Right at the start, let me point out that, no, I’ve not gone to the bad side! I will not try to sell any actively-managed funds here. If you’re a part of the passive investing crowd, which is a large portion of the FIRE community, you might find the title a bit “click-baity.” Because the thought process of the average passive investor would go like this:
Underperforming the VTSAX is a non-starter. That’s highly undesirable. The only assets we’d ever consider are those with an expected return equal to or larger than the VTSAX!
But the problem is that due to efficient markets, nobody can beat the market!
If we intersect the two sets above, i.e., constrain ourselves to what’s both desirable and feasible we’re left with the VTSAX (or whatever close substitute you might pick, e.g., FSKAX from Fidelity).
That line of reasoning has some advantages: it has probably convinced a lot of folks to get rid of their irrational fear of the stock market and many have benefited from low-cost index investing instead of wasting money on actively-managed funds. My concern here is that I think that this thought process of “nobody can beat the market” is overly simplistic and (literally) one-dimensional. Of course, there are ways to beat the market! Here are eight ideas I can think of… Continue reading “How to Beat the Stock Market”→
A few weeks ago I wrote the post “Do we really have to lower our Safe Withdrawal Rate to 0.5% now?” about the pretty ridiculous claim that the Safe Withdrawal Rate should go all the way down to just 0.5%, in light of today’s ultra-low interest rates. The claim was transparently false and it was great fun to debunk it. But recently I came across another proclamation of the type “We have to rethink the Safe Withdrawal Rate” – this time proposing to raise it all the way up to 5% and even 5.5%! Well, count me a skeptic on this one, too. Though I’d have to tread a bit more cautiously here because the 5.5% SWR claim doesn’t come from some random internet troll but from the “Father of the 4% Rule” himself, Bill Bengen. He’s been doing the rounds recently advocating for a 5% and even 5.5% Safe Withdrawal Rate:
On October 13 on Michael Kitces’ podcast, Bengen made another explicit SWR recommendation: “[I]n a very low inflation environment like we have now, if we had modest stocks, I wouldn’t be recommending 4.5%, I’d probably be recommending 5.25%, 5.5%” It’s not clear what made him raise the SWR by another 0.25-0.50%, though.
And the whole discussion was quickly picked up in the personal finance and FIRE community:
The main rationale for increasing the SWR: inflation has been really tame recently and will stay subdued over the coming years and even decades. That’s his forecast, not mine! Hence, Bengen makes the case that we’d have to make smaller “cost-of-living adjustments” (COLA) to our withdrawals. Smaller future aggregate withdrawals afford you larger initial withdrawals, according to Bengen. But as you might have guessed, the calculations that justify the significantly higher withdrawal rate don’t appear so convincing once look at the details…
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!
People have often asked me what I think about value and small-cap equity portfolios. So, this is a post I always wanted to write but kept postponing because I never knew how to best frame it. But now I have the perfect excuse to write it; last week, I listened to the ChooseFI podcast and they had Paul Merriman as a guest in episode 130. Paul Merriman is one of the big proponents of small-cap and value stocks. Of course, they talked about a variety of topics and I thoroughly enjoyed most of the discussion. I’m completely on the same page with Paul, Jonathan and Brad on a wide range of issues. For example:
Choose index funds over actively managed funds
Take emotions, especially fear and greed out of investment decisions
Young investors shouldn’t even think about bonds in the portfolio when starting out. Use 100% equities, use as much risk as possible.
But there’s one thing I vehemently disagreed with! Paul Merriman seems to suggest that by using a “better” or “smarter” equity allocation, specifically, overweighting the value and small-cap styles – both domestically and internationally – we can increase our expected return by two full percentage points a year. And just to be sure, this is not stockpicking but simply asset class/style picking, all implemented with passive ETFs. Two percentage points of extra return? Let that sink in! 2% a year can compound to a large sum over the years and then you retire and you get extra 50% of withdrawals when you add 2 percentage points to your 4% safe withdrawal rate. Pretty impressive! There’s only one problem: Merriman’s recommended portfolio didn’t return those two extra percentage points over the past few decades. And there are good reasons to believe that you will not gather those 2% extra returns going forward either. Let me explain why… Continue reading “My thoughts on Small-Cap and Value Stocks”→