Investing For a Living

[makincaid]

I just came another blog by an early retiree. He didn't retire until 41, but that's still pretty mustachian in my book. He has written several interesting articles on investment strategies.

http://investingforaliving.wordpress.com/about/

[grantmeaname]

It's nice that he retired early, but I can't believe that managing a portfolio should be a full time job just because you're retired -- "My only source of income is from my investments. Seen another way, I’m not retired at all. My job is being a full-time investor." I'm even more skeptical since it hasn't been demonstrated that managing investments actively can even equal passive investment after fees and commissions, much less generate substantial additional value.

He gets really handwave-y when he discusses finance, too -- he's big on broad overstatements and summarizing things he hasn't demonstrated like "in summary, even efficient market theory shows you can beat the market and the 4% SWR rate by investing in certain types of stocks." No, it doesn't quite say that.

[arebelspy]

I hope he isn't planning for a > 4% SWR on 40+ year retirement.  Odds of failure are high.

But he may be retiring into a great bull run, so hopefully he'll do okay (of course, that may just give him the wrong confidence to get ruined at the next cycle).

I wish him the best of luck, but I think he has a tough road ahead if his retirement plans is being a full time investor and trying to consistently beat the market year in and year out because his spending is consistently above a 4% SWR.

Yikes even typing that sentence makes me worry.

EDIT: Thinking about it more, I just can't see it working.. Once down years hit (which they inevitably will) your high spending will hit your portfolio too much to recover in the good years.  That's the whole reason for a low SWR.  See: raddr's y2k retiree.

[Nords]

He's been blogging for over two years and he seems to have a nice tailwind from the market.  He's living in an RV, his asset allocation is 70% cash, and he's not even trying to make money off his blog.  He's also set himself the goal of raising his net worth every year, which should do a good job of counteracting any confusion he may have over the longevity of the 4% SWR.

http://investingforaliving.wordpress.com/2013/01/05/2012-in-review/

His thinking and his investment strategies may be fuzzy, but he's not day-trading options.  I suspect he's conservative enough in his spending that he'll be fine.

[grantmeaname]

Even that goal doesn't account for inflation, though. If we're talking a 40 or 50 year retirement, having an increasing nominal net worth could still be a dramatic decrease in buying power over time.

[arebelspy]

Even that goal doesn't account for inflation, though. If we're talking a 40 or 50 year retirement, having an increasing nominal net worth could still be a dramatic decrease in buying power over time.

From the blog:

What about inflation you may ask? That is automatically embedded in this goal. Inflation will drive spending during a given year so as long as the goal is met, inflation is taken into account.

Essentially if his spending rises due to inflation, as long as his net worth rises, then he's beaten inflation.

I'm not sure that's a realistic goal for someone who thinks they can beat the market and has 70% cash as their AA.

For example, he got a 6% return for 2012.  That's .. not good compared to the market.  Now he argues that because of his goal, he shouldn't compare returns to some benchmark.  Hogwash.

What will happen, over time, as inflation increases and the market rises more than his personal returns, eventually due to the increased spending he won't be able to meet his goal.  And then there may be some ugly years as he tries to catch up.

After reading that link I now think he's unrealisticly conservative on one hand (being okay underperforming index funds), and wildly optimistic on the other (thinking he can beat market returns and have higher than a 4% SWR).  I hope it works out for him though.

[grantmeaname]

Essentially if his spending rises due to inflation, as long as his net worth rises, then he's beaten inflation.

If you have a $700,000 portfolio, and you make $28,000 in the market and spend $27,000, your portfolio will be $701,000 at the end of the year, so your nominal net worth has risen. But at 3% inflation, your portfolio would have to grow $21,000 just to preserve its real value, and so your real net worth has decreased. If in 40 years, you have $740,000, you have met your poorly-written goal. Your portfolio may throw off $29,600, but you'll have to consume significantly less in real terms.

I guess what I'm saying is that his spending, rather than his earning, is required to take the burden of inflation because he's adopted such an unsuitable metric. It's also such a narrow period of measurement that it's like he's artificially compressed his time window. By measuring annually, he's put himself in a situation that makes his goal untenable many years, and the amount that he can live on will vary dramatically -- in stagnant years, he'll have nearly nothing to live on, and in years the market actually drops he'll need to spend negative money to increase the value of his portfolio.

[arebelspy]

We're coming at it from different angles, but amounting to unsustainable.

You're saying he'll have to decrease spending, leaving him with less real spending power due to inflation.  I'm saying what will eventually happen, if he does increase spending with inflation (let's leave that constant) yet continues to underperform the market is that he won't be able to meet that goal.  He'll get to a point where he'll need to ridiculously outperform the market several years in a row to catch up.

[Dee]

Also of interest, the companion blog, written by his wife, about their RV lifestyle:  http://wheelingit.wordpress.com/.

I haven't had a chance to dig very deep into either blog yet, but they both seem worthwhile.

Let's not forget, too, that one or both members of the couple may wind up wanting to pursue paid employment or paying projects in the future as well, regardless of what is going on with their investment strategy.

[Nords]

Even that goal doesn't account for inflation, though. If we're talking a 40 or 50 year retirement, having an increasing nominal net worth could still be a dramatic decrease in buying power over time.

We agree with your analysis, but at least he's not planning to consume his principal along with his returns.

You're right that his spending will have to decline (at least) with inflation, but Joe Dominguez made that work for nearly 30 years with an even more conservative asset allocation.

At least he has tripwires to keep an eye on his system, and he has a whole blog from which he's not even trying to earn revenue.

I suspect he's going to draw his own conclusions about asset allocation and beating the market...