Actually, not one ETF, but two! Or more! How can there be a need for a new ETF? Aren’t there enough already? Earlier this year, Motley Fool argued there are too many ETFs (1,929 at that time, probably over 2,000 by now) and they are covering pretty much every thinkable (and unthinkable) benchmark. Soon we might have more ETFs than publicly traded equities in the U.S., how crazy is that??? Why would I propose a new ETF that doesn’t already exist?
Here’s some background. I’m an index investor at heart and I like tax optimization. For so many years now, I’ve held equity index ETFs and Mutual Funds in both taxable accounts and tax-deferred accounts (both retirement and deferred compensation at work). It’s so painful to see the dividend payments in the taxable accounts getting taxed every year. Sure, it’s only about 1.9% dividend yield in the S&P500 right now but for us, that’s taxed at 15% federal, 10+% state (California!) and 3.8% Obamacare tax, for a total of almost 30% marginal tax! Isn’t there a better way? Sure! Simply put the taxable equity allocation into stocks that pay zero (or close to zero) dividends and keep the high-dividend stocks in the tax-deferred account where they can compound in peace and be taxed only once upon withdrawal rather than every year along the way! So, the two ETFs that I wish existed would exactly replicate the S&P500 if held in equal shares. But individually they’d have non-index weights and one would hold the equities with the lowest dividend yield and the other with the high-yield equities!
Notice that most folks already do this tax optimization across asset classes: Hold the tax-inefficient asset classes (bonds, REITs, etc.) in tax-deferred accounts and equities in taxable accounts. So, why not do this within the equity asset class as well for additional tax efficiency? How much extra after-tax return would we get out of this? Let’s look at the numbers…
Continue reading “Here’s an idea for a new ETF”
Welcome to the newest installment of the Safe Withdrawal Series! Part 25 already, who would have thought that we make it this far?! But there’s just so much to write on this topic! Last time, in Part 24, I ran out of space and had to defer a few more flexibility myths to today’s post. And I promised to look into a few reader suggestions. So let’s do that today pick up where we left off last time…
Continue reading “The Ultimate Guide to Safe Withdrawal Rates – Part 25: More Flexibility Myths”
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 1 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… Continue reading “The Ultimate Guide to Safe Withdrawal Rates – Part 24: Flexibility Myths vs. Reality”
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…
Continue reading “A dog, a homework and a reader question about Robo Advisors”
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…
Continue reading “Market Timing and Risk Management, Part 2 – Momentum”
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!
Continue reading “Inflation Risk for Early Retirees – Part 4: Hedging”
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…
Continue reading “My best investment ever: Homeownership?!”
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. Continue reading “Guest Post: Farmland Is The New Gold”
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…
Continue reading “Inflation Risk for Early Retirees – Part 2”
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… Continue reading “Market Timing and Risk Management, Part 1 – Macroeconomics”