Critique my Investment Policy Statement

[Cornel_Westside]

Hey guys, here's my investment policy statement. It was copy pasted from Word, so the formatting is a little wonky, but it's pretty readable (and long). Let me know what you guys think. I assume the main topics of concern will be GEM and Asset Allocation.

Investment Policy Statement
Goals
Mindset
The most important goal is to achieve the proper mindset. The best mindset is one that allows financial stability with little stress and that does not succumb to the vagaries of the market. The goal is not to make a ton of money or to work as little as possible. The goal is to attain financial control over one’s life. Do not try to time the market. Do not sell in a panic. Do not make finances a hobby. The best mindset allows one to have planned finances correctly and focus efforts on happiness for myself and loved ones and making the world a better place.

Retirement
The goal of retirement is targeted for 2026.
Retirement can be supported if retirement income can support expenses. Future expenses will be based on the last 2 years of expenses. If the last 2 years of expenses, not including extenuating circumstances involving major costs or windfalls, can be sustained from investment income and part time work, retirement can be considered. Healthcare costs must be calculated separately from past expenses.
Retirement income is set to be calculated by the MadFientist’s Safe Withdrawal Rate Calculator, which is based on the Shiller-CAPE Index. It is currently 3.5%. The calculator is located here:
https://lab.madfientist.com/calculators/safe_withdrawal

Home Ownership
Home ownership is expected in the next 5 years. Hopefully stability in career and location allows this. The choice of home should be based on lifestyle and not attempt to expand lifestyle to things that are not currently hobbies or activities. The choice of home should prioritize quality of life in all the ways that matter, including proximity to work, green space, and culture. This implies that size is not a large concern.
Home ownership is not a must. If no affordable homes are available in a location that provides happiness or meets criteria above, a home does not have to be purchased. This will have benefits in flexibility over time and should not be considered a failure. That said, home ownership’s ancillary benefits should be taken advantage of if possible.

Savings
Savings goals are based on expected retirement date. With the current retirement date, savings rate will need to be 64% of current salary. This can be improved with salary increases or may need to improve based on unforeseen career obstacles. This rate can be reduced with better part time pay in retirement.
Current savings rate of the last 12 months (as of October 2018) has been 55%. A savings rate of 55% means realizing the retirement goals a full 3 years later. Discipline must be improved to achieve the goals outlined.
Savings will include Roth IRA, 401k, traditional IRA, normal brokerage accounts, savings accounts, and checking accounts.

Investments
Principles
The key principle will be one of humility. Do not try to outsmart the market. Investment in index funds beats the vast majority of professional asset managers, and keeping the portfolio squarely centered on diversified index funds is the smart, simple move.
Taxes and expenses on investments will be minimized. This will be accomplished through retirement vehicles and choosing brokerages that charge less in expenses, such as Vanguard.
Home ownership is a useful investment vehicle, but not a necessary one if lifestyle, career, or circumstances do not allow it.

Strategies
Tax Avoidance
Tax Avoidance will be achieved by maximizing use of retirement vehicles. 401(k)s reduce taxable income by $18,500 in 2018. Roth IRAs are not taxed when withdrawing contributions, and not taxed at all after 59.5 years old. Both investment vehicles will be maxed out yearly.

Retirement Fund Withdrawal
The Roth Ladder will be the key strategy to accessing retirement funds before traditional retirement age. The following link describes the strategy.
https://www.madfientist.com/how-to-access-retirement-funds-early/

Asset Allocation
Assets should be focused on passively managed, diversified, low expense index funds.
Global Equity Momentum will drive the allocation strategy for funds that do not incur fees with transfers, buying, or selling. This includes funds in most retirement vehicles. Global Equity Momentum is described in greater detail on personal finance spreadsheets. Historically it calls for a roughly 65/35 ratio of equity to fixed income over time. But at any one moment in time, it calls for 100% allocation into one of 3 asset classes: a broad global index fund, a broad US index fund, and a conservative bond fund. GEM will be used in my Roth IRA and Traditional IRAs at Vanguard.
Funds in brokerage vehicles will be in an 80/20 equity/fixed income allocation and buying and selling will be minimized to avoid taxation. Equity will be split between Total US Stock Market Index and Total World except US Index. The ratio between them is not considered important, but as of today is approximately 75/25:US/World. The bond fund is a Total US Bond Market Index Fund.

Spending
Overall lifestyle spending is the key variable that affects retirement date. Spending money should be focused on things that have been shown to provide happiness. Those things are experiential, give opportunities for growth, and increase connection with others. Travel, cooking, exercise, and seeing loved ones are great examples of ways to spend money that create happiness. Consumerism does not.
Spending will be tracked monthly and categorized. Over time this will show areas that can be improved and the true costs of bad and good habits. Savings rate will be especially noted. This will be tracked in the finance spreadsheet.
In general, possessions should not be purchased on credit. A home is a notable exception. Nor should possessions cost money to store. This implies one has too much stuff and it isn’t being used since it is in storage. This is wasteful and does not add happiness to life.

Risk Mitigation
An emergency fund will be maintained. The emergency fund will consist of 6 months of expenses. One third will be in a checking account for ease of access. The rest will be in a savings account.
This document itself is a method to avoid risk. The primary risk is personal weakness in investing too much in one asset, trying to time the market, or panic selling. This document outlines the strategy and should be followed. If adhered to, risks will be mitigated. For that reason, changes to this document should be considered for 3 months before implementation.

[simonsez]

Overall I think an IPS is one those highly personalized things and they're hard for me to judge.  Mine is a lot more outline-y with brief phrases instead of sentences aside from the Introduction.  I need specific details with contingency plans baked in as opposed to more generic statements (not saying yours is too vague, just what I need personally). 

Does your plan fit your needs?  That's really the most important part.  A few things I do not see discussed (or not discussed that much) are a spouse or potential spouse, family planning information, automobile needs/plans, healthcare planning, and general retirement plans.  That is obviously private and maybe some don't consider that necessary for an individual's IPS but can definitely have major impacts on financial goals and plans.  E.g.  I do not have any children currently but 529 plans are in my IPS in case I do.

I don't know enough about GEM to say if that violates your own tenet of not trying to outsmart the market or if it is just something that works for you and aligns with your principals.

[jacoavluha]

Investment Policy Statement
.....Do not try to time the market....

Investments
...The key principle will be one of humility. Do not try to outsmart the market. Investment in index funds beats the vast majority of professional asset managers, and keeping the portfolio squarely centered on diversified index funds is the smart, simple move....

Asset Allocation
.... Global Equity Momentum will drive the allocation strategy ... Historically it calls for a roughly 65/35 ratio of equity to fixed income over time. But at any one moment in time, it calls for 100% allocation into one of 3 asset classes: a broad global index fund, a broad US index fund, and a conservative bond fund. GEM will be used in my Roth IRA and Traditional IRAs at Vanguard....

Risk Mitigation
...This document itself is a method to avoid risk. The primary risk is personal weakness in investing too much in one asset, trying to time the market, or panic selling....

Critiques:
1. Your IPS is too long for my tastes. But that's just me.
2. I focused on the investment part because that's what interests me. I like the idea of not trying to time the market. Now please tell me how Global Equity Momentum" is not a market timing strategy. I admit this is the first I've heard of it, but from your brief description it sure sounds like a market timing strategy to me.

[erp]

I agree with simonsez that an IPS is a very personal document. Mine is mostly to provide me with a signpost when I might make rash decisions.

My personal IPS has much more detail on goals, because then I can judge whether an action supports my goals. Goals are also where a lot of discussion about family, ambitions,  etc. show up in my IPS. It contains some discussion on which risks I'm willing to accept (this section is mostly about leverage, and why it's not in my risk basket). Finally, my IPS has a review frequency, which helps me ensure that my goals are consistent and that I have a process for implementing changes when/if required.

As long as your IPS works for you, this looks like a good start. If it were mine, I'd add some discussion on why you are amassing capital, and what scenarios might trigger changes to your plan.

[Cornel_Westside]

Investment Policy Statement
.....Do not try to time the market....

Investments
...The key principle will be one of humility. Do not try to outsmart the market. Investment in index funds beats the vast majority of professional asset managers, and keeping the portfolio squarely centered on diversified index funds is the smart, simple move....

Asset Allocation
.... Global Equity Momentum will drive the allocation strategy ... Historically it calls for a roughly 65/35 ratio of equity to fixed income over time. But at any one moment in time, it calls for 100% allocation into one of 3 asset classes: a broad global index fund, a broad US index fund, and a conservative bond fund. GEM will be used in my Roth IRA and Traditional IRAs at Vanguard....

Risk Mitigation
...This document itself is a method to avoid risk. The primary risk is personal weakness in investing too much in one asset, trying to time the market, or panic selling....

Critiques:
1. Your IPS is too long for my tastes. But that's just me.
2. I focused on the investment part because that's what interests me. I like the idea of not trying to time the market. Now please tell me how Global Equity Momentum" is not a market timing strategy. I admit this is the first I've heard of it, but from your brief description it sure sounds like a market timing strategy to me.

Well, the reason I don't personally think of it as timing is because the strategy is very defined. It isn't a set of principles. It has clear metrics for when to trade and there's no room for human error as long as you follow the signals. If you look it up you'll find the strategy. The reason for using it is mitigation of loss based on historically accurate signals that still allow for time in the market. The Trinity study is based on long term stock market history and so is this strategy. It reduces drawdown substantially and therefore can hopefully reduce sequence of return risks. But only my fee-less funds will be using this strategy. The rest will be buy and hold.

I agree with others about detailing strategy regarding partners, healthcare, automobile, goal metrics, review cycle and family. I assumed that kind of stuff was too detailed for an IPS, which I thought was a very general document. I may add this detail in this IPS or make a detailed document about the nitty gritty regarding these other topics. I refer to a finance spreadsheet in my IPS - this spreadsheet has lots of detail on GEM, my monthly finance reviews, and financial resources.

[jacoavluha]

Whether a strategy is loosely or tightly defined or based on computer data or personal whims doesn’t change the fact that it’s a market timing strategy. And the formula that tells you what to do is written by a human.

You are of course free to do what you want. And it may be a good timing strategy. I would revise your IPS, however, so as not to have a strategy in conflict with your goals of not timing the market.

[MustacheAndaHalf]

A global fund holds both international and U.S. assets.  I think your 3 funds are international equity, U.S. equity, and bonds. 

My problem with GEM is how neatly it avoids market crashes.  It looks like curve fitting to me - perfectly adapted to the past.  I have trouble believing a formula can avoid crashes.  And GEM doesn't switch back into equities at the bottom - it waits for the same spot as before, then switches back.

GEM isn't widely accepted, and isn't passive investing.  I would say "humility" is much closer to using a 3 fund portfolio (maybe 60% US, 30% international, 10% bonds) that uses fixed allocations.  GEM aims to beat the market, not match it.

[2Birds1Stone]

Looks solid, but verbose.

My IPS is more about concrete numbers, reallocation bands, defined ways of dealing with life events, future income changes, and withdrawal strategy.

Maybe I should add more objective data to it.

[Cornel_Westside]

A global fund holds both international and U.S. assets.  I think your 3 funds are international equity, U.S. equity, and bonds. 

My problem with GEM is how neatly it avoids market crashes.  It looks like curve fitting to me - perfectly adapted to the past.  I have trouble believing a formula can avoid crashes.  And GEM doesn't switch back into equities at the bottom - it waits for the same spot as before, then switches back.

GEM isn't widely accepted, and isn't passive investing.  I would say "humility" is much closer to using a 3 fund portfolio (maybe 60% US, 30% international, 10% bonds) that uses fixed allocations.  GEM aims to beat the market, not match it.

Very fair. Maybe I'm not being humble. But we mostly agree with the 4% rule, which also is pretty adapted to the past. And when you run GEM with different lookback periods from 3 months to 12 months you still outperform the market. (Source) https://svrn.co/blog/2015/8/2/is-gary-antonaccis-global-equity-momentum-strategy-robust
That implies the strategy is fairly robust and is driven by a genuine source of inefficiency in the market that can be captured. However, that source still notes that changing from the recommended 12 month lookback almost always hurts the results. That makes it seem like it's just curve-fitting, as you say. This curve fitting has worked from 1926 and on, but it still is curve fitting. So it is safe to assume that it will not decisively dominate the market the way it appears when you look at results now. However, it may still beat the market consistently. My goal isn't to beat the market, it is to reduce drawdowns. But maybe wanting to do that isn't humility.

Whether a strategy is loosely or tightly defined or based on computer data or personal whims doesn’t change the fact that it’s a market timing strategy. And the formula that tells you what to do is written by a human.

You are of course free to do what you want. And it may be a good timing strategy. I would revise your IPS, however, so as not to have a strategy in conflict with your goals of not timing the market.

I can see your thinking. I guess it is market timing, but not emotional market timing. I think you are right that I should update my IPS. The hard part is rationalizing how I can feel that my thoughts from before are enough to drive my investment strategy but also that thinking more NOW isn't helpful. How can that be logical when my thinking in the past is what drove me to be a buy and hold investor before I found research on GEM? People attempt to avoid risk by reducing their potential gains by using a stock/bond allocation or a more complicated portfolio allocation, but isn't that also simply a strategy? If GEM is also a strategy to avoid risk that passes back testing with plenty of margin throughout long periods of time, why is that not to be trusted? Because it has trades?

I agree that I've been inconsistent in my IPS, but I think it is potentially possible to have non-emotional trading in a defined way to avoid risk and minimize reduction of gains. It could be foolishness to think that my level of investment knowledge is enough to know that this strategy can do that for me, but I don't think that I can discount this strategy for those reasons but think a 70/30 stock bond split is correct. If I don't have the knowledge to make an informed decision on strategy, I don't see how I have enough knowledge to trust in an asset allocation. Especially when they seem to use the same type of historical data driven arguments for their use.

[MustacheAndaHalf]

But we mostly agree with the 4% rule, which also is pretty adapted to the past. And when you run GEM with different lookback periods from 3 months to 12 months you still outperform the market.

I did not say I agree with the 4% rule - I think it's outdated.  For a 50 year retirement, if you withdraw 4% from a 60/40 portfolio you've got a 20% failure rate.  I based that on Vanguard's nest egg calculator:
https://www.vanguard.com/nesteggcalculator

Since I'm not familiar with "svrn.co" I didn't visit it.  Did they use decades of stock market data to prove their point?  How do you know this source of data is not affiliated with the inventor of GEM?

Just to illustrate curve fitting... don't invest in years ending "08".  That strategy beats the market, by avoiding a -37% stock market loss in 2008.  From there, all I need are some plausible explanations why I'd do that, and I have a backtested system that beats the market.  And in multiple countries, too!  (Out of band testing)

If you go the GEM route, note the price of the S&P 500 when you start and keep comparing your results to a simple S&P 500 investment.  Have a benchmark to test against, and see if you beat that benchmark.

[BicycleB]

What you write sounds excellent and inarguable, supposing that the choices you have made do in fact maximize your happiness, with the possible exception of the the GEM part.

Re 55% savings vs 64%, it's up to you whether 3 more years is worth whatever joy reduction is involved in living on 36% of current income instead of 45%. If your work is tolerable, I'd suggest earning to point of being able to spend at the 45% rate, so that a discipline failure doesn't risk the failure of your FIRE. Just my perspective after several years of thin-ish FIRE; currently flirting with return to work myself. YMMV. You definitely seem to be thinking of the issues wisely and arriving near the likely "efficient frontier", though; good job.

Re GEM, I don't know the details, but assume you are in effect adding a bit of padding in today's environment, and you have a defined plan for various situations. Those ideas generally sound reasonable to me. I have been through several bouts of a similar thought process.

Live long and prosper!

[Cornel_Westside]

But we mostly agree with the 4% rule, which also is pretty adapted to the past. And when you run GEM with different lookback periods from 3 months to 12 months you still outperform the market.

I did not say I agree with the 4% rule - I think it's outdated.  For a 50 year retirement, if you withdraw 4% from a 60/40 portfolio you've got a 20% failure rate.  I based that on Vanguard's nest egg calculator:
https://www.vanguard.com/nesteggcalculator

Since I'm not familiar with "svrn.co" I didn't visit it.  Did they use decades of stock market data to prove their point?  How do you know this source of data is not affiliated with the inventor of GEM?

Just to illustrate curve fitting... don't invest in years ending "08".  That strategy beats the market, by avoiding a -37% stock market loss in 2008.  From there, all I need are some plausible explanations why I'd do that, and I have a backtested system that beats the market.  And in multiple countries, too!  (Out of band testing)

If you go the GEM route, note the price of the S&P 500 when you start and keep comparing your results to a simple S&P 500 investment.  Have a benchmark to test against, and see if you beat that benchmark.

Gary Antonacci has his own blog with lots and lots of free analysis. I doubt he would randomly write a different article on a less popular blog, but I don't have access to the data this author used or any other way to verify it.  Here's an example:
https://www.dualmomentum.net/2016/03/momentum-for-buy-and-hold-investors_25.html

I do track S&P 500 vs GEM and I check it monthly (as you have to for GEM). I also plan on being buy and hold for all my brokerage investments (which are about 1/3 of my overall investments). As of now GEM is up about 4% over the S&P 500 in the 18 months I've been using it. But right now is the critical time, as there is likely to be a sell signal today.

[waltworks]

Yeah, the issue is - there are an *infinite* number of strategies that beat the market, because the dataset is limited and the number of potential strategies isn't. All kinds of nonsensical stuff (especially mashed together) will look like it works great over all of the history of the stock market - until it doesn't.

You can curve fit to any random series of numbers you want, if you're willing to try *everything*. But that doesn't mean that your cat's sleeping habits and the last 7 years of NY Rangers point totals predict my coin flip sequence going forward even if it did awesome yesterday.

A few people here have experimented honestly with momentum strategies and reported their results (though only one is still doing it AFAIK). They all had great backtested results when they started. None of them (AFAIK) has managed to even come close to matching the S&P.

But at the same time, some kook in his mom's basement (of the population of a million kooks) has done great for 5 years on strategy X, which now he'll tell everyone on the internet about. The 999,999 folks who failed miserably won't pipe up and around and around we go.

-W

[frugledoc]

You say you want to be humble, not try to beat the market, and turn investing into a hobby.

GEM does none of that.