Coasting Into Long Duration

More quick hits.

Flow Financial Planning blogged about something it calls Coast FIRE. It's a play on FIRE which stands for financial independence/retire early. We've looked at this quite a few times favoring the idea of achieving some measure of financial independence but not so much actually retiring early.

Coast FIRE is a catchier phrase for an idea we've narrowed in on which is the optionality that goes with making some good financial decisions early on so that you have more optionality later but before you retire. The optionality comes from getting to a point at maybe 50 (a little younger, a little older?) where you no longer need to save for retirement or save as much. This optionality allows for moving into a career that is more about your passion than the need to maximize your income in a job that may no longer be enjoyable. When this sort of financial independence is achieved at an earlier age, Flow Financial would say you are coasting into retirement. 

Cullen Roche looked at the 60/40 portfolio concept through an interesting lens. The main takeaways are that one, 60/40 is not dead and that two, different assets have different durations. He works through a little theory coming with equities being an 18 year asset and bonds being a 5 year asset. 

Realizing that money you need in the short term should not be invested in something that can go down in value is a pretty important thing to understand, we talk about this all the time in the context of sequence of return risk. It is important to understand equities as a long duration asset but I've never quantified equities and fixed income as precisely as Cullen does. The importance comes in understanding diversification and the importance of long term thinking in the equity portion of your portfolio.

The stock names don't matter, it's just an example. Both stocks have compounded at more than double the rate of the S&P 500, the yellow bar on the chart. The stocks have outperformed more often than not in individual years but you can see there are period of dreadful underperformance too. Being able to sit in a name when it is lagging, like the blue bar in 2015 or the red bar in 2016, requires a lot of patience but that patience is more easily found when you think in terms of stocks being long duration assets regardless of whether 18 years is the right number or not. 

Additionally on this point. In a portfolio of narrow based holdings, you might have an opinion on what your best performers will be this year or the next couple of years but you can't actually know which is why you diversify. 

Barry Ritholtz interviewed David Dunning...Dunning as in Dunning-Kreuger. The simplified definition is over estimating your ability out of ignorance. The interview also touched on a more interesting aspect related to knowing yourself and what you value as truly important. 

We've looked at this a lot. I've thankfully been aware of this personally for a long time and I believe my life has been better for it. I think people struggle with this which leads to many years wasted, pursuing the "wrong" outcome, wrong for them. I value time and day to day enjoyment of life over a bigger paycheck. I have no idea whether I'd be making a fortune as an advisor in a big city but you don't move to Prescott expecting to rake in big bucks. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.