High-Risk Retirement: Asset Allocation Daily

by: SA For FAs

AllianceBernstein: U.S. stocks are a buy.

Cullen Roche shares his views on the FIRE movement.

Thought For The Day: FIRE is a very high-risk strategy because of the uncertainty the gap in time brings to the equation.

U.S. Stocks A Buy

“US stocks look resilient from three perspectives: Market fundamentals are solid. Technical forces are supportive. And even stock valuations - a lingering concern - are relatively attractive today.” (AllianceBernstein)

Upside Surprises

“Our BlackRock GPS points to sustained above-trend global growth. We see increasing scope for upside surprises in the U.S. as consensus expectations for growth have taken a hit amid rising trade tensions. A third of the industry-wide inflows into U.S.-listed fixed income exchange-traded products (ETPs) over the past three months has gone into ETPs holding short-term debt, according to Markit. Markets with stronger fundamentals, such as U.S. equities, have also benefited: U.S. equity funds have pulled in $10.4 billion since May even as global equity funds as a whole bled money, EPFR data shows.” (Richard Turnill)

Tesla’s Leadership

“Elon Musk has once again attacked a British man who helped rescue a boys' soccer team trapped in a flooded cave in Thailand, calling him a "child rapist". The Tesla chief executive has launched a third attack on cave diver Vernon Unsworth…The initial tweet from Musk in July dampened investor sentiment on Tesla, with shares falling on the day on concerns over the executive's leadership, public image and his presence on Twitter.” (CNBC)

FIRE Movement

“On average, these people are earning an income that is 3-4X the median household income. They save 10X what the average household saves. They invested aggressively in low-cost index funds during a strong bull market. This is great. But it's worth emphasizing that this is extremely difficult to achieve and impossible for most people.” (Cullen Roche)

Thought For The Day

Cullen Roche adds his thoughts on the controversy blazing around FIRE (“financial independence retire early”). On the positive side, he admires the movement for its emphasis on saving and on eschewing materialism. On the negative side, he thinks it impractical for most people, for reasons he details in his above-linked article.

I too admire the focus on modest living and saving for the future, though I noted in yesterday’s post that it is simply not the way of the world for someone to disconnect himself from work for most of his life. The training you receive in your 20s is simply not apt to be professionally viable in your 50s should the need to produce income again arise, without the link of continuous career development.

And that is but one expression of the real problem here, which is that an extremely early retirement is a very high-risk strategy. Let’s look at this in terms that are more readily understood by investors. One who earns a monthly paycheck can be compared to a conservative fixed-income investment, whereas an entrepreneur is akin to a stock because of the volatility of his income (see Moshe Milevsky’s classic book “Are You a Stock or a Bond?”). From a financial planning point of view, salaried employees should invest more in stocks, whereas entrepreneurs would benefit from a greater degree of fixed-income.

FIRE is magnitudes riskier because of the large gap in time between the production of the income and its consumption. Any calculations about the future must factor in this time-based uncertainty, which economists starting with the late Paul Samuelson have maintained increases risk, despite the commonly held assumption in investing that time lessens risk. (Technical aside: He said annualized return volatility decreases but volatility in total return—which is of greater relevance to a retiree looking to draw down income—actually increases with time.)

In reality, this is quite intuitive. The farther out you go, the less confident you should be that your skills will still be useful, that your needs will be the same, that your money will store value in the same way as when you started, etc. If time lessened risk as the investment industry cliché has it, then trillion-dollar asset managers wouldn’t also be saying that "past performance is no guarantee of future results.” Knowing for almost certain that the market would produce 7% annually after inflation, they should be clamoring to offer you 6% and pocket the excess percentage they could make from each customer. But, of course, they don’t do this because the risk is far too great. The variables influencing the asset's performance are simply too numerous to guarantee results, and so too are the variables influencing a person’s life.

So by all means, investors should work towards achieving financial independence by saving and investing and watching their spending. But with no clear picture of the distant future, much less the near future, together with the all but certain knowledge that unforeseen shocks will eventually occur, it’s a good idea to lessen the gap in time between producing income and using it, while maintaining professional viability.


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