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 🙁

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!

Listen:

• 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 😀

What?

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. tschüß!”

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

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: Interactive Brokers (affiliate link).
• 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 🙂

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 🙂

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 🙂

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 🙂

 

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Other posts in the Investing series:

• Investing basics
• Financial Investing
• Funds Investing
• Fees & Taxes
• Stock Price and Market Model
• Investor Profile and Lifelong Investing Strategy
• ETF 101
• Stick with it
• My take on Cryptocurrencies – Part 1: The Ugly
• Interactive Brokers 101