My Taxable Investment Portfolio – August 2012

For the past few weeks I’ve been writing articles in which I started fantasizing planning for an early retirement. You can read those articles here:

Especially in Part III, I discussed building a portfolio of passive investments with the ideal goal of having them yield a minimum of $500 in monthly dividends. Before I reveal my decisions about which investments I have chosen, first allow me to make a few points clear.

Why Taxable?

First, all of these investments are in a taxable brokerage account. I plan to build these investment shares during my accumulation phase because I plan for the dividends to supplement my income in early retirement. My IRA and 403(b) accounts are separate – I plan to keep contributing to these accounts during accumulation, but will stop (or at least slow down) once I hit early retirement. Plus, I’m not terribly concerned about the tax consequences of this portfolio since my earned income will drop significantly once I retire.

But why not consider my Roth IRA as a possible source of funding during early retirement? After all, my contributions can be withdrawn without a tax penalty at any point, so if I need extra cash, I could always raid the Roth. While this is true, I prefer to use my retirement accounts for their intended purpose: to allow money to grow and compound until it can be harvested without penalty starting at age 59.5.

In other words, I want my taxable money to function as my early retirement money, and it simply must last until I can tap the retirement accounts when they’re fully ripe. I therefore view the contents of my tax-advantaged accounts as entirely independent, following a completely different viewpoint of asset allocation.

Why not individual stocks?

My next point is that I’m a weenie. For all practical purposes, I’m a rather conservative investor. My asset allocation heading into The Great Recession was 90% stock mutual funds, and while I pat myself on the back for not panicking and selling any shares, the resulting roller-coaster ride was enough to make me queasy.

My basic investment strategy hasn’t changed, but my asset allocation is less aggressive now. I also don’t invest in individual stocks*, as I don’t feel informed enough to make sound decisions, nor do I like paying trading commissions. My passive portfolio is therefore comprised entirely of commission-free mutual funds and ETFs, which provide me with far greater diversification than owning individual stocks.

The Passive Portfolio

IM Passive Portfolio

Current allocation: 70% Stocks / 30% Bonds

Keep in mind that my current ratio of 70% stocks and 30% bonds is only for this taxable account, and will slowly morph toward 60/40 as I near early retirement. As I mentioned earlier, my tax-advantaged accounts have a different purpose entirely and therefore do not figure into this allocation. My primary purpose here is to buy, hold, and rebalance occasionally into shares of each fund over the next 5-10 years which will then produce a healthy stream of dividend income.

Stock Holdings

  • Schwab U.S. Broad Market ETF (SCHB)
  • Schwab U.S. Dividend Equity ETF (SCHD)
  • Schwab U.S. REIT ETF (SCHH)

Bond Holdings

  • Schwab Tax Free Bond Fund (SWNTX)

As you can see, this is a simple portfolio. On the stock side, the broad-market index ETF provides tax efficiency and the potential for growth, while the Dividend Equity and REIT ETFs produce a higher dividend yield while still showing some growth potential. On the bond side, SWNTX is a fund comprised of over 450 different municipal bonds, the dividends of which are exempt from federal income tax (as well as state income tax for me since I live in Texas). It’s more risky to own municipal bonds versus, say, a total bond market fund, but considering its diversification and tax efficiency, I’ll sleep well at night. If hundreds of municipalities default on their bonds at once, we’ll have greater problems than the bond portion of my passive portfolio.  For the record, my total bond funds are in my tax-advantaged accounts. Each stock fund distributes dividends quarterly, while the bond fund throws them off monthly.

This portfolio has an average expense ratio of 0.21% annually, which is far lower than the average mutual fund expense ratio. The worst offender is SWNTX, which has a current net expense ratio of 0.49, but considering its tax-free dividends, I’ll take it.

What About Cash?

I currently keep a separate emergency fund with roughly one year’s living expenses held in a regular savings account and CDs, and since savings accounts yield such pitiful interest rates right now, I don’t consider cash part of my passive portfolio. Once our first child is born later this year, I may entertain the idea of dialing down our cash stockpile to six-months worth of living expenses and investing the rest, but that remains to be determined.


I have to take a long-term outlook here, and this portfolio is a work-in-progress. I may make a few modifications in the future, but you have to start somewhere. For instance, I may switch the tax-free bond fund to something taxable with a higher yield once I retire since I’ll be in a lower tax bracket. As always, I’m open to reader suggestions and insight.

Right now, I have a set amount that I will continue to invest each month with a current target goal of generating at least $500 in dividends monthly. When combined with my other planned streams of income in retirement, this passive income will continue to grow and help cover our expenses. My ideal plan is to never sell a share of any fund once purchased, save only for an absolute emergency that exhausts my liquid cash. Retirement is still years away, but I want each dollar working tirelessly to bring me dividends for the rest of my life.

* The only position in an individual stock I have is about 150 shares of GE that I purchased using ShareBuilder’s automatic investing feature during 2009. These shares have done well and are throwing off a 4% dividend for me, but I feel like I got lucky. I plan to hold these shares for a long time.

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