Friday, August 26, 2022

Short Takes: Portfolio Construction, Switching Advisors, and more

I haven’t found much financial writing to recommend lately, and I haven’t written myself, so I thought I’d write on a few topics that are too short for a full-length post.

Be ready for anything

I sometimes see this advice in portfolio construction: be ready for anything.  On one level this makes sense.  It’s a good idea to evaluate how it would affect your life if stocks dropped 40% or interest rates rose 5 percentage points.  Would you lose your house or would it just be a blip in your long-term plans?

However, those who give this advice sometimes use it to mean that you should own some of everything that performs well in some circumstances.  So they advocate owning gold, commodities, Bitcoin, and other nonsense along with stocks and bonds.

Just because you always own at least one thing that is rising doesn’t mean your overall portfolio will do well.  What you want is a portfolio that is destined to do well over the long term, with the caveat that you’ll survive any shocks along the way.  This means controlling leverage and risk.  It doesn’t mean you should own a bunch of unproductive assets.

Switching advisors

“My guy has done very well for me.” People think their returns come from their advisors’ great choices, but returns really come from a rising market.  When markets inevitably fall, many of these people will dump their advisors looking for something that doesn’t exist: an advisor who can steer them away from losses.  What a good advisor can do is help you choose a sensible risk level, keep you from making impulsive decisions, tax planning, and other services unrelated to portfolio construction.

How I would run my portfolio if it weren’t automated

For a DIY index investor, my portfolio is fairly complex.  I’m able to maintain it with little work because I run it with an elaborate spreadsheet that automates almost all decisions.  What would I do if I couldn’t automate it this way?  I’d own just VEQT for stocks, and a mix of VSB and high-interest savings accounts for my fixed income.  I need to be able to ignore my portfolio for weeks at a time without anything bad happening.


It’s not hard to compare the premiums of insurance policies from different insurance companies.  What is difficult is figuring out whether they’ll pay you or fight you if you make a large claim.   If I had useful information about which insurance companies are fair and which are most aggressive in denying claims, I might be willing to pay a higher premium to a better company.

Friday, August 12, 2022

Short Takes: Factor Investing, Delaying CPP and OAS, and more

I haven’t written much lately because I’ve become obsessed with a math research problem. I’ve also had an uptick in a useful but strange phenomenon.  I often wake up in the morning with a solution to a problem I was thinking about the night before.  Sometimes it’s a whole new way to tackle the problem, and sometimes it’s something specific like a realization that some line of software I wrote is wrong.  It’s as though the sleeping version of me is much smarter and has to send messages to the waking dullard.  Whatever the explanation, it’s been useful for most of my life.

Here are some short takes and some weekend reading:

Benjamin Felix and Cameron Passmore discuss two interesting topics on their recent Rational Reminder podcast.  The first is that they estimate the advantage factor investing has over market cap weighted index investing.  They did their calculations based on Dimensional Fund Advisor (DFA) funds used in the way they build client portfolios.  They also take into account the difference between DFA fund costs and the rock-bottom fund costs of market cap weighted index funds.  The result is an expected advantage of 0.45% per year for factor investing.  Others would be tempted to try to justify a much larger advantage, but to their credit, Felix and Passmore came up with a realistic figure.  As far as I could tell, this figure doesn’t take into account their advisor fees.  So they still have to sell the value of their other services to potential clients rather than claim these services come “for free” with factor investing.  The second interesting topic is a discussion of a study showing that “couples who pool all of their money (compared to couples who keep all or some of their money separate) experience greater relationship satisfaction and are less likely to break up.  Though joining bank accounts can benefit all couples, the effect is particularly strong among couples with scarce financial resources.”  Although my wife and I never joined bank accounts, we do think of all we have as “ours” instead of “yours” and “mine”.  For example, which one of us gets cash from a bank machine or pays the property taxes is determined by convenience rather than some division of expenses.  However, it appears that this study would lump us in with the group that didn’t pool their money.

Robb Engen at Boomer and Echo does an excellent job illustrating the power of delaying CPP and OAS to age 70 for certain retirees.  However, this creates what he calls the Retirement Risk Zone, during which the retiree spends down assets in anticipation of large CPP and OAS payments at age 70.  This approach makes a lot of sense for those with average health and enough assets to get through the Retirement Risk Zone, but most people are very resistant to this idea.

Neil Jensen announces that Tom Bradley of Steadyhand Investment Funds was inducted into the Investment Industry Hall of Fame.  Tom Deserves it.  He created an investment firm that focuses on client success rather than treating client assets like an ATM, and he regularly writes articles that teach important investment concepts in an age when we see so much useless commentary on stock prices.