(Part 1 of ten-part series on Financial Truths)

 

Section 1: The old model of: go to school, get a stable job, get pension / save in your retirement accounts, buy-and-hold for the long run, retire with lots of money set aside – it’s dead, over, gone, buried in history.

Section 2: You can easily become over-concentrated in a few highly correlated asset classes; correlations rise in a crisis

Section 3: “Leaving it to the experts” is leaving money on the table

 

 

Section 1: The old model of: go to school, get a stable job, get pension / save in your retirement accounts, buy-and-hold for the long run, retire with lots of money set aside – it’s dead, over, gone, buried in history.

  • Employment/population ratio (data.bls.gov) – peaked at 65% around 2000, down to 60% now and will keep dropping
  • Shift towards part-time jobs, freelancing: A survey by Upwork and the National Freelancers Union suggests that 55 million people, or 35% of the US workforce, made money by freelancing in 2016 – up by 2 million in the last 2 years. The largest growth rate has been in “diversified workers” who combine different part-time and freelance gigs into a full-time income. http://www.citylab.com/work/2016/10/the-two-sides-of-the-freelance-workforce/502955/
  • Today, 27% of private sector workers have access to defined benefit plans, and 58% to defined contribution (Bureau of Labor Statistics) https://www.bls.gov/ncs/ebs/retirement_data.htm
  • IRAs only became popular starting in 1981; Roth IRA began in 1997, 401(k) in 1980; there isn’t a long track record of them working for people from start to finish
  • Need a diverse skill set and good financial literacy to be successful today – take charge of your life
  • Fortune: nearly two-thirds of Americans can’t pass a basic test of financial literacy, 5 point drop since 2009 (http://fortune.com/2016/07/12/financial-literacy/ ).  Example – calculating interest on a loan.
  • Dave Ramsey: “Growth stock mutual funds make 12%/year”; Suze Orman says to dollar-cost average, it’s nonsense. Past performance does not indicate future results.

 

Section 2: You can easily become over-concentrated in a few highly correlated asset classes; correlations rise in a crisis

  • What does diversification really mean?
  • Examples of alternative assets that offer real diversification
  • Diversification is NOT: (but these are a start)
    • Having more than one brokerage account or retirement account
    • Different stocks, like in an ETF, mutual fund, tracking a market or index
    • A bunch of ETFs or mutual funds, tracking different markets or indices; all paper assets
    • Having money denominated in various currencies
    • Different paper assets like bonds (beyond a certain point)

 

Section 3: “Leaving it to the experts” is leaving money on the table

  • If you need your savings to be there for you when you retire, you need to know what you’re invested in, and why
  • Very few of the real experts are managing public money
  • They cost too much, extract lots of fees out of you
  • Some are compensated based on revenue they bring to the firm
  • Narrow-minded thinking, limited skill/knowledge of these experts, not looking at big picture
    • Thomas Picketty on demographics: In Capital in the Twenty-First Century (2013/2014), he states that global output grew at an average annual rate of 1.6% from 1700 to 2012, 0.8% of which reflects population growth and 0.8% of which came from growth in output per person.  Growth averaged 3.0% from 1913 to 2012, but this was largely due to population growth and is not sustainable.
  • Robo-advisors are selling a lie
    • Same type of garbage mathematical models that were used to justify mortgage-backed securities before the 2008-2009 financial crisis
    • Short time horizon, static models, not accounting for enough inputs or qualitative factors
    • Might seem cheap but what are you getting?  They don’t offer anything other than a very short list of ETFs, like a 401(k) – no PMs, no digital currencies, no country- or region-specific ETFs, no way to use options to manage portfolio risk.
    • Wash sales – not integrated with other holdings outside of that robo-advisor – false sense of security.
  • More sophisticated strategies achieve better results
    • Hedge funds (before they grew too large) – http://www.businessinsider.com/hedge-funds-and-sp-500-nearly-identical-2013-8 Hedge funds outperformed the S&P 500 only slightly from 1993-2006, but with much less volatility and far smaller drawdowns.  Risk management matters.
    • Private equity – https://www.bloomberg.com/gadfly/articles/2016-05-11/private-equity-has-diminishing-returns – The Cambridge Associates US Private Equity Index returned 13.4% annually net of fees from 4/1986 to 12/2015, with a standard deviation of only 9.4% (vs. Russell 2000 at 9.9% return, 16.7% standard deviation)
    • Picketty research (Capital in the Twenty-First Century) – the largest university endowments consistently outperform the smaller ones.  These have the funds needed to employ sophisticated advisors and invest in alternative assets that improve portfolio returns and reduce volatility
    • You can learn and apply many of the same strategies these sophisticated investors use to manage multi-billion-dollar portfolios.  In fact, you have an advantage they don’t.

 

Intro music by audionautix.com

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