2million - My Journey to Financial Freedom

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Wednesday, March 08, 2006

Taking Assessment of My Portfolio Returns, Part 4: Investment Accounts

In the 1st part of this series I determined that the total return for my net worth was a measly $2,094. In the 2nd and 3rd parts, I found my retirement and cash accounts had respectable returns of $8,331 and $778 respectively, for the year.

Now I turn to my investment accounts. I have a brokerage account at Etrade and a sizeable number of Dividend Reinvestment Plans. I will looking at my holdings in IBM (my employer) at a seperate time. This table includes my begining and ending balance, 2005 contributions, total return for 2005, and the annual rate or return for each account:








$ 1,826.85

$ 2,303.35

$ 250.00

$ 226.50


Merck DRIP

$ 1,405.50

$ 4,192.19

$ 2,500.00

$ 286.69


Bellsouth DRIP*

$ 4,056.92

$ 4,122.57

$ -

$ 65.65



$ 581.39

$ 807.26

$ 25.00

$ 200.87



$ 1,560.09

$ 1,639.39

$ -

$ 79.30



$ 3,037.87

$ 2,990.81

$ -

$ (47.06)


Exxon DRIP

$ 2,426.29

$ 2,658.69

$ -

$ 232.40


Medtronic DRIP

$ 3,139.64

$ 3,656.33

$ -

$ 516.69



$ 470.37

$ 4,718.69

$ 4,421.49

$ (173.17)


Pfizer DRIP

$ 7,757.30


$ 7,400.00



Total (w/out PFE)



$ 7,196.49

$ 1,387.87





$ 14,596.49

$ (685.10)


*Note: I receive cash dividend payments from my Bellsouth stock which gets added to my cash, therfore I have added the dividends to the 12/31/2005 value to account for the dividend return.

Wow! These results are eye opening. The bottom line is I would have come out just as well if I stuck this money under my mattress. While disappointing, it looks like several of these accounts actually did pretty well, however, my largest holding Pfizer PFE, was the biggest loser I had. If I ignore my Pfizer holdings, I would have had a respectable 7.5% return, beating the Russell 1000 Value Index* at 7.05% and S&P 500 Index* 4.91% for 2005.

I'm not particularly worried because I didn't expect Pfizer to do well in the short term. My investment in Pfizer should perform well in future years as the dividend yield will be around 4.3% of my investment.


  • What do you hold in your Etrade account? How do you pick?

    By Anonymous Anonymous, at 2:05 PM  

  • Good question - my main holding is BUD plus a few other leftovers (worth < $500).

    By Blogger 2million, at 2:25 PM  

  • We bought BUD in early 2004 in an IRA. It has not gone anywhere. I was excited when I heard the news that Warren Buffet bought a big stake. Unfortunately it has still not gone anywhere much like our Pfizer holdings. Hopefully something will happen this year.

    By Anonymous Anonymous, at 3:01 PM  

  • This is a textbook example of why it's a waste of time and money to invest in a handful of individual stocks. Also, you didn't include your IBM stock which lost 20% in 2005. You would be much better off to sell your holdings and invest in a diversified mutual fund.

    By Anonymous Anonymous, at 10:14 PM  

  • I would disagree with anonymous with selling off your funds and letting someone run your investments, this is because most mutual funds and investment funds are rip offs, have never invested in them and will never invest in them. Most people will rip you off if given the chance, ONLY TRUST yourself and trust no one, the richer you are the more new FRIENDS you would get that have great investment ideas that do not work. If you make money, keep on making money the way you are doing it. If you lose money you are in trouble and you need to look for a mentor to teach you how to make money, even if you do find a MENTOR, he or she would probably rip you off. Once you find your niche to make money, keep on rolling the money to let it grow, you should reach your 2 million US dollars easily.

    P/S Don't even trust me with your money, only trust yourself.

    Anonymous Millionaire.

    By Anonymous Anonymous, at 1:34 AM  

  • I agree with the first anonymous: it would be much cheaper and effective to invest in diversified low-cost mutual funds with a well respected mutual fund family. The risk-adjusted returns of a well diversified portfolio trample a hodge-podge portfolio of stocks. First pick an asset allocation (i.e., how you want to break up you portfolio between different asset classes) then focus on low-cost mutual funds (mainly through indexing) using dollar-cost averaging, and then rebalance your portfolio when the asset allocation gets “out of whack”. With this approach, you will be rewarded without taking on substantial company-specific risk.

    By Anonymous Anonymous, at 7:59 AM  

  • I can't argue with anyone. The numbers are telling me I would have done better in a mutual fund (or even a matress) plus it is only going to get worse when you start to look at my IBM holdings. If this trend continues I clearly need to do something to improve my returns.

    By Blogger 2million, at 8:56 AM  

  • If you want a great feeling of control and are attracted to lower expense rates you might consider building a portfolio of ETFs. There are so many ETFs available now you can slice the market any way you want. Since most are still indexes, you have the automatic diversification of an index and the ability to craft a well diversified portfolio. I'm not sure how sharebuilder would charge, but you could invest in ETFs through Firsttrade.com. They won the consumer reports award and charge $6.95 per trade.
    You can use the x-ray service at morningstar.com to build your planned portfolio, exam the level of risk and expected returns. It will also show how diversified your portfolio is. That can be a big help.
    ETFs are generally very tax efficient and they don't have to distribute capital gains like mutual funds do. Since it seems like you'll be holding these outside of retirement accounts - this issue is important.
    I put alot of money into lifecycle retirement funds. While they simplify balancing by doing it automatically, they don't always have the breadth of diversification I'd prefer.
    My initial ETF investments were based on a well diversified equity model, after using morningstar to xray my entire portfolio, I'm beginnig to wonder if it makes sense using the ETFs to invest in further diversification outside of what the lifecylce funds invest in. This would mean more exposure to geographies they don' touch, possible into other asset classes. Certainly into more international investments, since my lifecycle fund targets a lower investment percentage than I'd prefer.

    Also, I think there are a number of ETFs that specialize in divident yielding equities - I sense that dividends were a strong motivator for you to invest in equities directly.

    The ultimate question is which is better DRIPs versus dollar cost averaging into ETFs (or mutual funds)?

    If you're investing outside of retirement accounts and don't have the large balances that some fund families like Vanguard and Fidelity require for reduced expense rates, then ETFs probably make more sense.

    As to drips, First Trade is $6.95 per transaction. Consequently, I try to invest in chunks of $2000 or more to minimize the % commission I'm paying. That means I might invest in ETF A in January, ETF B in February and ETf C in March, then return to ETF A in April - this allows me to increase the amount I'm putting in relative to commissions.

    Incidentally, you only need to purchase $350 each month before an $6.95 commission starts crossing below 2% commission. It seems that some of the DRIP plans charge a 3% charge off the top.

    Also, regarding anonymous 2. I agree that not all mutual funds have been honest - remember the late trading scandal that hit Janus and a number of other mutual funds? However, index funds are very straight forward as are ETFs. You know the fees they charge in advance and their exact investment formula. If they have a good reputation - morningstar rates fund stewardship - you need if you want to trust them. I think it's a weak argument to assume that no one can be trusted. Complex economies only succeed when trust works. Even direct investment in equities requires an immense amount of trust (think Enron and Arthur Anderson's scandals). So it would be naive to say direct investment eliminates trust vulnerability.

    Passive Index investing vs. Active index trading. I've seen several references to active index trading using ETFs. It's not something I've researched. Has anyone tried it? Is anyone familiar with it? Index Universe.com has published a book on it with Wiley.

    $2M, here's another thought. If you passively invested your out of retirement monies in indexes and rebalanced each quarter or year - what would you do with the extra time?


    By Blogger makingourway, at 11:47 AM  

  • 2million, thanks for presenting this to us, even though the numbers bum you out. I will try and use this same format for my investments last year and see how I faired. This is why I love PF blogs, so many people with so many good ideas and information. -Me

    By Blogger Me, at 11:56 AM  

  • i think you'd do well over the long haul in no load index funds divided by market sector. i'd consider cashing out individual stocks, holding them in an online savings acct (like hsbc, emigrant, ing) and DCAing them back into the market via the funds mentioned above. you'd want large, mid and small cap indexes, international index and a bond fund or 2 as a hedge. and plan on leaving the $ there for minimum 10 yrs.

    or another idea that's also worked well is buy rental property at $100k rent it out for $850-$950/month. beware it's an active investment (rather than a passive one), your money's tied up but i think every $100k in rentals = about $250-$300k in the market, probably closer to $300k if you don't carry a mortgage/pay cash for your properties.

    can tell you more if you're interested - my net worth's $469k and i'm 34 . .to put my advise in context (also replied to another one of your blogs a few days ago)

    By Anonymous Anonymous, at 2:35 PM  

  • This is off topic but I emailed you at 2millionblog@gmail.com

    Please could you email me back?

    By Blogger pyroracing85, at 4:53 PM  

  • anonymous,
    Can you explain what you mean about $100k in rental being equal to $200k - $300k in the market?
    Are you talking about leverage?

    Advice - I have an online savings account with emigrant at 4.25% - is it worth opening up a temporary online account with hsbc? The 4.8% is only available for 2 months. What happens later? Can I link the two?



    By Blogger makingourway, at 9:37 PM  

  • nofcarolina -

    re: 100k rental prop. investment =200k-300k mutual fund investment: sorry for lack of clarity -

    what i mean is 100k property rented at 1000/month = 12000/yr + tax benefits = about 14k-16k give or take, not including appreciation or about a 14% after-tax return. $200k invested returning 8% pre-tax = 6.8% post-tax (assuming 15% taxes), round up to 7% = 14k net return. since we didn't include property apprecation, i'm guesstimating 100k in rental property = about 200-300k invested in the stock market. hope this makes sense, i'm pooped LOL. . .long day.

    re: tying online savings accts - i believe emigrant lets you do it (on their FAQs page) but it sounds like a royal pain (you have to snail mail stuff in if i remember correctly). i'd open an hsbc, emig and ing account and move money around according to who's paying the highest rate but keep in mind interest is above the line when it comes tax time and is taxed like ordinary income - the price for keeping $ liquid i guess.


    By Anonymous Anonymous, at 11:24 PM  

  • I'm curious why you are so focused on dividends? If you goal is to get to 2mil net worth as quickly as possibly, you should be investing in tax efficient vehicles. By accepting dividends, you are taking a tax hit to your earnings each year, and presumably you are just going to re-invest these dividends anyways?

    Also, you should stop fooling yourself with active stock picking. Read "A Random Walk Down Wall Street" by Burton Malkiel. While the market is not purely efficient, the common joe has little hope to make prescient stock or mutual fund picks. You are better off just guying a no-load low fee passive index fund. Something like Vanguard Total Stock Market Index

    Something like a Vanguard total stock market index fund. Expense ratio of around 0.20%, and you save on the no transaction fees. Also its fairly tax efficient since the fund manager can offset cap gains (divident payouts) with cap losses while retaining capital appreciation. In the long term (>15 years) you are VERY unlikely to do any better.

    I'm very similar to you and have similar goals. I'm 30, work for a fortune 500 high tech firm as a software engineer making ~100k year in California. My net worth is ~380k. My asset allocation is: 60% US total stock market index, 30% International, and 10% Emerging. I own no property.

    For the next year i am going to create an exposure to Vanguard REIT (a great way to get real estate exposure without owning a house) to the order of 10%, atleast until I buy a home.

    But honestly, best thing I ever did was indexing. And i'm confident it will outperform any active stock picking over a 10-15 year window.

    Good job on the blog... love reading it.

    By Anonymous Anonymous, at 4:26 PM  

  • Thank you everyone for your comments.

    Let me add I am disappointed that my returns were as low as they were for the year (ie below many typical investment benchmarks such as the S&P500), but I am certainly ok with it. I have shared all this analysis for my and everyone's benefit. The reality is its importnat to take these self-assessments and if your performance isn't in line with your peers then maybe you need to change your strategy.

    My strategy has been for my taxable investments to focus on larger dividend paying stocks that I feel would be good long term investments. I think its important to establish a base of passive income from investments for long term planning reasons.

    I also have sizable investments (for my portfolio) in low cost index funds primarly in my 401k.

    That being said I have plenty of room for improvement and am always looking for ways to improve my overall returns. I will certainly be thinking about directing future taxable investments into more diversified low cost index funds. Stay tuned...

    By Blogger 2million, at 7:27 PM  

  • Hey 2million,

    Don't be discouraged by your results - this game of investing is a learning game and you are now in a position to learn about how you react to these situations. Much of investing is psychological and this will be a test...learn from it and you will become a better investor, throw in the towel and invest with a broker or some mutual fund and you have learned nothing.

    By Anonymous Anonymous, at 2:48 PM  

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