In my first 2016 review post, I talked about the events that led me to choose a DIY approach to investing (or at least a semi-DIY approach) instead of hiring a costly financial advisor. There are so many great free or low-cost options available today to build your investment portfolio.There just isn’t a good reason in my mind to pay someone a hefty fee who is just going to use the same software programs now readily available for free on the internet. A few conversations with a financial advisor early in 2016 helped me realize this. After that, my focus turned towards where to invest in building my after-tax portfolio.
Where to Invest?
My initial goal when beginning to invest in an after-tax portfolio was finding a low-cost method for doing so. This led me to open up three new accounts that currently charge no fees. After a few months, I realized that it would be wise to start investing in other assets besides stocks. It was then that my focus started to shift to other asset classes like real estate and peer to peer lending. I’m really excited about the prospect of diversifying my portfolio and earning a nice return through the two platforms I chose here. Altogether, I ended up opening five new investment accounts in 2016 to house my after-tax investments. Here’s where my money currently resides and where I plan to invest in 2017.
1) Index Funds
My primary source of investing in index funds is through Wealthfront. I’ve talked a lot about Wealthfront already on this blog. What I like about it is that it’s super easy to get started. I answered eight questions for Wealthfront to determine what my goals are and what my risk tolerance is. The result was a risk tolerance of 9.0, and a portfolio allocation as follows:
As an investor, you can adjust your risk tolerance score at any time. I felt they pegged me pretty well with the 9.0 score so I stayed with it. This is where the majority of my after-tax savings goes. Wealthfront charges no fees on the first $10,000 you invest ($15,000 if you sign up through someone’s affiliate link). After that, you’ll pay 0.25% annually on your investments in excess of the initial free amount. In 2017, I plan on continuing to put a healthy percentage of my after-tax savings into Wealthfront. I’m really curious to see how well the tax loss harvesting works with a full year of investing and a larger portfolio. If the tax loss harvesting offsets a good portion of the fees, then I’ll likely continue to use Wealthfront as my featured investor.
2) Dividend Stocks
I began investing in individual stocks this year. For the most part, I’ve invested in dividend champion stocks. These are high-quality companies that have a track record of increasing dividends for at least 25 straight years. Some well-known dividend champions are Johnson & Johnson (JNJ), 3M (MMM), and Coca-Cola (KO). FYI, I don’t own any of these three stocks as valuations were a bit high for these companies when I was looking at investing in them.
My dad is a dividend investor, which makes sense for him as he is retired and looking for income out of his investments. After learning from him and reading several books on dividend investing, I thought this was the path I wanted to take. There are several in the FIRE community who invest solely in dividend stocks. The goal being to get your yearly dividend income to exceed your yearly expenses. Investing primarily in the 106 dividend champions decreases your risk of having your dividends, and thus your retirement income, cut during a down period. You also aren’t worried about short-term fluctuations in principal as you are living on the income generated from dividends.
In the end, I decided not to go this route. First of all, dividend stocks are not an efficient after-tax investment as your dividends received will be taxable income, even when you are reinvesting them. Second, I would rather focus primarily on growth stocks now. Then I can move a portion of my portfolio into high-quality dividend stocks in retirement to provide a steady income.
There are two platforms I used in 2016 to invest in individual stocks:
Loyal3 charges no fees to make a trade. That’s a big positive for someone looking to build a portfolio of individual stocks over time. With other brokers, you’ll find fees ranging from $4.95 to $9.99 per trade. Those add up! Another thing I like about Loyal3 is you can buy fractional shares. Want to invest in Google but don’t have the $792 needed to purchase one share? No worries. You can start investing with as little as $10 and buy fractional shares of the companies you want. This is important because if you just have $1,000 to invest, and you want to invest in Google, you don’t have to put 80% of your money into one share of Google stock.
The bad thing about Loyal3 is the limited number of investment options. There are 70 companies you can invest in through Loyal3. Many of these companies pay fees to Loyal3, which is how they can offer no trade fees to the investor. While there are some excellent companies to invest in, like Berkshire Hathaway, Google, and Disney, among others, 70 companies is not a lot to choose from. Another issue with Loyal3 is orders aren’t completed in real-time. Loyal3 purchases stocks in batches, which keeps their costs lower. This means it may take a day or more before your stock purchase is executed.
There’s a lot to like about Loyal3. I don’t have much invested through them, however, as I found another platform that I like even better for buying individual stocks…
I haven’t found much not to like about Robinhood. Like Loyal3, there are no trading fees charged. Unlike Loyal3, you can invest in any stock you want. Better yet, you can also invest in ETFs. Furthermore, trades are executed in real time, so there is no waiting for batch orders like Loyal3. There is no online interface with Robinhood. It’s all powered by an app, which may turn some people off. For me, it’s not a big deal. I do all my research on sites like Morningstar or Yahoo Finance, so I’m not looking for robust research capabilities in my investment platform.
Currently, I have a very small percentage of my portfolio invested through Robinhood. As my after-tax portfolio gets bigger, I may turn to Robinhood and start investing in some ETFs. I could use Robinhood to replicate the same portfolio that Wealthfront has me in. This would take a little extra work on my part, but may be worth it if I decide the tax loss harvesting services through Wealthfront aren’t worth the fees I’m paying them.
3) Peer to Peer Lending
This is an area that has interested me for a while. I used Prosper as a borrower about ten years ago. The twelve months free financing on my wife’s engagement ring was coming to an end, and I needed a short-term loan to float me for a few months until I could pay it off. I ended up getting a loan at a very good rate and paid it all off in three months (sorry investors).
Prosper is not currently open to investors in Kansas. However, Lending Club is. After doing some research on Lending Club, I decided to invest a small percentage of my portfolio. It has only been about four months so far, but I’m happy with the process and my returns. To date, I’ve earned a return of 16.85%. This will likely decrease as my portfolio becomes more seasoned. I have invested in some higher risk loans to earn a higher return. My risk is spread out as I invest just $25 in each loan, and have over 200 loans that I’m invested in. I haven’t had to write-off any loans yet, but expect to in the future with the type of borrowers I’m lending to.
Right now, I’m in a trial phase with Lending Club. I have plans to invest more later this year if I continue to like what I see. P2P Lending will never be a large percentage of my portfolio. But I do think it is a good way to diversify and offers a higher reward for the higher risk I’m taking. I’ll provide a more thorough overview of my experience once my portfolio becomes a little more seasoned.
4) Real Estate
I’m not big on becoming a landlord. The stress of finding tenants, collecting rent payments, and possibly having to evict bad tenants is something I don’t want to add into my life right now. Still, I want to diversify my portfolio by adding some real estate. Until recently, the only way to invest in private real estate was to have a lot of money and to know the right people. However, beginning in 2012, some of the restrictions for investors in this area were removed. The removal of these restrictions allowed companies to raise capital and advertise publicly. With this, real estate crowdfunding has taken off.
The only issue is that many of the top crowdfunding sites require investors to be accredited. An accredited investor is defined as someone with a net worth of at least $1,000,000 (not including their primary residence), or annual income of at least $200,000 in each of the last two years ($300,000 joint income with a spouse). But I recently came across one crowdfunding company that doesn’t require investors to be accredited. Fundrise. Today there are more than 80,000 members of Fundrise invested in nearly $3 billion worth of real estate.
I invested just $1,000 in Fundrise back in November to get started. I plan on expanding my investment in them throughout the first half of 2017. My investment will remain relatively small until I get a better feel for Fundrise, but so far so good!
Plans for 2017
There you have it. Those are the five investment accounts I opened in 2016. I don’t have any plans for any new accounts in 2017 at this point. My plan for 2017 is to keep investing monthly through Wealthfront. I’d also like to double my investment in P2P lending which will be my focus during the second half of the year. In the first half of the year, I’ll be focusing on expanding my real estate investments through Fundrise. Those three accounts will receive the majority of my investments in 2017. But I’m always on the lookout for a good deal. I don’t spend a lot of time researching individual investments, but if I do come across a good value in 2017, I’ll be using Robinhood or Loyal3 to invest free of fees.
Readers, what investment platforms do you use? Where are you looking to expand your investments in 2017? Is there a particular asset class in which you’ve been looking to expand your holdings? I’d love to hear your investment plans for 2017.