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What Global Withdrawal Rates Teach Us About Ideal Retirement Portfolios

Insights, Chart Talk, Featured, Retirement

Between my own independent research and the discussions of other investors I enjoy reading, it seems the topic of safe withdrawal rates has been bubbling to the top lately. One particular question recently captured my attention.

What portfolio has the best safe withdrawal rate in the worst case scenario around the world?

You see, the vast majority of withdrawal rate research focuses on the United States. However, most people consider the US to be an extremely positive outlier, which raises legitimate questions about the appropriateness of determining one’s retirement plan by myopically focusing on only the best case country. Start exploring this question in earnest, and it draws into question not only our biases about what “normal” returns look like but also our assumptions about proper portfolio construction.

While it may sound like a simple question, answering it with real numbers is no small task. The reason that most retirement studies focus on a small handful of countries and portfolio options is that understanding the big retirement picture takes a lot of data. And not just raw source data, but also a mountain of creative calculations to do the topic justice.

Well, it so happens that creative calculations are a strength of mine and I have a few tricks up my sleeve. So let’s roll up those sleeves and talk about truly global withdrawal rates that look well beyond US borders.

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How Investing Personality Types Frame Your Money Perspective

Psychology, Featured

It’s interesting how the simplest question can sometimes cut straight to a complex reality that is deceptively difficult to explain. For example, I recently received a nice email from a new Portfolio Charts visitor that went something like this:

“I’m new to stocks, kind of. I know crypto decently. I’d love to know in layman’s terms what this site is about exactly? To buy stocks that are historically low and going to go back to its high someday?”

While that may seem like a softball on the surface, the thing that tripped me up is the phrasing. I recognize that the reference to buying stocks low is an important social cue that provides insight into the investing mindset of the writer. And I know from experience that it’s not good enough to reply with just any boilerplate summary, as presenting new information in terms people can relate to is critical to effective communication.

So we’ll need to go deeper. How deep? Lean back, relax, and let’s talk about the concept of investing personality types.

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How to Replace Income in Retirement

Retirement, Beginner, Featured, Theory

I had the distinct pleasure of spending time with my wife’s family this week. Between catching up on life events and helping with a few household chores, my father-in-law (let’s call him John) took the opportunity to ask his financially-minded visitor a question directly pertinent to his own immediate goals.

“How can I use my investments to cover the bills in retirement?”

I knew that John is a CPA and a knowledgeable investor who has actively traded his family accounts for years. So as a well-educated student of retirement finance, I naturally jumped in to an explanation of safe withdrawal rates, retirement spending methods, and how portfolio theory can be used to tweak the numbers to safely spend a certain percentage of his portfolio every year without fear of running out of money over his expected lifetime. John listened intently and replied with a deceptively simple follow-up question:

How do you guarantee that level of investment income every year?

That’s a terrific question, and the simple answer is you don’t have to. But that’s the exact moment I recognized my own investing bubble. The internet these days contains more information than ever about every nuance of retirement finance, but the gap between the theory debated by eggheads and John’s completely rational income-driven paradigm is just as perfectly normal as it is surprisingly wide to bridge.

I was talking about systems theory, and he just wanted to directly replace income. Which makes perfect sense! And I imagine many of you may have the same question.

So rather than jumping into a painfully long series on every possible way to tweak the numbers, let’s start with the basics. If you’ve ever wanted to know how to safely move beyond depending on regular work income to pay the bills, this article is for you.

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Three Secret Ingredients of the Most Efficient Portfolios

Advanced, Featured, Theory

December is often the time of retrospection and yearly wrap-ups, with stories recapping events of the last year and looking forward to new opportunities. In the finance space, you’ll find endless collections of the top performers of the year and forecasts for the one to come. While that’s all interesting and comforting in its own ritualistic way, this holiday season I decided to revisit a bold question that’s much bigger than short-term market news cycles:

What do the most efficient portfolios in history have in common?

Truly understand that answer, and much of the market noise that worries you from day-to-day and year-to-year loses its power over not only your emotions but also your account balances. So if you’ve ever wanted to think beyond your investing assumptions and explore the data for proven ways to approach timeless portfolio problems, grab a cup of coffee and pull up a chair. This article is for you.

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How to Survive and Make Money in the Matrix

Beginner, Featured, Theory

There must be a lot of anti-bond sentiment circulating these days, as my inbox has been lighting up lately with questions about whether bonds still make sense to investors. It started last year when Ray Dalio got on a roll and made a series of rather provocative comments about how he thinks you’d be crazy to hold government bonds and how cash is trash, too. It accelerated as interest rates continued to drop to new lows. And it has reached a bit of an apex as bond returns have taken a pretty decent hit in the last few months. Was he right? Should you sell all your bonds now before it’s too late?

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Metal, Money, and the Measurable Value of Gold

Advanced, Featured, Theory

Buried in an otherwise mind-numbingly boring regulatory filing released recently was a seemingly innocuous line item that most people would not give a second thought. Sometime in the second quarter, Berkshire Hathaway invested a comparatively tiny 0.3% of their total portfolio into just a single new company. No big deal, right?

But it wasn’t just any company. After spending decades as perhaps the most respected and widely-cited critic of gold as an investment, Warren Buffett bought 21 million shares of Barrick Gold — one of the largest gold mining companies in the world. It was so out of character that the financial world immediately did a huge double-take. The headline from Bloomberg pretty much speaks for itself:

Berkshire Makes a Bet on Gold Market That Buffett Once Mocked

As one might expect, investors on both extremes of the gold-appreciating spectrum are furiously debating what this all means. Buffett’s closest gold-averse followers are circling the wagons and dealing with a lot of cognitive dissonance, while gold bugs are enjoying dishing out some playful jabs after years of being on the receiving end. Lost in the middle is a vast sea of normal investors watching the news and searching for actionable information.

This article is for that last group just wanting to know the truth about gold and what it can (and can’t) do for their own portfolios.

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Asset Allocation in the Most Painful Month

Psychology, Featured, Portfolio Talk

As the entire world locks down in reaction to the ongoing coronavirus pandemic, our number one concern as a group is mutual solidarity in saving lives. But the ultimate impact of the tiny COVID-19 virus extends so far beyond the immediate health toll. The disruption to our global economy required to prevent its spread is having profound, deep-scarring effects on the everyday lives we take for granted. Entire industries are closing their doors, countless people are losing their jobs, and any short-term treatment for the disease may simply be a prelude to a much longer financial road to recovery.

So as we shelter in place taking care of our families and waiting for the worst to pass, it’s natural to count not only our stock of food in the pantry but also our collection of stocks in the market. No matter how you invest, I wager it isn’t pretty. It’s not just you. There’s no hiding from the turmoil, and we’re all feeling the pain.

The resulting anxiety prompts normally self-confident investors to suddenly get very curious about how others are doing in the same situation. I get it. So let’s talk real numbers and put the current financial crisis in perspective for different types of portfolios.

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The Top 4 Portfolios to Recession-Proof Your Investments

Portfolio Talk, Beginner, Featured, Theory

Something must be in the financial water lately, as even the most bullish investors have started publicly expressing worry about the stock market finally reaching an unsustainable climax after more than a decade of record growth. With increased stock volatility, inverted yield curves, and global trade worries all making news, the economic tension is palpable to the point that the dreaded R-word is starting to get some significant buzz.

Are we headed for a recession?

Recessions get people worked up for a variety of reasons. For example, the events of 2008 decimated the stock market, cost scores of people their jobs, forced many leveraged buyers out of their homes, and nearly upended the entire financial system in the process. While there are many factors that contributed to that turmoil beyond the recession that came with it, it’s true that recessions tend to coincide with a lot of negative financial events. So it’s understandable that anyone who lived through the situation might be worried about a repeat and walking on eggshells given current market sentiment.

I’m not going to pretend that I have all of the answers for every problem associated with recessions, nor am I going to claim I have any idea when the next recession will start. But as a long-time student of portfolio history I’m in a pretty decent position to bring something to the table when it comes to how to structure your investments to weather the inevitable storm. So rather than just peddle in the typical doom and panic, let’s study something productive.

Which portfolios performed the best in recessions, and what can we learn from them?

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High Profits at Low Rates: The Benefits of Bond Convexity

Advanced, Featured, Theory

In the world of investing, it seems most people’s energy is focused squarely on stocks. Massive amounts of research goes into stock investing every day and even casual investors have an incredible amount of information at their fingertips. Combine that wealth of data with a long term growth pattern in the stock market since 2009 that means anyone who has been in the market less than ten years has no recollection of a single meaningful bear market, and stocks are so ingrained on our collective investing consciousness that many people don’t give other assets a second thought.

As a result, while bonds were once staples of any self-respecting asset allocation lots of investors just aren’t into them like they used to be. Some of it is definitely recency bias, and I think another factor is that many people don’t truly understand how bonds work. But I’ll concede that the bond market is also different than it was more than a decade ago, and I can understand why people might think twice about relying too much on historical data. After all, bonds sound like awesome choices when they paid 10% interest, but consistent declining rates over time surely boosted any backtested numbers while depressing yields today to something a lot less desirable. So it’s no surprise that I see questions along this line all the time:

With record low interest rates today that are even negative in some situations, what’s the point of having bonds in a portfolio at all?

That’s a very good question. And the full answer is kinda complicated and includes some advanced finance mechanics that fly under the radar even for very experienced investors. But explaining complicated concepts is kinda my thing, so let’s talk about a little thing called bond convexity.

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A Meeting, a Book, a Portfolio, and a Better Life

Featured, Goals, Portfolio Talk, Theory

As I blindly swung my arm to swat at the tedious drone of the alarm on the night stand, it was pretty much a morning like any other. I labored out of bed, trudged my way through the early routine on autopilot, and set out on my long morning commute down highway 280 towards San Jose. I always found that stretch of road to be an interesting experience in dual realities, as the stunning views of the bay and surreal scene of clouds pouring over the mountaintops were all too often completely hidden by relentless inner thoughts of important job tasks needing immediate attention.  Silicon Valley attracts a certain type of always-on engineer and actively feeds their obsessions, and my blossoming career as a successful product designer at a job I loved had long since shaped me into eager, if anxious, submission. 

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