Diversification Doesn't Always Feel Good

Cullen Roche rhetorically asked if 60/40 is finally dead. He was of course referring to the standard allocation of 60% into equities and 40% into bonds. He notes that bonds haven't really come through this year to offer ballast to the equity market declines. 

I've been writing about the flaws, as I see them, with 60/40 for many years. Yields have been low and going lower for many years until recently. The ten year US Treasury is currently in the neighborhood of a 2% yield which is higher than it's been for awhile but I would argue that even 3% for ten years is not very attractive. Of course if/as yields go up, the price of bonds and bond funds will go down. That is the risk when you buy fixed income at a high price (low yield). With a bond you will eventually get your money back, save for a default, but with bond funds there is no par value for the fund to return to. 

The relatively low yields more than 15 years ago pushed me to learn about alternatives, back then there's wasn't really a term for them so I called them diversifiers, that would help manage the volatility of a normal equity portfolio. Back then it was pretty much just gold, inverse index funds and a managed futures mutual fund. All three do a great job, IMO, of maintaining their low to negative correlation to equities so they do tend to go up when equities go down but they also go down when equities go up and equities go up the vast majority of the time. I don't want a portfolio of alternatives that are hedged by a little equity exposure. Equities go up most of the time, so I want to maintain an equity portfolio and am reasonably confident that the alternatives I use will do what they're supposed to in terms of hedging, more often than not. 

The chart shows most of the alternatives I use personally and for clients. I have been writing about all them for many years. BLNDX as possibly the newest addition is one I've used and written about for two years already. They are all up by varying amounts which helps. Early-ish last year I added a metals and mining ETF which has benefitted from the surge in reported price inflation. Of course we still have exposure to tech and discretionary and those are both struggling, doing worse than the S&P 500. 

It is crucial to understand that those things on the chart would probably all be underperforming the stock market if we were having another up year. BLNDX has at times kept up with equities and there was a stretch a couple of years ago or so where BTAL also kept up but that is not the expectation for either one. 

A good way to think about diversification is to ask yourself, if everything you own goes up together in a bull market, what is likely to happen when there is a bear market? They're likely to all go down together. You've diversified issuer risk but not market risk. My objective, as I have always articulated it, is to try to avoid the full brunt of large declines not to miss those large declines entirely. 

For now, the S&P 500 isn't really down a lot, it's only down a little. I am concerned that this could turn into down a lot so this morning I added to clients' existing position in SH increasing our hedge. The catalyst was not the death cross that looks like happened today but that the 200 day moving average is about to turn lower any day...maybe that happened today too. I took all previous action in regards to hedging with diversifiers long before the SPX breached its 200 DMA because certain risks seemed very high to me, risks having nothing to do with Russia invading Ukraine, that was not on my dance card early. 

One behavioral issue with these types of funds is that on the way up, you own too much and on the way down you don't own enough. On thing though is that if equities really puke down, I think at least a couple of the above mentioned funds could go up a lot. At some point, hedges need to come off, you don't need to protect against a large decline after a large decline, and those proceeds can either buy back in or be used to meet client income needs. If the market rockets higher starting tomorrow, then yes we will lag a little but not miss it--see own too much up above.  

The Value Of Being Financially Resilient

In an article about retirement withdrawal strategies, Richard Connor looked at a variation I'd never seen before where the idea is to mirror the IRS tables for Required Minimum Distributions (RMDs). The most common approach to retirement withdrawals, more like the most common philosophy, is the 4% rule which says in your first year of retirement you take 4% and then adjust up every year by the rate to inflation so if inflation runs at 3% you'd take 4.12% the second year and then reevaluate every year thereafter. 

It's difficult for me to believe too many people pull out the CPI number and then adjust their withdrawal up by that amount. If you know anyone who does that please let me know. What is more realistic is people who take a regular distribution start with some fixed number that's somewhat close to 4%...maybe...stick with that as long as is practical and then at some point that dollar amount will change based on client need and chances are that number will go up, not down.

What I've written about as building block is whatever you got, 4%. That's a slight tweak on the 4% rule that throws out the inflation math because as the portfolio goes up, as it inflates, it will hopefully keep up with inflation. The more practical application would be 1% of your balance every three months. 

The RMD strategy that Connor wrote about might be thought of as a middle ground between those three ideas. The way this works is you look at an RMD table, look at your age and divide your portfolio by the factor associated with your age. The amount you take goes up every year as your life expectancy decreases. With a $500,000 portfolio, at 72 you'd take $18,248 ($500k/27.4) and with the same amount at 92 years old you'd take $49,019 ($500k/10.2). At 114 years old, you'd take half of what is left. 

You have to take the RMD if you have a traditional/rollover IRA. You don't have to spend the money, you just need to make the withdrawal from the IRA so the government can collect taxes from you. 

Scaling up your total portfolio income up in line with the RMD table makes sense math-wise. If you make it close to 90 and have been able to stay on plan with your withdrawals with no plan-altering large expenses then you can get away with taking more out.

I do question how practical this is though from one standpoint which is that retirees tend to spend more money early on in retirement, then spend less as they get older and then spend a lot more when they are considerably older and most likely to need some sort of long term care. If I am reading this link correctly, 37% of us will need some sort of care from checking into a facility. A long time ago, there was a rule of thumb that long term care facilities were designed to take your last $200,000. With inflation, maybe that's now $300,000.

Quick detour: no one wants to end up in a facility. Our best chance for avoiding that outcome is to lift weights to avoid becoming physically frail and to greatly reduce carbohydrate consumption to avoid getting sick. Carb consumption has been studied in conjunction with every malady there is. You should draw your own conclusion but I've said many times before that I am living my life in belief that sugar, not anything else (other than cigarettes and drugs), are at the root of all medical conditions. Don't take my word for it but there is endless research for you to find and learn from to draw your own conclusion. 

Tying in a rule of thumb I made up, being 85, healthy and out of money is a tough spot to be in. Money is optionality. In the phase of life we're talking about that optionality can protect against the unexpected. You could be otherwise fit and healthy but have something medical come up that for whatever reason is expensive out of pocket. It will become increasingly common that 70 year olds will have to care for their 100 year old parents. You may want to move closer to someone (family) or something (National Park or hobby center) which ends up being expensive to do. Maybe you want to invest in a grandchild's startup which might be more of an act of love than a true money maker.

These sort of life events are why I write about optionality so frequently. You never know what you'll want to do in the future or what you'll have to do. While things like the 4% rule and the other variations are handy, my wife and I hope to be as independent from our portfolio as possible if/when we "retire." Things like post retirement gigs monetizing hobbies or some sort of passive income if you're lucky enough to create that sort of stream or finding work you don't want to retire from all serve to reduce the burden off of your portfolio which gives you more optionality later. 

A scenario of retiring healthy at 65 to do some sort of fun work that covers your expenses without needing to take from your portfolio or take Social Security is a great spot to be in. Especially if you love the endeavor and stay healthy enough to do it for awhile.

Just a couple of good decisions/habits early on can get you to that outcome. I of course concede that plenty of people do not want that outcome because it probably means dying with a lot of money in the bank. You've shorted yourself somehow, the thinking goes by dying with a lot of money. There's value in enjoying your money but there is also value in knowing you're financially resilient. I would encourage knowing the difference so you can choose what's best for you. 

Cultivating Your Side Hustle

An article in The Wall Street Journal cited a study from Zapier done in December 2020 that showed 1 in 3 people had a side hustle. Hat tip to Michael Batnick who called BS on the data, I jokingly replied to his Tweet that Zapier surveyed Uber drivers. 

Who knows how many people have a side hustle but I think just about all of us should be investing time to cultivate some sort of hustle as a back up plan in case how things are expected to go don't work out for some reason, some completely unpredictable reason. 

You have 30 years in at a company that cannot fail but does anyway and you're 58. You probably should have a backup. You're forced to get a vaccine by your employer (stale example now maybe but a big deal for some folks who did leave their work over this), you should probably have a backup. You work in some sort of highly specialized technology field and the tech goes through some sort of monumental change that is for you unlearnable (maybe not realistic, I don't know), you should probably have a backup. And 100 other scenarios, you should probably have a backup. 

I talk about this all the time because I think it's important. The term side hustle came to be long after I started writing about monetizing hobbies and although not quite the same thing they are related. If someone needs a second job then yeah they should seek something out and hopefully it is enjoyable. My primary context is more about cultivating a post-retirement gig in hopes of relieving the burden off your portfolio for a few years. If you've put in the work early on and then your hand gets forced like in one of the scenarios above then you're all the more resilient if you can get paid for a hobby and maybe even make it completely sustainable versus your monthly expenses. 

My backup of course involves the fire department. I literally cannot envision the scenario where I lose interest in the stock market and want to move on and being self employed should mean I determine my own fate but just because we can't envision something doesn't make it impossible. 

I have 19 years in with the fire department and hope to stick with it until I am very old. In all that time I've made essentially no money, a couple of hundred bucks ages ago, but the path monetizing it if I need to by working on large fires off district has been laid out for years and the department has taken steps in this direction lately so this is something I could just start doing. The way I maintain the opportunity is staying current with my EMT certificate and still being able to pass the pack test (three mile hike, wearing 45 pounds in 45 minutes or less). I have training for a couple of other things too that I could pursue. 

Crucial point of understanding is how much I love everything I do that is fire department related, I've loved it the whole 19 years and haven't cared about getting paid. That love for it, I believe contributes to some of the opportunity I have beyond being an EMT. 

If you love doing something as much I as love the fire department your odds of getting "lucky" with your unexpectedly needed backup plan go way up. I also think life is much better when you have an outside or extra curricular endeavor that you can give a lot of energy to. 

Correlations & The Long Game

Let's talk about gold. I've owned gold through the SPDR Gold Trust (GLD) for clients and personally since the 2nd or 3rd day that the fund started trading back in 2004. I've been saying the same things about exposure to gold since then which is 1) gold has the historical tendency to not look like the stock market, in times of equity market turmoil it tends to go up, not always, it's a tendency, enough of a tendency that I stick with it. And 2) if gold is the best performer you have, chances are things aren't going so well in the world.

Gold is not the best performer but the chart from Yahoo shows it up for the year just under 10%. 

I regularly see content and Tweets mocking gold because it has done so badly for the last however many years although for the last five years, Yahoo shows it up 56%. That's far behind the S&P 500 but it's not like it's down either. And if you look at a chart of any longish timeframe, you'll see exactly what I said. It tends to not look like the stock market more often than not. If the S&P 500 goes up 50 or 75% for the rest of the decade, I would expect gold to lag that by a lot but during the (hopefully) short windows of market panic I think gold will do what it usually does, that it tends to go up when markets go down. Not always but IMO more often than not. Diversifying with a little gold helps smooth out the ride during market events like this. 

Inflation is perking up of course. As a matter of maintaining a diversified portfolio, do you maintain any exposure to sectors or industries that tend to do well in an inflationary environment? If so, they are probably also up year to date. Holding on to a defense contracting company for the long term makes sense along the lines of gold for some types of crises like the current one also tends to be a good idea. Defense contractors tend to be procyclical so they should lag far less frequently than gold does.

The types of  hedges, liquid alternatives, that I write about so often which do lag when equities are doing well have also generally done what they're supposed to during this event, go up some or go down less. 

At some point the Ukraine situation will end, stocks will have stopped going down and start going back up. I have no idea when that will happen but it will and when that time comes all of these hedges and alts and inverse funds and the rest will probably go back to underperforming and that's ok. Over the long term, equities are the best performing asset class. Alts and hedges are meant to compliment an equity portfolio to smooth out the ride. For the long term, you don't want a portfolio of alternatives, hedged with a little bit of equity exposure unless you're in game over mode. 

If you don't want to be in the business of guessing when the next crisis will come, I certainly don't, then you might want to consider simply maintaining a position for the long term....for a little context I've held GLD for more than 17 years! I think that reasonably meets the definition of long game. 

The Only Definition Of Wealth...

JP Morgan is running an add where the tag line is "the only definition of wealth that matters is yours." The commercial then goes on to include different ideas like retiring early, or trading off a smaller house for a larger nest egg and other monetary ideas. 

Of course having some number in the bank you believe to be sufficient does meet a definition of wealth but I think the commercial misses the most important aspects of wealth. Once you get past the point of being able to pay for your shelter, to fill your refrigerator and other basic needs I would argue that just as important as monetary goals for wealth are health, time and optionality. They might be more important than monetary goals.

Whatever it is you want to do will be better if you (still) have your health. If all you want to do is be there for your grandkids, cool but no grandparent wants said of them "oh no, Grandpa can't do that anymore." For that person, wealth is being all in for time with grandchildren. If your hand is forced in retirement by having to work at a job you'd generally prefer not having to do, it will be easier if you're healthier and here I probably mean that you don't have the aches and pains that someone that age could otherwise have. And no matter what anyone wants to do or has to do, they certainly don't want to spend more than half a day a year in the doctor's office getting checked out. 

Time is another form of wealth. Setting your own schedule while you're still working is very empowering. Not punching a clock or answering to some sort of boss are also very empowering. When you set your own schedule it might make you less likely to want to retire. If someone spends years dreading some aspect of being an employee somewhere, even if the only thing they dread is their commute, then they are probably going to want to retire sooner than later. It's not that I am against retiring but sticking with work that you love does all sorts of things to promote successful aging in terms of social engagement, being challenged and having a sense of purpose. It also gives more room for error financially. 

I write about optionality all the time, it is a very important form of wealth. Optionality is something that most of us need to cultivate over a long period of time, I feel that way about myself anyway. I've played a very long game with the fire department and believe I have optionality to pursue some of the financial opportunities I've written about in the past. I don't think I will ever pursue them but they are there for me, it is optionality and it is empowering. I want to underscore that this has been a very long game for me. When I talk about monetizing a hobby I always say to figure out how to do it, if it can even be monetized long before you need to start to monetize it. 

The path here, if you've been an adult for a couple of decades is simple even if it is not easy. Live below your means (you'll save more), take care of yourself (cut carbs and lift weights) and stay curious enough to learn new things or get involved with new things. You never know where future optionality can come from. I've said all that before so I will add to that list to always do more than is expected, more than the minimum. I figured this out in college and that mind set has always led to experiences I would have never otherwise had or financial opportunities that although never led to millions, did help me build up a bigger cushion.

For younger readers, 45 or 50 or 60 or any age can be young allowing you to do all sorts of things you want to do or need to do. It comes down to a few good decisions early on and then sticking with those decisions to maintain your health, owning your time and your optionality. 

Just Because Someone Is Paranoid, It Doesn't Mean...

Before the stock market opened this morning I sent a note out to clients about keeping things in context, that there have been more military conflicts than most people can remember and that no matter the outcome, at some point the decline will stop then stocks will go back up and eventually make a new high, we just don't know how long that will take. War is bad for just about every aspect of life but not necessarily bad for markets based on history. I reiterated that I have no idea what the sequence of events will be. We have things in place to soften the blow of large declines and I think they are generally working. 

And right on cue, the S&P 500 closed in the green....by a lot....

On to today's main point about general preparedness. I tried to prepare portfolios for market upheaval a while back, mostly over concerns of price inflation but not entirely. 

Today I saw a couple of Tweets that I found to be thought provoking. One talked about the possible seizing of bank accounts of Russian people by the Russian government if the US/Euro sanctions prove to be very effective. I have no idea if that possibility is real but that's not what matters. I can't get to the point of ever thinking the US government would ever do something like that but I would say the steps Canada took over the Freedom Convoy were shocking. 

The other Tweet said something to the effect that, this is not a 20th century conflict. Hacking would play a much greater role with the example used of hacking a train to crash. 

Now, marry those last two paragraphs together, some sort of hack where American's financial assets are not accessible for a time. I don't think theft is the likelier threat, more like not having access to bank accounts to pay bills or buy food. I don't know how concerned to be about this. I naturally tend to assign very low probabilities to these sort of threats but there's no reason to totally ignore this possibility either. Having a little cash on hand if nothing else certainly is convenient. Having $100,000 sitting around the house seems excessive but the convenience of just $50 runs out pretty quickly. Next level, have some gift cards (we don't have gift cards for this threat). Next level after that, have some Bitcoin. We have Bitcoin but not for this purpose. We own it for the asymmetric potential and I don't want to have all the time into learning about Bitcoin only to see the touts turn out to be right and not own any. 

I will say I am more bothered about being hackable. I'll take being called crazy but I want no part of having my house on the internet, appliances, door locks and the like, or having something like an Alexa listening to everything going on in our home. Our cars are kind of old but I assume they are not too old to get hacked. I readily concede how extremely remote it is to have you car hacked. Our ATV is not hackable for whatever that's worth. 

The bigger point is mitigating problems that you can foresee. In life, this could include the things above or getting a couple of weeks ahead on groceries at the dawn of Covid (before the pandemic was declared) which I wrote about back then. In portfolio terms, this means something I have been writing about all the way back to the first version of this blog which is owning a couple of things that have a low correlation to equities just in case you get caught wrong-footed by the start of decline of some sort. 

That used to be a little more difficult, you could buy gold. You can still buy gold but you can also use a bunch of other strategies that used to not be accessible in retail products. I write all the time about the ones I use which include GLD, BTAL, MERFX, TAIL and a couple of others. 

The barrier to entry for this sort of safeguarding, in life or your portfolio, is pretty low. I think you just need to think about it a little bit. What are the biggest threats to whatever it is you care about? Ok, how do you mitigate those threats. Often, my thought process will use the words threat and nuisance interchangeably. I wasn't really worried about there being no food two+ years ago but I wanted to avoid the nuisance of long lines at the store or substituting to the point of eating crappy food for a couple of weeks or so. If you shop at Costco, there's no reason to ever run out of toilet paper. Just don't wait until you're down to your last roll. This is pretty reachable for most folks. 

Don't Call It A Dip!

Barry Ritholtz was on Bloomberg for what I think is his weekly appearance and today's conversation focused on whether or not to buy pullbacks or BTFD if you know that acronym and a couple of other things. 

On buying the dip, I both agree and disagree with what Barry said. He said it is very difficult to time the bottom on theses declines that come along, very few people can do he said. I agree with that idea, it is difficult to reliably bottom tick a decline. Enough tries and yeah, you'll do it a couple of times but that is not a reliable methodology.

I do disagree with the framing of the entire premise. I would say forget about trying to guess when bottoms are in, don't think of it in those terms at all. A long time ago I said something like the odds of a large decline are a lot less after a large decline. When we're in the middle of a 20% or 30% or 50% decline, and of course on the way down there's no way to know where it will stop, you have a chance to buy at a very good discount. It's a good discount, it will still be a good discount even if it goes lower before going higher.

The habit of adding to equity exposure after a 30% decline is very likely to have a very good long term outcome, even if you're "wrong" for the next six months meaning it goes on to bottom at a 50% decline. Peter Lynch is instructive here, "I don't know what direction the next 20% is but I know what direction the next 100% is." The S&P 500 closed today at 4225. In 2007 it peaked at 1530. If you added to equities after the first 30% down, or 1071, does it today look like a good decision? The timing was not very good in the short term but handsomely rewarded nonetheless. 

If the current decline turns into something more serious and you can buy more down 30%, how good will that decision be 10 years from now? Pretty good I'd venture even if down 30% is just a stop on the way down to 40% or 50%. 

In Barry's appearance, Lisa Abramowitz asked Barry if his firm was doing anything different, if they were sitting on more cash than normal and he said no they weren't. I got the impression that they normally don't have much cash in client accounts but I don't know. What I will say is that I'm a big believer in setting cash aside for clients who are taking income from their portfolios. No matter where this current move down bottoms out, we know what will happen. The market will stop going down at some point and then eventually it will make a new high. We just don't know how long that will take.

Once someone really accepts that as true then they stop worrying about the market and start to turn their attention to making sure their portfolio income stream is not disrupted. The way I do things, that can mean having cash set aside or selling hedges owned for clients that are meant to go up when the market goes down. The need to hedge against a large decline is much less after a large decline. 

Don't Take Stock Tips From TV Touts

The following pictures were Tweeted into a conversation about Cathie Wood, Jim Cramer and Draftkings (DKNG) stock.

That's a chart of Draftkings puking down over a period of months. Supposedly, Jim Cramer yesterday said on CNBC that she (Wood) was buying the stock near $50 back in October and rhetorically asked "who would ever do that?"

If the second picture is real, apparently Jim Cramer would do that. I gave up on CNBC years ago, preferring Bloomberg TV. I have CNBC on in the background maybe an hour/week, otherwise Bloomberg.

I have no idea what Jim has ever said about Draftkings but in its short life as a publicly traded company it has been popular and widely followed. In rocketed higher for a time and how has been enduring a pretty long downtrend. For all of those factors, it is certain that Jim talked about the name several times. Where he spends many hours a day talking about stocks on TV, being asked questions, giving opinions, reacting to news, I bet if someone spent the time they'd find positive and negative comments from him about many stocks.

If someone wants to follow his advice about a given stock then arguably they can't afford to miss anything he says. I perceive him as being short term oriented, certainly much much short term than me, clients have owned some stocks for 15 years+. If you are short term oriented and interested in DKNG then you might have tried to trade that 20% bounce higher between Jan 25 of this year and Feb 1st and then that next slightly smaller bounce that followed. 

Some people are good at capturing those types of moves but that is trading that is not investing. Are you a trader or investor? I'm not saying being a trader is bad but what is bad is getting caught up in the excitement when a tout comes on to talk about what is really a trade and you, like me, are an investor. 

One thing that is important to me to understand about any stock or ETF I might buy is what its market attributes are, not the company, that's a different but obviously important thing, but how it behaves in the market. More volatile, less volatile? What, if anything does it correlate to or does not correlate to. In this context, Draftkings is heat, a lot of heat. It is volatility. When you buy the stock, even if you bought two years ago at $17 on the way to $60, you are buying volatility, you are making your portfolio more volatile, maybe a lot more volatile depending on how much you buy. 

If you have a diversified portfolio then you likely have some volatility in there and that's ok, I'd say it's an important feature in a diversified portfolio when properly sized. DKNG is not my type of holding. It's a good bet (see what I did there?) that sports gambling will remain popular but human emotion is such a huge component of the business model that I'd rather add volatility with other holdings. 

A while back I added a mining and metals ETF for clients. There certainly is volatility in that sort of holding but human emotion is not a first level component of pulling copper out of the ground. There's emotion in market pricing of copper, I accept that, but that is not the same to me if that makes sense.

So down all this way, is DKNG a buy? I have no idea and I am not a buyer but if we all accept that sports gambling is not going away, then I might wonder can sports betting go on without DKNG? The answer there is probably yes but DKNG has great name recognition. A small gamble on something down 2/3rds that you think won't disappear is not a crazy idea. If you do that regularly, you will be very wrong on occasion and of course very right on occasion. If you accept that, then you know that the next gamble you make could be the one you're very wrong about. 

That's a type of complexity that can be rewarding but that the typical investor just trying to have enough money when they need it (retirement?) probably doesn't need to speculate on.

We Should Probably Take Social Security Early

But I'm not gonna.

I haven't been able to post in awhile, I've been crazy busy across my various constituencies. We have a huge project with my day job and at the fire department we are working on the upcoming wildland fire season which includes spooling up to apply for a grant for a new Type 3 Engine which kind of looks like the truck below. That truck, one of our firefighters and I took a 36 hour trip to Missouri to look at it, it won't quite work but it's a stunning truck in great condition. 

To today's post. Yesterday a client asked me what my opinion was on taking Social Security early. I've been clear forever that I plan to wait until 70, or pretty close as a matter of the circumstance when the time comes, in case I die young, my wife who is 6 years younger would get the biggest payout possible. Other than that reason, the other big reason to wait is you get more in nominal terms every month. I said to my client "although I plan top wait, there are probably more reasons to take early than to wait." 

Arguments to take it early that I've seen made include that you're spending less of "your" money every month, thus letting your investment accounts get larger. There's no guarantee that you'll live past the point of breaking even. By breaking even I mean that if you wait until 70 and then die at 71, you'd have been worse off because you went all those years not collecting, so "they," the government, won. If you wait until 70 and die at 100 then you won, you end up with more money in the long run. The breakeven is around 78. 

If you don't know the math, every year that you wait, you're payout goes up by 8%. The payout at 70 is 76% greater than at 62. In the context of taking it early, I'm not sure 62, the earliest, is ideal but if you want to take it early, then you need to do some spreadsheet work to figure out what is optimal.

It doesn't make sense to take it early if you haven't retired from your career job because the payment will be reduced, maybe down to nothing depending on how much you make. You get it in the end but then, you might as well wait. 

If your full retirement age is 67 and you take it at 67 but you're still working then 85% of your payout is taxable as opposed to 50%....sort of. The 85% kicks in when a couple on Social Security makes $44,000+. Instead of paying extra tax, if you love your work at 67 and it pays well, you might as well wait. There's no advantage to waiting past 70. At that point you're giving money away, more precisely, you're giving money to the government. 

I think more people are interested in retiring as early as possible than people who want to keep working. Is that right? The reasons, related to successful aging, to keep working are many. Challenged mentally, having a purpose, having more optionality with what you've accumulated in your investment accounts, having meaningful interaction with other people, having the opportunity to keep learning (depending on what you do) and there must be others. 

Almost all of those things can be found elsewhere like very actively volunteering, monetizing a hobby or finding a second act career that pays much less but that you love. If you've been making $100,000 but can make it work with some sort of part time gig that pays $15,000 that you love, then taking Social Security makes a lot of sense. It may or may not be ideal relative to your specific situation but generically it certainly can make sense. 

Once you start taking it, if you take it early, you're not stuck. You can suspend it up to age 70 if after not working or making less money you get another high income job, you can suspend it and it will continue to accrue higher at that 8% annual rate. There is also a circumstance where you can pay back what you've taken to get a higher payout later. I've never heard of anyone doing that and it doesn't make a lick of sense to me why someone would do that. 

The most important planning tool is to figure out your priorities. Loving my job makes it much easier for my reason to want to wait. No one else should care about my priority but the utility is figuring out what matters to you. You want to retire early and draw it at 62, go for it...if you can swing it. If you don't love your work but you can't swing it at 62, then maybe 64 would work and in the mean time your payout would go up 16% plus a little more for the cost of living adjustment (COLA) and you might have been able to save more money in those two years.  

What Joe Morgan Can Teach Us About Critical Thinking

I don't talk about it frequently here but I am a huge baseball fan, huge. I have been fascinated by the statistics since my father brought home my first pack of baseball cards in 1973 when I was 7. I played a little bit when I was younger, been to quite a few parks over the years and every summer I get the MLB extra innings package from Directv. 

One of the great things about being a fan of the game and the history of the game is debating what players were the best at this position or that position, greatest all time teams, anything like that is a ton of fun for me. I could go on and on. 

As a child of the 70's, a favorite player of mine, along with just about every kid from that decade was Joe Morgan. He was a hall of famer, won two MVP awards and won two world series but I think what made him so popular, aside from being the best 2nd baseman of the 1970's was that he wasn't that much bigger than us as kids, I blew past his 5'7" in 7th grade, and the way he jerked his elbow before each pitch as a mechanism to make sure he had his proper stance. 

Earlier this week someone posted their all-time first team and second team. I clicked through of course figuring I'd disagree with a few things. Johnny Bench was the first team catcher and Josh Gibson was the second team catcher. Was Bench better than Yogi Berra or Roy Campanella? I can't say for sure either way but that's a brutally tough choice and my favorite player from when I was a kid, Carlton Fisk, as much as it pains me to admit, is probably just outside that inner circle of Bench, Gibson, Berra and Campy and you'll find some people who think Mickey Cochrane is the best catcher of all time which is a head scratcher.

There'd be no such debate at 2nd base though. Morgan might be first but if not, definitely he'd be on the second team. He wasn't. How could this be? The second team 2nd baseman was Eddie Collins. Heard the name, knew nothing about him. A quick look at the numbers for Collins and sure enough, they are much better than Morgan's and keep in mind, Morgan's numbers are great. Morgan's average WAR per 162 was 6.1 which is outstanding. But Collins WAR per 162 was 7.1. Collins was a career .333 hitter which is 62 points higher than Morgan. Collins had 800 more hits than Morgan playing just three years longer than Morgan. Collins had more RBIs too. I often look and how many seasons a player's WAR was above 5 but for this comparison let's go with 6. Morgan had five such seasons while Collins had 10 including five years with a single season WAR above 9. 

Setting aside the potential flaw of comparing players from different eras due to it being a counterfactual, Collins was clearly better in my opinion. Morgan=great, Collins=greater. And the top 2nd baseman of all time, Rogers Hornsby. How good was Hornsby? Career .358 hitter, WAR per 162 was 9.1 including eight seasons above 9 and a ninth season at 8.9. In really only 15 seasons as a full time player he had 2930 hits including seven seasons with more than 200 hits. The numbers are mind boggling. He was miles ahead of Collins who was miles ahead of Morgan. 

Thinking Morgan might the be best 2nd baseman of all time, as truly great as he was, is simply not evident in the numbers, not even close. Maybe I should have realized this long before now but when faced with overwhelming evidence, I changed my mind. 

This post isn't actually about baseball. 

Fiat Tires?

Before anyone gets carried away, the tire stuff will be almost entirely metaphorical. 

A while back I cited Saifedean Ammous, author of the books Bitcoin Standard and Fiat Standard, who Tweeted about fiat food. I thought it was a metaphor, I got a kick out of it and blogged about it. While it is at least in part a metaphor, it might be an actual thing, Ammous thinks so anyway. The basic idea on this is that when government (fiscal and monetary) policies inflate away our purchasing power they make whole, single ingredient foods like meat more expensive, too expensive for many people so they are replaced with unhealthier, processed foods that are cheaper in nominal terms, have much higher profit margins and makes us unhealthier. 

I don't know that I am on board with Ammous' conclusion about why our diets are terrible but either way our diets are terrible and all the carb-laden processed food we eat is making us weak, frail and sick. Cut carbs and eat meat is all I can offer there. 

We live up a steep dirt road that is very challenging when there is snow on the ground. Two wheel drive cars can't get 20 feet from the pavement without spinning out. Four wheel drive on the right, or wrong, combo of ice and other people having driven on it previously, might be insufficient. Going down hill in these conditions, it is easy to slip and slide. It gets more treacherous than makes intuitive sense. It's nothing like I grew up with back east.  

Where we live now, as compared to the other hill we lived on here from 1998-2012, is much worse. During our first winter on our current hill I had a lot of trouble sliding around in my Tundra. I remember in the middle of one slide it clicked in my head "I need different tires." I went in and got some very beefy tires from Cooper and when I needed tires again a couple of years ago, I got another set of the same Coopers. That picture is one of my tires. When I got the first set of these a buddy of mine who's only up here in the summers saw them and he said "holy shit!"

A few years ago when we bought the house next door and put it on Airbnb we tried to make the description of the road and it's challenges very plain in our listing and we reiterate the point in our welcome message. We're glad to drive anyone up who can't make it in the winter (the summer, anyone can make it up) but as you can imagine everyone wants to try and I don't blame them, I would too. 

Because the cabin is hard to find I meet everyone at the bottom of the hill and show them the way up. Part of the discussion about whether they will try or not includes me eyeballing their tires even though I don't tell them I'm doing that. The wrong type of tires, fiat tires maybe, versus the right type of tires can be the difference maker on our hill in the winter. The wrong type are "city tires," tires with much smaller, shallower tread patterns. The fiat tires have less optionality for where you can go because they have less functionality. I think that general idea can be applied to many aspects of life, it being easier to accept suboptimal choices or foods or recreational choices (sitting on a couch playing video games doesn't exactly promote health).

Admittedly, the analogy falls apart a little because four wheel drive with fiat tires and snow chains will make it up the hill just fine. 

Where I am using the word fiat as a substitute for suboptimal outcomes, the current event in the stock market is the type of trading that can cause panic. Was Monday a capitulation when the SPX was down 4% and now it will work higher? I have no idea but panicking is a fiat-like reaction. Markets panic but that doesn't mean you need to. Where fiat can be thought of as a consensus to be avoided, meaningful selling during this type of sell off by long term investors is fiat-ish. As @collaborativefund Tweeted today, "your lifetime investment returns are overwhelmingly determined by how you behave during brief moments of market craziness." 

Zen & The Art of Snow Removal

It's been an interesting and fun weekend with a lot of reading and a lot of snow removal thanks to a snow storm that none of the weather websites knew was coming. 

In case you missed it, Bitcoin and the other cryptos are enduring their latest puke downs and of course all of the naysayers are out pounding their chests about being right and pounding the table about why it's going zero. At some point it will bounce and rally like it has before and all the touts will be pounding their chests about being right and pound the table about why it's going to a bazillion. It's the same sort of extrapolation you see on stock market television. When the market is heading lower, it's a parade of guests who did some selling at the top and see it going lower. When the market is going up, which is most of the time remember, a different set of pundits who bought at the bottom tell us why it is going higher.  

The current Bitcoin episode was an opportunity to dust off one of my favorites that "finding out you have too much AFTER a large decline is a bad place to be" and that if you're sweating this decline, you do have too much.

Josh Brown just had a post about how to endure large asset price declines. He was talking about the stock market but it applies to other assets, like Bitcoin, too. One point he made was comportment, keep it together. I make the point all the time that all stock market declines are the same. It goes down, people get scared, it stops going down at some point and then works back to a new high. The only variable is how long that all takes. I reiterated this point in a client email this past week. A client replied, essentially repeating the point and I was thrilled, they get it!

Once you reconcile that and realize that as a retired person drawing from your portfolio you really just need to be reasonably ahead of your cash needs (cash on the sidelines so you minimize the need to sell down a lot) and as someone still accumulating you really just need to keep contributing with each paycheck then your odds for financial success are very high. It can be that simple.

One way to make it that simple is to not obsess over your money. To say I love working in the stock market would be an understatement. I'm fascinated by when it does what it's "supposed to," fascinated by when it doesn't do what it is "supposed to," I love learning about investment products even if I don't use that many, I love learning new things about portfolio construction and studying investor psychology. All of that but I do not obsess over our account balances. It's counter productive on multiple levels all tying into a poor quality of life.

Lately, this blog has been exploring various aspects of life outside of capital markets and then connecting those various aspects of life back to investing such that it hopefully helps people adjust their thought processes and psychology to be more relaxed market participants. More relaxed means better long term results which might just mean never panicking or otherwise succumbing to emotions again.

This morning, I got out about 6am, while it was still dark to start shoveling the snow. The plow on my ATV is kind of broken (it is broken) so I thought I should shovel in our driveway more than I usually do to reduce the amount of plowing I would do with the ATV, even if just a little. A lot of backing up and going forward again in our driveway. A few months ago my wife brought home that big shovel. You push it the way a farmer a 100 years ago might push on a plow being pulled by a couple of oxen. It's a total game changer because you don't bend over at all to shovel so you don't feel it on your back at all.

After shoveling the small dog pen with a regular shovel, I did the driveway with the big boy, all in 90 minutes and felt great. After feeding the dogs and coffee I went back out to ATV-plow down to the main road. I really enjoy snow removal, shoveling and plowing, because it's a great way to start the day by getting a lot done very early. Also, snow removal is for me an activity like deadlifting where my brain empties out and I am just focused on the task at hand. I don't get that sensation from other weight exercises, just deadlifting. It is a fantastic reboot. Enough of these activities in our lives makes it much easier to avoid/minimize negative behaviors like obsessing over your account balance.

Also, I'd have never gotten this picture of the moonlit snow (taken with my phone on night mode).

Engaging in your financial outcome is an important and productive behavior, it becomes destructive when it drifts into obsessing. Having varying and totally unrelated interests prevents obsession and makes for a much happier and more interesting life.

Friday Night Potpourri

First an excerpt from a client letter I sent out this morning about the recent stock market volatility.

There’s no way to know what will happen in the short term but as we’ve talked about before, we know how this will play out longer term. The decline will end at some point, maybe for no reason at all, and then the market will start to go back up and make a new high. We just don’t know how long that will take. In many instances, that process is very quick like in March of 2020 or December of 2018 if you even remember that panic. Sometimes the process for digesting declines takes longer like in 2008 or 2000. 

I would also add the idea that although we have been somewhat hedged with BTAL, TAIL, SH, GLD, BLNDX (they've worked to varying degrees), when the market is going up, you're hedged too much and when the market is going down you're not hedged enough. Recognize that potential sentiment early to help minimize the odds of succumbing to emotion.

The other day I found a great quote. “For short-term investors, volatility is a risk. For long-term investors, volatility is a gift.” This ties in with the quote from Peter Lynch I like to cite which is about not knowing which direction the next 25% is but being certain which direction the next 100% is...or 200%.

Nassim Taleb lamented that he may have "created a monster" over the way people misuse the term anti-fragile. The concept fascinates me but I think people conflate it with resiliency. There's room for both of course. Anti-fragile means to benefit from disorder, chaos or adverse events. Resilience is when you're able to endure disorder, chaos or adverse events without too much trouble.

I'll use a personal example that I hope clearly and simply delineates between the two. In January, 2020 we started to buy some extra stuff at the grocery store (I've told this 100 times) out of concern over what Covid might become. Doing this made us more resilient in the face of what Covid became. We did not derive a benefit beyond having less hassle during the shortages of meat, water and toilet paper. Nothing anti-fragile there.

Our Airbnb rental may have turned out to be anti-fragile however. Other than Airbnb canceling all reservations for the first two weeks of April 2020, our Airbnb's bookings increased. Our semi-isolated, cabin on top of a mountain in the forest, turned out to be a great place to hide from the world and continues to be so today. We caught a wave that we're still riding, this means a little more revenue which is why I think it is at least a partial example of being anti-fragile if not a full blown example of anti-fragility. 

True anti-fragility is rare but resilience doesn't have to be.

Joe Norman Tweeted "Don't let the people you admire narrow your curiosity. Don't let their judgment be yours." This resonates with an idea I've said many times and pertains to Taleb mentioned above which is it would be odd to agree with everything someone you respect says. There are plenty of people I learn from even if I don't agree with half of what they believe/say.

I've learned a ton from Taleb over the years, really a lot but anymore I don't agree with half of what he says. Another tie in from me from the past is to take bits of process from various sources to create your own process.

Shocking Vulnerability Revealed

We were all captivated by the underwater, volcanic explosion in Tonga over the weekend. Before getting to the post, the video was a spectacular reminder of how powerful the forces of nature are.

Fallout that might not immediately come to mind is that an underwater cable providing communications, phone, cell signal and internet, was severed potentially isolating the island for an extended period. In 2019, Tonga decided to deploy a satellite system as a back up of sorts but that has not happened yet due to prohibitive costs. Even then though, it may not have been effective as the ash that is still in the air is interfering with satellite phones.

How many people fantasize about selling everything and moving to a place like Tonga or maybe, a little more practically New Zealand? We've been to NZ twice and while I wouldn't say we a serious notion to move there, it's fun to ponder. Whereas maybe we got caught up in a fun moment, some people actually do this. Picture taken near Milford Sound in 2012.

I suppose if you're really living in the jungle, totally self-sufficient for food, then the lack of communications might be less of a problem than trying to recreate some portion of your previous life in an exotic and interesting location. 

In everyday life in Tonga or other places, I have no idea whether the threat of natural disaster-induced isolation or other form of disruption lives on people's front burner or not but it is potentially serious given Tonga could be isolated for weeks, even longer. 

In 2007 we went to Molokai. It's the smallest of the islands you can visit. Things could have changed since then of course but there was a shocking lack of stores to find food. I remember one store in the main town of Kaunakaki that sold some Kirkland brand food and one or two other stores. There was one restaurant at a resort near where we stayed and there was a pizza joint and a Subway in Kaunakaki too. Choices were very limited and although we had access to food, it was not too difficult to envision some sort of hiccup causing problems. I don't know how or if the island was worse off than the rest of us during empty shelf event in the earliest days of the pandemic. 

The pictures we have do don't justice to how stunning it is there but the potential challenges that you might not think of are substantial and I don't think I even understand half of them. The process to solving this would probably mean having a backup to everything. Solar is an easy solution even if it isn't cheap to install. Being self-reliant for food is easy to know you need to do it but then you have learn how and be successful. When the ash cloud in Tonga clears, will satellite TV and phone, maybe internet which is what our ISP is, work normally again? What if there is a serious disruption in gasoline or diesel supply. You can keep some gas on hand and maybe add stabilizer to slowdown the process of it going bad. What about medications? What will a doctor give as an emergency supply and how long before things like insulin expire? I consider myself very lucky that I have no idea about that. 

My desire to explore this line of thought is not about believing bad things will happen, that's just not how I think but inconvenient things happen and the idea of beefing up self reliance is something I enjoy learning about and I believe it is directly related to financial plans and retirement. 

How vulnerable are you to a serious means testing cut to Social Security? If it happens it will come down to affect those who are merely comfortable or well off, not just the truly wealthy. How vulnerable are you to needing a full 4% from your portfolio no matter what in order for your retirement plan to work? Are you in the sandwich generation meaning you might have to financially support parents or children...or any other relative for that matter? How vulnerable are you to healthcare costs continuing to go up at the same rate they've been going up for the last 15 years? 

Here's one, if you envision consequences of climate change being as dire as some believe, how vulnerable are you to having to move because where you live might be underwater one day? Not only would you have to move, you wouldn't get any money from selling. What if you're not worried in the least about this but it happens anyway? 

No one can plan for every possible adverse outcome. But we know some of the basics that we can't really interrupt for very long; food, medicine and utilities. We know with our finances, that we have to be able to pay for certain things uninterrupted. There are simple ways to mitigate these things such that regardless of what causes supplies to be reduced, we can be a little bit ahead of our regular need. That applies to money too. A client is starting their RMD this year and they asked if they have enough set aside because the actual cash balance was low. They have a Treasury note maturing on January 31st that will cover two years worth of RMDs. The market may or may not do crazy things but they are nicely insulated from potential volatility. This is useful financial management and I believe also useful real life management too.   

Vulnerabilities Exposed!

A few months ago I mentioned my interest in learning about Doomer Optimism. The first impression I got from it was that it was about self-reliance and while that is part of the equation I think it is more accurate to think of it as being optimistic about what comes after the collapse of society and if I am right about that then it does not interest me anywhere near as much. I can't get to the point of thinking society will fall like Serbia 25 years ago or Venezuela more recently. 

The self-reliance part of it actually isn't quite right, more like a small, local community being self reliant together to emerge from the rubble. I had a quick, friendly exchange with one of these folks on Twitter who was talking about surviving a collapse, my response was "I don't think in terms of surviving collapses but resiliency in the face of prolonged distortions like the toilet paper/bottled water event of 2020 or one in the future that might last a little longer."

Similar to navigating stock market cycles, I am less concerned with what causes the "collapse" or less dramatically, causes the distortions as opposed to doing what I can to be as insulated as possible from the consequences of the event. As the Covid event was heading towards being declared a pandemic, I mentioned back then getting a couple of weeks ahead on things like meat, bottled water, dog food and the like. We get our paper goods from Costco, the quantities are huge so we just lucked out having enough of that to avoid ever running out. We also lucked out with hand sanitizer, I was in Sprouts early on a Saturday and they'd gotten a bunch in so I bought 100 of them...just kidding, I bought two that we're good sized and still haven't used them up.

The thought process was to assess the situation. Are people going to panic? What would create the biggest hassle for us? The word hassle is critical my thinking, I don't expect true catastrophe but it is easy to envision nuisance and hassle from having to wait in lines and the like. In taking steps to avoid hassle, we were probably also partially insulated if the distortions caused by the early supply chain issues ended up being a couple of orders of magnitude worse than they'd actually been. We had enough food we like and regularly eat to last for a bit and then had food we don't like that much or eat very often like soup and sardines. We had plenty of propane and solar power in case things got even worse. We have a huge propane tank not because we are worried about bad things but because the delivery guy can't reliably get to us in the winter so we avoid the hassle of running out. We have solar power and backup not because we are worried about bad things but because occasionally the power here goes out for a very long time and we avoid the hassle of a regular propane generator putting a serious dent in our propane supply.

If you've seen the news this week, you might have seen empty store shelves again. I don't know if that is weather related or actually supply chain related but it's not happening here...yet. Could there be another, Covid-related, nationwide food supply chain disruption again? Sure. It doesn't feel like we have great handle on things yet. We all see news that says Omicron doesn't attack the lungs, if that is true, then it is not clear to me why things are clamping down again but if they do clamp down again then it would make sense to once more get a few weeks in front of regular staples needs for anyone who has not already done so.

This is built on how little I know, not how much I know. I try to stay engaged but as a layperson I see results of studies that say completely the opposite things about every aspect of the management of the pandemic. You'll find plenty of content that shows that masks are very important and just as much content that says otherwise. Right or wrong, I believe that Vitamin D is important and taking steps to reverse metabolic syndrome (cut carbs, lift weights) can only help anything else you've done for yourself. Cleveland Clinic defines metabolic syndrome as having any three of the following five: waist greater than 40 inches, BP greater than 130/85, blood sugar greater than 100, triglycerides above 150 or HDL below 40.

Everything I've mentioned is consistent with my wanting to avoid adverse consequences if possible. Everyone's idea of adverse will be different, so if any of this resonates, then figure out what you don't want to have to deal with and do what you can to mitigate your hassles.

The investing parallel ties into sequence of return risk or people who are already retired and drawing from their portfolios. Someone with a million bucks in their account, taking $4000/mo, so more than 4%, would have a hassle if the market cratered and they hadn't set aside some reasonable number of months of income need aside so their lives won't be disrupted by a drawdown. Instead of cash, you could have some invested in products that either will go up when the market goes down or are designed to trade almost sideways with very limited volatility. It would be unfortunate to sell assets that are down 20-30%, even if that is just in lockstep with the broad market, to meet income needs.

What Is Your Safety Number?

There's an interesting number floating around from a survey that "the average amount American adults said they’d need to earn to feel in good financial shape was $128,000." Bloomberg noted the $128,000 contrasts with an average income it cited at $67,521.

The numbers in nominal terms are what they are, accurate or not but what is interesting is the perception that twice the average income would provide financial safety. Also interesting is the whole concept of what sort of dollars would make someone, anyone, you, me feel safe? I might replace safe with being on firm footing or able to withstand a negative financial shock.

While anyone would want a higher income, I've always thought of this sort of thing as how much I had in the bank...or more precisely in our joint brokerage account. We have qualified accounts but in a emergency situation I would certainly try to avoid the 10% penalty for taking out of qualified accounts (IRAs and the like) before 59 1/2. 

Over the years, I quit jobs with nothing immediately in front of me for a new job a few times. The first time was when I was 25. Back then I thought in terms of how many months of expenses I had set aside. Back in that first time, I had 6 or 7 months of expenses if needed. Fast forwarding a little, when I got laid off from Schwab in 2001, between savings and my severance check I think we could have lasted for close to two years. Fortunately, I never came close to exhausting those resources.

At some point a long the way I began to think in terms of do we have enough resources to make it until 59 1/2 (now three and half years away) for the reason mentioned above, what about taking Social Security early at 62 (a shade over six years away)? How far out could we last that would be least disruptive to our Plan A. What I mean by that is, if you plan to take Social Security at 68 and have to take it at 67, that might be a small bump in the road versus having to take it at 62. 

To the extent this is about financial resiliency, there's no wrong answer to what makes anyone feel secure but I think the road to this sort of financial security relates to what we talk about all the time here which is living below your means and having a high savings rate. I like to say that those two habits make every other aspect of life easier. 

Faced with some sort of external shock like a job loss (regardless of the reason), having modest monthly expenses and a lot in the bank relative to those expenses should make you feel financially secure, that is the reward for those constructive habits. 

5 Things

There's been a fun thing going around Twitter for the last few days where people paste in "5 Things I can talk about for 30 minutes without preparation" and then they list the things they can talk about. I saw some interesting things, one funny one that stuck out was someone being able to talk about the misery of being a Mets fan and a doomer optimist gave us a list of head scratchers including reality tunnels/memetic mediation. I have no clue what that is. 

My immediate reaction to the idea is to think of this as benchmark or measurement for being an interesting person and/or having a balanced life. I think this sort of thing is important. Not necessarily being able to talk for exactly 30 minutes without prep on five things but being interested in enough in several-many things to be somewhat knowledgeable able to share with someone who knows less than you and able to absorb information from someone else who knows more. 

This doesn't have to be polymathism level expertise but maybe polymath-lite? The idea is having interests that you want to learn about that might lead to other related things to learn about. Maybe a weak example but if you leave near the beach and like to surf, maybe that leads to learning about sea kayaking or something scientific related to the ocean or sea life. One hobby leading to an offshoot of other interests even if not full blown hobbies. 

Hopefully you enjoy what you do for a living enough that you enjoy learning more about it as well as sharing what you know. Hopefully you have a couple of hobbies like maybe at least one where you do something outside and maybe one where you learn things like, reading about something in the scientific realm, maybe even a third hobby where you create things. If you volunteer your time somewhere then chances are that is something you know about, want to learn more and share what you know when appropriate, you don't want to go Cliff Clavin on anyone in unsolicited fashion.

There are probably very boring, often but not always useless topics that you are well versed in. I've mentioned that the parcel down hill from us sold and was split into four parcels, we bought one and just keeping it as unimproved land for now but that houses are going up on the other three parcels. 

Winters here can be tricky especially where it comes to driving. The snow compacts into ice in such a way that it is very difficult to drive. No one believes it, they have to see/fail for themselves. Part of the equation is that during the day things melt some but then freeze back up at night and the ice gets progressively worse every day until it starts to finally melt away. 

I clear our road with my ATV and plow assembly. That usually pushes most of the snow off the road but some storms are too big. The plow blade does not scrape down to dirt though and based on the trouble everyone here has, even people who hire big yellow equipment to plow can't scrape down to dirt. In a six inch snow storm, if I can plow away 5.5 or 5.75 inches of snow away, I am shortening the time it will take to melt. Shady spots next to the road that go unplowed and have snow stay for weeks. 

There are other things though besides plowing to be able to drive up and down. ATVs seem to be able to drive just fine most of the time. I've only had an issue one time on my road with the ATV. The county road department leaves huge piles of crushed lava cinders around the community for people to take for improved traction on tricky spots. This involves filling up five gallon buckets and then spreading them on your road or driveway. The parts of my road that I need to do is usually 10-12 buckets full. Some of the time though, when you put cinders down on ice the ice melts some and the cinders drop down into the ice then it freezes that night and any traction benefit is lost and you need to do it again the next day. 

Once you plow down to what becomes a couple of inches of ice you can put snow chains on your vehicle and come and go easily enough. Putting chains on isn't exactly fun but it allows you to wait out the melt. 

I've mentioned before our next step with road stuff would probably be buying something bigger like a smaller back hoe or skid steer, something that I could put a bigger plow on so we don't have to wait a week for someone to get to us to dig us out when we get a storm that my ATV can't handle. Last January we had 30 inches over the course of a few days, with 18 inches of that coming in a couple of hours on a Monday and I could not keep up. I could go on from there about techniques for plowing.

Are the above five paragraphs boring? Most of the time yeah but to my three new neighbors, especially the two who will have very long, steep driveways down to the road I plow, it will be important information...if they ask. One already did, he was just up here meeting with the local utility about getting power to his lot having driven on the road I just cindered, noting that he couldn't get all the way onto his lot because there was too much snow/ice.  

This is something I need to know about but could still learn plenty more. If you manage your own money, I think that last sentence would also apply. You need to know about it but can always learn more. If you read stock market blogs then you are probably the person in your circles that people come to for investing advice. Chances are you can share quite a bit, unprepared because it is information you need to maintain a proper engagement in steering your own financial outcome.

Another connection that I've made before is problem solving in one area of interest helping solve a problem in another are of interest or even your work. My day job and fire department involvement has been a two way street of lessons learned and lessons shared for years. Same with blogging. Someone one asked me, would I rather be a money manager or a blogger. I will tweak the question to would I rather be a money manager or a fire chief? Would I rather be a money manager or run an Airbnb? Would I rather be a money manager or take pictures of fire trucks? 

The answer is that all of my interests, as they exist in my life combine to make me who I am. I think this is true of everyone. All of our respective interests balance us out. One dimensional people whose sole dimension is obsessing about their portfolios are in my opinion far less likely to be happy and far more likely to make bad decisions. Obsessing is the opposite of ergodicity, letting the market and the portfolio do its thing for you. A balanced life is likely to be a happier life and lead to better results in the things you care about.  

Is Delayed Gratification The Most Important Trait You Should Develop?

A topic we cover frequently here is doing things for your future self. We make our future easier for ourselves when we have financial plans in order and are executing them as intended. We make our future easier for ourselves, both physically and financially, when we invest in our health and fitness. We improve our chances to gain the outcomes we want by being willing to "pay our dues" in the short term. We enhance our future optionality, our protection with these behaviors against some unexpected turn in our career versus how we thought our careers might play out. 

The point about career could be about deciding one day you want to do something completely different or having your hand forced through some sort of layoff or forced, early retirement. Other ways to phrase this idea is playing the long game, delayed gratification or as we've started referring to lately; low time preference. 

I've built my life around this concept paying career dues into my mid 30's before building my ideal work situation, having always been cognizant of the need to stay fit and live below our means and in how I've run our fire department, not wanting to make panicked policy and procurement decisions as a couple of my predecessors did. 

There's a funny story to how I think I came to be this way, I only recently connected the dots on this. My grandmother loved to bake and the stuff she made was fantastic. Everyone's favorite was chocolate mint cake with chocolate mint frosting. I've never had cake that was better than this. Better than the cake though was the frosting, chocolate mint frosting. We always saved the best for last, saved the chocolate mint frosting for last because it was the best part. Delayed gratification. 

On Facebook and Twitter I post a lot about diet and exercise (I realize I bring it up here all the time too) and it is a focal point within the fire department. The importance ties in with investing and financial planning. If you're healthy enough to avoid spending a fortune on drugs for chronic maladies you are placing fewer burdens on your portfolio or whatever other sources of income you rely on. 

Your 50's can be a great time of life when you're healthy enough to do what you want and have a little money in the bank to be able to afford what you want to do. I suspect I will say the same thing about my 60's too. Think about it, are there any activities that you did 20 years that still interest you now? In terms of physical stuff, for me that would be hiking and wildland firefighting. 

If there are things from 20 years ago that still interest you, then what are the odds you'll still be interested in them ten years from now or further out? Probably pretty high that you'll want to do these activities, that I will want to hike and fight fires ten years from now. The work you put in back then allows you to keep doing that thing today, whether you thought about it or not, you made an investment in yourself, you did something for the future you, the future is here and you're benefitting from whatever you did 20 years ago. I actually joined the fire department 19 years ago though, not 20.

The future is here now and if you've been living below your means (building up a financial cushion) and are healthy then you are benefitting from delayed gratification, having invested in your future (now present) self and low time preference. The ages we thought of as being old when we were 20 don't have to be old when we get there. 40, 50 and I am guessing 60 can be young with some good decisions and habits. 

If this pertains to you, then you understand the benefit and will probably keep investing in yourself this way. If it doesn't pertain yet, life can be much easier with this approach. 

The mindset captured above promotes long term investment success on multiple fronts. 

Think of all the scary stock market events in your lifetime that have led to crashes, bear markets and other forms of panic. Despite all of them, and I promise you there are more than you can remember, the stock market keeps going higher. There will be other scary market events that will feel different in real time but of course they won't be. Those future scary events will end and then the market will eventually make a new high. 

If you're close to my age, then it is a good bet you will see the S&P 500 hit 20,000, right now it is at 4677. I have no idea how long that will take and the next 20 or 30% could always be down but at some point in your lifetime: 20,000. If you can see that long game and tie it into your investing process then it becomes much easier to avoid panicking. If you're 50 today, you want to retire at 65 and I told you that when you are 65, the S&P 500 will be at 18,000 but sometime between now and your 60th birthday, the S&P 500 will touch 3000, would you worry? Having that foreknowledge, would you panic? Of course not.

Well you kind of already know the above. With a long-ish time horizon you know that stock prices will be much higher even if there will be one or two scary bear market declines in the mean time. You still need a suitable asset allocation and pay heed to sequence of return risk but the above paragraph will happen in some fashion, we know this, we just don't know the timing or the price levels. 

Playing the long game promotes investment success for narrower holdings like individual stocks or sector/industry ETFs. Whatever your top performing holding over the last ten years, it hasn't been your best performer every year. Whatever your best performing holding will be over the next ten years, it won't be your best performer every year. No holding can always be the best. 

I've owned the iShares US Medical Device ETF (IHI) for clients for about ten years. According to Yahoo Finance, for the last ten years it is up 520% versus 262% for the S&P 500. In 2021 in lagged the S&P by more than 10 percentage points. In 2016 it was the same as the S&P but in the last couple of months of that year IHI kind of crashed while the S&P traded sideways. Selling it when it struggled would have been a shortsighted, high time preference trade. If anything, the demand profile for devices is even stronger now than it was 10 years ago and while I know there will be periods where it lags over the next ten years, there's no visibility for now of wanting to sell out the position. 

The last point where low time preference helps with long term investing success is with compounding. At some point in your life you learned about compounding. The best way to let your money compound is to...actually let it compound. When you're young, just keep putting in your 10% or more without paying compulsive attention to it and then all of a sudden, one day you'll look and think to yourself "holy cow, that's a lot of money!" When you keep doing that for decades then you might find yourself at 50 or 55 and then say to yourself "holy cow, I'm at my retirement number already!" 

This is not a nudge to retire early but the empowerment of being 50 and being at or close to your number is incredibly liberating. That combined with being fit and healthy and now you are young and 50, you've won. 

I was not exaggerating about that cake and frosting. 

Opening Our Retirement Kimono

Early on Thursday I got my annual email from Social Security encouraging me (everyone) to log in to their account to get their latest numbers after they were bumped up for last year's large, by recent standards, cost of living adjustment (COLA).

Everyone's numbers went up of course. Past a certain age, maybe 50 but either way, it is important to understand your numbers and make sure there are no errors in your earning history. I had one once and got it fixed. 

My full benefit at 67 went up to $3118/mo so my wife's spousal benefit would max out at $1559/mo. There is of course a perpetual debate about whether to take it early, take it at your full retirement age or wait to let it keep growing but for a spousal benefit it stops going up at age 67 assuming the primary spouse hasn't already taken it. 

People get very impassioned about whether to take it early along the lines of not using their own savings to live on but having the SS payment from the government right away to do that, some people bank it believing they can make more in the stock market or they have reason to think they might not live past the point where you start to come out ahead by waiting. People who like to wait often like the idea of a "guaranteed" 8% annual raise they'll accrue by waiting. I've said many times that I prefer to wait until 70 so that if I die young, my wife would get my max benefit.

For a little context of how much you get by waiting, if I take it at 62 I would get $2134 so the most my wife would get then would be $1067. As mentioned, at 67 I get $3118 and at 70 I would get $3897. I also looked at what it would be if I split the difference between 67 and 70, at 68 6 months it would be $3316. 

While I am motivated to wait until 70 to take my payout, it's less important to max out Joellyn's benefit. As a matter of circumstance at the time, when I am 70, Jo will be 64, her payout at that time would be in the low $1300's and we might want to take both at essentially the same time for a combined $5200/mo. If she took it at 65 it would be in the mid $1400's. 

By the time 2036 rolls around we'll have long been mortgage free on the house we live in and a few years mortgage free on our rental. In today's dollars, our fixed expenses excluding soon to be paid off mortgages is about $2800. The extra $2400 could cover most month's one-offs like vet bills, small home repair, car stuff, discretionary spending, our annual firewood delivery and all the other stuff frequent to our life. Our income from our rental would be less than our Social Security payout if we're still doing that. I certainly have no plans to stop managing money at a particular age but don't feel I can plan for what my income from that might be when I am 70. We also have savings we can draw from but I am hoping that money would just be for big things that we want to do, like travel, and big things we might have to do like buy a new car every so often or do something very expensive to our house. 

The biggest variable to our plan seems to be the costs of medical things. Our system is so broken, I have no faith in it which is a small part of why I am a bit of a health nut. Another variable is whether Social Security does go through that 23% payout reduction that's been floated for the last few years. While a cut seems like a low probability outcome, that is the threat. It makes more sense to be concerned about what could go wrong, not what can go right. 

We are very lucky that a payout cut would not be catastrophic, $5200 would become $4000. Some people even think SS will completely go away, that it will fail. I think that's nuts but anyone who is worried about that should work now to figure out how to financially mitigate that threat. Clarifying one thing, I don't think it is impossible that some sort of Universal Basic Income replaces Social Security, welfare and all other government programs. A payment reduction could certainly be part of that outcome, more along the lines of a haircut.    

I think it's important to be transparent and accountable to the things I suggest other people do. It doesn't really matter if you read this and disagree with all of it, but walking the walk is important to me. 

What Is The Biggest Risk To Your Retirement?

In the last few years I've become fond of talking about people preventing/solving their own problems. A hot button for me is not wanting to be dependent on anyone to come save me. If I need help with a task, I ask, but the context here bigger picture long term things. For example if someone is relying on the government for help, they just become a statistic or a file in a stack of files (metaphorically speaking now because it's all on computers or the cloud) on some overworked person's desk. 

I talk regularly about maintaining and improving optionality which can include staying physically fit and mentally sharp to have a better chance of being able to take advantage of something that comes along that you might want to do or need to do. 

We all have some vision of what our retirement might look like or maybe we call it our next chapter. I am assuming people who are at least in their 40's have some idea anyway. At some point we start to have a little better understanding how we might finance that next chapter.

A common path of course is a combination of Social Security and income drawn from a retirement portfolio. Moving further along you start to understand about sustainable withdrawal rates and you find the 4% rule. At a high level the 4% rule says you can take out 4% of your starting value every year and have a better than 90% chance that your money will last. 

As you dig further, you probably will also find that if you take 5% out every year you have a better than 80% chance that your money will last. Any advisor will have clients who've take more than that out over the last 10 years or so, I certainly do, and are doing just fine thanks to fantastic stock market returns. Those people have gotten lucky. 

At some point taking out 7% goes from being a one-off, it happens, stuff comes up, to being a regular thing and if someone is taking that much out then they didn't save enough for their spending requirements. That's a risk to anyone's retirement math, not having enough money for whatever reason. 

Think about the person who has been taking out 7% for the last 10 years but instead of fantastic returns in the market, the returns were more like 2000-2010, down 18% per Yahoo Finance for the ten year period ending 1/4/2010. In that scenario our seven percenter has probably blown up. 

Morningstar has a current article that addresses the need for future retirees to take less than 4%. I'd put that idea in the something's gotta give category when a plan is in jeopardy of not working due to mediocre or worse returns as the article cites as possible for the next ten years. 

Back to preventing or solving your own problems, how reliant is your retirement financial outcome on the 4% rule working for you? If you think you need $7000/mo to live on, you expect a combined $4000 from Social Security, then you'll need to figure out where that $3000 will come from. If it will just be from your portfolio then $36,000 divided by 0.04 means you need $900,000 in the bank. That obviously is applying the 4% rule literally but it leaves no margin for error. Also, if the entire $900,000 is in a traditional IRA account you will owe income tax on the withdrawals so your 4% of $900,000, or $36,000 that you need to make it work every month is actually just $28,800 or $2400/mo. Is that going to be a problem? 

Here's a curveball, what is Social Security gets cut, what does that do to the above scenario? What if instead it gets means tested down to a combined $3000/mo? Between SS and the portfolio those are serious haircuts to income and neither scenario is farfetched, I mean the taxes, that's going to happen.  

Your retirement or next chapter might be vulnerable to something else or multiple things. The time to figure that out is now so that you can then figure out how to mitigate that problem or any other problems you can reasonably foresee. In terms of something's gotta give the simplest mitigations would be to cut your overhead, find some sort of active or passive income that relieves some of the burden you place on your portfolio or some combo of the two. 

In past posts, I've talked about our having a Plan D for our old age in case a whole bunch of things go wrong. A buddy teased me about that but for whatever reason, I am very motivated to not have my hand forced into something I perceive as a negative in kneejerk fashion. I don't know where that comes from but that is a big part of how I solve problems. It's also a big part of how I construct and manage portfolios and run the Walker Fire Department. 

It is up to us to prevent/solve our own problems. No one will care more about your outcome than you.