Market Timing and Risk Management, Part 2 – Momentum

I started a new series in February on Market Timing Risk Management (part 1 was on macroeconomics) but never got beyond the first part. So, finally, here’s the second installment! Part 2 is about momentum (sometimes called trend-following) and this is a topic requested by many readers in the comments section and via email. Specifically, many readers had read Meb Faber’s working paper on this topic, which by the way is the Number 1 most popular paper on SSRN with 200,000+ downloads. I always responded that read that paper and found it quite intriguing but never followed up with any detailed explanations for why I like this approach. Hence, today’s blog post!

And just for the record, I should repeat what I’ve said before in the first part: I have not suddenly become an equity day-trader. I am (mostly) a passive investor who likes to buy and hold equities. But with my early retirement around the corner and my research on Safe Withdrawal Rates and the menace of “Sequence Risk,” I have that nagging question on my mind: Are the instances where an investor would be better off throwing in the towel and selling equities to hedge against Sequence Risk? At the very least, I’d like to have some rules and necessary conditions that need to be satisfied before I would even consider reducing my equity exposure. I think of this as insurance against overreacting to short-term market volatility!

So, without further ado, here’s my take on the momentum signal…

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My podcast appearance on NewRetirement.com

Everybody, I was on a podcast on NewRetirement.com, please see link below. Steve and I sat down to talk about personal finance in general and – you guessed it – safe withdrawal strategies in retirement:

Link to the podcast at NewRetirement.com

NewRetirement iTunes page

NewRetirement Stitcher page

NewRetirementPodcast.png

And when I say “sat down” I mean we really met in person at the New Retirement recording studio (in Steve’s garage) just outside of San Francisco. The first time I ever did a podcast with the interviewer sitting across the table from me! It turned out really great, so if you have time, please check it out and also don’t forget to subscribe to this podcast on iTunes/Stitcher. It’s a new podcast but with some really high-profile guests (e.g., J.D. Roth from MoneyBoss/GetRichSlowly, The Wall Street Journal’s Jonathan Clements, etc.)!

How crazy is it to invest an emergency fund in stocks?

I thought I had written everything I wanted to write about emergency funds. Especially why I don’t like them! For example:

But this topic just keeps coming back. Most recently in the ChooseFI podcast episode 66 and the discussion that ensued afterward. One unresolved issue: the pros and cons of investing the emergency fund in the stock market. As I’ve mentioned before, I am not against having an emergency fund. Quite the contrary, if you’re on your path to Financial Independence (FI) you strive to accumulate 25 years (!) (or better 30+ years) of expenses – much more than the 3-6 or even 8 months of living expenses normally recommended to keep in the emergency fund. In other words, I view our entire portfolio as one giant emergency fund invested in productive assets (mostly equity index funds) and I don’t see the need for keeping a separate bucket of money in low-risk assets. One could view this as having an emergency fund that’s invested in stocks! 100%! How crazy and/or how irresponsible is that? That’s the topic for today’s post. Let’s look at the numbers and quantify the tradeoffs…

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Our Net Worth as of 3/31/2018

I wish the first quarter had ended on January 26 when the S&P500 peak reached the all-time high of 2,872! But in the end, the first quarter of 2018 was really nothing to write home about. And the second quarter is off to a volatile start as well! But I started with this series exactly a year ago and I might as well keep going! Besides, looking at the visitor stats, these posts are some of the most popular! I don’t blame you for being nosy because net worth updates are some of my favorites to read on other blogs, too! 🙂 Soooo, where do we stand as of 3/31/2018? Let’s take a look at the cold hard numbers…

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Does Big Ern really exist?

Psssst? Can you read this? I’m not supposed to do this but I secretly logged into the EarlyRetirementNow WordPress account. I’m not Ern! I’m a whistleblower! Big Ern doesn’t actually exist. It’s all a big sham! This blog is created by a Macedonian content farm. We got five people here working around the clock, churning out blog posts, answering emails, commenting on other blogs, writing tweets, posting on Facebook, SEO, you name it! The whole shebang!

Don’t believe me? Ask yourself: have you ever actually met Big Ern? Have you seen him? Yeah, there are some photos on the blog and you heard him on the ChooseFI podcast. But that’s an actor! We found him on Fiverr! And since we’re running things on the cheap we went with some dude who doesn’t even speak proper English. So, we conjured up that whole story about Ern being an immigrant.

How about the financial analysis and the Safe Withdrawal Rate Series? Well, all of that work is indeed legit and original research. But it’s all contract work! With the money we haul in from the blog every month we could buy the entire Finance department at Macedonia National University. So, we just “rent” two assistant professors to help with the simulations! You should see our profit margins!

And back to the Big Ern actor, do you know why he couldn’t come to the FinCon in Dallas in 2017? He has no training in Finance! You talk to him for two minutes and you figure out the guy doesn’t know anything about finance! He wouldn’t know the difference between a Safe Withdrawal Rate and a mortgage rate – he’s an actor for Chrissake! When he doesn’t pose for the pictures on the blog he’s doing clown gigs at kids’ birthday parties in Tulsa, Oklahoma! At least for the upcoming CampFI in April they coached him enough to not make a total clown out of himself. But ask him how the calculations in the SWR Google worksheet work and you’ll see a blank stare! Try it!

But there’s more…

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