Halloween is around the corner, as evidenced by the annual return of the “Pumpkin Spice Latte” at Starbucks and 5-pound bags of sweet stuff at the grocery store! That’s also a good time to stab through the heart and kill with a silver bullet all those scary senseless finance myths, truisms, and falsehoods. Every time I hear one of the phrases below I suffer a mini heart attack. I hope people would stop saying those. Continue reading “Five Fishy Finance Phrases Deserving Diabolical Deaths”
All Parts of this series:
- Part 1: Intro
- Part 2: The strategy as implemented in 2016
- Part 3: Some updates on the strategy as I’m currently running it as of 2019
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On the path to early retirement (and most likely in early retirement as well), the ERN family will be writing options to generate passive income (in addition to equity and real estate investments, of course). This may be something that people either haven’t heard before or even if they did, they might be turned off by the involvement of derivatives. After we got over our initial aversion against trading exotic instruments like options we found that it’s actually a reliable and profitable strategy to generate passive income. We mentioned this strategy already in a previous post on trading derivatives on the path to FIRE and thought that others might find this interesting too.
Today, in Part 1, we will do a quick intro to cover mostly the conceptual aspects of this strategy. Part 2 will go into how we actually implement our strategy. As a warm up, though, let’s start with a …
Since 2000, the SPY ETF (S&P500 index fund from iShares) returned about 101% (Dec 1999 to August 2016, dividends reinvested), or about 4.3% p.a. What would the return have been if we had participated only when the market went up, i.e., if we had avoided every single down month and received a 0% return during that time?
A: 386% total, 10.0% annualized
B: 1,039% total, 15.7% annualized
C: 2,497% total, 21.6% annualized
D: 3,891% total, 24.8% annualized
This is a follow up from our post last week when we couldn’t fit debunking all the arguments for emergency funds into one post. This is also good place the point out some of the great work other bloggers have done on this topic:
- The Green Swan: Emergency Fund Alternatives
- BeNetWorthy: HELOC as an Emergency Fund option
- Unchained55 thinks Emergency Funds are a scam
- (we must have forgotten some, please let me know if you see an obvious omission!)
Here are our reasons 6-10. Enjoy! Continue reading “Top 10 reasons for having an emergency fund – debunked (Part 2)”
In a past blog post, we pointed out that a $0.00 emergency fund is most useful for us. Lots of visitor traffic came from both Physician of FIRE and Rockstar Finance (thanks for featuring us!!!) and most comments were very supportive. Good to know that others follow a similar approach. To make the case more complete we should also look at some of the standard arguments people normally use in favor of keeping a large stash of cash for emergencies.
That’s because in addition to some of the complaints we got in the comments section, someone we quoted in our post, Scott Alan Turner, is a blogger and podcaster and he dedicated almost an entire 28 minute podcast (transcript included if you don’t want to spend 28 minutes) to our theory and why he thinks we’re wrong. We respectfully disagree!
For full disclosure: I really like Scott’s blog and podcasts in general. I mean no disrespect and like to invite everybody to check out his material. I agree with most of what he has to say, just not the advice on emergency funds! Enjoy!
So, let’s look at some of the arguments in favor of an emergency fund and debunk them. It took us a while to put this together, but better late than never! Continue reading “Top 10 reasons for having an emergency fund – debunked (Part 1)”
Derivatives and FIRE (Financial Independence and Early Retirement) sound like two things that don’t mix. Like oil and water. Financial derivatives (options, futures, etc.) have the aura of opaque and highly risky investments. On the way to Financial Independence, most people are either oblivious to derivatives or avoid them like they carry communicable diseases. Probably derivatives are also traded in some smoke-filled backroom or an illegal gambling joint, right?
Let’s look at the myths vs. facts! Continue reading “Trading derivatives on the path to Financial Independence and Early Retirement”
Update: If you’re coming over to this article from Mr. French’s article over at RetirementResearcher, please note the last few paragraphs below where I shoot down his shockingly sloppy analysis.
Bonds diversify your equity portfolio risk. Everybody knows that, right? Well, how much diversification potential is there, really? Much less than we thought! (For full disclosure, though, bonds still serve a purpose, but it has nothing to do with diversification!)
Pop Quiz: Over the last 10 years, a portfolio of 80% stocks (U.S. Broad Equity Market) and 20% bonds (U.S. Aggregate Bond Market) had what correlation with the stock market?
The correct answer is A: the correlation was +0.998, so an 80/20 Stock/Bond portfolio would have been extremely highly correlated with the stock market. We might as well round it up all the way to 1.0 because from a statistical, financial and economic perspective that’s pretty much a perfect correlation. This correlation coefficient is for a broad U.S. stock market ETF (use Vanguard’s US Total Market VTI) vs. a portfolio made up of 80% Vanguard’s VTI and 20% Barclays Aggregate bond index (we used the iShares AGG total returns). Monthly returns are from 07/2006 to 07/2016. Continue reading “The Great Bond Diversification Myth”
A lot of economic and financial research deals with behavioral biases, those occasions where the mind plays tricks with us and leads even very intelligent people down the path of irrational and sub-optimal decisions. Other bloggers have pointed out some of these biases before, see Plan Invest Escape on cognitive biases. Also, Northern Expenditure wrote an interesting post on the temptation of instant gratification over saving for the future. Among all the different biases, Mental Accounting is not that well-known but it’s one of the most fascinating. Mental accounting, sometimes called Framing, shows up in human behavior in the following ways:
Intentionally or unintentionally creating different buckets of money and ignoring the fact that money is fungible; displaying different degrees of risk aversion and/or different propensities to consume out of different buckets.
Quite intriguingly, in personal finance the mental accounting bias is not only committed frequently, sometimes it’s even celebrated as a great innovation. It’s not a defect, it’s a feature! Some of the well-known financial gurus fall for this fallacy and are not even ashamed! Continue reading “Beat Behavioral Bias: Mental Accounting”
Ever since we posted our view on emergency funds, we have been thinking about a succinct, straightforward but also scientific way to debunk that bad, bad, bad advice that investors should hold large amounts of cash in a money market account. Here’s one try: Continue reading “Why an emergency fund is a bad idea in one single chart”
You heard that right! You can use leverage the smart way and reduce risk, all the while keeping the expected returns the same as in an unleveraged portfolio. Leverage has gotten a bad reputation, sometimes for a good reason, think Global Financial Crisis in 2008/9 or the LTCM debacle that almost sank the financial system in 1998. But every force can be used for good or bad, think Star Wars. So how do we change leverage from a Darth Vader to a Luke Skywalker? Continue reading “Lower risk through leverage”
Everybody knows that stocks are riskier than bonds. We agree with that, but like to present one chart to cast a little bit of doubt on that picture. Food for thought if you will, for the fact that in finance and personal finance (and most other places in life, for that matter) nothing is completely clear-cut all the time. Continue reading “When bonds are riskier than stocks”