Tag: investing

Small-Cap Value Stocks: Diversification or Di-WORSE-fication?

December 2, 2024 – Many of you have asked me to comment on a recent phenomenon in the FI/FIRE community: Small-Cap Value (SCV) Stocks. Oh, my! Just when I thought we were making progress in the personal finance community, a new fad comes along and threatens to undo all that hard work. When you thought everyone was on board with simple, stress-free, and hands-off index investing, I sense that people feel the itch again to tinker with their portfolios – this time with “Small-Cap Value (SCV) Stocks.” To be precise, small-cap value is nothing new. I’ve written about my SCV skepticism in a post over five years ago. But the way it’s sold now is from a new angle, and it’s getting traction in the FI/FIRE community. The SCV media blitz relies on the latest narrative that, sure, broad index funds (VTI, ITOT, etc.) are a great and simple way to reach your financial goals. But SCV is an even better way—a “more optimal” way to reach your goals. Allegedly, SCV is the secret sauce for accelerated financial success for astute and enlightened investors.

But alas, much of that narrative is hype and false advertising. In today’s post, I want to reiterate the case for simple broad index investing. Let’s take a look…

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Why the Wheel Strategy Doesn’t Work – Options Series Part 12

September 17, 2024 – Welcome to another installment of my Options Trading Series. Please click here for the Options Landing Page for more details about the strategy. People frequently ask me how I deal with losses when I trade my options strategy. My approach is that a loss is water under the bridge, and I run the same strategy going forward, albeit with a slightly smaller account size. I’ve been trading my put options strategy since 2011, and this approach has served me well in several significant equity drawdowns, most recently in the 2022 bear market.

However, some of the options traders who have found my blog over the years must be big fans of the so-called “Wheel Strategy” (or “Options Wheel” or other related terms) and ask me all the time if it wouldn’t be better to take possession of the underlying, and then sell covered calls until I recover the loss. This strategy is often marketed as a great risk management tool and a surefire way to claw back losses.

I’ve previously dismissed this idea and given short and curt answers. But since the issue keeps coming up, I want to publish a more detailed post explaining why I don’t think the Wheel Strategy holds up to all the hype on the internet. Let’s take a look…

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Safety First – SWR Series Part 61

May 16, 2024 – Welcome to another Safe Withdrawal Rate Series installment. Please see the landing page of the series for a guide to all parts so far. In Part 60, dealing with the “Die With Zero” idea, I mentioned working on an upcoming post about the “Safety First” approach, and I finally got around to writing that post. What is Safety First? It involves using asset allocations different from those in the Trinity Study or my SWR Toolbox (see Part 28). For example, we could use Treasury Inflation-Protected Securities (TIPS) as a default-free and CPI-hedged investment option. However, TIPS are no hedge against longevity risk. An annuity hedges against longevity risk; though the most common annuity option, a single premium immediate annuity (SPIA), is usually not CPI-adjusted. Also, for the longest time, low interest rates rendered the Safety First approach all but useless because neither TIPS ladders nor annuities generated enough income for a comfortable retirement. You would have been better off taking your chances with the volatility of a 60/40 portfolio.

In other words, there is no free lunch. You don’t get peace of mind for free. Rather, you likely pay a steep price for that safety by giving up most, if not all, of your portfolio upside and/or bequest potential. However, since interest rates started rising again in 2022, the entire fixed-income interest rate landscape looks more attractive now. Could this be the time to reconsider Safety First? Let’s take a look…

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Looking for high-yield CDs? Consider an Option “Box Spread” as a tax-advantaged alternative!

April 17, 2024 – People sometimes ask me for a good and safe place to “park” their money for a short period. CDs, high-yield savings, and money market accounts would be the obvious answers. When looking for safe, short-term investments, options are probably the last thing on your mind. Options have the aura of complicated and highly speculative investments. However, sophisticated investors can structure options trades to make them (almost) as safe as CDs but with more flexibility and higher after-tax income, thanks to a Box Spread trade.

You can implement this trade by hand, and I will go through the mechanics. You can also buy an ETF, though with some small drawbacks. Let’s take a look…

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Trading Options: A Primer (Options Series Part 11)

March 7, 2024 – My claim to fame in the personal finance and early retirement community is my Safe Withdrawal Rate Series, which has now grown to 60 parts. But I also have another passion: trading options to generate extra income in retirement. By popular demand, I like to update everyone on how my strategy has evolved since my last update in early 2023. Before I do that, though, I also want to reemphasize the rationale for my options trading strategy: Why does it work? How does it fit into a portfolio, both during accumulation and now in retirement? How do we dispel some of the common objections and misunderstandings? I think of it as an options trading primer.

Let’s take a look…

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100% Stocks for the Long Run?

February 12, 2024 – Last week, I wrote about how equities historically outperformed bonds by a comfortable margin. So, the principle of “stocks for the long run” is still valid. Does that mean a portfolio with 100% stocks is a good long-term strategy? That’s a recommendation from another finance research paper that’s gotten a lot of publicity lately. Three finance professors claim that a 100% stocks portfolio, 50% domestic and 50% international stocks, would have consistently outperformed all other conventional wisdom asset allocations, e.g., 60/40, glidepaths in target date funds, etc. Quite a sweeping claim! They claim they have the empirical evidence to prove it.

I have my doubts, though. Let’s take a look…

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Stocks are STILL a great long-run investment!

February 5, 2024 – Two recent papers in the personal finance area have caused enough of a stir that I’ve gotten numerous requests for comment. I noticed that if I compile all my notes, calculations, simulations, and replies, I already have more than half of a new blog post. So, today I would like to share my results with my other readers who might also wonder what to make of those new research ideas. The first paper claims that the famous “Stocks for the Long Run” mantra is all wrong because stocks don’t outperform bonds as reliably as Jeremy Siegel and many prominent finance pundits claim. The second paper effectively claims the opposite, namely that a 100% equity portfolio, half domestic and half international stocks, handily beats any bond portfolio and all diversified stock/bond portfolios, including life-cycle, i.e., target date funds. Thus, the authors claim they have upended decades of personal finance conventional wisdom on stock/bond allocations, diversification, and target date fund glide paths.

Well, isn’t that ironic; both papers can’t be right! So, which one is right? Or are they both wrong, and conventional wisdom prevails? I started this post and wanted to comment on both papers in one single post but then ran out of space. So, I had to split my material into two posts. Today, I share my thoughts on the first paper and on whether stocks are still a good long-run investment in light of the new data. But stay tuned for the follow-up post, likely later this week or early next week!

Let’s take a look…

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We’re All Millionaires! (on average)

December 3, 2023 – When I wrote my post on the “Die With Zero” philosophy in October, I dug through the Survey of Consumer Finances (SCF). I used the detailed wealth distribution data to study the extent of asset overaccumulation late in retirement. The Federal Reserve releases the SCF only every three years, and just a few weeks ago, we got another survey covering 2022 and providing a wealth of information – pun intended. Quite amazingly, in 2022, for the first time in history, the average household net worth crossed one million dollars, now standing at about $1,060,000. Of course, wealth is unequally distributed, so while we may all be millionaires on average, the number of millionaire households is much smaller.

Then, what’s the percentage of millionaires? Is it a tiny elite, like the wealthiest 0.1% or 1%? I remember reading years ago that the share of millionaires was in the high single digits. So, I was surprised that more than 18%(!) of households were millionaires in 2022. That’s across all households and all age groups, and it is significantly higher for older folks. Also, the overwhelming majority of millionaires are homeowners. Homeownership can’t be such a terrible investment after all.

Since I did all that work, writing a Python program to dig through all those datasets, I thought I might as well write a blog post and share the results with you. Let’s take a look…

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How Crazy is Dave Ramsey’s 8% Withdrawal Rate Recommendation?

November 12, 2023 – If I wanted to comment on every piece of bad advice in the personal finance community, my quiet, relaxed early retirement would be busier than the corporate career I left in 2018. So, I usually stay out of the daily Twitter/X spats. Last week, though, an incident caught my attention, and it was egregious enough that I weighed in. In a recent Dave Ramsey show (original video here, starting at the 1:13:50 mark, Twitter discussion here), Dave doubled down on his recommendation of the 8% safe withdrawal rate in retirement, calculated as 12% expected equity returns minus 4% inflation (his numbers, not mine – more on that later). And several people pinged me and wanted me to comment. Safe Withdrawal Rates are my wheelhouse, given that I wrote a 60-part series looking at the topic from almost every angle I can think of. So here is my analysis, more detailed than I could do in a tweet: Don’t use a 8% Withdrawal Rate! That recommendation is crazy in more than one way. Let’s see why…

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How useful is the “Die With Zero” retirement approach? – SWR Series Part 60

October 6, 2023 – There’s been a lot of chatter about the Bill Perkins book “Die With Zero” and its approach to life and retirement planning. Most recently, just yesterday on the awesome Accidentally Retired blog. After several readers asked me about my views on the “Die With Zero” idea, I finally relented and decided to write a piece in my Safe Withdrawal Rate Series on the topic.

I’ll briefly describe the areas where I agree with Perkins. But then I also go through all of the fallacies in this approach. Let’s take a look…

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