Pretty Happy

Yesterday was a humdinger as the S&P was down 58.14 or -1.77%. I tend to use the S&P as my benchmark as it’s a broad US index with many multinational companies. My portfolio was down almost exactly half of that 1.77%. This is what I’ve been aiming for, a portfolio that is half as reactive as a pure passive equity play. This means if 4M in equities goes to 2M in a crash my 4M will drop to 3M. In doing a efficient frontier analysis

My portfolio risk of 9.9% is virtually 1/2 of a pure equity risk of 19.76%. My projected return is 7.6%, which is 76% of the projected 9.99% of the 100% equity portfolio. I get 75 cents of every dollar to the upside, but I risk only 50 cents of every dollar to the down side. Given my 20 year longevity regarding the sustainability of my portfolio, I think my odds are good, especially since my portfolio is tax optimized. My odds will further be enhanced in 2 years when I pull the trigger on Social Security. If the market dies sooner I can pull the SS trigger if need be, since pulling the trigger at 68 is not hugely different than pulling the trigger at 70, so it would quench my need to deplete my portfolio in a bad SORR scenario. If I pull that trigger it will cut my portfolio WR in half. Each month I get closer and closer to 70, so each month my relative value of SS increases. It’s a nice place to be in.

The majority of my Roth conversion has taken place. If the market dumps it will cut the value of my remaining assets to convert, and therefore I will be able to convert more (cheaper) assets for the same tax dollar. The tax money to pay for conversion is already in the bank. I sold high, paid the taxes, and didn’t look back. If the market doesn’t dump I will simply convert a smaller amount over a longer time ( to age 72 vs age 70) and lower my tax bill that way.

I recently sold some QQQ and bought some BRK.B to reduce my risk exposure while increasing my return. BRK.B has a 11.3% return and a 17% risk while QQQ has a 8% return and a 24% risk. Better return, lower risk = no brainer. The 2 also have only a .16 correlation. Compared to the 1.77% loss in the S&P, BRK.B lost only 1.5%.

Who says you can’t time the market! My conversions are parsing out exactly according to plan.

14 Replies to “Pretty Happy”

  1. Happiness on the way down as you wait for the 2nd derivative to turn positive! Turning those peaks and valleys into rolling hills should undoubtedly lead to better sleep at night. Just beginning the Roth conversion phase of my life so it’s good to be able to see the experiences of a front runner. While I don’t look forward to the next Bear market I do want to have your front seat analysis when it does happen.

    1. Thanks GF. All of the rate of change data I look at is failing on a year over year basis. The prediction is things start to get bad in Q2, but bad doesn’t always happen all at once. First it happens slowly then all at once.

  2. I like your analysis of how your projected returns capture 75 cents of a dollar on the upside and only 50 cents of each dollar lost. I checked my personal capital projection for my current allocation and it is 7.3% expected return/8.3% risk and am on the efficient frontier line (so it is comforting to know I’m in the same ball park as you). I have yet to tax optimize my portfolio though but will do Roth conversions when I stop working.

  3. Did you see Kirsten’s latest post on Asset Allocation with an interesting calculator?
    Since you are strongly building your Taxable/Roth/TIRA mix of accounts and have your allocation well planned out for tax reasons, I would like to see your comments on what Kirsten posted, but over on his blog and here on yours. Kind Regards.

  4. I read about you and GasFIRE in the Roth conversion stages, and I feel – what would be the term – security envy?

    The reduced pile placed at risk on the table at least lends a sense of comfort. Combined with watching paths those far smarter than I have taken, I feel like if I blow that stage it will not be for lack of good mentors.

    1. GF and I are but Pilgrims on the road CD, same as you. We just happened to look at the happy talk narrative with a bit more of a jaundiced eye. That’s what age gets you, a jaundiced eye, and shorter time frame in which to execute. In retirement a fatal mistake may take 2 decades to manifest. If you’re old, by the time it manifests you’re already dead. A 50 year retirement however…

    1. Thanks for the article!

      In my opinion the Minsky Moment occurred in late Nov or early Dec, which is the oldest reported case of Corona. In a world wide population with no immunity and no hope of effective treatment, the die is cast. Die is a verb as in to die and noun as in a method to project probability so my usage is a cruel pun.

      China sits next to India and Pakistan. Pakistan has resumed full flights with China. China with all it’s autocratic brutality can not contain the virus I assure you neither India or Pakistan will be able to with stand for an instant. China is thoroughly enmeshed in Africa. There is no immunity and no medical machine to stop the death in Africa. The virus kills through ARDS which effectively kills the effective physiologic functionality of the lungs. The lungs fill with a proteinacious fluid which acts as a barrier to oxygen and the chest becomes heavy to breathing so drastically decreasing the ability to expel CO2. So you become hypoxemic and acidotic. Mitochondria rely on an adequate supply of oxygen and a pH environment that is 7.4. No oxygen and low pH = dead cells = dead host. Intensive care and tincture of time are the only thing we have to treat. In the US there are 100K ICU beds probably 85% full on any given day. How soon will that system be overwhelmed? Even with the new 2000 beds in Wuhan it’s spitting in the bucket in a town of 11M and a region of 60M.

      The result will be a major disruption of an already slowing and globally synchronized world, poised for recession if not depression. Put on top of that debt, so much debt it’s almost beyond counting and unfunded liability, and the die is cast.

      The market is sniffing this out. Bonds are on the rise at every duration. BTC is blasting off. Gold is rising and gold miners are rising. Stocks are WAY over valued and the companies those stocks represent hold way too much debt. I hold a defensive portfolio that I trade actively to try and front run the market and Friday my defensive portfolio (including my BTC holdings) was up 0.5% while the S&P was down .54%. On Monday I’m buying SLV and the silver miners ETF, and I’ve moved a lot of equity money into cash and companies like BRK.B poised to deploy their cash once things get cheap. This is how Buffet got so damn rich. Bide your time, buy quality low, have a coke, in fact BUY COKE. I guess we’ll see, but what we are going to see are mass graves of millions of people in Wuhan alone. I think the US will be OK regarding the virus, but you can’t grow an economy when all of your trading partners are dead. If the economy folds we just follow the rest into the drain.

      In a world levered up for perfection, a little dab of imperfection is a big problem.

  5. Wow ! Good info and suggestions. I always keep a certain % of GLD in my portfolio. Agree the world is levered up for perfection and the next bear market is going to be a big one – maybe the biggest in our country’s history. What are your thoughts on odds of an effective vaccine ?

    1. Right now there are 2 candidates for treatment that interfere with the virus multiplying, 1 old, one new, but there is no way to make enough to dent the rate of growth in time IMHO. You don’t just make a billion doses of a drug. This is a dangerous virus and ranges from asymptomatic to deadly in infected people. This means asymptomatic people can shed virus for a month and since there is no immunity it spreads rapidly. Spread is by droplet and fecal oral so the masks don’t do anything. Hand washing does. Staying out of crowds does. It’s unclear what will stop this. It could stop in summer or it could blow right through summer. It could die away in 1 year or it could come back every year. Too much is unknown and the data being presented likely is false and wildly underestimates the real incidence of disease and death. More is known every day, but the virus grows every day as well. You could go to an airport and buy a McyD and sit down at a table just vacated by a virus shedder from Wuhan and you just got infected and will carry that infection to your next destination. We already surpassed deaths from SARS.

  6. Scary. Especially the ineffectiveness of masks. I also never believe numbers reported by China. I always add some zeroes to what they say. If they say 200, it’s likely 2000 or 20,000. Nobody will know the true number.

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