One of the ways that investors seek status through their investments is to buy into private equity.  As an added inducement, a technical detail in how private equity returns are calculated makes these investments seem better than they are.  So, private fund managers get to boast returns that their investors don’t get. Private Equity Overview In a typical arrangement, an investor commits a certain amount of capital, say one million dollars, over a period of time.  However, the fund manager doesn’t “call” all this capital at once.  The investor might provide, say, $100,000 up front, and then wait for more of this capital to be called. Over the succeeding years of the contract, the fund manager will call for more capital, and may or may not call the full million dollars.  Finally, the fund manager will distribute returns to the investor, possibly spread over time. An Example Suppose an investor is asked to commit one million dollars, and the fund manager calls $100...

On episode 289 of the Rational Reminder podcast, the guests were retirement spending researchers, David Blanchett, Michael Finke, and Wade Pfau.  The spark for this discussion was Dave Ramsey’s silly assertion that an 8% withdrawal rate is safe .  From there the podcast became a wide-ranging discussion of important retirement spending topics.  I highly recommend having a listen. Here I collect some questions I would have liked to have asked these experts. 1. How should stock and bond valuations affect withdrawal rates and asset allocations? It seems logical that retirees should spend a lower percentage of their portfolios when stocks or bonds become expensive.  However, it is not at all obvious how to account for valuations.  I made up two adjustments for my own retirement.  The first is that when Shiller’s CAPE exceeds 20, I reduce future stock return expectations by enough to bring the CAPE back to 20 by the end of my life .  These lower return expec...

My investment return for 2023 was 13.0%, just slightly below my benchmark return of 13.2%.  This small gap was due to a small shift in my asset allocation toward fixed income.  I use a CAPE-based calculation to lower my stock allocation as stocks get expensive .  This slight shift away from stocks caused me to miss out on a slice of the year’s strong stock returns.  Last year, this CAPE-based adjustment saved me 1.3 percentage points, and this year it cost me 0.2 percentage points. You might ask why I calculate my investment returns and compare them to a benchmark.  The short answer is to check whether I’m doing anything wrong that is costing me money.  Back when I was picking my own stocks, I chose a sensible benchmark in advance, and after a decade this showed me that apart from some wild luck in 1999, the work I did poring over annual reports was a waste.  Index investing is a better plan. The next question is why I keep calculating my investment re...

My wife golfs with a ladies group in Florida sometimes.  They all chip in a few bucks for prizes, and some of that money goes to the golfer who is closest to the pin on a designated hole. My wife’s group was last to play this hole, and they could see the best effort so far; a marker stood about 9 feet from the pin.  One of the ladies in this last group hit a shot that came to rest closer to the pin.  She now stood to scoop up some prize money. Then my wife hit a shot she thought was off line, but it came off a banked part of the green and rolled all the way down to the hole.  A hole-in-one! Her prize was $30.  That stack of U.S. singles sits on her nightstand.  Eventually, she’ll spend that money, but not yet. For now, that money isn’t fungible.  One day it will become fungible, but right now it serves as a pleasant reminder of a fun day.

Jeremy Siegel recently wrote, with Jeremy Schwartz, the sixth edition of his popular book, Stocks for the long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies .  I read the fifth edition nearly a decade ago, and because the book is good enough to reread, this sixth edition gave me the perfect opportunity to read it again. I won’t repeat comments from my first review .  I’ll stick to material that either I chose not to comment on earlier, or is new in this edition. Bonds and Inflation “Yale economist Irving Fisher” has had a “long-held belief that bonds were overrated as safe investments in a world with uncertain inflation.”  Investors learned this lesson the hard way recently as interest rates spiked at a time when long-term bonds paid ultra-low returns.  This created double-digit losses in bond investments, despite the perception that bonds are safe.  Siegel adds “because of the uncertainty of inflation, bonds can be qu...

Michael Lewis’ latest book Going Infinite: The Rise and Fall of a New Tycoon is an entertaining account of the journey of Sam Bankman-Fried and his cryptocurrency trading firm FTX.  Lewis’ many critics wanted the story to be a deep dive into Sam’s criminal activity and fraud within the cryptocurrency industry, but that’s not the story Lewis is telling. Relative to social and business norms, Sam is an outlier of huge proportions.  So much so, that his meteoric rise in the cryptocurrency business world would have seemed impossible in advance.  This is the story Lewis told. However, Sam is currently on trial for (allegedly) swindling billions from traders and investors.  Those most interested in this story wanted to learn more details of the swindling. Some critics accuse Lewis of having been taken in by Sam.  I didn’t get this from the book.  Lewis did discuss Sam’s seeming transgressions, he just didn’t dwell on them because they weren’t central to the stor...

The origin of the so-called 4% rule is WIlliam Bengen’s 1994 journal paper Determining Withdrawal Rates Using Historical Data .  Experts often criticize this paper saying it doesn’t make sense to keep your retirement withdrawals the same in the face of a portfolio that is either running out of money or is growing wildly.  However, Bengen never said that retirees shouldn’t adjust their withdrawals.  In fact, Bengen discussed the conditions under which it made sense to increase or decrease withdrawals. Bengen imagined a retiree who withdrew some percentage of their portfolio in the first year of retirement, and adjusted this dollar amount by inflation for withdrawals in future years (ignoring the growth or decline of the portfolio).  He used this approach to find a safe starting percentage for the first year’s withdrawal, but he made it clear that real retirees should adjust their withdrawal amounts in some circumstances. In his thought experiment, Bengen had 51 retire...