September 15th, 2023 paycheck

Created:

This paycheck was a bit weird, given recent history.

I could send a decent amount over to the taxable brokerage account. It was the first full check where I started switching out the small-cap value fund I’m using. I decided to recalibrate the spreadsheet to target the future Golden Butterfly-style portfolio I’m building toward.

With all the medical things I’ve been working through the last few months (along with traveling for the conference), I haven’t been able to send much to the taxable brokerage account. I’ve still been sending enough to hit the maximum 401k and HSA contributions for 2023. I’ve still been pulling money aside for the end of the year to contribute the maximum to the Roth and possibly Traditional. IRAs. But, every other extra dollar has been going toward building up the short-term assets back to their 6 percent target.

In fact, I saw today that cash was reaching 7 percent of the total value of the portfolio and transferred a bit extra to go toward the taxable brokerage account.

Every dollar that went to the taxable brokerage account was sent to the new small-cap value fund I’ve decided to use for now. It took 2 or 3 trading days for me to make the purchases go through. The orders using the little bit extra didn’t complete before publishing. I still appreciate the investing approach related to limit orders and basing things on whether the fund was up or down the previous day.

Where things get interesting (complicated to explain) is with the spreadsheet.

Let’s start with a brief description of the Golden Butterfly portfolio. The Golden Butterfly portfolio is a risk parity-style portfolio that uses 5 funds or asset classes, depending on how you want to look at it. Each fund is allocated to occupy 20 percent of the portfolio:

  1. total market,
  2. small-cap value,
  3. long-term bonds,
  4. short-term bonds, and
  5. gold.

Simple enough.

The first thing I wanted to do was translate this to universal portfolio terms, which gives us the following:

  1. 40 percent growth assets,
  2. 20 percent negative correlation assets,
  3. 20 percent low-correlation assets, and
  4. 20 percent short-term assets.

I’m in accumulation mode. Therefore, I’m following something more like the barbell strategy—invest in high-risk and no-risk assets, with nothing in-between. So, the universal portfolio numbers look something like this:

  1. 94 percent growth assets,
  2. 0 percent negative correlation assets,
  3. 0 percent low-correlation assets, and
  4. 6 percent short-term assets.

If you’re new here and don’t know why I chose 6 percent for the short-term assets, it’s based on the FI numbers I’ve been playing with. The theory goes like this. By the time I reach financial independence, I’d like to have 1 year’s worth of living expenses in short-term assets. My current burn rate is about 30,000 USD per year. My final FI number is around 500,000 USD. 30,000 is about 6 percent of 500,000.

This also forms the base for decision-making regarding investable income outside of the automated stuff mentioned above, and gives me a way to rebalance the portfolio.

If growth assets are “shooting the moon,” then I’ll need to stockpile cash to keep things in balance. If the growth assets drop (like they did at the end of 2022), I can probably throw more money toward growth assets (“buy the dip”). And, if I find myself in a position where I need to spend a lot of short-term assets (like now for medical and travel), then extra money goes toward the short-term assets.

For growth assets, the Golden Butterfly is, basically, 50 percent small-cap value and 50 percent large-cap growth because a cap-weighted total market fund will favor large-cap and tend to tilt toward growth (mostly blend, though). Right now, I want to have 94 percent in growth assets. 50 percent of that is 47 percent of the total portfolio, so 47 percent of the total portfolio should be in small-cap value. Further, 47 percent should be in a total stock market fund.

Here’s the rub.

My current employer doesn’t offer a total stock market fund in their 401k plan. The closest they offer is an S&P 500 index fund. I know the math to mimic a total stock market fund using an S&P 500 and an extended market fund. However, I’m trying to keep this simple. I’m also starting to come around to the idea of reducing the mid-cap and small-cap growth exposure. So, that leaves me with the total stock market fund.

All right, back to the spreadsheet.

I’ve set the target for the small-cap value fund at 47 percent of the portfolio, the S&P 500 fund at 23.5 percent, and the total stock market fund to be 23.5 percent.

As a result, my original plan of being roughly 30 percent in small-, mid-, and large-cap while also being 30 percent in value, blend, and growth gets kind of thrown aside as a meaningful target or goal. If it happens, it happens due to the more desirable 3 targets.

This target allocation would put me roughly 22 percent in growth, 37 percent in blend, and 35 percent in value—as a portion of the total portfolio (94 percent for growth assets, not 100 percent). Further, it will be 36 percent large-cap, 8 percent mid-cap, and 49 percent small-cap.

It gets interesting from a correlation perspective because small-cap value and large-cap growth have the lowest correlation to each other within growth assets. The target results in 25 percent in small-cap value and 16 percent in large-cap growth. Further, small-cap growth, the worst historically performing style, drops to 4 percent.

I had planned to make this migration over time by slowly changing the targets in the portfolio. However, I no longer want to spend any time or brain power on that. Therefore, I’m just going to live with the growth assets portion of the portfolio being out of balance for a while.

I still plan on closing out the M1 Finance account and starting to rebalance inside the Traditional IRA. This should help bring the portfolio back into balance as I sell off some of the extended market fund assets to purchase 1 of the other 3.