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Firstly, full credit to Kristine Hayes for this idea. I wish I could say that I thought of it on my own.
Kristine wrote about her buying and selling of houses that didn’t fit the accepted “rules of thumb” for personal finance. I was reflecting on my own financial path thus far, and ways in which we have strayed from the recommended path. Two in particular stick out.
All in equities
My wife and I were lucky to have good jobs straight out of university. With the compulsory superannuation system in Australia, our retirement savings started from our very first pay. Because we working for healthy wages in the mining industry and had very low living expenses, we both contributed more to our “super” than the required minimum. Without knowing it at the time, we both had a wonderful financial head-start.
We also recognized that we had a very long investing timeline, so could be aggressive – 100% in equities. Now both in our fifties, we are still basically 100% global equities. As we near retirement we may pull some of that money into fixed interest to cover a few years of living expenses. But other than that we will likely remain all-in on global equities.
Lots of financial discussion seems to assume 60% equities / 40% bonds, or some similar variation, as a somewhat default position. I can understand that people would seek this particular allocation for several reasons. In particular, either aversion to volatility or nearing retirement and seeking to ensure that they are not selling equities during a down market. But for many people in their 20’s, 30’s and 40’s (and maybe older) it would seem to me that 100% equities is well worth considering.
Part of the issue seems to be conflating volatility with risk. Volatility is fine, as long as you don’t need to sell during a downward cycle. If you likely need to sell when the market has tanked … now that’s risk.
Buying a business
Over the last decade we bought and operated two businesses – an automotive workshop and a carwash. Both were beaten down and unloved. According to all the good advice, we should have walked away.
Net profit was very slim, if there at all. Some of the figures appeared a bit rubbery. The premises look tired and drab. Luckily we were ignorant and naive, and went ahead anyway.
Both business required lots of hard work. But I regard the last 9 years as some of my most rewarding and satisfying. They were also financially fruitful.
When I read advice offered to potential business purchasers, there always seems to be a very long list of information that should be considered. Detailed profit and loss statements, balance sheets, stocktake records, tax returns. In the carwash industry, common recommendations are to get water use records, along with sitting outside the site counting cars all day. I’m sure that these are all good rational things to do. But if a business ticks all these boxes, it will likely attract a particularly high price. And high loan repayments.
My experience has taught me that there can be great value in the down-trodden business, on life support but still hanging in there. No-one wants to advise buying a business in that state, because it’s risky and difficult. But sometimes risk and challenge generate the brightest results.
I tend to agree that many people confuse volatility and risk. The risk that something will change in price by 20% is quite different than the risk it will become worthless. Bad debt is worthless. Distressed assets are still assets.
And distressed assets can become just like bad debt when someone else pledges them for cash. Sears in the hands of Eddie Lampert is the poster child for how it can be done!
What I find emotionally hard is to sell low so that I can focus those funds on better opportunities. I try to convince myself to do it anyway and deal with my emotions as a separate issue.
During times of high inflation and low interest rates you’ll get eaten alive with fixed income. The place to be is equities because they can raise their prices to keep ahead of inflation.
Fixed income such as bonds are not primarily for income but are a less volatile asset to provide some protection for our portfolios when the markets retreat, especially for us old retired folk.
Thanks for an insightful article. Our combined accounts are about 80% equities and 20% cash. The cash is to ride out the storms when the market tanks. At 80 years old the S&P 500 is our main equity. You will learn in retirement that Inflation is your killer along with insurance increases, this year 25% increase for medical gap insurance. The old 60/40 split just does not do it anymore. Congrats on your idea to buy low and turn those businesses into successes. Just think of yourselves as Turn Around CEO’s!
Thanks William. I would love to find another “turn-around” to tackle.
You have to trust the math. Unless you expect to both die within 5 to 10 years, you are better off in equities. I am 70 and am 97% in stocks. A bit of cash from dividends that I will pull out next year. Even if the market crashes, you are not going to sell everything and what you have still in the market will come back. Dollar cost averaging works for buying as well as selling stocks. Trust the math.
How does dollar cost averaging work for selling?
While dollar cost selling is definitely a “thing,” and simply involves selling equity on a monthly basis, it’s not generally a good strategy. Converting some of your equity holdings to bonds and drawing from the bond allocation is considered, in most scenarios, a better drawdown strategy. It helps insulate you from sequence of returns risk (SORR) more effectively than dollar cost selling. That said, there are situations where systematic selling might make sense – such as when you need to gradually exit a concentrated position for tax reasons or when you’re managing a windfall and want to avoid making a single large timing decision.
Thanks Bob, I most definitely “trust the math”.
But I also know that you have to be emotionally comfortable with your plan. In this case, 100% equities (or close to it) ticks both those boxes.
If you plan to keep the businesses in retirement, and they’ll still generate a healthy income stream, 100% stocks may be fine for you.
If you plan to sell the businesses and you’re targeting a withdrawal rate of 3% or less, then an all-stock portfolio might work out fine, too.
Otherwise, I’d take a harder look at shifting some from stock to fixed income as you approach retirement. The math of loss in the accumulation phase is way easier than in retirement when each withdrawal after loss creates an additional permanent loss.
Congratulations on the great turnaround story! So cool.
Thanks David. Disasters notwithstanding, I expect our withdrawal rate to be below 3%. At this stage, I expect we will be comfortable to keep a very high exposure.
You’ll be fine. My only suggestion is to keep whatever fixed income holdings you do buy in near zero risk assets like T-bills (or the AUS equivalent). Keep the risk in the stock side.
I’ve spent the last 20 years+ involved in private equity owned businesses, generally, in a financial role as part of the ownership group. They were all what I would call “turnarounds.” These companies were beat-down, neglected assets that needed attention and focus. You mention all the common elements of due-diligence. I would say your hard work was the difference maker.
Greg, will you have any form of guaranteed income when you retire (e.g. social security (in the US), pensions and/or annuities)? If you have enough steady income to cover the basics, 100% equities could work out well. However, if you will be using those funds for living expenses in retirement, some cash and short-term bonds could save you from selling stocks in a down market.
We were pretty aggressive with our investments until about five years prior to retirement, when I started to add some fixed income (now about 45%). But in our case, we will be living off the portfolio exclusively until we collect social security. I plan to ramp up our equity holdings once we begin social security. Ken
Ken,
The compulsory superannuation system in Australia is their Social Security-like system. However my understanding it is much better financial condition than our SS system.
David & Ken, without being an expert on US retirement plans, I think our superannuation system is more accurately thought of as a compulsory 401K.
Basically, 12% of each employee’s wage is compulsorily paid into that person’s superannuation account. That remains their own retirement savings, and is not in a large government bucket. There are also lots of tax incentives to get people putting extra into their super.
Once you reach retirement, you may also receive a government funded aged pension. This is means tested, and above a certain level of assets there is no aged pension, and you become a self funded retiree.
I wrote a more detailed article on this:
https://humbledollar.com/forum/australian-superannuation-a-local-perspective/
Does the government direct the investments, and if so, are there concerns about corruption and other mischief with workers’ funds? When similar plans are discussed every few years in the US, my first thought is usually, what could go wrong with having government officials directing our investments…?
Generally no, the superannuation funds are managed by mainly (1) privately run financial institutions (2) industry funds, typically starting off from a particular trade union (3) self managed super funds, and (4) public sector (government) funds.
The funds managed by government are for government employees. But this is only about 14% of the total, and there is no compulsion for government employees to stay with the government managed fund.
The system is heavily regulated by government. The key is that each superannuation fund has a fiduciary duty to it’s members.
Why-oh-why can’t we imitate success when we find it?? Instead our ideology is sinking us. Free-to-fail is the battle cry.
My cousin in Melbourne told me recently that you don’t pay any tax on pension withdrawals in Australia.
Correct. You pay 15% on the way into your super fund, and nothing on the way out. This is one of several tax incentives to encourage people to put more into super, and therefore fund their own retirement and reduce reliance upon government funded aged pension.
One fundamental rule that I did not follow in my 30s was carrying a balance on my credit cards for a couple of years, which cost me dearly.
I knew it was not wise, but we had necessities as a young family we could not immediately afford, and I was too stubborn or proud to go to my parents for the cash (who I know would have helped me). I just kept moving my balances around to 0% cards each time it came to pay. My wife kept telling me that this would not end well over time.
Funny how you know the best thing to do, yet do not have the behavioral will to execute that wisdom! One day, I calculated all the money I had spent in interest and that number shocked me into change.
The only real failure is to not learn from our mistakes. Glad I learned that lesson early.
Carl, I have, in the past, posted that I never had credit card debt. That is not entirely true, as my newlywed first wife went crazy after getting her first card. It took me a year or two to get a handle on that. I suppose it’s true that what doesn’t kill us, makes us stronger.
Dan, having another person in the house with a different view of finances does make the challenge more difficult. Glad you were able to set the ship right.
Greg, I don’t recall that you also owned a car wash. Was that separate from the repair shop?
I can’t argue with your investment strategy, it sure worked out for you guys, you were fearless.
I could not have done it that way for several reasons. At age 20 I had no investing acumen; didn’t know where to begin. My early investments occurred in my 30s, shortly before Black Monday. I thought armageddon had arrived, still, I learned the lesson that what goes down, comes back up. After that, I was never bothered by recessions or market corrections, though I still tried to follow the rules.
I agree with the idea of buying struggling businesses with potential for growth; the concept worked out okay for both you and Warren Buffett.
I looked at a few retail businesses that fit the description but never pulled that trigger; still following the rules.
My eventual business was a desperate attempt to make ends meet; a side job that morphed into a profitable career (preparing taxes).
Thanks Dan. Yep, we bought a carwash too – gluttons for punishment!
I would love to say we carefully planned all this and had wonderful financial foresight. In reality, we just followed our gut, took some risks and had some luck work our way.
But I do like the idea of being contrarian and considering a different path.
Greg, I admire your 100% risk capacity. I’m going off topic. You’re in your 50’s, do you have resources outside of your portfolio to draw on? I’m thinking about unknowable sudden health issues that could reduce or end your earning ability. If something like that occurred during a market correction, or worse, a crash, a few years in bonds or cash could be a lifesaver.
We have life insurance and income protection insurance to help ride out such events. Hopefully we don’t need to touch them!