Financial Professionals Fall 2022

This is my quarterly e-mail (aka “the massive missive”) intended primarily for my fellow financial professionals wherein I share items I have run across or thought about this quarter which I think might be beneficial to you. Enjoy!

We occasionally take consulting clients (typically RIA firms). The annual retainer for this is generally the square-root of your AUM (with a minimum of $10,000). For more details or to discuss further, please e-mail or call me at 770-517-8160. – David

First, “[O]ur results paint a picture of a stock market that in most periods and categories is very efficient and in which active management’s benefits are commensurately modest.” (source)

However, the main factors seem to work: value, momentum, and the low-beta anomaly all exist prior to the CRSP data that was used to find them. I.e., out of sample (1866-1926) they are still statistically and economically significant and thus likely real and not data-mined artefacts. (source)

Second, a few months ago an advisor asked me what I thought about investing in REITS. My response:

As you may remember, since REITs have to pay out substantially all their earnings, I consider the current yield to be a pretty good estimate of the expected real return (real because they can raise rents and property values should rise with inflation). The five largest REIT ETFs, along with their current yields, are:

SCHH Schwab U.S. REIT ETF 2.47%
REET iShares Global REIT ETF 2.63%
ICF iShares Cohen & Steers REIT ETF 1.75%
USRT iShares Core U.S. REIT ETF 2.31%
RWR SPDR Dow Jones REIT ETF 2.88%

The unweighted average is 2.41% and the median is 2.47%. Since 20-year TIPS are over 1% the risk premium here is pretty small. The dividend yield on the S&P 500 is 1.71%; but some earnings are reinvested so that is probably lower than the real return. The earnings yield on the S&P 500 is 4.85%; but some earnings are wasted so that is probably higher than the real return. REITs don’t look mispriced.

If I average the dividend yield and the earnings yield on stocks for an estimated real return and use the 20-year TIPS YTM to get an estimated bond real return and use the current yield on REITs to get an estimated real estate return, we have:

Stocks 3.3%
REITs 2.5%
Bonds 1.1%

The ERP there doesn’t look very high, but the REITs are worse. In addition, REITs are riskier than stocks since they are undiversified (just one industry). Annualized standard deviation of RWR vs. SPY (from daily data since 8/26/2001 which was the inception of RWR) is 29.4% vs. 19.5% so REITs are (by that measure) about 50% riskier.

Also, it does seem others are on this same page, I just saw this.

Third, I talk about this a lot, but never thought of making a quadrant chart. Someone else did; I like it:

Fourth, here are eight Advisor Do’s and Don’ts During Extreme Market Volatility (condensed and mildly edited by me):


  1. Fight fear with facts.
  2. Remind clients that market volatility is baked into their long-term plans.
  3. Keep your clients focused on what’s knowable.
  4. Discuss strategies to better cope with or take advantage of market volatility.
  5. Reach out to all your clients.


  1. Avoid client calls.
  2. Give in to your clients’ fears.
  3. Miss the opportunity to demonstrate your value.

Fifth, some academics researched the personalities of crypto owners. Interesting.

Sixth, A newbie advisor on a financial planning message board wanted to know (spelling/grammar/punctuation corrected):

As an aspiring financial planner, I am curious to know: in your professional experience as a financial planner, have you found that investments are an essential part of growing one’s wealth, or can someone achieve financial success without investing and just saving to accomplish personal goals?

And clarified later in the thread:

By “not invest,” I am referring to not holding any investment vehicle with high risk such as stocks but instead putting money into a savings account with interest to accomplish short- and long-term financial goals. In short, I would like to know if the risk of investing is worth taking for those without debt and an established emergency fund.

My response:

You can always retire (the primary “personal goal” for most people) successfully if you save enough pre-retirement and spend little enough post-retirement.

I posted this here a few months ago:

Ignoring SS, taxes, and a whole bunch of other pretty relevant things just to see what savings rate we come up with, assume a 30-year working/savings period (people don’t get started right away), a 30-year retirement period, 4% real return on the portfolio, and income, expenses, etc. rise solely with inflation (in real life you get real wage increases over your career and are probably trying to match the ending lifestyle, not the average over your whole life). Assume we want level consumption over our lifetimes (Friedman’s Permanent Income Hypothesis), then I need to set X in the two formulas to the same percentage. Here are the excel formulas:

Saving: =FV(0.04,30,X)
Spending: =PV(0.04,30,1-X)

Remember all figures are real, not nominal, so this vastly simplifies our computations.

If you solve that, it is 23.57% which I round up to 25%.

You can quibble with the assumptions (even I would), but in a very rough way, it’s conceptually sound, I think.

If we assume that the real return is zero (i.e., that the returns on savings merely match inflation) then the formulas become:

Saving: =FV(0,30,X)
Spending: =PV(0,30,1-X)

If you solve those for X then it becomes (obviously if you think about it) 50%. Of course, you could start earlier, work longer, etc. but it gives us a starting point.

I also ignored Social Security. If you make (and live on!) $12,288/year pre-retirement (the first Social Security bend point), then upon retirement you will get 90% of that as a benefit. So, you are pretty close to matching your lifestyle (such as it is) with no savings.

Of course, no one wants to do that – even though the median global household income is about that number! ($9,733 in 2013, which, with inflation and productivity improvement, would be about that first bend point today. $12,288/$9,733^(1/9)-1=2.62% annual growth rate since 2013 to make them equivalent. Seems roughly right.)

I looked at T-bills vs. CPI to see if my intuition/recollection was correct about cash and CPI, and it is. Three-month T-bills have had a very small excess return over CPI, they matched until about 1981 and then T-bills have actually done better (until spring of 2009). Of course, there would be some taxes on the T-bill returns though.

Thus, I think zero-ish real is a good assumption for cash rates (i.e., saving rather than investing).

So, getting back to the original question: “[C]an someone achieve financial success without investing and just saving to accomplish personal goals?”

Yes, but it requires a saving rate in the vicinity of 50% (less for lower incomes because Social Security, and more for higher incomes because taxes).

Seventh, another advisor wrote this: “[I]n rocky times I turn off dividend reinvestment and let the cash build so if they need money from me, we don’t have to sell principal.”

I want to comment not only on that, but also on so-called bucket strategies that I don’t think I’ve written up anywhere.

This silliness bugs me because it doesn’t make any sense. (Mathematically, that is. It may feel good emotionally to “do something” rather than just strategically rebalance.)

When a company pays a dividend, the stock price goes down by the amount of the dividend. You are essentially selling the stock. Imagine a company that paid no dividends, and you sold an amount equal to their earnings yield. That is equivalent (mathematically) to not reinvesting the dividends of a company with a 100% payout ratio. But I don’t think anyone would think selling some shares of AMZN or BRK isn’t selling.

Now I suspect what was meant was at the asset class (not company) level. But still, why would changing the asset allocation (from stocks to cash) by an amount that happens to be equal to the dividend yield be optimal? When dividend yields are 1.3% (2021) that’s the right amount to go to cash (annually) but when they are 7.4% (1950) that’s the right number?

Are we avoiding invading principal in real or nominal terms? So today you need to reinvest everything (plus some) to maintain a real principal balance or in the 1970’s you can spend all your “income” even though the purchasing power of the portfolio is plummeting? Both seem silly, but you get either one silly outcome or the other if you follow these types of rules. The 4% rule (and most variations) and MPT are based on expected returns and risk. There is no place for “but the return comes from dividends not appreciation so it’s different.” It’s not different. Total return matters, not yield (except as a component of the total return).

In addition, “in rocky times” probably means the market is already down so you are (effectively) selling stocks lower. (Unless this is an actual VIX strategy that actively allocates based on the VIX and goes more to cash when stocks spike up as well as down.)

This is actually just disguised market timing because you have to make a subjective call on “rocky” and “not rocky” – not only to stop/start dividend reinvestment, but also to determine when to redeploy the cash that has accumulated.

Similarly, some advisors (including some I respect) employ a “bucket strategy” that divides the client’s funds into short-term and long-term buckets (and sometimes into intermediate-term too). While I’m sure that has psychological benefit, I don’t think it works the way people think. The idea (as I understand it) is that the client has some amount in cash to cover the next 2-5 years of expenses, so they don’t have to sell if/when the market is down.

First, that is market timing (again) because it makes the decision of when to replenish the cash account subjective (it implies you can tell when the market is “too low” to replenish the cash). If you always keep X years in cash then it’s just an allocation with a fixed dollar amount in cash – which seems odd, and I don’t think that has any empirical support in the literature as an optimal allocation strategy.

Second, it doesn’t work that way! In any significant downturn you would be buying stocks even after taking a draw, not selling them. Here’s the math:

Suppose we have a client who is 60/40 stocks/bonds with a 4% initial draw. Assume the market value of the 40% doesn’t change. How much would the 60% have to decline before we are buying stocks anyway? 10%. Let’s use dollars. On a $1 million portfolio, the $600k declines to $540k. $40k is withdrawn from bonds (you are overweight bonds now) for the client’s living expenses, leaving $360k. Total portfolio value is $900k. $540k/$900k is 60% and (obviously) $360k/$900k is 40%. Any decline larger than 10% in stocks would lead to buying stocks to rebalance back to target.

In short, if you rebalance, you can skip the bucket strategy as it makes no sense (mathematically) unless the investor has a pretty high equity allocation, or a pretty high withdrawal rate. I think people just say this because it sounds smart, but they never actually thought about it and certainly didn’t do any math!

At a 20% stock underperformance relative to bonds, you would need an 8% withdrawal rate (off the original values, which would be over 9% of the current values) before you were selling stocks. Again, the worse the bear market, the less likely you are to be selling stocks. If there is a 50% stock decline you would need a 20% withdrawal rate policy to be selling stocks (again off the original value, it would be almost 29% of the value after the drop).

But what if you were 80/20 to begin with rather than 60/40? Then on a 20% downturn you would take anything over a 4% withdrawal from the stocks (again of the original values, I’m using the “4% rule” methodology where you don’t change the withdrawal due to market returns, but I’m ignoring inflation for simplicity of exposition) and you would be “selling” in a bear market. If we are 80/20 and had a 50% market underperformance you would need a 10% withdrawal rate (pre-drop, almost 17% of the new value) before you sold any stocks.

In the most catastrophic downturns, you are never going to be selling stocks – so I have no idea what a bucket strategy is supposed to do, but I’m pretty sure it doesn’t do it.

Eighth, if you look at real historical home prices (Shiller data here):

  1. Real home prices were basically unchanged for 107 years (from 1890 to 1997 the real CAGR was 12 basis points – yes, 0.12%).
  2. Since then (24 years), the real CAGR has been 246 bps.
  3. We are now past the 2006 peak (by about 4.7%) but leverage is much lower today so it isn’t as concerning – and mortgage rates aren’t higher, even though they may seem high because of how really low they have been more recently.
  4. The real CAGR since the 2006 peak is just 31 bps.

The historical mortgage rates can be found here.

Ninth, is there a place for SPIAs in the portfolio? You should apply Betteridge’s Law (mostly) to that question. Or you can read this.

Also, there was a good paper (here) analyzing the trade-off between buying and annuity or buying long bonds. It’s also a good background on the history of bond market returns which most investors (and advisors) neglect in favor of studying the history of stock market returns.

Tenth, here is an excellent post, There will Always Be Sorcerers. I have written on forecasts before (including here, here, and here):

At that last link, I included some good quotes on planning and prognosticating, and Howard Marks just came out with a new memo (here) which gave me a few more:

  • There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know. – John Kenneth Galbraith
  • The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge. – Daniel J. Boorstin
  • Forecasts create the mirage that the future is knowable. – Peter Bernstein
  • The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait. – G. K. Chesterton
  • Forecasts usually tell us more of the forecaster than of the future. – Warren Buffett
  • I never think about the future – it comes soon enough. – Albert Einstein
  • It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on. – Amos Tversky
  • The inability to forecast the past has no impact on our desire to forecast the future. Certainty is so valuable that we’ll never give up the quest for it, and most people couldn’t get out of bed in the morning if they were honest about how uncertain the future is. – Morgan Housel
  • No amount of sophistication is going to allay the fact that all of your knowledge is about the past and all your decisions are about the future. – Ian H. Wilson (former GE executive)

(The memo is worth reading in its entirety. If you get to the end of it, I am clearly in the “I don’t know” school.)

The point made in that final quote is known in philosophy as Hume’s Problem of Induction – I think investment management is mostly applied epistemology!

The penultimate quote above from Morgan Housel reminds me of this WWII story (from Peter Bernstein’s Against the Gods which I mention in item 23 below):

One incident that occurred while [Nobel Laureate Ken] Arrow was forecasting the weather illustrates both uncertainty and the human unwillingness to accept it. Some officers had been assigned the task of forecasting the weather a month ahead, but Arrow and his statisticians found that their long-range forecasts were no better than numbers pulled out of a hat. The forecasters agreed and asked their superiors to be relieved of this duty. The reply was: “The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.”

And here are two more quotes I have often used (though not in the sources above):

  • We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children. – Warren Buffett
  • I think everybody who predicts the future with a straight face should be required to change out of the business suit, wrap himself in a gypsy shawl, wear one of those pointed wizard’s hats with a picture of a crescent moon on it, and make conjuring sounds over a crystal ball. That way, everybody would know exactly what’s going on and how much credibility to give it. – Bob Veres

Related, this applies to the stock market, etc. as well. In other words, in our field we should just predict the market will go up. We will be right about 75% of the time, which isn’t great, but almost certainly better than any other prediction.

I wrote more elaborately on this a few years ago: What’s the Market Going to Do?

TL; DR: “Most likely between a 33% loss and a 50% gain, but there is about a 1-in-20 chance it could be outside that range.”

Eleventh, Exhaustive analysis on sustainable withdrawal rates here. Reading the entire paper may be too much, but I would highly recommend “Part IV: Worst Cases Found Outside the US” (pages 25-33) at a minimum.

Twelfth, The Economist put together a special report on ESG back in July. See also The Expected Returns of ESG Excluded Stocks.

Here is another angle on it from me: many people believe that ESG investing will provide them higher returns (perhaps risk-adjusted). But if that is true then that means active managers (writ large) are mispricing those stocks on an ongoing basis.

In other words, you can either believe that ESG investing has higher returns, or you can believe that active managers have skill. But you can’t coherently hold both beliefs.

Thirteenth, here is yet another report on crypto, Unlicensed Gambling: Bitcoin in Monetary Perspective. Another commentator thinks perhaps crypto is recapitulating the S&L debacle. What does Krugman think?

Fourteenth, I’m always interested in what Michael Mauboussin has to say. Good interview here.

Fifteenth, two papers (one and two) recently got a lot of press, I saw them referenced four places in one morning. Here is commentary from Marginal Revolution and the New York Times.

Sixteenth, most advisors are natural conversationalists, but, if you aren’t, these 100 questions might help get to know your clients, co-workers, or others.

Seventeenth, the Schumer-Manchin Tax and Subsidy Pact passed recently. I refuse to erroneously call it the “Inflation Reduction Act of 2022” even though that is the official name, so I plagiarized the WSJ. (Others have issues with the name too.)

There isn’t much to it, but an overview of the few relevant provisions can be found here.

Eighteenth, research found that “More than two million U.S. households have an eviction case filed against them each year.” (source) There are 128,451 U.S. households (source), so about 1.5% of U.S. households are facing eviction each year. About half of the cases are successful in obtaining an eviction order. (source) But, of course, many are homeowners; there are only 43,776 renters (source) so roughly 5% of renters have eviction notices filed against them each year. That is much higher than I would have expected.

Nineteenth, the recent executive order to forgive some student loans could cause some problems. (Highlights of that article here.)

Quasi-related, here is an excellent thread on changes in popularity of various majors: (keep scrolling down for several takes on the data)

From that same poster’s 2018 article:

Students aren’t fleeing degrees with poor job prospects. They’re fleeing humanities and related fields specifically because they think they have poor job prospects. If the whole story were a market response to student debt and the Great Recession, students would have read the 2011 census report numbering psychology and communications among the fields with the lowest median earnings and fled from them. Or they would have noticed that biology majors make less than the average college graduate, and favored the physical sciences. Most 18-year-olds are not econometricians, and those that are were probably going to major in economics anyway. The census has been asking about college majors for almost a decade now and aside from a few obvious points—engineers make more money than journalists—the results are most surprising for how trivial the differences between most majors turn out to be.

Much of that evidence does indicate that humanities majors are probably slightly worse off than average—maybe as much as one more point of unemployment and $5,000 to $10,000 a year in income. Finance and computer-science majors make more; biology and business majors make about the same. But most of the differences are slight—well within the margins of error of the surveys. One analysis actually found that humanities majors under the age of 35 are actually less likely to be unemployed than life-science or social-science majors. Other factors, like gender, matter more: Men with terminal humanities B.A.’s make more money than women in any field but engineering. Being the type of person inclined to view a college major in terms of return on investment will probably make a much bigger difference in your earnings than the actual major does.

Twentieth, there was an excellent paper Popular Personal Financial Advice versus the Professors. I think sometimes the popular advice has a point and sometimes the professors have a point. In the first case, the professors are generally missing some relevant psychology, in the second case the popular writers are generally missing some mathematics.

Twenty-first, I first commented on this two years ago. The Economist just got to it recently: The grandchildren of China’s pre-revolutionary elite are unusually rich.

Twenty-second, I just read a Robert Shiller paper from 1984 (Stock Prices and Social Dynamics), simply because I ran across it and had never read it, and it had this:

According to poll analyst Daniel Yankelovich:

We have seen a steady rise of mistrust in our national institutions. Trust in government declined dramatically from almost 80% in the late 1950s to about 33% in 1976. Confidence in business fell from approximately a 70% level in the late 60s to about 15% today. Confidence in other institutions – the press, the military, the professions – doctors and lawyers – sharply declined from the mid-60s to the mid-70s.

A footnote had the source:

From a speech, April 1977, quoted in Seymour Martin Lipset and William Schneider, The Confidence Gap: Business, Labor and Government in the Public Mind (Free Press, 1983), p. 15. The Gallup Poll also documents a fairly steady decline in confidence in all major institutions over the years 1973-83. See Gallup Report, no. 217 (October 1983).

1977, but it sounds modern does it not? Historical perspective will generally enable you to be more sanguine when the news makes it seem like we are doomed. We have frequently seemed doomed!

Twenty-third, Laurence B. Siegel wrote:

If an investor were allowed to have only a dozen investment-related books, [Edward Chancellor’s The Price of Time] would be one of them. The others would include Peter Bernstein’s Against the Gods, Matt Ridley’s The Rational Optimist, and Nassim Taleb’s Fooled by Randomness.

In the related footnote:

The Price of Time might not make my top 4, but only because of the narrowness of its subject matter. It’s as well written as the other three I mentioned. Bernstein’s Capital Ideas and Capital Ideas Evolving are more directly relevant to the practice of investment management, but Against the Gods (about risk) should be required reading for anyone who takes risk – and that’s all of us. Taleb’s book, likewise, should be required reading for anyone who deals with statistics and numbers – again, that’s all of us.

I would agree with all of those books, but I haven’t read The Price of Time yet (it just came out). Here are some Amazon links:

Two of those were already on the list I made a while back for our associates’ personal development program, but upon reflection, I’m persuaded to add Against the Gods (and drop Extraordinary Delusions and Madness of Crowds (1841) which is not as historically accurate, though its sweep is broader, but much of the content is captured in Manias, Panics, & Crashes anyway). I’m trying to keep the list to 16 titles! Here’s my updated list:

  • Wealth Management:
    • Winning The Loser’s Game (1985, as Investment Policy)
    • Four Pillars of Investing (2002)
    • More Than You Know (2006)
    • Psychology of Money (2020)
  • Historical Perspective:
    • Against the Gods (1997)
    • Manias, Panics, & Crashes: A History of Financial Crises (1978)
    • Devil Take the Hindmost: A History of Financial Speculation (1999)
    • The Rational Optimist (2010)
  • Business Strategy:
    • Blue Ocean Strategy (2004)
    • Competing Against Luck (2016)
  • Operations:
    • E-Myth Revisited (1986)
    • The Checklist Manifesto (2009)
  • Professional Development:
    • How to Win Friends and Influence People (1936)
    • Seven Habits of Highly Effective People (1989)
  • Marketing
    • Never Eat Alone (2005)
    • Give and Take: A Revolutionary Approach to Success (2013)

Twenty-fourth, I read some good analysis about China (part 1 and part 2). I don’t think people realize how big a problem misallocation of resources is. This is why capitalism (not crony capitalism, true capitalism) beats everything else. Hayek explained it well in The Pretense of Knowledge (1974).

I also think people underestimate the demographic issue. China either has (my guess) or will soon (official numbers) start declining in population. Their unproductive citizens (old people) will become disproportionate to the productive citizens.

You can google “China demographics” and read endlessly. Here for example.

The combination of the two issues means I think China is in big trouble. Which may make an invasion of Taiwan more likely as a distraction to the people. There’s nothing that helps a leader rally support more than a common external enemy.

Twenty-fifth, this line may be the defining quote for our times: “[I]gnorance and self-deception can and often do have greater subjective utility than an accurate understanding of the world.” (source) Our job as advisors is to have as accurate view of the world as possible so we give the best advice.

Twenty-sixth, two papers on decumulation:

Do the Retired Elderly in Europe Decumulate Their Wealth?

Explanations for the Decline in Spending at Older Ages

Twenty-seventh, it appears the effect I mentioned here holds up. Here’s a new paper: Long-Run Trends in Long-Maturity Real Rates 1311-2021. Graphs on page 13, 28, 30, 32, and 33.

Twenty-eighth, from this article, a pithy summary of how to invest: Minimize expenses and emotions; maximize diversification and discipline.

The whole piece is worth a read.

Twenty-ninth, retirement age came up recently on a situation where the plan is, basically, for the younger spouse to “work until 70.” But:

The median expected retirement age for workers —age 65 —and the reported retirement age of retirees —age 62 —remain unchanged (Figure 30). However, workers envision (or hope for) a gradual retirement transition to retirement and work for pay in retirement, which doesn’t match the experience of most retirees. (source)

In other words, people plan to work until 65, but end up retiring at 62, and those that intend to work in retirement don’t make as much as they expected. Thus, I think most financial plans should be designed for success if retirement occurs at 62, even if the person intends to work longer than that.

Thirtieth, I’ve talked about this before, but money does buy happiness. Happiness rises logarithmically, not linearly, with income. This confuses non-experts.

Thirty-first, you may not have seen it, but Scott Adams devoted some Dilbert comics to lampooning ESG. It starts here.

Finally, my recurring reminders:

J.P. Morgan’s updated Guide to the Markets for this quarter is out and filled with great data as usual.

Morgan Housel and Larry Swedroe continue to publish valuable wisdom. Just a reminder to go to those links and read whatever catches your fancy since last quarter.

That’s it for this quarter. I hope some of the above was beneficial.

If you are receiving this email directly from me, you are on my list of Financial Professionals who have requested I share things that may be of interest. If you no longer wish to be on this list or have an associate who would like to be on the list, simply let me know.

We have clients nationwide; if you ever have an opportunity to send a potential client our way that would be greatly appreciated. We also have been hired by some of our fellow advisors as consultants to help where we can with their businesses. If you are interested in learning more about that arrangement, please let us know.

We also offer a monthly email newsletter, Financial Foundations, which is intended more for private clients and other non-financial-professionals who are interested. If you would like to be on that list as well, you may edit your preferences here.

Finally, if you have a colleague who would like to subscribe to this list, they may do so from that link as well.