Rip and Ben

Hi dear readers,

Today I want you to meet my friend Ben. Say hi to Ben ๐Ÿ™‚

Who’s Ben? He’s Ben Carlson of course!

Sadly, Ben is not a real friend of mine, and I don’t think he’s even aware of my existence. But I follow his blog since quite a few years now, and I feel somehow close to him. He also wrote three books so far that I didn’t read yet. Sorry Ben for that. You know, I’m a kind of a freeloader. Yes, I know, I’m not giving our friendship a good start… I will do my best to make up for it, I promise!

These days I’m receiving a higher than normal volume of personal messages from people who ask me “what should I do in this market crash?

Like I were someone who has an answer for that…

I’m in no way a market guru! I’m dumber than the average, like it’s shown by my performance numbers. I preach passive investing, and I mostly follow my own suggestions, but when I try to be smarter I end up underperforming the benchmark all the time!

Being aware of that, my “financial training” during the last 2-3 years has been focused on the psychology of investing. So I’m doing my best to listen to my body and my emotions, calm down, don’t get overly excited when things go well and don’t get heated when things go wrong. I survived nicely the 20% decline in Q4 2018, and I’m doing fine (so far) in this 12% rapid decline, amplified by my overexposure to Emerging Markets, but softened by my underexposure to stocks in general (30% of my Net Worth).

Then, for now, I’m just following my plan.

Few days ago I wrote a post on how I’m adapting to the “new normal”, and how I’m not taking many actions. Just maybe accelerating my “come back” into the markets after my huge November sell-off.

Btw, we already had a couple of bounces and a FED intervention. Markets seem to be recovering but, as always, we have no idea if that was the bottom or just a dead cat bounce and we’re going for a full pandemic who destroys the world economies.

I have my opinions, but I’m not very attached to them. I’m open to change my mind given new evidence. My personal opinion is that the governments reactions to prevent the spreading are damaging the economy and not preventing the spreading – which is not possible anymore – and on the disease side it seems to be mild on people below age 60. If I were a benevolent world dictator for life, I’d do my best to (1) ensure old people are protected, (2) fund research for a vaccine, and (3) not destroy the economy by imposing vetoes of any kind.

Again, those are just my personal weakly held opinions at this moment.

Hey RIP, I’m waiting here…

Oh, right! Sorry Ben, please come in ๐Ÿ™‚

If you follow my blog you know how I like and follow the guys at Ritholtz Wealth Management (Ben Carlson,ย Michael Batnick,ย Nick Maggiulli,ย Josh Brown,ย Barry Ritholtzโ€ฆ), and their YouTube channel The Compound. I’ve mentioned them several times in the past (1, 2, 3 and more).

Today, as part of my morning reading routine, I read Ben’s latest post on his blog.

The post title is “Questions Every Investor Needs To Ask Themselves Right Now

Dear Ben, you know how to catch readers attention, don’t you? ๐Ÿ™‚

๐Ÿ˜‰

Readers, go read his post, it’s a gem!

Ben starts with mentioning a psychological study on gambling addiction, touching concepts like magical beliefs, illusion of control, investors craving for predictability, and the role of “financial guru” in this scenario.

And then, as I was expecting, Ben dropped his piece of wisdom: look for more questions, not answers.

Ahem…

Yeah, right. In Ben’s own words:

Investors often look to find some modicum of control through the answers of gurus. We just want someone to tell us whatโ€™s going to happen next so we can either buy or sell to relieve the fear and anxiety.

In all my years of doing this, Iโ€™ve never come across a single person who has all of the answers. That person doesnโ€™t exist.

When stocks go down in a big way I find itโ€™s more helpful to seek out the right questions as opposed to trying to find all of the answers.

Thanks Ben. Thanks for also providing a good place where to start our own self inquiry ๐Ÿ™‚

Here follows his suggested set of questions:

Click on the image to go to Ben’s blog post

You know what I’m going to do now? I’m going to answer them all publicly ๐Ÿ™‚

Dear readers, before asking for my opinion about the market situation, I strongly recommend you to do the same (maybe not publicly if you don’t feel like).

Ben, can you be my interviewer?

Well, it’s 5am in New York…

Thank you!

Let’s start! Have a seat, take a drink.

Can I have my coffee?

Later. Let’s go!

But… Ok ๐Ÿ™ First question: If you sell your stocks now what is the plan for getting back in?

Thanks for asking, Ben ๐Ÿ™‚

This is the rhetorical question to prove the point that “in order to time the market you have to be right twice”.

My personal answer is that I’m already low on stocks, and I’m slowly re-entering the game, so selling my stocks is not an option now. I’d be only considering it if I had some knowledge (not factored yet in the market) that the pandemic is going to hit hard on fundamentals and a worldwide recession is coming. In that case I don’t know… I might develop a plan to buy back stocks at -50%? Or gradually every -5% decrement? But that would be only for short term gains, because I know that in 10 years from now this epidemic will only make us stronger as a society, given our antifragile nature.

So… no, there’s no way to make a rational plan which doesn’t involve magical thinking and ad hoc strategies backed by no data.

Good question! Made me think that selling now is completely irrational, unless you urgently need your money. In that case you’d have much worse problems, first of which a very bad financial planning attitude.

Has your time horizon, risk profile or circumstances meaningfully changed enough to warrant a portfolio change?

Well, something is changing in my life: I’m quitting my job and semi-retiring, basing my financial future on a plan which is weak against a sudden market crash.

Anyway: time horizon has not changed, risk profile a bit, circumstances a bit more.

Still not enough to warrant a portfolio change though. As I said, I might accelerate my return into the market. Instead of DCAing 20k per month, I might try to micro-time my purchases to buy the dip.

RIP, you read Michael’s post about it, right?

Yeah, I know, I read it… but I’m human, and I need to learn things the hard way!

Next question please!

Will your lifestyle be impacted in a meaningful way if stocks continue to fall?

Yes it will!I might have to say “goodbye Switzerland, welcome back Italy” sooner than expected…

You know what? You’re convincing me to sell all my stocks!

It’s your fault! Did you build your portfolio with the understanding that stocks can and will fall on occasion?

Everybody has a plan until they get punched in the mouth.

Mike Tyson

Well, this is complicated.

The short answer is of course “yes, I know it. It’s lecture number 1 of investing 101!”

But theory and practice differ, a lot. And it’s also a matter of size and timing.

Size because the more your investments grow, the more their value swings up and down with market volatility.

Time because the closer you are to “retirement”, the stronger the effects of a bad sequence of returns are on your financial plan.

In my 4 years of “investing career” I’ve already experienced few minor corrections (Brexit, US-China trade war, 2018 Q4 20% crash, and now the Covid-19 outbreak) and a couple of amazing years (2017 and 2019).

I’m lucky enough that I’ve already realized good profits to mentally offset the potential losses, and I’m also lucky enough to have been exposed to market downturns in small doses of increasing volume.

I had time and financial room to prepare myself for a real bear market. In reaction to these 4 years of experimentation with stocks, I adjusted my risk profile and reduced stocks exposure accordingly.

I’m good to go!

I recommend anyone who just started investing to do a honest assessment of their own risk tolerance. Mind that your risk tolerance will change over time, especially if you just started earning, saving and investing. Go all in now, and wish for the worst! Experiencing the pain in small doses makes you stronger.

Actually, Ben showed in a Common Sense Investing video that one could also aim to constant exposure to stocks over their lifetime, which means going leverage in your early earning years – a bit controversial idea that makes sense if you think about it!

Hey, this is not me! Who’s this guy? It’s a different ‘Ben’… RIP, are you betraying me?? You said I’m ‘the Ben’! And this guy’s channel has ‘Common Sense’ in its name, like my blog! How dare you!!

Oh crap… sorry Ben!

There are just too many Bens in my radar. And I didn’t even mention Franklin or Graham yet…

Anyway… next question, please ๐Ÿ™‚

Have you underestimated your appetite for risk assets?

I know what you mean. Are we talking about Greed?

I think I can honestly say I’m not being greedy with my investments. I’m following passive investment strategies, and my current allocation is 40% bonds, 30% cash and 30% stocks.

Since I started investing, I’ve had my dose of exposure to “promised higher returns”. From Bitcoins to P2P Lending, from active funds to hot sectors, from value investing to stock picking. Just land on any other personal finance blog nowadays and you’ll see promises of guaranteed “15% above market average with value investing”, or “guaranteed 10% returns with P2P Lending”… while in the meantime several of them are showing up as scam.

Beware of “too good to be true”. If it sounds too good to be true, it probably is!

Greed (and overconfidence) is a bad beast. So far, I’ve not been blinded by it. I’m more of a Fear guy.

Good job ๐Ÿ™‚ Next: Do you need to use the money you have invested in stocks for spending purposes in the next 3-5 years?

My asset allocation is built on top of a cash cushion of ~2 years of living expenses (well, right now even more), so the answer is probably “No, I don’t, at least not all of my invested money”.

There are scenarios where we’ll move back to Italy and maybe we’d want to buy a flat there, but for that we could use uninvested pension funds.

For you, dear readers, the point is: do not invest in stocks money you already know you’ll need in less than 5 years.

Does your portfolio match your willingness, need, and ability to take risk?

Bro, aren’t you repeating yourself? Isn’t this similar to a question I already answered?

That’s because when asked a question you go wild and answer to questions nobody asked (yet)…

Yeah, good point.

My current portfolio matches what I think is my current willingness to take risk. The fact that a sharp decline happened means that we’re checking the extreme conditions, the riskier scenarios. If this volatility would be the normal, I’d say my portfolio doesn’t match my willingness to take risk.

… and what about the need and ability to take risk?

Oh right, didn’t see them at first sight.

That’s because you are affected by Jumping to Conclusion bias!

Yeah, you’re right… but hey, are you my guest or my therapist??

Anyway, this is a very good point. I have a need to take risk!

That’s a good question to ask yourself: “how much risk do I need to take?

If you take no risk, you get no returns. You actually lose money thanks to inflation.

if you want your nest egg to sustain your lifestyle forever, i.e. if you want to be Financially Independent, you have to take risk. You need risk.

I could reduce my stock allocation to 10% of my portfolio, but then what about the 4% rule?

I need to take risk. You need as well. How much, though?

Let’s take a break.

(RIP goes away for 10 minutes to focus on the question)

Hi Ben, huge fan of yours!

Thanks ๐Ÿ™‚ Can you call RIP back? It’s 7am and I should get ready to go to work…

I saw your office is in Bryant Park… I love the New York Public Library! Next time I come to New Y…

Yeah, but why is RIP taking so long? Is he always that weird?

Oh, even more than that! He’s probably just playing a mobile game or scrolling on Facebook. Or worst, buying stocks on a whim! Tell him not to, please! Oh, here he comes, see you bye bye

That’s really a nice question! Thanks for having asked, Ben.

After a careful consideration, I realized that I would need to take more risk if this was the end of my productive career, i.e. if my current nest egg would have to last for my family’s lifetime. On the other end, I’d need to take less risk if I’d still be generating an income or being cash flow positive.

The net effect of those two forces is that I probably need to take a bit more risk than I’m currently taking, thus I’m keeping up with my strategy of Dollar Cost Averaging back into the market until my cash cushion is of my target size (150k EUR).

To my surprise, this is a counter-intuitive answer, since one is supposed to be more conservative after retirement, and not before.

I’m welcoming this apparent paradox and will work on it.

Next!

Do you fully understand the potential range of outcomes when investing in stocks?

Yes, of course. But this one is identical to “Did I build my portfolio with the understanding that stocks can and will fall on occasion?“, isn’t it?

Hey, you’re the interviewee!

Yeah, yeah ๐Ÿ™‚

I told you! He’s an ass!

Hey, how dare you…

Ok, nest question: Is your portfolio durable and diversified enough to withstand severe dislocations in the stock market?

The hall does it mean? O_o

Are we talking about diversification?

My current portfolio is diversified, even though it has several weak points that I want to fix in the mid term:

  • Too much exposure to Emerging Markets, even though I’m ok with a bit of over-exposure because (personal opinion of a dumb man) I think EM are lagging behind Developed world for too long, and CAPE is low for EM.
    • RIP, did you read Michael’s post about multiples?
    • Yeah, I did, and that’s a very good one! But WTF are you doing here in my bullet list??
  • Too little (zero) exposure to Size Factor (Small Cap Stocks)
  • Wrong exposure to the Value Factor. I’m holding significant positions in high dividend stocks ETFs (VYM and VYMI) while what I want to get is the value premium, which is weakly correlated to high dividends.

I shared many of ‘the other Ben’ videos about the irrelevance of dividends and factor investing. I might want to switch to a more focused factor investing strategy, but I guess your question wasn’t meant to be answered in fine grained details.

In general, dear readers, you should always ask yourself if you’re diversified enough.

And an epidemic outbreak like this can test your portfolio robustness to unprecedented (in our lifetime) events that slice your allocation across verticals you hadn’t planned. For example, my portfolio is weak against an epidemic originated in an emerging market. I hadn’t planned for it!

Let’s see the glass half full: let’s hope for more “Grey Swan” events that unit-test your portfolio robustness.

Does your investment strategy fit with your personality?

Uhm… this is a question I don’t fully understand why it is supposed to be important.

My interpretation is the following: if I can identify a bit with my investment strategy, I’d be more willing to stomach the losses because it will be part of my identity.

For example, let’s assume I want the world to move toward renewable energies. If I want to identify with my investments, I can decide to buy stocks from companies that operate toward the carbon footprint reduction.

Let’s say those stocks lose 50%. I’m more willing to stick with them because it’s part of my identity. I’m not jumping on Marijuana stocks because that’s what’s hot now. I’m following my Soccer team even if it goes in “Serie B”.

I see advantages of coupling a bit of your identity with your investments, but I also see the dark side of self delusion, confirmation bias, and availability bias.

Right now I’m mostly detached to the companies I invest into, but I know I do want to feel closer to what I’m investing.

Food for thought, low priority though.

Please correct me if I misinterpreted your question.

Yeah, like I will really read this post…

Can you at least pretend? ๐Ÿ™

Next…

How did I react to market carnage in the past?

This is a scary question to answer, because while I can proudly tell that I did well during recent corrections (including 2018 Q4) I was invested in the 2000-2002 dotcom bubble and I behaved in the worst possible way!

RIP, how old you are??

I was 23 years old in Y2K. That’s how old I am.

You can find the full story in the third episode of “My Story” series.

TL;DR: I had some savings, not much tough (16M Italian Lira, 8k of today EUR). I was convinced by a banker to invest in an actively managed fund of tech stocks in year 2000. I sold at the bottom in year 2002 and lost 50%. That’s how dumb and ignorant I was!

But I’m here to help you not making my mistakes!

Me?

No… of course not you! I’m talking to young readers, assuming there are some with attention span longer than a TikTok video.

So I hope I learned from my past mistakes. Recent events are showing that I did learn, to some extent. I don’t know how I will behave in case of a longer and tougher bear market though.

How much volatility are you willing to accept in order to earn higher expected returns over time?

Oh come on Ben, this is the third time you’re asking me the same question ๐Ÿ˜€

Fair… What are your core investment beliefs?

This is a good question, and I suggest everyone to take time to write an answer and document it in an Investor Policy Statement encompassing your beliefs, your financial plans, corner cases, conditions and so on.

Mine is a bit rusty. I should update it, I know.

What do you own and why do you own it?

I see what you mean.

I won’t fully answer this question here, because I’ve done so many times and the pieces are scattered in various posts on this blog. It would require some context and long explanations to justify why I own what I own, but the key point here is: “is your money where your mouth is?

With the previous question we checked intentions, now we check actions.

Because you might be telling yourself “I want to be a passive investor”, but then you keep buying those Tesla stocks and brag about it on your TikTok channel… that’s not a recipe for success!

Nice article ๐Ÿ™‚

I knew you would like it ๐Ÿ˜€

So, make sure your actions don’t contradict your intention.

Mine?

No, Ben, not yours, come on! Anyway, I can only take one more question.

Finally! It’s 9am and I really need to go. Here’s your last question: What will cause you to buy or sell securities, funds, or asset classes in your portfolio?

Is this the last question? What a pity, I was having fun! Before I answer, thank you Ben! It’s been an amazing mental exercise! Come here, gimme a hug!

NOOOOOO!! Go away, infected Italian! You and your viruses!!

You’re breaking my heart but I understand. ๐Ÿ™

Back on track.

It’s a very good question!

First things that come to my mind are:

1) Have a B plan, always.

2) Don’t change strategy on a whim, always define the conditions before you move into panic mode, before you take a U turn, or before you celebrate/quit/retire.

This is a very interesting question and I don’t have an answer right now.

I need to take my time to think about it, see you in a hour

(RIP runs away, ruminating on the exciting question)

What the hell… an hour? I’ll get fired if I don’t show up at work in 15 minutes! RIP? This guy is crazy, I’m out. Wait… why is the door locked?

Yeah, he’s a bit mad. Do not worry, I have the second key. Here you go, have a nice day!

Screw you all! Goodbye!

… an hour later…

What an amazing question Ben! I wrote down the main points for which… Ben?

Beeen?

Where are you?

Hey RIP, I don’t know where Ben is, but I guess these cops waiting outside are here for you…

๐Ÿ˜ฎ

Perfect! Let’s tell them in which condition I’m going to sell my stocks and…

YOU’RE UNDER ARREST! YOU HAVE THE RIGHT TO REMAIN SILENT!

Oh, finally! Well done cop!

Where’s Ben? ๐Ÿ™

Come here, I need you!

IS BEN YOUR LAWYER?

No. But… dear cop, are you saving at least 20% of your salary? How’s your second pension pillar doing? Are you afraid about the market crash? When do you plan to sell your assets? Do you perceive that the need to act on the stock market right now is just “illusion of control”?

Wait, why are you running away?

People are crazy!

Have a nice day!

10 comments

  1. Hi RIP,
    Once again a nice post though… Did you already considered a standup comedy career? ๐Ÿ™‚
    Regards,
    Luis Sismeiro

    1. Haha well, standup comedy might be in my future, but for now I’m trying to be a pioneer in the land of “fintainment” ๐Ÿ˜€

  2. Your plan is good, you set a Swiss buffer and you decided to wait until march 2021 without worrying about market fluctuations. And there you are worrying about market fluctuations.
    You worked hard and went through a lot to find some balance beginning this end of march.
    Either you stick to your plan and you find peace with what markets do, either your plan has to change (but I donโ€™t think you want to follow that route).

    1. Technically I won’t look at market fluctuations starting on April 1st 2020 until March 31st 2021, the “unemployment” is not started yet ๐Ÿ˜€

      Jokes apart, you’re right. I should not care. But I hope you see that this is exactly the worst scenario possible for my plan, and I’m a bit worried. It’s like if you say “tomorrow I’m going to the lake”, and you triple checked everything, including the pressure of each of your car tires and then the day after there’s a zombie apocalypse while a UFO is landing on your lawn… yeah, this is a scenario you didn’t plan. Maybe the lake trip must be reconsidered.

      Anyway, I’m not at that point yet. I’ll do another assessment of the viability of the plan at the end of March 2020

  3. Hi there,

    Long time reader, really appreciating your writings. Iโ€™m not staying for long but I felt a urge to dive in reading the โ€œinvesting with leverageโ€ part. While the idea has merits, it can be deeply affected by sequence of returns risks.

    Weโ€™re lucky enough to have the story of someone who went into it just before the 2008 crash and had the guts to keep documenting his journey as the market kept falling down : https://www.bogleheads.org/forum/viewtopic.php?t=5934

    My personal opinion is that in a falling market, you absolutely donโ€™t want to be in a position where youโ€™re forced to make a move. Leverage puts you in a position where sometimes, either selling or putting in new money is forced, Iโ€™d make really sure Iโ€™m prepared before diving into it.

    1. I don’t advocate for investing with leverage, and I wouldn’t do it in my situation. But I think it’s a valid option for those who are young and in a good career track.
      There are many ways to invest with leverage (maybe I’ll make a post about it), there isn’t only the loan/margin account way.
      one can also invest in a leveraged ETF, rebalanced daily. You’re not forced to sell or putting in new money, you just experience amplification of profits and losses. And higher fixed costs, which might make the strategy less interesting.

      Anyway, thanks for the bogleheads link, it’s very interesting!

  4. Hello Rip

    Could you please build a model on renting vs buying a home in Switzerland? I am arguing with my wife on this topic: she buys the smooth talking from the banks (you pay the same as your rent and in 30 years the home is yours) whereas I am trying to show her that the hidden costs (maintenance, insurance, taxes, transaction costs, financial costs…) are huge and that the prices of real estate in Switzerland are unreasonable (discounted cash flow calculations). I am not as good as you at explaining complex things in a comprehensible way. Please help ! Br, Alan

    1. Maybe one day I will.
      I have several friends who went thru the process, and we built a spreadsheet together. I don’t feel confident enough to draw conclusions though.

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