pull down our principle investments too heavily, especially is things turn down for a while. I think 2 yrs of ‘cash’ can easily cover 3 years expenses if we tighten up our budget. From what I’ve read, historically most bear markets average less than two year – so, ideally I’d want enough cash in hand to outlast that, as well as a little extra cash to give the markets time to rebuild their value. Am, I over thinking this? Is 1 year cash about the standard in the FIRE community?
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Ahhh, the great debate; how much cash to have. I think that this depends on two things:
1) Current investments: If you have a portfolio of stocks paying big time dividends or have $200,000 in peer lending or a couple rental properties, perhaps you don’t need much cash at all. On the other hand, if your whole portfolio is tied up in crazy growth stocks like mine, I’d have 2 years cash socked away.
2) Cost of holding cash: Interest rates are horrible. The top Internet banks only pay around 1%, so you’re losing money to inflation. In an environment like this, I prefer to keep the absolute bare minimum amount in cash.
I see 2 rentals bringing in about 3K/month after all expenses (if they’re paid off). The peer lending would bring in another 1K/month. So, I’d be somewhere around 48K/ year which would pay for all of my expenses without ever touching my core 600K.
Again, thank you for your transparency on revealing your investments. I think you have a sound plan in place to diversify your concentrated positions and preserve the longevity of your assets. I would encourage you to consider a combined process of the stop-losses for inter-period fluctuations, and begin to sell off pieces of your large individual holdings at regular intervals (quarterly, semiannually, annually, etc.). That way you have downside coverage outside of your selling windows and the set plan to reduce your exposure over a period of time.
Anyways, that IPO we discussed has been announced… should be interesting to track the upcoming developments.
writing2reality recently posted…Snowball City – Loyal3 Dividends
YES, the IPO! Please, please, please give some shares to us little guys who have stood behind you for years.
I really like the idea of a stop loss. I am going to set them up very soon.
Can you guys stop being so cryptic and tell us whether you’re talking about “Jessica Alba’s Honest Co. (maker of eco-friendly baby products)” or The Lending Club?!?
Which one is it??! 🙂
Jessica Alba, ha!! It is Lending Club. Just don’t want to give people bad ideas. Really like the company and their CEO.
I just googled “recent IPO announcements” and those were the two that came up 🙂
Get where you are coming from with regards to giving out bad ideas. I don’t know much about the company myself (or even if I could invest in it being from UK) so certainly won’t be getting any ideas, good or bad! Thanks for the interesting 3 parter… found it very insighful!
Some very good points Mr 1500. I have been building dividend stocks recently as I see the income is more stable, but I do always want index funds and select those in my 401(k).
I wish I could get into the Peer-to-Peer lending, that isn’t allowed in my state directly so I would have to pay a 3rd party to buy their share. I hope that changes in the future.
Kipp recently posted…Can a Nissan Leaf Save Me Money?
Kipp, after the Lending Club IPO, you will have your chance. It will be available in all states.
Gains are good trouble, but it is hard to argue with success.
I’d love to have your portfolio in a 60 stocks/40 bonds split of VTSAX, VTIAX and VWIUX. (Assuming it is taxable dollars. Substitute VBTLX for VWIUX if in tax-sheltered.)
I think owning a REIT index is much better than playing the landlord. That is not for everyone. Not for most probably when you compare the hassle factors. I am in a group with 12 rental units. They generate income, but the repairs, maintenance and vacancies are quite amazing.
Nice job and good luck diversifying.
Wade recently posted…A stroll through Fargo
Yes, good trouble indeed. Worrying about incredible gains are definitely first world problems.
My problem with individual stocks is often not knowing when to sell. Speaking of Nokia, I bought it over 10 years ago at $14. It went up to $40 and now down to the single digits. I’ll stick with index funds. Fortunately for me, my 457 (401k) has many options from Vanguard…no match though. I have a small portion in lending club for fun, but I’m not sure it’s worth it when you consider the risk and rewards.
Andrew@LivingRichCheaply recently posted…Would You Live in a Multigenerational Household?
Hi there! Love the blog. As far as your tax situation goes, you might want to consider a charitable account that will allow you to transfer some of your stock directly to your favorite charity to avoid paying any capital gains while still being able to deduct the full market value of the appreciated shares from your taxes. Vanguard charitable has a great program.
Thanks Joe! Interesting thought.
This is aspirational! It gives other folks on the same journey some ideas on money management and investments.
Individual stocks are certainly risky…you never know what will happen when. For my portfolio am also tending to index funds…and I sleep better at night 🙂
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