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Confessions of a Financial Double Life
Old 04-27-2015, 09:54 PM   #1
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Confessions of a Financial Double Life

I have come to appreciate a remarkably consistent voice here on this forum. Life is good if you live below your means, buy Vanguard funds with a low management expense covering the whole market, get your asset mix right and live with some nice sustainable withdrawal rate that maximizes the long term chance of success. I don't mean to simplify because there is obviously a spectrum of remarkably sophisticated financial minds here with a broad range of opinions on all sort of matters, but advice tends to come back to something like that.

I think it is great. I have moved my investments out of some funds that were expensive and have them in a happier place after reading some here. Now I have a confession.

Once or twice a week, sometimes only once or twice a month, I get an email that says sell stock x, buy stock y. And I go and sell the designated quantity of stock x and buy the designated quantity of stock y. And most of the time I have no idea what company x or company y even do.

The emails come from a friend who is a PhD electrical engineer with a day job and a night time quantitative hobby. He has a model that he had been running and back-tested for 30 years etc etc and it was showing consistent 30% gains.

In 2011 I had about $100k and change in cash that I was trying to figure out what to do with. So I thought what the hell, nothing else is giving me a decent return. Might as well have some fun. So I followed the trade instructions and in relatively short order, we turned $100k into $80k. All consistent with the relatively volatile nature of the model in a down market. Fun so far. I stuck with it.

By middle of last year, the account had grown to $280k. Damned if it didn't work. But for me at least, $280k was kind of well beyond fun money range. So I took all of the original investment out and put it into some nice Vanguard ETFs.
Now I am playing with house money so to speak. The annualized return since inception is 23.4%.

Up until last year, my overall retirement portfolio has been 100% equity. I had always felt that the biggest risk was being to conservative.

Now, I have just bought a small town home in a good seasonal rental market that will be built in a year. Moved my boat to a less expensive slip. Called the realtor to find out what we need to do sell the big house for the best value. Have long since given up the home phone and cable TV. Looking forward to a life without debt and dreaming about sailing away.

Which is all very weird, because the notion of retiring on ~4% withdrawal rate on a portfolio that will be about $1mil seems absolutely crazy based on our current rate of spending. Cars, cell phones, insurance for everything, mortgage, vacations etc.

But over on another forum there are cruisers who endlessly debate the merits of living on $500 month. Another thread talks about the $2500 a month lifestyle and the luxury that it affords. If I posted over there suggesting I had a paid for boat and a million dollar cruising kitty (the cruising kitty is the retirement portfolio that you blow while sailing the world - and perhaps work occasionally to top up), the overwhelming question would be "what the hell are you waiting for?". Here on this forum if we look at same fact set the advice would probably be keep working...

It all seems very risky, but I don't think there is a reset button if you get to 80 and don't like the way you lived your life. So what the hell.

But it is weird feeling living on this boundary between relatively high income and what would be a very modest land based income, relatively aggressive investing approach and relatively conservative portfolio going forward, relatively high debt and no debt, high cash consumption and spending very little.

I just have to flip the switches in the right sequence and not screw up. The double life is hard. One small slip and I am working another 5 years...
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Old 04-27-2015, 10:49 PM   #2
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<sigh> See this:

List of cognitive biases - Wikipedia, the free encyclopedia
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Old 04-27-2015, 11:45 PM   #3
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Oh my. Quite an extensive list of irrational behavioural biases, many of which I may be guilty of. A loaded list...

There is always a risk to confessions. It is much better to represent yourself as being completely sane.

I fully understand that having a portion of my portfolio invested in stocks picked by a quantitative model based on past performance is not rational. I played four hands of blackjack in a casino in Sydney once, won all four and walked out. Also not rational, but I really enjoyed the expensive bottle of port bought at the duty free.

But I am mixing in a nice conservative mix of bonds and contemplating dropping the dock lines with a withdrawal rate for firecalc showing 97% success. There remain big financial risks but they're more around lifestyle and health uncertainty than market risk.

We actually packed up all our stuff and sailed away once before when my oldest son died. It was easily the stupidest financial decision of our lives. It was also perhaps the best decision of our lives. Burn rate was low enough that we could have sold the house and gone for a long long time, but came back so our youngest could go to high school. One more year to go...
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Old 04-28-2015, 06:25 PM   #4
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That's the thing. A cruisers retirement lifestyle and a land based one are so different. Depending on your age, your abilities, and your comfort level, you can "normally" spend years roaming around on the boat for a lot less $$$ than your land based counterparts. Sure, you got boat maintenance and slip fees etc but most people who choose this lifestyle are fairly good do-it-yourself types. Plus you don't have car payments, house payments, real estate taxes and other common land based expenses.
I think a few years at sea, roaming and dropping anchor here and there is a great way to start a retirement. I would recommend having a backup plan for when you're older and no longer wanting to handle all the limitations of living on a boat.
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Old 04-29-2015, 06:06 AM   #5
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I just have to flip the switches in the right sequence and not screw up. The double life is hard. One small slip and I am working another 5 years...
That's why I went conservative prior to ER. Saw too many guys NOT do this prior to 2000 dot com crash. Adding five more years to my countdown may have created significant health problems. Good luck!


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Old 04-29-2015, 07:53 AM   #6
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Just trying to speak about this "sanely":

1. If you have the money to live the lifestyle you want for the rest of your life, why take any more risk than you have to?
2. If you have some extra, and you enjoy the risk, why should there be any qualms about taking that extra and having fun taking some financial risks with it?

Bottom line is you earned it, you aren't risking your future, so do as you please.
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Old 04-29-2015, 08:30 AM   #7
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I worked with a guy who in late 1999 was begging me to go all in on equities. He was saying "you will not be able to retire" if I didn't get enough return, etc. etc..

He got his head handed to him on a plate when the party ended in 2000. He got cancer and died before he even got a chance to retire.

Some can take risk, some can't, so do what your comfortable with.
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Old 04-29-2015, 08:31 AM   #8
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Originally Posted by ArkTinkerer View Post
Just trying to speak about this "sanely":

1. If you have the money to live the lifestyle you want for the rest of your life, why take any more risk than you have to?
2. If you have some extra, and you enjoy the risk, why should there be any qualms about taking that extra and having fun taking some financial risks with it?

Bottom line is you earned it, you aren't risking your future, so do as you please.
I've been lurking on this forum for about 7 or 8 years now and on occasions, I'll see someone post similar comments, which I happen to agree with. To be honest I probably would not have retired yet if my financial future depended on risky investments and/or if I had to live below my desired lifestyle.
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Old 04-29-2015, 05:35 PM   #9
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I have gone conservative on the portfolio. Except the fun money. It already returned me a nice 40 foot boat or 5 years of dock fees, diesel, groceries and rum. I am inclined to see what it will do over the next few years.

The risk is the lifestyle issue. We have no business retiring now on land without a profound lifestyle change. We know we can live well within our means on a boat indefinitely. If we do that for 15 years, we should be able to fund a relatively luxurious land based retirement later. Illness, grandchildren, long living inlaws could all alter the plan.

What happens if we go and then pull the plug after 5 years? Probably challenging to start working again. We would kick out the renters and live in the paid for townhome. It would just be a quiet life building guitars without expensive travel and perhaps maybe only a small sailboat in local waters for summer use.
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Old 04-29-2015, 09:07 PM   #10
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Having a few degrees in Electrical Engineering myself, I will caution you about the ease in creating models that will fit past data. With enough free parameters, you can come up with something that has very very good returns on the past data.

The problem, however, is that this is essentially curve-fitting after the fact. There is no guarantee that future returns will have the same results.

I am not sure how many free parameters you friends model has, or how he changes it as new data becomes available but these are some basic concerns about using models based on historical data.

-gauss
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Old 04-29-2015, 11:27 PM   #11
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We know we can live well within our means on a boat indefinitely.
One of my favorite sayings is freedom is low overhead. I suppose huge amounts of money accomplish the same thing, but the low overhead is easier for most people to pull off. We don't live on a boat but we have found it amazing how with more free time we keep finding ways to cut expenses and maintain the same basic lifestyle (or better) than the one we had when we both worked full time.
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