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dabiggapicta

Post cash-out considerations

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Disclaimer: This is a collection of personal thoughts and ideas, not financial advice.

 

Now, as a conservative libertarian, I want to live in a world without a government monopoly and without inflatable fiat money and although crypto can deliver just that (i.e. sound money), I think we are quite far away from this. Maybe I'm wrong, happy to be surprised.

This means, that some of us will sell significant holdings of their crypto and turn them into fiat. I wish to all of you, and of course to myself, to become rich beyond your dreams and to live a life of financial freedom.

I wanted to put together a series of posts with ideas, which can be of help. These are approaches I would take, given they have passed my sniffing test. My tolerance for financial BS is very low after a few years in the investment advisory and asset management industry.

So let's start with a few key messages, which I hold true.

1. Aim to never consume your working capital, only the returns from it - be they dividends, interest, or capital gains (CGT)

2. Aim to consume just a bit less than the stream of returns - reinvest the rest if possible

3. Asset Allocation, where a fixed part of your portfolio is in equity and the other in bonds, say 60/40, is a sure way to underperform. Bonds and equities are correlated

4. Asset Allocation, where sometimes you own equities, and sometimes you own bonds (100% each, respectively), is a great way to outperform 

5. Diversification, as in owning different stocks, or different bonds, is meaningless beyond a handful of single securities, say 15-30

6. Bond and equity portfolios go up for the following reason: There are limited resources on this planet, but unlimited needs (we are humans, after all). If a company catering to those needs wants to stay successful, it needs to make better use of the resources than the competition, hence become more productive. The same amount of shares must produce more income, i.e. their value goes up. If the company does well, it can service its debt, meaning bond coupons and the debt get paid off.In other words: buying bonds and equity means "going long capitalism". It is the same inefficiency (i.e. limited resources vs. unlimited needs), hence the correlation of the two, hence the statement in point 3. Do not hold bonds and equities at the same time. Never.

7. Diversification, as in holding different strategies, which exploit different inefficiencies (say "momentum" and "relative value" and "mean reversion" and "short volatility") works great, because the individual inefficiencies do not materialize at the same point in time. The result is a smoother performance curve of your portfolio. See for yourself: https://robotwealth.shinyapps.io/algo_diversification/

8. Simple is better.

9. The illiquidity premium of private equity or private debt does not justify the illiquidity you have to live with. The reason is, that the premium is calculated relative to a broad market index, with all its ups and downs and this is a bad benchmark to begin with. Liquid investments can produce the same returns and even better than private markets.

10. Tax advice matters. Do not hesitate to pay well for these services. The fee you pay is a fixed hourly fee and with time will represent a smaller fraction of the overall stream of income you will have. It's worth it.

 

We will look at practical implementations in the next post.

Edited by dabiggapicta
typo
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The question of "how much is enough?" is of paramount importance. And while this is an individual question, of course, I'd like to share a few thoughts.

First, money is a tool. If you are not in peace with yourself without money, you won't be with it. If you have destructive behavior traits, please seek help. There's nothing shameful about this, and help exists. ISTDP practitioners can do a lot for you and with you. Been there done that. Still doing it. It works.

The good news is, that all the stories of lottery winners, who messed up their lives, were not messed up by the money they suddenly had. They had issues to begin with, money was just the magnifying glass. Don't be afraid of being rich. It's OK to be successful, it's OK to shine.

 

In determining how much one needs, I like to go backwards. I start with the median household figure in the region where I want to live. For Switzerland, this would be around 90k per year. Now, while I think that spending millions each year is cool, we know from studies that levels of well being in Switzerland do not significantly increase beyond a salary of 120k per year. To be on the safe side, I want to aim for five times the median household income after taxes, produced through passive income. Again, that's my multiplier. Yours might be different.

We end up with a desired after-tax income of 450k per year. Assuming a 40% tax rate, this means 750k per year through passive income.

Now comes the tricky part, where we have to assume a rate of return, or a safe rate of withdrawal (SWR). Because we will do things differently then other investors, we will not assume a 3-4% SWR, but a 6% SWR. We will see how in the next post.

If 750k represent 6%, then our working capital must be 12.5mio.

What I want to show here, is that once everything is taken into consideration (taxes and performance), then suddenly we realize how much money we actually need to get to our goal.

37'500 Swiss Francs certainly is a lot of money to have each month, even here in Switzerland, but it's still quite a thing to know, that under semi-conservative assumptions in terms of taxes and returns, this requires a whopping twelve and a half million Swiss Francs.

The idea of this post was to put things into perspective.

In the next post, we will look into how to invest.

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The how-to part must be simple. I want to present the only approach in the traditional markets, which I think is simple and easy and also effective.

It's "Dual Momentum" by Gary Antonacci.

You can buy his book, watch a great presentation and read his blog.

Here are the rules

Bildergebnis für dual momentum review

 

At the end of each month, we look at three 1-year performances. SPY, BIL, VEU.

Here's a link where you can easily do that: https://stockcharts.com/freecharts/perf.php?SPY%2C BIL%2C VEU%2C AGG

I have included the AGG symbol as well.

Please note, that you will have to adjust the look-back period, which I marked off yellow in the screenshot. The link above defaults it to 200 days, which is not a full year.

Here is what it looks like: https://imgur.com/w75dO4E

 

And based on that, you just check the charts once a month and buy one of three ETFs. You can read all the details in the book, but the strategy is just that.

I have done the tremendous work and manually put in all the performance figures on Gary's webpage into an excel file and let it run against the S&P500.

Here is how the all time performance looks like.

And here is how the performance since the dot-com-bubble looks like. You can also see how well it did during the Great Financial Crisis.

 

Below are the (admittedly not totally up to date) performance figures from Jan1950 to Sep2018. GEM means "Global Equties Momentum" and is the Dual Momentum approach.

Screenshot_30.png

 

This is a pretty compelling argument for a dynamic asset allocation, as mentioned in point 4, in the very first post above.

 

With regards to the safe withdrawal rate (SWR), we can see that this approach allows for a much higher SWR than a traditional 60/40 or just S&P500 ETF portfolio:

Screenshot_25.png

 

It even looks good if we only use the worst 30 years of data:

Screenshot_26.png

 

Bottom line, this is a simple do-it-yourself approach and it is cheap to implement, given that especially in the US, there are now several zero comission Brokers, such as Schwab, TD Ameritrade, and E*Trade. I hope European brokers will follow.

In the next post we will examine another, probably more advanced option to invest.

 

Edited by dabiggapicta
typo
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Last but not least, here is an investment boutique, here in Zug, which I have been tracking.

I have not done meaningful due diligence on them, but so far they seem solid.

http://preussen-hohenberg.com/

You can check out their performance figures of the individual modules, which they have

 

I spoke to them on the phone a while ago and inquired about the two modules, which I'm most interested in: "Global-Macro-Universal" and "X-Type Trading –Level 4".

The first one requires 1mio minimum investment and the second one requires 500k. As far I understand, these are managed accounts and are run by Preussen-Hohenberg. The performance looks beyond stellar.

A few key points to make:

1. Minimum investments are not insignificant

2. I haven't done much due diligence

3. It is not clear to what extent these are available to US investors or to non-CH investors

 

When the time comes and I do have the money to go with them, I will definitely conduct some serious due diligence and send them a big questionnaire. We do fill out these so called RFPs ourselves at work, since we are an asset manager. Time will tell.

 

I hope this helps.

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On 12/24/2019 at 9:53 AM, dabiggapicta said:

Last but not least, here is an investment boutique, here in Zug, which I have been tracking.

I have not done meaningful due diligence on them, but so far they seem solid.

http://preussen-hohenberg.com/

You can check out their performance figures of the individual modules, which they have

 

I spoke to them on the phone a while ago and inquired about the two modules, which I'm most interested in: "Global-Macro-Universal" and "X-Type Trading –Level 4".

The first one requires 1mio minimum investment and the second one requires 500k. As far I understand, these are managed accounts and are run by Preussen-Hohenberg. The performance looks beyond stellar.

A few key points to make:

1. Minimum investments are not insignificant

2. I haven't done much due diligence

3. It is not clear to what extent these are available to US investors or to non-CH investors

 

When the time comes and I do have the money to go with them, I will definitely conduct some serious due diligence and send them a big questionnaire. We do fill out these so called RFPs ourselves at work, since we are an asset manager. Time will tell.

 

I hope this helps.

These posts are some of the best I have ever seen on practical financial investment advice, and I've read all sorts over the years.

Many thanks for sharing.

Lets hope 2020 allows us to put this advice into practice. 

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1 hour ago, Lancsgent said:

These posts are some of the best I have ever seen on practical financial investment advice, and I've read all sorts over the years.

Many thanks for sharing.

Lets hope 2020 allows us to put this advice into practice. 

You're most welcome. I have one more ace up my sleeve, but it's fairly difficult to implement and it has its own risks, predominantly on the operational side, not so much on the investment risk side. Plus, it's quite discriminating, given it is FX related and therefor US citizens will have difficulties. There are always workarounds though.

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