Today’s volunteer “Rene” (not her real name) was laid off earlier in 2017 and is now living off her severance package. She wonders if she has enough of a nest egg to simply call it quits and retire in her late 40s. And many other questions: if/how/when to annuitize any of her assets and what accounts to draw down first? So many questions! As I pointed out in Part 17 of the Safe Withdrawal Series, a safe withdrawal rate calculation has to be a highly customized affair and that’s what we’ll do today again. Let’s see what the numbers say! Read More »
I don’t think anyone has recommended selling equities and running for the hills. I certainly haven’t, and I am probably one of the more pessimistic FIRE bloggers. Please don’t buy gold coins! Personally, I would never bet against the U.S. stock market. If you had invested $1.00 in large-cap equities in 1871, your investment would have grown to over $13,000 by July 2017, even adjusting for inflation. In nominal terms, to more than $260,000! How amazing is that?
So the good news is: Stocks have the tendency to go up, on average. The broad index not just recovered from every possible disaster we have ever encountered (2 world wars, the Great Depression, several financial crises, the Dot Com bust, 9/11, etc.) but rallied to reach one all-time high after the other. After every cycle of fear, we see a quick recovery back to economic fundamentals. But buried in the equity return chart above is one small piece of bad news; the flipside of the market bouncing back from disasters and returning to the trend is that stocks also underperform after long periods of above-average performance. And this is where Jack Bogle is coming from. He doesn’t forecast a new bear market – nobody can – but simply predicts a decade of underwhelming returns after the strong bull market over the last 8 years. How do you even make a forecast like that? That’s the topic for today’s post…
A few weeks ago I had the honor of talking to Jonathan and Brad over at the awesome ChooseFI podcast. Today, this long-awaited episode finally went online, so I hope everybody heads over to check out this podcast:
Almost everywhere in life, the word “active” has a positive connotation. An active lifestyle, an active personal life, an active participant in a discussion, etc. In contrast, “passive” stands for low-energy, dull and boring. Imagine setting up a friend on a blind date with a nice gal/guy who has a really great “passive lifestyle” and see how much excitement that generates.
But investing is different. Passive investing is the rage right now! It is a noticeable market trend in finance overall and the Financial Independence blogging world seems particularly subscribed to the passive investing idea. For the most part, I agree with the superiority of passive investing. But then again, not all active investment ideas are created equal. And that means that we are at risk of throwing out the baby with the bathwater!
Has the Personal Finance Passive-Pendulum swung too far? Are we willfully ignoring some useful principles from active investing for fear of shaking the foundations of the Passive Investing Mantra?
Take the following five examples of active investing. They all fall into different spots on the Futility vs. Opportunity spectrum:
Style investing, i.e., tilting the portfolio toward a theme such as dividend yield, small stocks, value stocks, low volatility stocks, etc., or a combination of them.
Allocation to different asset classes (e.g. stock, bond, cash, alternatives) in response macro fundamentals (P/E ratios, bond yields, volatility, etc.).
Changing the major asset weights over the life cycle, e.g., using an equity glidepath to retirement and even throughout retirement.
Setting the initial safe withdrawal rate in retirement and all subsequent withdrawal rates in response to changing market conditions.
It would be a mistake to apply the same passive investment mantra to all five aspects of personal finance. So, that’s what today’s post is about: Where should we stay away from active investments and where can we learn something from active investment principles? Let’s look at the five active investment themes in detail…