Tom’s Quarterly Reads

Here are the best articles I read over the past three months, mostly all finance-related. I’ve moved to grouping the links by topic, but the topics will shift each quarter based on the set of articles. 

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The Twenty Craziest Investing Facts Ever (Irrelevant Investor): Everyone loves a good list – and this delivers on the clickbait-sounding title. This is great even if you don’t have a lot of context in investing; some facts provide context for each other.

The Number, Trade-offs and Optionality (Abnormal Returns): When I discuss retirement with clients, I often ask whether they see retirement as a cliff (stop working completely on a specific date) or as a ramp (slowly transition, decreasing work over time). For those that take the “ramp” approach, this piece (with links to two others) urges readers to think about “optionality” in place of “retirement”. There isn’t a single all-powerful Number that controls when you exit; instead, being able to choose how and where to spend your time and your money is the ultimate goal.

Using Flexible Spending to Achieve Financial Goals (Alpha Architect): A common shortcut in retirement is to withdraw a fixed percentage of your account and spend it each year – the “4% rule” is often thrown around. This piece dives into the benefits of taking a slightly more flexible approach to your expenses, which can help your nest egg last longer.

Can’t You Hear Me Knocking: A Contrarian Look at Inflation (Charles Schwab): This is a well-reasoned and non-alarmist reminder that inflation, which has been at or under 3% for over 20 years, could be higher in the future than we’ve come to expect.

Owning Quant Funds is Not Easy (Behavioural Investment): There is a growing set of funds available – many of them ETFs – that invest in a systematic, numbers-driven manner. Adding some of these to your portfolio as a complement to cheap index funds can add quite a bit of value, but you have to understand what you’re buying.

Yield Curve Inversion: Maybe It’s Different This Time (SVRN): Provides a primer on yield-curve inversions as well as a discussion of factors surrounding the recent inversion. Normally the 10-year US Treasury yield is higher than the 3-month US Treasury yield, but that recently changed and inversions have tended to presage recessions by no more than two years. (Note: my comments below about trading on politics apply to his analysis; I don’t think there is information to trade on here, just good perspective.)

House Rules (Humble Dollar): There are many benefits to home ownership, but the drawbacks and risks are often overlooked or underestimated. Owning a home is one of the least-diversified bets you can make, and you’re taking on debt to do it. Also, don’t buy and sell too frequently. Personally, I’ve seen many military families buy and sell a house every three years as they move, and very often the transaction costs alone make that a losing proposition.

Real Estate vs. The Stock Market (A Wealth of Common Sense): Comparing owning your home with an investment in the stock market is an apples-to-oranges comparison; you need to stay diversified. As Ben says: “Your home should certainly play a role in your financial plan but it shouldn’t be the entire plan.”

Status as a Service (Eugene Wei): Eugene looks at many of the technology companies today (don’t just think of social networks) as tools that allow people to amass social capital – aka “status”. And while we may think of these companies as allowing people to transmit information or their own content, these networks are really built on the fundamental human desire to cater to one’s own ego. And to use a Bitcoin analogy, the number of followers/likes/retweets/etc that a user can generate is the “proof of work” that enables them to monetize their account.

Michael Kitces – The Past, Present and Future of Financial Advice (Invest Like the Best Podcast): This is a great discussion that dives pretty deep into the world of financial advisors. It’s well worth a listen for advisors, clients, and anyone thinking about working with an advisor.

Now seems to be a good time to invoke Rudyard Kipling: “Oh, politics is politics, and investing is investing, and never the twain shall meet in my financial decision-making.” Or maybe that was from Dr. Seuss; I was never very good in English class. But the point stands: never let your political views impact your investment decisions.

Studies have shown that politics does impact financial decisions, and this applies to all of us. (If you think it doesn’t consider starting here and coming back later.) Further, Kempf and Tsoutsoura found that “The effect is more pronounced in periods of high partisan conflict and for [those] who vote frequently.”

Humans are bad at forecasting in general, but possibly one of the most interesting and relevant biases is that we’re bad at predicting futures we don’t want to see happen. And when we’re proven wrong, we tend to look for proof that the evidence is wrong instead of changing our views.

So regardless of which side of the aisle you sit on, or if you’re standing in the aisle, or if you’ve stood up and walked outside, keep these two tips in mind:

1. Don’t assume you know what political outcome will occur – and be most wary if you project the outcome you want.
2. Definitely don’t assume you know how markets will react to your projected outcome.