Think Differently

PressingPausers have proven to have little interest in personal finance. Correction. PressingPausers have proven to have little interest in my thoughts on personal finance. Big dif. So why do I persist? Idk.

Just like getting dressed in the morning while on sabbatical, the fact that NO ONE will read this is liberating. Whatever shorts and t-shirt I left splayed on the floor last night are good, not many peeps are going to see me anyways as I write a blog post NO ONE will read. If a blog post falls in the woods. . .

Classic investing advice is to keep investing expenses to a bare minimum; determine what balance of stock, bonds, and cash will enable you to sleep well at night; and keep trading to a bare minimum.

In the US, investors currently have 56% of their assets invested in stocks or more than 10 percentage points higher than its historical average of 45.3%. At the top of the bull market in 2007, it stood at 56.8%. This has a lot of analysts worried that a correction is coming.

Another investing maxim of increasing popularity is to stop trying to outsmart the market. Instead, as Kendrick Lamar advises, “Be humble!” His next vid will prolly be about investing in passive index funds like this. The chorus. . .”Be passive!”

Another oft-repeated investing maxim is never invest more than 5% of your net worth in any individual stock because they’re far too volatile. A mutual fund or exchange traded fund is a basket of hundreds or thousands of individual stocks that go up and down at different times, thus creating a smoother, steadier, long term increase in value.

But damn is AAPL en fuego. Check this missive from a Vanguard forum of knowledgeable investors I’ve taken to reading recently. Wait a minute. That last sentence presumed you’re reading this, which you’re not, so note to self—revise that. This missive from a Vanguard forum of knowledgeable investors has me thinking about chucking conventional investing wisdom and improvising like #3.

“Hi—
Long time lurker first time poster. Thank you to all who have contributed to my education here, absolutely invaluable.
I’m writing about my mother and father in law’s finances, which I am slowly taking over at their request.
FINANCIAL PICTURE
Savings
$425k in various super low interest checking / savings accounts
Investments at Fidelity (unlikely to change brokerages):
Rollover IRA: $675k of which
* 86.8% AAPL he’s a lifelong Apple fanboy, bought $11,500 worth way back when, which is now $575k.”

Hindsight is 20-20, but if I was my daughters age again, for every $2 dollars of savings I could set aside, I’d put $1 in a super safe certificate of deposit and the other in AAPL. And then rebalance annually and pay 15 or 20% on the capital gains. As the aforementioned anecdote intimates, I would’ve done really, really well adhering to this “barbell” plan.

But this way of thinking suggests I’m suffering from an advanced case of “optimism bias” which causes a person to believe that they are at a lesser risk of experiencing a negative event compared to others. Note to self—AAPL can’t continue its recent run. VTI is a much safer, wiser, long-term instrument for building wealth. VTI is also long overdue for a serious correction, or to use the fancy pants mathematical phrase, a regression towards the mean. It’s as certain as the Mariner’s August playoff fade.

Sometime soon, the half of the barbell holding certificates of deposit earning 3-4% is going to bring great comfort.

 

 

 

 

 

Why We’re So Susceptible to Decision-Making Paralysis

The short answer. Because we succumb to self-induced pressure as a result of thinking about big decisions in zero-sum, make or break, right and wrong terms. Is this the absolute best college to attend? The perfect person to commit to? The ideal number of children? The best job? The best possible residence? The right investment?

The longer explanation. Thanks Bill Pollian, former Indiana Colts General Manager, for a very helpful alternative perspective on big-time, life decision-making. Asked why Peyton Manning signed with the Denver Broncos and not the Tennessee Titans, San Francisco Forty-Niners, or any of the other NFL teams he recently talked to, he said, “The decision to play for Denver wasn’t the important decision. What’s most important is all the decisions he makes from this point forward.” Beautiful. My interpretation. If he continues to do the things that have made him so successful throughout his career, outworking everyone else, he’ll continue to win no matter what color uni he’s wearing.

Some high school grads think there’s one best college for them. Pollian would argue it doesn’t matter if you get into your preferred college. What matters more is whether you apply yourself at whatever college you attend. Do you take full advantage of the opportunities? Do you do the reading, take challenging courses, develop self understanding and practical skills, pursue internships, figure out what work might be meaningful, build social capital?

Some people think there’s one “soulmate” for them. Pollian would argue it’s less important that you feel a mystical “love at first sight” connection to your partner than how determined you are to make the relationship work. Based on Pollian-logic, there’s not one right person, just proven processes. Mutual physical attraction is a wonderful thing, but the physical elements of love lessen over time. Long-term committed relationships are less about flashy wedding ceremonies and more about day-to-day decision-making, mutual respect, shared values, interpersonal skills, kindness, and resilience.

A final example. Building wealth is less about picking the absolute best stock or creating the perfect asset allocation and more about distinguishing between “wants” and “needs”, day-to-day discipline, and regularly saving more than you make.

The next time you have an especially important decision to make take some pressure off by remembering that a positive outcome hinges mostly on the long-term, cumulative effect of the numerous daily decisions that follow.

Where’s the bottom?

In a late January post titled “Market Downturn” I wrote, “Our mutual fund company provides an unusually helpful service that helps me keep historical perspective. When I log on to its website there’s a “Portfolio Watch” that shows our asset allocation. Currently, it’s short-term reserves, 3.5%; bonds, 38%; stocks, 58.5%. Then there’s a link to “Historic Risk/Return, 1926-2006.” Average return, 8.8%. Best year, 35.7% (1933). Worst year, -25.9 (1931).

Then I added, “This won’t sell many papers or fill much time on cable television, but after an unusually strong six year run, the market is returning to the mean.”

What I meant to write was, “The market is mean, very, very mean.”

I was thinking the market might end down 10-15%. -25.9% was from so long ago, it seemed fictional. I doubt I was alone in not taking the previous worst case scenario seriously. If I had seriously considered it, my aforementioned asset allocation would have been more conservative. With five/six weeks left in the year, I’d be thrilled with the previous worst year of -25.9%.

Can’t believe I just wrote that.

Here are the first few sentences from Jason Zweig’s commentary in Saturday’s Wall Street Journal titled, “1931 and 2008: Will Market History Repeat Itself?”

“Over the two weeks ended Nov. 20, 2008, the Dow Jones Industrial Average fell 16%. Over the two weeks ended Nov. 20, 1931, the Dow fell 16%.  If you think that is scary, consider this: In the final five weeks of 1931, the Dow fell 20% further. Then it went on to lose yet another 47% before it finally hit rock-bottom on July 8, 1932.” Later he adds, “When the Dow finally stopped going down, in July 1932, it had lost 88% in 36 months.”

How does anyone learn to invest? My hunch is for better or worse most of us learn from our parents’ modeling and then trial and error. Sure some study it in school, but I suspect that’s a small number of people in higher education. Few K-12 schools do anything to promote financial literacy. 

I am self-taught. In my 20’s and then 30’s I inherited a little money, and although I wasn’t very materialistic, I wanted to be a good steward of it. I understood it represented a unique opportunity to establish more savings than I normally would be able to as an educator. So I parked most of it in CD’s.

In the meantime, I asked a wealthy friend in his 60’s for advice and he recommended his financial planner to me. I was a naive numbskull and followed the planner’s advice too passively. As a result, I ended up in poor investments that paid him nice commissions. It took some time and money to start over.

In the end, that setback was a blessing, because at a relatively young age, I realized no planner anywhere cares half as much about my family’s future as I do and so I resolved to educate myself. I began reading. The seminal book was Bogle on Mutual Funds. His writing was accessible enough for me to understand and embrace his recommendations regarding asset allocation and passive index fund investing. I knew I wasn’t smart enough to pick individual stocks and was relieved to learn I didn’t need to be.

Starting over, I invested in low-cost index mutual funds right as the bull market was beginning. Long story short, by the end of the 90’s I felt like making money in the markets was a piece of cake. 

Fast forward to this week when my brother asked me the conventional question a lot of people are wondering, “Where’s the bottom?”

Of course the only people who really care about that question are those with cash reserves. I’m not among them so I’m not obsessing about perfectly timing the bottom. Each Friday I think if this isn’t the bottom it’s darn close and if I had cash reserves, I’d go in now. Then, after this morning’s run, I read Zweig’s commentary over a mountain of cereal, and felt like hurling.

Maybe I’m wrong again and there’s still along ways to go.

I suggest asking two different questions. First, what’s your time horizon? If you invest in stock index funds now with money you don’t need for five to ten or ten to twenty years, I’d invest now despite Zweig’s horrific historical data. Many index funds are on sale at 35-60% off their December 31, 2007 prices.

Second, what’s your “sleep at night” asset allocation? If you’re distracted on a daily and nightly basis by your portfolios declining values, adjust it. The downturn has adjusted mine all by itself. My former 3.5% cash-38% bonds-58.5 stocks split is now 3-47-50.

The litmus test of whether I’ve learned a valuable lesson from this historic downturn is whether I adhere to Bogle’s suggestion that your bond holdings should always equal your age. I turn 47 in February so right now I’m spot on.

What will happen when the market eventually picks up steam again though? Will I get greedy and “forget” to rebalance like many of my higher education colleagues did seven/eight years ago before the correction mucked up their retirement plans?

Please do me a favor. Every few years from now until I expire, stop me and ask, “Byrnes, what percentage of your portfolio is in bonds?” If I fail to answer quickly and clearly, and if my answer is not within 3% of my age, you hereby have my permission to rough me up.