Testimonial

Not a real testimonial.

We are all predisposed to certain beliefs and over time those beliefs evolve to become either more entrenched or hopefully we can change beliefs when for whatever reason, the thing we thought we believed was not true or not applicable or not ideal. 

If you read Barron's, do you see the occasional columns from Neal Templin? He's semi-retired and he writes every so often about his experience of his retirement, things he goes through and things he learns. I think I stumbled onto him two or three years ago but either way, I enjoy his articles. 

His Christmas Eve writeup is a mea culpa of his very poor investment performance in 2022. I don't recall ever seeing this from him before but his retirement account only had one fund in it, the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) which is a proxy for a 60/40 portfolio. He notes that as of Dec 22 the fund was down 16% YTD and had been down more a few weeks earlier. 

The reason I titled this post testimonial is because Neal's column is like a checklist for many of the things we've been writing about here and other places for the last 18 years as being bad ideas for retirement strategies or at the very least, suboptimal ideas for retirement strategies. 

Going down his list he said he "wasn't prepared for my bond losses." That fund he said has a duration of more than six years. This is probably a recurring theme for many investors.We've been talking about the elevated risk in bonds for many years for the very simple reason that yields were at all time lows and kept going lower. Recognizing that risk has elevated for that reason and then simply being underweight duration is much easier to do than to get the timing right for when that risk would matter. 

In talking about duration, Templin says "this is why some experts advise leaning on cash more than bonds." Maybe I am adding 1+1 and getting eleven (joke about jumping to conclusions) but I take that as saying he doesn't (didn't) have any cash set aside to manage an adverse return sequence. Whether he did or did not, having something in place to manage this risk is pretty important. It could be cash or cash proxies but it could also be a diversifier that should go up when equities go down. As an example if you bought an inverse product, then stocks dropped 25%, you could sell the inverse product which presumably has gone up. There is less need to hedge a large decline after a large decline and this allows for not having to do a lot of selling of assets that are down a lot. If you don't believe in using inverse products or other diversifiers then some cash set aside would be a good idea. 

Then "I finally had enough and sold the fund." He then detailed how after selling the fund he bought a couple of equity funds and short term bond funds and CD's. So he veered away from his one-fund approach to go a little narrower which is something we talk about here. I'd rather manage narrower exposures for a little more specialization. Going broad is valid and can work but I don't believe that is optimal and Templin apparently changed his mind on the optimality of a one-fund approach. 

You probably already noticed that Templin sold after a large decline and locked in whatever his loss was for the bond portion of that 60/40 fund. If yields go back down, the shorter duration products will not get the bounce that his original 60/40 fund would get. It's a difficult spot to be in. I certainly don't know what rates will do and am glad I'm not in that position. To the point above, recognizing the elevated risk and having maybe 5-10%, great if it's less, in further duration is nowhere near as difficult of a spot as 40% like Neal's original fund. Instead of selling his fund outright, maybe making a little room for something that goes up when rates go up, there's quite a few of them now, would have been better. It could offset further losses if rates continue higher but doesn't permanently impair his capital if rates go lower. 

The last point I will make is that he blames himself for being too detached. It's pretty clear he's a do-it-yourselfer which can work. Most people are capable of being their own manager but success here relies on how much time someone is willing and able to commit to the task. It doesn't need to be a full time job but it does require some time. Simple is better but there's such a thing as too simple. I've never been on board with a one fund portfolio beyond a theoretical exercise. I love the idea of one or two equity funds paired with one diversifier and one fixed income proxy but that it too simple for not accounting for the risk of something going wrong during a year like 2022. 

For as much as the whole world is talking about managed futures, there is nothing that says it must do well when stocks go down. Yeah, it does do well most of the time that stocks fall but what if it doesn't? What if people had gone as heavy on tail risk (a put strategy) in 2022 as some are telling us to put into managed futures? Tail risk hasn't done so well this year. 20% into tail risk, some are saying put 20% into managed futures, at the start of the year with 80% equities is actually down 20 basis point more than 100% equities through Nov 30th. 80% equities, 20% managed futures has outperformed 100% equities by about 450 basis points in 2022.

When the next equity market event rolls around, why couldn't it be tail risk that "works" and managed futures that doesn't? Maybe they'll both work next time or maybe they'll both flounder.

Too simple, too hands off, too passive takes a lot of risk. I don't think Neal understood the risk he was taking, pretty apparent he did not. Don't put yourself into this position. 

I have no interest or intention of using VSMGX personally or for clients.