Bogglehead Time

I give the Bogelheads a hard time. I was on CD’s site and realized in all fairness l should give the Bogel aficionados their due. What they do right is get people to right size their lives. For example for the average guy there is no reason if your employed to live in long term debt except for a mortgage and there is no reason to own a mortgage that is not right sized to your income. There is no reason to own too much car, and there is no reason to not save and invest. There is no reason to not try for a better job since a better job is an income multiplier.

The Bogelheads also get the portfolio basically right. Cheap index funds properly risked in a rising market are a sure winner. Return relies on the economy not stock picking or magic. It’s the jokers in the C suites of the companies that make you wealthy, such a deal. All you have to do is come along for the ride. I poke a lot of fun at the BH3 because I want to teach folks about modern portfolio theory and doing comparative analysis is a good way to do that.

With the advent of Personal Capital graduating to a modern portfolio theory portfolio is plug and play simple. You can upgrade your portfolio to one consistent with MPT and Personal Capital will tell you exactly how to pick your assets and AA to be on the Efficient frontier. It will then add up your cost of owning those funds and Monte Carlo the result to give you some insight into the future and if you are saving enough.

Funds now are dirt cheap to own and transaction costs are dirt cheap as well, the tools of optimization are free, life is good. So what’s the downside of Bogel’s crew? It’s unclear what FI really is. I listened to a “what’s up now” podcast and the panel was interviewing the audience asking if they were FI. Everybody in the room thought they were FI including people with just a few K in the bank. Because they had read a book or read some blogs they assumed they were on their way and could claim the title. Then there is the RE at 30 crowd. They are just gambling or they have a job (like a blog) or a wife who has a good job aka they are freeloading to a greater or lessor extent. Certainly a 1 income household is legit but it takes a long time to reach true FI on one income. In the recent Playing with Fire movie this became evident. The couple were living on their parents couch for a year while grandma baby sat. The wife “tele worked” all day to bring in some dough and the dude hung out tying to figure out a gig. I don’t see free loading as FI or as a means to a 3M nest egg, nor is it a real narrative of success. Free loading by definition is financial dependence.

I find it interesting the narrative seems to have moved from FIRE to FI and people still have a W2 or have manged to start some kind of business. I hear more and more about being FI and less and less about FIRE which means normal wisdom and risk aversion are modulating the narrative. Virtually nobody is retired in earnest they are just FI. I’m not the retirement police so people can do what ever they want, but it causes the narrative to skew wildly away from reality, and I think that does a disservice to those who are being sold the narrative. My hope is the narrative will continue to evolve into something essential and sustainable since we now have amazingly powerful tools, to use to accomplish the true goal of true FI.

So we have now the analytical tools of accumulation, and some ability to attempt to peer into the future using either a historical analysis technique or a Monte Carlo technique. We also have some models of spend down very different from the BH boilerplate of 4% x 25. Kitces for example just wrote a piece of flexibility in spend down. Big ERN includes Sharpes ratio in his spend down viability calculations attempting to better quantify risk and improve his aim at the retirement target. Others are developing odds based models (expectancy theory) to try and determine what is the smartest choice based on probability of success vs probability of some failure or less likely outcome, a very Bayesian approach to spend down. If you look at a normal distribution in spend down, expectancy theory attempts to choose the choices most likely to place you in the better half of the distribution. If you wind up in the better half your chances of being in the worst half tend to zero eventually. My own work at looking at actual year by year spending to arrive at a total cost of retirement and a means to accurately estimate through budget a rational “number” based on your actual life style and not some wanna be lifestyle.

That is the future. Those books have yet to be written, and when they are both FI and FIRE will come into clearer focus. The financial tools and programs for understanding this also exist. Being rich and then not becoming poor is a different thing than day dreaming about being rich. Eventually the hucksters and snake oil sellers who make their fortunes off the masses will die away. People are smart. It’s the reason nobody accepts the 4 x 25 rule as legit. There is simply too much at stake.

12 Replies to “Bogglehead Time”

  1. I will always have a soft spot for the Bogleheads in my heart.

    When I was emotionally and financially reeling from my divorce I discovered their site and my first post in the forum was giving my situation and asking for help with the goal of just being able to retire, not even retire early.

    There were so many kind responses as well as great advice that got me motivated to the point where I wanted to learn even more about finance. That started a chain reaction and less than 8 years later I do think I am FI but want to pad it even more to get to the RE part.

    It will be interesting to see how things do shake out as the population gets more and more savvy and trendy stuff like the 25x rule starts getting exposed a bit. But it is a good starting guideline for those who at least want to set a goal to try and obtain.

    1. I’m encouraged that FIRE is maturing. As things unfold people become more sophisticated in their investment decisions. For example it’s not uncommon for people to foray into real estate and small businesses for diversity since 4 x 25 is shaky. There seems to be less pressure to be the youngest retired ever and more interest in safety and sustainability not unlike yourself. It’s a good thing

  2. Well said.

    I struggle to articulate why I don’t want to be “FIRE.” You mentioned many of the reasons.

    None of this is new. I have been reading and talking about FI, frugality, and index investing since the mid-1980s (over 30 years now).

    Plus I love what I do. Everyone should. If you don’t, change something.

    My plan is FINER. Financial Independence, Never-Ever Retire!

    1. FINEST Financial Independence Never Ever Stop Twerkin’, the ultimate aerobic dance mode retirement. I too enjoyed my career and didn’t quit until my risk exceeded my return. At that point I decided to de-risk. Every day you work as a physician you wear a target on your back and at some point you have well more than enough and seeking a little more only buys you more risk. So that realization was my seminal event. My partner of 25 years who is 3 years older than me kept on working till one day he “had enough” along several dimensions, quit, sold his house in 2 weeks and moved to VA so he wouldn’t be tempted to continue working. The end happens in many ways but it inevitably happens. Like any Boy Scout will tell you be prepared.

  3. I had my FI done before I ever read anything on the internet about it. Thankfully money management is common sense.

    It is fun nowadays to see what others are doing. Especially yourself Gasem. I can not and will not do most of what I read on other sites.

    Proper stewardship of one’s financial ship is NOT a popularity contest. Admittedly, I have never cared about such things.

    1. Not comparing yourself to another is a strong feature of independence. Someone else brought me to the dance also. I had read a couple Bogel books (they are all the same book actually) but I knew nothing of the “heads” aspect or the affiliated clubiness and subsequent regimentation, testosterone and alpha-maleness of the “in group”. I recently joined Choose FI Orlando because they have meet-ups and I thought I might see what that is like, and a bunch are getting matching T-Shirts DOH! I’m loosing status at the high school is all I gotta say, but I’ll give it a try anyway maybe meet some hot chix in search of financial independence or something! I am friendly and charming after all. Joking aside, these people are interested in improving their lives, and that’s the American dream alive and well in a generation I could be a grand parent to, and I’m a fan of that.

  4. I’m tempted to try Personal Capital now, for the MPT analytics. I had been avoiding it because I read that the company relentlessly spams your phone with sales calls. Also, because it’s one of the products that FIRE blogs advertise along with Tuft and Needle mattresses and real estate investment companies.

    As for the Boglehead approach, what do you think about fund selection, or whether indexing is still a good idea? Do you like Vanguard Total Stock Market for equity exposure, or do you think it’s over diversified? S&P 500 instead? Individual stocks? What about bond funds?

    I’m also curious about lessons you took away from your work with Phil DeMuth? I recall that he generically advises a Boglehead-like approach mirroring exposure to the global economy, with specific tilts based on individual circumstance. I know you don’t agree with global exposure, and I’m coming around to understanding your reasoning.

    1. Hi ED I have no problem with Vanguard funds in fact I use Vanguard Admiral bond funds. Neither do I have problems with the stock funds. Funds like VSTMX provide broad diversity. What that means is you do as well as the market NO BETTER. You are limited on the upside by the averages. You are not limited on the downside however unless you take an active role in assuring all of your allocated capital is at risk. So if you have a couple hundred K sitting around waiting to DCA you’re loosing money. It is also incumbent you actively keep an eye on rebalancing as rebalancing keeps your risk at your chosen level. If you let stocks gallop ahead you let your risk gallop ahead, a good deal in good times, BAD in bad times. Rebalancing is mechanical so takes human stupidity out of the equation. The way money is made is because corporate America is excellent in making money and if you own corporate America you own money makers. So what I have outlined is the most efficient investing you can do using the Bogel approach, and as long as the market goes up over decades you WILL make money. If you analyze 40/60 vs 60/40 there isn’t much difference in return but a greater reduction in risk so that helps if you get really nervous about the market just take some off and move to a little more conservative AA you still will be making money just not quite as much. Last year before Dec, I moved from the mid 60’s to the mid 50’s in my AA.

      I also don’t hesitate to sell if I have a need and the market is up. The market is up the past 10 years, I need money to live on and Roth convert so I sold high on the way up and pocketed the profit. I wasn’t trapped by the idea of making every last damn cent. I have a need and I funded my need with profit. If I wait till next year I may have more profit I may have less but as of today I’m fully covered in my need and that’s what my money is for to cover my need. I don’t know if that constitutes bogglehead-ism or not but it’s my approach. Boggelheadism seems to be return driven at all costs.

      As regard to DeMuth, he is strongly quantitative in his approach as am I. There are many ways to invest. The bogglehead approach is by mythology. Their diversity management is PhD, pile higher and deeper. That is not diversity. Diversity is achieved by owning non correlated assets not by owning a pile of assets. This is a major bone of contention between me and boggleheadism. If you study modern portfolio theory you find living on the efficient frontier pays you free money. If you look at my last post how to beat the market this becomes evident. All I did was move the BH3 portfolio which is away from the efficient to a 2 fund which lives “on” the efficient frontier, and over time made a pot full of extra money. A portfolio on the efficient frontier gives you the most return for the least risk at any given level of either return or risk. The fact that 2 portfolios occupy points on the same plane let’s you directly compare apples and apples because every portfolio is boiled down to 2 values, risk and reward. You can own 30 assets and it still boils down to 2 numbers overall risk and overall reward. That is the power of an efficient frontier calculator.

      My portfolio is pretty complicated because there are aspects of my financial life I want to protect and aspects I am optimizing. My approach to retirement is to plan epochs. So epoch 1 there is early accumulation with TIRA’s and brokerage. Epoch 2 there is then no more TIRA additions and heavily investing in brokerage with heavy tax loss harvesting. Epoch 3 is sell some brokerage mix with TLH to rise cash tax free for Roth conversion. Epoch 4 is Roth convert all but 500K of my TIRA into a Roth with as much tax efficiency as I can muster. Epoch 5 is begin taking SS at age 70, add some some RMD from the 500K TIRA (which effectively becomes an annuity) and make up the difference from the brokerage using TLH or by staying in the 12% bracket to minimize cap gains tax. Between SS and a small RMD I will stay in the 12% bracket for 15 to 20 years and my WR from the brokerage will be under 2%. This is about as bullet proof as you can get.

      The TIRA holds mostly bonds with a little stock in what is called the tangent portfolio. The tangent is the most return for the least risk on the efficient frontier and is the most efficient portfolio. It is typically around 20/80 stocks/bonds. It’s growth is slow but steady and it doesn’t respond to market gyrations. If a 20/80 has it’s stock proportion cut in half it’s still a 10/80 you didn’t loose much. If you rebalance you will likely have grown back beyond the 20/80 level in a couple years anyway, also bullet proof.

      The Roth stands alone. I don’t extract money it just sits there and grows. It provides my life with self insurance in case of disaster. Everybody is going to die and death can be long and protracted and if you are married there are 2 deaths to pay for. In addition when one spouse dies the other can get kicked up 2 tax brackets and that’s a lot more taxes so the Roth provides asset protection in the face of increased taxes. It also provides protection in the case of high inflation. If I want a new car I can also buy a new car from the proceeds of asset growth in the Roth without affecting my retirement cash flow. Essentially my new car is free from paid by Roth interest.

      I also did a stochastic analysis of what my retirement will cost (projected) and it’s 2.7M for 20 years. I devised a plan to actually budget what I spend per year accurately so I know what I spend and can inflation adjust, model SS and compute tax loads etc, so it’s very quantitative. This is also where I part ways from boggleheadism and the 4 x 25 mythology. I have considerably more than 2.7M so my next 20 years once I pull the trigger on epoch 5 is basically assured and my wife’s future is assured as well.

      This is a very different kettle of fish than what I see in blogo-land and bogglehead land. DeMuth provides me a professional sounding board from which to plan. He is also a wizard in tax efficiency having written the book. He also provides access to DFA funds which are a bit more efficient than retail index funds. They have different trading rules that optimize the returns. I do have some tilts as well but I think most of the tilt returns have been arbitraged out. There was a time though I made more return in tilted funds. My total portfolio lives on the efficient frontier even though it’s pretty complex. In addition Demuth tracks all of my transactions and has the software to optimize my tax bill if I want to sell, or if I want to rebalance or if I need to TLH. That alone pays for his AUM fee If I spend 20K but save 50K I make 30K. The other thing he provides is continuity in case I die. My wife simply gets on the horn and he is fully apprised of the plans. She has met him and knows him and is comfortable with him. That piece of mind is also worth the AUM fee

      Managing millions is big league. DIY is OK to start but at some point it’s kind of half assed unless you are a real student like Dr. MB. She runs a portfolio that’s got it going on as well as a DIYer but also her portfolio is pretty complicated taking into account Canadian government pensions and her businesses and practice incomes from her and her husband. She likes to pretend she is simple. She is not. She is simple like a scalpel is simple one swipe and sinew separates from bone. If you can understand the reality of a scalpel you may be able you DIY other wise you’re just pretending.

      Personal Capital uses modern portfolio theory to set up portfolio allocations, and it uses Monte Carlo to understand if you are saving enough to meet your goals. It also aggregates all of your accounts into one place for analysis, and all for free. I have o problem owning global as long as the whole portfolio is on the efficient frontier. It’s the BH3 AA that is at issue. Everybody and their brother calls you all the time anyway. My bank is always calling to hawk some special deal. Personal is well worth the hassle IMHO. I don’t find them that intrusive but I’m pretty immune to spam

  5. Thank you! I have been hoping to wind down with 5MM at age 55 but I may have to get more serious about using a modelling approach like yours to see if this is viable.

    1. My website is your oyster. You may not do what I did, but all the tools are there for the taking to build your own sustainable money machine. Depending on your actual burn rate, 5M at 55 should be sustainable including Roth Conversions. The key is the epoch approach and determining the cost/benefit of each epoch

  6. One of the things I relish most is your willingness to challenge orthodoxy – there’s always that hellion bright kid in the class that gives the teacher the greatest fight. In order to give a legitimate fight he masters material the rest of the class simply takes for granted.

    I love it when you run your head-to-head two fund comparisons of the Boglehead 3 vs. a two fund to demonstrate the reduced risk and superior outcome. My favorite hellion is at it again with the teacher, and observing the challenge he offers is where I learn the most.

    Your take on Dr. MB is perfect – elegant simplicity can delude onlookers into mistaking precision of parsimony for naivete.

    My wife and I are shunting the next several years of savings to augment our taxable brokerage in anticipation of a Roth conversion strategy down the line that mirrors your own, entirely due to your posts and the conversations we’ve held on and offline about risk mitigation in planning for the future.

    It’s no understatement to say that what you do has made our retirement plans that much safer, for which I am grateful.

    1. The thing that Harry Markowitz who invented the efficient frontier and modern portfolio theory realized was something I call the free money of diversity. Diversity is non correlated or uncorrelated diversity in other words the correlation between groups is zero or near zero. The reason it works is efficiency. If you hold a weight at arms length and try to climb some stairs the amount of weight you can hold is far less than if you hug the weight tightly or carry it on your back. If you look at my post on how to beat the market what I am demonstrating is the free money of diversity. The BH3 is less efficient like the arm length stair crawl.

      I think given the maze the government has constructed with it’s tax law owning several accounts with different tax treatments gives you the flexibility you need to create an “efficient portfolio” across the many epochs you need to cross on the way to very old age. The trek to old age is time dependent so there is some kind of market timing involved, like tax loss harvesting when the market crashes, which gives you more flexibility in the future. When you buy return what you actually buy is risk, and necessarily the more return you aim for the more risk you own but if you follow the risk and returns on the efficient frontier plane the risks grow faster than the returns and that’s where the free money comes from. Owning less risk for the same return is always a winner. Owning portfolio accounts with different tax strategies like ordinary income vs cap gains vs tax free vs forced RMD vs progressive tax code allows you to make choices now and into the future when they try to change the rules on you.

      I have skin in the game since this is how I invest and I have the welfare of my family on the line. Believing my portfolio to be efficient is the only way I sleep easy when the S&P drops 100 points in 3 days. Retirement funding is not just a linear thing. I have 1 kid who graduated and became employed who is going back for a masters. Fortunately I pre-planned most of the cost of that. I have another kid who is likely going to switch colleges since she’s hot for photography and the other college will actually teach her about the profession. Her cost is under control as well. It’s always something. Having flexibility makes a difference

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