Three Equity Investing Styles that did OK in 2020

April 22, 2020

Recently, I wrote a post endorsing the simple Bogleheads approach: invest in passive index ETFs. Everything else is just mumbo-jumbo, window-dressing and people not understanding the (mostly) efficient market nature of the stock market. In other words…

Simple (indexing) beats complicated active investing

Well, after unloading on some of the fancy complicated investing styles, I just like to point out the select few of them that indeed performed relatively well in 2020. At least better than the index. So, for the record, I’d also like to write about three examples where…

Complicated beats simple index investing

And most importantly, I’m not pulling some “Monday Morning Quarterback” nonsense telling you that if you could have sold your airline stocks in February and replaced them with stocks for video conferencing makers you could have done really well. Well, duh, very few people other than U.S. Senators had that kind of inside information back in February! Rather, I want to write about some of the deviations from simple indexing that were mentioned here on the blog in my posts and/or in the comments. Before the crisis!

Let’s take a look:

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Some Financial Lessons from the First Quarter of 2020 (incl. Jack Bogle’s Revenge)

April 8, 2020

Wow, we made it through the first quarter of 2020. Seemed like an eternity! Remember January 2020? Suleimani Drone strike and an almost-war with Iran? Australian Wildfires? February? The Super Bowl, the impeachment trial? Even early March: Super Tuesday (March 3). It all feels like years ago! All those daily 100-point S&P 500 and 1,000-point Dow Jones moves took a toll. They make you age in dog years, I guess!

Time to look back and reflect. Let’s take a look at a few lessons I learned… Continue reading “Some Financial Lessons from the First Quarter of 2020 (incl. Jack Bogle’s Revenge)”

Dealing with a Bear Market in Retirement – SWR Series Part 37

March 25, 2020

In my post last week, I looked at how the 2020 Bear Market will impact folks saving for (early) retirement. But I deferred my recommendations on how current retirees will optimally adjust to the new realities. So, here we go, a new installment of the Safe Withdrawal Series, now 37 posts strong!

Nothing I write here today should be shocking news to people who have read the other 36 parts, but having it all summarized in one place plus some new simulations and perspectives is certainly a worthwhile exercise. In a nutshell, I argue that if you’ve done your homework before you retired, not even a bear market, not even this bear market will derail your retirement. Depending on what approach people chose, some retirees might even increase their spending target now.

Let’s take a look…

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Safe Withdrawal Math with Real Estate Investments – SWR Series Part 36

Welcome to another installment of the Safe Withdrawal Rate Series. This one has been requested by a lot of folks: Let’s not restrict our safe withdrawal calculations to paper assets only, i.e., stocks, bonds, cash, etc. Lots of us in the early retirement community, yours truly included, have at least a portion of our portfolios allocated to real estate. What impact does that have on our safe withdrawal rate? How will I even model real estate investments in the context of Safe Withdrawal and Safe Consumption calculations? So many questions! So let’s take a look at how I like to tackle rental real estate investments and why I think they could play an important role in hedging against Sequence Risk and rasing our safe withdrawal rate…

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Asset Location: Do Bonds Really Belong in Retirement Accounts? – SWR Series Part 35

Welcome back to another installment of the Safe Withdrawal Rate Series. This one is about taxes. Amazing, how after 30+ installments in the series, I have written conspicuously little about taxes. Sure, I’ve done some Case Studies where, among many other issues, I delved into the tax planning, most recently in the Case Study for Becky and Stephen. But I’ve never written much about taxes and tax planning in the context of the Series.

There are two reasons why I kept the tax discussion on such a low burner: First, my background: If I had an accounting Ph.D. and CPA instead of an economics Ph.D. and a CFA charter, I would have written a whole lot more about taxes! Second, pinning down the Safe Withdrawal strategy and the safe withdrawal rate is my main concern. Most (early) retirees will have extremely low tax liabilities as I outlined in a post last year. You’d have to try pretty hard to pay more than a 5% federal effective tax rate in retirement. So, as long as you stay away from anything clearly irresponsible on the tax planning side, you’re fine. Don’t stress out over taxes in retirement unless you have a really, really large nest egg and taxable income deep into the six-figures during retirement.

But you don’t want to leave any money on the table either. So, I still want to write about taxes if I encounter something that captures my attention. And I came across a topic that’s most definitely interesting from a withdrawal strategy perspective: Asset Location (as opposed to Asset Allocation).

Imagine you target a particular asset allocation, say 60% stocks and 40% bonds. Or 70/30, or 80/20, or whatever suits your needs the best. How should we allocate that across the different account types? If we put all the different accounts into three major buckets…

  1. Taxable, i.e., your standard taxable brokerage account: Interest, dividends and realized capital gains are taxable every year they show up on your 1099 tax form. But you don’t have to pay taxes on capital gains until you realize them.
  2. Tax-deferred, i.e., your 401(k) or your Traditional IRA. Your account grows tax-free until you actually withdraw the money (or roll it over to a Roth). So, so can realize as much in interest income, dividends, capital gains along the way, as long as you keep the money inside the account.
  3. Tax-free, i.e., your Roth IRA or your HSA. The money grows tax-free and you can withdraw tax-free as well.

… then where do we put our bonds and where do we put our stocks? It would be easy, though likely not optimal to simply keep that same asset allocation in all three types of accounts. But is there a better way to allocate your stock vs. bond allocation?

Sure, there is! One of the oldest pieces of “conventional wisdom” investment advice I can remember is this:

“Keep stocks in a taxable account and bonds in your tax-advantaged accounts.”

Or more generally:

“Keep the relatively tax-efficient investments in a taxable account and relatively tax-inefficient investments in a tax-advantaged account.”

Most stocks would be considered more tax-efficient than bonds because a) dividends and capital gains are taxed at a lower rate than interest income and b) you can defer capital gains until you actually withdraw your money, which is a huge tax-advantage (more on that later).

So, it appears that we should ideally load up the taxable account with stocks and the tax-advantaged accounts with bonds. Hmmm, but that doesn’t sound quite right, does it? Why would I want to “waste” the limited shelf space I have in my tax-advantaged accounts with low-return bonds while I expose my high-return stocks to dividend and capital gains taxes? So, it would be completely rational to be skeptical about this common-sense advice!

So who’s right? Conventional wisdom or the skeptics? Long story short: they’re both wrong! You can easily construct examples where either conventional wisdom or the skeptics prevail. So neither side should claim that their recommendation is universally applicable. The asset location decision depends on…

  1. Your expected rates of return,
  2. Your expected tax rates,
  3. Your investment horizon. Yup, you heard that right, it’s possible that you want to go either one way or the other depending on the horizon. Though, this is not really a separate case but really only a result of asset allocation drift. Accounting for that, we’re back to the two cases, but more on that later!

Let’s look at the details…

Continue reading “Asset Location: Do Bonds Really Belong in Retirement Accounts? – SWR Series Part 35”

Using Gold as a Hedge against Sequence Risk – SWR Series Part 34

Happy New Year! It’s time for another installment in the Safe Withdrawal Series! Here’s a topic that I’ve thought about for a while and that was also requested dozens, maybe even hundreds of times from commenters: What about gold? Gold has been a safe haven asset for many decades (Centuries? Millenials???) and it should have the potential to hedge against Sequence of Return Risk. And I recently found this article on Yahoo Finance: “The world’s super-rich are hoarding physical gold“. Maybe it’s just click-bait. Yahoo Finance must have lowered its standards substantially because they even (re-)published one of my articles last year. 🙂

But seriously, in light of the recent runup in gold prices, rising interest by the world’s super-rich and the many requests by readers, I’ve finally gotten around to studying this subject in the context of Sequence Risk. Let’s take a look at how useful gold would be as a hedge against running out of money in retirement…
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A Safe Withdrawal Rate Case Study for Becky and Stephen

What? A new case study? I know, I had promised myself to wind down the Case Study Series I ran in 2017/18 after “only” 10 installments. It was a lot of work and a lot of back and forth via email. It takes forever! I mean F-O-R-E-V-E-R! But then again, there’s always a reason to make an exception to the rule! Jonathan and Brad from the ChooseFI Podcast had a very interesting guest on their show this week (episode 152). Becky talked about her experience of a late start in getting her and her husband’s finances in order. They started at around age 50 and became Financially Independent (FI) in their early 60s and retired a year ago. I should also mention that Becky recently started her own blog, appropriately labeled Started At 50, writing about her path to FI and RE so make sure you check that out, too.

In any case, Jonathan and Brad asked me to look at Becky’s numbers because I must be some sort of an expert on Safe Withdrawal Strategies in the FIRE community. I chatted with Jonathan and Brad about my case study results the other day and this conversation should come out as this week’s Friday Roundup episode. Because there’s only so much time we had on the podcast and I didn’t get to talk about everything I had prepared, I thought I should write up my notes and share them here. Heck, with all of that effort already spent, I might as well make a blog post out of it, right? That’s what we have on the menu for today… Continue reading “A Safe Withdrawal Rate Case Study for Becky and Stephen”

How To “Lie” With Personal Finance

“Lies, damned lies and statistics” (Mark Twain)

“Do not trust any statistic you did not fake yourself” (Winston Churchill)

There is a classic book called “How to lie with Statistics” that I read many, many years ago (actually decades ago!) as a college student. If you’re ever looking for an inexpensive but fun and impactful present for a young student/graduate with the hidden agenda of getting that person interested in math and statistics, this is the one! The book taught me to take with a grain of salt pretty much anything and everything number-related. Anywhere! Whether it’s in the news or in the Personal Finance blogging world and even (particularly?!) in academia. I’m not sure if I was already a severely suspicious (paranoid?) person before reading this or the book turned me into the person I’m today. So, inspired by that book, I thought it would be a nice idea to write a blog post about the different ways numbers are misrepresented in the FIRE/Personal Finance arena. And just to be sure, this post is not to be understood as a manual for fudging numbers, but – in the spirit of the “How to Lie With Statistics” classic – serves as a manual on how to spot the personal finance “lies” out there!

And there’s a lot of material! Probably enough for at least one more followup post, so for today’s post, I look at just four different way of how quantitative financial issues are frequently fudged in the personal finance world. And a side note about the slightly attention-grabbing title I used here: Well, I put the word “Lie” in quotation marks to show to the faint-hearted that this is a bit tongue-in-cheek. I could have written, “fudge the numbers” or “Enron-accounting” or “How we delude ourselves in personal finance,” or something like that. Also, Hanlon’s Razor (“don’t attribute to malice what can be explained by incompetence”) comes to mind here, but I’m not sure if those faint-hearted folks feel that incompetence is a significantly more benign explanation than malice.

So, let’s look at some of my favorite examples of how people lie to themselves (and others) in the realm of personal finance…

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Where are they now? A Case Study Update with “Captain Ron”

From 2017 until early 2018 I ran a series of ten case studies for readers who volunteered to open their books and serve a real-world safe withdrawal rate guineapigs. The second case study in July 2017 was for Captain Ron (not his real name) who was planning to FIRE and enjoy early retirement with his wife on a sailboat! That title picture you see up there, that’s their actual boat! Sounds like a great adventure, not just the financial aspects but also the lifestyle changes are daunting! So, how did that all go? Captain Ron just sent me an update on how life has been, so Ron, please take over the wheel…

***

We retired in September 2017 as planned and are really enjoying life. Financially things are great and we have adjusted to the sailing life, but that first year of cruising was a surprisingly difficult transition. More on that later.

Continue reading “Where are they now? A Case Study Update with “Captain Ron””

Passive income through option writing: Part 3

Back in 2016, I wrote a few posts on trading derivatives, especially options, to generate (mostly) passive income:

I’m still running that same strategy but it definitely evolved quite a bit over time. This might be a good time to write a quick update on what I’m doing and what I’ve changed since then. And for everyone who’s wondering what’s the use of this: I’m planning a future post on how selling options may help with Sequence Risk, so this is all very, very relevant even for folks in the FIRE crowd!

So, let’s take a look…

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