Good reads from around the Web.

I often joke with my co-blogger The Accumulator about the terrible business model of this website.

“Let’s suggest people set up an automatically topped-up and annually rebalanced passive portfolio – and then go outside to do something less boring instead. That’ll be great for growing a readership!”

It’s funny (-ish) because it’s true. People do seem to read us for a while, get up and running, and then bugger off.

It’s fair to say I’ve never been involved with any other venture that gets as much positive feedback as Monevator.

But it’s a bit like being a splendid funeral director – a one-shot win that doesn’t do much for repeat business!

Go away

Secretly, I hope you will stick around, perhaps for our lame gags or maybe for regular vaccinations against the more misleading investing ‘advice’ out there.

But US researcher and blogger Meb Faber betrayed no such weakness this week, when he told his readers:

If you’re a professional money manager, go spend your time on value added activities like estate planning, insurance, tax harvesting, prospecting, general time with your clients or family, or even golf.

If you’re a retail investor, go do anything that makes you happy.

Either way, stop reading my blog and go live your life.

Wow!

Meb’s mic drop was prompted by an analysis of all the asset allocation models from the leading financial institutions in the US, in terms of how their proposed portfolios would have performed since 1973.

He found that the difference between the most aggressive portfolio and the least amounted to a return differential of just 0.53% a year. Over the long-term, the great mass of them were indistinguishable in return terms.

Meb then pointed out that paying a fee of just 1% a year for such asset allocation advice turned even the best performer into a worse-than-mediocre one:

From this graph you can see why being average – which is very close to best – is a perfectly good goal, especially as it helps you avoid a poor result.

You can also see how fees drag down returns.

And that there is the entire rationale for pursuing market returns as cheaply as possibly – passive investing, in other words.

On the other hand, you might argue that a graph like this obscures the real money benefits of getting even a mere 0.53% a year extra in returns.

That’s true – it could amount to hundreds of thousands of pounds over a lifetime – and it’s also the entire rationale (and much of the marketing) behind the active investing industry.

But good luck however predicting which of the dozens of barely distinguishable asset allocations will be the single one that delivered the best result in 40 years time…

Same as it ever was

One contrary note I’d make is that Meb’s probably over-selling the similarity of these different suggested portfolios.

After all, they don’t exist in a vacuum. Each bank will have created its model asset allocation from historical returns, and each bank also knows what the bank across the road is selling. So it’s no surprise they’re similar.

Something like the so-called Permanent Portfolio with its 25% allocation to gold would make for a bigger contrast.

Sure enough, Meb himself showed just that in a previous look he took at more diverse asset allocations.

But remember two things.

Firstly, hindsight and survivorship bias both loom large – the lop-sided asset allocations we remember are the ones that worked, not the ones that went nowhere.

Secondly – again – who knows which strongly differentiated allocation will win over the next 40 years?

That unpredictability matters even more when you try to do something very different, because the downside will be greater, too.

Both thoughts will take most people back to wanting to be average instead.

Don’t worry, be happy

To regular readers of this blog, this isn’t really news – it’s just another bit of reinforcement.

We no longer get many readers arguing the toss for an extra 0.75% allocation towards private equity funds or similar in the comments, for example. I think most of us now agree that roughly right is probably as good as it gets in practice.

Do you need to keep reading a blog that tells you to aim high by being roughly right and seeking average?

It’s not an aspirational message. But it’s surely the correct one.

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We don’t talk about it often but the reason I’m investing is because I want to be financially independent (FI). I’m a quarter of the way through which is a difficult place to be.

It feels like I’m rowing solo across the Atlantic. The planning is done, the course is set and all I gotta do is row.

Behind me are hundreds of miles of flat, grey ocean. There’s nothing on the horizon. In front of me, are thousands of miles of flat, grey ocean. There’s nothing on the horizon.

It’s hard to tell I’m moving at all.

An ancient mariner would pass the time by juggling mortal danger and hallucinations. A modern mariner has the same options as well as their GPS tracker and calls from home.

All four are needed to keep the rowboat on an even keel.

Hallucinations

I keep fantasising that I’ve made it. These episodes may or may not be voluntary but they are definitely an attempt by present me to establish a psychic bridge to future me.

My cycle into work on a Monday morning. Full of grief for the weekend life I’ve left behind. How would this ride feel if it were my last day before FI?

How would it feel if, instead of the daily commute, this was my daily exercise jaunt? If in an hour I’ll turn the bike around and head home for breakfast and smiles? To know that feeling is something I’m willing to take some pain for.

The wave of bliss that washes over you on the eve of holiday. A whole week of being me again. Remembering the joy and zest and curiosity that spring from having hours to yourself. Life for life’s sake.

The serendipity of play reclaiming your living space from the ‘to do’ list. Like nature recolonising an ugly city. How sweet is that place?

Whatever it is I’m going through now, it’s worth it because it brings me closer to there.

Calls from home

I need a self-help group. A crowd to cheer me on. Someone waving the flag for my team.

Going for FI is a lonely pursuit. There aren’t many of us out there. I only know two people in my real life who understand what I’m trying to do: Mrs Accumulator and The Investor.

Others can’t wrap their heads around it. Or wonder what I’ll do with the time. Or imagine it’s a huge risk because, well, what if I have a heart attack in a few years?

What if I don’t?

What if I live to age 84 as per the average life expectancy for males who are already 20 years older than me?

So my self-help group has widened to people I’ve never met but who speak wisely about FI:

• Living a FI 
• Early Retirement Extreme 
• SexHealthMoneyDeath
• Mr Money Mustache

Among others.

That’s not to mention the Monevator readers who chime in with their progress reports.

They all help me visualise how my FI life will feel. Their happiness (mostly) confirms that this journey really is about the destination. Their full lives dispel any worries about filling the time.

If anyone really believes the hours will be empty, just have a chat with the retirees in your life.

They’re so hectic, you’d think they were trying to win the American Presidency – hurtling around the place on a frenzied roadshow – packing in friends, holidays, grandchildren, hobbies, life.

Y’know, life.

GPS tracker

One of the things that makes FI socially tough is that there are no outward signs of success. If anything it looks like you’re going backwards.

Especially when much-loved possessions look like the love might be killing them.

If you makeover your house, your friends will coo over your freshly gilded splendour.

Voila! Instant validation.

But inviting the neighbours to take a look at your net worth spreadsheet is no way to impress the Jones’s.

So you need to create your own journey planner that joins the dots from first step to FU.

When a task is huge, scary and covered in razor-sharp spikes then chopping it into manageable taskettes is the only way to go.

For me, that means micro-goals, mid-level goals and BHAGs (Big, Hairy, Audacious goals).

Micro-goals mean taking things a step at a time. Focusing all my energies (negative and positive) on the very next task rather than the vast gulf I’ve yet to cover.

This way the internal monologue switches from: “This is impossible” to “If I can just get to the end of today, it’ll be OK.” Or, “If I can just make it to the end of the week, it’ll be OK.”

It’s a cheap trick but it buys off the brain with the promise of imminent reward. The reward might be real, such as switching off from Python-esque work pressures (both crushing and surreal) because you really can’t have given it any more today. Or the reward might be pretend…

I do the same thing when exercising with kettle bells.

Let’s say I want to do 100 clean and push-presses but I know that’s going to be agony. I tell you what, brain, if I do 50 then we’ll call it quits. Honour served.

• Get to 50. OK, maybe another 25. I can do that.
• Get to 75. OK, no way I’m stopping now, I can make it to 100.
• Get to 100. OK, now I’m having a mini heart attack. I’ll stop now.

Every time. This is the opposite of procrastination. Instead of pacifying a panicking brain with distraction, you quell the rebellion by making yourself believe it will all be over soon.

Mid-level goals are my navigable markers. For me, it’s a four-monthly review of net worth and savings to date. Each checkpoint is far enough apart so that I’m rewarded with significant signs of progress, while being close enough together to keep me on track.

The BHAG is a scary goal that keeps things interesting. In my world that amounts to an annual savings rate of 70% measured at the end of March. I made it this year. Fell short last year. Made it the year before that.

Plug your savings rate and a few other key numbers into Networthify’s calculator and you can see how far you are from FI.

Savings Rate = (annual savings / (expenses + annual savings)) x 100.

With a 70% savings rate, 4% expected investment return and 3% anticipated withdrawal rate, I’m done in eight years. With a 4% withdrawal rate I’m done in five and a half.

If I can push the savings rate up to 75% then I can be done in six years with a 3% withdrawal rate. (I consider a 3% withdrawal rate to be much safer than 4%.)

Saving 75% is a big stretch from here, but not impossible.

Mortal danger

I’m not theatrical enough to believe I face much peril in my life but my limbic system acts like there’s sharks everywhere.

Drama is a great way to speed up time, as I discover whenever I hurtle towards a big deadline like it’s the event horizon of a black hole.

But we should draw more comfort than we do from our daily woes. Because, regardless of the adversity we face, we almost always come out the other side.

It’s worth cataloguing all the challenges we didn’t think we could handle but did. We may have been floored for a while, we may have been knocked back, but we got up and kept going.

We’re tougher than we think. We can do it. And that’s the truth.

Take it steady,

The Accumulator

Good reads from around the Web.

A wildly disproportionate number of Weekend Readings have focused on market volatility.

And today’s post of the week by Morgan Housel for the Motley Fool US joins this innumerable crew.

Is there a more important subject in investing?

Perhaps keeping fees low, perhaps compounding regular savings for the long-term – but both of these strategies can be disemboweled long before the finish line if you sell up whenever the stock market crashes.

As Morgan writes:

The biggest story in investing is understanding why so many people have been hurt by, and are skeptical of, a market that has increased 18,500-fold in the last century.

The answer is that people hate to see their money go down. Even temporarily.

We’ve discussed many times just how scary investing can be, usually with a look at the worst years for returns.

What Morgan does with this piece though is show that even in the good times, stock markets are still tremendously volatile.

He calls this the “pain gap”, which is:

… the difference between what the market returns in a year and what it did during that year.

And he illustrates it with a cool graphic, which shows (in red) how big the swings between peaks and troughs were on average in a particular year, per decade:

Read Morgan’s article for more insights on this under-discussed topic.

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