What Are Your Goals? Do You Have Any?

I've never been much of a goal setter. There's never been a dollar amount either income or bank balance that I've sought. I don't have a goal for lifting a certain weight. In February we're due to pack test for 2022, pack testing is the annual fire department physical requirement of hiking three miles with a 45 pound pack in 45 minutes or less. I am only concerned about passing it, 45 minutes is just as good as 38 minutes you pass or your don't. 

My way has always been to take advantage when an opportunity presents itself. Blogging is a good example. Some people make a lot of money from their blogs and it would be nice to do that of course but that never happened directly. Opportunities came from blogging though, I wrote for TheStreet.com for eight years and had a side gig with AdvisorShares for four years which were both lucrative for part time work and of course I had an opportunity managing an ETF for a couple of years and although that failed to gain traction with assets it was a great experience. There were also experiences that went along with blogging like being on stock market television a bunch and meeting some people that I would have never met along with a few visits to the NYSE.

My writing has slowed down lately. I hope to write more in 2022. Is that a goal? No argument with anyone who thinks it is but either way, writing regularly is a productive use of time. It leads to learning about yourself, it can help you work through things and solve problems and it's fun. 

I have what might be considered goals for Walker Fire, the volunteer fire department serving the community where I live and where I've been the chief for 10 years. We approved buying a Type 3 engine which looks like this: 

This is an evolutionary step for us and while I've long wanted this type of apparatus, it was never a goal that I set a clock to. In 2021, for the first time we sent a brush truck (pick up looking fire truck) off district to fight fires in various places in the west. This generates revenue and provides experience. For 2022 we plan on sending out our rescue in a similar capacity (in this context, rescue is a vehicle that looks like an ambulance but isn't called an ambulance). If we find a Type 3 in time then we could have three vehicles going out subject to available personnel. This would bring in a lot of revenue and result in a serious leveling up of our department's equipment and other resources. Again, I never thought of these as goals but as opportunities that I was open to exploring as a result of the environment I tried to create that could lead to this outcome but would be ok if it didn't.  

I may have some sort of opportunity in my volunteering with the Del E Webb Foundation. This is a recent thing, I help out as a volunteer with their process of awarding grants to non-profit organizations. This came through my affiliation with Walker Fire. I never sought out this sort of thing but am always open to new experiences, I've said yes to far more things than I've said no to. If all the foundation work turns out to be is helping organizations get funds, that's a win. I don't know what the opportunity could be, it will evolve one way or another but I have no goals with it and no expectations. 

Everything above is probably connected to why I place very little emphasis on a retirement number. You know like "I need $800,000 to retire" or "I need $1.4 million." Yes, we should do the math but far more important than some number you derive along the way is what you end up with. Your number 20 years ago was $1.3 million but you are now retiring with $900,000. That's what you will make work.

In that scenario of $900,000 vs $1.3 million you might not have to make drastic changes to make it work but what if you come far short of your number because something very expensive came along, like a medical thing and you had to go out of pocket? That was five years ago, everyone is ok but you're at what you planned on being your retirement age and instead of the $1.3 million you planned on, or the $900,000 you might have otherwise had, your balance is $350,000. 

If you've paid off your mortgage and don't have car payments, then this is not a catastrophic outcome but plans probably need to change drastically, something will have to give. How are you able to adapt, go with the flow of opportunity that might present itself and what have you done to cultivate whatever opportunities might fit into your life and lifestyle?

My life and how I view things has evolved along these lines. I have no idea where it comes from but I think it corresponds to an idea we talk about a lot here which is knowing yourself, understanding what makes you tick.

Happy New Year! 

The Zen of Deadlifting & Simple Portfolios

@Spiritofthepines had a short thread on Twitter calling on dudes, maybe in his age cohort, to essentially man up through a bunch of different activities including lifting weights, hunting and working on dirt bikes. I chimed in, adding reasonable risk taking, splitting firewood, building confidence and helping others. My buddy Phil Bak had a similar thought with "The more I hear about the metaverse and the more time I spend on my phone and computer the more I crave doing real, tactile work. Woodworking, gardening and painting feel like escapes from a digital prison." 

I think there is value in these things in the literal sense if you want to look at it that way but a subtler message that I take from all of the above is about simplicity. Seeking simplicity where possible, doing what needs to be done in a basic simple fashion when possible. If simplicity can be maintained then the actual thing that needs doing will probably get done faster and done so with less time spent in your head post-analyzing the task.

This works on so many levels. Related to diet and exercise, everyone knows that "too much" sugar is bad for them even if they don't fully understand what sugar is (anything with carbohydrates, carbs=sugar). Everyone knows they should exercise even if they might not know the most efficient and effective way (traditional cardio does nothing for building/maintaining muscle mass, lifting weights done correctly builds muscle mass and provides cardio). Simple, even if not easy.

In personal finance, everyone knows they should save money and live below their means. People certainly struggle with that but they know. Again it is simple even if it isn't easy.

Simplicity in work should lead to more success in actually fixing the problem. There is also psychic value in performing simple but important work.

We heat our house with propane. In the winter, on cold days we have a fire in our wood burning stove. The above picture is our current wood pile. When we get low in the house I go out to get more. Usually I have split it a little more. It is a simple task but when I am doing it, I don't think about anything else I just empty out for a few minutes like a little reboot. It is potentially hard work, if done for a longer time but either way it is a nice break from the day and to Phil's point requires no electronic visual stimulation.

I get the same sensation deadlifting. Maybe this could be thought of as a sense of Zen, Zen in the simplicity of doing simple, manual tasks to help balance out the electronically stimulated parts of our lives. I certainly spend a lot of time on the computer doing the basics that my job requires along with trying to learn more beyond the basics that my job requires and of course leaving a little time for fun. We all do this to some extent but we should not get away from doing stuff, simple stuff that is important like making a drafty cabin warmer on a cold day or putting in the work to stay fit.

The simplicity, the basics have a direct application to investing. I've long said that for most people a simple portfolio is the best, put differently, if you are managing your own portfolio you should think it's a simple portfolio that is easy to understand. If you hire someone to manage your portfolio then I think they should be able to explain it to you in an easy to understand fashion.

I remember years ago a mutual fund manager coming on CNBC, his fund was wildly complex, placing thousands of trades per day. He couldn't really explain how the fund was positioned, I'm not even sure he was a finance person so much as the boss of the tech and math guys who maintained the algorithm. If something goes wrong, you have no idea what happened as opposed to owning the REIT of a mall operator that drops in value because the stores closed during the pandemic.

The starting point to a simple, Zen-like portfolio is understand that a basic equity index fund and an adequate savings rate can get the job done. The volatility might be tough at times but it can get the job done. If that sort of volatility would be too much, it can be dampened with just a couple of other funds to help smooth out the ride. It can be something you don't have to make a full time job out of, with less time spent in your head post-analyzing the portfolio.

When you get closer to retiring, things will get a little less simple because you will need to manage sequence of return risk (the risk that the stock market goes down a lot right before or right after you retire), figure out an efficient way to draw from your portfolio and navigate the Social Security/Medicare minefield.

Keep it simple whenever possible.

The Most Important Question

Carl Richards says, via the Evidence Based Investor blog, that the most important question an investor can ask themselves in a planning context is why is money important to you? We'll all have different answers and I can't imagine there are any wrong answers. If you want to buy stuff, fine. If you want to give money away, fine. Anything else, fine. Related to many past posts here though, is knowing yourself well enough to be able to answer that question. 

I believe a lot of people struggle to figure themselves out but as our friend Bill, here in Walker once said very wisely, you can figure it out now or you can figure it out later but you'll be much happier if you can figure it out now. 

My answer to why money is important might be odd. I don't aspire to much. I love looking at all kinds of vehicles and taking pictures of them. Many kinds including trick trucks (desert racing), Ferraris, old Harley Davidsons, fire apparatus and so on. I can't convey enough how fun that is for me. I've never had interest in buying something like that. I'm not motivated by leaving a big financial legacy to heirs or charities. I suspect we'll have some left over for that but whatever the equivalent is for name on a building for someone who is not wealthy means nothing to me. 

The reason money is important to me is for optionality. For purposes of this conversation I am assuming people are able to pay their bills and put food on the table. 

I've talked about this before but as I get older I find myself more willing to spend money on adding convenience or you could think of it as removing hassle. When we first moved to the house we're in I frequently shoveled the 1/3 of a mile down to the county maintained pavement. I'd put on my iPod and go get it done. I'd like to think I could still do that but a few years ago we bought an ATV with a plow blade. We've had a lot of small snow storms lately. Earlier in the week I was able to do the plowing in about 1/2 an hour without being wiped out. Today there was more snow so it took an hour. There still some work, getting out of the ATV to do a little shoveling but it is not tiring. Last year we had one storm where we got 18 inches in a couple of hours and my ATV could not get it done. A buddy from the fire department bailed us out with his front loader. At some point, as matter of convenience or removing hassle, we'll get a bigger piece of equipment that is capable of pushing more snow. It will be nice to have that optionality, to be able to afford that without going into debt for it. 

Another recent example of optionality as hassle avoidance that I may have mentioned before; a year and a half ago the 15 acre parcel went up for sale. The whole 15 was beyond us financially but we were able to buy the 3 acre slice closest to us to have a buffer from the development that is now happening with three different build sites downhill from us. This was important to us, so that no one would build in our line of site, we still will feel secluded.

I think success on this front comes from knowing what you want, understanding what you want to avoid and all this is much easier to achieve when you live below your means. 

Is Going Off Grid The Answer?

Dividend Hero Tweeted the following:

This resonates on some level. We live in the forest on a mountain, we are not off the grid but we mostly could be other than needing propane delivered. Mark Baker coined the phrase living off the grid in the grid which is more of an attitude about life than actually being off the grid in the mountains or a cave somewhere. 

In that light, both sentiments tie into self sufficiency or as I like to phrase it, preventing/solving your own problems. I don't like the idea of counting on others to solve my problems, in that instance you're just a statistic or if you prefer, you cannot expect someone else to care more about your outcome more than you. 

An investing form of the grid, the status quo, is the 4% rule. I believe it is a crucial building block of understanding and it is a great starting point but very few retired clients adhere to it. Some have some combination of account balances larger than their needs and other sources of income and some have been at more like 6-7% having been helped by the equity market's tail wind of the last 12 years.

Maybe I am stretching here but if you want to go off grid in life I'd guess your benchmark is the typical on grid lifestyle and then figuring out how to access modern conveniences like electricity, water, heat, the internet and whatever else you need as opposed to going full 19th century prairie living.

To the 4% rule, here is an example from Morningstar of total on grid, heavy arithmetic, complexity. I didn't count the number but it must be at least 2000 words which I could replace with "whatever you got, no more than 4% per year." That's it, done. Not that there wouldn't be drawbacks to that idea but there are drawbacks to the complexity laid out in the article too. Where possible, simple is better.

My ideas of off grid in this context for when I am older, I don't even want to say retirement because I will view whatever comes next, whenever it comes as being my next chapter, is years working on cultivating other sources of income should I need them (fire related, maybe I can derive an income writing again), staying fit enough to have optionality to do something I really wouldn't want to do like work in a warehouse or store and very crucially, not painting myself into a corner that relies on one outcome going my way. 

It would be stressful to need $6000/mo, having $3500/mo coming in from Social Security, needing $2500/mo ($30,000/yr) from the portfolio to get to $6000 and having exactly $750,000 in the bank--$30k is 4% of $750k. There's no margin for error in terms of a protracted bear market or a large one-off expense. We all know people in some version of this scenario and they make it work because they have to but it would be better to prevent this scenario or if you can't prevent it, then to solve it when it happens. 

That resiliency, self-sufficiency, ingenuity, optionality is how you get off grid and in my estimation make things better.    

Harsh But Succinct

Yahoo Finance had an article titled Pandemic Upends Retirement Plans For A Third of Americans citing that some people are delaying retirement due to insecurity about their finances/readiness while others are retiring earlier than expected because the pandemic has caused them to reassess their priorities and retiring earlier because of the forced hand of job loss at an age where finding a new job becomes more difficult. 

The word upend evokes an image of violence to me. Not physical violence but more like a huge disruption that someone is ill prepared for. Using that definition, it seems like no one would want any part of their life upended, I certainly do not.

Barron's took yet another look at the 4% rule, offering ideas on how to adapt to a world of much lower interest rates than existed back in the mid-90's when the 4% rule was devised. Getting your withdrawal process wrong such that you run out of money early would certainly be upending. Years ago I came up with the quip that being 80, healthy and out of money is a bad spot to be in. 

Read the article if you can access it. It's not incorrect but I do think it can be simpler by being flexible and avoiding all of the math that the article avers by simply taking no more than 1% of whatever your balance is every three months. That could lead to inconsistent income which is one way that flexibility comes into the equation. I first wrote about this idea with the tag line "no matter what you've got, 4%" per year. Someone observed that with "no matter what you've got, 4%" you'd never run out of money and that you'd leave a lot on the table when you died. That's technically correct but the nature of life is that we have to pay for one-off, unbudgetable expenses like vet bills, home repairs, new tires, whatever else might be relevant in your life. "No matter what you've got, 4%" can provide flexibility in the face of one-off, unbudgetable expenses.

We've looked at ideas related to monetizing hobbies, downsizing and some other things to enhance this sort of flexibility but yesterday, I may have been exposed to a different way, or at least a modification of finding a post retirement career. Yesterday I went to a small get together, a college buddy was in town visiting/doing work with his boss who lives here in Prescott. Their company seems is a portfolio of small start ups that they invest in but also seem to play varying roles in helping these companies start up...if I understood correctly. Without getting specific, they are involved in tech, consulting, a new use for an existing material and a couple of other things. My buddy is my age and his boss is definitely older than us, not sure how much older but in the realm of normal retirement age. The excitement and energy in telling me about the startups (the ideas were crystal clear, their role in these start ups wasn't) was genuine and purposeful. If you can find something to be that excited and energetic about at 60, or 70 or 80 (no way he was 80 and I can't imagine he was 70 either) then the easier of a time you'll have deriving some sort of post retirement income if you need that flexibility in your financial plan. 

Another aspect of being more flexible is literally being more flexible physically. I say on here a lot that a ground level fall for a person in their 60's or older can be a life altering event, upending everything depending on how serious the injury. The probability of serious injury is tied to habits related to exercise and diet. Building and maintaining muscle mass and preventing bones from getting particularly brittle is a great way to avoid having your life upended from such an accident. 

This will seem harsh but it is succinct, it is crucial for successful long term aging to maintain the ability to pick up heavy things, walk normally, run and jump even if you can't do those things the way you did when you were 25.

Back in October, we took a short trip to Kanab, UT and one of the hikes we did was Buckskin Gulch. There are two ways in, the long way and the short way. We took the long way. Once we got to the end and headed back, we went for a distance on the short way just to see if it was prettier or more interesting. We only went a short distance on the short way before heading back but there were two spots that required very modest scrambling (using all fours) to get up three or three and half foot boulders. Again this will be harsh but succinct, going up these boulders required just a little flexibility and strength and going down required just a little bit of strength and ability to jump. If this sort of thing is a source of fear, you probably have some work to do but the good news is that all of these things can often be built back up. There were people younger than me negotiating these boulders slowly, fearfully and unconfidently and that's unnecessary. Don't be an old 68 where falling down in your kitchen ruins your life. 

Selective Learning

Francis Melia Tweeted "if you want to maximize your muscle growth potential, don't do keto." Melia is quite a bit younger than me and I included him on a Health list that I created on Twitter. 

Side bar, using lists on Twitter is a huge productivity boost.

His tweet is interesting because it is rare to find too much negative sentiment about keto but the comments on his tweet all piled on the anti-keto theme. If you don't know, keto is short for ketogenic diet which is usually no more than 30 carbohydrates per day. It is built on the idea that just about all health problems stem from too much sugar/carbs. Our metabolisms cannot burn fat until sugar has been depleted so exercise alone is very unlikely to result in meaningful fat loss. 

I'm a walking testimonial for this. I found out I was prediabetic when I was 50, despite being fit. I learned about cutting carbs, my prediabetes reversed right away and I lost 30 pounds I didn't know I needed to lose. I was lucky though that I did not need to go full keto. I reversed the prediabetes and lost the first 20 pounds cutting to 100 carbs/day, a far cry from 30 and then I made my way down to 60-70 carb/day and have been there for the last four+ years.

Melia and other workout experts do allow for more carb consumption than what keto calls for. What I don't see very often is anyone who has settled in where I have with carb count, at 60-70/day. The point is not that I am right about what people should do but to repeat a longstanding theme here, is that to find what works for me, I've taken bits of process from different sources to create my own process. 

This can all be an analogy for investing. Melia clearly has success lifting weights and eating a lot of carbs but his objectives as a much younger dude are clearly different than mine. I still have learned about weightlifting from him, that part of his process I can use but very little carbs and not eating before working out, bits of process I took from other people.

Think about your investment process. If you've taken anything from me, cool, but it seems unlikely that you'd take everything from a source. I believe in holding a little bit of gold, not because it necessarily hedges inflation but because it has the tendency to have a low correlation to equities far more often than not and that still works. Despite the inflation situation, stocks have gone higher so gold has gone lower as I would expect. That won't resonate with a lot of people. I am a big fan of trying to manage portfolio volatility but again does not resonate with everyone, maybe not even most people. 

I think there is a balance to be struck in how to learn and take from other people while leaving the things you don't need. I've noticed that in the various segments of Twitter I engage with or otherwise follow there seems to be shared political ideologies that to me are irrelevant to the topic. I don't really care about the political views from the workout guys or the Doomer Optimists although I am interested in the connection between Bitcoin and Libertarianism. I lean Libertarian in terms of smaller government and autonomy but not as hardcore as I perceive the Bitcoin crew to be. The balance there is I am interested in how they connect the two (Bitcoin and Libertarianism) but haven't changed my view on things. 

On a related note the ergodicity embedded into index investing is certainly interesting so I go part of the way down that road having held quite a few individual stocks and narrow ETFs for 10-15 years but I am far from passive.

The thing that really matters is that what you decide to do, with investing and beyond, has to make sense to you and you need to have a reasonable basis to believe that the approach you plan to take will get the job done. The other day I mentioned the guy who placed 1000 trades in one day. That could never work for me, I have no idea if it even works for him (will give him the benefit of the doubt) but he has interesting things to say about asymmetry which is all I take from him. 

It's ok to not agree with everything someone else says. 

Optionality Is Still An Asset

Today I talked to a client in his early 60's who is trying to narrow in on a specific retirement date within his original broad timeframe he laid out for himself. At one point I replied to a comment with "well yeah, if you never retired you wouldn't spend any of what you've saved but you can pretty much do what you want, you have optionality."

He walked me through how he got to this point and basically he has optionality today thanks to a couple (or more than a couple) very good decisions when we was younger. At 40, 50 or 60 you are in a great position to benefit from decisions made when you were younger regardless of whether retirement is on your immediate horizon. 

Optionality can mean anything you want, I would imagine that for someone in their 40's or maybe 50's one form of optionality would be the ability to change careers, make some sort of radical change to work you'd love doing without having to worry about a pay cut. You want to go from some sort of job requiring a suit that pays $200,000/yr to being a fishing guide making $40,000/yr, no idea what fishing guides make but you get the point, then the decisions you made early on very likely determine the plausibility of such a move. Optionality in your late 50's and into your 60's could be the same but could also be about  retiring early. 

There's an infinite number of attitudes about retiring and how to spend your time and they are all fair game limited only by optionality. We've been saying forever here, if you're plan calls for $800,000 at age 66 and you find yourself at 64 with $620,000 and hating your job, you can still retire but something will have to give. That scenario has less optionality than if instead of $620,000 you had $1.1 million. Without complete optionality you need to apply ingenuity to figure how manage what thing will have to give so that you can have the outcome you want. This seems obvious but don't wait until you're in the equivalent position of being two years away, a little bit short in your account and miserable at work. If you can't derive optionality from the amount of money you have saved you can derive optionality from ingenuity, from problem solving.

This afternoon I renewed my EMT certificate with the State of Arizona, I'm good for another two years. I think getting your EMT is a great life skill to have even if you never practice as an EMT anywhere. The relevance of my EMT renewal ties into my optionality. I think it is important that I actually do what I write about not just talk about it. 

A couple of days ago I mentioned that Walker Fire sent a brush truck out on off-district fires for the 2021 fire season. The firefighters get paid and the truck gets paid, it's a lucrative opportunity.

We are now working on getting our rescue out (it looks like an ambulance but we have to call it a rescue) too. It's too soon to know if we'll get it out in 2022 or later but eventually it will go out. The EMT and Paramedic on the rig get paid and the truck gets paid, it's a lucrative opportunity. 

The way the pay and overtime work out, an EMT can make close to $4000/wk going out in this capacity, a Paramedic would make more. I don't see myself ever doing this for a bunch of reasons but it is empowering to know that I could. It requires some work, the need to maintain the certification and stay fit enough to pass the pack test (annual physical requirement to be a wildland firefighter, hike three miles in 45 minutes wearing a 45 pound pack). Maintaining both maintains my optionality. 

I didn't know about any of this stuff when I first joined the department in the winter of 2002-03 but my involvement, interest and training all evolved over the course of many years giving me several different routes to pursue, I have no guarantees here, just opportunities. 

I would encourage you to cultivate as many of these as you can. If nothing else you'll learn a few things which is important all by itself and maybe you'll create a lucrative income for yourself doing work that you love that you never thought you'd be doing. 

Time Preference

The term time preference has recently come into vogue when talking about Bitcoin. I attribute the term to Saifdean Ammous who wrote The Bitcoin Standard and more recently The Fiat Standard. You'll see it referred to as a high time preference or low time preference and the very simple explanation is preferring instant gratification (high time preference) versus being able to play the long game (low time preference). 

When I talk about doing things for your future self, you are playing the long game, you are exhibiting a low time preference. Spending a lot of money when you're younger because you can is an example of high time preference. Only living for today will likely end badly because you have no room for error, no optionality. 

A great application of low time preference in investing comes from a Peter Lynch quote (two in two days!), he said I don't know what direction the next 20% is, but I know what direction the next 100% is. Despite Lynch being a legendary stock picker, that is a nudge to just let the market do its thing for you (the literal definition of ergodic) over the long term.

You can take that as an argument for indexing but that is not the argument I am making. A simple portfolio doesn't have to only consist of passive products. Ever since I started managing portfolios, I've actively managed a mix of individual stocks, indexed sector funds and a couple of narrow strategic funds and I tweak the mix occasionally as needed. These products can absolutely capture the broad market's ergodicity over the long term. 

The other day, someone on Twitter mentioned having maybe placed 1000 trades one day...1000 in one day? He may have been exaggerating but that kind of trading is high time preference and even if he is very successful trading like that, it's a much harder existence, it's the opposite of ergodicity.

This of course applies to many (all?) aspects of life. If you've never lifted weights before and you start today, you actually can benefit immediately but it will take quite a while to see changes in body composition. If you're just an average person looking to be fit, to be able to play with your grandkids and not have a ground level fall ruin your life then even starting to lift at 50, is a low time preference activity targeting your future self at 60 or 70 and older, you typically don't start lifting weights at 50 to drastically improve your life at 51. If you started lifting weights at 30 though, you now reap many benefits from that decision at 40 years old, 50 and older. 

I apply this to the fire department as well. For years we have wanted to send apparatus off district to work on large wildland fires but doing it the "wrong way" just to get out would have been a high time preference that very likely would have end badly. For the 2021 fire season, several things fell into place, our truck was out for much of the summer, generated a lot of revenue and we built a good reputation along the way. This creates a path to vastly upgrading our fleet over the next couple of years and creating more opportunities for guys who can go out. In terms of low time preference, I am ten years in as chief and although this could change, I don't think I will stay past 15 years total as chief. If we can upgrade the fleet the way I would like in the next couple of years thanks to our new off district program, that could take care of all of our fleet needs for the next 20 years. 

I've been living my life this way for decades, long before I'd ever heard of time preference, long before Bitcoin was a thing. Somewhere along the line I learned how to envision my future self which made being able to play the long game in all aspects of life easier to do. I'm convinced this makes life easier which I equate with being better.     

Simplicity>Complexity

Many years ago in one of Peter Lynch's books he said something along the lines of if you can't explain why you own a particular stock so a child could understand, then you don't really understand the stock. This might have been my first introduction to the idea of simplicity versus complexity. This Lynch idea has also been applied to other things beyond stocks, if you can't explain a particular concept so that a child could understand it then you don't understand the concept. That might have come from Richard Feynman and if it did, maybe that is were Lynch got his heuristic (rule of thumb) about stocks. 

Many years later Nassim Taleb came along with a related idea when he said (paraphrasing), everything you need to know about finance you learned from your Grandmother. Save money, don't lend money and don't go into debt. I have applied this same idea to diet and exercise. On some level we all know too much sugar is bad for us even if we don't fully understand where sugar comes from (it comes from carbohydrates) and we also know that we need to exercise even if we don't know the most effective and efficient way to do it (resistance training with weight). 

Quite a few years ago there was a skit on Saturday Night Live with Steve Martin, Amy Poehler and Chris Parnell called Don't Buy Stuff. Parnell plays an author/guru who created a program called Don't Buy Stuff You Cannot Afford. Poehler and Martin keep asking essentially the same question over and over and Parnell says then don't buy it. 

Most of life can be that simple, certainly personal finance for ordinary folks can be. You need to save money, you know that and it's simple. Too much debt will cause problems, you know that and it's simple. Building a simple investment portfolio with broad based funds can get you to where you need to be if you just let it do its thing for you. That's a slight level up but if you've been engaged with markets for even a little while you know this, it's simple even if not always optimal. If you make a huge bet on something risky you stand to take a huge hit, you know that and it's simple. Years ago, a reader left a comment on the blog about having put 25% of his money into a lottery ticket biotech that went bad. He knew better going in but did it anyway. Keep it simple. 

I get a lot of questions about diet and exercise on social media and from friends. The starting point is very simple. Cut carbs, lift weights and skip breakfast. That's it. It's very simple even if not easy. Cutting carbs (sugar) and lifting are a little easier to understand, the science behind skipping breakfast requires a little study but the idea is simple, eat your first meal at mid-day. 

I see an overlap in the previous paragraph and the one higher up about simple portfolio construction. For most people, their ultimate financial goal is to have enough money for what the realistically want to do when they want to do it. The path to that outcome is simple, have an adequate savings rate, maintain an appropriate mix of stocks, bonds and whatever else you believe in and don't panic. For most people their ultimate health goal is to avoid being sick and be able to do what they enjoy doing. The path to this outcome is simple, cut carbs and lift weights and if you want to level up on that skip breakfast and don't eat food in boxes with a long list of chemicals listed in the ingredients. 

I try to bring this same philosophy to the fire department with the motto at the top of our white board.

Everything we do should be some combination of our staying safe, serving the community, learning and having fun. Not everything will be fun of course but my thought is why would someone volunteer if it wasn't fun for them so we make it fun where appropriate. It's a very simple foundation upon which to build a volunteer fire department. Simplicity can even be applied to medical calls for EMTs. A simple way to think about what an EMT does, as opposed to a paramedic, is to treat what they see. No pulse, CPR. Bleeding, direct pressure. Difficulty breathing, give oxygen. And so on. Medical calls boil down to some sort of assessment of the scene and patient and then some sort of intervention based on observations of the patient's issue.

Medical calls are not always that simple, often they are not but the underlying building blocks above are. Same with personal finance. People have all kinds of complicating factors but the building blocks are simple, save and invest prudently. People have all kinds of medical issues and even if the carb/lift/no breakfast doesn't quite fit, no one will be worse off for avoiding all the sugar in the typical breakfast of cereal/bread products/oatmeal/fruit/fruit juice combo.

Right or wrong, I think all aspects of life can be made simpler even if not truly simple. I've made this a priority in my life forever and I believe I've benefitted from it. 

The Psychology Of Retirement

Closing Time by Joy Lere PSY, found via Abnormal Returns, took a look at the psychology of retirement with a serious glass half empty perspective. The issues and challenges are real, I don't want to minimize the potential that Lere detailed in her article, but I do believe they can be overcome. 

She starts out questioning whether too much emphasis is placed on the milestone of retirement by maybe focusing too much on the destination (retirement) versus the journey (your entire working career). I've touched on this before in saying that if you're wishing away the week to get to the weekend you'll find yourself old one day having wished away much of your life and having done far less than you hoped you'd do. So I agree with her on this idea and would stress the need to live in the moment, find joy in what you do and make changes if you don't enjoy what you do. Don't confuse paying your dues when you're young though with not enjoying your career. I was a stock broker (cold called all day long) when I was young and I hated it but I view it as a necessary step to get to where I wanted to be. Similar with working at Fisher investments. I did not hate that, it would be more accurate to say it was not fun but was also necessary, it was crucial to my development as an investment advisor.  

Her next point is about the anger that can occur when you realize that you might soon be forgotten at your old job, that they will go on without you and do so quickly. This is something the Mark Baker (@guruanaerobic on Twitter) talks about frequently. If something happens to you, you'll be replaced very quickly, it's just the nature of business. If you can truly understand and accept that reality when you're younger then it should be less of a speed bump when you actually retire. Even if you are very well thought of, your employer, the institution, is bigger than you and has to go on. In fire department terms, I love the idea that we are part of an institution that is bigger than ourselves, I think of us as caretakers for the institution with the hope that during our stewardship we are making the institution better than when we came in. 

Lere has observed regret in retirees who lived one-dimensionally focused on their work. This is clearly a bad outcome. It is crucial to place a high priority on diverse interests. I've been writing about this since the beginning. It helps with overall quality of life, helps avoid burnout on your primary endeavor and I think creates an easier path for your life to evolve. If you retire from your primary endeavor, it frees up time for your hobbies (secondary endeavors) that you've already been doing. Staying curious to learn new things has a seat at this table too. 

The combination of fearing the unknown and getting older were mentioned and are of course real emotions. Not knowing what retirement looks like ties in with what is mentioned above and I think the answer is in how we live our lives. Doing different things, staying fit, staying curious to learn new things, living in the moment and starting these habits early on will again lead to retirement being an evolutionary step in life as opposed to a jarring, binary life event.

Her final point is legacy, how will we be remembered? I don't have a sense of how important this is to people. I like the idea that I have the opportunity to help people through the fire department and through my work (both my actual job and through this blog) but that is more about being in the moment and the psychic value I derive from what I do. Going back to the fire department, there's no one left to remember the chiefs before Chief Sumner (the chief when I joined who had a big impact on my life including the honor of eulogizing him a few years ago). There are only a couple of firefighters left who served under Chief Sumner, eventually they will move on for one reason or another. He clearly was a good steward who made the department better but at some point he will just be a name on a wall as far as the future crew is concerned. Same with my time as chief, and that doesn't bother me even a little. It's an institution bigger than any individual and having the chance to make it better while enjoying my time on the department is incredibly purposeful and fulfilling. Find something that is as purposeful and fulfilling to you as Walker Fire is to me. The benefits will be enormous. 

A quick note about confronting our own mortality which underlies all of these issues. In past posts I've connected being happy in life with making milestone birthdays easier to deal with. I've only had one tough birthday, when I turned 25. Even if all future milestones are difficult, I've been able to go a long time without a tough one. I realize I've been lucky to have the kind of adulthood I've always wanted but I did have to overcome some things when I was a kid. Those obstacles sucked but led to being able to figure out early on what matters to me and how to get to what mattered to me at an early age. Learn from your experiences and the mistakes of others and I did both. It is not too late for anyone to start this. The concept of death doesn't really scare me, obviously if I knew I was about to die in an accident I would be terrified but the concept that no one gets out alive doesn't bother me. Overcoming that makes all of the points Lere isolated easier to overcome or avoid. 

A couple of final ideas from me on the issues raised by Dr. Lere. Think about your long term and the things you can do now for your future self. This works for financial matters, how you spend your time and how you feel physically. If you think or act like you're "old" you're going to be old regardless of your chronological age. I think you stay young by being fit and learning new things. If you are fit and healthy you will have fewer aches and pains relative to your age than you'd otherwise have. Building muscle mass and staying active will obviously make you biologically younger. Learning new things that you're interested in makes life more exciting and fun.

So much of how we age and the outcomes we have circles back to the inputs we add, that is very empowering if you let it be. 

Do Your Future Self A Favor...

 ...and open and fund an HSA account. 

HSA stands for Health Savings Account. They were created in December of 2003, they allow you to take the income deduction on a contribution but not have to pay taxes on the way out when paying for qualified medical expenses. The definition of qualified is very friendly. If you take money out for non-qualified expenses then you owe tax just like you would taking money out of an IRA. One important detail is there is no time limit to take money out against a qualified medical expense. Last January, I got my colonoscopy. I have the receipt, I think I paid about $1000 out of pocket, so at some point in the future, I can take $1000 out of our HSA against that expense. 

I first funded our HSA in 2004. I've not funded it every year, we had health insurance from AdvisorShares when I had that gig and for a couple of years we had temporary insurance, which is cheap, lousy insurance that we can get away with for being healthy. We had high deductible, HSA eligible insurance for 2021 and will probably go back to the temporary insurance in 2022 for a couple of years. 

If HSA's have been around for 18 years, we've probably contributed in 13 or 14 of those years. Our HSA account comprises a little over 10%, maybe 12% of our investible assets. Our last umpteen years of receipts for medical expenses are currently nowhere near what our account balance is and hopefully they never will be but the optionality of a decent sized account that can be accessed tax free is a huge positive. 

You can contribute to an HSA until you go on Medicare, then no more. Usually you go on Medicare at 65. How many years until you get to 65? How much at $3650/yr single or $7300/yr family can you put into an HSA before you get to 65? The reason for this post was this article in Barron's. One of the comments was dismissive because of the "low" contribution amount but I disagree, it can be a meaningful part of an retirement plan. Starting at 55 you can add another $1000 catchup contribution which I did for 2021. 

If you can build up some sort of HSA balance between now and starting Medicare, you are doing the future you a huge favor. Lately, I've taken to saying that the future is here relative to any good financial decisions you made when you were young like funding your 401k every year, living below your means or taking a 15 year mortgage. If you've been funding an HSA for any long period of time, the future is here in terms of having a useful piece of money. If you're 15 years away from Medicare and you can put $8300/yr in for that 15 years and you can an unheroic average annual return of 3% you'll have close to $150,000 in your account. For most of us, that is well worth doing. 

Levering Down

You might be familiar with the portfolio strategy known as core and explore. Core and explore can be thought of as having most of your portfolio in very basic, vanilla broad based funds like an equity index fund and an aggregate bond fund and then take a few percentage points of your investable assets to speculate with. Sometimes you might hear something similar referred to as a barbell approach. Barbells are different but similar in some ways, repeated for emphasis. 

A couple of years ago WisdomTree launched the WisdomTree US Efficient Core Fund (NTSX) although it had a different name when it launched. The strategy is to allocate 90% to equities and 60% to bonds, so it is leveraged to 150% net exposure. The fund was the byproduct of a collaborative effort on Twitter. The fund has traded as advertised, that's good, and has also been successful in asset gathering at about $800 million. 

Over the years we've looked at various forms of portfolio efficiency, it's an interesting topic that is a subset of risk adjusted returns. If a portfolio allocates 2/3rds of its assets to NTSX and the other 1/3 to cash, then the result should be equal to 100% invested into a 60/40 portfolio plus the interest earned on the remaining 33% that's in cash. In comparing NTSX to the Vanguard Balanced Index Fund (VBIAX), this fund targets a 60/40 equities/fixed income portfolio, the math mostly checks out. If that's not close enough for you then obviously you wouldn't consider NTSX.

A similar idea could be to put 33% of a portfolio into a 3X levered fund like Direxion Daily S&P 500 Bull (SPXL) and then leave the remaining 66% in cash. The didn't work very precisely over the last two years, probably because of the daily compounding effect during the pandemic crash.

Don't put 1/3 of your money in SPXL, this is a theoretical discussion. Leverage is often viewed as risky when used to lever up. Putting 100% into SPXL would be disastrous during market declines but putting 66% into NTSX or 33% into SPXL (again, don't do this) could be thought of as levering down, not up. If you can get full equity market performance with only a portion of money and able to leave the rest in cash then you will have a better risk adjusted return and that cash is optionality you wouldn't have otherwise had. In case it wasn't clear, don't put 1/3 of your money into SPXL.

When we first had these discussions before Bitcoin was a thing I used the example of putting 1% into something that goes up 10x while leaving the other 99% in cash. You get a decent, not heroic, equity portfolio number while only having exposed 1% to risk/volatility. Every now and then Bitcoin goes on a 10x run. I don't know if that will happen again but it might. 

Again, this is all illustrative of the concept of portfolio efficiency and levering down (new term with this blog post!).

There are probably quite a few applications for levering down. I think of it as a way to be conservative. I touched on my asset allocation the other day and as I think it through, levering down might describe some of my mix. I've been transparent that Plan A is that I never stop managing money, that we take Social Security when I am 70 and continue to rent our our Airbnb. If all that goes to form then we wouldn't take from our portfolio for regular expenses, it would be for large one-offs like if we ever need a car, traveling once the pandemic is behind us and emergencies. 

In the last 10 year, the S&P 500 is up almost four-fold, 274% per Yahoo Finance. Many think that the next ten years will be far below that. What does that mean? A double? 50%? Realistically, I don't know that we even need half of whatever the return might be. What if, like the ten years ending 12/31/2009 its down 26%? That would be a bad sequence of returns. 

We've talked about managing sequence of return risk, there are many ways to do it and levering down might be what I gravitate to; a little asymmetry (crypto), more in vanilla equity, about the same in low vol strategies, a little in tail hedge with cash being by far the largest allocation. My little less than 1% in crypto had grown larger but is not a lifechanging piece of money (yet?). From here, a 10x in crypto would allow us to derisk even more.  

Assess your situation either yourself or with some help, then figure out how to move forward as best you can and be willing to change if you need to. 

Is Optionality An Asset Class? What About Ergodicity?

It's been a while since I've blogged anywhere. The world is crazy. The capital markets are crazy. Nothing is working like it is "supposed to." Client portfolio are going along for the ride because despite what I just said, the market goes up when it shouldn't all the time. Personally, life for my wife and me is generally terrific.   

I got into a brief exchange on Twitter with Mark Baker (@guruanaerobic) about asset allocation stemming from a comment he made about Bitcoin. Mark is a great follow if you're not already doing so. One thing I love writing about is the manner in which asset allocation might be evolving or maybe how we should think of it individually as we all cycle through our investing lifetimes. 

As a product of our convo, I had the idea for building an asset allocation model not using any of the typical terminology like stocks/bonds/cash, not to necessarily encourage crazy behavior with your money but to zoom out a little bit to focus on attributes that stocks/bond/cash might have or not have. For example, if US Treasury Bonds are return free risk, how much exposure should you actually have? 

The first asset class is Ergodicity. The basic idea is that if you just get out of the way and let it, whatever it is, do its thing, it will do its thing and reward you over the long term. The easiest application I can think of here is equities. I've been saying since long before I'd ever heard the word ergodicity that the stock market is going to average its 7 or 8% or whatever annual return no matter what you do. The more you do the more you risk increasing your lag to that 7 or 8% or whatever annual return. Great investors and traders will be an exception of course but I am not willing to bet clients' money that I am great so I try to trade as little as possible. That does not mean no trades but there are several names in the portfolio that have been there more than 15 years doing their thing because I let them do their thing.  

This chart is a good example of ergodicity with a couple of individual stocks that have been in the portfolio for at least 15 years, longer for the pink stock. The names don't matter.

One stock has wildly outperformed, the other has lagged but is intended to be very unvolatile and has yielded 2.5%-3% most of the time I've owned it. Hopefully I'll never need to sell these but if at some point the respective stories change, then I'll sell but in the mean time, I will just let them do their thing.

What else could be ergodotic? Maybe real estate, not sure but if you think something is ergodotic, then it is, no wrong answers here, just whatever is right for you. 

Asymmetry is another "asset class" I would include. Cryptocurrencies are a simple example as are lottery ticket biotech stocks and maybe certain natural resource stocks. 

Next is optionality which for me is cash or cash proxies. The optionality doesn't have to just mean for investing but also optionality in life. Maybe someone gets to 40 or 50 years old and wants to do something completely different in their life and that new endeavor will pay a lot less. A good buddy went from the mortgage industry to becoming a nurse. Knowing little about the medical field as an EMT and knowing a little more about the finance industry, those are pretty disparate jobs. Anyone wanting to make such a big change, especially one requiring school in between would have greater optionality to do this with cash set aside. 

A year ago we bought three acres of land next to us as a buffer to development on our little hill here in Walker. We have optionality to build on it. We have optionality to just sit on it. We could invest a little more into it with a septic system to then sell and let someone else build. I don't know if we could ever grow any type of food on it in some sort of Doomer Optimistic outcome (I know some fruit can grow in out forest, not sure what else). So is land optionality? I think it can be. 

The idea of tail risk protection has always appealed to me, a small allocation to something that will go up if the rest of the market takes a serious hit. In the last few years tail risk has become much easier to allocate to. The first fund I am aware of is the Cambria Tail Risk ETF (TAIL) which is a client and personal holding. There are others coming. The Simplify Tail Risk ETF (CYA) started trading a few weeks ago, no position in that one but how about that symbol?

I've maintained a position in TIPS for clients and personally, I believe in inflation protection as an asset class even as risk of price inflation has remained low for a long time until recently. Some think of gold as an inflation hedge. I'm a maybe on that, it certainly used to be but seems to not be capturing the recent inflation event. I own gold because it tends to not look like the stock market far more often than not. Some say Bitcoin is an inflation hedge. It is up over 100% YTD as price inflation is running much hotter than it has in a long time so we can't really refute Bitcoin as an inflation hedge but Bitcoin could just as easily be up for reasons having nothing to do with inflation. I believe in the latter, it is not primarily hedging price inflation except as a happy accident. Am I wrong about that? Absolutely could be wrong about that.     

Experiences. This is a stretch to label our Airbnb something other than passive income. We have been very lucky with our rental. For a lot of our guests, the experience of being at the cabin with the view is the reason they booked as opposed to going to some city and finding an apartment that is a good mix of cheap and well located for what you want to see in that city. We are in part, allocated to offering and getting paid for other people to have an experience. Maybe it's a stretch but we have a view that we've been able to monetize. 

Have you been inundated with ads for things like art or other collectibles? I have a few baseball cards. A few years ago I bought a Bobby Orr hockey card from 1971-72 for about $20. I just saw the same card with the same grading on eBay for more than $300. That sort of price appreciation is what I'd call a happy accident which is this asset class (I realize I just used that phrase up above). Sure if I had a couple of hundred cards bought for $20 each that were all worth $300, that'd be enough to move the needle for us. $60,000 would be close to a year and half's worth of expenses. However I don't have it in me to spend thousands of dollars to bet that values of sports cards will grow to the sky. Where this sort of thing is concerned, if you like/love it buy it but don't spend more than you're comfortable with.

These two are from the mid-1930's. To me, they are stunning pieces of art in a subject matter I love. Each card was in the $20's. Some cards from this set are worth a fortune. It's a good bet but not a bet on an ergodtic outcome, that these cards will at some point go for $100 each. Great if they do, don't care if they don't. A more aggressive risk tolerance than mine might view this much differently. 

Do you view your career/business as an asset? My practice isn't necessarily a marketable asset but it is an asset. Like many things in life, the more I put in the more I will get out. I invest time into monitoring, learning new things, customer service and so on and while outputs are partially out of our control, maybe entirely out of our control, I'm not leaving anything on the table in terms of the effort I make. It is easier for someone who is self-employed to view their vocation as an asset. When I worked on the trading desk at Schwab back in the 90's I certainly had fun but there was no asset really. The difference was skin in the game.  

The last one is making your life easier; convenience. Here I mean things like tools, but you might have different things that would add convenience to your life. At some point we may need to go from plowing our road with an ATV to using a tractor if/when I can no longer shovel a lot of snow (when the snow is very deep, clearing it is a mix of plowing and shoveling). I expect no direct monetary return but if we can stay here until we are really old then we'd save money not having real estate transactions and depending on the circumstance of a possible move, we'd save money being mortgage free for a longer period. So an indirect monetary return. Taking care of your health can fit here too. Staying strong and avoiding chronic maladies will result in thousands of dollars not spent on medical care. That's probably a via negativa return on your investment.  

How much should someone allocate to these "asset classes?" If your financial plan is relying on normal stock market growth then the ergodicity of the stock market would probably be your largest allocation. 

When I talk about asymmetry I say to start at 1% or maybe less and let it grow. It's been long enough now where my exposure to crypto is probably 7-8% and my intention is to just let it keep growing. I might add a little on dips or not, sometimes I have and sometimes not, but it is almost all house money. Yes, that is a gambling reference which helps gives context about how I view crypto exposure.

I have more in optionality, cash, as a percentage than most people do. I've disclosed that before. We live well below our means, I don't want to retire, I don't want to risk being emotionally distracted by my own portfolio that it leads to emotional decisions in client portfolios (have had good luck on that front). Beyond that, this is a pretty psychological decision. How many months of expenses in an emergency fund makes you comfortable? If you don't like your job but can't bring yourself to try something else, how much psychic value do you get knowing you have enough cash to make a big change if you wanted to? We're all different on these points.  

Go back to the first paragraph of this post. Do you agree that things are really strange these days? Cool if you don't but if you do, then I think it makes sense to view asset allocation which is as important as it ever was, a little differently.

Going Back To A New Platform?

 Just testing to see if this works.

That's an elk from the south rim of the Grand Canyon.

And that is a pasture in New Zealand.

In case someone actually sees this, lift weights, cut carbs and live below your means. This will make your life much easier.