Critique my retirement portfolio - I'm 27 and want to live life
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.
What do you guys think?
Portfolio: http://s29.postimg.org/jxdftayqv/Screen_Shot_2015_03_23_at_8_04_39_PM.png
This has troll written all over it but I'll bite anyway...
Why in the fuck would want to hold so many tiny positions in your personal account? Killing growth potential, wasting money on fees, too many redundancies.
If you know for a fact that you need a certain amount of income without touching the principal, do some simple math and buy some high quality bonds that will pay good chunk of what you need, or close to what you need in interest. Invest the rest of the cash in a portfolio with more concentrated positions, say 5-10 stocks or other equities.
If you know you'll need some sort of fixed income you certainly shouldn't have 100% in equities.
"Why in the fuck would want to hold so many tiny positions in your personal account? Killing growth potential, wasting money on fees, too many redundancies."
You didn't even look at the portfolio. The ETF fees equate to about $1,000 a year, there are also no redundancies between the stocks and ETF holdings. I specifically picked those ETFs for that reason. The "tiny" positions are meant to to diversify the portfolio.
You have a point with the bond statement. What are considered "high quality" bonds? Long term US Gov?
Idea should be a investment grade ETF that could yield around 3-3.5% with a high enough duration so you don't have too much problems with rates rising/dropping. Invest 1-1.5m in that and the rest in dividend paying stock that also have growth potential.
1.5m @ 3% thats 45K a year the rest can come from dividends on the remaining 500K (5 to 15k is 1-3% div. yield needed).
Then you have to think about taxes (corporate bonds are taxed at the state level; while treasuries aren't) and the dividend income is taxable as well
Let's say I'd like 60k a year in living money. I'm not aware of any bond, or product that will pay that out without taking a significant portion of the $2 mil, to have enough left over to invest in the 5-10 stock concentrated position like you suggest. Do you know of any?
concentrated meaning a higher percentage of your total equities holdings.
Might I ask how you ended up with $2m in the first place?
It is redundant in the sense that you have about 40 positions total, with several positions in each sector, some of which overlap in terms of industry.
Brokerage fees. $20 round trip doesn't seem expensive for a $2M account, but take into account that you could be paying over $1k in brokerage fees (trade commissions) each year because you have so many positions. I don't know about you, but I'd rather keep that money invested.
If you are so concerned about diversification, you should just build an equities portfolio of say 7-8 ETF's. The stocks in your example may all be great companies but ultimately you have spread yourself too thin. You're likely to just see beta returns in the long run, because you've basically created a miniature mutual fund for yourself.
High quality bonds= bonds from companies or municipalities that are in good financial standing and have good credit ratings. And yes, I am suggesting that you put a decent chunk of the money into bonds. Specifically because you are relying on preservation of capital and a steady, reliable payout. Some of the ETFs in your equities portfolio can be high dividend paying REIT funds to provide more income while adding growth potential.
A 100% equity portfolio is enticing, but if conditions turn south, you're looking at a significant decrease in dividend yield AND a loss of capital at the same time which would not be fun.
To put it simply, there are trade offs involved here.
Congrats. If you spend less than about $80,000 (or 4%) per year, you never have to work again -- the portfolio should just keep growing. Check out Mr. Money Mustache's popular blog on how he and his wife retired at 30 with savings of about $800,000.
Forget about the individual stocks. Buy the following:
US Broad Market Index ETF MSCI EAFE Index ETF Emerging Market ETF REIT ETF a few MLPs (need to own these individually, not in ETF format)
The above should get you the diversification you want with minimal overlap, will be easy to keep track of, and will minimize taxes. If you want to gear it towards higher dividends, just modify the above to dividend focused versions of these broad indexes.
MLPs can work in an ETF or ETN (inside of a tax advantage account). It all depends on how much tax filing you want to do. If you own an MLP in multiple states expect to file K-1's for every state in which it generates income. At $2M I would suggest seeking out a wealth adviser and accountant as there are non-typical investment vehicles accessible to you given that amount of capital that are tax advantaged. IE. you are considered an "accredited investor" and can invest in established startups on their way to IPO.
Some of the advice on this site is so horrifically bad it's hard to even describe.
EDITED: Repost
This is pretty similar to what I have right now. What's your take on doing individual MLPs vs an MLP ETF?
ETFs are a no go. They pay corporate level taxes because registered investment companies (mutual funds and ETFs) are not allowed to own more than 25% in publicly traded partnerships (basically MLPs). So, they set up corporations that pay corporate level taxes and distribute that after tax return to fund investors. Basically they underperform the Alerian index by massive amounts because of this. Hence, why you should own individual MLPs. You only need to file in a state where you generate more than $10,000 in income per year. With yields around 5-6%, that is unlikely for any particular state unless you are investing many millions overall. MLPs shouldn't probably be more than 5-10% of a portfolio.
ETNs are a different story than mutual funds or ETFs. There you should get taxed as ordinary income. You won't get to shield your income with depreciation like a regular MLP, but at least there are no corporate level taxes.
Do not put MLPs in a tax deferred account because you may be subject to UBTI and have to pay taxes on earnings inside that account.
I'd go with MSCI ACWI Ex-US in place of the EAFE Index
Why not ACWI ex-US+a little extra EM over EAFE and EM? Basically a bet on global equities
This is almost exactly what I have except the MLPs and REITs. Instead of the REITs I have an interest in a few commercial real estate properties that generate a small but dependable amount of income. I don't understand MLPs enough to get into them...or I suppose I've never even tried to understand them.
Keep it simple.
Out of curiousity.... How did you make investments in the small commercial properties? I'm curious how you sourced it and got comfortable with the investment.
I'd like to make property investments myself (likely commercial), but I am not the right person to manage or own 100% of it.
LOVE your portfolio.
I would add some preferred securities. I prefer ex-financials, but thats up to you.
Congrats to you. Did you earn the money or inherit it? I ask only because it will likely have a huge bearing on your risk tolerance, how you think about the money, and frankly how long you can stay away from the game. I found myself in a similar situation but had a number of commitments and no real desire to leave everything I had worked for behind to travel. I did hit the reset button to reflect on future plans but quickly found that I missed working on deals and working in general. People overestimate how much they will enjoy retirement (especially early retirement).
How long do you anticipate travelling and just roaming around? Assuming one year and given what you have said, I would put $100k in a checking account and split the rest among diversified low cost index funds and 5 - 10 individual stocks (if you are so inclined). That is what I did. I bought some real estate along the way but only because I was intent on putting down roots (probably not the case for you at the moment). Most of the names I own are companies that I anticipated holding for 2 - 5 years (and often indefinitely) so even though they are sizable positions in my PA I do not monitor their near-term fluctuations (although I do receive alerts). I know you want yield but given rates and depending on your travel plans I would just draw on your checking account and literally check out for the year.
If you want to start depending on this for Income I would suggest you need to be a bit more conservative. If you don't want this to be a full time (or even part time) job then put it all in funds.
Maybe look at an overall allocation of 30% Fixed and 70% equity.
On the fixed side, a good high yield manager for income (I actually still like PIMCO, their high yield team is basic, cheap, and consistent) and maybe something cheap and duration managed on the high quality side.
On the Equity side, I have a preference for small and value, but you could throw in a levered growth manager for fun. On the international side I prefer Frontier - there are only one or two good managers here, not hard to find.
The secret to making it last is being conservative with your spending. Travel cheaply! There was a great article a while back about a retired couple that just picks out an AirBnB in a different country each month and stays in one spot for a month. They eat locally and out of grocery stores, they travel cheaply and make tons of new friends wherever they go. Honestly sounds like a dream. If you have an expensive month in one country, balance it out with a cheap month elsewhere. If you really want to save money, look up some place that you can work as well (organic farming is one way i've heard of people working and traveling for basically free).
This does not constitute actual investment advice. I would have to do a lot more in depth inquiry into your situation and needs for that. I would also charge you.
Edit to my previous - I don't totally ascribe to the efficient markets stuff about perfect risk/reward tradeoffs, so I don't recommend index only with no factor tilts. However, I do think it is generally accurate, especially if you are not willing to put in the work to find some alpha. Basically, a few funds and low fees are pretty much all anyone needs.
I didn't really read the thread but in my skimming I don't think anyone thought about the tax man here. For annual income of 50K you'll have to make ~80K depending on your home state since all of your income will be dividend.
MLP's .... Kinder Morgan...
These people are trying to get you to run a family office for yourself. You don't want that. You want to take a vacation/mini retirement. Buy your portfolio that you designed. There's nothing particularly wrong with it and you obviously put a lot of work into it so just buy it. Make a definite budget/timeline for this mini retirement and stick to it. Have a plan for getting back to work in 1-2 years (MBA with grade nondisclosure) or however long you are planning to take off. If your budget eats into the principle amount so be it, if you do better than expected, great. Just spend your budgeted amount then get back to work.
Take your vacation and have fun. Good luck.
here's an example of a preferred ex-fin: http://www.vaneck.com/funds/PFXF.aspx
Yield is over 5%, the issue quality is pretty good. for example, the top holdings are a mix of tysons foods preferreds with laddered maturity.
Long Apple
It seems like you want to go after safer and less of a headache route. With that kind of money I would suggest investing buying some shares of the companies you most highly regard in your portfolio and investing the rest in either real estate(apartment complexes that can be looked after by management companies) or a franchise business. You will get a lot more than your anticipated 60k a year
It seems like you want to go after safer and less of a headache route. With that kind of money I would suggest investing buying some shares of the companies you most highly regard in your portfolio and investing the rest in either real estate(apartment complexes that can be looked after by management companies) or a franchise business. You will get a lot more than your anticipated 60k a year
Put it all on black.
Not according to Brendan Schaub who, while broke in college, turned $44 into $640 by putting everything on black, 4 times in a row.
I don't know shit, but here is my two cents: You are young so you can take the hit of losing some of your capital. You don't work in markets - SO you can invest 100% of your cash in equity if you so wish. Worst case you go back to work. Until you are 30+ you don't need to worry about FI at all.
You are heavily invested in the US though, I'd look at diversifying, get into Europe. They are about to print loads of money to push the market.. I believe you got way too many stocks to look at, but if that gets you wet why not? Someone suggested properties - I second this. I am 80% of my wealth in properties, 20% in cash (still waiting for the crash to happen 3 years onwards...)
I wonder if you actually wanted critique or if this was a poorly disguised humblebrag
Investing in Real Estate would be a good, people always need a place to live.
So you want $50k of annual income? Assuming a 4% bond yield (pick your poison on duration, investment grade vs. high yield, sovereign, etc. but that kind of return should be achievable) and a 1.9% yield on the S&P 500, you would earn $50k in pre-tax income by investing $1.43 million in equity and $0.57 million in bonds.
I really don't think you have enough. Certainly not if you plan on living in a major city.
I'd wait for interest rates to go up and buy an annuity.
Good luck with that. Rates are never going up again in my lifetime.
I also agree with this. Good luck living in America on 50k a year if you ever want a family. 2mm isn't insignificant, but you're talking about having the same standard of living for the next 60+ years, do you really think that you can swing that and that there's zero chance of you wanting to start a family? If you want a different career try to get into a top Mba, pay cash for it, travel as much as possible before you start, and maybe try for retirement in 20 years. You can live life even if you're in the workforce, as long as you're in the right career
Agree. If you really want to drop out at 27 with 2MM in the bank you are going to have to move someplace low cost and live frugally otherwise you are taking a big gamble on the relationship between asset prices and inflation and you could easily end up way short of where you want to be down the road.
Buy gold bullion. Oh wait, you wanted yield. Damn my standard rec may not be suitable here...
2 million after taxes is at least 2.5, more like 3 million before taxes and that's being conservative ...if you started working at age twenty you would average a gross income of about 400k per year
If started work at twenty two, avg=600k gross per yr
Numbers don't add up sonny, looks like a college investing project you want advice on ...just ask brother
Let's assume for the benefit of the analysis that the OP is telling the truth. When you consider the law of large numbers within the context of high paying jobs it is not outlandish to think that a 27 year old could have netted $2mm after tax. Sure, it's unlikely but there are plenty of scenarios where I can see it happening. 1) young hf analyst works under superstar PM and gets some early career P&L responsibility and proceeds to shoot the lights out (whether through luck or skill). 2) analyst joins a spin off PE fund which grants all employees equity/carry and the fund out performs 3) quant develops a successful HFT strategy at a top fund and is compensated well 4) junior VC guy identifies a company that turns out to be a unicorn and participates in the proceeds. Also, remember the environment and bull market that a 27 year old would have been operating in over the past 7 years. Plenty of factors working in his favor.
so you want principal protection and an income stream? This screams annuity.
Congrats on 2m at 27, its a great accomplishment. Folder looks decent (I would personally shift some investments into AAPL, INTC, and MU for long term, my opinion choice is yours). Moreover, simplicity is always good, just like your stocks carry risk, your decision carries risk. You need to realize this to it's core, it's the only way you will be able to maintain a win/win outlook no matter the outcome. Realize that you may* meet "the one" while you're traveling. You may* want to invest in some kids too.. Who knows? You can brush your shoulder and say "nah that's not me now maybe later" but truth is you'll never know until the moment arrives. You may* survive off of 2m for your entire life and of course this is all dependent on the lifestyle and environment you are willing to be invested in. Staying in a big city itself with 2m -not going to play out too well. Staying in a big city with a family on 2m -definitely not going to work out. Investing in a house/condo in a decently cheap yet beautiful environment (ex: parts of Thailand or South America) may* just give you the license to drive your life comfortably in your 2m. Your post reminds me of the short story "The Dead". Moral of the story is it takes A TREMENDOUS amount of courage to follow a true passion and LIVE for a short period vs not following a passion and being dead your entire life. Do not get upset with your outcome if it doesn't turn out the way you had hoped. Just make sure, which ever route you administer be sure to administer a positive mindset. There is an opportunity everywhere.
How does a troll post still get this much action?
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