Economy

Oikonomia: Household Management

noun, 

thrifty management; frugality in the expenditure or consumption of money, materials, etc.

an act or means of thrifty saving; a saving:He achieved a small economy by walking to work instead of taking a bus.

the management of the resources of a community, country, etc., especially with a view to its productivity.

the prosperity or earnings of a place:Further inflation would endanger the national economy seriously.

the disposition or regulation of the parts or functions of any organic whole; an organized system or method.

the efficient, sparing, or concise use of something:an economy of effort; an economy of movement.

economy class.Theology.

  1. the divine plan for humanity, from creation through redemption to final beatitude.
  2. the method of divine administration, as at a particular time or for a particular race.

Obsolete. the management of household affairs.

FIRE is in fact defined by the obsolete definition of economy. All of the books, bogglehead rants, WCI’s Robbin and Collins of the world are subsumed in the normative definition this ONE NOUN. It boils down to frugal or parsimonious expenditure, and the efficient productive use of excess. The more efficient and the more parsimonious the more productive the system becomes. It’s really quite useful to have a one word understanding. Intimately understanding that one word gives you the arrow needed to point at the target and hit the bulls eye.

David over at FIPhysician wrote a provocative article claiming there is no such thing as market risk. With regard to retirement there is some truth to that. If you own a portfolio, what you own is portfolio risk. If your portfolio is 100% passive equities, say VT or VTI you own 100% market risk. Market risk and portfolio risk are identical. If you own 100% 3 month T-bills you own 0% market risk. 3 month T-bills are considered “the risk free asset”. Davids point is you don’t control market risk. The market does what it will.

The Market is a pricing mechanism. In accumulation it converts work into property. You are born with your maximum human capital, the amount of time you have to be productive. You can’t get any more human capital you only spend human capital. You CAN modify the value of your human capital. You can spend some human capital and multiply the value of your human capital through education and experience. You possess less human capital but it’s more valuable and its value is also set by a market. A cardiac surgeon’s human capital is worth more than a nurse practitioners. The parsimony and productivity aka the economy of that is obvious at least in the present market. If a NP’s wages rise and a Surgeon’s wage falls at some point the excess cost of training and practice costs (malpractice etc) will overtake the benefit of being in the workforce an additional 10 years and bearing none of the excess costs. It’s a market driven economy on the value of human capital. Even the cash value of your time is based on a complex analysis of cost and efficiency.

Yea, yea, but what about the damn portfolio! You don’t control market risk but you do control how much risk you own. The market is a pricing mechanism. When you enter the market you convert risk free assets into risky property. Today I added to my BTC position. I took some cash and bought some property. I put the cash “at risk”. BTC is up 3.19% today compared to when I bought so I “made some return” for my trouble. I made some return but what I bought is risk. Given the volatility of BTC I could as easily be down 3% and may be by morning. I don’t own BTC to make money I own BTC to not loose money. It turns out BTC and VTI (the market) are non correlated so it reduces my risk. I also own EDV which is not correlated with BTC and is negatively correlated with VTI. Gold is also not well correlated with any of the other 3. So owning this quartet reduces my risk and the amount of risk I own is all I can control. I don’t control my return. The market controls my return. Owning the quartet does mean I make the same relative return for less risk. This is a parsimonious, frugal and productive use of capital, aka it’s economic, i.e. possess he quality of economy. Here are the correlations

I’ve decided maybe 3 – 3.5% in BTC might be useful, but be very clear BTC is making a bet, but then buying and owning any risk asset is making a bet. 4 x 25 is making a bet.

Back to the portfolio. Retirement portfolio’s have a job. Their job is to pay for your expenses when you quit working. When you quit working you relinquish your remaining human capital. If you retire normally age wise, typically your human capital has all been consumed anyway. Your productivity and efficiency tends to decrease, and you get tired or develop medical issues. The society’s social systems are designed around “normal” retirement. It’s actually a great boom to the younger generation. In times past it was the families job to bear the cost of the elderly parent. In China it’s still the case. Sons are expected to step up and pay. This is why the one child policy generated so many sons in excess of daughters. China does not have SS. No son no old age income. In america we are more communistic we pool the risk and let everybody’s sons and daughters pay for everybody’s parents. This dramatically reduces the families out of pocket expense. If you kvetch about SS you should consider the cost if it wasn’t there. It dramatically reduces your risk. SS therefore reduces your risk to a relatively capped fixed cost while you are accumulating and reduces your risk in retirement because it covers part of your retirement expense. Medicare is there to reduce your cost as well. The “government” aka you pays a discounted amount to cover your parents when they are most likely to get sick. Imagine if it was up to you to cover that expense! At age 65 you don’t have that long to live so the expenses are relatively capped. It’s a societal bet that you run out of breath before the corporate cost of your living becomes uneconomic. Be very glad you pay SS and Medicare you would hate paying full the load as opposed to the discounted pooled load.

In “early” retirement You create a bigger burden on society. You sop paying your fair share and start consuming. You also throw away large chunks of your human capital and productivity. Your “need” will be considerably greater than your cohort who works later so in effect you are stealing some of his productivity and then turn around and call him a dope for not retiring early. If everybody 4 x 25’d it the economy would collapse. So be damn glad and not smug that your neighbor doesn’t retire early and throw away his human capital and productivity. In a low productivity economy, FI becomes AFU.

W hen you buy a portfolio to take over for your job, you need a set amount of money. That’s what 4 x 25 means. In it’s main you save 25 times, and if it was all in inflation adjusted cash aka a risk free asset you could live 25 years. Standard retirement allows you to lever up your 25x principal using risk assets to pay for 30 years of retirement. You expect to gain 5 extra years of retirement for free because you bought the risk. This scheme, and it is a scheme is a bet. It is no less of a bet than BTC is a bet. And just because buckets of digital ink have been consumed extolling it’s safety it’s a bet. The problem with the bet is that it can turn your expected 30 years of money into only 20 years of money. Risk giveth and risk taketh away. All you can control is risk since that is what you buy when you buy risk assets. Buy more risk and maybe you’ll reap bigger return, maybe not. Maybe much smaller return.

David’s article was about mitigating risk over 3 epochs of portfolio life accumulation transition and deflation. Peak risk is the year of retirement. It’s a bet. You retire because you hit your “number” which likely means the market has been going up and your risk has been paying reward. Lets say your FI number is 3M and you retire in 2019 after the longest bull market in history and you own market risk i.e 100% stocks. The market drops the value of your property in half, aka 1.5M. You are no longer FI according to your definition. You presume the market recovers but what if it doesn’t? To stay solvent for say 30 years you have to cut consumption in half. That’s the bet you make with a levered retirement.

If you retire early you get to cut consumption by 2/3 because you have a lot more years to cover. In addition you are far away age wise form “normal” conditions like SS and medicare. Smugness turns to uggness. Therea re means to limit your risk on the journey. Since risk is highest at retirement 10 years before retirement you can sell some risk. Get out of some stocks and get into some bonds. Hold the reduced risk for at least 15 years AFTER retirement slowly ratcheting up over time like a glide path, that’s what David recommends. I’ve seen alternative recommendations of 5 years before and 10 years after retirement. That would constitute 15 years out of a 35 year period or you should reduce risk about 40% of the time. If you’re going to do that you should probably save a bigger pile to start since owning a bigger pile is a means to reduce risk. There are all kinds of variations of risk reducing strategies, peri-retirement, my favorite is the 2 portfolio different risks. One large more risky portfolio to use when times are good, one small low risk portfolio to use when the market drops in half.

It’s all about creating true economy out of granularity. If you think 4 x 25 is safe don’t ever criticize me for buying BTC. I have only a tiny bit at risk.

When I awoke, the dire wolf
Six hundred pounds of sin
Was grinning at my window
All I said was, “Come on in”

Don’t murder me
I beg of you, don’t murder me
Please don’t murder me

Dire Wolf Grateful Dead

4 Replies to “Economy”

  1. How does real estate – personal property, investment property, and REITs – fit into your views on personal finance and retirement? Having a paid off house at retirement seems like it would offer some inflation protection and help to de-risk one’s overall situation.

    What you write about human capital makes sense. It’s too bad there isn’t much average doctors can do to preserve earning and career future potential, besides continuing to engage in clinical work. For some of us, practice becomes unsatisfying after a while. Seems worse among the younger generation of docs. I think physician FIRE and discussion around non-clinical jobs (insurance, pharma) will remain popular topics for that reason.

    1. Real Estate depends on your leverage. REITS if you look at risk reward as a group has a high return, but a higher risk compared to US total stocks. So when you own REITS it can raise your portfolio total risk and the higher the risk the farther it falls in a crash. the advantage of REITS is they are liquid and can be readily sold. Not so with the other vehicles. If you own your home, you will have a place to live. If you have a loan simply pay the loan, house values go up and down but I never considered my house an investment just a place to raise my family. I have a bad feeling on commercial real estate and residential rentals but again it depends on leverage. The assumption is businesses need real estate, that works till there is no business. People need places to rent, that works till there is no jobs. In 2008 people moved into their cars, or tents or small trailers, which is why Cali has such a big homeless population. The weather is good. North of me there is a homeless encampment of ex military and some of the locals help feed them with bogo food and coupon deals.

      Regarding medicine, the physician has steadily lost ground during my 38 years in the biz. The administrator has steadily gained ground so that’s the transfer of wealth, physician to administrator. The transfer continues by training all of these new “providers” who will happily eat your lunch. Providers are trained to perform policy not take care of patients. Policy is what insurance including medicare and medicaid pays for. It’s why you spend half your day checking boxes an a laptop. Provider medicine is one size fits all. I recently had surgery and got home health nursing PT and OT. The nursing was totally unresponsive to my medical needs and totally responsive to what medicare would pay for. Had I not been a physician and forced the issue with proper care, I would have been readmitted. PT and OT actually helped me but also were all about checking all the boxes. I went to cardiac rehab and it was a total joke. It was run by Big Nurse from Cuckoo’s nest, you know one of those mid level administrators who spends their day going from meeting to meeting eating Sysco cookies and drinking bottled water. The rehab was stupid and my home gym was far superior, the teaching was strait out of 1981 but I’m sure they met the letter of the medicare reimbursement law. So that’s why medicine has become so distasteful. You spend your day treating insurance claims not patients. When I practiced I owned the shop so we maintained quit a bit of autonomy in the hospital. My last couple years was as a corporate employee a totally distasteful experience. By then I was old so I quit.

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