The Full Motley -- 1Q, 2021

For those who do not know me personally, my father died 30+ years ago this month. Recently, I saw some of his paperwork at my mom's place that he had written in the final 18 months of his life. It was calculating his pending retirement, which was anticipated within the subsequent five years (assuming he did not keep working longer to increase his monthly stipend, which I have always held he would have). While reflecting on the paperwork, I realized that this was the closest I would ever get to an adult conversation with my father.

My initial takeaway from what I saw in this paperwork was how his calculations would have failed in today's realities, a meticulously planned future that never panned out. At first, I chalked it off as naivety to the stock markets, but after reflecting a bit longer, I realized that my dismissal foolishly undermined his ability to adapt.

One big pet peeve of mine today is how often macroeconomic discussions online that outright ignore reactive behaviors. We saw it at play most recently within the false narrative of $GME, where the stock price of GameStop rose to bankrupt Melvin Capital Management. The pitch was that if $GME rose to $150, it would bankrupt the hedge fund. The folly was that it assumed a hedge fund would sit idly by as its losses mounted.

I hear other online dimwits proclaim that they will never buy ZEVs because there are not enough recharging stations, as if supply-and-demand would not create that reasonably foreseeable shift. I am waiting to see whether fueling stations will become hybrid models offering both refueling and recharging, but a belief that the number of today's recharging stations would remain static lacks any foresight (or hindsight, for that matter as things have changed when changes occur).

At work, I call it the kaleidoscope effect, where making one change causes ripples that might change the big picture, even unexpectedly. While we cannot plan for those changes, we cannot detail a plan past them either. Unfortunately, this is what happens too often from the collective wisdom of the vocal minority online. I even read articles stating what the $15 minimum wage “would” do while describing what it could do (which I expect to benefit the retirement crisis more than poverty rates). Their goals are based on unrealistic ability to prepare a future from a smörgåsbord, freely selecting which changes they want and what details remains the same (not to mention, determining how the world around them accepts the changes without reacting).

While my father's plans for the future were set on a past reality, his ability to adapt to a changing environment would have determined his success. Once consumer interest rates yielded <4% for 10+ years, his planned reliance on dividends would have required adjusting. Setting plans for 30 years is unreasonable. Things change, especially plans.

If things never changed, then rebalancing would be a futile exercise. But they do, so rebalancing is very worthwhile. That was my task today, moving 2% from my active and passive domestic equities to spread across my domestic bonds and international exposure. It was a small percentage (honestly, the dollar amount moving at first made me expect it would be a higher percentage, so it somewhat surprised me to acknowledge how far that account has appreciated in the past couple years) but it reacted to recent changes. Next quarter, it will react to those changes.

Meaningless Millionaires?

Rich & Famous

As I grew up in the '80s, "millionaire" was synonymous with the pinnacle of success! For those who were millionaires, they had inconceivable buying power (especially compared to us "Okie Yokels," which admittedly would be a misnomer for my family as-is since we were upper-middle class). The residual '70s tag team of "rich & famous" was still a mostly-conjoined pairing. While the 21st century has generated countless celebrities who are "famous for being famous," money and fame was a celebrity formula with origins like the-chicken-or-the-egg debate, where it was hard to ascertain which one provided for the other. Among the most notable examples of the time was Donald Trump himself.

As the late-'90s brought upon such pop cultural references of "Who Wants to Be A Millionaire?" and Calloway's "I Wanna Be Rich," that seven-figure threshold started showing signs of accessibility and, for headlines, insouciance. For all intents and purposes, "Lifestyles of the Rich & Famous" spawned an entire network (E!). The term "multi-millionaire" (which had a hat-on-a-hat impact through the mid-'80s) became a noteworthy distinction. Thomas Stanley fully normalized millionaires with his best-selling book, The Millionaire Next Door.

Among today's billionaires

In the past decade, Bruno Mars and/or Travie McCoy made the transition to the next level almost official by dreaming of becoming a "Billionaire." The largest lotteries have started to surpass billion-dollar-jackpots. Forbes reports that there are over 2,000 billionaires in the world today. The media has already started tracking the "race" to becoming the world's first trillionaire (a word only recently recognized by spellcheck). Meanwhile, varying reports estimate that there are 14.6 million to 35 million millionaires in the world today, and that number will only increase as time goes on.

Nowadays, being a millionaire is not the pinnacle of success as it was when I was a kid. Some argue that it has become a relatively meaningless term. Unquestionably, no millionaires are famous for that financial achievement alone. They are no longer considered excessively rich.

That said, becoming a millionaire is still a lofty goal (especially after starting out at $0) for any individual. But, for the youngest Millennials, it is reasonably achievable, even before they turn 40!

Millionaire for Grabs

There are a few recurring benchmarks where your money feels more significant: when you reach a savings goal of $1,000, and again when you hit $2,500, and again when you hit $5,000, then when you reach $10,000. Seemingly, reaching $7,500 instantly sets the mind toward the next marker, instead of marveling at the accomplishment. The process repeats with $25,000, $50,000, $100,000, $250,000, and $500,000, ahead of the still elusive but not exclusive $1,000,000.

Although the inherent prestige of becoming a millionaire is not present, a psychological satisfaction will occur.

My Stock Portfolio

Traditionally, my discussions herein have focused only on my 401(k) at a former employer. In the interest of full disclosure, I have several more investments than those five mutual funds. I have an active 401(k) with my current employer, a Rollover IRA with assets from a prior employer (which coincidentally happens to be my current employer) (it also has a very small past IRA contribution I made one year to shift my tax liability into a refund), a Health Savings Account with my current employer, and a Roth IRA with a brokerage account.

Primarily as a means to further educate myself on the how-to, I have been investing in individual stocks for the past five years. I have 35 active stocks, including one below zero that should close soon (but excluding a couple other inactive stocks that zeroed out). The reason I keep my stock portfolio in my Roth IRA is the tax-advantaged status of the account, so any profits I realize in this account will not be taxed later.

I was curious how my Top 10 holdings would look, if reported the same way mutual funds report theirs, so I mocked up the list below. 

Week-end 10 largest holdings

(75% of total portfolio assets) as of 12/4/2020

1. NVIDIA Corp. $NVDA

2. Tesla Inc. $TSLA

3. Alibaba Group Holding Ltd $BABA

4. Carnival Corp $CCL

5. Visa Inc. $V

6. WP Carey Inc. $WPC

7. Restaurant Brands International Inc. $QSR

8. Slack Technologies Inc. $WORK

9. Stitch Fix Inc. $SFIX

10. World Wrestling Entertainment Inc. $WWE

The brightest red flag is how my Top 10 represents 75% of my total portfolio assets, so the other 25 stocks only average 1% of the total assets each. Not all my Top 10 are huge winners either. Only the top two have >1,000% return. Unfortunately, my initial investments vary among stocks, although the reported Top 10 is strictly a reflection on the current balance. Only seven of my investments have doubled from the original investment, 11 are showing a loss (which excludes a couple stocks that were full losses), and I have pulled my initial investment amount out of four of my current investments (two in the Top 10).

The most meaningful lesson I have learned from investing in individual stocks is the importance of risk/reward scenarios. I am not lamenting my full losses or other losses. I becomes very apparent (especially after creating a spreadsheet of this portfolio) that the risk is limited to 100% while the returns are unlimited. This does not create a risk-free investing scenario, but it shows how huge returns (>1,000%) by one or two investments can exceed the losses in several losers.

To follow up on what I noted as a bright red flag is the poor allocation. If this portfolio were the bulk of my investments, then I would be more concerned about it. As it is, the total portfolio assets represent about 5% of my overall investments, so I am not inclined to manage risks that this top-heavy allocation could present.

The Full Motley -- 4Q, 2020

Risk management is the core of all forms of management. The definition of risk stems from uncertainty, often being classified by sources of uncertainty. Political risk refers to political instability, among other things. Conventional wisdom would suggest that presidential elections increase political instability. Therefore, if I were a betting man, I would have been placing bets that the market's reaction to an inconclusive election last week was erase all of its most recent gains. As we know now, the market's actual reaction was to soar higher! The Dow even set new record highs this week.

I was recently asked whether I thought markets would still be overpriced at 2018 values today. My response was that once I learned the market does not care what I think, I stopped gauging my market moves based on what I think should happen. I would have placed my money on markets retracting from its gains during a depressed job market and an intentional economic slowdown as a response to the global pandemic. Maybe I know better what the market should do than the market itself. Probably not.

Then again, the nature of risk is that the higher the risk, the higher the return. Perhaps it is not fully unreasonable to question this strong reaction in the face of such uncertainty (plus, the majority of the gains I am referencing occurred after most media outlets had projected a winner, and the latest included early reports of a Coronavirus vaccines). Whether or not I know better, it is truly irrelevant and my decisions should not be based on what I think, much less what I think I know.

In market lingo, those "betting men" are called day-traders. The size of their losses can match the size of their gains, and in the end, day trading results in a below average risk-adjusted return.

For wealth preservation, risk management is tantamount to its success. Thus, instead of taking bets on how the markets will react to any given situation, managing the majority of active portfolios through dollar-cost averaging and periodic reallocations will provide better risk-adjusted returns. When the market introduces strong elements of risk or volatility, an emotional response is innate to the human condition.

In my case, this quarterly reallocation consisted wholly of removing increases (approximately 1.3% of total portfolio assets) from all funds except Total Bond Market Index, so I directed those assets into that one fund.

Young & Wise

Conventional wisdom says that wisdom and youth are mutually exclusive. In life, we start off as young & dumb and grow old & wise.

That is, unless everything learned from all those years of life's lessons changes.

Conventional wisdom currently seems to be a liability in today's market, and truly much of that conventional widom no longer applies. Stocks and bonds have lost their inverse relationship. Interest rates have managed to fall below zero for negative rates. Momentum investing is not as precarious as it had been in the past. In short, we are learning a new set of conventional wisdom for the modern market.

The percentage of assets within index funds and ETFs of total money invested in U.S. equities went from 20% in January 2010 to over 50% by January 2020, a change that even outpaced expectations.

There's a false narrative that big banks prey on the individual investors to siphon their money first, as if they collude to share in the profits collectively. The better comparison would be to that of a poker game. Novice investors are the person at the table that cannot spot the sucker (to borrow a well-known adage).

Modern investing practices, however, may dispel that mindset however. If it is not individual investors preying on index funds, keeping large corporations buoyant after a decline, knowing full well that index funds will have to purchase more units to rebalance the large funds.

Some individual investors, and even money managers, hold to their beliefs that the way things have been is how they will be again. No amount of evidence to the contrary will break their thinking. In a way, it's the backfire effect at play. They reject new information that disrupts what they have seen for themselves in the past, what they have known to be true for so long.

Unfortunately, most truths are only true for so long before things change. Prolonged reliance on proven market wisdom creates its own reticence against it, the reluctance to adapt to meaningful changes in an industry sustained on salesmen repackaging the same products with gimmicks to spark FOMO and buy anew. Like the Gold IRA, for example.

Old jaded men who have achieved enough success to comfortably wrest on their laurels lack the proverbial wisdom that age allots them. Instead, the partly naive youth with wide eyes and open minds reap the rewards when systemic changes occur. To this end, they receive the best of both worlds: youth & wisdom. Until things change again.

The Full Motley -- 2Q, 2020

Only you are responsible for your portfolio.

"Only you can prevent forest fires" was ingrained into our American lexicon during the 1980s. The focus was on the importance of taking individual responsibility for our personal actions that may lead to greater issues, in this case a sweeping wildfire that creates billions in damage.

Personal responsibility has often been an online battlefield, but personal finance is unquestionably one area that requires individual responsibility for personal actions. Unlike uncontrolled wildfires, the consequences are often contained to the individual who is accountable. Social media often endorses both a victim mentality and self-empowerment simultaneously with minimal success. Those two mindsets are difficult (if not impossible) to maintain as an amalgamation.

While sweeping wildfires in the stock market are known as stock market crashes, we are helpless to prevent them. But protecting it from burning our personal accounts can be managed through a few general rules. Creating a target allocation, creating an investment plan and creating investment goals are important because they can answer how to manage through unexpected market crashes. For long-term investing, including wealth accumulation, market crashes are unlikely to disrupt allocations, plans or goals. It may modify them to varying degrees, but focusing on what you can control, instead of worrying over what you cannot control, will ease the anxiety that can be ever-present in a market crash.

My investment plan includes quarterly reallocations, resetting the account balance back to my own target allocation. In my case, when the market plummeted shortly after my first quarter reallocation, I knew that my next reallocation was only 10 weeks away. If the market furiously declined for the entire 10 weeks, then my reallocation would be hefty. If the market fell and then quickly recovered, then my reallocation would be insignificant. Instead, the market fell and then slowly started regaining its losses unsteadily, so this reallocation was relevant.

Unsurprisingly, I pulled money from my two bond funds to place back into the three equity funds. The biggest surprise was the fact that my domestic stock index fund received a very small amount ($50). The difference was mostly in the active domestic equities fund. Individuals selecting stocks had a slower recovery than the broad index. Ideally, those strategic choice will show up in a later reallocation. Otherwise, this active domestic equities fund is a losing investment (because the amount allocated into that fund is returning less than the next closest alternative, i.e. my domestic stock index fund).

Two Truths & A Paradox

Truth #1-Past performance is no guarantee of future results.
Truth #2-The definition of insanity is doing the same thing over & over, and expecting a different result.

Are these two truths a paradox, or is one (or both) simply untrue? The answer is largely in the semantics, as is often the case. Although past performance does not guarantee future results, doing the same thing repeatedly rarely generates different results (most other things equal).

Once I was discussing personal finance with a friend who questioned the benefits of setting money aside for the future with "what if you die early?" To which I sharply responded, "what if you don't?!" As I have discussed before, "what if" can be a precarious game that portends mistakes.

The drivers of personal finance are uncertainty and probabilities. Over time, stocks generally return better performance than bonds or cash equivalents. Likewise, human generally live 80 years. Neither generality ensures that stocks will outperform bonds and cash in any given year any more than it can ensure survival through the year. Regardless, if stocks outperform bonds and cash seven of every 10 years with higher average annual performance for each period, then expecting stocks to outperform bonds and cash over the long run is highly reasonable (the opposite of insanity).

Even when expectations change, it is generally best to stay the course, at least until the changes become more certain. Several years ago, I was talking to a friend about an obligatory market recession because the bull run had been going for so long. She referred me to a source, citing that the man had been projecting this downturn for the past five years, to which I quipped "So, he has been wrong for the past five years." She quickly defended him, before realizing what I had said was in fact true. That bull market has continued fairly strongly through today as the Dow Jones has 30,000 on the horizon.

Until domestic stocks prove to be unreliable performers, they are the best foundation of a growth portfolio for the next 10 year or more. Perhaps decades from now, international stocks will have proven to outperform domestic stocks significantly more often than not, in which case they may become a better foundation for growth portfolios. But projecting that shift today and shorting domestic stocks as a result has not been a reasonable strategy.