A dog, a homework and a reader question about Robo Advisors

There is a first time for everything. A first time in about two years! I didn’t get today’s designated blog post up and running in time! The dog ate my homework! Well not literally but only figuratively. Things are busy at work and last weekend we had to move (again). After a month and half of couch-surfing with friends and relatives and some vacation time in between, we finally moved into a slightly more permanent place, an AirBnB in Oakland. Hopefully, our last place in the Bay Area before I finish my job in mid-June. Right as we settled in at the new place and I wanted to get working on my blog post my laptop gave up its ghost! The new one I wanted was not available at Costco and needs to be shipped. ETA TBA! What to do now? Well, I could just skip this week’s post, right? I figure once we go on our long trip to Europe, Asia, Australia and New Zealand in the second half of 2018 I will likely reduce the blog post frequency to 1-2 per month anyway. Vacations are a lot of work! But as long as we’re here I’ll try to keep up with the weekly posts on Wednesdays.

So, what about today’s post? Simply repurpose something I had already done! I receive a lot of emails with personal finance questions from readers. I can’t answer them all because I don’t have an army of Macedonian content writers working for me! But a few weeks ago I got an interesting question via email that I couldn’t help but answer! It’s about Robo advisors! And why two Robo advisors are worse than one! That’s something I have to share on the blog as well! Let’s take a look…

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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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Inflation Risk for Early Retirees – Part 4: Hedging

Here’s the next installment of the inflation series, joint with my blogging buddy Actuary on FIRE. Check out the other parts here:

Today’s post is about one issue I raised in the post last month: What asset classes – if any – are useful in hedging against inflation? Simple question, not an easy answer. It all depends on the horizon!

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My best investment ever: Homeownership?!

Sometimes folks ask me what has been my best investment ever. I normally answer that this is not the right question to ask. We didn’t have one lucky break that made us rich overnight. We never owned the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google/Alphabet) outright, only through index funds. No lottery winnings, neither literally nor figuratively (tech company stock options, IPOs, etc.). Building our Net Worth is mostly the result of many years of small and large contributions to brokerage accounts, never losing our nerves and staying the course through volatile periods.

But the other day, I ran the numbers on how well we did with the apartment we just sold in January (not pictured above!!!). Over a period of just under 10 years, the IRR was almost 16% and beat stocks pretty handily! Again, this did not single-handedly catapult us into Financial Independence, but in the ranking of good investments, it’s clearly way up there, probably even at the top!

Of course, all this assumes that we do the math right. And that’s what today’s post is all about…

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Guest Post: Farmland Is The New Gold

Happy Wednesday! I have been busy with the move this week so this is a good time to run a guest post! Today, we feature a guest post by Scott, who runs the Basic Capital Forum. I don’t really feature guest posts very often despite getting tons of proposals – my fellow bloggers probably know what I’m talking about! But a guest post about an alternative asset class with pretty cool return stats is actually something I like to publish. So, take it over, Scott…

Are the boom times back? Judging from investor sentiment, it looks like they are. Despite some recent volatility, the bull market is still in full swing and according to data from fund tracker EPFR Global, markets attracted $102b into equity funds over the past four weeks. Behind the curtain, the euphoria might be unjustified – there are a few warning signs that investors may be ignoring. Firstly, stocks are over-valued by many measures. The Shiller CAPE hit 31 in January – the same vicinity of its peak in 1929. Warren Buffet’s measure states that stocks are overvalued by 40% as of November. The most over-weights stocks are FAANGs (Facebook, Amazon, Apple, Netflix, Google) with forward-PE-ratios even higher than those in the overall S&P500.

Secondly, the level of private debt is enormous. According to the IIF, global debt hit $233 trillion this month. If global GDP is roughly 73 trillion, the global debt is 310% of global GDP. To put this in perspective, private debt to GDP only surpassed 150% in 1929 and 2008. In this time of overvalued stocks, one could make the case for investing in gold. The issue with gold, of course, is that it produces nothing and it has no inherent value. The enterprising investor, however, could invest in the 21st-century gold: Farmland.Read More »