Some Financial Lessons from the First Quarter of 2020 (incl. Jack Bogle’s Revenge)

April 8, 2020

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!

Time to look back and reflect. Let’s take a look at a few lessons I learned… Continue reading “Some Financial Lessons from the First Quarter of 2020 (incl. Jack Bogle’s Revenge)”

My thoughts on Small-Cap and Value Stocks

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 benefit from Dollar Cost Averaging. Specifically, a market crash early in your investing life can even be beneficial, at least under specific assumptions, as I wrote earlier this year in “How can a drop in the stock market possibly be good for investors?
  • 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 stock picking 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”