We have already arrived, and why we carry on

We knew it at the beginning of the year.

But in all the tumult in the world during spring, we forgot it again.

We have already arrived.

We could spend all our time sipping on soft-drinks from now on.

We have low, probably even very low, monthly expenses. And atop of the 'must have to live', we still add around 30% of "pleasure spending", which makes us happy with life (in a stoic way). 

What dawned upon us now as summer goes over in fall, is that the safe withdrawal rate gave us, already in the beginning of the year, that we could withdraw all we needed + our small "pleasure spending" and another 50% in safety margin, and still be safe in the worst historical case.

That's a 50%-100% safety margin if one does the math. 

That's what we had already at New Years Eve earlier this year. 

And since then, half a year has elapsed, and we've been adding to our investments since then.

So on top of the safety margin, which is already a worst-case-scenario, we've been adding what correspond to several years of expenses. 

So, yes. We have arrived. 

Why carry on?

Fundamentally, we don't believe that more money from this point on will a big difference when it comes to if we feel content with what we have. 

If we're not happy, the biggest problem will probably not be if we can or can't spend a little more per month.

So why go on?

So why don't we stop then, and savor what we have? 

Well, one thing is that we don't really know our future preferences. Even if we think we're stoic today, why not give our future self the gift of actually being somewhat wealthy as well. A money-machine on top of the money-machine, so to speak.

And it's pretty easy for us to earn money right now. We're in the middle of our careers. We're relatively well-payed. Our jobs don't imply freedom for sure, but we're also in positions that are interesting, we perhaps even allow to delude ourselves that society is slightly better off if we show up for work. So it's not freedom, but it's not directly painful neither to build that money-machine on top of the money-machine right now. 

A third thing is the black-swan-factor. We only know the expenses we know, or can forsee. It's the unknown unknowns that will bite us. And we don't want to keep looking over our shoulder and wonder if what quacks (or whatever swans do) is that proverbial black swan.

So hopefully, we'll soon be free with a margin, and soon thereafter, wealthy as well.

Are we right? Are we wrong? Are we just greedy? Are we not greedy enough with the time that we have left? We don't know.

We'll see how it goes.

As Seneca has it in his second letter to Lucilius:

"[quotoes Epicurus]: "Contented poverty is an honourable estate." Indeed, if it be contented, it is not poverty at all. It is not the man who has too little, but the man who craves more, that is poor. What does it matter how much a man has laid up in his safe, or in his warehouse, how large are his flocks and how fat his dividends, if he covets his neighbour's property, and reckons, not his past gains, but his hopes of gains to come? Do you ask what is the proper limit to wealth? It is, first, to have what is necessary, and, second, to have what is enough. "

We're poor, in Seneca's eyes. And perhaps he's right, because we hope of gains to come. And this part of the journey will continue for some time more.

Farewell

//antinous&lucilius

Why stock index investing is probably wrong for you

Stock index investing is a common recommendation on the journey to financial freedom.

And sure, it looks like there could seemingly be advantages to stock index investing. 

Are we sure which chimpanzee is picking the stocks here?

In stock index investing, there is no smartassing around with what stocks should be in the index. 

Hence, a stock index is less risky than certain other high-risk-behaviors, such as running around in a cage of chimpanzees armed with guns, sky diving in a squirrel suit, picking stocks, etc.

An index has the advantage that we don't need to bring our small and far too proud and easily tricked brains into how to pick out individual stocks. No guns, no squirrel-suits, no fragile ego complex in the equation.

Just a mathematical, simple rule, behind the index.

That's good, in the exceedingly likely event that we do something stupid when we try to 'think'.

Another important advantage: it's easy to start investing in a stock index. 

Investing in an index can very easily be set up to be automatic. 

Yet, does that automatically make the index the right choice for you?

Obviously, index investing is - over the very, very long time - probably better than not investing (but that's not entirely true, as we will see below, and that's a helluva important nuance). 

"It's better to start early" as they say.  "Good for you that you are still young if something happens", is what they actually mean.

Why stock index investing is not good for you

So one way or the other, we're talking about our life's savings.

Even if it takes a few hours more of effort, we think that given all the tens of thousands of hours one has potentially spent earning one's life savings, one might be able to stomach a few more hours to understand some more nuances than just blindly following the stock index investing-recommendation.

Let's say that we're not complete investing newbies and have understood that we need to invest, and that it's better to avoid the squirrel suit-bunch and chimpanzees with guns, yet we're still ready to spend some hours to think a little deeper, after all. 

So is there something hiding immediately beyond stock index investing? Is the recomendation, well, really good?

Let's start with what "good" could mean.  

Good could mean 'good' as in efficient; as in there is no other obvious alternative that, with reasonable ease, provides a better price for the risk one is taking on. 

Unfortunately, it doesn't seem that stock index investing is efficient; however we measure risk, as long as we stay within some minimal boundaries of what 'rational' can mean; there are simple yet better variants. 

Here's a trivial example: balancing in just 20% of a very different asset class (we propose gold) makes the resulting two-asset portfolios much, much less volatile. 

And that has a tremendous impact. Less volatility means a higher probability to reach the destination in a comfortable time even in a bleak scenario. Less volatility means a higher safe withdrawal rate when living off one's investments, which directly translates into higher material standard. 

Less volatility means sleeping better at night.

Why wouldn't one go with that?

Well, you're right. Why wouldn't one. 

A rule such as the 80/20-split is so simple that one can easily stay rule-based, applying yearly rebalancing back to the asset split. Such a rule is so straightforward that only someone with severe cognitive deficits would say that the the portfolio suggested above is not, to the minimally interested investor, just as trivial as investing in an index. 

There are other alternatives; investigate and find a composition that suits you, instead of assuming the one-size-fits-all-recommendation of pure stock index investing.

A quick summary from previous articles here on the blog:

• Stock index investing can have up towards the double time needed to recover back to +/-0 (often more than 10 years) than a simple modification with another asset class. 
• A stock index is a very dangerous place to be. 10+ years of severe underperformance is common. Life is long enough for most of us, and everything that can happen should be assumed to happen during our investment lives.
• Even worse: catastrophic setbacks of 20+-25 years have happened in recorded history. What, then, promises that such setbacks, or worse, might not happen again in our lifetimes? 
• Because of the risk of decade-long setbacks, one is much more likely to try to time the market with stock index investing even if one is 'supposed' not to. This will destroy the average return that was the motivation in the first place.
• One doesn't get fair compensation of a better average return for the wild swings of a stock index compared to easy adjustments to a much safer portfolio. 

Let's leave the serious reservation concerning the lack of efficiency with that. Because that's not the most important objection.

Most importantly: where are we in the assumption?

We're concerned if one doesn't feel that one shouldn't even consider one's own risk tolerance when investing one's life savings. 

Serious downside protection is very cheap, like house insurance. 

One-size-fits-all is a non-sequitur; a deceptive misuse of logic. The conclusion (that it's right for us) don't follow on the premise (that stock index investing is easy and hopefully gives some kind of average return after a few decades).  

Yes, a stock index buys a certain basket of stocks. But that doesn't mean that the risk implied in that basket is acceptable for us. 

We have our own plans, goals, appetites, emotions, journeys and ambitions.

Why should a certain portfolio by default match an acceptable investing profile for us? Why assume that we are not ready to 'pay' with less chance of the most rosy best scenarios, to be able to stay out of seeing or investments devaluated for decades until they reach the same level again, if we're even there to see it?

Not to mention a higher withdrawal rate, that just plain simply translates into a higher material standard when living off one's investments. 

The 'one-size-fit-all' assumption of the stock market, and stock market index investing, is, we think, a dangerous one.

For us, for instance, it has been more important to arrive at financial freedom within a reasonable time, also in a hypothetical bleak scenario, rather than arrive a tiny little bit quicker on average. 

The assumption that all our hopes and dreams fit automatically in the strategy of stock index investing is a hole in the deceptive conclusion of stock index investing as a universal recipe for everyone. 

Examples of misalignment 

- Importance to reach the goal: There are better ways when it's more important to reach the goal within a reasonable time, than to reach the goal quickly.

-High and stable withdrawal: There are better ways when it's more important to be able to withdraw a high, sweet amount to live of. Risk efficient returns it's the cherry on financial freedom, and stock index investing doesn't have it as we saw above. 

- Fear might derail the plans: In the beginning of one's investment career, contrary to common wisdom, one might be so discouraged by a long setback that it's worth to trade a slightly lower expected return and have serious and robust protection of the downside. The same fear might get hold of experienced investors as well, when they realize how long a downturn might turn out to be.

A side-note on cost averaging

It's at this point that proponents of blind stock index investing might throw in the argument of cost-averaging. Of course we don't mean that you should invest everything you own tomorrow, they say. The risk of regret would be to high, they try to comfort the nervous investor. 

Cost-averaging, we're afraid to say, is a fallacy. Let's see what we mean. 

The problem lies in the answer to this question: If one feels that one can't go all in with a large sum due to fear of regretting the timing, well, why should one be comfortable with the risk profile in a year? Or in two years? 

There's a never-ending recursion behind the argument. 

Two years down the line when one is entirely in the stock index; should one sit awake every night and wonder if we should "cost average" in (or out) of the investment? 

No. The obvious conclusion is that the risk profile of the investment is wrong for that investor from the outset.

A tragic recommendation

The most tragic (almost criminal) aspect with recommending stock index investing as a cure for everything, is perhaps to recommend it for complete newcomers, perhaps especially those with some savings already. 

Many are the examples of a newcomer that are emotionally attached to their savings ("I worked a lifetime!") or perhaps sudden wealth ("I inherited my mother!").

These newcomers are then scared and overwhelmed when the market eventually drops (as it always does), and sells at a low point, misses the bounce upwards and might be set back for decades, if they even ever gets back in ("I destroyed my life savings", "I lost not only my mother, but also the sum of money she left me").

Think about your risk profile first, if someone recommends that you should cost-average into an investment. If you can't stomach to own a certain portfolio today, why should you be able to stomach that in a year from now? 

Once more, volatility is more dangerous than one might think from the armchair, until one starts to face real prospects of financial ruin, however minute they are.  

So why would you assume that stock index investing is right for you? 

Farewell

//antinous&lucilius

Hope is not a good strategy

When we started to think about investing, one of our reservations - and a reason that we avoided investing - was that we felt that there was, well, far too much hope involved.

And hope felt like speculation.

Who would like to put one's hard-earned money up for something as fickle as that?

Hope is not a strategy

Yet, if one can make a decent return again and again, consistently, even if one doesn't end up on top every year, as time accumulates, one will have a very good return over one's investment lifetime.

John William Waterhouse, Pandora, 1896.
According to Hesiod, Elpis - the Goddess of Hope - was hiding as the last item in the box.

When thinking through a strategy, as we felt intuitively when we were young, the best path is to try to figure out a way to remove hope. 

If we can look at the strategy without hope for any particular scenario over another, then we're on to something.

Removing hope

For a small-guys investor, there are some ways of removing hope.

• Long-run. One strategy is to go for the long run (read: Welcome to the 1825 day-year)
  
  - If you don't need the money for 20+ years: invest in the stock market (but we have some reservations)
  - If you don't need the money for 5-10 years, invest in some kind of asset allocation

• Creating a well-devised money machine (read about our pathfinder portfolio, or the permanent portfolio), put the money there, and trust the mechanics that a certain withdrawal rate (3% or 4%) should work in the future as well. 

The stomach and the trade-off

The trade-off here is: will one stomach the lower returns when other assets are booming? When the less prudent investors chase hope and gets the fickle rewards as fortune sails in their waters?

Betting on both

The mistake in our youth was to think that there was no other strategy than hope.

But there is, call it the Kelly-criterion, the safer bet, or winning the war - not the battle.

Bleed a little, and win a little, all the time.

Yes, a strategy contains an element that bets on a good outcome.

But it also bets on protection, so even a bad outcome becomes good.

Don't chase the risky bet.

Or as Howard Marks has it: Take care of the downside, and the upside will take care of itself. 

Farewell.

//antinous&lucilius

More reads:

- Amor fati. The art (and Stoic habit) of loving whatever fate has in store for us. 

- Don't predict. The ego-defending little-sister of Hope is the Fortune Teller. 

- How long is the long run? Read: The speed and the destination

- What is asset allocation? Some thoughts here: How we dared to start investing

When the knifes are falling

It has been a rough spring for our open societies, not to mention the people in Ukraine where we have friends and acquaintances that have caused many a white night for us. 

A stress-free portfolio

Despite all that, we have not been particularly anxious about our portfolio. Sure, it has fallen somewhat, but not with more than we can brush it off. We also remember all the simulations and back-tests for the "bouncing back factor" of our portfolio, which is one of the reasons we've chosen it. 

Over a three-year period the portfolio has been back where it began in all cases, during the last 52 years. 

So it's more bombs falling than the portfolio falling that keep us up at night. 

In short: we felt prepared when the financial world started to seemingly fall apart during this spring.

,
In Ciceros original telling of the story, there were boys (twinks?) at Democeles' party. Just saying. But a debauched same-sex orgy (with additional food and wine to satiate all appetites) was a little too much in 1812 when Richard Westhall imagined the impeding fall of the sword and gory end of the party, so the twinks became ladies instead. 

The markets price everything in

In the last few weeks, we've read doomsday forecasts for all asset classes we own. 

Allegedly, Putin would be sitting like an old dragon on a ton of gold, and what happens with that pile, one way or the other, might completely perturbate the price of the shiny metal. We'll soon see kitchenware in pure gold instead of steal at Ikea, according to the most negative predictions.

Inflation eats bond yields, and it's going rampant and then central banks and governments will not able to control inflation, or so it goes, so treasury bonds and toilet paper are soon to be equivalent investments. Actually, toilet paper might be an investment with a better outcome if the wars in Europe get severe enough. 

And the world economy will never be the same, with supply chain disruptions, a scared populace that refuses to consume and shrinks demand, and shortages of all kinds. 

Perhaps. Perhaps not.

Don't forecast. And with enough time, everything happens. 

What these fortune tellers seem to forget is, in our opinion, a very fundamental thing. 

All assets above correspond to financial contracts, traded on open markets in anonymous transactions, by intelligent agents - mostly institutions - with access to much information, and much more than the alluring stories presented above. 

Which means that all ideas about what will happen in the future is already priced into the current asset prices. There's no "natural laws" or "safe bets" that haven't already been baked into a (very refined) average assessment of the situation - an assessment that we normally call the current price.

For instance, bond prices already anticipate what the future payment stream (coupons) will be worth today, in today's money, inflation and all, with expected real returns, in the net present value in relation to existing bonds, buy backs, expectations of future quantitative measures, money printing and issues of new treasuries. It's all there, in the price, already.

So what one is saying when trying to see anything as "doomed", is that one is more intelligent than the market, or perhaps that one has figured out a bias that no-one else is exploiting. But beware. Markets are learning machines, and they are smart. 

As good stoics, we prefer to lean back instead of trying to outsmart people that, truth be told, probably are much more intelligent than us. 

We rely on the method, and we have pre-meditated that the sword may fall.

Come year's end, we will follow our strategy, and as usual pour our hard-earned money into the worst performing asset of the year (whichever that might be). That is probably then the lowest priced bet possible between long term treasuries, gold and stocks, and hence, also the bet with most upside if the market expectations are surprised.

So yes, we bet, but according to a pre-meditated and simple plan.

And the markets are always surprised, but not in ways that the stories above indicate - but genuinely surprised and one, at least not we, will not be able to predict why, when or how. 

For instance, in our own risk assessments for our future FIRE-life, we hadn't even really written out war explicitly (it was implicitly there, but more like "Sweden becomes impossible to live in"). 

Once more: with enough time, everything that can happen will happen, and now war is raging in Europe, despite (at least) us not foreseeing it. 

The best is to be aware that the knives might be falling at any time, and take precautions in advance and not hope that one will be able to do a last millisecond rescue when the unforseen actually happens. 

Be prepared in advance, prepare for all eventualities, consider a strategy that works for the human you are and not the hero you wish to be, so you are able to stick to the plan when the party ends.  

Farewell,

//antinous&lucilius. 

More reading:

Ergodicity - everything that can happen, will eventually happen.

Amor fati - love what destiny has in store for you.

Our portfolio - the pathfinder, bringing us to our goal. 

Beginning 2022 closer than ever to our FIRE point

We're getting closer to our FIRE point. Currently we aim for corresponding to around two million dollars as our FIRE point. 

The idea is that whatever point we set, it's going to be wrong because reality is never precise. 

How much money do we need? Impossible to say. We will not magically end up with zero investments the day we die, with perfect planning. 

Yet, it's better to err on the safe side, and hence; we should be erring on the safe side with our fire number.

Always err on the safe side, according to Antinous.

Summing up 2022 we also see that we spend below the poverty line here in Sweden, yet we feel quite rich. 

We've spent 7+ week travelling together this year, and much more including travelling for work, we live in a penthouse-like apartment, we always drive new cars. We certainly do not feel poor at all. We have gym memberships and access to a fabulous big pool where we can swim laps almost anytime we want and to mask ourselves as not overly frugal, we hide in branded clothes.

As a proponent of the FIRE movement, you probably understand how we manage to do all that and still end up below the poverty line. 

Which also means that we save a LOT. 

So the projection is fire within 2-3 years. The younger one of us will not even have turned 40 by then.

And FIRE will not be FIRE neither, or not quite the retirement part of the idea.

We're sure that we will keep on doing things that we will want to get payed for. Not because we necessarily need the money, but as a token that what we do have value. But we will be free, in the sense that no one will be telling us what we should do. 

And then, of course, there are all the other things, outside of what other people will care about; the things without monetary value where we hope to spend time: the long runs, the walks, the pastimes. 

There's so little time for us now, to do everything we want within our working lives; time to use the working life as a school to prepare ourselves for our next phase. 

How are your outlooks for 2022?

Farewell,

//antinous&lucilius

Character is destiny

This year is coming to an end as we're writing these lines. 

We've achieved some and missed some when it comes to the New Year's Resolutions from last year. 

The training is where it should be, above 9000 minutes during last year. A secret has been to try to train before lunch, either in the morning or during the lunch hour. That seems to help us to use the higher energy part of the day for training. 

Another thing we've achieved is our savings. We've saved around 44 k€ per person that goes into our pathfinder portfolio. 

Other things where not quite there. My Mandarin is not that much better. Antinous German though is a lot better. I would not aim for Carnegie hall neither with my piano skills.

On the other hand, we've spent more time with family.

Why did some things succeed?

Perhaps because we've made these habits easy to fall into, so the fist step to get them going is easy. 

It's a simple idea that seems to work for us.

Resolutions take habits that constitute character and creates destiny.

Here are some character forming micro habits that we've used this year. 

• Training. If we change to training clothes at 10am or 11am. Then it feels strange not to go training at 11:30 and instead sit and eat lunch in training clothes. 
  
  
• Savings. We've automated everything. We have a side account with what we should spend in a month on food and basics transferred to it. Then the card is refused when we go above that limit. There's a side account with a little more, where all invoices are payed and the salary ends up that we then can refill some with, but it's cumbersome.tp withdraw from it. And there's no other account easily accessible with money beyond our monthly expenses. 

So what to do next year? We should probably think more about the micro habits, because they are the triggers to the habits, and when we've put them in place we seem to be able to live up to what we promise. 

We should probably also give more thought to the social, friend and love department. We're not always overly interested in this area, because we know that the social mirror is dangerous to our financial journey.

Changing the status game is what allows our freedom.

But yet, we're also social animals. And there are interesting things to work with in the social game. What are our emotional responses around other people, and especially people we might dislike? And friends we like and love? How do we react, what of our own shortcomings do we project on others, what do we want of our social surroundings, and why? 

So there are three areas to focus on for 2022 perhaps, summarized as: wealth, health and love.

And all will take habits that create character, which steers us in these three domains,.

And what is wealth, health and love, if not destiny. 

Farewell,

//antinous&lucilius

Who has got the initiative over our life-energy?

Here's a thought.

We're dependent on the paycheck for our livelihood for a considerable time.

We earn that paycheck by giving our life-energy away; our concentration, enthusiasm, wit, skill or labor. 

What guides where we focus our life-energy is the force that gives us the paycheck.

That directing force is ultimately dictated by the needs of society and the market.

What does freedom do?

It brings the control of that force, to decide where we spend our life-energy (concentration, enthusiasm, wit, skill and labor) over to us.

Art wants out

Suddenly, the initiative is in our hands. 

We become true grown-ups, adults, and sovereign in deciding where to spend our energy, without a guiding force to nudge us.

The beauty of early financial indepet is that much of that life-energy still remains in our hands; in our relative youth; it has not yet been spent in the hands of the market and society.

We still have energy to spend.

It's, though, an error to think that freedom means that the life-energy shouldn't be spent on creative, interesting endeavors.

The energy we're granted is far too interesting to squander away, in our opinion, on too simple pleasures.

Hedonism requires complexity.

And mastery of complexity is art, and art wants out.

And with freedom, the initiative to set that art free is ours. 

Farewell,

//antinous&lucilius