Why individuals should use a more agile approach to investing and financial planning.
Topics covered include:
- How to incorporate low probability catastrophic events in your financial plans.
- How traditional financial planning differs from agile financial planning.
- Why we need to test-drive our financial plans.
- How too much efficiency can lead to a lack of resilience.
- How David’s portfolio is allocated using a flexible, role-based bucket approach.
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 303. It’s titled, “How to Go About Financial Planning.”
I recently received an email from a new member of Money for the Rest of Us, Plus. He wrote, “I have listened off and on to your podcast for the last 6 years and finally upgraded to your Plus features recently. My reason for doing so is I’m stuck between 2 investment narratives that are becoming increasingly divergent in thought. As I struggled to reconcile between the 2, I’m hoping your podcast can play the role of mediator.
“My current financial advisor who I’m very happy with and have been with for 15 years, he espouses conventional, institutional investment mantra and has delivered mid-single-digit returns. So predictably I rode the 2008/2009 recession down 34% and then have ridden it back up. He always has convincing arguments to dissuade me from pursuing alternative, speculative investments such as gold, Bitcoin, etc. I have a well-diversified portfolio made up of conventional equity asset classes.”
Here is the second narrative. He writes, “The other extreme are a random collection of podcasts that I find myself drawn to, which highlight the extreme precariousness of the American economy, and specifically the US dollar with the emerging threats of the Chinese yuan, COVID-19, ushering in UBI, QE infinity, and social upheaval due to extreme income disparities, among other concerns. These podcasters sound reasonable, logical, and all operate off of fundamentals, my same guiding principles as an engineer by training.
Chicken Little Themes
“I’m sure you are familiar with some of these. The Investor’s Podcast and various guests that the Investor’s Podcast interviews, such as Jim Rickards, Luke Gromen, Grant Williams, and Ray Dalio.” Although I don’t think Stig and Preston have actually interviewed Ray Dalio. “The theme of all these guys who call chicken littles is our system is broken and it’s simply a matter of time before it will be replaced, either with the Chinese yuan or oil as the basis for a new monetary standard, gold, or Bitcoin. Even going so far as to compare current American with Venezuela and Weimar Republic in 1930s Germany. At the end of the day I need to rationalize these two disparate viewpoints into an asset allocation that accommodates both perspectives.”
Now these are the same questions that I deal with in my investing. It’s one reason I’ve done episodes on some of those topics. Here’s what he would like: my perspective on the validity of these chicken little themes promoted in these podcasts. He writes, “Clearly there is a non-zero probability of these events happening, but is it 0.1%, 1%, 10%, or 50%?”
He wants to know the shortcomings of conventional financial advisors and how to effectively use an advisor. He would like me to discuss my overall asset allocation philosophy. And why I have such a small percentage in stocks, and what would cause me to increase my allocation to stocks.
Now regarding these, what he calls chicken little themes, I’ve recommended the Investor’s Podcast on this show. Stig Broderson is a good friend of mine. And I’ve discussed the views of Ray Dalio, most recently in episode 300. I discussed James Rickards views in episode 49. Luke Gromen’s view in episode 260. Grant Williams, he’s the co-found of Real Vision which is a video service where you can watch and listen to interviews with many of the individuals that this new Plus member mentioned. Real Vision was an early sponsor of Money for the Rest of Us. And I’ve covered these themes off and on because they are plausible. Most recently, in episode 295 when we talked about the potential for the Federal Reserve to go insolvent.
Unfortunately, we can’t put a probability to these things happening. They are uncertain and things that are uncertain by definition you can’t assign probabilities to them. We don’t know. I think it’s a possibility, but it is not my base case. My base case is we just keep plodding along like we have been for decades.
What Is the Business Model?
Whenever you hear someone share a logical view of disastrous things that could happen, we always have to step back and ask “what are their incentives.?” What is their business model? Do they have a newsletter that they’re selling? A subscription service? Are they selling books? That doesn’t necessarily mean they have a conflict of interest, but we want to understand what’s their model.
My model is I do a podcast and I have Plus membership. And one of the most important things that I do in that Plus membership, which I think all individuals that are sharing their investment and financial views should do, is show their portfolio. Show me what you’re holding in your portfolio. That’s why this member could ask me why do I have so little invested in stocks, which I’ll get to in a few minutes.
One of our challenges is how do we potentially plan for catastrophic things that could happen but may not. And probably will not. I actually listened to a recent episode on the Investor’s Podcast with Luke Gromen and Grant Williams. And one of the things that struck me is how frequently they said they didn’t know about specific things. They didn’t know why the dollar wasn’t weakening or other events. Because we don’t know, which gets to some of the shortcomings of traditional financial advisors.
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