Are we in another Bull Market now?

May 11, 2020

The stock market is still well below its February all-time-high, but it’s holding up remarkably well considering how poorly the economy is doing right now:

  • Double-digit unemployment,
  • 20+ million jobs lost according to the BLS payroll employment data,
  • 30+ million jobs lost according to the sum of weekly unemployment claims since March,
  • -4.8% GDP growth in the first quarter (annualized rate) and possibly a 10% drop quarter-on-quarter in Q3, which would be reported as a 34% drop annualized!
  • And a whole host of other economic indicators that look so bad, you’d have to go back to the Great Depression to find similar readings

Actually, “holding up” is a bit of an understatement when you look at the stock market as of the Friday, May 8 close:

  • The S&P 500 TR index rallied 31% since the March 23 low!
  • We’ve recovered more than half of the drop peak to trough!
  • Since April 8, we’re no longer 20% below the recent all-time-high, which is often quoted as the cutoff for the Bear Market!
2020 Case Study
The 2020 Bear Market up to May 8. Did a new Bull Market start on 3/24?

Does that mean the Bear market is over now? I certainly hope so! Whether the Bear Market is over and a new Bull Market might have started already obviously depends on the definition of Bull vs. Bear. What is that definition of Bull vs. Bear anyway? Different people have different definitions, some more sensible than others. And it gets more complicated: even if we do agree on a sensible definition, there could still be uncertainty over what’s the state of the market right now because some criteria cannot designate the state of the world in real-time but only after the fact. There’s a confirmation lag! So, we could be in a sort of a bull/bear-limbo state right now! How is that possible???

So many questions! Let’s take a look at how I think about Bull vs. Bear…

Continue reading “Are we in another Bull Market now?”

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:

Continue reading “Three Equity Investing Styles that did OK in 2020”

COVID-19: Some Empirical Observations and Reasons for Optimism

April 14, 2020

Welcome back to a new post! I hope you all had a happy and safe Easter Weekend! Last week I published a post wondering about how the stock market can be down “only” about 20% in the first quarter when we’re facing a deadly virus, a wide-ranging shutdown of the economy and no clear idea when we can reopen again. We are expecting a deep recession and macro data significantly worse than during the Global Financial Crisis.

If you listen to the media talking heads it’s all doom and gloom, so why is the stock market holding up so well? Why isn’t the stock market down 55% as in 2009 or even 80% as in 1932? Does the stock market “know” something that even your trusted news anchor doesn’t realize yet?

I updated some of the charts I posted a few weeks ago and gathered some additional data as well. And it all looks much better than the breathless and scary headlines in the media. Maybe that’s why the stock market looks relatively solid – under the circumstances, at least.

Let’s take a look… Continue reading “COVID-19: Some Empirical Observations and Reasons for Optimism”

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)”

Some Random Thoughts on the State of the World

March 27, 2020

Wow, I’m in a writing mood these days. A second post this week! Here are a few random thoughts about the current situation. All the things on my mind right now that might be too short to put into a separate blog. Since you’re likely all sitting at home feeling bored, I thought you might enjoy this… Continue reading “Some Random Thoughts on the State of the World”

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…

Continue reading “Dealing with a Bear Market in Retirement – SWR Series Part 37”

It’s a Bear Market now, all right! But what kind of bear will it be?

March 18, 2020

Well, there you have it! Just after I wrote a post two weeks ago pointing out we hadn’t even reached a Bear Market yet, all major U.S. indices, including the S&P 500 and the Nasdaq Composite tanked and fell into Bear Market territory last week and even touched the -30% mark after the precipitous fall on Monday. 

So, it’s a Bear Market now, all right! But not all Bear Markets are created equal. Which begs the question…

What KIND of bear will this be?

A little cuddly Panda Bear like in the picture above? Or the fearsome Grizzly Bear? Here are some of my thoughts and reflections on the Bear Market…

Continue reading “It’s a Bear Market now, all right! But what kind of bear will it be?”

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…

Continue reading “Safe Withdrawal Math with Real Estate Investments – SWR Series Part 36”

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…
Continue reading “Using Gold as a Hedge against Sequence Risk – SWR Series Part 34”