"Beware of Financial Alchemy"

[VanWinkle]

I read an interesting article today that reduces investing to doing a few things right, instead of some complicated ploy to beat the market.

https://movement.capital/beware-of-financial-alchemy/

"I disagree with the narrative that older investors now have to take more risk. Today the 10-year Treasury yields 0.8%. It averaged 2.2% over the past decade. If this year’s drop in rates breaks someone’s financial plan then it was never sustainable to begin with."

"Investors have to embrace the fact that they cannot predict the best portfolio for the future. The silver lining is… that’s OK. Meb Faber showed that ten different strategies earned similar returns over four decades. Most importantly, high fees transformed the best performing portfolio into the worst. There are only a few things you can control that have a big impact on your finances:

If you’re young, how much you save
If you’re retired, how much you spend
How you behave when markets panic
Your allocation between stocks and bonds
How much you pay in fees"

2 of the more interesting quotes in the article.

VW

 

[jollystomper]

I read the article. As someone who prefers to keep things simple, I liked it.

One article statement I liked:

Sacrifice is necessary for success in life and investing. Someone researching portfolio strategies but refusing to save more than 3% of their income is like spending hours at the gym and eating donuts for dinner.

The true foundation for our FI status was due to our savings. Our investment returns were average, even slightly below. But being good savings, along with using items that rewarded saving (like getting the company 401K match) was the key for us.

 

[Onward]

As a fellow investing "simpleton," I approve this message.

 

[Amethyst]

Add: If you're young, how you choose to earn your living (unless it's by trust fund).

I read an interesting article today that reduces investing to doing a few things right, instead of some complicated ploy to beat the market.

https://movement.capital/beware-of-financial-alchemy/

There are only a few things you can control that have a big impact on your finances:

If you’re young, how much you save
If you’re retired, how much you spend
How you behave when markets panic
Your allocation between stocks and bonds
How much you pay in fees"

2 of the more interesting quotes in the article.

VW

 

[gerntz]

If your NW is growing at your current desired spending level, why wouldn't you take more financial risk as you grow older? Odds of a significant downturn a) occurring, and b) it hurting you while still alive decrease as you age.

 

[VanWinkle]

If your NW is growing at your current desired spending level, why wouldn't you take more financial risk as you grow older? Odds of a significant downturn a) occurring, and b) it hurting you while still alive decrease as you age.

Maybe to sleep at night......

If your current risk profile is allowing your net worth to climb well
over your ability to spend, it might be time to take some risk off
the table. Or, ratchet risk up for your heirs if you can still sleep at
night.

 

[CRLLS]

If your NW is growing at your current desired spending level, why wouldn't you take more financial risk as you grow older? Odds of a significant downturn a) occurring, and b) it hurting you while still alive decrease as you age.

I sort of agree on the first part, if the N̶W̶ Investment growth is matching your expenses, you can start living on the principle to some level.

And the odds of a significant downturn do decrease. If we use a bear market as the definition of "significant decrease", these happen very often. Further the odds of being able to recover become less too, as we approach our terminal age, thus hurting you more.

 

[Chuckanut]

Add: If you're young, how you choose to earn your living (unless it's by trust fund).

+1 Agreed.

I have mentioned before on these hallowed site, how I gave up the opportunity to more than double my salary for a few years during the lead up to the Year 2000. My goal was to keep my [-]solid gold, platinum plated pension[/-] descent brass and pine pension. The plan worked.

 

[Sunset]

Add: If you're young, how you choose to earn your living (unless it's by trust fund).

+1

I changed careers, requiring a second degree and increased my earning by doing that 5x.
Didn't want to eat cat food when I retired.

 

[smihaila]

Re: "Someone researching portfolio strategies but refusing to save more than 3% of their income is like spending hours at the gym and eating donuts for dinner."

I actually find that statement in the article a ... mixed bag. Because what I've found that all these "financial planners", "advisers", alchemists etc do, more often than not, is recommending "save, save, and save again". Yeah, I can do my part very well (saving), but ... where is the beef? I want to see some return on those savings, and intelligent, risk-managed advice.

 

[VanWinkle]

Re: "Someone researching portfolio strategies but refusing to save more than 3% of their income is like spending hours at the gym and eating donuts for dinner."

I actually find that statement in the article a ... mixed bag. Because what I've found that all these "financial planners", "advisers", alchemists etc do, more often than not, is recommending "save, save, and save again". Yeah, I can do my part very well (saving), but ... where is the beef? I want to see some return on those savings, and intelligent, risk-managed advice.

Two or three low cost index funds, an asset allocation based on your risk tolerance and horizon, staying the course through good and bad. That is most of the investing advice needed, and much of the other knowledge needed is available from numerous sources.

Best to you,

VW

 

[Koolau]

Maybe I'm missing something. I thought bonds were primarily ballast for equities - not a big money maker. YMMV

 

[Amethyst]

I guess if you're a natural saver, it's hard to understand how difficult it is for some people to wrap their heads around "don't spend money on that stuff you want, or you'll never have anything to invest." Hence the constant reminders and encouragements.

It's like women's magazines, which always (every. single. issue.) feature articles on dieting and losing weight. One may not need to lose weight, but seemingly 90% of women would like to do so.

(To extend the analogy to include your concern, women's magazines rarely address the question, "Now that you've lost all that weight, how do you invest the results/what do you do with yourself?")

Re: "Someone researching portfolio strategies but refusing to save more than 3% of their income is like spending hours at the gym and eating donuts for dinner."

I actually find that statement in the article a ... mixed bag. Because what I've found that all these "financial planners", "advisers", alchemists etc do, more often than not, is recommending "save, save, and save again". Yeah, I can do my part very well (saving), but ... where is the beef? I want to see some return on those savings, and intelligent, risk-managed advice.

 

[qwerty3656]

I've bought into the dividend growth investing "alchemy" and moved almost all of my retirement savings into high quality dividend stocks. The author thinks that's a bad idea. Through both 2008 and the most recent downturn, while my portfolio value dropped significantly, my dividend income wasn't materially impacted. While no one likes to see their net worth negatively impacted, focusing on my monthly income has let me sleep relatively peacefully

 

[OldShooter]

A discussion like this begs the question: What do you mean by risk? and the assertion: “volatility is not risk.”

If “more financial risk” refers strictly to the predictable volatility of owning more equities in a diversified portfolio then IMO that doesn’t have to be a big deal if there is a cash cushion against SORR.

If “more risk” means moving an non-diversified portfolio of hot stocks and Argentine bonds, that is another matter entirely. IMO “risk” is owning Enron, Worldcom, Cisco, and such non-exotica as Sears Holdings, GE, and Chesapeake Energy in a nondiversified portfolio.

 

[VanWinkle]

The "right" stocks are always safe, just wondering which ones are the "right" ones gives me a headache........

 

[ERD50]

I've bought into the dividend growth investing "alchemy" and moved almost all of my retirement savings into high quality dividend stocks. The author thinks that's a bad idea. Through both 2008 and the most recent downturn, while my portfolio value dropped significantly, my dividend income wasn't materially impacted. While no one likes to see their net worth negatively impacted, focusing on my monthly income has let me sleep relatively peacefully

It is "alchemy". The author is right.

If you held a total market index fund/ETF, and withdrew enough to match the div payout of a portfolio of "high quality dividend stocks", you'd have the same monthly income, and very, very likely a higher net worth. And far more diversification. A win-win-win.

Back in July I ran this. I searched to find 7 DIV funds/ETFs with as long a history as I could find. Then entered them into portfolio back-test, compared to VTI Total Market and VBMFX Total Bond Fund.

AA of 70/30, and a 3.5% WD, inflation adjusted, annual re-balance - links below.

To test the mix, I set bonds to 30%, then 10% for each fund/etf. The DIV blend did NOT hold up better in downturns - the DIV funds dropped MORE!!!!.

I also tested each separately. FVD 70/30 is the ONLY one of the 7 funds to outperform VTI in a 70/30 AA. Follow this link, and you can see for yourself.

https://bit.ly/35YV5sA <<< short link to portfoliovisualizer.com

Portfolio Initial Balance Final Balance
VTI/VBMFX __________ $1,000,000 ___ $1,553,037
7 DIV FUNDS/VBMFX __ $1,000,000 ___ $1,278,891
Note: The time period was constrained by the available data for iShares International Select Div ETF (IDV) [Jul 2007 - Jun 2020].

Portfolio Initial Balance Final Balance
VTI/VBMFX _____ $1,000,000 ___ $2,059,518
FVD/VBMFX _____ $1,000,000 ___ $2,281,149
Note: The time period was constrained by the available data for First Trust Value Line Dividend ETF (FVD) [Nov 2003 - Jun 2020].


-ERD50

 

[qwerty3656]

ERD50 - I think you are probably right, I will just say that the Dividend portfolio is less stressful for me. Every month there is a dividend and it's easy to see where you're at any point in time. I sleep better knowing my monthly income is basically set.

Edit: one thing you lose with the dividend portfolio is the really high growth Tesla, Google, Amazon, etc, but I think there is maybe more risk for those stocks to correct (think dot com bubble)

 

[iloveyoga]

I read an interesting article today that reduces investing to doing a few things right, instead of some complicated ploy to beat the market.

https://movement.capital/beware-of-financial-alchemy/

"I disagree with the narrative that older investors now have to take more risk. Today the 10-year Treasury yields 0.8%. It averaged 2.2% over the past decade. If this year’s drop in rates breaks someone’s financial plan then it was never sustainable to begin with."

"Investors have to embrace the fact that they cannot predict the best portfolio for the future. The silver lining is… that’s OK. Meb Faber showed that ten different strategies earned similar returns over four decades. Most importantly, high fees transformed the best performing portfolio into the worst. There are only a few things you can control that have a big impact on your finances:

If you’re young, how much you save
If you’re retired, how much you spend
How you behave when markets panic
Your allocation between stocks and bonds
How much you pay in fees"

2 of the more interesting quotes in the article.

VW

I agree, and I love keeping it simple.

 

[ERD50]

ERD50 - I think you are probably right, I will just say that the Dividend portfolio is less stressful for me. Every month there is a dividend and it's easy to see where you're at any point in time. I sleep better knowing my monthly income is basically set.

Edit: one thing you lose with the dividend portfolio is the really high growth Tesla, Google, Amazon, etc, but I think there is maybe more risk for those stocks to correct (think dot com bubble)

Fine. I just feel it's important to point out to readers of these forums that the feeling of less stress and better sleep is built upon a false premise. I prefer fact/data based decisions to help me cope, but to each their own.

Your edit is a reason why the div paying funds lag. They aren't diversified, so they don't share in some of these growth stocks. But it's not true that that leads to more risk in a correction (diversification helps protect against those drops in specific concentrated areas). Look at that link I provided - the div paying funds dropped *more* in a correction than the broad market.

The div paying funds give up some diversification, and some growth with that. That would cause me more lost sleep, because it is a real thing. You can see it in the data, and, it makes sense as well.

-ERD50

 

[target2019]

ERD50 - I think you are probably right, I will just say that the Dividend portfolio is less stressful for me. Every month there is a dividend and it's easy to see where you're at any point in time. I sleep better knowing my monthly income is basically set.

Amen, fellow banker. Put the feet up and feel the stress melt away!

 

[VanWinkle]

For those retirees with Value stock concentration(Wellesley or Wellington), I can see the advantage of adding a total market fund to get some exposure to the growth side of equities. You can control the allocation based on how much total market to add to your balanced fund. It is personal preference, but isn't that what investing is all about? Each person can decide what is best for them, and then accept the consequences of their decisions.

 

[qwerty3656]

An argument for dividend investing (I posted this as its own thread, but it didn't show up)

https://seekingalpha.com/article/43...on-in-retirement-for-post-covidminus-19-world

 

[ERD50]

An argument for dividend investing (I posted this as its own thread, but it didn't show up)

https://seekingalpha.com/article/43...on-in-retirement-for-post-covidminus-19-world

IMO, that does not rise to the level of an 'argument'. All I see is that he cherry picked a great performing fund in hindsight (did he recommend it in 2003?), and then makes the claim that is was the dividends that led to its success. At least that's what I think the 'argument' was, correct me if I missed it.

But he provides no comparative measure, so it really has very little worth at all. Try this:

Here's a link to the portfolio visualizer, that compares PTY fixed income fund with (also hindsight-cherry-picked) growth stock fund, FDGRX. Again, drawing 3.5% annually, inflation adjusted. Note that PTY paid divs ~ 9.27% in the past 12 months, versus 2.46% for FDGRX (from dividendinvestor.com).

As you probably guessed, the lower div FDGRX outperforms the high div PTY. They were pretty much neck-neck, swapping the lead at times for most of that time. So dividends cannot be claimed to be the reason. FDGRX even has a lower standard dev.

https://bit.ly/39hkW0H


-ERD50

 

[qwerty3656]

IMO, that does not rise to the level of an 'argument'. All I see is that he cherry picked a great performing fund in hindsight (did he recommend it in 2003?), and then makes the claim that is was the dividends that led to its success. At least that's what I think the 'argument' was, correct me if I missed it.



-ERD50

His argument is you don't want to be forced to sell in a downturn, so you either need sufficient income or a bunch of cash