I will second the recommendation for compression socks (I like the Sockwell brand). About 10 years ago I had a DVT (deep vein thrombosis) behind my right knee), which was undiagnosed for months because the symptoms were similar to having a metatarsal stress fracture. I'm a runner and so I went to an orthopedist to deal with it. He even had me in a boot at one point. But when symptoms did not improve, he finally referred me to a more specialized orthopod, and the first thing he did was to check for a DVT. Bingo! Six months of warfarin cleared that up. But I now wear knee high compression socks every day.
Jonathan, my heart sank when I read this news, and I join with other members of the Humble Dollar community in offering my wishes for courage, grace, and peace. Over the last several years HD has become one of my indispensable go-to sources for learning, wisdom, and community around finances and life itself. I am appreciative and grateful for all the work you have devoted to this mission and to the resources you have cultivated here. As it happens, three years ago, when I was age 61, I also was diagnosed with cancer. My bloodwork indicated that my white blood cell count was rapidly increasing. A biopsy confirmed a diagnosis of chronic myeloid leukemia (CML), and I began drug therapy. Fortunately for me, CML is one of those cancers that is usually quite receptive to therapy, and I am currently in remission. But there are no guarantees for the long term. A point that I would emphasize for all readers is the importance of early and frequent screening for cancers, whether that’s bloodwork, colonoscopies, scans, or other forms of examination. Early detection remains one of our most effective ways to deal with this dreaded diagnosis. I hope that your treatments bring you comfort and hope that some kind of breakthrough may be possible. Your experience painfully reminds us that time, and the love of family and friends, is truly our most valuable asset. That is one of the most important lessons that Humble Dollar has reinforced for me. So even as I consider my retirement date, I weigh the financial benefits of another year or two of full-time employment against the reality that time is finite and that living these remaining years with our deepest sense of purpose and connection to those we love is the most important decision we can make.
Thanks Adam, this is a very helpful review of several fundamental financial concepts. I am particularly interested in your discussion of risk and volatility. You indicate that Markowitz “chose portfolio volatility as his preferred measure of risk,” while Klarman argues that “the use of volatility to measure risk is ‘preposterous’.” There was a discussion on X a couple of months ago in response to a post from HonestMath.com: "Many investors and advisors believe all of the following are true ... but why? Higher return corresponds with higher risk (no free lunch)
Holding stocks long-term (20+ yrs) is not especially risky
Holding stocks long-term (20+ yrs) is expected to achieve a high return" The post was apparently designed to point to a concept called the “equity premium puzzle,” a term coined by Mehra and Prescott in 1985 to refer to “the excessively high historical outperformance of stocks over Treasury bills.” My perhaps simplistic understanding of the puzzle is, “if holding stocks long-term is not particularly risky, why does it provide a high return?” I think the practical point of the post was to dissuade investors from an overly optimistic embrace of the “stocks for the long run” position of Siegel, et al. It seems that part of the issue is confusing or equating volatility with risk. Or even more: failing to include time as a factor. As the time horizon lengthens, the relationship of volatility and risk becomes decoupled. In other words, for example, it’s risky for me to put money that I might need in a year or two in stocks because of volatility and the possibility of losses. But the longer my time horizon, the less that the short-term bouncing around of stock prices matters, because we have data that the long-term trajectory of returns is positive. How confident can we be about that long-term trajectory? Cue the “what about Japan” question. Could we have a “Japan” on a global scale? It’s possible, I guess. How should I address the risk of a “global Japan?” That’s probably going to be a situation in which we have more fundamental things to worry about than our portfolios.
Another excellent article, Jonathan. Thinking through your point 3 has led me to the realization that, for myself at least, determining portfolio asset allocation in target percentage terms (60/40, 80/20, etc.) is rather pointless. Why? Because it utterly fails to take into account both portfolio size and future liability matching needs. I think the relevant analysis has to be carried out in dollar terms. Subsequently, that will of course yield a result that can be expressed in percentages. But the percentages are simply an end product of the process; they are not what one should begin with. I thus agree with Jonathan’s starting point: “What’s the minimum sum—for practical and behavioral reasons—that we should each keep in bonds and cash investments?” In other words, how much money does one need their portfolio to contribute over the next X number of years to meet anticipated expenses. Once that sum is determined, then the rest of the portfolio can be invested in the asset class that has historically demonstrated the strongest real returns over time, namely, a globally diversified holding of equities, preferably invested in index funds. I believe this has been referred to as the “barbell” approach to portfolio construction. We can debate what that minimum amount, expressed in years of anticipated expenses, should be. Is it five years? Seven? Ten? Twenty-five? That, of course, is a personal decision, based on our own temperaments, contingencies, objectives, etc. For me, five years, or maybe five to seven years, is the sweet spot. I am aware that Bill Bernstein and others have advocated for a longer period of time to ensure not having to sell equities. Fair enough. But again, even Bernstein has acknowledged that the crucial number is your “burn rate,” that is, the percentage that you need to withdraw from the portfolio each year to go with other sources of income in order to meet expenses. As he has said, if your burn rate is, say, 2% or less, it doesn’t really matter what your portfolio is invested in. So for me, I have two more years or so of full-time work and almost six years until claiming Social Security at age 70. My calculation of five years of portfolio withdrawals in safe assets will fluctuate quite a bit over the next decade, reaching a maximum amount at the point of retirement and then declining gradually until Social Security kicks in, and then declining more sharply. Right now, given our situation, that leaves me with an overall allocation of about 85/15. But again, I don’t start from that allocation as a target; I end there as a result of liability matching.
You've got a very long time horizon for those Roth assets in VT, though you're right, no way to predict performance. I believe Jonathan recently indicated that he has moved to a similar position for part of his portfolio. My own preference is to hold both VTI and VXUS in a 70/30 ratio, which I suppose gives me a bit of home country bias relative to global market capitalization. I think VT is 61/39, or something like that? Reversion to the mean is a very powerful force in financial cycles ... but it is always possible that the mean itself will drift and shift over long periods of time. Maybe the US will outperform for another 15 years or more? We have a lot going for ourselves here, but then again that was also true in the past when internationals outperformed.
Recent years have indeed been difficult for international stocks ... I know my patience has been tested, and I have questioned whether to continue putting 30% of my monthly 403(b) contribution into VXUS. But I tell myself that I'm doing exactly what I should be doing ... I'm "buying low." When international equities do begin to rally (as it seems might be beginning to happen, if Japan is any indicator), then I've got more shares that will participate in that rally. So on this question, at least, I think one's attitude depends upon whether one is still in the accumulation phase ... if so, one can have a more positive attitude about the recent underperformance of internationals. On the other hand, if you might need to redeem some of those international shares now or very soon, that would certainly be more painful.
I appreciate these observations, Dennis ... I am about a decade younger than you, but our situation parallels yours in several respects. I am two years away from retirement at age 66, then will also defer claiming Social Security until age 70. We'll use bridge funds from the portfolio to cover expenses during that time. We are also mostly consolidated with Vanguard, with the significant exception of assets at TIAA-CREF, to which I am still contributing. When I retire I'll shift most of that into Vanguard. I use Vanguard website's "Outside Investments You Update Yourself" to add other accounts and track net worth ... in addition to TIAA-CREF, that includes checking, high-yield savings, and Treasury Direct accounts. I update that once a month, right after new contributions go into my 403(b). It's a fairly trivial amount of labor, and I am much more comfortable tracking in this way rather than using Mint (which is going away) or something like RocketMoney. I'm not willing to give my account login information to these kinds of services, even if they do offer the convenience of a more automated form of tracking. I'm not opting for a Vanguard Personal Advisor at this point, as I have a fairly simple allocation of broad index funds. I'll keep an open mind as to whether that could be a service I would use in the future. What is the specific services and value that a Personal Advisor provides, and what is the cost structure associated with that? I think automating regular payments with credit cards is the ideal option if you have it. At a minimum, you should get 2% cash back on all payments, which does add up. Some bills charge extra for paying by credit, and for those we do use electronic checking. I keep a list of all the autopayments and the date of the month in which they are due in a master spreadsheet, so hopefully we won't get tripped up by somehow missing a payment. Given all this ... I'd say that the social connection piece is the most important. We'll be relocating in a couple of years back to Texas to be closer to family and friends, but have made it a priority to cultivate and nurture relationships near and far. We are active in our faith community, which is a big plus in terms of connection. As Catholics, we can plug into the life of a parish community no matter where we live and find pretty strong and robust connections there.
Re cellular service ... I just implemented a hack from Jim Wang at his WalletHacks sites that is saving me $40 per month for at least at year with my Verizon account. For each line on the account, you can request a PIN to transfer your number to another carrier. Verizon will then offer you a $10 discount to stay with them. We have four lines on our account, so this really added up. https://wallethacks.com/verizon-wireless-how-to-save-10-mo-on-every-phone-line/
Thank you Jo ... yes, a significant portion of my portfolio is with TIAA-CREF, and in fact I will be meeting soon with a representative who comes to campus regularly. I will definitely check out The Prudent Professor, as it sounds like a resource that would be very helpful to me.
Comments:
I will second the recommendation for compression socks (I like the Sockwell brand). About 10 years ago I had a DVT (deep vein thrombosis) behind my right knee), which was undiagnosed for months because the symptoms were similar to having a metatarsal stress fracture. I'm a runner and so I went to an orthopedist to deal with it. He even had me in a boot at one point. But when symptoms did not improve, he finally referred me to a more specialized orthopod, and the first thing he did was to check for a DVT. Bingo! Six months of warfarin cleared that up. But I now wear knee high compression socks every day.
Post: Eyeing the End by Jonathan Clements
Link to comment from October 26, 2024
Jonathan, my heart sank when I read this news, and I join with other members of the Humble Dollar community in offering my wishes for courage, grace, and peace. Over the last several years HD has become one of my indispensable go-to sources for learning, wisdom, and community around finances and life itself. I am appreciative and grateful for all the work you have devoted to this mission and to the resources you have cultivated here. As it happens, three years ago, when I was age 61, I also was diagnosed with cancer. My bloodwork indicated that my white blood cell count was rapidly increasing. A biopsy confirmed a diagnosis of chronic myeloid leukemia (CML), and I began drug therapy. Fortunately for me, CML is one of those cancers that is usually quite receptive to therapy, and I am currently in remission. But there are no guarantees for the long term. A point that I would emphasize for all readers is the importance of early and frequent screening for cancers, whether that’s bloodwork, colonoscopies, scans, or other forms of examination. Early detection remains one of our most effective ways to deal with this dreaded diagnosis. I hope that your treatments bring you comfort and hope that some kind of breakthrough may be possible. Your experience painfully reminds us that time, and the love of family and friends, is truly our most valuable asset. That is one of the most important lessons that Humble Dollar has reinforced for me. So even as I consider my retirement date, I weigh the financial benefits of another year or two of full-time employment against the reality that time is finite and that living these remaining years with our deepest sense of purpose and connection to those we love is the most important decision we can make.
Post: The C Word
Link to comment from June 15, 2024
Thanks Adam, this is a very helpful review of several fundamental financial concepts. I am particularly interested in your discussion of risk and volatility. You indicate that Markowitz “chose portfolio volatility as his preferred measure of risk,” while Klarman argues that “the use of volatility to measure risk is ‘preposterous’.” There was a discussion on X a couple of months ago in response to a post from HonestMath.com: "Many investors and advisors believe all of the following are true ... but why? Higher return corresponds with higher risk (no free lunch) Holding stocks long-term (20+ yrs) is not especially risky Holding stocks long-term (20+ yrs) is expected to achieve a high return" The post was apparently designed to point to a concept called the “equity premium puzzle,” a term coined by Mehra and Prescott in 1985 to refer to “the excessively high historical outperformance of stocks over Treasury bills.” My perhaps simplistic understanding of the puzzle is, “if holding stocks long-term is not particularly risky, why does it provide a high return?” I think the practical point of the post was to dissuade investors from an overly optimistic embrace of the “stocks for the long run” position of Siegel, et al. It seems that part of the issue is confusing or equating volatility with risk. Or even more: failing to include time as a factor. As the time horizon lengthens, the relationship of volatility and risk becomes decoupled. In other words, for example, it’s risky for me to put money that I might need in a year or two in stocks because of volatility and the possibility of losses. But the longer my time horizon, the less that the short-term bouncing around of stock prices matters, because we have data that the long-term trajectory of returns is positive. How confident can we be about that long-term trajectory? Cue the “what about Japan” question. Could we have a “Japan” on a global scale? It’s possible, I guess. How should I address the risk of a “global Japan?” That’s probably going to be a situation in which we have more fundamental things to worry about than our portfolios.
Post: Thinking Anew
Link to comment from March 17, 2024
Thank you Jonathan. I only wish that I had known all this 30 years ago!
Post: Asking Myself
Link to comment from March 16, 2024
Another excellent article, Jonathan. Thinking through your point 3 has led me to the realization that, for myself at least, determining portfolio asset allocation in target percentage terms (60/40, 80/20, etc.) is rather pointless. Why? Because it utterly fails to take into account both portfolio size and future liability matching needs. I think the relevant analysis has to be carried out in dollar terms. Subsequently, that will of course yield a result that can be expressed in percentages. But the percentages are simply an end product of the process; they are not what one should begin with. I thus agree with Jonathan’s starting point: “What’s the minimum sum—for practical and behavioral reasons—that we should each keep in bonds and cash investments?” In other words, how much money does one need their portfolio to contribute over the next X number of years to meet anticipated expenses. Once that sum is determined, then the rest of the portfolio can be invested in the asset class that has historically demonstrated the strongest real returns over time, namely, a globally diversified holding of equities, preferably invested in index funds. I believe this has been referred to as the “barbell” approach to portfolio construction. We can debate what that minimum amount, expressed in years of anticipated expenses, should be. Is it five years? Seven? Ten? Twenty-five? That, of course, is a personal decision, based on our own temperaments, contingencies, objectives, etc. For me, five years, or maybe five to seven years, is the sweet spot. I am aware that Bill Bernstein and others have advocated for a longer period of time to ensure not having to sell equities. Fair enough. But again, even Bernstein has acknowledged that the crucial number is your “burn rate,” that is, the percentage that you need to withdraw from the portfolio each year to go with other sources of income in order to meet expenses. As he has said, if your burn rate is, say, 2% or less, it doesn’t really matter what your portfolio is invested in. So for me, I have two more years or so of full-time work and almost six years until claiming Social Security at age 70. My calculation of five years of portfolio withdrawals in safe assets will fluctuate quite a bit over the next decade, reaching a maximum amount at the point of retirement and then declining gradually until Social Security kicks in, and then declining more sharply. Right now, given our situation, that leaves me with an overall allocation of about 85/15. But again, I don’t start from that allocation as a target; I end there as a result of liability matching.
Post: Asking Myself
Link to comment from March 16, 2024
You've got a very long time horizon for those Roth assets in VT, though you're right, no way to predict performance. I believe Jonathan recently indicated that he has moved to a similar position for part of his portfolio. My own preference is to hold both VTI and VXUS in a 70/30 ratio, which I suppose gives me a bit of home country bias relative to global market capitalization. I think VT is 61/39, or something like that? Reversion to the mean is a very powerful force in financial cycles ... but it is always possible that the mean itself will drift and shift over long periods of time. Maybe the US will outperform for another 15 years or more? We have a lot going for ourselves here, but then again that was also true in the past when internationals outperformed.
Post: Yesterday’s Influence
Link to comment from March 3, 2024
Recent years have indeed been difficult for international stocks ... I know my patience has been tested, and I have questioned whether to continue putting 30% of my monthly 403(b) contribution into VXUS. But I tell myself that I'm doing exactly what I should be doing ... I'm "buying low." When international equities do begin to rally (as it seems might be beginning to happen, if Japan is any indicator), then I've got more shares that will participate in that rally. So on this question, at least, I think one's attitude depends upon whether one is still in the accumulation phase ... if so, one can have a more positive attitude about the recent underperformance of internationals. On the other hand, if you might need to redeem some of those international shares now or very soon, that would certainly be more painful.
Post: Yesterday’s Influence
Link to comment from March 3, 2024
I appreciate these observations, Dennis ... I am about a decade younger than you, but our situation parallels yours in several respects. I am two years away from retirement at age 66, then will also defer claiming Social Security until age 70. We'll use bridge funds from the portfolio to cover expenses during that time. We are also mostly consolidated with Vanguard, with the significant exception of assets at TIAA-CREF, to which I am still contributing. When I retire I'll shift most of that into Vanguard. I use Vanguard website's "Outside Investments You Update Yourself" to add other accounts and track net worth ... in addition to TIAA-CREF, that includes checking, high-yield savings, and Treasury Direct accounts. I update that once a month, right after new contributions go into my 403(b). It's a fairly trivial amount of labor, and I am much more comfortable tracking in this way rather than using Mint (which is going away) or something like RocketMoney. I'm not willing to give my account login information to these kinds of services, even if they do offer the convenience of a more automated form of tracking. I'm not opting for a Vanguard Personal Advisor at this point, as I have a fairly simple allocation of broad index funds. I'll keep an open mind as to whether that could be a service I would use in the future. What is the specific services and value that a Personal Advisor provides, and what is the cost structure associated with that? I think automating regular payments with credit cards is the ideal option if you have it. At a minimum, you should get 2% cash back on all payments, which does add up. Some bills charge extra for paying by credit, and for those we do use electronic checking. I keep a list of all the autopayments and the date of the month in which they are due in a master spreadsheet, so hopefully we won't get tripped up by somehow missing a payment. Given all this ... I'd say that the social connection piece is the most important. We'll be relocating in a couple of years back to Texas to be closer to family and friends, but have made it a priority to cultivate and nurture relationships near and far. We are active in our faith community, which is a big plus in terms of connection. As Catholics, we can plug into the life of a parish community no matter where we live and find pretty strong and robust connections there.
Post: Making It Easy
Link to comment from March 1, 2024
Re cellular service ... I just implemented a hack from Jim Wang at his WalletHacks sites that is saving me $40 per month for at least at year with my Verizon account. For each line on the account, you can request a PIN to transfer your number to another carrier. Verizon will then offer you a $10 discount to stay with them. We have four lines on our account, so this really added up. https://wallethacks.com/verizon-wireless-how-to-save-10-mo-on-every-phone-line/
Post: Every Bit Helps
Link to comment from February 25, 2024
Thank you Jo ... yes, a significant portion of my portfolio is with TIAA-CREF, and in fact I will be meeting soon with a representative who comes to campus regularly. I will definitely check out The Prudent Professor, as it sounds like a resource that would be very helpful to me.
Post: Retirement Ready
Link to comment from January 11, 2024