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Some ideas that I use for investing. Part 1.

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6 thoughts on “Some ideas that I use for investing. Part 1.”

  1. Hey Ronan, I’m always interested in hearing people’s thoughts on personal finance, so thanks for sharing.

    Your reasons for a 50-50 split make sense to me for non-retirement accounts or for a retirement account when you’re reaching retirement age, but they don’t make sense to me for a retirement account of someone who will be working for 15+ more years.

    The main reasons you give for being loss averse is that you don’t want to lose money during a downturn when you’re more likely to be unemployed, or lose money right before you need it for something important (down-payment or wedding), but neither of those situations should be funded by retirement accounts anyways — weathering a downturn should be accommodated by an emergency fund, and down-payments and weddings should be paid for through savings (or maybe a conservative non-retirement investment account for a down-payment).

    The goal of a retirement account should be to maximize net worth when you actually need it for retirement. If that’s in 20 years, that means it’s not important if the account loses value in the next 5 years as long as your strategy produces the most gains over a 20 year time frame. The conventional wisdom is that young folks like us should have ~90% stocks in our retirement accounts because most modeling shows that a 90-10 balance outperforms 50-50 over these longer time scales.

    1. Howdy Lee, thanks for reading, and for commenting.

      For me, doing 90% in stocks would mean very high faith in continued stock market growth vs bonds. I think this is likely but not assured and so I lean more towards 50%. Here are some data points I find interesting in thinking about this:
      1. The Japanese stock market has been pretty poor for the last 30 years. Is this scenario possible for other stock markets?
      2. There is decent data on the US stock market since 1870. When you think about long investing periods (30 yrs), is that a lot of data to go by?
      3. Since 1870 there have been multiple 30 year periods where bonds have outperformed stocks. Interest rates are very low now compared to historically. Will that continue? Might there be good periods for bonds ahead?
      4. There is survivorship bias in just looking at – for example – US stock market data. Argentina had very impressive growth and made it into the top 10 for per capita income in 1900 – now the country (and it’s markets) are not doing as well comparatively.

      1. These are fair points, and my response to 1, 2, and 4 would essentially be that it is indeed true that past performance is not a guarantee of future returns, but past performance is the best data we have. Even if that data is relatively limited, I’d rather use it then treat the situation like a coin flip. Also, if those are points you’re particularly worried about, I’m curious why you’re ~90% exposed to US debts and equities and don’t hold more international investments for some additional diversification.

        On the first part of point 3 I have to admit that I wasn’t aware that there had been 30-year periods where bonds outperformed stocks. I found this article: (if you have a better source, please let me know) and while the data in it shows that there have been multiple periods where bonds outperformed stocks over 30 year periods, that statement still feels a bit misleading since there were only two such windows (after 1870) and one was over 100 years ago (notable because it predates the Fed) while the other only applied to a single 30 year window (during which bonds only marginally outperformed stocks). So the prospect of bonds over performing stocks over long periods doesn’t seem too likely/isn’t that worrying to me.

        On the second part of point 3, perhaps my understanding of how bonds perform is incorrect, but I was under the impression that bonds do best when interest rates fall. Given the low interest rates we have now, there’s not much room for interest rates to go lower, which I imagine should serve as a ceiling for how well current bonds could perform.

        In any case, the extra research you’ve inspired me to do has persuaded me that a 50-50 split is a good strategy for reducing tail risk without reducing expected returns too much compared to a more aggressive portfolio, but it still seems to me that the aggressive portfolio will produce better returns on average.

        1. Thanks Lee!

          I think your argument is that limited data is better than nothing. My response would be that limited/poor data shifts me towards towards ignoring the data and trying to take a more fundamentals based approach. As model uncertainty increases, my predictions move towards equal weight outcomes. If I was very confident in the last 150 years of US data being representative of the full set of outcomes, this would lean me more towards equities. Looking at other markets and histories, it seems to me this 150 years of data is incomplete, so I favour a more even split.

          I do international diversification on my retirement monies – the 50% stocks I hold are 25% US broad market and 25% developed markets. For my other monies you can see that Berkshire, Southwest, JetBlue and Facebook are US. Ryanair is European, but that wasn’t why I picked it (it has low debt, a CEO with high % net worth in the business, and it generates [or at least generated!] lots of cash). Generally, my sense is that the US stock market will perform better than stock markets in other countries, so I weigh towards that. For stock picking, I also don’t understand much about other countries.

          Good point on bonds doing badly as interest rates rise. My (poorly communicated point) here is that rates are low now and bonds may not look good, but that may change in future and bonds may become attractive. My retirement bonds are split 50-50 between broad market and inflation protected bonds (TIPS) so there can be an inflation protection benefit built in as well. For my other monies I hold short term TBills right now (specifically ones with less than 3 month maturities) – these inherently have low inflation (and interest rate) risk because of their short maturities. I favour them over broad based bonds (of mixed maturities) right now because interest rates are low and – as you point out – I don’t think the return from bonds can get much better in the short term. The purpose of holding short term TBills for me right now is not to get a return but rather to preserve capital so it can be invested in stocks at a good time.

          1. Yes, I think you’ve identified the root of our disagreement. I trust limited historical data over trying to model based on economic indicators, but it’s entirely possible that you’re right and the next 30 years won’t look anything like the last 150.

            And I misread your comment about SPY as saying that half your retirement money was in SPY, which is why I wrongly assumed you were fully in US equities.

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