Hi RIP friends,
Marry Christmas and happy new year 🙂
Welcome another boring post about my investing paralysis. A couple of weeks ago I told you about my unmotivated November 2019 escape from stocks. If you missed my last post, please take your time to read it before this one, or else this one wouldn’t make much sense.
TL;DR for the lazies: I sold ~300k of stocks ETFs, realizing a lot of (hopefully tax free) capital gains and leaving my portfolio unbalanced and too conservative (35% Bonds, 35% Cash, 30% Stocks) for a wannabe FIRE.
I’m glad many of you found the time to write me a comment or a private message: thank you very much. Some of you found my thought process reasonable for my wealth/health balance, and few even useful for their own situation as well.
So here I am, documenting what happened since last post.
I’m sorry that I’m pushing many more interesting posts further, but this had to be done before EOY. Do not worry, I’ll soon have much more time to focus on my writing 🙂
[Also: before EOY 2019 I’ll set up first meeting with the 6 “lucky ones” selected for my coaching experiment. – for you folks: expect an email before end of the year 😉 – and then I can get back on track with my desired schedule. It will be an amazing 2020!]
Ok, back on topic!
I’m in a messy situation: hosting grandparents for Christmas Holidays, going to Ikea every other day for the new flat, mounting furniture every other day, unboxing boxes, playing with BabyRIP and also…
“RIP, you said back on track…”
Yeah, right. Everyone has a messy life, I’m not the only one! Anyway, I dedicated an evening to read all your comments and reply to them, I let the thoughts evolve in background while doing other tasks and chores, and decided to set aside the entire Tuesday December 24th to make decisions and take actions.
Let’s start with analyzing the alternatives you recommended:
1) Dividend stocks / Dividend Growth: quite a few of you told me I should just put money into “high dividend stocks” or better “stocks who have historical records of growing dividends over time“, the so called dividend growth strategy. Someone mistakenly call this “value investing“.
This has been the most common suggestion.
And I hate it.
But don’t get me wrong. I don’t hate dividend investing, I hate that the “FI Community” is so fond into dividend investing. It’s like a cult I called dividendism.
Dividendism has two flavors:
- the “High Yield” order: buy stocks with high dividend yield. A nice pair of Vanguard ETFs that implement this strategy is VYM/VYMI (US/International).
- the “Dividend Growth” church: buy stocks with historical record of growing dividend over time. Vanguard has also ETFs tracking this: VIG/VIGI (US/International). Mind that VIG Yield is around 2%, like S&P500 Yield… confusing at least.
It’s also common for dividendists to not buy ETFs but pick stocks directly. A cult must have its own dogmas.
What do I have against dividendism?
It’s been proven so many times that issuing dividends is irrelevant – if not negative – for a company. Still people believe into this thing like it’s the only thing that matters in investing. Someone even made a fortune about selling this mantra to others.
Let’s back my claim with some data from real experts:
- Big ERN from Early Retirement Now wrote about the Yield Illusion (or Delusion) three amazing posts, with simulations and data. Plus another insightful post on small cap and value stocks (mind that high dividend stocks are not the same as value stocks), arguing against size and value risk premiums. I’m a bit on the fence about this one, but few decades of history have their relevance.
- A 2017 Vanguard research on both High Yield and Dividend Growth concluded that “Compared with other equities, the performance of these strategies has been time-period dependent and largely explained by their exposure to a handful of equity factors: value and lower volatility for high-dividend-yielding equities and lower volatility and quality for dividend growth equities“. Not the fact that they issue dividends.
- Ben Felix, in his amazing Common Sense Investing (CSI) YouTube channel, demonstrated how dividend investing should just be called stock picking. And he confirmed that the exposure to the factors (value, size, profitability) are relevant, not the fact that a company pays dividends. Enjoy the video, it’s just perfect:
A few more words on Ben Felix and his channel (CuriosiTips time!): if my blog were only a blog about investing, I’d shut it down after having discovered his channel. He’s simply perfect. There’s no need for anything else at this level of complexity. He’s able to reduce complex matters in simple and precise terms. I’m devouring his videos in my spare time. I’m learning a lot of technicalities, and I’m pleased to discover that (1) I know more than I thought I knew, and (2) I agree with his conclusions 95% of the time. Amazing Ben, thank you for your great work! Ah, Ben also hosts a podcast named Rational Reminder, about investing of course.
About the above “dividend irrelevance” video, I have a main concern though: money, and in general the entire economy, has some value because we assign a value to it. It’s a story we tell ourselves (cit Sapiens, Harari). So if there’s a psychological factor at play in “receiving a consistent and almost predictable cash flow from my stocks”, then it has economical value. It can turn dividend investing in a self fulfilling prophecy. Which is both good and… extremely bad! Companies are encouraged to keep issuing high and/or growing dividends even when it doesn’t make financial sense for the company, just to keep shareholders from running away. It can easily turn into a Ponzi scheme. An example: GameStop. Issuing high dividends until… ooops! Fun fact: GameStop stock is up 51% since August, when announced cutting dividends 🙂
Note that the dividend infidels are not detractors of dividend stocks. They are all showing us that following blindly dividend strategies is at best irrelevant, at worst brings in uncompensated risk due to lack of diversification. P.S: here‘s another perfect video from Ben Felix about risks.
TL;DR for the impact of historical (high? growing?) dividends on future returns:
I couldn’t help but laugh at it 😀
But still… I’m one of those victims of psychological effects, with the desire to replace a steady income with an investment-generated cash flow. Yes, I could buy the entire market and sell shares when needed (not allowing the companies dividend policies to dictate my spending – Ben Felix), but I’m lazy and I like passive cash flow so… let’s cherry pick some articles to rationalize my decision to invest in dividend stocks!
Value (not dividend, but let’s pretend it’s dividend!) is underperforming since few decades… but it’s cyclical so YEAH!
“The valuation spread between value and growth stocks has widened. Indeed, as a result of the relatively poor performance of value stocks over the past decade, the book-to-market spread between value and growth stocks is at about the same level it was in 1992, when Fama and French published their research. The potential for outsized returns from value stocks is greater now than it has been for some time“. I don’t understand what it means but… YESSS!
Dividends payouts have been much less volatile than stocks evaluations in last 120 years so YAY! Well, total returns volatility of dividend stocks has been much closer to the global market one, and during the financial crisis of 2008-2009 dividend stocks performed even worse but… shut up! And give me a break!
P.S. saying that a company who keeps issuing growing dividends is better because the cash flow is less volatile is the same as saying that applying the 4% rule to a retirement portfolio reduces its volatility to ZERO, because its “dividends” are predictable, and growing with inflation rate. And if the market goes down the yield goes up!
But… as I said, I have a relationship of love/hate with dividend stocks. To add more irons in the fire, dividends are tax-inefficient in Switzerland. Unless your income is low (dividends are taxed as income), and of course unless you’re considered a professional investor and pay taxes on capital gains. Since low income and professional investor might look like 2020 for me, dividend paying stocks become appealing again.
I own high yield stocks (VYM and VYMI) and some supposed high yield bonds (WING and IEML). I’ll keep them and maybe increase my VYM and VYMI exposure.
2) Value investing: a couple of you told me I should look into Value Investing “a la Benjamin Graham”.
According to Wikipedia “Value investing is an investment paradigm that involves buying securities that appear underpriced by some form of fundamental analysis“.
Someone mistakes Value investing for dividend investing, someone else mistakes it for just stock picking based on intuitions. Value Investing is hard work. It’s a job that requires time, skills (very hard to prove one is skilled), and it is very likely to underperform the market.
Of course I’m somewhat tempted to try it, I’m an easy prey to the overconfidence demon. But the facts that (1) it requires a lot of work, (2) increases volatility without an extra risk premium (i.e. uncompensated risk due to lack of diversification), and (3) makes it easy to be classified as a professional investor (requiring higher returns to break even considering capital gain taxes) make me think ten times before stepping into that territory.
Not for now.
3) Ray Dalio’s all weather portfolio: why not copy a popular low volatility / decent yield portfolio? Few years ago, Ray Dalio – for those who don’t know who Ray Dalio is, please get out of this blog within 30 seconds! Go! – suggested a simple portfolio with assets anti-correlated in a way to reduce volatility while obtaining higher profits than fixed income strategies.
This is the composition:
I’ve dug into it a bit, and it’s hard to find a reliable source of data on past performance of this portfolio in terms of yields, max drawdowns, and volatility. According to iwillteachyoutoberich, who quotes Tony Robbins who quotes Dalio (LOL): “The strategy has produced just under 10% annually and made money more than 85% of the time between 1984 and 2013“. Nice cherry picking of start and end dates 🙂
In increasing articles quality: lazyportfolioetf shows how the portfolio made money even during the great financial crisis of 2008-2009, with a max drawdown of 6%, while portfoliocharts (the kamasutra of financial nerds) brings the enthusiasm down with just a 5.3% average annual return from the 1970 to today. Even worse: since year 2000, the 10 years rolling average is just around 4%.
Anyway, I have no doubt that it’s a good portfolio for its low volatility.
My complains are:
- His low volatility is kind of magic, I suspect it’s overfitting past data.
- Too much US centric.
- I don’t like Gold (but I might get in love for commodities, that are underpriced now).
- 55% bonds? In a low yield environment like this?
Still, it might be a good temporary choice while figuring out other variables in life.
Not for me though.
4) Get back in stocks ASAP: just swallow the pill of a month out of the market, while most indexes grew by 2-3%, and get back in before it’s too late.
Valuations are high, but maybe we’re closer to 1989 than 1999. Getting out now and wait for a crash might mean never coming back without a significant amount of lost opportunities, and decades of regrets.
Don’t time the market! I wrote one of my most successful posts about this, why am I not following my own advice?
It’s time in the market that matters, not timing the market.
Yes, I’m swallowing my pride and buying stocks.
Not buying the exact same assets though, I’ll take advantage of last month weakness to simplify my portfolio and buy VT.
Not all at once: reducing volatility (and accepting lower expected returns) by Dollar Cost Averaging (DCA) during 2020.
5) Hold Cash: cash is king! What’s the problem with holding cash? If you don’t see opportunities around, why not sit on your cash? Warren Buffett is sitting on a lot of cash right now, you can do it too!
But let’s not FOMO, there’s no need to rush.
I feel more at peace with myself if I have some (hundreds of thousands of) cash reserve. As I said in my last post, this is also due to my perception of being running last lap of my career as a software engineer. My risk profile at age 42.5 with a dead end career is probably different than yours. Judge me judiciously 🙂
Ok, I’ll keep holding a lot of cash for FIRE standards.
6) Buy better bonds: as reader eagle commented, I should get rid of the bad EU bonds I hold (IBGS and IEAC) and buy USD-denominated Investment-grade corporate bonds (FLOT). I’m sorry I never introduced these bonds before. I purchased some bonds in late summer and fall, and I’m a bit overdue for a Financial Update (one of the next posts) where I’ll explain my thought process back in summer.
Anyway, US bonds were on my target. They still offer 2+% stable returns, which is much better than 1% IB interest rate on USD cash.
I took time to look into US bonds and decided to purchase some of them.
Ok, then what?
I sat in front of my computer on Tuesday December 24th, with a full day of focus ahead of me: no chores, no duties, no furniture to assemble.
First thing I did was write a document with goals and planned actions. As I started writing it, I realized that my goals were not clear. Good! Let’s spend the entire morning clarifying my investment rebalance goals.
At around noon, I was done with a draft of my investment goals.
Is it a new version of my IPS? I wouldn’t call it that way. It’s a temporary doc, that needs to be re-evaluated during next year. The doc lists goals and actions in the immediate, short, mid and long terms. It seemed to me a smart thing to do given my circumstances. I’m in the midst of a turbulent life change, so I’d rather have some fine grained maps for the transition along with the long term vision of an IPS.
This is my doc, please take a look:
- I’m going to sell more ETFs this year, and realize more capital gains.
- I’m keeping a huge emergency fund of 200k EUR equivalent (mostly CHF).
- I’m aiming to 50% stocks / 50% bonds for the mid term, then I’d like to implement a CAPE & Age based AA strategy.
- I’m not buying regional ETFs for stocks, just VT (as I recommended in my ETF List).
- I’m getting rid of small cap stocks. It doesn’t make sense to chase lower volatility and hold high volatility assets.
- I’ll put more money into high dividends (VYM and VYMI). In theory, value factor carries a risk premium which means it has higher volatility… so why value is ok and size is not ok? I’ll live with this inconsistency and will figure it out later.
- I’m buying US bonds (at least as a temporary store of value) and getting rid of most of EU bonds. I plan to keep some EU, and EM bonds in the mid term.
There are many more minor decisions taken, take a look at the doc.
Before you say “well done RIP, this is very wise/smart/responsible” (or before kicking my ass) let me tell you that all I’m doing is make our wealth ready to dodge, deflect and bounce back the most insidious attacks from its strongest enemy: myself. I’m the weakest cog in our machine. I’ve been the one who made the accumulation of wealth possible, but I’m also too emotional, weak against greed and fear monsters, and – as I already said – an easy prey to the overconfidence demon.
My time weighted portfolio performance in 2019 has been 20.24%. And this doesn’t count the fact I’ve been sitting on more cash than I planned to!
A dead investor who had all their money invested in a 75% stocks (VTI) and 25% bonds (BND) would have achieved 25.67%. A better dead investor who hadn’t stopped monthly automatic contributions to their investment plan would have performed even better!
I’m not in danger, I’m the danger!
Anyway, on the same day I took a lot of the planned actions for immediate, short and mid term.
Here’s a screenshot of ideal vs real Asset Allocation with actions taken.
This is a screenshot of the investment tab of my private spreadsheet. The public one is not in sync yet. Will do once I connect it with the new 2020 Net Worth spreadsheet, it’s not worth the effort now.
Fun fact: most European stock exchanges closed at noon on 24th, so I wasn’t able to sell CEUS (will try again on the 27th).
Report of the actual trades and fees follows:
As you can see, I purchased 120k USD VT, 70k USD BSV, and 27k USD FLOT. I’m mostly done with bonds until April (will sell IBGS and maybe buy more BSV, not clear though). I will DCA into VT, VYM and VYMI during 2020, need to define the exact deployment though. With the expected future sales of CEUS, EIMI and IBGS (135k EUR) and the current cash above 200k emergency fund (another 115k EUR) I should be able to DCA 20k EUR per month into stocks during 2020.
As always, trading US domiciled ETFs is laughably cheap, while EU ones are relatively expensive.
I don’t know WTF happened with IPRP though. One share was sold at a higher price, but it generated 2.19 EUR trade fee! What the crap??
Anyway, thanks to the sales, I realized another 5.3k CHF capital gains! Let’s celebrate!
I’m at +90k CHF in realized profits for year 2019!
Uhm, let’s wait tax declaration for the celebrations 🙂
You can take a look at my Net Worth by Asset Class evolution. Currently I’m 30% stocks, 43% bonds and 27% cash.
You can also take a look at my Net Worth by Currency, which shows an uncomfortable USD over-exposure (15% EUR, 31% CHF, and 54% USD)
I’m now sitting on 230k CHF equivalent (mostly USD) on IB, plus another 100k on my checking account. More money is coming my way during the next month (Hooli stocks vesting 30k+ USD and yearly bonus 20k+ CHF).
I plan to DCA into VYM, VYMI and VT. I also plan to sell CEUS (asap), IBGS and EIMI in April.
I guess by summer 2020 I should review my strategy, based on how foggy is our family future.
But this is material for a new huge series of posts 🙂
“Wait RIP, did I hear correctly? You ‘quit’ trying to time the market?”
Yes, yes, I quit timing the market (for now) with with my tail between my legs.
If you ever want to try it: please don’t.
And… Happy new year 🙂