Crypto is probably a bad investment!

April 25, 2022

If you remember my April Fools Day post from a few weeks ago, I poked fun at the proliferation of new crypto coins. Most of them are scams. But what about the mainstream crypto coins, like Bitcoin, Ethereum, etc.? Are they a good investment? What’s not to like about a 100%+ annualized return in some of the crypto coins between their inception and their 2021 peak?

Well, those returns are “water under the bridge”. What matters to me today is the outlook for the crypto world going forward. In today’s post, I like to go through some of the reasons why I believe going forward, crypto looks like a sub-par investment. I currently don’t invest in crypto and I don’t think that anything more than a few % of the portfolio seems prudent. Let’s take a look…

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Timing Leverage in Retirement – SWR Series Part 52

March 21, 2022

Last year in Part 49 of the Safe Withdrawal Series, I wrote a post about using leverage in retirement, and in today’s post, I like to explore some additional issues. 

A quick recap, the appeal of using leverage in retirement is that we would borrow against the portfolio instead of liquidating assets. Nice! That might help with Sequence Risk if we avoid liquidating assets at temporarily depressed prices. There could also be a tax advantage in that we keep deferring the realization of taxable capital gains, potentially until we bequeath our assets to our daughter who can then use the “step-up basis” for complete forgiveness of all of our accumulated capital gains. That’s the famous “buy, borrow, die” approach popular with high-net-worth folks.

The gist of the post last year: Not so fast! Leverage could potentially even exacerbate Sequence Risk if you are unlucky and retire right before a bad market event that’s deep enough (like the Great Depression) or long enough (like the 1965-1982 stagflation episode) to compromise the portfolio so badly that the margin loan becomes unsustainable relative to the underwater portfolio.

One solution proposed by several readers: instead of always borrowing against the portfolio, maybe we should carefully time when we use leverage. For example, borrow only when the stock market is down “far enough” and use withdrawals from the portfolio otherwise. And if the market is doing well again, potentially pay back the loan again! Sounds like a reasonable and intuitive plan. But I want to put that to the test with some real simulations. Let’s take a look at the details… 

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Retirement in a High-Inflation Environment – SWR Series Part 51

February 28, 2022

What a difference a year makes! In late 2020, only about 16 months ago, I felt the urge to comment on the then-fashionable discussion of how low inflation would impact retirees. See Part 41 – Can we raise our Safe Withdrawal Rate when inflation is low? of my SWR Series. Feels like a lifetime ago, doesn’t it?

The takeaway back then: don’t get distracted by high-frequency economic fluctuations. Low inflation doesn’t necessarily mean we can all raise our safe withdrawal rates. Certainly not one-for-one. There is neither empirical nor theoretical economic backing for materially changing your retirement strategy.

Only a little more than a year later the tide has turned. We’re now facing the highest inflation readings in about 40 years. 7.5% CPI and potentially 8% year-over-year once the BLS releases the February figure in mid-March. So, people asked me if my inflation views are symmetric, i.e., high inflation is also a non-event? As I signaled in my inflation post last month, I’m not too worried. Here’s why…

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Ten things the “Makers” of the FIRE movement don’t want you to know – SWR Series Part 50

January 3, 2022

Happy New Year, everybody. I hope you had a relaxing and healthy Christmas and a good start to the New Year!

Last month was the 5th anniversary of the Safe Withdrawal Rate Series! In December 2016, I published the first part of that series. I had material for maybe four or five parts but one thing led to another and with new ideas, most of them due to reader feedback, the series took off. It’s been running for 5 years and I obviously opened a bottle of bubbly last month to celebrate.

So, what’s the deal with the title then? Very simple: Blogging 101. You need a catchy title! I might have called the post “What I’ve learned in 5 years and 50 posts” or something along those lines. But to shake things up and get everybody’s attention, this is the title I went with. Think of this post as a natural extension of Part 26 “Ten things the “Makers” of the 4% Rule don’t want you to know” or the equally “tongue-in-cheek” posts “How to ‘Lie’ with Personal Finance” – Part 1 and Part 2.

So, after 5 years, 50 posts, what have I learned? What do I think others in the FIRE community are missing? What can you learn from my series that you may not have seen elsewhere? Let’s take a look…

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Using Leverage in Retirement – SWR Series Part 49

November 16, 2021

My Safe Withdrawal Series has grown to almost 50 parts. After nearly 5 years of researching this topic and writing and speaking about it, a comprehensive solution to Sequence Risk is still elusive. So today I like to write about another potential “fix” of Sequence Risk headache: Instead of selling assets in retirement, why not simply borrow against your portfolio? And pay back the loan when the market eventually recovers, 30 years down the road! You see, if Sequence Risk is the result of selling assets at depressed values during an extended bear market, then leverage could be the potential solution because you delay the liquidation of assets until you find a more opportune time. And since the market has always gone up over a long enough investing window (e.g., 30+ years), you might be able to avoid running out of money. Sweet!

Using margin loans to fund your cash flow needs certainly sounds scary, but it’s quite common among high-net-worth households. In July, the Wall Street Journal featured this widely-cited article: Buy, Borrow, Die: How Rich Americans Live Off Their Paper Wealth. It details how high-net-worth folks borrow against their highly appreciated assets. This approach has tax and estate-planning benefits; you defer capital gains taxes and potentially even eliminate them altogether by either deferring the tax event indefinitely or by using the step-up basis when your heirs inherit the assets. Sweet!

So, is leverage a panacea then? Using leverage cautiously and sparingly, you may indeed hedge a portion of your Sequence Risk and thus increase your safe withdrawal rate. But too much leverage might backfire and will even exacerbate Sequence Risk. Let’s take a look at the details…

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Passive income through option writing: Part 9 – 2016-2021 backtest: Guest Post by “Spintwig”

November 10, 2021

Welcome to a new post in the Put Option Writing Series. My blogging buddy Spintwig volunteered to perform another backtest simulation. If you remember from Part 5, he simulated selling 5-delta and 10-delta put options going back to 2018. He now added 18 more months of returns to go back to September 2016. In the end, I will also compare my live results with the simulated returns and point out why my live trading achieved even slightly better results.

Mr. Spintwig, please take over…

* * *

Thank you BigERN (can I call you Dr. K?) for another opportunity to collaborate and add to the body of research that supports what is colloquially known as the “BigERN strategy.”

Part 8 of the options trading series is a 2021 update that discusses, among other things, premium capture, annualized return and the idea of lowering leverage while increasing delta.

Let’s throw some data at the idea of trading a higher delta at a lower leverage target and see how metrics like premium capture, CAGR, and max drawdown are impacted. As an added bonus, I’ve obtained SPX data that can facilitate a Sept 2016 start date for this strategy. This gives us an additional 18 months of history vs the SPY data that was used in Part 5.

For the benchmark, we’ll use total return (i.e. dividends reinvested) buy/hold SPY (S&P 500) and IEF (10Y US Treasuries), rebalanced annually, in the following configurations:

  • 100 SPY / 0 IEF
  • 80 SPY / 20 IEF
  • 60 SPY / 40 IEF

Let’s dive in…

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Retirement Bucket Strategies: Cheap Gimmick or the Solution to Sequence Risk? – SWR Series Part 48

September 14, 2021

Welcome to a new installment of the Safe Withdrawal Rate Series, dealing with Bucket Strategies. This is one approach that’s often considered a viable solution to the dreaded Sequence Risk Problem. Simply keep buckets of assets with different risk characteristics designated to cover expenses during different time windows of your retirement. Specifically, keep one or more buckets with low-risk assets to hedge the first few years of retirement. And – poof – Sequence Risk evaporates, just like that! Sounds too good to be true, right? And it likely is. Long story short, while there are certain parts of the bucket strategy that can indeed partially alleviate the risk of retirement bust, bucket strategies are by no means a solution to Sequence Risk. Let’s take a look at the details…

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When to Worry, When to Wing It: Withdrawal Rate Case Studies – SWR Series Part 47

August 18, 2021

In my post two weeks ago I outlined my approach to retirement planning: In light of significant uncertainty in retirement, I like to do a more careful, robust, and scientific analysis. Not because I could ever undo any of the existing uncertainties but because I don’t want to add even more uncertainties through “winging it” in retirement.

But how much detail is really required? I can already hear objections like “you can never know your future spending month-by-month, so why go through all this careful analysis with a monthly withdrawal frequency?” To which I like to answer: Well, maybe that’s the part where you can indeed use the “wing it” approach! So, today I want to go through a few case studies and learn how much of a difference it would make in my safe withdrawal strategy simulations if we a) carefully model the whole shebang in great detail, or b) just wing it and use a rough average estimate for the spending path. For example…

  • Does the intra-year distribution of withdrawals matter? In other words, how much of a difference does the withdrawal frequency make: monthly vs. quarterly vs. annual?
  • What if there are fluctuations in my annual withdrawals around the baseline average budget, due to home repairs, health expenses, etc.?
  • What if those fluctuations have an upward bias?
  • What if there is a slow (upward) creep in withdrawals?
  • What about nursing home expenses later in retirement?

Where can I safely wing it? And which are the ones I should worry about? Let’s take a look…

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The Need for Precision in an Uncertain World – SWR Series Part 46

August 5, 2021

Welcome back to another post in the Safe Withdrawal Rate Series. For a quick intro and a summary of the series, please refer to the new landing page.

People in the FIRE and personal finance blogging community – readers and fellow bloggers alike – often tell me that while they enjoy my writings here, they wonder if I haven’t gone a little too far into the rabbit hole of quantitative analysis. Why measure safe withdrawal rates down to multiple significant digits? Why do all of this careful analysis if there’s so much uncertainty? Market uncertainty, policy uncertainty, personal uncertainty, model uncertainty! Why not just wing it? I always try to give a short reply to defend my quantitative approach and out of the many different mental and written notes I’ve taken over the years I created this post for your enjoyment and for my convenience to refer to if I get this question again next week.

Specifically, I want to propose at least three reasons for being diligent and precise not despite, but precisely because of retirement uncertainties. And, by the way, I will keep today’s post relatively lean in terms of simulations and calculations, and rather try to make this more of a philosophical exercise. So, if you’re one of the quant-skeptics I hope you keep reading because I can promise you that we don’t have to get too deep into the (quant) weeds. So, let’s take a look at my top three reasons to get the math right…

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The Emergency Fund: It’s Still Useless!

May 26, 2021

One of my earliest blog posts back in 2016 detailed my thought process for skipping the emergency fund. Back then, while we were still accumulating and saving for early retirement, our entire seven-figure equity index fund portfolio served as our emergency fund. We never kept more than $1,000, maybe $2,000 in a checking account. We’d simply used the credit card float and/or the Home Equity Line of Credit (HELOC) if any larger expenses came up that exceeded my monthly cash flow, e.g., car and home repairs, medical bills, etc.

So, again, the idea is that if you are a practitioner of the FIRE movement and you save and invest aggressively just put all your money in an equity index fund and be done. It’s not crazy at all to simply invest your emergency fund in stocks! And I repeat it again in case people misunderstand (intentionally or unintentionally) my point here, I most definitely advocate stashing a large pile of money. I simply advocate for moving all that money into an investment with high expected returns, ideally equities, instead of letting the money languish in a money market account at 0.03% interest. Please refrain from quoting the strawman sob stories about people who couldn’t afford their roof or car repair because they live paycheck to paycheck. 

But a lot has happened since. We’ve had the 2020 recession and bear market and massive equity market volatility. Many financial experts, bloggers, and podcasters started spreading the “you need x months worth of expenses stashed away in a savings/money market account” mantra again. Have I changed my opinion? Heck no! Quite the opposite! The 2020 recession is a perfect example of the lunacy of the emergency fund invested in a money market account. Let me explain why…

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