1/ Part 4 of 4: Implementation
Part 1
Part 2
Part 3
Part 1
Part 2
Part 3
2/ So most of what we've talked about is pretty simple.
Start with the global market portfolio as a base case allocation, it's diversified and you can implement it for ~free.
That's roughly half in stocks and half in bonds. And of that, it's half US and half foreign...
Start with the global market portfolio as a base case allocation, it's diversified and you can implement it for ~free.
That's roughly half in stocks and half in bonds. And of that, it's half US and half foreign...
3/ Which reminds me of the Bogle quote:
"I'm about 50 percent stocks and 50 percent bonds and I spend half my time worrying about why I have so much in stocks and the other half worrying about why I have so little in stocks."
"I'm about 50 percent stocks and 50 percent bonds and I spend half my time worrying about why I have so much in stocks and the other half worrying about why I have so little in stocks."
4/ Then, calibrate your portfolio to break the market cap weighted link with tilts to value. (Momentum and trend are other favorite tilts we didn't get into, next tweetstorm!)
This may be uncomfortable for some as the US is one of the most expensive stock markets.
This may be uncomfortable for some as the US is one of the most expensive stock markets.
5/ You can implement this strategy on your own through tax efficient ETFs that are near expense ratio free, and do so through many brokerages like @Vanguard_Group or @RobinhoodApp that have commission free ETF trading.
Just don's use expensive funds!
mebfaber.com/2017/04/27/pay…
Just don's use expensive funds!
mebfaber.com/2017/04/27/pay…
6/ You can even automate this process through one of the excellent offerings like @Betterment, @Vanguard_Group, @SchwabBlue (or my company Cambria).
Most of these shops all have a similar allocation (not necessarily a bad thing)
mebfaber.com/2015/04/24/sch…
Most of these shops all have a similar allocation (not necessarily a bad thing)
mebfaber.com/2015/04/24/sch…
7/ If you haven't tried an automated solution yet, you should consider. The user interface and experience is great, and will be table stakes going forward.
I invest all of my public assets in a similar way:
mebfaber.com/2018/10/01/why…
I invest all of my public assets in a similar way:
mebfaber.com/2018/10/01/why…
8/ All simple and easy right?
Not quite.
Not quite.
9/ Let's use another example that includes a dead simple formula.
Weight management, where the formula is basically:
Weight change: Calories consumed - calories burned.
Now before you keto crazies (@MikePhilbrick99) or others pull your hair out, I realize it's simplified.
Weight management, where the formula is basically:
Weight change: Calories consumed - calories burned.
Now before you keto crazies (@MikePhilbrick99) or others pull your hair out, I realize it's simplified.
10/ But for the most part, it's a pretty accurate formula.
But how much money is made on the back of that simple formula with the weight loss industry, fitness industry, etc.
Bazillions.
But how much money is made on the back of that simple formula with the weight loss industry, fitness industry, etc.
Bazillions.
11/ We penned a fun paper on this topic but not the point of where I'm going:
cambriainvestments.com/wp-content/upl…
cambriainvestments.com/wp-content/upl…
12/ My point is that because we are genetically hard wired in a way that makes following that simple formula so, so difficult.
The same is true in investing. The process is dead simple. It's the emotions that get in the way.
The same is true in investing. The process is dead simple. It's the emotions that get in the way.
13/ Emotions are especially problematic when financial markets are at extremes.
What happens when everyone agrees, in fear or in euphoria?
What happens when everyone agrees, in fear or in euphoria?
14/ Here's my favorite example. The @AAII_Invest_Ed survey that goes back to 1980s asks people if they are bullish, bearish, or neutral.
As you can see now people are a little bit bearish, not surprising after a nasty October!
As you can see now people are a little bit bearish, not surprising after a nasty October!
15/ But look at the extremes. When were people most BULLISH? January 2000.
When were people most BEARISH? March 2000.
Literally you could not make up a worse time for either!!
Most BULLISH when you should be BEARISH, most BEARISH when you should be BULLISH.
When were people most BEARISH? March 2000.
Literally you could not make up a worse time for either!!
Most BULLISH when you should be BEARISH, most BEARISH when you should be BULLISH.
16/ Here's another one from @LeutholdGroup that goes back to the 1960s. They examine average sentiment over a whole year and look at subsequent year stock returns.
Not surprisingly, bad sentiment leads to good returns and vice versa.
Not surprisingly, bad sentiment leads to good returns and vice versa.
17/ Guess where 2017 ranked, after a year where the stock market went up every single month for the first time in history?
The second highest bullish reading ever...
The second highest bullish reading ever...
18/ Pros love looking down their nose at these foolish retail investors right?
Please, they're just as bad, but just use fancier words like "rigorous" while expecting the same 10% returns, they just make believe it's all magically coming from private equity.
Please, they're just as bad, but just use fancier words like "rigorous" while expecting the same 10% returns, they just make believe it's all magically coming from private equity.
19/ Here's a famous academic paper demonstrating how bad these large allocators are at chasing returns.
It shows hiring/firing decisions for manager allocations, and no surprise, they chase performance and would be better off just doing nothing.
It shows hiring/firing decisions for manager allocations, and no surprise, they chase performance and would be better off just doing nothing.
20/ A recent survey showed that 89-99% of institutions would fire a manager after two years of underperformance. 2 years!!
I would love to see the names of who filled out that survey so they could all be fired!
I would love to see the names of who filled out that survey so they could all be fired!
21/ Here's a fun example. From our book Invest with the House (free download here: cambriainvestments.com/investing-insi…)
We examined investing in lots of famous fund managers through government filings. Quick summary: it works great.
We examined investing in lots of famous fund managers through government filings. Quick summary: it works great.
22/ A classic example is @WarrenBuffett. If you followed his top 10 stock picks since 2000, you would outperform the stock market by about 4 percentage points per year...
That would beat 99% of all mutual funds over the period
That would beat 99% of all mutual funds over the period
23/ So why doesn't everyone just follow Warren?
Because during that period he had a stretch where he underperformed 8 out of 10 years.
He would have been fired many times over by those consultants after two bad years. Forget 10!
Because during that period he had a stretch where he underperformed 8 out of 10 years.
He would have been fired many times over by those consultants after two bad years. Forget 10!
24/ But that's the trade off you have to make when allocating differently vs the passive global portfolio.
Half the time you will look stupid and about 25% of the time you'll look incredibly stupid. That's hard for many especially when their neighbor is getting rich...
Half the time you will look stupid and about 25% of the time you'll look incredibly stupid. That's hard for many especially when their neighbor is getting rich...
25/And nothing is worse than your neighbor getting rich...
"I've heard Warren say a half a dozen times, 'It's not greed that drives the world, but envy,'" Munger says.
So how to combat this? Simple - have a plan.
"I've heard Warren say a half a dozen times, 'It's not greed that drives the world, but envy,'" Munger says.
So how to combat this? Simple - have a plan.
26/ I polled my tweeps a few days ago on this topic, and 75% of you said you have no plan. None, zip, zilch.
27/ And almost everyone we speak to
- Owns an investment salad
- Has a binary view on investing
- Harbors a secret desire to complicate the process
These above problems persist and are exacerbated since you do not have a written investing plan.
- Owns an investment salad
- Has a binary view on investing
- Harbors a secret desire to complicate the process
These above problems persist and are exacerbated since you do not have a written investing plan.
28/ So, after 4 tweetstorms across 100s of tweets, let's summarize....
Most investors have unrealistic expectations. Solution? Lower expectations, spend less and save more. If you exceed those expectations, that's gravy...
Most investors have unrealistic expectations. Solution? Lower expectations, spend less and save more. If you exceed those expectations, that's gravy...
29/ You can likely improve the future returns by diversifying into the global market portfolio from just US investments. Get rid of your home country bias, and even better news, is you can implement this portfolio for near free.
30/ Once you have the global market portfolio as a base case, consider calibrating the portfolio by tilting towards factors like value as most stock markets around the world are reasonably priced to very cheap....just don't implement with high fee funds!
31/ Lastly, have a plan. Write down your rules, automate it if possible, and get on with your life...
"AND JOY IS, AFTER ALL, THE END OF LIFE. WE DO NOT LIVE TO EAT AND MAKE MONEY. WE EAT AND MAKE MONEY TO BE ABLE TO LIVE. THAT IS WHAT LIFE MEANS AND WHAT LIFE IS FOR." Mallory
"AND JOY IS, AFTER ALL, THE END OF LIFE. WE DO NOT LIVE TO EAT AND MAKE MONEY. WE EAT AND MAKE MONEY TO BE ABLE TO LIVE. THAT IS WHAT LIFE MEANS AND WHAT LIFE IS FOR." Mallory
32/ We'll circle back in a few weeks with some more ideas for the next tweetstorm!
