The Ultimate Guide to Safe Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

It’s been three months since the last post in the Withdrawal Rate Series! Nothing to worry about; this topic is still very much on my mind. Especially now that we’ll be out of a job within a few short weeks. I just confirmed that June 4 will be my last day at the office! Today’s topic is not entirely new: Flexibility! Many consider it the secret weapon against all the things that I’m worried about right now: sequence risk and running out of money in retirement. But you can call me a skeptic and I like to bust some of the myths surrounding the flexibility mantra today. So, here are my “favorite” flexibility myths…Read More »

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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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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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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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Inflation Risk for Early Retirees – Part 2

February is “Macroeconomics Month” on the ERN blog! And the topic of inflation fits right in. My blogging buddy Actuary on FIRE suggested doing a series on the “Inflation Risk for Early Retirees” and I like that idea because this topic hasn’t gotten all that much attention in the FIRE community. Even though inflation is a top concern for 78% of retirees, according to this recent article.

In addition, the topic is not just extensive enough to span multiple blog posts, but it also greatly benefits from the viewpoints of two experts in their respective fields: An actuary and an Econ Ph.D. each with their own expertise in number crunching. AoF started the series last week with the introductory post, Part 1, and this week it’s my turn. Just like AoF, I like to start setting the stage and give a little bit of an overview – think of this as another introduction to the inflation topic, just by a different kind of numbers geek. So, today I’ll take a brief look at the U.S. inflation history and the different ways inflation can ruin our retirement. Let’s jump right into this…

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Market Timing and Risk Management, Part 1 – Macroeconomics

Last week’s post ended with a bit of a cliff-hanger: I wrote about how the major stock market disasters are highly correlated with U.S. recessions. Since it doesn’t look like we’re anywhere close to a recession let’s not get too worried about the stock market volatility in early February! But I didn’t really elaborate on why I’m not that concerned about the U.S. economy right now. So, today’s post is about what indicators would I look at to reach that conclusion.

The broader context of this post and, hopefully, a few more followup posts in the coming weeks is the question that I’ve been grappling with for a while:

What would it take for me to reduce my equity weight?

You see, a lot of my safe withdrawal rate simulations assume either constant equity weights (e.g. 80/20) or a rising equity glidepath in early retirement (see the SWR series Part 19 and Part 20). But what would entice me to do the opposite? Throw in the towel and reduce my equity share as a Risk Control! Should I ever even consider that?

The broad consensus in the FIRE community seems to be to stoically keep your asset allocation through thick and thin. Physician on FIRE had a brilliant post, adequately titled “Don’t just do something. Stand there!” on why not to react to market swings. That was in 2016 and I very much agreed with that assessment back then. But that doesn’t have to be a universal truth. In my wedding vows, I swore to stay with my wife through “good times and bad.” But the last time I checked I’m not “married” to my equity portfolio, so I should have the right to at least consider scenarios that would convince me to pull the plug on stocks.

If nothing else, thinking about when would be a good time to dump stocks gives me the confidence not to lose my nerves when those conditions are clearly not present, such as during the volatility spike earlier this month. So, what would be the indicators I’m following? Today, Part 1 deals with the macroeconomic picture (but in a future post, I will also share my thoughts on momentum/trend-following etc. as requested by some readers). Among all the different macroeconomic indicators, here are my three favorites…Read More »

Joined at the hip: The Macroeconomy and the Stock Market

This is a topic I wanted to cover for quite a while and I think this is the perfect time for it: I got a few posts lined up already dealing with the intersection of macroeconomics and (personal) finance. Of course, I can already hear one objection:

“Oh, come on Big ERN, did you see the volatility in the stock market last week? My portfolio went down by 10+% since the January 26 peak and you want to talk about macroeconomics now? The first week of February 2018 proves that the macroeconomy doesn’t matter for stocks!”

And my response: Yes, this is actually the perfect time to talk about macroeconomics! See, the main reason I was not overly concerned about the market volatility earlier this month is that the economy seems to be running just fine and there don’t seem to be strong signs of any impending recession. Of course, the stock market has some wild swings, sometimes during a recession, sometimes outside of a recession. But all the really bad disasters, the bear markets that sunk retirement dreams in my Safe Withdrawal Rate historical simulations, they all occurred during recessions. And not just any minor garden-variety recession but the big ones! In other words, this is how I insist macroeconomics matters for the stock market:

What do we make of a 10% drop in the stock market? It’s a buying opportunity during an economic expansion! But during a recession, the market might potentially get a lot worse before it gets better!

And in today’s post, I like to provide some empirical evidence for my view…

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