Some define passive income and portfolio income differently. For simplicity, I’m considering them one and the same – income NOT “earned” via a paycheck from my employer. Here is our passive income breakdown as of month-end. We use Personal Capital to track our net worth, assets vs. liabilities, and cash flow.
January 2018 Update
Following great feedback from last month’s update, I attempted to continue with the “face lift” to the primary month-over-month summary table. Additionally, I’ve left the previous month’s account type perspective to highlight taxable vs. non-taxable accounts on a quarterly basis. I’m still playing with additional charts or graphs, but I prefer tables for the time being because I like to see actual numbers. More to come soon.
I also attempted to reorganize some of the content. Overall, I greatly appreciate your continued comments and feedback.
Don’t also forget to checkout the revised 2016 passive income summary, as well as our 2016 vs. 2017 year-over-year (YoY) comparison from a few posts ago.
Let’s now dive further into January’s results.
Background
I had a change of heart toward retirement in October. Nothing changed significantly in January, but we made some decisions in December that will continue to impact our outlook in 2018. Our continued motivation comes from reaching an average of $1,000 a month in passive income. Additionally, we took a further look at how we’re leveraging different account types. This is near the forefront of our investment decisions.
We are taking active measures to increase our earnings or income to invest additional capital. But tax considerations and account allocation can have a significant impact on one’s returns. Again, we consider this an important factor, but not the primary driver of what type of assets we consider.
Related:
2018 Goals Overview: What Do You Want To Do This Year?
Tax Reform & Your PFUI: Applying the 10 Heuristics
Key Monthly Highlights
After a killer month in December with record income across our various accounts, January brought about both “routineness” and dividend hangover.
1) Maturing Investment Opportunities – Our initial contributions into Fundrise weren’t made based on which month potential distributions are paid out, but it is nice to see some passive income occur in a different month each quarter. While January contained our second distribution from Fundrise, we also brought our total investment to $5,000 as we looked to diversify our existing REIT holdings in my Roth IRA.
We might explore other individual holdings or opportunities that pay on a different frequency, but I don’t think we’d solely consider a particular investment just because of its payout frequency. Fundrise currently pays our distributions out in the first month of each quarter (January, April, July, and October). We continue to reinvest all proceeds.
Overall, we received $55.51 in passive income from Fundrise in January.
Related: 6-Month Update: Fundrise Passive Income Review
2) Steady Stalwart Continues to Stall – Related to real estate exposure, my Roth IRA’s REIT Index holding paid out an impressive $1,233 in tax-free income in December, which totaled $3,389 for 2017. While I’m very happy with this figure (especially considering it’s tax-free via the Roth account), December’s payout was down a few hundred dollars vs. December 2016’s figure. I covered more of this in the YoY comparison.
We’re not focused on our Roth contributions right now, but further dips in price does make us consider buying.
Related: Balanced Dividends Passive Income Analysis: 2016 vs. 2017
3) Dividend Growth Domination Diversification – My traditional, pre-tax rollover IRA – which composes the bulk of our net worth – had a great month in December. We received just over $3,900 in December alone – and over $7600 for the year. As mentioned previously, we’re not actively contributing to our IRAs. So this tree continues to grow up strong on its own!
Alas, we chopped off a few branches and did a rebalance of nearly $60,000 from a primary dividend fund to another fund that focuses more on growth AND income. This decision was tough emotionally, but easy methodically; we were due to rebalance our winners.
4) New-Year (Non) Boosts – Our taxable accounts paid out a combined $247 in December bringing our total to $670 in 2017. Comparatively, our non-taxable accounts paid out a combined $5,484 in December, for a total of $11,593 in 2017. Clearly, December is by far the largest contributing month.
And then January came, returning a measly $16.
Overall, 94% of our passive income is still coming from retirement accounts. Growing taxable account passive income will continue to be a priority in 2018. Diversification is key.
Related:
3 Lessons Why “Assumption Is The Mother of All F*ck Ups”
FTW! Is it Possible to Invest for Today AND Tomorrow?
BD’s (Semi-) Automatic Ecosystem
Passive Income & Portfolio Updates
Summary of Results
As we didn’t launch Balanced Dividends until mid-2017, here is a retroactive review of 2016’s Passive Income. We use Personal Capital to track our net worth, assets vs. liabilities, and cash flow.
Reminder – Emergency Savings vs. Retirement Investing
In mid-2014, I switched employers after being with my first company out of school for nearly 7 years. My wife and I had very little cushion between each pay check. Not because of excessive spending, but rather from saving anywhere from 15-25% of my take-home pay in retirement accounts for several years. This included a mix of (1) pre-tax or traditional 401(k) contributions and (2) Roth contributions – both 401(k) and IRA.
There are a number of articles and opinions on the benefits of contributing to a traditional IRA or 401(k) vs. a Roth IRA or 401(k), but I’ll perhaps explore that another day. In general though, we found it more difficult to contribute to a Roth IRA or 401(k) as we’re putting away money that has already been taxed (vs. a traditional IRA or 401(k) where money has NOT yet been taxed). We ultimately went for a balanced approach.
A few months after starting my new job, a former colleague experienced an abrupt, unforeseen medical issue. Fortunately, he had insurance to cover the costs of a necessary procedure, but he also had to pay a few thousand dollars out-of-pocket. Reflecting at what had happened, I realized that we would have been unable to cover the sudden out-of-pocket costs.
So for about 18 months, we reduced our retirement contributions to the minimum in order to build up our taxable account investments and savings. We now have roughly 4 months of expenses covered, which is spread out between a few different taxable accounts.
Staying the Course – Still Planting Seeds and Growing Trees
All of the passive income in all of our accounts – both retirement and non-retirement – currently gets reinvested. As retirement dividends currently account for nearly 94% of our passive income, we’re just beginning to increase the number of sources of passive income in taxable accounts and from other sources.
Our traditional bank checking and savings account are considered “high-yield”, and we love Ally Bank which has competitive rates and great service. We’re not holding a large amount of assets in checking and savings accounts at the moment though due to the still relatively low-interest rate environment. We began funding an Acorns investment account and Robinhood investment account within the last year to begin increasing our taxable investments.
We’ve also looked at peer-to-peer lending and other crowd-sourcing investment platforms, but haven’t decided to invest (yet). We might also start a CD ladder if interest rates increase again; January brought about reminders for the importance of fixed income.
Related: BD’s Apps & Tools
Investment Portfolio Allocation
This includes our retirement and non-retirement investment accounts. Here is our high-level portfolio allocation as of close of business 5-Feb-2018 (we’ll look to continue to provide quarterly updates on actual allocations). Due to timing, we anticipate this content continuing to change after the FIRST month of each quarter in 2018.
We use Personal Capital to track our net worth, assets vs. liabilities, and cash flow. It’s free and a great tool. The above shows our allocation from an asset class perspective. Here is an overview of each respective asset level as well as a summary of key changes from the prior quarter:
Key Changes From Last Quarter
- Reallocated remaining ~3% of overall portfolio to US Total Bond Market Index Fund via inner 401(k) transfer
- Continued semi-monthly investments into Total Bond Market Index Fund via 401(k) contributions
- Subsequent investments into eREITs and eFunds via Fundrise
- Rebalanced $60,000 from income-focused fund to income and growth focused fund within rollover IRA.
Cash: This includes cash across holdings in our investment portfolio – NOT bank accounts, etc. We don’t have much control over the cash figure held inside our INVESTMENT accounts once we’re invested in a fund; we’re primarily invested in Vanguard Mutual Funds and many funds hold a small percentage of cash in order to cover redemptions or withdrawals.
International Bonds: We’re very, very light in this area (as of now). If we do seek to gain additional exposure, it will likely be via an index fund held if a retirement account. At the moment, we do not hold any individual bonds.
US Bonds: We hold a portion of our short-term emergency savings in a corporate-grade bond fund (which also has check-writing privileges). The rest of the US bond allocation had been made up from a balanced fund that we hold in a taxable account. However, as noted above, reallocated the remaining ~3% of holdings in my 401(k) to an US Total Bond Market Index Fund via inner 401(k) transfer. This was meant to rebalance our portfolio to be aligned closer to our target allocation model.
Alternatives: Roughly 22% of our portfolio is now in alternatives, of which the vast majority is real estate exposure via a real estate investment trust (REIT). This particular REIT holding is currently 100% of my Roth IRA account. The remaining ~1.0% of our alternatives allocation is composed of various non-real estate holdings across a number of funds we hold in retirement accounts. As noted above, we also completed the initial and subsequent investments into eREITs and now eFunds via Fundrise; we’ll likely consider to continue to increase our holdings in the coming months.
International Stocks: We’re still currently under weight from where I’d like to be in this area, so my current 401(k) contributions are all going toward a single, low-cost international index fund. This area will continue to grow with the semi-monthly contributions. My wife’s workplace retirement account contributions are also going toward an international fund (small-cap index). Our international exposure is all held in retirement accounts.
US Stocks: Currently our largest allocation, US stocks form roughly 50% of our portfolio. Over the last 2 years, I’ve consolidated the majority of our pre-tax retirement savings into large cap value and large cap core equities seeking moderate income with growth.
As mentioned, we had tapered back our retirement contributions in US Stocks with the aim of increasing our taxable investments. However, we still wanted to purchase additional shares via reoccurring dividend distributions within the retirement accounts. We’re looking to increase our exposure to mid- and small-cap companies in our retirement accounts – as well as in a few individual securities in a taxable account (still less than 1-2% of our net worth due to the concentrated risk in a limited number of securities).
Summary
Overall, we’re still extremely light on fixed income (i.e., bonds), but we plan to continue to gradually increase holdings in the coming years – this quarter’s shift to approximately now 12% (up ~2% from last quarter) of our portfolio had been planned.
We also had saved very aggressively during the financial crisis toward retirement, and we’ll continue to make retirement a priority; however, we’re attempting to find a balance between short, medium, and long-term goals.
We’re also working to understand the importance of leveraging different account types, diversifying across & within asset classes, and working to create multiple streams of income.
Readers, how are you progressing on your financial journey? What plans do you have? Any detours or potential sprints along the way?
Related:
5 Ways to Balance Account Types To Balance Life’s (Un)known Milestones
How We Got To Averaging +$1,000 a Month In Passive Income
FTW! Is it Possible to Invest for Today AND Tomorrow?
BD’s (Semi-) Automatic Ecosystem
Passive Income & Portfolio Updates
Our favorite free financial tool is Personal Capital. We use it to track our net worth, manage our spending & savings, and to monitor our investments. It’s simple and free to use.
Hi Mike, Nice summary and thought process. With interest rates on the rise, it may be a good time to start averaging into shorter term bond holdings to take advantage of the higher rates they will pay and passive income they will generate. After many years, I have finally started see an uptick in payments from my shorter term bond holdings. If you stay short to mid term, you won’t be exposed to much interest rate risk. Tom
Thanks Tom.
I’ve been happy so far with additional exposure to fixed income over the last few months. We began it as part of a gradual rebalance. Admittedly, it was hard not allocating future 401(k) contributions to equities the last few months of 2017 – especially as the market continued to do quite well.
You’ve made good made points on the duration / term consideration as well. – Mike
Nice update mike, I have been re-balancing a bit recently also, adding to my bonds and have been using preferred shares as fixed income. I am slowly building up more cash, hoping for a sale in 2018.
Thanks Steve – interesting choice on the preferred shares. I’ve looked into them but haven’t invested in any yet. And yes – I’m hoping for a sale, but it can be difficult at times to see current holdings decrease significantly. – Mike
Mike, I made it a goal to use my Roth IRA contributions this year on REITs. I’ve already spent all my contribution for 2018 with this current dip. Maybe I should have held out a little longer for some better prices. It would have been much easier if my crystal ball was working.
Hi Money – yes, it would be great if all our crystal balls could work all the time!
On the REITs, as I wrote, we also use our Roths to hold our current RE exposure. I only contributed small amounts in 2017… But agreed with your perspective as well. It’s really tempting to consider loading up on REIT shares in our Roth right now. We’ll see what happens.
At least you maxed out already! Thanks again for your comments and for reading. – Mike
Sounds like a well thought out portfolio Mike, with good exposure to different assets and a clear plan for where you want to grow it.
I’m 100% stocks at this point, but no doubt that might change as I inch closer to ‘retirement’….
Thanks Frankie – appreciate your comments. Interesting to be in 100% stocks only – do you mean just in terms of your investment portfolio?
I also just initially visited your site – your perspective on Australian dividends seems quite interesting. I’ll be checking it out further soon.
Thanks for reading. – Mike
Nice Mike,
What are your thoughts of the drops this week?
Thanks DM.
On the drops, I’ve ignored most of it… Been super busy at work (ironically, in financial services). I considered moving a few hundred bucks from my Robinhood account into a few positions, but I’m building up cash to do some shopping on a few names I’ve been following.
As I saw you mention on another post recently, time in market is more important – and a better strategy – than trying to time the market.
Agreed! Seems like the more experience someone has investing the less they care about the gyrations of the market.
Hi Mike, you have a good grasp of where you are and where you are going. All very important to reaching your goals. You’ve got quite the allocation to REITs. That’s probably been a drag on the portfolio these past few months, no? What’s your long-term plan for percentage of REIT exposure you want to have? Sounds like you might be interested in adding to your holdings. I enjoy the reports… keep them coming.
Thanks Engineering! Apologies for the delay in replying; I was traveling the last few days.
On the REITs, our primary holding in my Roth IRAs has lost about 8-9% of its value over the last few months. It’s disappointing to see the value decline, but I enjoyed the December 2017 repurchase of additional shares at the lower mark.
Overall, we plan to keep real estate at around 20-25% of our net worth. The bulk of this is currently in REITs. That target will likely change if/when we purchase a primary residence.
Related: https://www.balanceddividends.com/landless-landlording-how-and-why-we-use-reits/
Thanks again for reading. – Mike
Great write up BD and I agree with your definition of passive income. I actually do like the fact that most of your passive income comes from your retirement account. Also, I just discovered Personal Capital and have been using them recently to track my net worth. I haven’t made the decision to blog about my net worth as of yet, but I love reading posts, such as yours, about your income outside our regular paycheck.
Keep planting those seeds BD.
Thanks DP – apologies for the delay in replying; I was traveling the last few days.
I’m glad you found Personal Capital; it’s a great tool. Re: the net worth, I’m with you on the full details. I obviously share our passive income figures, but I don’t wish to discuss actual net worth just yet (if ever). Primarily because I don’t think it matters. I like talking in terms of %’s and other details to keep things relative.
Thanks again for your comments and for reading. – Mike