Q2 2017 Highlights

I highlight a lot of notes while reading. I try to make the time to actually review it each quarter. Here are some of the hand picked ones I thought you may find useful from last quarter. 

May 18, 2017 at 05:55AM The "Back-Door" Roth Conversion | Independent Thought 

Just remember that funds invested in Roth 401(k)s are still subject to required minimum distributions at age 70 ½. So be sure to roll those funds over to a Roth IRA before you reach that age. 

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May 25, 2017 at 08:12AM No? or Yes, Yes? | Meb Faber Research - Stock Market and Investing Blog 

Indeed, so many people have jumped on the passive index bandwagon that there are now more indexes than stocks! 

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May 25, 2017 at 08:18AM No? or Yes, Yes? | Meb Faber Research - Stock Market and Investing Blog 

It’s basic fiscal Darwinism – when some groups are charging 0% and you’re charging 0.9%, you’re not going to survive. (Note to financial advisors: this fee destruction is referencing pure asset management. We’ve said for a long time if you offer additional value added services you can we worth that 1% and your weight in gold, but the value is not in the asset management side…) 

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May 27, 2017 at 06:31AM Weekend Reading for Financial Planners (May 27-28) 2017 

Providers stepping into the void include Global Guardian and Black Umbrella, which offer support for everything from crafting emergency/safety plans for high-net-worth individuals, to offering emergency evacuation and real-time security response teams. WorldClinic provides a similar solution specifically for virtual medical support. For those who don’t quite have the financial wherewithal to build their own solutions, there are also offerings like Vivos Underground or Survival Condo, which provides massive underground shelters that people can buy access to. For most, spending any dollar amount – much less substantial dollar amounts for custom emergency preparedness services and solutions – may seem extreme; but for many of the ultra-HNW, the idea of such “extreme” emergency preparedness is simply another form of insurance, a way of dealing with a low-probability (but potentially high-impact) contingency that hopefully will still never actually manifest. 

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May 30, 2017 at 08:17AM Buying Happiness & Well-Being With Cash-On-Hand Reserves 

Except a recent research study by Ruberton, Gladstone, and Lyubomirsky finds that maintaining a healthy level of cash-on-hand (or at least in a checking or savings account) appears to improve our feelings of financial well-being and life satisfaction. And the relationship holds up even after controlling for income, spending, and other investments, as well as age and employment status. In other words, no matter how much total wealth and income we have, we’re just not as happy unless it’s also accompanied by a healthy pile of cash (or at least, a sizable and readily available bank account). 

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June 3, 2017 at 06:31AM Avoiding the Big Drawdown: Downside Protection Investment Strategies - Alpha Architect 

Trying to perfectly time the market is a waste of time.

There you go. You no longer need to read this classic academic paper in which Ivo Welch and Amit Goyal assess market timing variables. 

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June 5, 2017 at 08:15AM Thinking Through a Change an Asset Allocation 

Any sort of diversification is going to look foolish from time-to-time and it’s even harder to stick with at market extremes when certain investment styles or asset classes are doing particularly well. How many advisors do you think have been asked questions about Bitcoin in recent weeks after the run-up we’ve seen in cryptocurrencies? 

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June 6, 2017 at 08:24AM Ratcheting The Safe Withdrawal Rate For Income Upside 

Yet the reality is that in the overwhelming majority of scenarios, returns are not so bad as to necessitate a 4% initial withdrawal rate in the first place. In fact, by applying the 4% rule, over 2/3rds of the time the retiree finishes with more than double their wealth at the beginning of retirement, on top of a lifetime of (4% rule) spending! Half the time, wealth is nearly tripled by the end retirement, as retirees fail to spend their upside! 

Yet the caveat of the 4% rule is that in reality, the overwhelming majority of historical scenarios do not necessitate a 4% rule, or anything close, and come out with a significant excess of unspent wealth at the end. As noted earlier, the average initial withdrawal rate that would have worked was over 6%. And by withdrawing only 4%, and allowing the portfolio to compound higher, the reality is that the 4% rule actually has a remarkably high probability of leaving over a significant amount of remaining wealth by the end of the 30-year time horizon

Notably, then, while some have raised the question of whether the 4% rule is “too high” given today’s low return environment (even though the reality is that 4% rule was created for low-return environments, as average returns would allow a nearly 6.5% withdrawal rate!), the alternative criticism raised by some like Bill Sharpe is that the 4% rule is highly “inefficient” because it actually has such a high probability of excess wealth. After all, the data does show that most of the time, following a 4% rule just leaves over many multiples of a retiree’s starting principal left over, revealing (at least in retrospect) that most retirees actually could spend far more, either initially or by increasing spending along the way. 

Accordingly, a simple way to establish a new, higher income floor is simply to commit that spending will only be increased (above and beyond annual inflation adjustments) once the account balance grows 50% about its initial amount. So for a retiree with $100,000, there’s no extra spending increase until the account value is over $150,000. For a retiree starting with $1,000,000, the target is $1.5M. 

Thus, for instance, the “rule” might be that any time the account balance is up 50% over the original value, spending is increased by 10% (over and above any ongoing inflation adjustments), but such spending bumps can only occur once every 3 years at most (to avoid having spending ratchet too high too quickly). 

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June 8, 2017 at 08:23AM The questions we hear all the time 

The questions we hear all the time goes back to that uncertainty issue: What’s the Federal Reserve going to do? How many rate hikes this year? Where’s the Dow going to be in 12 months? What’s your favorite stock pick?

All those questions are things that you as an investor simply are not going to be able to answer with any degree of accuracy—it’s really a crapshoot. And so, rather than guessing, wasting a whole lot of psychological emotion and energy on it, why not just recognize—and, again, it’s with great humility—recognize what we do know and what we can’t know—and try to adjust accordingly. This leads quite naturally to a portfolio that is balanced and robust enough to withstand the regular market turmoil.

Over the past 20 years, how many market booms and busts have we seen? There was the dot-com boom and bust; the 2008–2009 financial crisis. There have been several 20% pullbacks over the past few years. That is simply the normal state of affairs for U.S. markets. Investors must understand that volatility is part of investing; if you learn that truth about markets, it won’t surprise you when it finally arrives and it shouldn’t disrupt your sleep too much

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June 9, 2017 at 05:40AM QOTD: The Financial Pain Equation 

Acknowledge, allow and accept. This advice will help you to endure the inevitable pain caused by the next bear market. Experts in the centuries-old practice of meditation have a formula for suffering.

S = P x R. The amount of suffering you experience is equal to the actual Pain (P) times the mind’s Resistance (R) to the pain. So, S = P x R. The idea is to stop resisting the pain to lessen it. Since anything that is multiplied by zero equals zero, you see where this is going.

The quicker you realize market corrections and bear markets are not “bugs” in the financial system, the happier you will be. Acceptance of these facts is critical to creating your own form of Advil for financial pain, without the ulcer inducing side effects. - Anthony Isola (Ritholtz Wealth Management) 

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June 27, 2017 at 08:22AM This is Your Nightmare Scenario 

Morgan Housel said, “Every past market crash looks like an opportunity, but every future market crash looks like a risk.” 

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