Heavy concentration in Electric Utilities

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outdoorguy
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Heavy concentration in Electric Utilities

Post by outdoorguy » Sat Jun 22, 2019 8:56 pm

My wife and I are retired, both have pensions, both get soc. sec., no debts.
Our IRAs are about 500k, which about 250k in electric utilities and 250k in cds. These funds will be past on our children.

Should I be more concerned about the high concentration in Utility Stocks for the next 18 months?

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vineviz
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Re: Heavy concentration in Electric Utilities

Post by vineviz » Sat Jun 22, 2019 9:03 pm

outdoorguy wrote:
Sat Jun 22, 2019 8:56 pm
My wife and I are retired, both have pensions, both get soc. sec., no debts.
Our IRAs are about 500k, which about 250k in electric utilities and 250k in cds. These funds will be past on our children.

Should I be more concerned about the high concentration in Utility Stocks for the next 18 months?
Yes.

On the one hand, if neither you nor your children actually need or want the money then it probably doesn't matter much how your IRAs are invested.

On the other hand, this is a very unusual asset allocation. Half the IRA is invested in an INCREDIBLY aggressive bet on stocks from a single industry in a single country, and the other half of the IRA is invested in an INCREDIBLY conservative allocation to cash.

I was about to call this asset allocation "schizophrenic" but maybe there is more to the story?
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SovereignInvestor
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Re: Heavy concentration in Electric Utilities

Post by SovereignInvestor » Sat Jun 22, 2019 9:06 pm

outdoorguy wrote:
Sat Jun 22, 2019 8:56 pm
My wife and I are retired, both have pensions, both get soc. sec., no debts.
Our IRAs are about 500k, which about 250k in electric utilities and 250k in cds. These funds will be past on our children.

Should I be more concerned about the high concentration in Utility Stocks for the next 18 months?
Yes that is pretty concentrated but if you don't need the money it's not as big of a deal. Utilities are usually the most defensive sector so having an allocation greater than that of the market is helpful to reduce equity risk but 50% is quite high.

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outdoorguy
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Re: Heavy concentration in Electric Utilities

Post by outdoorguy » Sat Jun 22, 2019 9:23 pm

Thanks for your comments, the rest of the story is I’ve been in the market for over 50 years, total ROI has been superior in this sector, both in high and low fed rates. I know this sector very well, and have also had index funds for a 15 years and been a boglehead very early on, more so than a Lynch fan. This has worked well for me, even though the concentration is high, I was wondering if other bogleheads can understand this philosophy.
We do not need the 500k, seems pretty concervative, using utility stocks instead of corporate bonds.

mhalley
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Re: Heavy concentration in Electric Utilities

Post by mhalley » Sun Jun 23, 2019 1:08 am

Utilities have performed well in the past. Certainly not a boglehead portfolio, so doubt you will get many supporters. But if you are truly well versed in the sector, and don’t need the money taking a flyer for heirs might pay off for them. The rule of thumb here is no more than 10% of equities in stocks. Violating it is a risk. You might think about asking the heirs whether they would prefer the higher risk higher reward of your method of investing vs a more conservative bogleheads portfolio. How much have you outperformed tsm?
You ask about 18mos for some reason, why is that?

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CyclingDuo
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Re: Heavy concentration in Electric Utilities

Post by CyclingDuo » Sun Jun 23, 2019 5:54 am

outdoorguy wrote:
Sat Jun 22, 2019 8:56 pm
My wife and I are retired, both have pensions, both get soc. sec., no debts.
Our IRAs are about 500k, which about 250k in electric utilities and 250k in cds. These funds will be past on our children.

Should I be more concerned about the high concentration in Utility Stocks for the next 18 months?
Since your IRA's will be passed on as BDA IRA's to your children (Beneficiary Distribution Accounts), and you mentioned in a subsequent post that you and your spouse do not need the funds, you might want to consider the option to diversify the IRA's to include the other end of the barbell approach so that in addition to the defensive end of the barbell, you have some growth on the other end of the barbell. At the very least, you could use the dividends from the utility stocks and the interest from the CD's that are not being used for your RMD's to purchase shares of the Total Stock Market Fund.

Personally, I would also consider some alternatives in the mix via REITs since the location in the IRA is hospitable to the dividends. I would also want some international exposure. In other words, you want the holdings to grow with your heirs in mind. Under current law, they will be able to utilize a well balanced BDA IRA for many years. If the new laws pass, it could change to the funds needing to be taken as RMD's in a shorter time frame of 10 years or less for your heirs.

Either way, we would want a bit more diversity in the IRA's (growth, alternatives, and some international) for our kids if it were us.
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livesoft
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Re: Heavy concentration in Electric Utilities

Post by livesoft » Sun Jun 23, 2019 6:09 am

I don't understand this philosophy.

I wanted to say that I have told my children that if they inherit any investments from their parents that our asset allocation and investments are not their asset allocation and investments. I have told them not to have any sentimental feelings about any of the investments that we own and to sell them to get money to buy the things that go with their asset allocations and investment plans.

I have seen many times on this forum that people want to keep the investments that their deceased father had for sentimental reasons. Sometimes those stocks have been old utility stocks.
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Grt2bOutdoors
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Re: Heavy concentration in Electric Utilities

Post by Grt2bOutdoors » Sun Jun 23, 2019 6:37 am

outdoorguy wrote:
Sat Jun 22, 2019 9:23 pm
Thanks for your comments, the rest of the story is I’ve been in the market for over 50 years, total ROI has been superior in this sector, both in high and low fed rates. I know this sector very well, and have also had index funds for a 15 years and been a boglehead very early on, more so than a Lynch fan. This has worked well for me, even though the concentration is high, I was wondering if other bogleheads can understand this philosophy.
We do not need the 500k, seems pretty concervative, using utility stocks instead of corporate bonds.
Are you diversified by region and state? In other words, you don’t have $250k in Southern and American Electric Power (for example). Instead you have it spread out amongst many different ones. Right now, quite a few utilities are experiencing growth in base rates due to population migration (think South Western region) and investment in transmission and distribution, those investment costs are passed on to ratepayers over the life of those assets along with a return on equity that is determined by each respective states utilities commission. Some states commission are more/less generous than others, that coupled with a continued low interest rate environment has lit a fire under utilities. Then you have some utilities that invest in wind/solar/distributed power (batteries) - that is another source of strength for them.
Personally I would not hold such a concentration, however if you are in the industry I can understand your stance.
Last edited by Grt2bOutdoors on Sun Jun 23, 2019 7:55 pm, edited 1 time in total.
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Sandtrap
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Re: Heavy concentration in Electric Utilities

Post by Sandtrap » Sun Jun 23, 2019 7:35 am

outdoorguy wrote:
Sat Jun 22, 2019 8:56 pm
My wife and I are retired, both have pensions, both get soc. sec., no debts.
Our IRAs are about 500k, which about 250k in electric utilities and 250k in cds. These funds will be past on our children.

Should I be more concerned about the high concentration in Utility Stocks for the next 18 months?
Yes. . . and No.
In this case you're more interested in capital preservation whether 18 months or any period of time.
Imagine if some of your Utility or other single stocks contain the next Radio Shack, TWA, Pan Am, etc.

It would be prudent to exchange those funds to low cost broad index (Total Stock) or balanced fund (Balanced Index Fund), etc, in a manner and sequence that minimizes costs and taxes. It will also be easier to inherit in that Single stocks will have to be valued and divided up whereas IE: a single Balanced Index Fund will only need to have the shares divided up.

j
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mtmingus
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Re: Heavy concentration in Electric Utilities

Post by mtmingus » Sun Jun 23, 2019 8:07 am

I guess you didn't own PG&E shares...

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Sandtrap
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Re: Heavy concentration in Electric Utilities

Post by Sandtrap » Sun Jun 23, 2019 8:37 am

mtmingus wrote:
Sun Jun 23, 2019 8:07 am
I guess you didn't own PG&E shares...
$6 +- at it's low during bankruptcy.
In the 20's now.
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ChinchillaWhiplash
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Re: Heavy concentration in Electric Utilities

Post by ChinchillaWhiplash » Sun Jun 23, 2019 9:29 am

Why not hold a indexed utility fund? Safer than individual stocks and still all in the same sector. Check out VPU. You could sell the individual holdings and just buy VPU and hold a lot more utility stocks in one low cost fund.

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Wiggums
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Re: Heavy concentration in Electric Utilities

Post by Wiggums » Sun Jun 23, 2019 9:39 am

I worked for a mid sized electric utility and the stock was low risk and the return on the utility investments was guaranteed by the public service commission. Having said that, I never help much company stock. The utility can be acquired or they can have safety issues (even with contract workers) and it takes a long time to fix a damaged brand. I rather not hold individual stocks.

Just my two cents.

Broken Man 1999
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Re: Heavy concentration in Electric Utilities

Post by Broken Man 1999 » Sun Jun 23, 2019 1:33 pm

Electric utilities were one of the most reliable income streams for my father, and they served him very well. Over the years the dividends grew steadily, as did the stock price. Of course the stock prices were also reflective of interest rates.

However, when my father passed, his favorite son sold them all, and has not bought or held electric utilities stocks other than those found in his index funds.

Having said that, I don't necessarily believe anything has to be done at the moment, though you might start a migration plan to a more Total Stock Index-like portfolio.

Is there something specific about the "for the next 18 months" statement of your initial post? Is something specific happening, or are you just looking for long-term planning?

Broken Man 1999
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delamer
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Re: Heavy concentration in Electric Utilities

Post by delamer » Sun Jun 23, 2019 2:10 pm

Why would you choose to be conservative investing money you plan to pass onto your children?

We have the same expectation, and have about a 75% stock/25% cash & bonds allocation in our portfolio. The stocks include US and international, both large cap and mid/small cap.

By the same token, why do you care what happens over the next 18 months given that the money is intended as an inheritance?

You also could consider gifting some of the funds in the IRA to your kids now, especially if your tax rates are lower than their’s.

heyyou
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Re: Heavy concentration in Electric Utilities

Post by heyyou » Sun Jun 23, 2019 3:37 pm

Mom owned some Arizona Power and Light shares that failed to continue to do well. The business assets may have survived some type of failure, but ceased paying dividends, or perhaps the surviving value was just the reciprocal of the dividend percentage. Something went wrong with the shares of that electric utility in the 1980s.

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outdoorguy
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Re: Heavy concentration in Electric Utilities

Post by outdoorguy » Sun Jun 23, 2019 6:56 pm

Thanks for all the ideas support and concerns. I will address some
Questions from others to help explain my rational and have gathered a lot of helpful comments and ideas.
Yes I had a small position in PCG or PG&E, but the west coast utilities have traditionally demonstrated to much risk so for me. I currently have position in 12 electric utilities, POR, Portland Electric is my only west coast inversent. Renewable energy wind and solar are strong attributes along with growth, dividends, and positive or favorable regulatory support. Seven of the 12 companies show up as major holdings in most of the utility mutual funds from various underwriters and brokerages. I have previously been involved in Utility Index Funds and realize there an excellent investment, I enjoy actively managing my account. Having said that I agree money is like soap, the more you touch it the less you have. I will change some positions, but mostly stay the course. I find active investing interesting and rewarding. I am a strong believer in indexes and lazy type portfolios for most investors.
I guess being retired and my love of research (let’s say balance-sheets versus talking heads)
keeps my interest. The 18 months mentioned in my original post is a sidebar thought regarding political issues, nothing having to do with the strength of individual companies.
Thanks again for concerns, potential issues and the great discussion.

Trader Joe
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Re: Heavy concentration in Electric Utilities

Post by Trader Joe » Sun Jun 23, 2019 7:08 pm

outdoorguy wrote:
Sat Jun 22, 2019 8:56 pm
My wife and I are retired, both have pensions, both get soc. sec., no debts.
Our IRAs are about 500k, which about 250k in electric utilities and 250k in cds. These funds will be past on our children.

Should I be more concerned about the high concentration in Utility Stocks for the next 18 months?
Yes, you should be very concerned about your high concentration in Utility Stocks.

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whodidntante
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Re: Heavy concentration in Electric Utilities

Post by whodidntante » Sun Jun 23, 2019 7:20 pm

outdoorguy wrote:
Sun Jun 23, 2019 6:56 pm

I guess being retired and my love of research (let’s say balance-sheets versus talking heads)
keeps my interest. The 18 months mentioned in my original post is a sidebar thought regarding political issues, nothing having to do with the strength of individual companies.
It seems that managing your utility fund is more of a hobby for you, and I guess it's better than playing slots. Since you don't need the money, I think it is fine if you keep doing it.

Grt2bOutdoors
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Re: Heavy concentration in Electric Utilities

Post by Grt2bOutdoors » Sun Jun 23, 2019 7:53 pm

heyyou wrote:
Sun Jun 23, 2019 3:37 pm
Mom owned some Arizona Power and Light shares that failed to continue to do well. The business assets may have survived some type of failure, but ceased paying dividends, or perhaps the surviving value was just the reciprocal of the dividend percentage. Something went wrong with the shares of that electric utility in the 1980s.
It's owned by Pinnacle West now. Something went wrong with Tucson Electric Power too, but they were recently acquired.
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delamer
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Re: Heavy concentration in Electric Utilities

Post by delamer » Mon Jun 24, 2019 10:33 am

whodidntante wrote:
Sun Jun 23, 2019 7:20 pm
outdoorguy wrote:
Sun Jun 23, 2019 6:56 pm

I guess being retired and my love of research (let’s say balance-sheets versus talking heads)
keeps my interest. The 18 months mentioned in my original post is a sidebar thought regarding political issues, nothing having to do with the strength of individual companies.
It seems that managing your utility fund is more of a hobby for you, and I guess it's better than playing slots. Since you don't need the money, I think it is fine if you keep doing it.
That is one very expensive hobby, playing around with a $250,000 nest egg.

And that is ignoring the $250,000 that is sitting in cash.

If the OP wants to continue his hobby, then the money now in cash should be deployed according to Boglehead principles since he says that he is “a strong believer in indexes and lazy type portfolios for most investors.”

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