Vent your Spleen

The question arose what about disinterested spouses and the DIY portfolio. Here is a quick 15 years of projected retirement starting at age 70, married and single

The assumptions are a WR inflation adjusted to 120K/yr. A TIRA of 600K with a return of 4%. A married net SS income of 44K/yr or a single SS income of 35K/yr. Residence in FL. The taxes are for married filing jointly or single. I did not include cap gains on the portfolio since that is not easily predictable but absolutely needs to be considered. This portfolio is for WR only. It is the portion of a greater net worth that provides yearly income. It consists of SS income as described both non taxed gross inflation adjusted and inflation adjusted taxable, it includes the projected TIRA annuity payout, It includes the amount needed to be taken from a portfolio like a post tax portfolio which makes up the difference between need and the annuities of TIRA and SS. I only did the taxes for the first 5 years so a trend can be established, You can use the chart to compare circumstances. For example, you can easily see how a single gets hosed in taxes. You can easily see how a single needs to stress the portfolio more since the SS is less and the taxes are more. For example at age 75 for the same total 132490 WR, a married has 48580 of SS money available and need only tap the portfolio for 57600. A married pays only 4539 in taxes. A 75 yo single would make only 38643 in SS and need to tap the portfolio for 67537 and the single’s tax bill would be 5962. So you have to pull another 12K out of savings to live the same 132K lifestyle as a single as your married counterpart. If your non TIRA nest egg is 1,500,000, the single is pulling out 4.9% from the nest egg when you count taxes, while the married is pulling out only 4.1%.

This is the kind of granularity you need to survive in retirement and it’s only a part of the story. You also have to worry about health care inflation. It works a bit opposite for health care. If there are 2 of you twice as much medicare payment will be extracted monthly from your SS and twice as much supplemental insurance cost. With this kind of personalized chart you can ask and answer questions like what happens to the old lady’s income when the old man dies at 75? What happens when RMD forces us into a new tax bracket? How does going from married to single affect the tax bracket? What happens if we get a cap gains bill after the tax loss harvest runs out? If there are 2 of you different income cliffs exist where if you make too much money they charge you double or triple for Medicare. There are all kinds of progressive soak the rich fees built into retirement by the government which are hidden from simple minded formulaic predictions. It gets even more complicated tax wise if you happen to have made a post tax contribution to a IRA or SEP and you better have the supporting docs so you can make the calculation. I get about a 6% tax break each year because I saved the paper work. 6% compounded over a couple decades ain’t chicken feed. I’m doing a dance with how we take SS. My wife is younger and as of this year I am filing her as retired. She will take SS at her age 62 for 80% of her FRA income. I will take spousal. So for example if her FRA is 1000/mo her SS will be 800 at 62 and I get 50% of that or 400 for a net 1200/mo payment. My SS will continue to grow till 70 @ 8%/yr. At age 70 she will continue and I will take about 43K/yr for a net 52,600 in SS between us of which only 44710 is taxable. If I RMD 25K/yr at age 70 my portfolio need is only 42,400. I will get a 6% tax break on my 25K RMD and a 15% tax break on our SS plus I will pocket several years of 1200/mo from my wife taking early plus my spousal. At my death she will claim survivor which will pay her about 3500/mo or more depending on inflation. In the end this scheme will generate 150K extra money if I live a normal life span because of the SS growth and it’s subsequent easing on my portfolio need. 150K free money pays for an extra year of retirement by the time you work through the doe see doe. More SS = less from the portfolio = safer WR and better immunity from SOR. This should result in a larger portfolio at the time of my death which translates into safer WR and better SOR immunity for my wife as well.

If you listen to the shuckers who claim “easy math” or reading those same damn 10 bullet points month after month you get what you pay for. I don’t seem how you do this kind of analysis using 4th grade fractions. Also you can now see the utility of doing a low risk high risk portfolio in the WR aspect of your money. In my portfolio I have WR money and disaster money and I consider them separately in my NW. WR money comes from an open portfolio made from SS, TIRA and post tax brokerage and disaster money is closed in a Roth. The open portfolio is liable to SOR the closed is not since nothing is being extracted from it. It is in this kind of SOR sensitive open portfolio that 2 tiers of risk should shine. More to follow.

Splenic Portfolio Theory

The spleen is an organ that sits below left diaphragm in the abdomen. It’s generally thought of as an organ that filters bacteria and old blood cells. You can live without a spleen but you live better with one. Not only does it filter but it stores considerable blood, and it’s contractile. In the case of shock, a spleen through contraction can auto-transfuse it’s stored blood into the general circulation improving blood pressure and oxygen carrying capacity, just in the nick of time. Of course massive hemorrhage can overwhelm the spleens storage ability, but in terms of the so called golden hour where shock turns from a reversible phenomena to terminal that extra auto transfusion can make the difference.

I’ve written a good deal about my theory of a large portfolio risked at around 60/40 or 70/30 and a smaller portfolio risked as the tangent portfolio on the efficient frontier. I’ve written extensively about the risk and inefficiency involved in portfolios off the efficient frontier. The inefficiency is described using Monte Carlo analysis as an increasing portfolio failure rate and a failure rate that starts sooner into retirement. In my reading it appears poor SOR in the first 1/3 to 1/2 of retirement dominates the sequence and available funds in late retirement. The classic graph from the homepage of FIREcalc is:

This graph is of 3 identical 750K retirements, red starting in 1973, blue starting in 1974, and green starting in 1975.

This is GDP growth during 73-75 and the red line is average GDP from 1947-2009. GPD growth therefore were contracting by as much as -7.5% since normal is around +3.5%. This is the bad Juju of SOR. This chart describes 9 quarters of bad SOR Q2-73 to Q2-75, which is consistent with the red 1973 portfolio above, 6 quarters of bad SOR consistent with the 1974 portfolio’s outcome, and 2 quarters of bad SOR consistent with the 1975 portfolios outcome. A 30 year portfolio consists of 120 quarters so only a tiny fraction i.e. 9/120 quarters or 7.5% of a 30 year retirement was sufficient to run the ’73 portfolio out of money in just 20 years. ’74 survived 30 years but ended at half of it’s initial value, and ’75 thrived despite some bad SOR to start to close at more than double it’s starting value. To be fair the withdrawal load on these portfolios was 35K/yr or 4.6% so a smaller withdrawal could have lead to ’73’s survival as well. But what if you had a financial spleen? Could a reservoir of efficiently stored dough auto-transfused at the right time make a difference?

An alternative to a smaller WR would be to hold 3 years of WR in a differently risked portfolio, namely a efficient frontier tangent portfolio. So in this case for the 750K portfolio, 105K would be stashed in a 20/80 tangent portfolio and the remaining 645K left in a riskier say 60/40 or 70/30 portfolio that also rides on the efficient frontier. The idea would be in times that are good to remove money from the $645K portfolio and when times were bad to remove money from the $105K portfolio. To do this effectively you need to know when to pull the money from which account. A 35K withdrawal on a 645K portfolio constitutes a 5.4% WR so in years where you make greater than 5.4% take your money from the higher risk portfolio. In years when you make less take your money from the splenic portfolio.

In a 50% market downturn you would loose half your money if 100% in stocks. You would loose 33% if in a 60/40. You would loose 14% in a 20/80 since it’s mostly bonds.

The rule is to sell high, and in a crash the portfolio with the 14% drop is the high portfolio so sell from that portfolio. In normal times the 60/40 would be high and you would sell from that portfolio. The result of this is each portfolio has a chance to automatically donate at the proper time and recover in the proper time, according to it’s relative value. In the case of a crash the high risk portfolio is closed and re-balanced and no money extracted. Money is extracted from the low risk. In the case of good times money is extracted from high risk and low risk is allowed to grow unmolested. The expected rate of return on a 20/80 is 6.8% which isn’t chicken feed. The expected return on the 60/40 is 9.17% So a small percent of your money (14%) is growing at 6.8% and a large percent (86%) is growing at 9.17%, but in the down turn the portfolio with the larger risk suffers the worse insult and can least afford liquidation and is protected from the ravages of bad SOR. The protection isn’t perfect and given a long enough drain in bad times the low risk fund will run out of money, but it’s in bad times early in retirement that you you want the protection. It’s less necessary as time goes on. If you don’t use the smaller portfolio once it begins to accumulate interest over inflation, you can start to dollar cost averaging the excess from the low risk to the higher risk. If low risk runs out of money early do not refill it, as it served it’s purpose to protect the high risk portfolio. As retirement proceeds you begin to move out of the period of portfolio failure due to bad SOR, say year 10 – 15 in a 30 year retirement. As long as the low risk portfolio insurance exists you can start to glide up your total asset allocation by say 1%/yr as you re-balance every year with the added excess and dollar cost average from the low risk fund.

This technique solves the issue with the usual bucket theory problems where the cash bucket is constantly draining money from the riskier buckets. Instead you are using a buy low sell high strategy. It also solves the problem of a bucket of cash which returns virtually nothing. The low risk portfolio is in fact risked most efficiently and though returns aren’t stellar they are quite consistent because their risk is low, adding their own value to the portfolio in terms of stability. The other thing I like about this is it mechanically forces you to buy low and sell high. In the case of a crash by not selling low in the riskier portfolio you are effectively buying low relatively speaking. You sell high and buy low when you re-balance from the bond money you have been stashing from selling high on the way up. That excess money sold high is then reconverted to cheap stocks when they are at the best value. If the low risk portfolio is transfusing it’s excess gains into the higher risk portfolio it is another form of buying low. This portfolio is cutting it to the bone with a 4.6 WR. The S&P 500 has only returned 5.5% on the average over the past 19 years. I would feel much better about a 4% WR or a little less but none the less this takes advantage of a kind of risk shifting over time to protect at least to some extent against SORR. Add a little SS to the mix and you’re golden. I don’t think I would get hyper anal about precisely a 5.4% return as the trigger but in a year like last year where the market was down 5% that a net of 10% below where you need to be and I’d think about pulling the trigger. I haven’t done an in depth analysis especially on when to pull the trigger so I won’t recommend this but I wanted to get it in the archive while I had it in mind.

Is it Diversity or Mirage?

I’m always getting into pissing contests over foreign investment. It just points out how much of bogglehead land is steeped in mythology and dogma. Foreign investment is best characterized by the BH3 the three fund that holds 20% bonds 30% foreign and 50% US. The argument goes somehow owning foreign pays you compared to not owning foreign. Somehow owning foreign improves your “diversity”. If that’s the case there should be metrics to support that. Let’s consider Japan. Japan is a well run economy the 3rd largest in the world.

Here is the Niekki 225 dting back to 1970

And here is a S&P 500 chart dating back to 1950 but including a similar period as above

In the 80’s foreign was the hot topic, especially Japan. You threw some money at Japan and it threw more money back at you, multiples of more money. It was almost as good as buying AMZN in 1997. Then came 1990 and the party was over. Japan deflated. It’s now 30 years later and Japan is still deflated. In my opinion the loss is permanent, at least for anybody relying on Japan to pay them in retirement. If you retired in 1990 with 50% of your dough in Japan and a 4% so called “SAFE” WR you ran out of money decades ago. The contrast is the USA. It’s trajectory is up at a greater rate than 4%. Over 30 years the S&P has grown at 10+% per year and 4% even with a bad SOR is overcome by the monster 10% return. This is the reason 4% is “Safe”. This and no other reason. The reason the S&P grows like that is because US productivity rages at about 4% long term and productivity is the furnace that keeps the balloon inflated. There is nothing inherent in our economy that guarantees 4% productivity. In may respects it’s because we lucked out historically and benefited immensely from creative destruction.

I once owned stock in a Russian mining company. Big company with big profits and superb growth. I was so pleased with that ownership, I dutifully checked it every day. Mining is a big deal in Russia. Russia for example is the second producer of gold in the world along with things like cobalt nickel copper iron etc. One day Putin indited the oligarch prez/major shareholder of this mining company. In addition Putin suggested taxes be placed on this company I owned! The stock plummeted. Without it’s head and with the threat of monster taxes the stock deflated like the Nikkei. Putin was short the stock. I had a Russian partner in my practice and he filled me in on the reality. Being short means you sell high and then buy low at a later date and pocket the difference same as with profit on a long trade. By arresting the head of the company and threatening taxes Putin pocketed billions. As well, he then owned the stock, bought low, and owning the stock was equivalent to owning the gold mines that constituted the property of that company. Just because the stock price fell didn’t change the worth of the underlying property. Putin has a plan to put the world back on the gold standard, and remove the US as the reserve currency. If you make gold the reserve and you own all the gold, you do the math.

This is why foreign is problematic. We live in a bath where the water temp is always fine and sustaining, and we stupidly presume the water elsewhere is equally as pristine so we “diversify” in our doe eyed stupidity.

Here is a graph of the BH3 Efficient Frontier plane with the BH3 described by the point Provided Porfolio.

The global fund is WAY low and right with a piddly 7% return and near 18% risk

Here is US Stocks 11.3% return at 15% risk. 4+% better return with 3% less risk.

Here is the BH3 R/R

8.9% at 12% risk

Here is a Efficient Frontier 2 fund with a 12% risk AND 10.11% return. 1.2% better return for the same risk. If you do the math that 1.2% advantage of the 2 fund over 30 years is a 38% improvement in end portfolio value compared to the BH3. 38% is a lot of money to pay just to wear the badge “diversity”.

Don’t even get me started on the BH4 fund! The BH4 adds TIPS to the BH3 mix. It’s long term return is 6.57% at 12.3% risk MORE RISK LESS RETURN!. Just goes to show you can make a bad thing even worse no problemo.

Take away:

  • Deflation is a real thing
  • Foreign is quite open to manipulation and permanent losses
  • Rule of law matters
  • Productivity and protection of productivity is paramount
  • Diversity does not mean “just own everything” and you’ll be safe. It means own the right things and do the right things and you’ll be safer. The right things are easily discernible.


If you retired in 1988 and died in 2018 This would have been your S&P 500 SOR. Bold is negative returns. Only 6 years in the last 30 were down years! In a 1988 retirement you didn’t experience a bad SOR till 12 years into retirement, just one small loss near the beginning. The average 30 yr reinvested return was 10.012% Not bad!

Here is a retirement in 1998 now 20 years old. It’s average return is 5.86% and 5 down years. Notice the negative SOR is bunched up early.

Here is a 19 year retirement beginning Dec 1999. it’s average return is 5.09% and 5 down years.

And here is a 18 year old retirement with a 5.735 return and 5 down years.

Notice how the worst return starts the year BEFORE for bad SORR. 1999 the year before the dot com bust was the worst year in the past 30 years to retire. The next year (2000) the year of the actual bust was better.

Get ready FIRE crowd!

This is a 2008 retirement!

This 10 years yielded a whopping 13.654% annual return and 2 down years.

One year later only 11.967% return, and only 1 down year.

The thing to note NONE of these includes withdrawal of any money, It’s just what would have happened to the portfolio had you filled up the portfolio on the so called year of retirement and let it ride adding no more money, nor subtracting money. Look at the variability WRT to when retirement started and when the bad SOR started in the sequence. It makes a huge difference in income and portfolio viability. Also it points out the red herring of the FIRE movement which came of age during good SOR. It’s hard not to become a Johnny come lately millionaire if you’re making 13%.

I read a recent article on Bucket portfolios by Swedroe, extremely interesting. The paper contains a discussion of techniques to prolong portfolio longevity based on AA optimization in the face of SOR. You have to drill down to the PDF files cited to get the full discussion. The upshot is the bucket portfolio destroys end of life portfolio value based on it’s constant withdrawal of higher risk assets into a risk free asset which earns virtually nothing. A risk free asset is also a return free asset or may even loose some money due to inflation. What the study found on the average the optimum portfolio is a 60/40 portfolio. It beats the bucket because it is properly risked. It also shows people running 80/20 portfolio are suboptimal. It discusses the creation of a metric that looks at half the SD, the downward pushing half, which is the half that drives you into failure. It’s more complicated than I want to write about but I agree with the concept. I’ve been brewing a scheme for a couple years that combats SOR early in retirement. It allows re-sequencing the higher risk portfolio (say the 60/40 portfolio which seems to be optimal) to a more favorable sequence by providing a respite to 60/40 withdrawal from a fund different fund that is the efficient frontier tangent fund. The EF tangent is the balance point of risk and reward, the point where your reward costs the least risk. It has a bit more risk that risk free but also has the propensity to grow. The tangent portfolio of a S&P 500/Short term treasury fund is 20/80 with an expected 6% return. So if you put $500K in a tangent $400K is risk free and 100K is risked optimally. If the market drops 50% the next year (which we saw was worst case). Your tangent would drop $50K in the stocks leaving $450K available, only a 10% dent. You would start living off tangent money and leave the 60/40 closed to withdrawal except for re-balancing. If you go 2 years with no bad SOR the tangent will grow to 561K. Extract 61K and use it to add to the 60/40 by withdrawing less and re-balance the tangent. In other words for the third year of retirement at 100K/yr withdrawal pull 61K out of the tangent and 39K from the 60/40. This effectively donates 61K to the portfolio and you are 3 years into retirement. Do the same at 5 years except donate 100K to the portfolio by removing no money from the 60/40 that year and 100K from the tangent. Re-balance everything. You are now 6 years into retirement. If bad times come close the 60/40 and live off the tangent. If not continue to dollar cost average into the 60/40 by modulating the wealth transfer from the tangent into the 60/40. Since the hit from a SOR is most deadly early you need SOR re-sequence insurance early. As time goes on the portfolio becomes less susceptible to SOR. Eventually the tangent WILL run out of money which means it did its job. There is no need to refill the tangent since the tangent’s job is to refuel your portfolio not act as a drag as in the bucket method. In this case the tangent acts as a supercharger by limiting SORR.

I haven’t worked out the details so the money injections into the 60/40 are my guesstimates and not quantitative. I did do some preliminary work on AA and portfolio SOR risk and it turns out There is a definite danger in excess risk if you draw a bad SOR. On about the 20% SOR line a 80/20 portfolio does much worse and fails much more often than a 50/50 or a 20/80 for the same WR using a total stock/total bond portfolio.

Lotta stuff to think about in this post. In the end low WR big, nest egg and a couple pool’s of variable risk and a plan is a good thing. Early retirement in the context of unusually high rate of return (good SOR) regression to the mean plenty of threads to pull on

Emergency Money

There are all kinds of schemes to have some money on hand just in case in retirement. They range from 5 years of cash on hand to “just use credit cards and leave the emergency money invested. I think in retirement the “just use credit cards” ploy is stupid. When you have a W2 it’s might be an OK plan. Enjoining leverage at 19% is the last thing I would want to do in an emergency, penny wise pound foolish. You incur the full market risk of your portfolio and add a 19% loan on top. But then a big wad of cash is a slow drag on your net worth because of inflation. $1000 @ -2% is worth $800 in 10 years. So whats a mother to do? How about employ the efficient frontier? The tangent portfolio on efficient frontier is the portfolio that provided the most return for the least risk.

This is the efficient frontier of total US stocks v short term treasury. It has an expected return of 7.11% over a 40 year period with only a 3.97% risk. Why would you choose this for your safe emergency money? Most FIRE types are way over risked. They’re all running 80/20 portfolios. In an 80/20 portfolio if stocks drop in half that 80% goes to 40% and you go from rich to poor as you are down to 60% of what you were. In a 20/80 portfolio if the stock market drops 50% you go down 10% and therefore are at 90% of your previous glory. Numerically say you have $500K in a rainy day fund $400K in short term treasury and $100K in total stocks. If the market drops in half like in 2008, you have $400K in treasuries and $50K in stocks, barely a dent. The value of your emergency is effectively maintained.

Let’s say you don’t use your emergency money for 10 years.

Your emergency money grows to close to 1M on the average. Yea but what about inflation you say.

Even with lousy 10% SOR you’re still money ahead inflation adjusted. Just from inflation you would expect your $500K to be worth $400K if you were in cash. This analysis assumes re-balancing to keep the fund at 20/80. If you recall the 1973 recession it looked something like this:

You’ve all seen this picture, it’s from FIREcalc. This is the SOR if you retired in 1973 (red), 1974 (blue) or 1975 (green). In a 73 retirement you were out of money in 20 years. In a 75 retirement you were worth double. 2 years mattered. If you had the emergency fund you could easily live off the emergency fund for 2 (or 5) years while the market recovered effectively indexing your retirement from a 1973 loser to a 1975 winner. Can’t do that with a credit card. It turns out in my analysis you would only need to use this money once to save your portfolio. The graph also informs you a bad SOR still lasted 20 years, one year of indexing to a 74 retirement lasted all 30 but lost some and a 2 year indexing lasted all 30 and doubled, so the risk is early and takes a while to manifest but the manifestation is relentless. 10 years into your retirement you can probably begin small withdrawals from your “emergency money” to supplement your income if you don’t need it to save your bacon, and still keep a nice pot around “just in case”.

I was alive and kicking in 73 and my first year of investing was 75. I remember it. Retired people were freaked out. People talk a big game about their risk tolerance. I’ve lived through and remember 1960, 65, 73, 80, 87, 93, 2000 and so on and so on. One thing is for sure if you whip it out someone is going to cut it off. A little cash in an emergency fund tangent portfolio is just the ticket against the castration of too much bravado.

It’s All Speculation Don’t Kid Yourself

Everybody has a strategy. Some people call themselves investors and look down their noses at at people they call “speculators”. Speculators look down their noses at commodities traders like those ex-football jokers on CNBC with the pony tails. Those guys look down their noses at the Vegas card counters they call gamblers. My favorite lottery game is going out of business. It’s a game that has 3M:1 odds so for 3 bux you have a million to one shot. I usually spend 2 bux because the real odds are nearly zero and as the game progresses without a winner the excess the prize money of the lower payout more likely wins grows. This week I’m playing 4 chances for free on winnings from previously won payouts so my odds are 750K to 1, still effectively zero. The next higher up odds are lotto at 22M:1 but I haven’t bought into that so my risk tolerance is somewhere between 1M:1 and 22M:1.

My wife looked into scratch-off games and found web sites devoted to scratch-off strategies devoted to changing the odds. These strategies are quite similar to card counting and betting strategies used in Vegas. I didn’t know anything about them till she mentioned them to me. She was considering to get my kids some scratch-offs for stocking stuffers at Christmas and decided to teach herself about scratch-offs. In the end she didn’t buy any because if one kid won $100 and the other kid didn’t win the non winner would feel gypped and who needs that headache. My wife is smart. I would have just bought the tix and stuffed ’em in the sox next to the Christmas tree snickers. The correct trick would be to buy each kid a an entire roll of scratch-offs since each roll is pretty much guaranteed to have winners, and the fun is in being a winner but then the kids might have to go to gamblers anon if they had too much fun.

Doesn’t this narrative sound like a FIRE narrative? The investor considers himself quite wise investing only in blue chip stocks like wait for it: GE and SHLD better known as General Electric and Sears. Remember Blockbuster? Replaced by something that looks like a red industrial refrigerator and Netflix. Bet you’re glad you don’t own any Blockbuster! What about AAPL? People have made a fetish about owning iPhones and AAPL reaped the profits hitting $227 last Aug but $150 today in a roaring raging bull economy where a $1000 for a phone shouldn’t phase anybody, should it? Don’t look at me I’m running a five year old $200 Google 5x. When they quit updating the software I’ll move on up the line to something new/er that continues updating.

The point being what exactly do you own as you look down your nose? Do you own hype? AAPL is hype, GE making a come back is hype, winning the lotto is hype. They are stories we tell ourselves in which to encase our denial and shield ourselves from our stupidity. 4% x25 hmmmm low cost index funds is the BEST PORTFOLIO hmmmm You can’t beat the market hmmmm Can you clap with one hand? It’s all speculation. How much of your future have you based on hype? What’s the likelihood your portfolio will become a blockbuster, a Blockbuster or a GE? Bitcoin? Only a dope would invest in BTC but then I’m up 1300% in BTC with a free trade. I have no equity remaining in my BTC only profit. I took out the equity when I was up 5000% and put that into BRK.B which has gone up 30% since I bought it in 2016.

The first thing they tell you is thew “low cost mutual fund rap”, that’s the hook. The next they tell you is to pick your risk tolerance like you have a friggin clue what your “risk tolerance” is. (I’ve established my risk tolerance it’s between 1M:1 and 22M:1). You don’t want to look like a chump so you pick 80/20 OUT OF THIN AIR. They ask you how much do you need in retirement? You wan’t to look upper middle class so you pick $100K OUT OF THIN AIR and they go: OK daddyo here’s the deal save up 2.5M take out 4% and you can live forever on that dough! Have a nice day! They point you to a calculator that looks at periods of history of adjustable lengths and it query’s the history about failure. The first period starts in 1871, 6 years after the Civil war ended and only 2 years after they drove the golden spike. Only 10 years after the demise of the Pony freakin Express! You mean I’m supposed to base my projected income need for my 2036 projected death on 1871 economic conditions??? That’s supposed to make me feel warm and fuzzy and confident? I just looked in the mirror and do not have MORON tatted on my forehead. What’s tatted on your forehead? A screed by MMM or 10 bullet points by WCI? Famous WCI quote “it’s 20% content and 80% marketing”, iPhone “it’s 20% phone and 80% marketing”. Like the title says it’s all speculation don’t kid yourself. If you look in investopedia they define speculation and investing in terms of longevity and risk. A good assessment. If you base your 50 year retirement need on a highly speculative stock portfolio are you pretending you short term bet is a long term winner? The variables are amount, longevity, reward, risk, sequence of return, budget, taxes. All of these are quantifiable and none of them get picked out of thin air. None of them should rely on economic data analysis leading back to the era of the pony express. It’s always good to consider and re-consider the assumptions and then track the plan as it plays out.

Addendum: I didn’t win but found another game to play with the same kind of trickle down payout strategy. The odds of the grand prize is 1:300K, over all odds of wining something 1:7, In this game I’m looking at using a number choice strategy of most likely distributions as opposed to quick picks. I’ll limit myself to $100/yr and see what happens.

Sir Francis Galton, Blaise Pascal and Where You End Up in Life

There was a mathematical genius that lived in 19th century Victorian England named Galton. There was a triangle invented by Paschal a 17th century French mathematical genius. The work of these two don’t define reality but it completely informs reality. Paschal invented his famous triangle:

You can read about the magic of Paschal’s Triangle here

It turns out the first reference was by the Chinese in the early 14th century and was used as a calculating machine. Francis Galton invented a means to animate Paschal’s triangle  It’s worth watching the progress of the balls as they settle from the collection bin into the distribution. The distribution of course is the famous Gaussian distribution described by mathematicians and gamblers Gauss and Adrain in the 19th century but hinted to by Galileo in the 16th century. Galileo noticed errors were distributed. Small errors more likely than large errors which then leads one to ask what is error accumulation and how does error accumulation effect things? The answer of course is the effect can be massive or indiscernible since errors can be of either sign and can add or cancel. This is the concept of sequence of return risk from the 16th century.

David Byrne et. al. put it this way:

And you may find yourself 
Living in a shotgun shack
And you may find yourself 
In another part of the world
And you may find yourself 
Behind the wheel of a large automobile
And you may find yourself in a beautiful house
With a beautiful wife
And you may ask yourself, well
How did I get here?

Where you end up is a function of a normal distribution of millions of decisions.

Notice that one lone ball way out in the right tail. How the hell did he get there and what is the probability? (the answer is 2^14) This assumes the board is level and gravity is acting equally on each ball and there is a 50/50 probability of a ball bouncing left or right at any given peg. Tilt the board the odds change. Here is the story of how you got there. This is how life works in a probabilistic universe, and you can use that to qualify your risk and effect where you end up. If you constantly make rightward choices you end up in right bins. Left choices, left bins. This example belies the silliness of the expression “you can’t beat the market so invest in low cost mutual index funds” . What that statement defines is the 50% bin. Clearly A LOT of balls beat the 50% bin. So the next time you hear someone quacking that party line tell ’em “you’re a clueless dumb ass” because they are. The way you end up on the left of the 50% bin is to make leftward choices. The next time you hear someone quacking about 4% x25 understand it depends. In a 50/50 portfolio counting from the left that puts you in bin 6 or so (98% chance of success). 80/20 moves you to bin 7 from the left. 99/1 gets you to maybe bin 8. Yes you can beat the market but the market can also beat the hell out of you by rightward decisions instead of leftward decisions. People do this all the time, claim you can’t beat the market and then proceed to try and beat the market by using real estate or by taking monstrous equity risk in their portfolio. People sit around with cash in the bank which they intend to invest but just can’t bring themselves to invest “waiting for a pull back”. This is called market timing and market timing can be a leftward decision, except you have to know when an event leans left which implies you need rules for trading that force leftward decisions. An example of leftward market timing is re-balancing to a predetermined portfolio risk level every so often. The mechanical nature of re-balancing forces leftward decisions. Sitting around waiting for a pull back merely means your portfolio is not risked correctly and money you intend to put at risk to procure some profit is not doing the job, a decidedly rightward decision cloaked in a leftward delusion. Lets say you choose to “MAX OUT YOUR PRETAX accounts” ever hear that one? Is that a leftward or rightward decision? How did you get here? You let the days go by. What that means is you wind up with a huge pretax pile some of which is owned by the government and at age 70 is wholly controlled by the government. RMD is progressive and taxes are progressive so the government by law is going to take a (progressive)^2 tax bite. Here is what happen in a (progressive)^2 scenario:

The red line is the ever evolving tax bite eaten by the government in retirement. The black line is money already taxed. Over time black beats red. Betting red was a rightward decision, black a leftward decision. It just took some time to manifest itself, yet people quack that nonsense all day long. A better tactic (and the leftward decision) is some of each and to optimize that ratio along the way. To understand that you need to understand what each account will be used for in funding retirement and the rules of taxation for each account going in and coming out, so you can make leftward decisions. Do not just let the days go by or it will be the same as it ever was.

I took a little break from the blog to live my life. I bought some Udemy courses on various topics on black Friday for $10 each, topics heavy into computer programming, micro controller programming, excel programming and a few others. Udemy is a little better choice than Youtube since you can correspond with the lecturer. I also completed my CME to keep my medical license active and I’ve been doing stuff in the yard since it’s FL and 70 degrees outside. It’s a great time to make some vitamin D in FL. I’ve really started to whittle down my blog involvement especially other blogs since the information contained is often useless if not actually wrong. Some sites are so agenda and marketing driven as to be unreadable. Some sites conflate ideas into a miss mash of gobbledygook and then dole it out in “10 Bullet Points of Nonsense”. If if the adage is “it’s 20% content and 80% marketing”, that’s another way of saying “you can rely on 80% of what I say to be BS!” Who needs it? I started working on an outline for a non Bogglehead approach along the above lines of processing probabilities in making financial plans. We’ll see where that goes. May be worth while may be a piece of junk.

Bar Bell? Dumb Bell? It’s All About Risk Management

I got involved in an interesting discussion about Bar Bell investing. The idea comes from splitting risk in bond futures trading or commodities trading. I traded commodities back in the 70’s and in fact saved up enough money I could either go to medical school or buy a seat on the Chicago Jackson street mini-market, so I was more than a little into it. Commodities trading is a zero sum game and a game of leverage. You might but a contract that has a potential for $1 gain but you may pay only 20 cents or 5 cents for the chance. Contracts expire so you can’t just buy and hold, your only choice if you’re in the game is to trade or get the hell out, so you place bets, and you win some and loose some. If you win more than you loose at the end of the year you have a profit, loose more than win a loss. Loose too much you’re busted. So it’s all about wining and its all about controlling your losses such that you have money to play. Commodities trading is not investing. It is trading on a market with the idea of buying low and selling high and the very real possibility of buying high and being forced to sell low. If you loose, what you loose goes to whomever had the other side of the trade your “buy high sell low” pair is his “buy low sell high” pair. If you don’t like that much risk you can do something called spread trades and there are all kinds of spread type trades.

So in a poker game you may have the main game going on and bets on the side. Bets on the side have a different risk of paying off than the main game. By knowledge of the odds of the side bets and the odds of the main game you can improve your risk by making enough on the side to make up to some extent for the risk of the main game. FIRE types do this all the time in fact they plan this into their strategy. They work 10 years with the idea of having that 10 year “investment” generate 60 years worth of income. Sounds psychotic doesn’t it? So they hedge their bets with a side bet called a “side gig”. A little blog or something that generates some income to cover part of the risk of the nutzo 10 years work 60 year play narrative. FIRE types think they are investing but actually they are speculating same as a commodities trader or a poker player. Small businesses fail 20% in the first year 30% in the second year and fully 50% fail in the first 5 years. 30% fail AFTER 10 years. So that little blog is anything but a sure thing. It is the reason startups sell out. Start up, make some money, sell out before you fail. Speculation. So what about Bar Bells?

The Bar Bell portfolio comes from splitting risk in bond trading. You can buy low yeild high quality paper and are pretty much assured of making your coupon. You can buy high yield low quality paper that if it pays off, pays off big but there is a definite risk of default. This is called a spread. You spread your risk between a sure bet which pays you and a speculation which may or may not pay you, and this is why it’s called a Bar Bell. It’s a bi modal risk. Pictorially

Here is a balanced portfolio of known risk and known reward and it sits on the efficient frontier. It has an expected return, the peak at the center, and an expected risk the range of values above +- 3. What if you squish down the center?

You get a bimodal distribution with a risky end (pink) and a safe end (blue). This is a Bar Bell The argument is you split your risk between safe and risky and if risky dumps you still have safe but in reality you have just the same amount of area under the curve in Bell as Bi-Modal it’s just distributed differently. The net portfolio will still work out to some average risk and reward. What if you have a BIG blue and a LITTLE pink but pink has a chance to multiply dramatically or it can go away completely? Lets look at some charts

Here is a portfolio of SPY. You retire in Dec 1999 just before the 2000 .com crash and also experience 2008. You’re a Bogglehead and expect SPY to generate 8.82% return over the long term.

Spy between 2000 and 2018 under performs BY A LOT

You’re expecting 8.82%, your actually getting 4.58% or half of what you expected. SPY experienced 2 recessions in that 18 years and so the volatility ate your lunch and your nearly 2/3 done with retirement! How much “return is it going to take to get you back to your expected 8.82% over the next 12 years? If you started with 1M and compounded at 4.58 x 18 years you would have 2.4M Your expected at 30 years with 8.82% is 12.6M, so at 18 years you are 10.2M under expected and NEED to make 13% / year for the next 12 years to make up the difference. The expected is 8.82% Do you really think it’s going to work out? THIS IS SEQUENCE OF RETURN and this is a real present day example not just some speculation This is exactly what happened to a guy who retired in Dec 1999 with 100% SPY

Let’s Monte Carlo a SPY portfolio for 30 years 4% WR

over 1/10 times you 100% run out of money. You run out of money because of the RISK in SPY

Here is the kicker to 100% SPY

Your portfolio starts dying EARLY. By 15 years it’s already heading down and for some is out of money. Retire at 60 get to 75 Uber Driver here you come!

Lets say you buy only VBMFX which was has been around since 2000. It’s expected return is

almost 5% and in fact it did better than that. Over the past 18 years VBMFX has returned

5.75% since inception in 2000. Bonds have been in a 30 year bull market.

So if you had SPY and took out 4% you could expect 0.6% growth on your money, less than inflation in the past 18 years, where as if you had VBMFX you could expect 1.75% growth about equal to inflation. What happens if you Monte Carlo VBMFX?

You survive 98% of the time but notice purple is headed into the dirt.

What about the kicker, what about the kicker??

The kicker is you don’t start running out of money till after you’re probably dead with this SORR

SPY alone and VBMFX alone are Bi-Modal when you look at them together, and they are almost perfectly uncorrelated as we saw in the example. Stocks under performed Bonds over performed. What happens if you Model a 50/50?

The kicker?

You fail about 2.8% of the time but look at purple, it is barely headed into the dirt and will survive for many years to come. The idea is to then have a “less risky part of the portfolio and a risky part for a Bell so lets add 20% AMZN for a 20/30/50 AMZN/SPY/VBMFX portfolio

Holy Cow! a >99% survival!

The kicker?

All you needed to do was to know to buy AMZN in 2000

Substitute GE of AMZN for a 20/30/50 GE/SPY/VBMFX portfolio Uh oh 89% survival no better than SPY!

It can be even more complicated if you change SORR or Inflation assumptions.

So what does all this mean? By choosing at Bar Bell you are speculating just the same as a poker player with side bets. Some times you win some times you loose, good time Charlie has the blues! How do you apply risk management? 1. You over fund to start. If you start at 20% above your 100% of need it can be a home run or a strikeout. If you’re a 3%/33 type with a million bucks you need 1.2M to start. An extra 200K is roughly an extra 7 years of work. If you strike out, YOU’RE OUT. It means you weren’t cut out to be a speculator. You don’t know what you are doing. Do not put hamburger money in the pot. See #2.

2. NEVER send money from low risk to high risk. You may send money the other way, in fact that’s how you get rich in this kind of scheme, dollar cost average the risk. When things are up stuff some into the mattress When things are down you have your 100% of need so go to the beach. Another way to play this is to completely divorce the portfolios into 2 independent portfolios one for investing and one for speculation. WR is strictly NOT part of speculation. The flow sheet for this kind of risk management is

You are always siphoning profit or principal off into investment never the other way. Here is my story with this technique but not with these numbers. The ratios are correct. In 2005 I bought a penny stock for 10K. It grew to 50K and I pulled out my 10K and put that in BRK.B. This is called a free trade. The remaining 40K was free money. The investment bobbled around till 2015 when I sold that 40K to cash. When I sold it it was worth 50K. I put half in BRK.B and half into BTC. 25K into speculation and 25K into investing. I had made 500% profit, and my principal was tucked in BRK.B plus half my profit. BTC exploded and my 25K went up to 1.5M. On the way up I took out the 25K and put it into BRK.B (free trade) and left the free money alone. BTC crashed OH WOE IS ME? Hell no The money was free money. It could go to zero and I’d be out nothing. As it turns out it’s still up 1300% and I have all that loot in BRK.B to boot. If I went to zero Whoope shit I had a good ride and made some money which I stuffed into BRK.B. But the thing is BTC is not going to zero. BTC is creative destruction and creative destruction multiples. AMZN is creative destruction. Apple smart phone is creative destruction. NFLX is creative destruction. Remember the brick and mortar Block Buster? NOT creative destruction. In the mean time I’m going to the beach quite content to do nothing.

The point is if you had co-mingled the portfolios the risk of one would seep into and erode the value of your hamburger money. In retirement do not let greed eat your hamburger money. Do not be a Dumb Bell because you read a Bogglehead book and think you know something. Reading a Bogglehead book doesn’t mean you know Jack it means you know Taylor Larimore, who’s just an old coot with a system (sorry couldn’t resist). These traders make their living eating your lunch and they are damn good at it. This ain’t bean bag. If you can’t practice risk management, don’t play. If you don’t know what you’re doing, don’t play. Speculation is a zero sum game. Some’s gonna win some’s gonna loose.


There is a program called PGP “Pretty Good Privacy”. It’s a cryptography program for emails and such and does what it’s name implies. The algorithm is good enough to protect your stuff from prying eyes. It’s based on using a set of rules as well as the algorithm and if you follow the rules… It’s not super duper government un-crackable requiring super computers but Pretty Good. It was designed as an educational tool to teach peeps how to wrap one’s head around cryptography. There is an open source version and a commercial version undoubtedly the commercial version is better and suitable for enterprise security.

My last series of articles constitutes PGRP. Pretty Good Retirement Planning

Goalscape Introduces a planning tool that succinctly allows you to encapsulate goals in a pictorial format. The ratios are variable and you can grow granularity. There is a free version to use but its somewhat crippled because it allows only one job at a time and has only 30 conditions to display. The limitation can be overcome by simply pasting screen shots of your Goalscape creation into a personal blog.

Goalscape is a planning tool so use it to make a plan. In retirement you need a portfolio and a cash flow to substitute for your job. There are a multitude of ways to get there and a multitude of accounts you can fund from Bank to Roth to IRA/401K to Brokerage. Money also comes from SS. The accounts are treated differently in distribution and most of them are owned by you AND the government understand the treatment is important since there are consequences to going down one path or another.

RMD Calc and Uses

RMD Calc and Uses looks at methodology and strategy to help plan those consequences by using Schwab RMD calculator, Tax Plan Calculator and Excel. The tax code is progressive and the RMD % is progressive so through out your retirement the government is taking a larger and larger bite out of “your” (plural) money because IRA money is owned by both you ad the government. By knowing whats waiting at the end you may make different choices at the beginning RMD calc shows you how to think about that prospect.

Where We Stand

Where We Stand is an article that looks back on a projected future from death back to accumulation. Very often planning is done from the other perspective from accumulation going forward. By looking backward from a projected future you can start to predict what is more or less important and how to optimize years in advance. You can’t spend Tax Loss Harvest if you never Tax Loss Harvested and you won’t see the advantage of a Brokerage and TLH if all you ever did was max out your tax deferred accounts which are owned by you and the government and taxed as ordinary income. Brokerage has different tax treatment so it’s like tax diversification, suddenly each account has a different risk and a different cost associated with ownership and can be incorporated to serve a different purpose in your old age. Money is fungible meaning you can’t tell one buck from another but the efficiency of how that money is created is specific and the plan and details matter. You only get to keep what the government says you can keep, harsh truth. No biggie, you got tools and a plan! Go slay the dragon!

Personal Capital

Personal Capital is an article on using a web based portfolio aggregator, a tool that tracks your portfolio in it’s entirety. Vitally important to making efficient decisions. The ability to accurately track and analyze is absolutely invaluable. It as important as giving sight to the blind. Use it or loose it.


Mint is an article on using a cash flow aggregator aka budgeting tool plus Excel to give you customized information on where the money goes. It’s implementation is trivial to use and it’s depth of knowledge is immense. I didn’t use it when I was getting rich because it didn’t exist. Had I used it I likely would be richer.

How I Knew When to Retire

How I Knew When to Retire is an article about understanding “enough” on a personal level using as a guide. Retirement is not boiler plate it’s personal. Retiring with “not enough” is a drag. Retiring with “too much” may mean you stayed too long. It may also mean your work pays you only in excess risk and stress, bad juju. The method along with the other articles gave me a personal way to understand my future in light of my past and be able to predict with virtual certainty the outcome even though I have yet to experience the outcome.

So there ya go! PGRP I could drone on about portfolio construction etc, but Personal Capital is adequate for that, in fact better than adequate it’s damn good.

Rock the Casbah

Rock the Casbah

Sharif don’t like it

Sometimes my opinions clash


  1. a place where money is coined, especially under state authority.
  2. a vast sum of money.
  3. produce for the first time.
  4. a peppermint candy.

Which one do you think of when you hear the word Mint? Mint is my go to budgeting tool. I’ve suffered budgeting for decades trying to discern the ins and outs of Microsoft Money and Quicken and Andrew Tobias’s Managing Your Money which I ran on an Intel X386 laptop under DOS with 1 mb of ram and a 4 bit grey scale on a 12 inch black and white panel. It was better than a napkin but infuriating to get any work done. I had a dozen accounts between me and my wife including business accounts and retirement accounts etc So pretty much I did it in a spread sheet in simple categories gross money, tax money, net money, investment money, living expense money, based on my accounts and called it a day. The granularity didn’t tell me what was going on just that something was going on, but the energy hump for any of these programs to actually provide accurate information was beyond the pale. So I used the slop in the system as my protection. Make a buck, save some for me, save some for taxes. use some to live on. don’t spend too much. don’t go into debt. I always made more than I spent so forward progress happened. Sound familiar?

Eventually I retired and the slop method worked, I had a nice pile of money, I guess you might call it directed slop, but it wasn’t tuned except in a gross way. I came across Mint and it was what was needed. It is what what all those other programs promised to be. I use Mint strictly to track my cash flow and acquire data which I transfer to Excel. I have 2 hub accounts a bank account and a credit card account. Both accounts do a nice job of automatically tracking category and are amenable to learning my customization without a lot of muss and fuss so it’s easy to tease out insurance line items and taxes and housing costs etc with some means to drill down and it’s easy to see what a transaction was an go to the account record for more complete information. The bank account is used to store money for living but not a huge amount. My money is in the brokerage which is linked electronically to the bank. The credit card is also linked to the bank so I can pay that bill one touch. The credit card pays cash back so I charge virtually everything which generates an excellent transaction and category record and gives me recourse if I didn’t like the outcome of a transaction. The cash back goes strait to the brokerage for investment. The bank pays the CC as well as automated accounts like power and internet. My wife has some other credit cards for her business she uses and I pay those as just another bill.

Mint has an export feature that allows export of a comma delimited spreadsheet and I open that file in Excel and cut and paste each month into my master Excel money management spreadsheet. The sheets are multiple and form a book organized by years. I just started 2019. Once the data is copied into Excel I go through the list and change the sign of every transaction labeled “credit” to negative and leave the debits alone. If there is a special deal I don’t want to track like something being paid for from an non tracked account I set that entry to zero and put that amount out to the side so it gets tacked but not counted in the totals.

Here is an example

Since I changed the signs on credits and debits I just go to the bottom of the Amount column and hit AutoSum and get a to the penny accounting. Down load, cut, paste, change signs, AutoSum, DONE! Mind blown! Since the data is in Excel I can do custom totals and averaging and track expensive months and cheap months. My budgeting is based around a generous monthly maximum compared to my need. I usually don’t reach the maximum but some month I may go over a bit like I pay home owners insurance once a year so that’s a big month. Under months compensate for over months and Excel is not bugging me about artificial spending goals and helpful hints to “improve” my situation.

When I first retired I was still tuning my spending knowledge and what retirement was really going to cost not just some projected number, so I checked often. As time went on the routine became predictable so now I check twice a month unless there is a specific question. If I wonder if something got paid I just turn on Excel and look. 2 seconds. So I use Personal Capital to aggregate my portfolio and Mint and Excel to aggregate my cash flow. Both of these are so easy to use. I recommend!!