My take on Cryptocurrencies – Part 1: The Ugly

Hi cRIPto’s, I heard they outlawed “having a PF blog without a post about Cryptocurrencies”.
Let’s fix this now

I was lining up at a Hooli cafeteria, small-talking with a colleague that I’ll call Mr.Crypt. It was… I don’t remember exactly when it was, but I found a note to myself that says “write a post about cryptocurrencies and Mr.Crypt story OMG OMG!” dated back in mid September 2017. I assume I wrote that note to myself shortly after the episodes I’m about to describe.

Everybody at Hooli was talking about Bitcoin skyrocketing “above 4k USD“, “OMG it was below 1k at the beginning of the year, this is the year of the Bitcoin!!” and all things like that.

Someone went nuts and started mining.

Someone else started gambling investing.

Someone else threw himself into arbitraging.

It was the beginning of a second, stronger, nerd wave on Bitcoin.

Not just Bitcoin, this time there’s a wide variety of Cryptocurrencies available!

I was being on the fence, not contributing much to the discussions and not sharing the same enthusiasm of all other colleagues. I just built some strong technical knowledge around the basics (blockchain, wallets, mining,…) to be able to have informed opinions and to not appear as a caveman in front of cutting edge tech nerds & cryptoexperts.

Mr. Crypt was a somehow close colleague of mine. Not in the same team, but in a team that shared our cubicle. He didn’t seem to be involved much in cryptotalks, I rarely heard his voice in the cubicle during cryptofights.

I thought I found another skeptic, and I just wanted to connect with him.

Hey Crypt, how come is everybody getting crazy about this bitthing? Don’t you think they are overreacting? Yeah, it would have obviously been awesome to have mined or invested back in time, but I think it’s too late now, isn’t it? ūüôā

He calmly replied: “I don’t think it’s too late. 99% of circulating money are still FIAT money!

Ok… so you’re a crypto fan too? Are you investing in Bitcoin or what?

I’m actually quitting Hooli at the end of the month. I’ve made a good fortune with Bitcoin and I’ll start traveling around the world in October. But you can make it too blah blah blah

Daaa faaack my ears just heard??

Later the same week I was having lunch with some colleagues talking about… wait for it… Cryptos and the future or money (you guessed it!) and Mr. Crypt’s case come up. Someone said he owned 2-4 millions USD worth of BTC.

It was September 2017, a BTC was worth “only” 4k. It didn’t look like Mr. Crypt was there to speculate. He jumped on the bandwagon probably pretty early.

He actually believed in Bitcoin, didn’t just want to make money out of it.

I guess he still holds at least a part of that investment, which would have seen a peak of 10-20M in December 2017, but I sincerely hope he sold at least half of it.

To put it simple, this guy just went on FIRE on Bitcoins!!

What if it happened to me?

I first heard about cryptos several years ago. I guess it was 2010 more or less. Bitcoin. I thought it was a joke. Luckily, I didn’t invest in Bitcoin back in time!


No, I’m not joking: good thing I didn’t invest in Bitcoin back in time!

We’d be talking about a completely different story compared to Mr. Crypt’s one.

Back in 2010 Bitcoins were a real nerd thing. I thought they were a joke, a legend, a fictional character. Something like the Flying Spaghetti Monster, or Loch Ness Monster, or well written code documentation. Something that doesn’t make sense! It just stayed on the back of my brain for few years.

Then everything changed.

It was end of October 2013 and all of a sudden the BTC jumped from 100 to 1000 USD. A 10x gain in a month! Everybody was talking about Bitcoin! Well, not like “today’s everybody”. Something like 1/100th of today’s everybody, which was “everybody” (most of the geeks) back in 2013!

I remember that December 2013, I was already working at Hooli. There were somebody in the company trying to evangelize others about this amazing technology and why everybody should use it and how this is going to destroy the future of FIAT currencies. It was not Mr. Crypt, but I don’t actually remember who he was.

I was still skeptical though. I told myself “yeah, this guy just realized his investment produced a 10x or even a 100x or 1000x (depending when he bought) and now is looking to gamble with the next person in this Ponzi scheme“. There were not many exchanges back then. Maybe just Mt. Gox. It was easier to sell coins directly to trusted people for cash.

I remember few days later someone saying “guys, let’s see the end of this joke all together“. Mt. Gox was hacked, trust was lost, everybody sold. I monitored real time BTC price and watched the house of cards falling on livestream. Sipping my cap of tea with a big “told ya” expression on my face ūüôā

BTC quickly dropped 50% and then slowly lost another 50% during the entire 2014 settling back at 200-250 USD. Not dead though. At the beginning of 2015 the BTC stopped losing value and entered a 9 months stagnation that ended in October of that year.

That’s when you should have bought a shitload of Bitcoins! In 2 years you’d walk away with 100x!!

I don’t know why like to think of ourselves being so smart. Like superheroes that buy at the bottom and sell at the top!

Let’s be realistic, here’s what could have happened had I invested 100$ when one Bitcoin was worth a single dollar (Feb 2011):

  • July 2011: “OMG the Bitcoin is not worth 10 dollarzz sell sell!! Coooool I invested 100$ and I made a thoooousaaaandzzz! Hahaha!!
  • December 2011, first heart attack: “ouch… in July it reached 31$, now a BTC is worth 2$. Better if I sell, I’ve doubled my initial investment anyway in less than a year (but I lost the opportunity to leave with 3k sheet sheet sheet!!)
  • April 2013, second major heart attack, and panic attack: “aaaargh what the f**k why BTC lost 71% tonight?? From 266$ to 76$. Sell everything! It’s still 7.6k USD (minus fees, minus 2-3 years of life expectancy)
  • December 2013, third (probably fatal this time) heart attack: “BTC dropped 50% again… What does it mean Mt.Gox was hacked? what does it mean MY ACCOUNT was hacked??” or if I was lucky enough “Aaaargh Mt.Gox was hacked! Bitcoins are not safe!! Let’s sell e-v-e-r-y-t-h-i-n-g and run away with this life changing amount of 50k USD!
  • December 2014, anxiety, stress, regrets “why why why?? Why Bitcoin goes down every-faaacking-day?? I’m turbo angry let’s get out of this sheet before the world is over! 25k USD, better than nothing”… but at the price of several heart attacks and a slow death filled with regrets of having missed the 1k mark twice (Nov 30th 2013 and Jan 6th 2014)
  • September 2015, anger, frustration, sad acceptance and ragequit: “… it’s dead. Full stop. It will never get back. Let’s sell this boring dead investment and run away. 20k. I should have sold in January. I’m losing my time here

Yeah RIP, but had you made it to October 2015 you’d be millionaire by now! It’s a fact! ūüôā

In the rare case I reached October 2015 alive and still invested, then the BTC started the easy way up to 20k USD (and my investment would have sent me on FIRE)!

Well… maybe.

Or else:

  • January 2016: just crossed the 1k mark again for the third time and suddenly dropped 30%. furious ragequit! (cashing 78k though)
  • May 2017: 2k per Bitcoin? Sell sell!! (cashing 200k)
  • September 2nd 2017: 5k?? Seeeeeell!! (cashing 500k)
  • September 12th 2017: Ouch, 2.9k… let’s not play with fire. Sell and regret having thrashed 210k in 10 days. Damn loss aversion!!

I had to be able to resist until¬†November 28th to hit the 10k mark and sell for a Million… and regret having left another Million on the plate when in December 17th Bitcoin reached 20k USD which would have probably made me jumping back on it (buying only 50 BTC, half the original 100, with that Million) at the top and quickly lose 50% in a month, ragequitting with 500k on January 17th (Bitcoin dropped below 10k) and spent the rest of my life regretting it.

…And that’s the best case scenario.

What also could have happened? One of these:

  • My PC could have been stolen
  • My PC could have broken
  • I could have lost my wallet key
  • I could have been victim of hackers kidnapping me or my wife and asking for my entire wallet. They tracked my IP because I forgot just once to perform BTC operations on incognito window behind a proxy/TOR
  • I could have been victim of my exchange being hacked and lost all of my money
  • I could have chose as a private key a hash of an easy passphrase
  • I could have been trading on Bitfinex and now hold a lot of not backed Tethers
  • I could have decided to lend my BTC on Bitconnect and cash easy 1% per day!! Yes, it’s definitely not a scam!!

Yeah, definitely not a scam!

Except that:

So far, I’m glad I didn’t gamble with cryptos.

The only good thing that I could have brought home would be a bunch of life lessons:

  • don’t invest emotionally
  • don’t try to time the market
  • be fearful when others are greedy and vice versa
  • that’s how your heart reacts when you lose 50% overnight (which doesn’t happen so frequently with stocks so I didn’t experience it yet)

All of that being said, I’m still on the fence. Still interested. Still curious. Still refreshing coinmarketcap every day.

There’s a bright side of this story, which I’ll tell you on next post ūüôā

The hardest part about your asset allocation strategy is to stick with it

Editorial note: I’ve been not much motivated to write on this blog recently but do not worry, I’m not giving up. I have a lot of ideas and blog posts I want to throw out! It just seems to me that writing a decent post takes so much time that I’m always behind schedule and frustrated by that. I’m trying new things, like switching to smaller but more frequent posts.

Hi RIP friends,

I’m having a conversation with my future self and he’s mocking me hard.¬†I can not stand it ūüôĀ

He says “you can’t understand” and that really pisses me off. What the hell are you talking about?

He says “you’re giving ‘advices’ on something you have no idea and no experience with, like investments“. Well, ok, I agree I don’t have decades of recorded history with investing, and I consider that my biggest financial mistake (a close call with buying a sheetty flat that lost 30-50% of its 2010 price and that it’s not rented out and costs taxes and condo fees) but it’s unfair to tell I know nothing!


  • I studied a lot in last 5 years, I’m leveraging the experience, knowledge and mistakes of hundreds of wise people I follow.
  • I already made mistakes and learned from them: I got burned in 2000-2002 market crash and lost money (peanuts today, 50% of my savings at that time) selling at market low after 2 years of seeing my investments sink.
  • I’m investing steadily since beginning of 2016, I defined my strategy, my asset allocation and I’m sticking with it (well, more on this later…)
  • I made money so far! Ok, I know it’s not a valid point, I just wanted to show off ūüėÄ


What does it mean “Kid, you’re playing with action figures, you didn’t start the real war yet“?

What do you want?

Ok, let me tell you this: so far everything was good and easy. You’re trying to optimize asset allocation, rebalancing strategy, stocks/bonds split cause you think that’s what’s important. Sure it is, but you know what is way more important than that? Sticking with it no matter what. And I don’t mean sticking with the original plan you write down in your 20s when you’re 70. It obviously will change according to your tastes, opportunities, luck, risk aversion, political and economic conditions… Maybe you’ll buy a Mars ETF in 50 years or maybe ETFs will disappear and everybody will use roboadvisors,¬†I don’t know. Well, actually I do know – I’m from the future – but the time machine guys told me I can’t tell you much, sorry. What I mean with ‘sticking with it’ is to learn how avoid panicking when the market crashes. And be sure it will (hey robots… ahem ‘machine guys’, that’s no spoiler c’mon!). So now you should stop looking daily at your current balance and stop feeling happy for a gain a sad for a loss. You have no idea. One day you’ll see your numbers cut in half and your heart will miss a beat or two. Learn how to cope with that but stay put. Do mental training, do whatever, but stick with it. Bye. Ciao. Sayonara. And learn Chinese and Arabic languages. Byeeeeeee. And in season 25 John Snow becomes a white walker and teleports himself in The Walking Dead. tsch√ľ√ü!

No, wait, what about Bitcoins?? Should I… he’s gone ūüôĀ

Maybe he’s right, I’m a kid playing with action figures, but it’s really hard – no matter how hard you try – to understand something you didn’t experience. This is a well known problem, known as Mary’s Room or¬†Knowledge Argument.

Thank you “big brother” for your help, now I need to figure out what to do. One good thing you pointed out is to do some sort of mental and behavioural training. Here some hints:

  • Avoid checking your balance multiple times a day. Try to stay one day or one week without knowing how your investments are doing. Nothing will happen, relax. My score 1 to 10: 3. It’s really rare I don’t look at my investments each day. They’re one click away, it’s so tempting and easy to access them. It’s getting better though, I don’t check my balance in the morning and some days I forget to do it entirely.
  • Detach from small term wins and losses. Play the long game. investments are going up? It’s not necessary good, it means your money will buy less shares when you invest tomorrow’s savings.¬†My score 1 to 10: 5. I’m no more enthusiast when I see daily gains in the four digits but I feel shivering along the back when things go south. More concerned about currency fluctuations than stocks price though. Currency fluctuations is a zero sum game, so when my reference currency (EUR) gets stronger compared with my income and other investments currencies (CHF and USD) I’m not ok.
  • Avoid trying to beat the market. That’s rule 0. You’re neither smarter nor more informed than wall street sharks. If you’re eager of greater returns you may deep dive into leveraged investing, individual stock picking, exotic/trending investing (lithium, cryptocurrencies, art pieces, quinoa farms). This is a road to failure. Yes, you may get 50% this year, so why not double your investments next year? Booom.¬†My score 1 to 10: 7. I’m well fond here. I’m totally ok with a single digit long term average returns. I know that this last 2 years at double digits are exceptions. But… but it’s addictive! I started, just ‘by curiosity’ to investigate other investments. Good thing I’m old and ‘wise’ enough to keep myself calm and safe.
  • Avoid market timing. Another rule 0. Enough said.¬†My score 1 to 10: 6. I can do better here. I’m scared we’re at all time high and I’m reluctant to put more money in. I’ve actually sold some investments (what?!?!? More on this later). I’ve let ~90k cash sitting on our accounts and lost opportunities because “the market is high now”. Don’t do like me. Listen my “big brother from future”, please.
  • Keep fees low. One aspect you can optimize with almost no downsides is costs and their compound effect over years. Keep fees low. Fees and taxes.¬†My score 1 to 10: 9. I only invest in automated index funds, with low TERs. All ETFs. I invest thru a very low cost broker, with no monthly fee (if you have more than 100k USD invested) and very very low trade fees: interactivebrokers.
  • Keep activity low. The more you buy and sell things, the more you spend. Every time you change strategy, it costs you trade fees. Minimize your activity. Rebalance without selling.¬†My score 1 to 10: 8. I’m ok but I’ve been moving something around and changing my strategy a little bit recently. I’m actually investigating changing ETF for my S&P500 fund. Switching from the IShares one I currently own to a Vanguard one to minimize taxes on dividends and fees. The cost of the switch is approx 160 USD (80 to sell 100k of shares at 0.08% trade fee and 80 to buy new shares of the new ETF at the same trade fee). Is it worth? Probably yes, but what if tomorrow a new ETF comes out that is more convenient? Hard to tell what to do.
  • Keep asset allocation changes under control. As I said, your AA will naturally change over time, it’s¬† a natural and healthy process. What’s unhealthy for your finances is changing it drastically and frequently.¬†My score 1 to 10: 6. It’s not been yet 2 years of personal investments history and I’ve already changed AA several times: I sold all my Tech ETF shares (more on this later), I changed Stocks/Bond/RealEstate split, I increased from 30k to 50k our cash emergency fund, added emerging markets and pacific ETFs and recently started dividend investing (more on this later). I’ve done too much.
  • Keep saving and investing. Nothing is more important than the basics of personal finance. Don’t explode your lifestyle, keep spending less than you earn.¬†My score 1 to 10: 9. We’re doing great, still saving two third of our take home pay.

Details about my recent investment-related actions

I sold all my Tech ETF in August. Why? Several reasons:

  • Diversification. I knew I was too much exposed to tech: S&P 500 is dominated by tech, I work in a Tech company, I had more than 15% invested in Tech ETF at one point (May-July 2016).
  • integrity. I joined Hooli in 2012 as a techie enthusiast but I’m growing up skeptical and a bit disenchanted by it. Take a look at South Park season 19. Take a look at the thousands TED Talks about “how our smartphone is ruining our lives”. I feel a little bit addicted to distractions, I see my ability to focus degrading. I want to detach and disconnect a little bit, and I honestly hope for a simpler future where we get back our life and our attention and we become users again, not just targets for ads targeting Machine Learning algorithms. Computers should be machines that perform tasks we ask them to do, not fancy assistants that suggest us what we should be entertained with. Am I biased? Of course! Is it good to be biased? No it’s not. So why do I do it? Well, I’m still investing in tech (S&P 500 and US Small Cap) so I’m still getting the benefits, but I think it’s important to put your money where your mouth is. I want to bet on a future I like more.
  • Loss Aversion. Look at the CAPE ratios of all tech companies. Look at price/earning ratios. They’re driven by hype and high expectations, like startups. It’s very high risk investing. Microsoft, Amazon, Google, Facebook, Apple, Tesla, Hooli stocks are all time high not because of their profits, because everyone expects them to grow drastically. Too much risky in my opinion.

Anyway, here’s a summary of my experience with the Tech ETF XLKS:

At peak I invested ~85k USD on it. I bought the shares below 100 USD per share. I sold them over time at 116-140 USD. Total profit in ~20 months: 23,658 USD. Let’s celebrate! Thanks XLKS! Yes, I’d be better off still owning the ETF since share value today is 145 USD, but who cares? Well, had I sold the final block yesterday instead of a month ago I’d have earned 1k USD more. I just sold the ETF and kept money on my brokerage account uninvested. It pissed me off to see that I did something stupid and that “a man in coma” would have performed better than me. Anyway, these are the kind of thoughts you should not be obsessed about! Reread the hints above! That’s why the “big brother” came visiting us! Shut up and celebrate the 23.6k USD profit ūüôā

I invested in World High Yield Dividend stocks

I’ve always been fascinated by dividend growth investing and I wanted to try. I like the idea of an “income from stocks ownership“. After selling my Tech ETF I felt like I’m well balanced in Markets exposure (US, Europe, EM, Pacific), so I didn’t have a market in mind. Let’s go for the World. I investigated a bit on justetf¬†and there are not that many ETFs available. I considered for a fraction of a second the option of buying and holding individual stocks but it’s a job on its own and I didn’t want to do that.

I invested 38.5k USD in the Vanguard FTSE All-World High Dividend Yield UCITS ETF, ISIN: IE00B8GKDB10, Ticker:¬†VHYD, traded on LSE (London Stock Exchange). Finally,¬†I’m part of the Vanguard family too!

RIP, how is this ETF? What’s its TER? Is it tax efficient?

Good questions! I see you read my ETF 101 post, well done!

Well, I’m experimenting with it, I want to see how it goes. First time owning a distributing ETF (distributing quarterly!). What I know is:

  • TER is¬† 0.29, not very low. Index tracking ETFs usually have lower fees, single basis points digit. I guess it’s because of being “world”. It’s algorithmically harder and bureaucratically less efficient to handle the World market, so come higher costs.
  • Dividend issuing companies are expected on average to produce less total revenue (stocks growth plus dividend issued) over time than companies who don’t distribute profits. Why? Well, from a company point of view keeping profits and reinvesting them instead of giving them away should be better.
  • It’s not tax efficient for two reasons. First: in Switzerland profits are taxed while capital gains are not. Second: the fund is domiciled in Ireland, so dividend withholds from various governments cannot be redeemed with a DA-1 form.

On the plus side we have:

  • Companies with a strong history of growing dividends weren’t impacted much by last 2 toughest¬†market crashes of this millennia (2000-2002 and 2008). I consider this an edge against inevitable market crashes. Kind of a less riskier stocks investment, since bonds are dead nowadays. Yes, it may be a double edged sword, since a company who’s giving growing dividends may fall dramatically if they stop following this pattern (which could be an option in time of recession). I know it may all be a Ponzi scheme and I’m on the last ride, but I feel confident. Coca Cola is not going anywhere in next 50 years.

So, let’s see how it works ūüôā

Last year the fund issued 4 dividends for a total of 1.572 CHF of imposable profits (according with the Swiss tax authority), which is a yield of 3.07%. This year, so far, 3 dividends for a total of¬†1.369 CHF (projected to 1.825 at end of year) with a yield of 3.27%. Plus the fund share grew by 11% during 2017. Not bad, I’m all in ūüôā

Final notes about my Net Work doc and my Monthly updates

I updated my doc a bit, like I retroactively added pro-rated expected bonus and thirteen salary to boost my motivation (and chances of not getting both of them today are close to zero). Progress toward the big goal: 62.06%. progress bar on the logo needs to be updated.

More details on the next financial update, which will probably become a quarterly post instead of a monthly one.

That’s all folks!

RIP, you told us that this would have been a shorter post… I count¬† more than 2300 words…

Cmon, shut the f*ck up, I’m back ūüôā

ETF 101

Welcome back RIPvestors, time has come to get back to my investment series.

We’re going to cover the very large ETFs world in this post, the preferred mustachians instrument¬†to join the stocks party!

Disclaimer: I’m not an expert on this subject. I’m¬†here to share what I know with you, my novice reader, since I think it’s more than enough to get started with ETFs. I’m here to learn more on ETFs from you, my dear expert reader, so that I can improve my knowledge and act better.

Another Disclaimer: I’ll run a simulation and finally pick an ETF at the end of this post. I’m not affiliate to the financial institution emitting the ETF. I actually own ~100k USD in shares of this ETF, so it’s a product I recommend because I’ve direct experience¬†with it. I’m not here to sell you something!


Hey RIP, what’s an ETF?

Hello friend, long time no see!

We’ve seen in a previous post¬†what generic investment funds are and the difference between actively and passively managed and how we should aim to invest into¬†passively managed ones.

We’re going to explore here the Fund Structure, i.e. how the fund capitalization is collected, how profits are¬†distributed and how shares of the fund are traded. We’re going to explore 2 different fund structures: ETF and Mutual Funds.

A possible structure is the following: you want to join the fund, decide which amount you want to invest on it, deposit the amount to your fund account and then you own a fraction of it. The total fund capitalization increases when new investors join. This extra money is used by the fund manager (or by the algorithm) to buy new assets according to the fund strategy. If you want to disinvest, the fund manager is forced to buy back the number of shares you want to disinvest at its current market value. The total fund capitalization decreases when investors quit. It means the fund may need to sell assets to pay back the quitting investors. This is the common pattern of Mutual Funds.

Another fund structure that’s getting every year more popular is the Exchange Traded Funds. ETFs¬†capitalization respects the¬†closed-end model, meaning that¬†no money flows in or out of the fund once created – with some exceptions (accumulating funds). So at creation time the fund size is defined and so is the individual¬†share size. Shares are then traded on stock exchanges like regular stocks. Initially¬†all the shares are¬†held by the¬†institution who issued the fund (the trust company).

An ETF can be liquidated, which means:

  • the trust company sells all the assets
  • each shareholder redeems their shares
  • the fund then disappears.

Let’s make an example: I want to create¬†an ETF with 100,000¬†CHF of capitalization and shares of 10 CHF, an unrealistically small fund. My fund will than have 10,000 shares initially worth 10 CHF. No matter how many investors will come and go, the fund will always have 10,000 shares.

My fund invests on stocks of italian companies that produces Mozzarella. With a capitalization of 100K we buy 1K shares of MammaBuona, 30 CHF each, and 1K shares of PizzaBella, 70 CHF each.

The day after buying the stocks, MammaBuona performed great and their share is now worth 40 while PizzaBella performed poorly and its share is worth 50. Total value of the fund portfolio is not 90K and so each share is now worth 9.

Wait, RIP, what does it mean that ‘a share is worth 9’? Aren’t they traded like regular stocks? So they are not strictly bound to their basket value… they may go crazy due to other factors, like normal supply/demand. is it correct?

Good point. Here things become a little bit obscure to me. You’re technically right, things traded¬†on a stock exchange can go crazy. Let’s say your fund management skills demonstrated you beat the market everytime, then investors may be willing to pay more than the market value of the assets in your basket, since you’ll surely¬†beat the market again. I lack knowledge here. Wikipedia explain that: “The ability to purchase and redeem creation units gives ETFs an arbitrage mechanism intended to minimize the potential deviation between the market price and the net asset value of ETF shares“. So let’s set this problem aside for a while. Well, let’s say for ever, I won’t come back on this.

“Ok, cool, but why do you advice ETFs and not Mutual Funds?”

That’s just personal taste. In US they love MFs slightly more. They have Vanguard, which is the best mutual fund company ever. Accessing Vanguard funds from Europe is more complicated and has financial implications (US Estate Tax, US dividend withholding…)

I personally prefer ETFs over MFs for the following reason: MFs bind you to a specific financial institution, while ETFs don’t. They may change their trading fees, they may go bankrupt, they may do aggressive marketing and force you to open other financial instruments with them (like bank accounts, credit cards…). Every bank has their “awesome funds you should buy” and a cool financial advisor that “works in your best interests“.

ETFs are kind of open source. Once they lift off they require less management (no external cash flow to handle) so it’s easier to make them passively managed, getting in/out is instant and cheap and they usually have lower Total Expense Ratio (TER). You don’t need to join any bank, you just need a broker to access the stock exchange(s) where the ETF is traded.¬†ETFs are rapidly becoming the de facto standard for low cost fund investing, i.e. passively managed index funds.

Some may argue trading ETFs has 2 points of failure instead of one: the broker and the trust company managing the fund. My reply is that both have few (zero?) connections with the fund managed assets. And the closed-end structure cuts off some of the malicious strategies like Ponzi / Madoff schemes.

For the sake of completeness, here‘s a good article about why invest¬†in Mutual Funds instead of ETFs.

Ok, cool, please RIP tell me more about stocks ETFs

Sure. We’ve previously discussed¬†why you want to track Stock Indexes and why you want to differentiate among them. I’ve also disclosed my Asset Allocation¬†so you know which indexes I want to track.

ETFs are tools to make your strategy happen, they are not a substitute for your strategy.

…Or are they?

Ok, let’s¬†digress a little bit on the cost/control spectrum, i.e. how to implement your diversification strategy among the stock component of your portfolio. Usually delegating control (simplifying) comes at a cost. You could:

  • Buy individual stocks, and manually diversify. Total control, low maintenance costs. Well, costs may not be very low since you might end up frequently trading low volume stocks to rebalance your portfolio¬†incurring in high trade fees.
  • Buy N¬†funds¬†that track stock market indexes and¬†keep their value balanced (according to your strategy). You may hold a US S&P 500 Fund, a Europe Stoxx600, an Emerging Market, a Pacific… and rebalance yearly/by-quarterly/quarterly/monthly. Minimal costs, good control.
  • Buy a single World fund¬†that tracks the entire world market, like the¬†MSCI World Index¬†or FTSE RAFI All-World 3000. A fund tracking such indexes keep self balancing to reflect world market capitalization and – in each market – to reflect company capitalization. Can be seen as a “fund of funds”. Given the slightly more complex behavior, usually world ETFs have higher costs (TER), in the order of 0.2 – 0.3 vs <0.1 of funds that track geographic (US, EU…) stock indexes. So, higher costs but less control. You may even buy more World funds to¬†avoid keeping all your eggs into one basket, where the basket is the trust company managing the fund. You may even open more brokerage accounts to hedge against points of failure…
  • Use a Robo-advisor. Robo-advisors are¬†(Wikipedia): “a class of financial adviser that provide financial advice or portfolio management online with minimal human intervention“. Essentially they are bots that keep your assets balanced, buying and selling shares¬†on your behalf, according to a strategy. You throw money on your account and your robo-advisor knows how to allocate it. You want to withdraw from your account and your robo-advisor decides what to sell. This service comes at a price on top of the funds’ TERs. Here‘s a good US-centric article about robo-advisors. Popular robo-advisors are: Betterment, Wealthfront,¬†Truewealth (available in Switzerland). We’re not going deep there for now. Check out this MMM post¬†about Betterment, this¬†TSD post about Wealthfront¬†and this JLCollins post about Vanguard for more info.¬†Even higher costs, zero control.

I know people who operates at each level of this spectrum. Personally I adopt the “Buy N funds” approach. Minimal complexity and minimal costs.

Now we can finally dive into the mechanic of a single ETF tracking a single Stock Market index.

Is that all you can do with stocks? I heard about High Frequency Trading, Option Writing, Dividend Growth Investing…

Sure, there are countless opportunities, I know. It’s just that I’m a novice investor and all my limited knowledge is about¬†long term investing on Stock Market Indexes. I don’t care about speculative high risk short term investments, I’m not a daytrader and I don’t wont to become one.

I’m both curious and suspicious about long term optimality of Dividend Growth Investing though. DGI means holding stocks of companies who have a long track record of having emitted constantly growing dividends over time. Here‘s an amazing introductory article on¬†apathyends blog. Other excellent articles here¬†and here. The good of DGI is that it’s a passive revenue stream without you having to touch the principal. The bad is that a company that issues growing dividends over time limits their potential long term growth. It’s not a coincidence that the strongest companies on the market today don’t issue dividends. Anyway, let’s just not waste time here to discuss this.

Wait, why just stocks? Why not go for angel investing, estates, precious metals, cryptocurrencies…

Wait wait wait, let’s step back. First you do your homework by asking yourself the following questions:

Q: What are your financial goals? Why are you investing? Short term? Long term?
(Mr RIP) A: I want to to reach FI and would like to live off of my portfolio profits forever.

Q: When will you need your money back? How much risk and volatility can you handle?
A: Ideally I’ll die at incredibly old age with my money still invested. I still need to be able to periodically withdraw¬†something from my assets (ore use dividends/interests/profits). I can accept high volatility on a portion of my assets, given higher expected returns.

Q: What you feel comfortable investing in?
A: Nice question, thanks for asking ūüôā Well, this requires more space and time to elaborate, take a look at my IPS. Tl;dr: my AA (Asset Allocation) cover all the risk/reward spectrum, from super safe no reward (cash) to low risk low reward (bonds), average risk high¬†reward (stocks) and potentially, in future very high risk high reward (angel investing / startups).

Q: Do you understand your investments?
A: Yes, I know the products I’m investing in, I’m in control of my portfolio. I made my investment choices and I’m ready to adapt them given new evidences. I know the risks. What I don’t know yet is my reaction if (when) things will go south. Will I be able to not panic? Life will tell.

Ok, ok, I got it. But I also heard of Small Cap, Large Cap, Tech, Finance, Banking and a lot of other sectors that have indexes. How am I suppose to pick my indexes? Just by geographic ares?

That’s a very personal question. Each one has their own taste and want to place their bets. My personal¬†opinion is that¬†sector-specific investments¬†are inferior differentiation techniques – but I invest in a US Tech ETF, home biases die hard – while market capitalization categories are good tools to differentiate in risks/reward. Historically small caps have better returns but higher volatility. I differentiate among Large-Mid-Small Europe and Large-Small US.

Ok, let’s get back on track. You know your goals, you control your Asset Allocation and time’s finally come to pick the right ETFs to implement (part of) your strategy.

(continue on next page)

My Investor Policy Statement

Hi RIP friends,

Facilitated by some¬†recent extra time¬†purchases, as promised to myself (and publicly committed), I’ve finally allocated time¬†last weekend to redact my IPS.

image: physicianonfire

What’s an IPS? IPS stays for Investor Policy Statement, essentially an investing guideline you define for yourself that helps keeping you on path when situations may trigger your instincts. The market crashes? You have a money surplus? You’re having kids? You lost your job? They say this year Emerging Markets will rock? What did you write in your IPS for those cases?

I wanted to write it down after having read this amazing post on PhysicianOnFire several months ago. I strongly recommend you write your own if you’re going to invest money (and you should). Btw, invest 5 minutes of your precious time and go read PoF post.

One of the¬†first rule of investing is “define your goals, priorities and strategies”, that’s almost all an IPS is about. The level of details of your IPS should match your desired complexity level. A too detailed IPS may end up being edited too frequently or going soon out of sync with reality. A too generic IPS is mostly worthless.¬†I¬†use the CV rule: it should never be longer¬†than 3 pages.

In writing your IPS you’ll¬†be challenged to think about your values, your long term strategy and your exit strategy. You’re forced to ask yourself if you really understand what you’re investing in and why you’re investing in such categories and specific assets. You may start¬†researching and gathering more information, refining your asset allocation and diversification strategies and, if you’re a nerd like me, you end up engineering¬†your¬†lifelong economic algorithm.

I chose to make mine a little bit longer than I’m comfortable with (whaaat? 5 pages??), since I wanted to embed in it my FIRE algorithm too.


Mr. RIP Investor Policy Statement

NW = Net Worth
WR = Withdraw Rate
SR = Saving Rate
FU = Target NW to call it FI


  • Reach FI (NW >= FU) before age 45, i.e. before year 2022.
    • FU = 30x yearly expenses (desired WR = 3.33%).
    • Yearly expenses to be estimated not based on current ones but considering factors like: 1) moving out of Switzerland 2) having 1-2 kids 3) buying or not a house.
    • Once FI is reached, Yearly expenses (thus FU) updated each year based on forecasts and actual spending.
  • Reach 150% FU before age 50.
  • Stay above 80% FU forever, after having reached FI.

Overall Strategy

  • ‚ÄúHard Accumulation‚ÄĚ phase while NW < 100% FU.
    • Save at least 50% of income (SR >= 50%).
    • Save at least 50k EUR each year.
    • It‚Äôs ok to not go beyond if it would impact well being (80% or even 60% is ok if previous 2 conditions are met).
  • ‚ÄúSelf Sustainability‚ÄĚ phase while 80% FU < NW < 120% FU.
    • SR >= 0% – Don‚Äôt touch the principal, keep working sporadically or find other ways to bring money at home to cover for expenses and let the principal grow.
    • Note that between 80% and 100% there‚Äôs a so called hysteresis: keep behaving according to the rules in current state.
    • Below 80% (Oh Crap percentage – cit LivingAFI) restart accumulating (probably via frugality and hustling more).
    • Below 60% (Oh Shit percentage) get back to work unless some form of social security is triggered or I am above conventional retirement age.
  • ‚ÄúWhat‚Äôs income?‚ÄĚ phase while NW >= 120% FU.
    • make all work and income decisions as if the wage were 0 – cit MMM.
    • Stop caring about having to earn money, It‚Äôs ok to withdraw from the principal.
    • Stay in this phase while NW > 100% FU (hysteresis between 100% and 120%).
  • ‚ÄúWhat‚Äôs money?‚ÄĚ phase while NW >= 200% FU.
    • make all spending decisions as if the price were 0 – cit MMM.
    • Stop caring about budgeting, expenses, earnings. Just avoid plain stupidity.
    • Stay in this phase while NW > 150% FU (hysteresis between 150% and 200%).
    • Note that the FU% will decrease if yearly expenses increase.

Investment Philosophy

  • Invest mainly in stocks (>50%), secondary in bonds (<30%), maybe real estates (<15%), might consider p2p lending or angel investing.
  • Max out stocks investment at 100% FU. If my asset allocation says 60% stocks, once that 60% NW = FU (NW = 166% FU) then don‚Äôt over-invest in stocks, take extra money out of market ready to be reinvested in case of market drop.
  • Buy and hold stocks strategy.
    • stay invested (extra invest if possible) if the market crashes.
  • Stay low on costs in the ‚Äúcosts vs efforts‚ÄĚ spectrum.
    • No individual stock picking (super low costs, high effort).
    • Yes Manually diversificate among regional Index Based ETFs: US, Europe, Emerging, Pacific (low costs, medium effort).
    • No world ETFs (medium costs, low effort).
    • No robo-adviser (high costs, zero effort).
  • Avoid investing in specific sectors (like ‚Äútravel‚ÄĚ, ‚Äúconsumer goods‚ÄĚ, ‚Äútechnology‚ÄĚ, ‚Äúbanks‚ÄĚ).
  • Accept territorial home bias, i.e. invest heavily in the market where I live.
    • To keep up with local currency inflation and economic situation.
  • Avoid professional home bias while in accumulation phase (avoid ‚Äútech‚ÄĚ investments).
    • To diversificate, i.e. avoid making a tech industry crash a double loss.
  • Optimize for tax efficiency over small variations (<0.2%) of costs (TER).
  • Prefer Distributing over Accumulating ETFs given same costs and tax conditions.
  • Don‚Äôt do DCA (JL Collins).
  • During accumulation phase, keep investing each month.
    • Use the monthly investing to rebalance.
    • Keep track of real vs ideal for each asset and throw money to assets that need the most.
    • To reduce investing trade costs, define an investing quantum and never invest amounts smaller than the quantum.
    • Forego monthly investment to cover large expenses (travel, vehicles‚Ķ).
  • Once every 6 months do a major rebalance between asset classes and within each class.
    • Keep in mind the ‚Äúno stocks above 100% FU‚ÄĚ rule (and that 100% FU changes over time since actual yearly expenses and forecasts change).
    • Use this major rebalance to review this doc and eventually improve/change it.

Asset Allocation

  • 60% Stocks
    • 25% – Europe Large/Mid/Small (STOXX600).
    • 25% – US Stocks: 20% Large (S&P500), 5% Small.
    • 5% – Pacific.
    • 5% – Emerging Markets.
    • I allow myself to go on a slightly different route while in accumulation phase.
  • 25% Bonds
    • Pension Pillars (once left Switzerland these will disappear).
    • Government & Corporate Bonds (mainly local market).
  • 15% Real Estate
    • Primary residence.
    • Eventual rental properties.


  • Keep 2-6 months of living expenses in cash while working.
  • Keep 12-24 months of living expenses in cash while not working.
    • Consider cash an asset class that needs to be rebalanced every major cycle.
  • In case of urgent need of cash in bear market, sell bonds first.

Other Considerations

  • While in Switzerland, maximise tax deductions via Pillar 3a and Pillar 2a buy-ins.
    • Check the cantonal limit up to which a Pillar 2 buy in is not locked for 3 years.
  • Don’t take into account social security and pensions at regular retirement age.
  • Don‚Äôt take into account expected inheritance.

Supporting Family Members

  • Support eventual children.
    • Pay for their education till Master‚Äôs Degree.
    • Don‚Äôt give them paychecks but make them work for the household and earn money.
    • Teach them financial skills (spend less, earn more, be frugal, save, invest, be free).
    • Encourage them to be independent and leave the nest as early as possible.
  • Support other family members (parents, siblings).

Preparing my finances for my expected death

  • Aim to leave a significant portion of inheritance for a greater good.
    • Angel investing.
    • Charities.
    • Projects I care about (going to Mars?).
  • Aim to leave enough to my children and eventual surviving spouse.

Preparing my finances for my unexpected death

  • Make a will to make sure my assets are handled as I wish.
  • Have a life insurance after work‚Äôs one will expire to make sure my family won‚Äôt have financial issues.

Open problems

  • Given that most probably we‚Äôll retire in Italy, understand investments opportunities and tax implications there.
    • Check income, dividends, capital gain and wealth taxes.
    • Check rental properties business.
    • Check freelancing / launching a company complexity and costs.

since this post won’t be edited much while my IPS will, I’m linking here a live version in Google Docs for those who want to follow how my IPS is changing over time. Here’s the link.

What are you waiting for?

Go write your IPS!

Market timing and US election

Good Evening RIP friends,

Did you sell all your stock funds? You know that doomsday is coming, don’t you? What are you waiting for??

Let me explain it clear:

  • aryaelectionIf Ronald Drumpf wins, the market is going to crash because he’s insane and none will¬†invest in US.
  • If Hilarious Clinton wins, the market is going to crash because she will tax companies and rich people so that none will invest in US.

Clear, right? S&P 500 is currently overpriced!


Sell everything!!

It’s obviously an ingenuous lie. Market¬†price already contains this¬†information.

Uh, RIP, you made my heart skip a beat! So the election won’t change my fund value?

Oh no no no, it will surely be hit! It’s just that you don’t know in which direction. And¬†you can bet that the expected value after the election – given all other conditions stay the same – is the current fund’s value.

I’m confused…

Let’s do some math: let’s assume¬†a share of your S&P500 fund is¬†priced 100. Let’s assume the market expectation in case of victory of candidate X is¬†+10%, i.e price would jump at 110 per share. Let’s also assume that in case of victory of candidate Y the market expectation is -20%, i.e. a price of 80 per share. If your price today is 100 it means that there’s a 66%¬†probability that candidate X will win against 33% of Y. Today’s value is the expected value.

If tomorrow a new poll says odds of winning are 60% for X vs 40% for Y and market expectations in case of victory of X or Y are the same +10% and -20%, then the new share price will drop to 98, which is the new expected value (110 * 0.6 + 80 * 0.4).

If, instead, odds of winning for X and Y stay the same but candidate Y announced a new wall on the Canadian border, bringing market expectation in case of victory to -30% instead of -20%, new expected value for the share is 96.666 (110 * 0.666 + 70 * 0.333).

What? Is it really so easy for a candidate to make the market drop?

That’s just a simplification. I hope that in case of such a claim the odds of winning for Y would drop and expected value for your share would actually increase in this scenario. Another level of simplification is that market doesn’t just react on what candidates say. That’s just propaganda. It reacts on true well founded hypothesis on what would happen in case of victory of X or Y. Who’s funding their campaigns, which kind of lobbies they have behind and so on. Market is more stable than our fears.

And don’t confuse expected percentage with chance of winning. Today¬†polls say 48% vs 43% (and 9% third parties) while odds are 86% vs 14% (and 0 third parties).

So… should I sell?

As I’ve already said, trading has costs. By trading a lot you’re expected to lose money, unless you’ve some kind of knowledge that’s not publicly available. Otherwise, selling is just an expensive bet. A less-than-zero sum game. Not selling is a better bet. A more-than-zero sum game.

Like any normal day in the market.

P.S. here some nice stats about historical market performance¬†based on¬†candidate’s party and here¬†the same concept expressed by Trent Hamm in 20 words, while I needed more than 500…

Investor Profile and Lifelong Investing Strategy

Good morning RIPvestors,

welcome to another post in the investing series, where I gradually introduce you to the world of investments and go deep on topics I have some experience with, mainly related to investments in Switzerland.

Here’s the tentative schedule for the series:

  • Investing basics¬†– Easy
  • Financial Investing¬†– Easy
  • Funds Investing –¬†Easy
  • Fees & Taxes¬†– Medium
  • Stock Price and Market Model –¬†Hard
  • Investor Profile and Lifelong Investing Strategy¬†– Medium (This Post ūüôā)
  • ETF 101Hard
  • Interactive Brokers 101 –¬†Hard (coming soon)
  • My Investing Strategy –¬†Whatever (coming soon)
  • “Uncharted territory”:
    • maybe a post about¬†degrowth¬†and how to reconcile capitalism and anti consumerism
    • maybe other socioeconomic posts I don’t know yet
    • maybe a post about investing in yourself

[Note: schedule changes with every new post. Please refer to the latest post in the series for a more up to date schedule.]

In this post we’re going to talk about… ouch, I forgot what we’ve seen so far!

RIP, I’ve been following you throughout the series. We’ve seen all the basics and I’m ready to invest my money! I know that I should keep some money cash, something between 3-12 months of living expenses. Then invest the rest. Some on bonds and some on stocks. Index funds more than individual stocks, to differentiate and reduce risks associated with individual stocks. I know that fees matter a lot, so I should shop for a cheap broker. I also know that I should invest as soon as possible and stay in the market for as long as possible… I’m not sure I fully understood that btw… Anyway, a lot of theory but I don’t know how to convert it into some concrete steps…

Ok, cool. Thanks for the recap! Well, brace yourself: we’re going to see something concrete here!

Yeeeah! So? How should I invest? Which actual assets should I buy? Which bank/broker should I use? When should I buy/sell??

warrenbuff11Relax, calm down. Not yet, not all together. Here we’re going to devise a plan for your lifelong investing¬†strategy. We’re not going to look at what¬†you should actually invest into (btw, we’ve gone very deep there, you should tell me on what to invest right now) and not even which bank/broker services to use. Just how to¬†design your support infrastructure.

Did you do your homework? Did you write your IPS? Do you have an assets allocation strategy? If not, go and come back once you’ve done with that.

Ok, welcome back!

swissflagDisclaimer: my view is biased toward Switzerland in several aspects:

  • No capital gain tax, but wealth tax.
  • Tax deferred¬†accounts (Pension Pillars) essentially not investable but they don’t matter¬†for wealth tax.
  • Investments are funded mostly with after tax money.

Ok, let’s move on! I assume you’ve your asset allocation strategy.

Well RIP… yes, I do. I’ve put 10K cash and the rest 75% Stocks and 25% Bonds… is that ok? Is that anything else I should invest in?

Cool! Well done! You asking me if you should invest in something else? Let’s face this soon so we can move on quickly. I don’t know. Surprise! I don’t really know. It depends on your personal taste, on your investor profile and on the amount of time you’re willing to spend to become an expert in a field.

Your investor profile, according with Wikipedia:

An investor profile or defines an individual’s preferences in investment decisions, for example: Short term trading (active management) or long term holding (buy and hold) Risk-averse or risk tolerant / seeker. All classes of assets or just one (stocks for example)

Your investor profile defines what kind of investor you are. Please, take time to assess it. Don’t invest mindlessly, be sure to have your investments and your strategy aligned with your profile.¬†There are people who invest in safer assets like structured notes. There are investors who invest in precious metals and mining companies¬†and those who invest in options¬†(it’s kind of meta investing). There are literally plenty of “paper assets”¬†types. You’ll find people who recommend X over¬†Y all the time. I do recommend¬†stock funds that track market¬†indexes¬†(and bond funds, eventually, for bonds). Because they are better? No, because they are simpler. You don’t need to know much to jump in. We already covered all you need to know to avoid panicking, trying to be¬†smart and trying to time the market. So the bottom line on this is: if you really want to spend your time and energy¬†on other investment areas, please do. I’m just here to show you a simple strategy that worked well enough in the¬†last 150 years of recorded financial history.

Back to us: you’d like to invest¬†75% of your current¬†investable NW (your NW minus cash/emergency fund). Before moving on,¬†let’s split your financially¬†aware life in few ages:

  • The¬†first investment time. Here you probably are, my friend. You have some savings and want to start investing them and you don’t know how, on what, when, what to do if you lose money,…
  • The income (or accumulation) age. Here’s where I am. You are investing and still earning a salary, you’re saving and you want to invest what’s left each month (or spend what’s left after investments).
  • The transition age. Your investments are producing enough money but you’re not FI yet. You may want to take a sabbatical, switch to part time, take some risks in new activities or careers or simply follow your passions being aware that this may reduce¬†your¬†earnings. Here you probably can manage to keep your expenses below your earnings but you won’t be investing much more. Maybe you even need to withdraw a little from your invested capital. I will explore this sooner or later, since I may actually take this path.
  • The withdraw age. You’re living off of your investments, you’re FI (and retired). You need to withdraw continuously to support your expenses.

I assume you’re either in the “first investment” time of your life or in the income phase, i.e. you’re still working, earning, spending and saving at least 25% of your earnings, possibly 50% or more (what about 80%?) which means you want to invest every month a good portion of your savings, am I right? Awesome!

You wrote your IPS, so you probably have your guideline written down and your differentiation strategy, am I right? Not yet? Listen… take your time and do something like this:


Here you can see an example market analysis and diversification strategy. On the first two columns you can see the indexes and their descriptions. This is just a screenshot, the original document (that I’ll clean and share sooner or later) contains links to justetf, a popular funds¬†search engine where I do all of my researches. Third column is the target percentage of my investable NW. As you see not all the indexes made it. But it’s good to spend a little time researching indexes, markets and sectors. You don’t do this very frequently, just every once in a while. Let’s assume the whole Travel industry collapses, then you probably want to remove the Travel index from this list!

Wow RIP, what a deep analysis… do I need to do the same? And btw, what are those¬†strange codes in columns 5-9?

No, you don’t have to do such an analysis. I did for… fun! Well, I wanted to know what’s around to differentiate more than I do today. These percentages are WIP and¬†subject to change. I remember to have signed off to provide my IPS by end of year (update: here you go), I still have time ūüôā

Anyway, you’ll probably be ok investing in few indexes like… wait, that’s your job! I can’t help you in this. Find your differentiation strategy and¬†come back. If you want to keep as simple as possible, find a WORLD index and go¬†all-in with¬†it. Vanguard has total market fund. Sadly, Vanguard in Switzerland is slightly harder to manage thus¬†they are¬†not so recommended. We’ll cover it later in this series.

Ah, and those strange codes are ISIN, a.k.a.¬†International Securities Identification Number. Identification numbers for your funds. Just don’t care about that for now (psst… those are actual funds!).

Now you have your assets allocation strategy! What’s next? Oh right, buying actual¬†funds! There are several funds type, and for each index you want to have in your portfolio, there are tons of funds that track it. We will cover the problem “how to chose a fund, given an index I want to have in my portfolio” in another post in this series, so please let’s assume for now that you already have a preferred¬†fund for¬†each of your indexes.

[Note: you can even diversify within the index and buy several funds that track the same index. I don’t know if that’s useful.¬†My personal opinion is that it is not. Plus it complicates things at tax time. The more asset you have, the more complex your system will be.]

So now you have your funds list each one with its desired target percent of your investable NW. cool! Let’s put that into a spreadsheet:


Note: previous screenshot is my new (WIP) strategy, while this one shows current strategy. Refactoring in progress.

Here you can see few things: current allocation, target and delta for each asset class and within stocks funds (ETFs, we’ll learn more about them in another post) allocation by index. If you’re curious, I’ve explained a little bit about this structure in a previous post.

How does this spreadsheet work? How can it help me during my entire life?¬†The schema we’re looking at easily supports income age (as well as first investment time), let me show you how.

You¬†can monitor¬†your desired allocation among funds and your¬†actual investments. In case you’re at the first investment¬†time all the actual would be zero. You periodically take a look at the deltas and if they are greater than a certain threshold, you act on it. Either buy buying more of asset X or selling asset Y. For example, according to the old plan, I’m short of STOXX 600 Europe fund by 37K. I should buy 37K of that fund. I’m investing 33K too much in S&P 500 Tech Cap, so I should sell it.

This way you can monitor diversification. The system is also self balancing: if a fund grows too much and sooner it will dominate your¬†portfolio, you sell a portion of it to rebalance and achieve the planned¬†diversification. If a fund loses too much to go below its target, you buy more of¬†it. This way you¬†also “buy low and sell high” automatically.

Why did I mention a threshold? Because in doing that I’m trying to minimize frictions: if my broker charges me 10¬†CHF minimum trade fee or 0.1% of the trade value, I try to never buy/sell less than 10K, to avoid paying fees at a higher percentage. So I don’t act on deltas smaller than 10K.

How frequently to buy/sell? Don’t get¬†obsessed by¬†it, you only need to take a look once a month o once everytime your accumulated savings are above the threshold. So, only you know when to look at it. If you save 500 a month and the threshold is 2K you go looking once every 4 months. In any case, better to not let more than 6 months pass, else your portfolio may become unbalanced on its own.

Cool RIP, so everytime I¬†have new savings all my deltas will grow… once I have 10K (or the fee-based threshold) available, I’ll throw them at the asset with the bigger delta!

Yes, you got it right! You’ll find that in this accumulation phase you won’t need to sell, since even if an asset performs very well, your overall NW is going to increase, leaving you with smaller deltas and a cash surplus.

Ok RIP… so I’m essentially NEVER selling my stocks, am I right?

That’s not totally true, you’re going to¬†switch¬†from “accumulation phase” to “withdrawing phase“. Eventually transitioning¬†to intermediate phases, in case you’ll reduce working time or switch to a semi retirement.

Ok RIP, I mean I’m not going to buy and sell frequently. I have friends who do that. I know you already told me it’s not the right way to go… but this friend of mine says he makes Godzillions…

Ok, let’s clarify this once and for all: there’s no right and wrong. I showed you how it’s hard to be smarter than the market, but you’re free to try and you may actually succeed! You may have better intuition than the investors crowd. You may bet on the oil price going up, or on banks going up, or on tech going down or whatever. If your guesses are right, you may be rewarded by tons of money. Go for it! The way I see it is like gambling, but in case you buy/sell frequently you’re paying a lot of trade fees that will make the expected return lower than just following¬†the crowd. Thanks to trading fees, if you do a lot of operations with expected zero impact you’re losing money. It’s like betting on red or black on the roulette without considering the green number zero.

That’s because my investor profile is different that your friends one. I’m a¬†Buy & Hold investor, while your friend is probably a Day Trader. The day trader’s job is to beat the market and perform better than average. The buy and hold investor is ok with matching the market. The first is driven by short term gains, while the second prefer to play on long terms.


I’m kind of Risk Averse, while your friend may be more Risk Tolerant. I’m a Fund investor, your friend may be a individual ¬†stocks investor¬†(or, as we’ve seen before, an investor focused on other asset types). Different people, different profiles. Seek out yours! Write it down in your IPS.

Cool… then, what to do when in withdraw phase?? I’ll soon be FIREd and living off of my investments, how to handle withdraws?

Nice question! I have no idea ūüėõ I’m not there yet so I’m not the best person to ask. But let’s try to¬†figure this out together:¬†in withdraw phase you probably want to reduce stocks exposure over time. You will probably¬†change your investor profile becoming more risk averse.¬†You should continually change asset category allocation and experience deltas changing. You act accordingly. I don’t see a big difference here. You may try to switch to distributing funds instead of accumulating, so you have the dividend in hands instead of having it automatically reinvested – so you can disinvest it.

I have another idea that involves defining your “Stocks FU Number“, a desired total invested amount in terms of number of years of expenses (say 20x). If you’re lucky and your investments grow above 110% of that, you disinvest the extra 10% and buy more bonds. If it gets below 90% you take the missing 10% from bonds and invest them in stocks. This way you¬†can reduce market collapse risks and you have a clear signal that you need to go back to work: when you hit the 90% and have no reserve.

But I still have plenty of time to tune my strategy!

Last but not least: Dividends.

In this very long post I talked a lot about stocks but almost never introduced the concept of dividend. A dividend is a tool companies use to redistribute profits to the shareholders. You own a stock of a company the day the dividend is distributed, you get the money. Some companies don’t distribute dividends by choice. I don’t like to focus on dividends since they are mostly neutral factors in stock decision for me (but need to tell there are investors who love¬†dividend stocks: 1, 2, 3). Actually, from a company point of view issuing a dividend is a damage¬†in the long term.¬†Let me explain: when a company issue a dividend of X per share, the stock price instantly loses X. It’s logical, the company is worth less. If a company doesn’t issue dividends, the not issued dividend is still in the stock price. A company that reinvest the not issued dividend is more likely to make more money out of it, with a final result of having more chances of growth in the future. There’s more¬†value in stocks who don’t distribute dividends.¬†Here’s a list of very successful and growing companies who don’t distribute dividends.

Have a nice day.

Stock Price and Market Model

Good morning RIPvestors,

welcome to another post in the investing series, where I gradually introduce you to the world of investments and go deep on topics I have some experience with, mainly related to investments in Switzerland.

Here’s the tentative schedule for the series:

[Note: this post is split in several pages because it ended up being very long.]

In this post I’m going to show you¬†my understanding of the stock market and the players involved. My humble¬†goal here – I’m totally NOT an expert this field – is to help¬†you¬†(and myself)¬†in becoming aware¬†of the risks associated with investing in stocks/funds, understanding the basic mechanics behind a stock’s price and avoid common¬†pitfalls¬†like panicking and trying to time the market.

astrobeerEssentially I’m going to throw¬†a lot of mostly useless words at you that probably won’t impact much your behavior as investor. Sadly¬†though, in the world of “risky”¬†investments even few apparently small mistakes can destroy an otherwise good strategy. For that reason – to avoid disasters and better react to¬†bad news – I think it’s useful to¬†build a solid¬†knowledge base. For the same reason astronauts spend more than 90% of their training time facing simulated disasters. The difference here though is that I’m not as good as the thousandth part of an astronauts’ trainer ūüôā

Hi RIP, I’m a little bit lost. I’m following you since the first episode and my mood is continuously¬†flipping¬†between enthusiasm and desperation… Can you just tell me how, when, where, on what should I invest??

Relax my imaginary friend, there’s still a¬†long way to go.¬†My goal,¬†by the end of this post, is that¬†you’ll know as much as I am and you’re going to tell me what I should invest into. The rest of the series is just technicalities to implement your strategy. Here we’re going to dig as deep as I’m able to¬†into the realm of the market rules.

Let’s start with the single¬†most important thing to know, and let’s do that by asking a question:¬†What’s in a stock price?

I think it should be intuitively clear¬†why¬†this is the single most important piece of knowledge about¬†the stock market, but let’s assume it’s not. If you understand¬†why a company is evaluated at X and what you’re paying when you buy it, you’d recognize¬†all logical fallacies when taking impulsive decisions. Bullshits like: “everyone should buy X, they are growing a lot!“, “Emerging Markets didn’t grow¬†in last 6 years, you shouldn’t buy” or “The market is high, you should sell” should ring a bell inside you.

So then, what’s in a stock price? Or in general, what’s in a price of anything sufficiently traded in free market model? I said “sufficiently traded” because if¬†the market is not wide you may experience under/over pricing due to lack of knowledge by some of the traders.

In the stock price of a company X in a free and wide enough market is the averaged risk adjusted opportunity cost of the flow of X’s expected returns over time.

What a complex definition! And I made it! It’s mine, mine! Let’s dig deeper.

magicstoneLet’s start with an example: “I want to sell you this Stone. This Stone will produce, out of thin air, 10 Dollars per day. Inflation adjusted, Forever“. How much would you pay for the magic Stone? Let’s for simplicity assume that the 10 dollars per day are the only asset we’ll be owning and that we can’t make¬†any other business decision like trying to become famous by showing to the world that we own a magic object (how cool would it be??).

There’s not a unique¬†answer to this question. But to try to come up with a price I’d do the following analysis: how much would I need to obtain the same cash flow with another known¬†investment strategy? That’s my individual opportunity cost. Let’s assume I’m risk averse, so my default strategy with my money is buying bonds and I’m looking for better alternatives, whatever gives me more than the very low at the moment bonds’ returns. Another potential buyer may be less interested, since they may be running¬†a nice business where every extra dollar they invest on it doubles every year. This potential buyer will be willing to pay less for the Stone, since they need less dollars than me to obtain the same cash flow. Their opportunity cost is higher. If you have a wide market, the opportunity costs eventually reach an equilibrium so do the prices.

Opportunity costs play the stabilizing¬†role of inserting a nice negative¬†feedback loop into the price of everything. If there’s an economic boom and everything is growing 20% each year my opportunity cost is very high so I’m willing to pay less for things. The opposite happens on recessions.

Such a Stone is a good model for a treasury bond, not for a stock. Expected company revenues¬†are harder to predict (mean estimation) and yield very high uncertainty in the prediction itself (variance estimation). The means may drive the price, the variance may alter the opportunity cost.¬†One¬†thing is to have a guaranteed and predictable cash flow over time, another thing is to have a lot of unknowns. Would you rather buy X¬†that earns 5% guaranteed per year or Y that is expected to earn on average 5% per year but may go up and down by up to 90%? Right, volatility comes with a cost. That’s why I added “risk adjusted” component into the price. That’s why you may get a predictable 2% from bonds but expect 6-10% returns (averaged per year over a very long period of time) from the riskier stock market.

Anyway, setting aside opportunity costs and the risk component (variance) the most problematic variables left in our price definition are the unknown expected returns over time.

Here’s where all the magic happens. Why¬†a stock’s price bumps by +-10% after a political news, a quarterly earning disclosure, a company acquisitions, a government maneuver? Well, because the expected returns of the company over time change.

And btw, expected by whom? This is another individual factor. You can try to make your offer for buying a stock¬†based on your personal expectations. It won’t impact the market price though. If your offer is below the market price, none would sell you. If it’s above everyone would buy from you. So what’s the market price? It’s the equilibrium. It’s the average expectations of future returns. It reflects the expected returns over time of the company, expected by the very large population of buyers and sellers. Expected by all the publicly available information about the company, the sector it operates in, the rumors about acquisitions, the hire rate, layoffs, current and past earnings, newspaper headlines, current and future projects… the price of a stock of a company contains the expectations of its future, based on all the publicly available information.

Well, I’m using the word “stock” where I should use “capitalization“, which is stock price multiplied by number of circulating stocks. Not a big issue, the same concept applies. I’m also focusing on stocks instead of index funds but the same¬†rules apply. An index fund in just an aggregation of stocks.

So, let’s say once again, since this is the basic rule of everything about stocks: the stock price of a company embeds the expectations of its future returns, based on all¬†the publicly available information.

“Ah cool… anyway, RIP, when is my stock price raising?

Essentially, it is raising¬†when today’s¬†expectations are better than¬†yesterday’s. Well, not exactly. Meeting expectations should earn you the risk adjusted opportunity cost. In an age where in US people¬†wonders¬†if you should take 5%,¬†someone else¬†aims to 3x risk free guaranteed returns of 2% (i.e. 6%) of a balanced portfolio with other assets categories represented along with stocks,¬†I guess that 6-8% per year is a valid expectation¬†those days, for investments in USD currency at current inflation rate (~1%). In Euro area, with inflation rate close to zero, expected returns may be 5-7% in EUR currency.

Anyway, it’s important to understand that it’s not enough that the company you’re investing in is doing well, it has to do better than expected (or at least as good as expected). This is true in the other directions. If a company is expected to shrink, it may still be worth investing in it. The price already reflects bad expectations and just keeping up or shrinking less than expected may end up in a stock price increase!

Let’s take a look a the implications of this rule:

(click on Next Page)