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3 Strategies for a Volatile Market

I originally wrote this for another blog during the severe COVID volatility of 2020, and with the return of uncertainty and market gyrations, I thought it would be a good time to dust it off and share the 3 strategies I have used to build wealth during times of volatility.

From my perspective there are only three things you should be doing with you investment portfolio right now, depending on your risk profile, and the state of your non-investment finances.

1) Go All In

If you are young, bold, flush with cash, or some combination of the three, then you should look at this as a stock sale and deploy all your available cash to buy stock, and boost your 401(k) withholding while you’re at it.

“But wait”, you say, “shouldn’t I wait until the market hits bottom?” or “But it’s too late, the market already hit bottom!” No, no one can predict the bottom of the market, and worse no one can predict the day the next Bull market starts, and missing the start of a recovery, or the even just a few of best days, can cost you serious returns.

Had someone invested $10,000 in the S&P 500 on Jan. 1, 2002, they would have a balance of $61,685 if they stayed the course through Dec. 31, 2021.

If instead, they missed the market’s 10 best days during that time, they would have $28,260.

CNBC

If you can’t stomach going all in at once, then buy the dips, or give yourself a daily limit and put that much into the market per day. There are good arguments against this kind of short-term dollar cost averaging, but in my book it’s better than sitting on your hands. This is what I did during the Great Recession as I watched my years of hard savings and investing cut nearly in half. Once I was out of free cash, I had to wait for each paycheck and invest my free cash flow.

Part of what gave me the confidence to do so was that at that point, I had just returned from a deployment to Iraq with the Guard, and my wife had built our emergency fund up to 12 months expense (and she had also managed to cut our expense 20%, so there was that boost too). If you don’t have an emergency fund, put money there first until you are ready to put your free cash in the market.

2) Have Faith In Asset Allocation

Disciplined investors, as opposed to traders or speculators, need to have a clear view of what their asset allocation plan is. Now there are tons of different models and advice out there for what the ‘correct’ mix is. If you are coming at investing from a FIRE perspective you really should be pretty aggressive in your stock target, but even if you follow some of the other advice, such as being 120 minus your age in stocks with the balance in bonds, you will reap the benefits of asset allocation.

When I first started working I was 100% in stock, then in my 30s moved to the method mentioned above, so for example at 35 my target allocation was:

  • 85% Stock / stock funds
  • 15% Bond index funds

I was headed down the slow path from heavy stock to 53/47 upon retirement at 67. Along the way I was winnowing out stocks and dumped all my actively managed funds in favor of index funds.

(As an aside this has helped bring the fees I’m paying down to 0.04% from over 1% when I first started investing, but that’s a whole other post.)

Then, thankfully I started reading some really contrarian thinking in the form of the various FIRE bloggers. I looked at my own risk profile, and settled on the following target asset allocation plan, which I intend to keep indefinitely.

A few notes on this:

  • You really could just go Stocks and Bonds on this, Jim Collins has made a compelling argument that you already get international exposure with Total Market stock and bond index funds. By breaking up my Stocks and Bonds targets into US and International, I’ve made my rebalancing more complicated, but I like to be more hands on, so this is definitely an area you could simplify for yourself.
  • ‘Alternatives’ in my case is just one thing – real estate in the form of the Vanguard Real Estate Index Institutional (VGSNX) available in my 401(k)
  • Cash I have in there just to keep some cash on hand to buy dips. The reality is that if you use a good asset allocation monitoring tool like Personal Capital it will surface the amount of cash your mutual funds actually have sitting around which is usually close to 1%.
  • Essentially, I have one fund per asset class in column D, which is not too hard to manage.
  • While I do hold crypto, I consider these as purley speculative, and not part of my investment portfolio that I plan my financial life around.

All well and good so far, we’ve settled on our target asset allocation, and we’re ready to enjoy the rewards of balancing risk, and get on with the rest of our life, right?

Active Rebalancing

Unfortunately, no. Mind you that I have been saying target asset allocation all along. Our actual asset allocation is going to change as the markets go up and down, and as we put more money in, even if we’ve set our 401(k) new contributions to match our target (which we should.)

We have to regularly rebalance our investment portfolio, and there are a few ways you can do this, especially while you are still contributing:

  • Selling those asset classes that are over allocation and using that money to buy funds in asset classes that are under allocation.
  • Adding new money in your taxable brokerage account, and just buying those asset classes that are under allocation.
  • Adjusting future 401(k) contributions to over-weight those classes that are under allocation.
  • Some combination of the above

So what does this look like, you might ask. Let’s take a look at where my asset allocation stood at the end of last weekend, with a hypothetical portfolio value of $250,000

I use Personal Capital to track my portfolio, and I really love their allocation view, below.

I simply paste the values from there into a spreadsheet I built for myself. This let’s me not only see where I am over/under, but also by how much. Generally I ignore anything less than 1% as noise, so in this hypothetical scenario above I would only focus on the International Stock asset class, which is 1.7% under allocation, and figure out how to buy as close to $4,250 as I can.

How often you do this is probably a matter of taste, and whether or not looking at your losses makes you anxious. I’ve read everything from once a year, once a quarter, to once a month. Personally, I would view once a quarter as the minimum, I checked mine at least once a month when I was tracking my progress towards FI (I love the Mad Fientist’s Lab for this.) I am pretty hands on though and when things are volatile I might check and move money once a week. If that sounds stressful to you then you definitely should not do so, I just happen to find satisfaction in staying on top of it.

Benefits of Asset Allocation

Be fearful when others are greedy and greedy when others are fearful.

Warren Buffett

Why go through all this trouble? There are several key benefits:

  • Sticking to your model, and a rebalancing schedule forces you to buy low and sell high. For example, in December 2021, January 2022, and February 2022, my asset allocation plan forced me to sell stocks funds at their recent heights to boost my bond holdings, which stocks were leaving in the dust. Am I brilliant or what? Actually no, I just stick to the plan.
  • This keeps emotion out of the picture, and forces you to be a disciplined investor, helping you avoid making costly panic-driven mistakes.
  • Unless you are 100% stock, which I guess technically is an asset allocation plan, it helps reduce risk on the downside when downsides might make you break for the exits.
  • It forces you to implement Warren Buffett’s famous quote above, and who doesn’t want to be more like Warren.

For example, during the COVID induced Stock Market Crash of 2020, THE most important decision I made that year was to stay invested in the market during the meltdown in March. I stuck to my asset allocation plan despite suffering a little over 25% drop in the value on my investment portfolio.

This has the effect of forcing you to by low and sell high – the exact opposite investors tend to do when allowing their investing to be governed by emotion and an over-estimation of our own abilities. Instead, as the market was falling, my bond allocation was growing, and I repeatedly sold bond funds in lots of increments of $3k-$5k and bought stock funds at lower and lower prices. Then as the market got into recovery, I had to move money back out of stock funds and into the now lower bond funds.

Sounds like too much work, and stress-inducing to sell stocks that are dropping. No doubt, I won’t lie and say I was sanguine thru the whole process, but I am committed to this process. More importantly, how did it work out?

By regularly rebalancing throughout the year (due to the volatility I was doing this 1-2 times a month) during the volatile 2020 I ended the year up 22.4%. However, that’s looking at my portfolio value at the beginning of 2020, but what I want to really, REALLY emphasize for everyone reading is that by the end of 2020 I was up OVER 50% from the lowest point of my portfolio value which was 3/23/3020. NO ONE can predict when the market will recover, and people who panicked and pulled out of the market to wait for it to recover will have missed most of that recovery.

So in the end, 2020’s so-called “V-shaped recover” really illustrates how important staying invested is to long-term investing success. During the volatility we are currently experience in 2022, I continue to rebalance and have bought several dips with the cash I have set aside for this purpose.

3) Do Nothing

No. 1 rule of investing: When you don’t know what to do, do nothing

Mark Cuban

The last option I’ll discuss is summed up by Mark Cuban’s quote above, especially if looking at your portfolio is likely to make you upset. Take a long break from looking at the market, turn off the news, go get some fresh air, and wait for the markets to recover, because they will. Just don’t turn off your 401(k) contributions.

At different points in my life I’ve done all 3. I was so shocked by the tech bubble bursting I did nothing. In the Great Recession I went all in buying all the way down every time I could scrounge up some cash. Nowadays, and for the foreseeable future, I’m sticking to my asset allocation plan.

And because I’ve stuck to one of these three strategies, well over 50% of my investment portfolio is made up of gains. Knowing this also helps remember that I haven’t lost anything if I don’t sell.

So don’t listen to industry pundits, do the work to define your asset allocation plan and stick to your strategy.

That’s it for today, share your thoughts and strategies in the comments.

Feel free to use my Asset Allocation Planner spreadsheet and make it your own. If you don’t have Excel, you can make your own copy of it from our Google Drive account, or just upload the Excel to Google Sheets.

Photo by Towfiqu barbhuiya on Unsplash

The Investing Superpower You Only Get One Shot At

Time

If you are in your 20s or 30s, you have the incredible power of compounding interest & gains in your favor, if you are disciplined enough to start saving and investing early. Don’t fall for the crap your peers tell themselves – “well when I just pay off the school loans, buy a luxury car, buy a house I can’t afford, then I will be able to saving for my kids’ college.”

The fact is, no matter how little you can afford to put towards retirement now in a 401(k)/IRA or similar tax-advantaged savings vehicle, because you have more time now than you ever will have ever again for compounding to occur, the money you originally put in will eventually be worth less than the interest, dividends, and gains that will compound over time.

Compounding is the simple financial miracle where you earn money on your money, then you earn more money on the money you earned. You end up earning money on earned money, what’s not to love!

Something I have tried to impress upon my kids is that 1) you will never get your 20s back, and 2) someone who invests say 100 dollars a month for 10 years in their 20s will end up with more money then someone who starts in their 30s and invests a 100 dollars a month until they retire. (Assuming the market performs in the future like it has for the last 100 years, which is not guaranteed )

Time in the market beats timing market

When I first started working after college, I distinctly remember only being able to afford to have $25 a paycheck go to my 401(k), but with every raise I increased that as much as possible until I was always at least maximizing my employer match. Now, at 52, more than half of my retirement investment funds are gains, not what I originally put in.

Again, if you are in your 20s or 30s, don’t make excuses, it doesn’t matter how little you can afford, start saving right now, every little bit adds to the compounding effect, and the fact that you are saving early makes up for not being able to save a lot right now in the long run. You future self will thank you.

A few things to keep in mind as you do invest:

  • Always maximize your employer’s match
    • It’s free money! Don’t leave it on the table
  • Buy inexpensive, well diversified index funds. (see why)
    • If you want to “set it and forget it” go with a target retirement date fund like Schwab/Vanguard/Fidelity Target 20XX
  • Fees matter – because of compounding, over your lifetime, paying high fees versus low fee index fund can cost you 10 years of retirement income
    • Consider the average mutual fund fee 0.50% with what I pay 0.04% – the ‘average’ is 12.5X more expensive for the same results! (see how)

My poor kids have had to sit through a Financial Basics presentation that this post is drawn from. Perhaps I will post on the other topics in the presentation in the future, but for now I will simply share the presentation with you here. As a reminder, I do have some strong opinions on this topic, but they are just my opinion, I am not providing you any specific advice, go do your research and make your own decisions.

https://docs.google.com/presentation/d/1HO29XXwjBghSfLnOygnMhlUfU21JWb4jUPZRSEfMbH0/edit?usp=sharing

Photo by TK on Unsplash

Avoiding the Dictator Trap

This Atlantic article on how Putin has fallen into the Dictator trap got me thinking about how to avoid this as a business or team leader. How could a manager, team or project leader have to worry about being a dictator?

In the course of a 25 year career, I have observed many team and corporate leaders who don’t realize that everyone on their team is agreeing with them.

That’s a key element of the dictator trap.

“despots rarely get told that their stupid ideas are stupid, or that their ill-conceived wars are likely to be catastrophic. Offering honest criticism is a deadly game and most advisers avoid doing so. Those who dare to gamble eventually lose and are purged. So over time, the advisers who remain are usually yes-men who act like bobbleheads, nodding along when the despot outlines some crackpot scheme.”

Yes, we aren’t launching wars or having people imprisoned or worse, but people like to be liked, and people like to be told their ideas are good. However, if you aren’t specifically on guard for this, and more importantly building a team culture that not only allows, but encourages, hell even requires even that people speak up and challenge ideas then you will end up with a team who will just go and execute your poorly conceived project plan.

via GIPHY

The next team meeting you have, really listen to how your team reacts to your ideas. There will be some who immediately agree, and some who say nothing until they see where the team lands, and then they’ll agree what a great idea it is. Some may say nothing. But does anyone disagree or at least offer risks or ideas to improve your suggestion?

So what can you do as a leader to guard against this?

  • Speak last – Pose a question or bring an issue to your team’s attention, but rather than proceeding to share what you think should be done about it, ask the team for ideas. And. Just. Wait.
  • Call on people – If no one speaks up, then ask someone.
  • Call on other people – Be sure that you are hearing from the whole team, especially those who don’t normally share. Ask for their input and actually listen. Ask follow up questions to show you did.
  • Create a safe space for negative thinking
    • I’ve written before about the value of a Pre-Mortem which is one tool for creating space for teams to think about failure without being negative or being worried about being perceived as a Chicken Little.
    • Something else that I learned during my time in Special Operations is coming up with multiple COAs, or courses of action, then gaming each one out. Challenge the team to come up with more than one approach to solve an issue or take advantage of an opportunity. Far too often in today’s fast paced world, I have seen teams converge on a solution before really identifying other options. Coming up with 2-3 COAs then asking the team what can go wrong with each allows them to offer critiques without the risk of them being perceived as being ‘negative’. (Alternatively, develop a full SWOT if warranted.)
  • Do not tolerate agreement – sycophants are dangerous, and not just to the project or issue at hand, if you are constantly told you are amazing, your inflated ego may get you into some serious trouble at some point. Ask your team, for example “I’m glad we like this option, but why? What are its strengths and weaknesses?”
  • Be patient with negativity – a negative team member may be one of the hardest team members to deal with, but don’t allow yourself to get upset or impatient, they may just be a significant asset. If you shut down team members who speak up, they won’t do it next time, and the rest of the team will get that message. Ask, “I can see you’re upset/don’t agree with this, tell me why, what am I missing? How might we address you’re concern?”
  • Look for opportunities to change your mind – if you really want your team to trust you by being vulnerable and disagreeing, they have to see that you are able to change your mind, or go with an idea other than your own. If you are uncomfortable with this, you might have control issues you need to deal with, but then start with something lower risk and work up from there.
  • Be careful with a ‘can-do’ culture – I have more to say about this in another post, but while a can-do culture can be positive, if you’re not careful it can become toxic in its own right, leading to a lack of critical thinking. Don’t let people just agree. Dig in, ask why, how, what else, what could we be missing?

Is this hard? It can be. But that’s your job, if you want to be a leader your comfort can’t be your first concern. If you have trouble with this idea, you aren’t a leader.

Is it going to take more time? Sure, upfront. But your team will end up with a better solution/product/plan and you will spend far less time refactoring and dealing with issues. Remember the old cynical software project management maxim:

There is never enough time to do it right, but there is always enough time to do it over.

Every grumpy software project manager

Photo by Rob on Unsplash

Stoic Business – Momento Mori

Let us prepare our minds as if we’d come to the very end of life. Let us postpone nothing. Let us balance life’s books each day…The one who puts the finishing touches on their life each day is never short of time.

Seneca

In this post I will look at the lessons the Stoic concept of ‘Momento Mori’ holds for those in business leadership today. Momento Mori, in the stoic sense is literally to ‘remember that you will die’ and, tradition has it, comes from Socrates who said philosophy is “about nothing else but dying and being dead.”

A somewhat more practical way of approaching our mortality was written by Marcus Aurileus – “You could leave life right now. Let that determine what you do and say and think.”

So what does that mean to us as leaders and managers in the 21st century? My take are the following 3 things.

Check your ego

First and foremost, reflecting on our own mortality, and the smallness of our place in the universe and history, should engender a sense of humility. Reminding ourselves regularly that life isn’t all about us will help keep our heads from inflating with our own self-worth and self-focus. This will make you a better leader, as we all can recognize when our own leaders and managers are simply building up their resume and the justification for their next promotion, or if they are genuinely focused on the mission and the team. And we all know who we would prefer to work for.

Ruthlessly prioritize and don’t procrastinate

If you take a moment to really think about the limited time we all have on Earth, let alone the limited subset of that time we will spend in our careers, you should develop a strong sense of the scarcity of your own time and focus. Recognizing that, we should be ruthless in making sure what we are focused on is truly important and needed now.

Learning to say no, especially to time wasting assignments or activities is very difficult in todays ‘can-do’, ‘team player’, ‘yes-person’ obsessed corporate cultures (aside: this also afflicts, in my experience, the career focused officer corps of our military.) But doing so will not only improve you and your teams’ results, it will give you more control over your schedule and sanity.

If saying no is too difficult or poorly perceived in your culture, try “If this is a priority, what should I de-prioritize to focus on this?”

Steel yourself by remembering that every time we say “Yes!” to something, we are in fact saying “No” to something else, whether it is another important item, our health, our relationships, a small piece of our life we will never get back.

But saying no others is only half the battle, we also need to take a hard look at all the to-do/action items we’ve given ourselves and eliminate as many as possible to get down to focusing on those items that are critical and will make a positive impact.

Now that you’ve gotten to a core prioritized list, get after it. If these items are the most important, don’t put them off since we don’t really know how long we get to work on them.

Build capability

Knowing as we now do that our time is limited, especially when you consider that, according to the US Bureau of Labor Statistics, as of 2020 the average worker is only in their job 4.1 years, what we alone can accomplish will be far less lasting and impactful than capabilities we build that can sustain after we leave.

And by capabilities, I mainly mean investing in growing and mentoring people, although certainly leading major system and process changes can fit in this category. Investing in people however, as we would say in the Army, is a force multiplier because, if you’ve done it right, the people you invest in will see it as their duty to invest in others.

And in the end, that may be the only thing that lasts.

Photo by Mathew MacQuarrie on Unsplash

Stoic Business – The Pre-Mortem

This post is part of a series (maybe) on applying the lessons of Stoicism in the corporate world. This post focuses on the Stoic practice of Premeditatio Malorum or “the pre-meditation of evils”, whereby you think or visualize all bad things that can happen to you, perhaps something you are particularly afraid of. Then you imagine how you would deal with and recover from it. The idea being that this exercise acts as a sort of inoculation for if the dreaded thing does happen and helps strengthen you against the trials of life, and perhaps help you realize that it isn’t all that bad either.

This practice can be applied to any business initiative, product launch, or project using a technique called the pre-mortem. This is an exercise I have use myself on several projects and at the very least is a good way to generate your initial set of risks to track and manage. However, it is also a way to get a temperature check on your team in a way that creates space for them to think about failure without being negative or being worried about being perceived as a Chicken Little. Unlike their managers, project teams often know long beforehand that a project is in trouble, perhaps even at the beginning when their estimates have been slashed without changing scope (hmmm).

via GIPHY

Far too often in the corporate world we only present and evaluate a highly optimized and ambitious plan without accounting for the inherent risks. This is in direct contradiction to Project and Program Management best practices, but unless we as leaders create the psychological safety for the team to engage in which is basically negative thinking, it is highly unlikely someone is going to speak up about risks they see as the hype train for the project gathers steam.

Typically, a pre-mortem is run in the following fashion, I would keep this to 50-60 minutes in duration:

  • Gather the team members together. Intentionally exclude senior executives and others who will stifle discussion at the team level.
  • Level set with the team that you are about to facilitate an exercise meant to identify key risks to the project/program/product, and you’re looking for them to start with a brainstorming activity in which you need everyone’s participation.
  • Announce to the team that the project/program/product has just failed and they have been brought together to identify the reasons why. [30 mins]
    • You must facilitate this discussion – don’t let people interrupt, talk over each other, debate the merits of the idea, etc. The goal of this portion is just to capture the things the team is already worried about but unwilling to bring up.
    • Do not end this earlier than planned, especially the first time you run this exercise. Let the team sit in silence or call on people. I also have 2-3 risks ready as part of my prep to help prime the conversation if needed.
  • Next, ask the team if any of the items are the same, or so related as to be combined. [5 mins]
  • Next, ask the team to assess how likely the risk is to come to actually occur. You could use a simple High/Medium/Low scale or whatever risk probability rating your organization currently uses (ask one of your Project Managers.) [5-10 mins]
    • Depending on the culture of your team you can either debate this openly, use a form of Planning Poker, or have everyone vote with colored stickies.
  • Lastly, look at the high likelihood risks, and ask the team two questions: [10-15 mins]
    • Are there any leading indicators that will warn us that this risk is about to occur?
    • Are there any pro-active mitigations we should consider to actively prevent this risk from occurring? (An example might be a risk to product quality that our entire QA team is inexperienced, when our estimate included 2 leads to run QA. A mitigation might be to overstaff that team, or to staff a junior project manager, etc.)
  • That’s plenty for one session thank the team and let them know you will take some additional time to assess the other risks and discuss with management or the client.

Now the question comes as to what do we do with this information.

  • First, spend additional time with this list. Put it into a risk register, clean up the way you wrote the risks and mitigations, and identify the impact of the risk occurring (for this you may need to consult specific team members and the project manager if this isn’t you.) After these additional deliberations and discussions you may want to adjust some of the risks, just be sure to communicate to the team along with your rationale or you’ll demand the trust the team has in you.
  • Present the risks to your management/client and, at least for the high likelihood risks, ask “are you willing to accept the risk of the documented impact, or should we include the proposed mitigation in our estimate” – do not waffle on this. They might proposed a different mitigation, and be open to that being a better option, but don’t frame the discussion in a way where they can refuse the mitigation AND avoid there being clear documentation what the dollar and time impact would be if the risk occurs. (Far too often I have seen clients and management act surprised and demand how we didn’t know about a risk when it was in the project documentation or even the contract from the beginning. This is just a tactic to get the team to eat it, don’t be a sucker.)
  • Regardless of the outcome of the discussions, document the meeting, the items discussed and the decisions made. Again, use the language “decisions made”, not some inconclusive discussion about hypothetical risks, but decisions made by management or the client on how THEY want to manage the project / program / product risk.
  • Ideally the risk register is part of your public team documentation, and you can just publish it and let the team know they key points in your next meeting. If not, specifically review the outcome of the discussions with ma

From here you or your Project Manager should manage the risks in accordance with your organization’s risk management practices.

For a robust description of project risk management see this PMI article: Project risk management–another success-boosting tool in a PM’s toolkit

If you have used this technique or something similar in the past, what was your experience? What did you learn?

Photo by Christina @ wocintechchat.com on Unsplash

The Value of a Financial Plan

The act of creating a financial plan helps you identify your financial goals and how you will achieve them. More importantly it gives you an accountability mechanism.

While there are more tools than ever to help you track and manage your finances, I still find it helps to take a step back and identify your financial goals broadly and for the current year specifically. These goals can help guide you in decision making throughout the year and serve as an accountability check to keep you on track. Perhaps as important, it forces you to think about what your priorities are and to think through what steps you need to take to advance closer to the outcome you are trying to achieve.

By Failing to prepare, you are preparing to fail.

Benjamin Franklin

In pursuing Financial Independence, there are fortunately only a few variables we need to focus on. For that matter, even if FI isn’t your goal, having a plan to maximize these variables will still lead to a more secure financial life.

  • Maximize savings
  • Eliminate debt
  • Lifestyle choices to reduce expenses

For several years, my wife and I documented our annual financial goals on a single Powerpoint slide, and I can now look back at over a decade of goals and see how we did each year. Below you can see our goals from 1997, along with annotations I made throughout the year to track progress.

Powerpoint slide showing several financial goals for 1997.

This was a powerful way to keep us on the same page as a couple, but also to keep us focused on our goals. You can see above that we didn’t hit our goal of getting our credit card debt below $3,000 by 6/1/1997. That caused us to figure out where to cut back and pay all our credit card debt off by 11/1 a month ahead of schedule.

If you are following a FIRE plan, you’re in luck because really there’s less analysis to do. Unlike most people, you’re NOT trying to figure out what’s the least you need to save in your 401(k) to be able to retire at 67 (for those born in 1960 or later.) You’re building your lifestyle to max out your 401(k) and your HSA, but I still urge you to write it down and do regular reviews of your progress.

When you are making good progress against your plan, that will make you feel great and energized to continue on the path. When you miss your goals, then you will have to face it and figure out what needs to happen to get back on track.

Schwab recently published research showing that “Having a written plan can increase confidence and result in more constructive financial behavior.” This includes a finding that 78% of people with a financial plan pay their bills on time and save regularly, compared to only 38% of those without. As I have written before, and is pretty much obvious anyway, living below your means is the key to Financial Independence and wealth.

That said, you definitely do not need to go out and hire a financial planner, though you certainly can. However, the advice they’ll give is the standard fare you’d get from all of the popular financial press, and not in line with the approach most FIRE adherents are taking. Really what you’d be paying for, in my opinion, is simply the ability to have someone to talk things through with and bounce ideas off of. And if that is what you need to have the confidence in your plans, by all means do so.

For my part, my wife and I have evolved from a simple one page slide to a more detailed written plan in the outline below. Note that we no longer carry any debt and have money set aside for the college, so those goals are no longer part of our plan, but might need to be part of yours.

  • Objectives
  • Allocation Strategy
    • Stock strategy
    • International strategy
    • Bond funds strategy
    • Alternatives (they only alternatives we have in our portfolio are REITs and crypto)
    • Cash (not including emergency funds, which we consider outside of our investment portfolio)
  • Link to current portfolio and allocation trackers
  • Rebalancing plan
  • Tax management strategy
  • Annual targets for 401(k)s, HSAs, IRAs (we use backdoor Roth IRAs to build a conversion ladder)

Also, here a few other resources to check out that I liked and may help you with developing your own plan. While these are best practices, also make it your own and make it work for you and your particular circumstances:

Photo by Helloquence on Unsplash

Personal Finance Lessons Learnt, Part III

Now that we have done a bunch of reading on personal finance, are paying ourselves first, have established our savings goals, and put some automation in place it is time to think about investing.

LBYM

I have mention lifestyle creep a few times, but it is worth restating – if you want to achieve personal financial success, or even Financial Independence, you must have the discipline to Live Below Your Means (LBYM.)

I believe many people confuse what it means to be wealthy with having a large income. While a large income certainly will help you attain wealth, no amount of income will make you wealthy if you stay on the hedonic treadmill our consumerist society is built to keep you on, and you keep spending more as you make more.

Wealth consists not in having great possessions, but in having few wants.

Epictetus

I can’t say it better than Epictetus. If our goal is to create wealth, then we need to focus equally on our careers and opportunities to make more money AND also keep our lifestyle in check. Then use the difference between income and expense to 1) pay down debt 2) build an emergency fund and set money aside for savings goals, and 3) invest.

We can see below the dramatic difference in the size of the investment portfolio you would need to achieve financial independence based on a given annual expense level using the 25x Rule.

Annual ExpensesInvestment Portfolio Needed
$50,000$1,250,000
$60,000$1,500,000
$75,000$1,875,000
$100,000$2,500,000
$150,000$3,750,000

Even if your goal isn’t financial independence or to retire early, being aware of lifestyle inflation and ensuring you live below your means will give you the fuel to fund your investment portfolio and give you the peace of mind that comes with not being overstretched financially.

Start (and stick with) index funds

The financial services industry has all manner of fancy products and big marketing budgets to get you to give them your money to manage. But despite what seems like common sense – that smart money managers backed up by teams of analysts (or AI powered ‘robo-advisers’) must be able to beat the market – it’s just not true. (Note: I’ll be referring to mutual funds in this post, and while they are different, you can also invest in ETFs. My points are true for both.)

Index funds are going to be your best bet for 3 main reasons:

Index funds outperform actively managed funds year after year

There are plenty of opinions as to why this is, but set that aside for the moment. The simple fact is that being invested in the entire market (or a substantial portion of it), which is what an index mutual fund buys you, beats actively managed funds year after year.

According to the SPIVA scorecard, for the 5 years ending December 2020, 75.27% of US Large Cap funds underperformed the S&P 500. That’s a lot of funds controlling a lot of other people’s money, with teams of (highly paid) analysts and money managers failing to beat an automated index.

Of course it does mean that 24.73% of funds did manage to beat the S&P 500. The issue with this is threefold:

  • You have to pick the right funds, and while they definitely offer more diversification that picking stocks yourself, you have to do the research and somehow pick the right funds
  • But it doesn’t stop there – just as with stocks, active funds go up and down, and fall in and out of favor. So you need to keep monitoring your funds and try to accurately decide when to sell, and what to buy to replace that fund in your portfolio. Fine enough if you enjoy it, but few people can accurately time the market or individual funds and stocks. Most humans are fundamentally inept at this and lose money in the market when they try to time things.
  • What’s worse, actively managed funds are expensive, though deceptively so because of the way costs are articulated. So your actively managed funds not only need to beat the market, they need to beat it by more than enough to offset the likely thousands of dollars in extra fees you will pay, which we’ll look at next.
Actively managed funds are 10-20 times as expensive as index funds

When I started investing in the 1990s it wasn’t unusual to see mutual funds with expenses over 1%. Now that doesn’t seem like much right? I could even hear myself saying that was cheap – “one percent is worth paying for the 10% return.” The problem is that compounding works both ways, we all love earning compound interest, but mutual funds (and other financial products) fees also compound.

As a simple example, let’s look at a $10,000 investment that we let grow for 30 years (not unreasonable for a retirement account) at an 8% growth rate and a 1% annual fee. Using this CalcXML calculator we get:

It appears that your initial investment of $10,000 is estimated to grow to $74,434 reflecting opportunity cost and expenses totaling $26,193.

The way that $26,193 breaks down is $10,056 paid directly in fees and, this is where the compounding comes in, $16,137 opportunity costs – all the growth that we didn’t get from the money we paid in fees. Our lost earnings end up costing us more than the fees themselves, and we used an 8% growth assumptions, historically the stock market has returned 10%.

Now let’s look at a Total Stock Market index fund, both the Schwab1 and Vanguard Total Stock Market funds have net expense ratios of 0.03% as of this post. That not 3%, that’s 3/100ths of a percent, so that’s $3 per year on our hypothetical $10,000 investment versus $100 per year at 1%. So let’s see what that gives us:

It appears that your initial investment of $10,000 is estimated to grow to $99,725 reflecting opportunity cost and expenses totaling $902.

The way that $902 breaks down is $365 paid directly in fees and, this is where the compounding comes in, $537 opportunity costs.

So if you had invested in our actively managed fund in the first example, you might have been really happy to end up with $74,434. You might even think you’d been pretty smart to pick it, but would you feel that way if you realized that you gave away $25,291 to your fund manager? Even if they had out performed the market in a few years, they’d have to have really outperformed it to make up for the fees. And remember you pay these fees whether you are up or down in the market, so the fund company can’t lose. Now, in part thanks to pressure from index funds, active funds fees have been dropping, according to Morningstar “The asset-weighted average expense ratio for active funds fell to 0.66% in 2019 from 0.68% in 2018”, even using that number we still get opportunity cost and expenses totaling $18,130.

And as pointed our above they usually don’t outperform the market, so you end up actually paying a lot more money for poor performance.

Personal Capital has an interesting view on this with their Retirement Fee Analyzer which shows how a seemingly ‘low’ fee of 0.67% results in 10% of lost growth opportunity over a 10 year timeframe on my existing retirement portfolio.

Graph showing 10% of earnings lost to fees
personalcapital.com

If you are worried at all about funding your retirement, fees should scare the crap out of you. I have managed my own fees down to 0.07% (mainly because I do have some money in international and emerging market index funds, otherwise it would be lower.) If you don’t know what you are paying in fees, you should stop reading this and go figure that out 😉

You can’t pick stocks (neither can I)

Stock picking is a fools errand, and even smart money managers backed up by a team will struggle to match the markets performance as detailed above. Why do you think you can do any better? No seriously, before you make a bet like this sit down and think through whether you have the time, the knowledge, access to the same information as professional money managers, the discipline, and the interest to keep up with it.

I learned my lesson early during the ragging dot-com bubble of the late 90s, back when we all thought we were brilliant for buying this dot com or that start-up. Many of my peers were getting in on IPOs, bragging about our gains, and thinking we were all going to retire in a year or two. (We were in our late 20s/early 30s, what the hell did we know.)

Then reality set in and market collapsed. I was invested in multiple technology focused funds, or a dozen individual stocks, lots of options and shares of my company stock, and fortunately a few Schwab and Vanguard index funds. I got wiped out to the tune of around an $800k loss, on paper at least. The technology mutual funds didn’t just drop, the fund companies themselves went out of business. The stocks I owned dropped a ton or simply went out of business, and the options I had were suddenly underwater to the tune of $50 or even $100 per share, most never to recover their value.

I mourned that loss for a good year; shock, anger, depression, resignation – I went through it all. But now from the vantage point of my 50 year old self I am glad it happened early in my investing career. I learned that I was not a brilliant stock picker, and I didn’t have the time to keep up with individual stocks. As I tallied my losses and unwound any remaining individual stocks I had, I put the remaining money in index funds, and kept putting money there.

We’re seeing this today in meme-STONKs and in the crypto market (I am not anti-crypto, but it is early days and it isn’t investing, so it belongs outside of your portfolio as speculation IMO.)

If you want to consistently and reliably build real wealth, with a simple portfolio that you can manage with a few hours a year and avoid panic selling or hype buying, you really can’t do better than a small set of index funds that you steadily invest in.

* I am not a financial professional or consultant, none of this information should be taken as advice for your specific financial and personal situation. Do your own research and form a plan that is appropriate for you.

1 Full disclosure that I own Schwab stock, but I am not being compensated by them or Vanguard for using them in my examples.

Photo by vadim kaipov on Unsplash

Personal Finance Lessons Learnt Part II

Continuing on from my previous post on what’s worked for me over the years.

Pay Yourself First

Paying yourself first is a staple of personal finance recommendations, but that doesn’t make it any less relevant or even easy. In a nutshell, the idea is you don’t pay off debt, build your emergency fund, your retirement and investment portfolios from what’s left over from your paycheck, but rather these things come out first.

Also know as reverse budgeting, the idea is that you don’t set your budget based on your prior spending habits, after all where would that leave you if hadn’t been living below your means? Deeper in a hole.

Rather, you start with your saving priorities and allocate your available cash flow to your highest priority first, then if there’s cash flow left, the next priority, and so on through your main budget categories. I like to think of it as saving buckets, and as one fills up money starts flowing out of that bucket to the next.

Graphic of three buckets with funds flowing from one to the next. The buckets are labeled debt, retirement, goal 1
Forgive the crude clip art 🙂

So in our example to the left first you would allocate your free cash flow to pay off your outstanding credit card debt, then to retirement, then on to your next goal when you had met your retirement savings goal for the year.

An alternative is to set a target date for example paying off your debt in X months, then divide the debt and projected interest by X, do that for your retirement goal for the year, and then allocate any left over to other savings goals. This way while you are paying off your debt you are making some progress against other goals. I would argue that if you have a credit card debt, that interest is so egregious you should prioritize paying that off over everything else, but the most important thing is your system has to work for you.

Employer sponsored plans like HSAs and 401(k)s (or the TSP for those in the military or other Federal service) where the money is literally deducted from your paycheck before you get your hands on it are a great idea, and if you aren’t maxing these out I would strong recommend allocating any future raise to doing so before you start letting lifestyle inflation creep in. Lifestyle inflation will literally kill your chances of being financially independent.

With many employers, you can set up a separate payment of a set amount to a savings account separate from your paycheck deposit account, say a $200 a paycheck deduction that goes into your emergency fund directly. This is a great way to build up saving without having to really think about it.

Other goals, or you if can’t set up an allocation like this, brings me to my next lesson.

Automate Everything

We live in a time when all our financial service providers are trying to win at Customer Experience management. This means they are always looking for ways to make things easier for us as customers. (Well except for companies using dark patterns to trick us into spending more, but that’s another website.)

Because we humans are of limited will-power, time, and attention, take all these things out of the equation. Make it so you’d actively have to stop yourself from saving and investing.

  • Set your 401(k) to annual increase it’s percentage until you’re maxing it out
  • Set up automatic transfers to build your emergency fund
  • Do the same with other goals to separate savings accounts, we have one each for: cash reserves, taxes, travel, property maintenance, dining out (when we started doing this years ago we opened separate savings accounts for each, but now many banks let you set up multiple savings goals/buckets/whatevers within a single account.)
  • Put all your bills on your credit cards, which also helps maximize points
  • Have your credit card bills in turn set to auto-pay, just maintain a cash balance in your checking to cover your average spending
  • While you’re at it set up balance alerts so you know right away if you don’t have the buffer you’d normally want
  • Have all these accounts aggregated on a platform like mint or Personal Capital so you can monitor them all in one place

* I am not a financial professional or consultant, none of this information should be taken as advice for your specific financial and personal situation. Do your own research and form a plan that is appropriate for you.

Photo by Francesco Gallarotti on Unsplash

Personal Finance Lessons Learnt Part I

I have been a saver and investor all my post-Army/post-college life, that’s a good 27 years at the writing of this post, and want to share as much of what’s worked and not, so hopefully you can benefit from it. It goes without saying, but this is really just my opinion, please consider your own circumstances carefully, and seek professional advice if you need it.*

Read about Personal Finance and Investing

The first place to start is what you are doing right now, I highly recommend regularly reading up on personal finance and investing. Read different perspectives, and different authors, see what resonates with you and dive deeper into topics you find interesting.

When I first started working, the web was still in its infancy, so I read the financial press – The Wall Street Journal, the Economist, Money, and the like. I also read the newsletters from my financial institutions – at one time or another I have been a client of USAA, Vanguard, Schwab, Fidelity, E*Trade and they all used to publish newsletters on personal finance tips and planning advice. I always found Schwab’s On Investing to be the best and looked forward to it coming each quarter.

And of course now with the tremendous amount of resources on the web, there’s no shortage of advice (and opinion) – I maintain a list of my favorites on the Resources page.

There isn’t any one thing you will get from all this, it is the grounding you’re after, to learn the language of finance, see how certain topics are generally presented, and look for some contrarian opinions among FIRE bloggers.

Fair warning that you will read a lot of crap, and you’ll also notice that a lot of writers will all write about the same thing, so you will need to read everything critically. But in the process you’ll also start to see through some of the hyperbole in the press, you can think of these as inoculations against following the crowd when the press is screaming about the market collapsing or the bull run extending for X months. “DOW 40k!!!”, “This bear called the last recession, you won’t believe what he says now!” Meh.

Blog forums and comments, and finance sub-Reddits are also good places to connect with others pursuing FIRE or just better personal finances, but tread with caution, and double check any recommendations you get there before acting on them. For God’s sake don’t take anyone’s word for it when it comes to taxes. Read the primary source, at least here in America it’s actually pretty understandable and easy to find on the IRS’s website. I have been surprised to find that it’s easier to read the IRS materials rather than sort thru all the different opinions you’ll find on the internet.

Track Your Spending

The best place to start next is to get a picture of where your money is going now. See what you are spending your money on, and really spend some time thinking about if you are getting the value out of your money. One of the exercises in Your Money of Your Life that has really informed a lot of my choices in life is understanding what you are trading in terms of the hours and energy of your life for a thing you are about to buy. In other words – if I want X, really do the math on how many hours I would need to work in order to afford it (after taxes) – this can be a very clarifying experience and I have passed on a lot of impulse purchases because of this. And while I am a big proponent of being frugal for the benefit it brings your finances, sanity, and lack of clutter, etc. – you will also quickly see that you aren’t going to skip a few lattes into financial independence.

Others have written a lot about frugality and the Big Four, but saving on housing, transportation, food, and taxes is where you will find the fuel for savings and Financial Independence. While I didn’t go the hardcore route exemplified by many millennial FIRE bloggers, my wife and I did make deliberate choices to mange the cost of these like:

  • Renting a little further out of the city – this saved on rent of course, and we were always able to take some form of train into the heart of the city or the trendy parts of town without paying the associated rent to live there,
  • Once we were ready to own, we always put at least 20% down even when that meant getting a smaller house. You save on interest, on insurance, and we never paid PMI, which I just found offensive, as you are paying to insure your mortgage company.
  • We took the higher deductibles on insurance, and contribute the difference to our emergency fund, essentially partially self insuring.
  • We shared one car and took public transportation while we lived in the city (I realize no car at all is better, but we didn’t make that choice.)
  • Bought our cars to own; paying cash or aggressively paid off our loans early, and then driving them as long as possible
  • Buy fresh ingredients and cook at home, which also has health and relationship benefits
  • Hike, bike, and go camping instead of fancy vacations or cruises.
  • Max out tax deferred savings vehicles like IRAs, 401(k)s and HSAs

For me, the thing that tracking really highlighted in the beginning was interest payments, and the amount of just random retail crap we were buying.

Having to look at the interest payments every month helped me get motivated to aggressively pay down debt and not buy things on credit (other than our house.) Since we paid off our credit card debt in 1997, we have always paid them off in full every month. For big purchase we saved up for them first (I know, a novel idea!) in high interest savings accounts set up for specific goals.

As for how to track your spending, there really is no lack of choices, depending on how nerdy you want to get with it, you can build custom spreadsheets to slice and dice the data any way you want. To just get started however, I’d go with an automated aggregator that can pull in all your financial transactions and categorize them for you.

Looking at our random spend also made us really think about whether we really needed things before we bought them and, though it sounds fundamental, stopping yourself in store or online when you are about to buy something and really think about it, what it costs, and how long you’d have to work to pay for it, really helped us really cut our spending. Now it’s not uncommon for us to allow a day or two to pass between when we put something in the online cart and when we actually purchase it. Easily 1/3 of purchases never make it through the filter of a little time.

As for tracking tools there are a lot of options – Mint and Personal Capital are good online options, I’ve used Quicken for just about forever (and MS Money when that was a thing.) There are tons of other options out there, just find something that works for you and see what’s lurking in your spend.

* I am not a financial professional or consultant, none of this information should be taken as advice for your specific financial and personal situation. Do your own research and form a plan that is appropriate for you.

Photo by Markus Spiske on Unsplash

Debts and Lessons

Day 8 of the Daily Stoic‘s 14 Day Stoic challenge take a page from Marcus Aurelius’s book Meditations, literally.

Meditations is a classic of stoic thinking, and famously the first book starts out with Marcus’s reflection on and acknowledgement of all those to whom he owe some part of his own character, knowledge, and success. Think about this – when he was writing this, Marcus was the Emperor of Rome, at the pinnacol of his own life, at a time when the Emperor was thought to be ordained by the Gods, and even a god himself. Yet here he is writing to himself (Meditations was his journal for himself, there’s no indication he expected it would ever be read by someone else) and he’s exhibiting the humility to remind himself that he owes great debts to many people who made him who he was at that moment. How many people have we run into in our own lives who think they are God’s gift to [whatever]? I believe we Americans are especially prone to this with our mythology around the Self Made Man Person. But are any of us, really? Not very likely.

Even such an individualist as John D Rockefeller had this to say:

The success of each is dependent upon the success of the other.

The top of my list has to be my grandfather, though I called him Gink. And because of that, in time everyone did. Gink was my father figure and taught me so many lessons it’s hard to enumerate them all. In fact I have been working on a short book for my children on everything he taught me. Above all though I feel he taught me the value of a hard days work, humility, and the important of having a sense of humor.

My mother who taught me how to cook, and always believed in me, told me I could do anything and go anywhere (I think she regrets that last part).

My sisters who showed me the power of having a sibling you can always call, and who always understands.

My best friend Phil. We spent so much time together growing up it seemed like we we almost brothers. He showed me there was no shame in being smart, and that you can live by your own rules. And that friendship can last across time and distance. You know that friend who you can talk to after years and it’s like no time has past? That’s Phil.

My other best friend Dave. Thick as thieves we were at times, Dave was more loyal than anyone I ever knew, and he literally stood at my side for one of the hardest things I ever had to do. And while discretion may be the better part of valor, Dave taught me sometimes it is better to stand and fight.

My late friend Pam, who always had a positive attitude, who always believed in me, as she believed in our whole high school class. In reading all the remembrances of her, I think her super power was that she made everyone feel that way.

All my other hometown friends who helped make me who I am. At times we laughed, cried, fought, played, skipped school, worked hard, studied hard, partied hard, practiced, made things, broke things, and just hung out together. I wouldn’t trade having been a Westie for anything.

My high school physics teacher, Rocky Tremblay, who showed me the wonder of science in the form of physics, and that learning could be fun. I still have my copy of the Dancing Wu Li masters, and I still feel that sense of wonder every time I think about the single particle double-slit experiment. (and while writing this, I came across an article about where his inspiration to teach physics came from, which is a lesson that in helping or inspiring one person, you may affect the lives of many.)

All my sports coaches, who taught me that hard work and practice, practice, practice, pays off on the ball field.

My drill sergeants and senior NCOs, who taught me that hard work and training, training, training, pays off on the battlefield.

Abhilash Karanth. Early 1996 I was happily working at Andersen Consulting (now Accenture) when a headhunter convinced me to take a trip up to Cambridge, Massachusetts to interview with a small technology start up. While I met several impressive people at Sapient that day, it was my interview with Abhilash, and his unbridled enthusiasm for the work he was doing, and his commitment to the company’s mission that sold me. And that changed the trajectory of my life.

All my project and pitch teams, we’ve done so many impossible things, I am always inspired by their willingness to believe in ourselves, and just go make it happen regardless of all the naysayers.

My children, who have taught me what it is like to love unconditionally, and to take joy in experiencing the world as a child again. To see things anew, to rethink and re-evaluate my ‘position’ on things, and to question our own convictions, if only to make them stronger and more grounded.

And above all, my wife, who has been my partner and friend though all my crazy adventures. She’s taught me many things, including the simple joy of having someone to walk through life with.

This represents a small portion of all the people I owe a debt to and I may add to it from time to time.