My Top 7 Disagreements With Personal Finance Experts

As members of the FIRE (Financial Independence, Retire Early) community, we are all nonconformist. We scoff at conspicuous consumption of our neighbors in their full-size SUVs and McMansions, and instead budget with a very sharp pencil (spreadsheets are fine, too) and grow our stealth wealth, one dollar at a time.

But the FIRE community is far from monolithic. For example, I consider myself nonconformist even inside our nonconformist movement! I hold some pretty strong non-consensus views on many financial topics. I’m a rebel among the rebels, imagine that!

Here’s a list of my seven favorite disagreements with the personal finance consensus:

#1: The 4% Safe Withdrawal Rate is safe! (No it is not)

The Trinity Study and the resulting 4% recommended safe withdrawal rate have become the gold standard when designing a savings target (25x annual spending) and the eventual withdrawal strategy. Even J$ here uses it. There are (at least) two problems when extrapolating the Trinity calculations to the early retirement community.

First, instead of a 30-year horizon in the Trinity Study, the average early retiree faces a 50-60 year horizon. That wouldn’t be a problem if the success criterion in the Trinity had been capital preservation, i.e., preserving the purchasing power of the initial portfolio value for 30 years. If your capital lasts for 30 years, then why shouldn’t it last another 20-30 years? But for the Trinity Study, even a portfolio value $0.01 after 30 years is considered a success. That one cent will not last another 20-30 years!

To gauge how much of a “haircut” we should apply to the 30-year safe withdrawal rates when extending the retirement horizon, let’s do the following thought-experiment.

Imagine we have a $1m portfolio that generates 4% p.a. (per annum) of real return in the long-term, but we got unlucky and suffer 10% losses for the first three years, followed by three years of 10% gains and then 4% returns after that (assume all returns are real and all withdrawals adjusted for inflation). That’s not even a worst-case scenario, more of a garden-variety bear market.

Our portfolio can then sustain a withdrawal rate of about 4.27% p.a. for a 30-year horizon. But over longer horizons that number will be significantly lower: Only 3.26% over 60 years, a whole percentage point less and that’s all because of the longer horizon!

safe withdrawal routes time horizons

[Figure 1: Path of portfolio values over 30, 40, 50, and 60-year horizon with different withdrawal rates, targeting capital depletion.]

The second objection is that today’s expected asset returns are significantly lower than the average returns observed since 1926. The Trinity Study averages over many decades with different financial market regimes. Sometimes the stock market was overvalued, sometimes undervalued. Sometimes bond yields were very high, sometimes they were very low.

Does anybody else see a problem with that procedure? Relying on safe withdrawal rates that are averaged over the past 90 years is a little bit like calculating the probability of getting into a traffic jam by averaging over the entire 24 hours of the day. That may not be the most informative figure if you already know that you will be driving during rush hour!

For today’s retirees, only today’s market conditions matter, not the averages over the last 90 years. And more than seven years in the current economic expansion, equities look more expensive than over the last 90 years (measured by the CAPE ratio) as I show in this blog post. Bonds don’t look too hot either. Since 1926, the real, inflation-adjusted bond returns were solidly above 2% for government bonds, and even above 3% for corporate bonds, but today’s yields are far lower. Lower bond yields and expensive equity valuations support only significantly lower safe withdrawal rates than 4%.

If 4% doesn’t work, then what’s the alternative? Personally, I plan to start with a lower withdrawal rate of 3-3.25% out of our equity portfolio to account for today’s expensive valuations and the long retirement horizon. Having income-producing assets with a less than perfect equity correlation is also a good idea, so, I started moving some of my investments into rental real estate. Owning rental properties with a 4%+ rental yield (after all maintenance and repair costs!) I can probably push the overall withdrawal rate to 3.5%.

This number, though, is not set in stone. If the CAPE ratio were to drop to a more normal level, say, under 20 (currently around 27) I could move the withdrawal rate closer to 4% again.

#2: Robo-Advisers are great! (If by “great” you mean “expensive”)

You can’t read through the personal finance blog world without finding glowing endorsements of Robo-Advisers, like Betterment and Wealthfront. I beg to differ though, and recommend Robo-Advisers only to my most financially disinterested friends.

But folks in the FIRE community? We are the masters of budgeting and frugality, financial hackers (not hacks) and always on our toes to find new ways to eke out a basis point (0.01%) of return. Why would we want to throw away anywhere between 0.15% and 0.35% in fees p.a.?

Robo-Advisers do nothing magical and are nothing but expensive gimmicks. You can go to their website, find out their recommended asset allocation and simply implement it with inexpensive index funds at Vanguard or Fidelity. But do you even want to use their recommended asset allocation? You could do significantly better by further hacking their recommended allocation, for example moving ETFs with a high dividend yield and taxable bonds from taxable to tax-deferred accounts.

But what about tax loss harvesting? Tax loss harvesting is a neat tool that can lower your taxable income by up to $3,000 p.a., so folks in high tax brackets can save $1,000 or more on their annual tax bill. In taxable accounts, simply sell your underwater investments, i.e., equities, ETFs and mutual fund shares that have a cost basis greater than their current value, and the loss can be used to offset up to $3,000 of ordinary income per year. Check Bogleheads for more details.

Robo-Advisers can do this process really well and in a systematic and automated fashion. But apart from the fact that we find Tax Loss Harvesting overrated (see #7 below), it’s also something that most investors should be able to do themselves. Here’s my guide to becoming your own homebrew Robo-Adviser. Do it yourself and save thousands of dollars over the years!

Finally, under no circumstances should anybody ever shift an existing brokerage account with sizable capital gains to the Robo-Advisers, because they might first liquidate your holdings to purchase their recommended ETFs.

And that’s true whether you are an experienced financial hacker or complete finance novice. I’ve saved $42,000 by not switching to Betterment! The tax bill could be so excessive you’ll never recover the loss even under the most optimistic assumptions for harvesting future tax losses.

#3: Everyone Needs an Emergency Fund! (Not everyone)

The almost universally accepted wisdom is that not only do we all need an emergency fund, but building that emergency fund is the number one priority of personal finance, taking higher priority than saving for retirement. Some even want you to start an emergency fund before paying off high-interest credit card debt. That’s nuts!

I laid out our plan for having no emergency fund (featured on RockstarFinance on 5/25/2016!) and two follow-up posts as well to debunk some of the common arguments in favor of the emergency fund. With our savings rate of 60%+ we are usually able to finance all expected and unexpected expenses out of our current cash flow.

Just to be sure, I’m not saying that anyone should forego savings altogether. An emergency fund is better than having no savings at all. I merely take offense in keeping large amounts of money in unproductive, low-interest money market accounts. I consider our entire portfolio our emergency fund and like to put our hard-earned dollars where they can work harder for us: in equity and real estate investments.

Am I not afraid of having to dig into an equity portfolio right when the market is down? Yes, to a degree, but as a passive investor, I try to stay away from timing the market. Keeping cash on the sidelines for fear of a market decline exactly coinciding with a cash flow need is market timing on steroids!

#4: Use bonds to diversify equity risk. (Don’t get your hopes up too high!)

What was the correlation between an all-equity portfolio and a portfolio with 80% equities and 20% bonds over the last ten years? 0.998. For all practical purposes, that’s a correlation of one.

To be sure, the 80/20 portfolio has a lower volatility; pretty much exactly 20% lower. But that volatility reduction came from the lower equity weight and had little to do with bonds reducing risk. In fact, simply keeping the 20% in a money market account would have achieved that exact same volatility reduction. That said, bonds delivered very nice average returns over the last few years, so the appeal of an 80/20 stock/bond portfolio came mostly from better returns than investing 20% in a money market account.

But that could change in the future; yields have been heading higher since November 8th, and bonds could have a rocky road ahead of them. In addition to having little diversification, they could also lose their potential to boost returns.

#5: Bonds are safer than stocks. (Depends on the horizon!)

Of course, stocks tend to have higher daily, weekly, monthly, even annual volatility than most bonds. No discussion about that. So, for folks with a very short investment horizon stocks may seem unattractive. But over a 50-year investment horizon, we should weigh the short-term volatility with the long-term sustainability of funding our expenses in retirement.

There have been extended periods of very poor bond returns. For example, there was one 80-year window (!) of zero real (inflation adjusted) bond returns from about 1900 to 1982. True, equities can be volatile in the short-term. You see overreactions both on the upside (late 1990s) and downside (2009). But equities normally return to a long-term trend growth path within a few years, see chart below.

Bonds, on the other hand, can move sideways for many decades. That’s poison for the retiree who relies on a nest egg to last for half a century! And what’s worse, the spectacular run of good bond returns that started in 1982, might be overdue for a reversal as has happened with the other two bond bull markets in the late 1800s and 1920-1940. I’m not saying that this will start now, but bonds did get crushed after the spike in interest rates since November 8th!

bonds riskier than stocks
[Figure 2: Which one is the risky asset now? Cumulative real total returns (CPI-Adjusted) of the S&P 500 and 10-year U.S. government bonds. January 1871- December 2015.]

So, to stay with our “financial rebel” theme, just like our American Founding Fathers preferred “dangerous liberty over peaceful servitude,” this writer likes dangerous equity volatility more than running out of money for sure with low volatility bonds!

#6: Cash serves as great bear market insurance in retirement. (Think again)

The idea sounds almost too good to be true: simply keep a few years’ worth of expenses in a money market account, enough to fund expenses during the occasional bear market, and we never have to worry about market volatility. Unfortunately, it is too good to be true.

The first issue is opportunity cost. The cash cushion is a little bit like leaving the house every morning wearing a Robin Hood costume, just in case I might come across a fancy-dress party that day. That strategy works beautifully every year in late October, but it would be a bit of a burden for the rest of the year. Likewise, the opportunity cost of carrying too much unneeded cash when there isn’t a bear market can compromise the average portfolio return. Remember, timing Halloween parties in late October is easier than timing the next bear market!

But even if you do get lucky and have the cash cushion ready to go at the onset of a bear market, it’s not going to make much of a difference. If you were unlucky and started your retirement too close to the market peak in 2000, then with or without the cash cushion your retirement portfolio would have been seriously compromised; we are talking about “going back to work” compromised! True, the portfolio with the cash cushion would have been slightly less compromised than an all-equity portfolio, but still seriously underwater. The cash cushion is no panacea because you will have to replenish the cash cushion right around the time when the stock market rallies again.

One way or another, opportunity costs will catch up with you! It’s very simple: there is no true bear market insurance. A good start would be using a lower withdrawal rate (see #1 above) and being prepared for plan B, plan C, and all the way to plan J (Money).

#7: Tax loss harvesting saves you a ton! (It’s nice, but you won’t get rich)

As mentioned above, I do the tax loss harvesting by hand without any help from the Robo-Advisers and my guide on how to be your own Robo-Adviser has a lot of the details on how to do this right.

Did I become rich from tax loss harvesting? Absolutely not! The claims of 0.7% or even north of 1% of additional annual returns from tax-loss harvesting claimed by the Robo-Advisers are vastly exaggerated. If you are like me your taxable portfolio is the result of many years of regular investments. So, even a bear market with a 20%+ drop right now would result in much less than 20% harvestable losses. I have some tax lots that would require a 50%, even all the way up to 70% drop in the stock market before generating even a single tax loss dollar.

My personal estimate is that I have generated less than 0.10% in additional annual return from tax-loss harvesting so far. Going forward, especially once I retire, the benefit will likely go away altogether.

I put together some calculations on how much extra return you’ll likely generate depending on different marginal tax rate scenarios and portfolio sizes. Under most realistic assumptions, the benefit is even lower than the 0.15% to 0.35% Robo-Advisers fees. It’s a benefit large enough to not leave on the table, but don’t get your hopes up too high. And don’t pay anyone 0.35% p.a. to do it for you, either!

I’ll now be taking all questions and concerns below 🙂

That Time I Maximized Regret

My home has two HVAC systems, one for the downstairs and one for the upstairs bedrooms and bathrooms. I had both installed after we moved here eleven years ago.

Eleven years isn’t an awfully long lifespan for a modern HVAC system; one hopes to get 15 years and perhaps 20 years of service before replacing them.

Ours had become unreliable. We had failures at least once in each of the past three winters so I decided to replace the downstairs unit with a more efficient gas furnace last fall. I hoped to get a year or two more service from the upstairs unit and reasoned that, even if it failed, we could limp along with the new downstairs unit while we repaired the upstairs. Besides, squeezing a couple more years out of the old unit and postponing the replacement costs was only good economics, right?

Last week, the Raleigh area experienced the worst cold spell in the past 130 years according to local news reports and measured at RDU. No doubt it was actually longer but they’ve only kept records for 130 years. Not surprisingly, our upstairs unit failed (heating systems rarely fail around here in July) plunging our bedroom and bathroom into a permafrost zone as temperatures outside fell to as low as 4º F.

(As an aside, please note that improbable events are not impossible, like 4º low temperatures in Chapel Hill, NC and investment portfolio failures, but I digress.)

Now, that may sound wimpy to the sturdy folks of Embarrass, Minnesota, but let’s just say that I had different expectations when I retired to North Carolina.

Given the cold spell’s demand on local HVAC service companies, it took two days to have a repairman spend 10 minutes determining that the cost of repairs would be nearly the cost of installing a new system. I learned this late Friday afternoon and had to wait until Monday morning to have the new furnace installed.We lost heat on Wednesday, the day the cold spell began, and had an operational system again on Monday evening, the day the cold spell ended, proving for the umpteenth time that Murphy was not only a genius but also an optimist.

For five days, I slept in long flannel pajamas, wool socks, and a hoodie with a hot water bottle near my feet. (And let me just throw this out there: hot water bottles are a delight that we maybe shouldn’t relegate to history’s dustbin, as they say.)

I learned to shower, shave and get dressed in under 90 seconds.

Had I followed my own advice when deciding to delay installation of the upstairs heat pump instead of replacing both during the perfect temperatures last fall, I would have anticipated my regret from all possible outcomes.

Had I replaced the upstairs system last fall and missed out on the few dollars of savings I would gain from delaying, my inner financial analyst would have regretted the lost savings opportunity.

I would have anticipated regretting much more my actual outcome, a week of frosty indoor temperatures for the want of saving a hundred bucks or so.

By failing to give my decision the gravity it deserved, I maximized regret.

To put this into a retirement planning context, consider the ever-popular «probability of ruin.» We can build a retirement plan that has «only» a 1-in-10 to 1-in-20 chance that we will outlive our savings, but it’s probably worth a few minutes considering how much we might regret our plan if we lost that bet.

To my credit, I avoided the Tech Crash by reasoning that, while I would regret selling my tech stocks if prices continued to soar, I would regret far more losing the financial security I had already attained on paper.

A dear friend lost his entire $4M retirement savings when MCI crashed. He was nearing retirement age. That’s a lot of regret.

It was 34º when we headed for the coffee shop the morning after we got the heat fixed.

It felt downright balmy.

Minimizing Regret

I’m reading Algorithms to Live By: The Computer Science of Human Decisionsby Brian Christian and Tom Griffiths[1]. Following is an excerpt.

Regret can also be highly motivating. Before he decided to start Amazon.com, Jeff Bezos had a secure and well-paid position at the investment company D. E. Shaw & Co. in New York. Starting an online bookstore in Seattle was going to be a big leap—something that his boss (that’s D. E. Shaw) advised him to think about carefully. Says Bezos:

«The framework I found, which made the decision incredibly easy, was what I called—which only a nerd would call—a “regret minimization framework.” So I wanted to project myself forward to age 80 and say, “Okay, now I’m looking back on my life. I want to have minimized the number of regrets I have.” I knew that when I was 80 I was not going to regret having tried this. I was not going to regret trying to participate in this thing called the Internet that I thought was going to be a really big deal. I knew that if I failed I wouldn’t regret that, but I knew the one thing I might regret is not ever having tried. I knew that that would haunt me every day, and so, when I thought about it that way it was an incredibly easy decision.»

Regret minimization can be a powerful tool for making retirement planning decisions. I have always used a similar approach to my critical life decisions. I wrote about it in a post some time back, but my process works like this.

I imagine myself at some point in the future long after having made the decision and I imagine that it turned out very badly. My future self then asks, «Do I still think it was a good decision? Would I make it again?» If my future self answers no, then my present self doesn’t make that decision.

Even though I assume my decision turned out badly, I recognize that good decisions can have bad outcomes. I can accept bad outcomes if I made the best decision available to me at the time. A poor decision that ends well is just dumb luck.

Imagine that you are a basketball player about to take a game-winning (or losing) shot. Your shot is a low-percentage gamble but you can also pass to a teammate who has a better shot.

If you take the shot and win, you will have a great outcome from a poor decision. Try that often and you will lose a lot.

If you pass to the open teammate and he misses, you suffer a poor outcome from a good decision. Make that kind of decision often and you’ll win more than you lose.

The fact that nearly all retirement finance decisions are probabilistic means that we can make bad decisions that turn out well or good decisions that turn out badly. To complicate matters, our own retirement is a one-time event. If we could have many retirements, a 90% probability of success would mean that 90% of our retirements would be successful, but we only get one. We can and should bet on the 90% probability but if we lose the bet, 100% of our outcomes (there will only be one) will be bad. When we lose the bet, the outcome won’t be bad 10% of the time or only 10% bad.

Still, the better strategy is to consistently make good decisions or «the best bets», if you prefer. While we only get one shot at claiming Social Security benefits, for example, we will make many other retirement decisions and if we choose the 90% probability bet every time we are likely to win most of them.

Recently, a reader commented that since we can’t be sure that delaying Social Security benefits will have a good outcome we really can’t make a blanket assessment of the strategy. We can’t make a blanket statement about the outcomes, true enough, but we can make a blanket statement about the quality of the decision.

Minimizing regret is an excellent tool for deciding when to claim Social Security benefits, assuming your financial circumstances afford you the option.

Retirees who delay claiming and die early in retirement might regret that they could have received greater benefits had they not delayed, at least to the extent that people who are no longer living have regrets.

Married retirees, however, will have surviving spouses whose survivors benefits may be limited (if they are the lower earner) by the higher-earning spouse claiming early and that spouse may not regret your decision to delay even if you do regret it.

Retirees who claim early and live a very long time will likely regret their lower lifetime benefits. Widows who live on reduced survivors benefits long after their husband passes because he claimed early might regret having let him make the financial decisions.

We might regret delaying claiming if Social Security were to be abandoned entirely by the federal government early in our retirement. I wouldn’t regret my decision to delay in that scenario because I assign a low probability to my cohort losing those benefits. After that outcome, I believe I would say that I would make the same decision under the same circumstances if I had it to do over.

You, however, might not agree with that assessment or might be substantially younger and have a different outlook. Regret minimization can be subjective and risk can be dependent on one’s life expectancy.

Regret can be a personal thing, though it can often be measured objectively in dollars. The dollar amount of regret can be defined as the difference between the outcome you expect and the outcome that would have resulted from clairvoyance, ie., from knowing the best answer. If the best possible strategy would have resulted in a $100 profit and yours results in $90, you have $10 of regret.One way to look at the Social Security claiming decision is to consider how much you or your surviving spouse would regret that decision in various scenarios and to make the choice based on avoiding scenarios with the greatest regret. This process won’t favor delaying claims for every person in every scenario, but often it will.

Minimizing regret doesn’t have to be the only tool you use for a specific decision but it may provide an additional perspective. Optimization tools like MaximizeMySocial Security[2], Financial Engines[3] or AARP[4], for example, also provide useful input.

Likewise, Social Security claiming isn’t the only retirement decision for which regret minimization might be useful. Let’s look at asset allocation.

I am thoroughly enjoying Algorithms and plan to read it again as soon as I finish. Be forewarned, however, that if you’re not a computer scientist, you might be happier reading tax tables. That having been said, here’s another excerpt that I enjoyed.

Harry Markowitz won the Nobel Prize in Economics for developing Modern Portfolio Theory (MPT). MPT calculates an «efficient frontier» of portfolio allocations that maximizes portfolio returns for various levels of market risk.

MPT determines an optimal asset allocation based on risk tolerance, market volatility, risk-free rates and the covariance of asset classes.

How did the father of Modern Portfolio Theory allocate the assets in his own retirement portfolio?

«I should have computed the historical covariances of the asset classes and drawn an efficient frontier. Instead, I visualized my grief if the stock market went way up and I wasn’t in it—or if it went way down and I was completely in it. My intention was to minimize my future regret. So I split my contributions fifty-fifty between bonds and equities.»

Interestingly, a 50% equity allocation falls into the sweet spot of several very different research strategies. Using a complicated simulation strategy, Gordon Irlam found that the 95% confidence interval for the optimal asset allocation ranges from 10% to 80% equities.

Using a much simpler simulation strategy, William Bengen’s work on sustainable withdrawal rates shows optimum asset allocations between about 35% and 60%.

In a paper entitled Nearly optimal asset allocations in retirement[5], Wade Pfau concludes, «with Monte Carlo simulations based on historical data parameters, a 4.4 percent withdrawal rate for a 30-year horizon could be supported with a 10 percent chance of failure using a 50/50 asset allocation of stocks and bonds. But the range of stock allocations supporting a withdrawal rate within 0.1 percentage points of this maximum extend from 27 to 87 percent.»

That’s a lot of research to find answers consistent with «My intention was to minimize my future regret. . . So I split my contributions fifty-fifty.«

The Markowitz story also struck a chord with me on a topic to which I have been giving a great deal of thought lately.

We have faster computers, better algorithms, and more in-depth research into retirement financial planning but very little empirical evidence to show how much they actually improve outcomes.

There is talk of «evidence-based» strategies, but retirement research doesn’t work like medical research. We can’t ask one group of retirees to use a portfolio-spending strategy and a control group to buy annuities and compare the results after 30 years. Even if we could, market uncertainty means we can’t expect similar outcomes the next time we run the experiment.

What we will find is evidence of uncertainty.

If Harry Markowitz thought that a fifty-fifty regret-minimizing strategy was preferable to mean-variance optimization, I won’t argue.

Lessons from 2017

Lesson #1 – the madness of crowds

The multiplying frenzy surrounding bitcoin is being fed by little more than price momentum. There has been no commensurate (or even perceptible) change in the fundamental prospects of the crypto-currency this year. We continue to argue that unless bitcoin finds itself a role in the global economy, its intrinsic value is essentially zero. We still see this role as elusive, and see the arguments behind the idea of a future ‘bitcoin standard’, as economically illiterate. However, fear of missing out can be a powerful force in investments when market values move as fast and as far as bitcoin’s has in the last several years. Bitcoin does not yet fulfil any of the criteria that we would look for in an investible asset and we would continue to advise extreme caution. Most boxes on the bubble checklist are already ticked, now all we await is a catalyst to spur the rout. This melee also serves to provide contrast to the other areas of the world’s capital markets that are apparently in bubble territory. Bonds are expensive, but we still expect most to be paid back at par. Meanwhile equity market valuations are also above long term averages, but with perhaps greater justification than is generally realised. Neither asset classes fit the description nor feel of a bubble.

Lesson #2 – Politics (still) doesn’t always matter

This was another year in which political bark and bite didn’t match up. The themes that dominated many outlook documents at the start of the year were protectionism, populism and the end of globalisation. French elections were seen as just another staging post in the inexorable return of nativist politics. Europe and emerging markets were generally seen as no-go zones by many investors as a result. In the event, European and Asian emerging market equities have been two of the stellar performers of the year so far. A sharp cyclical pick-up in global trade has been an important input into that story. Ironically, this pick-up is in large part down to the strength of US consumption, where trends in global trade tend to be forged. None of this is to argue that politics can’t be influential. However, we need to be wary of the priority many seem to routinely give to political events with regard to investment returns. We are not political strategists and cannot pretend to be able to be able to scent the changes in socio-political direction quicker or better than anyone else. The work that we have done over the last few years has instead focused on the constitutional restraints – what and how much could a particular protagonist, or group of protagonists, actually do within the confines of the various constitutions if they did make it into office? For the most part, our (admittedly guarded) faith in these restraints, alongside a degree of economic self-interest, continues to be rewarded.

Lesson #3 – The difficulties of forecasting inflation

We’ve long argued that the relationship between growth and inflation is a loose one, an idea that this year has served to reinforce. Growth has accelerated, unemployment in the developed world is close to three-decade lows, and yet still wages remain muted and the wider forces of inflation in abeyance. For our part, we do continue to see those forces slowly gathering in coming years, amidst that diminishing economic headroom. However, it remains very difficult to pin down precisely how much slack remains; from poor and incomplete labour market data to the difficulties inherent in measuring productivity in the modern, services dominated, world, it is easy to understand why an accurate estimation of output gaps eludes even the planet’s greatest minds. What we can say is that there is probably less slack than there was a year ago, and if the world economy continues on its current trajectory, the same will be true of next year. All this is important, as the main risk to our still benign outlook for markets is a sharper than currently forecast inflation pickup. We do not want central bankers hurried as they try to delicately untangle themselves from the extreme, and successful, monetary experiments of the post-crisis period.

Investment Conclusion

These are obviously not the only lessons to be learnt this year; markets are always teaching us humility for one thing. However, these three are likely to be helpful for us all to remember as we go into another year with a crowded political calendar and a few more grey hairs.

Japan — Q4 Update

Top performer

As 2017 draws to a close, most risk assets have outperformed year-to-date amidst the best global economic backdrop we’ve seen in years. The Japanese stock market stands out as one of the star outperformers, having returned 22% year-to-date against the MSCI World’s return of 19%. In this week’s In Focus, we explain in detail some of the tailwinds for Japanese outperformance, and how Japan fits into our current regional equity allocation.

Economic momentum

With 60% of revenues derived domestically, one major tailwind for Japanese stocks has been the health of the domestic economy. Japan is currently enjoying its second longest period of expansion in post-war history, with Q3 GDP growth printing at 1.7% y/y, above what most experts deem to be trend growth. Initially, the upturn was driven by broad-based export demand from key trading partners like China and the US. However, there is now growing evidence that domestic demand is also finally gaining traction. Domestic business confidence has risen to its highest level since 1991, mirrored by measures of consumer confidence. The latter speaks to improving income and employment conditions with the unemployment rate falling to a 23-year low of 2.8% and the jobs-to-applicants ratio nearing all time highs. This, in turn, is helping to drive consumer spending.

Meanwhile, both fiscal and monetary policies have been, and are expected to remain, supportive of growth. The ruling coalition’s solid victory in the October parliamentary elections has given Prime Minister Abe the go-ahead to proceed with a new ¥2 trillion supplementary budget. While the last supplementary budget centred on infrastructure investments and disaster relief, the next is likely to be focused more on populist measures such as educational support for lower income households and increased healthcare spending on Japan’s rapidly ageing populace. Moreover, the Abe administration is mulling corporate tax incentives in order to encourage firms to boost wages and productivity-enhancing capex. These fiscal plans are expansionary in nature, and should, at the margin, provide an additional boost to growth on implementation.

On the monetary side, while Japan has managed to pull itself out of sustained deflation, core inflation remains well below the Bank of Japan’s 2% target. Therefore, we see no change to the Bank of Japan’s accommodative stance as we move into 2018.

The outlook for Japanese growth remains positive looking into 2018. To us, the Japanese economy is likely to continue to benefit from robust domestic demand, expansionary fiscal and monetary policies, as well as further external demand from major trading partners.

Rising profitability

The positive economic backdrop – both domestically and externally – has coincided with improving corporate profitability for Japanese companies. Corporate profits have rebounded strongly from the 2016 downturn, and are at post-Crisis highs. As expected, the pro-cyclical sectors like technology and industrials have led the earnings charge, while the low yield environment has ensured that the financial sector has lagged. Dividend payout ratios have also risen substantially – a nascent sign that government reforms to alter corporate behaviour and improve shareholder returns may be starting to bear fruit.

Structurally, the Japanese equity market is highly pro-cyclical, with consumer discretionary, industrials and technology stocks making up more than half the market capitalisation. The corollary is that earnings leverage to improving economic conditions is strong, compared with other markets. Our outlook for continued domestic economic expansion and a supportive external backdrop heralds further upside for aggregate profitability over the medium term.

Investment conclusion

Japan’s outperformance this year hinged on some of the common macro themes we’ve witnessed in global equity markets this year – a robust domestic backdrop, strong external demand, and rebounding corporate profitability. Based on our preferred lead indicators, we think that global growth and trade momentum should be sustained as we move into 2018 – a net positive for the more cyclically-levered Japanese equity market. All of this argues for investors to have some, primarily hedged, exposure to Japanese equities. However, for the moment, we retain larger relative positions in Continental European and US equities, where we still have higher conviction in the path of corporate profitability.

Opportunity in India?

“India may be a land of over 100 problems, but it is also a place for a billion solutions” – Kailesh Satyarthi

Changes are afoot in India, changes that will likely raise the sustainable growth rate for the Indian economy. This week, we examine some of the likely effects of these changes and how they might eventually interact with the country’s equity markets.

The black economy…

For some time, the sheer scale of India’s ‘unofficial economy’ has been seen as a key impediment to India’s long-term growth prospects. Estimated by some to represent close to two-thirds of the total economy, the so-called ‘black economy’ generates more income by a distance than agriculture and industry together. Various efforts have been made down the years to bring these dark, untaxable, transactions into the economic light. From Aadhaar (a unique 12-digit number that creates a digital identity for more than 1 billion people, enabling individuals to be rapidly identified using biometric data) to the introduction this year of the Goods and Services Tax (GST) (replacing the patchwork of indirect taxes and duties), these efforts seem to be starting to bear fruit.

By some estimates, this current administration’s recent efforts alone have already increased the number of taxpayers by 20-25% and are thus expected to significantly increase future tax revenues. In a country where the growth prospects have long been blighted by the government’s inability to fund much needed infrastructure, this prospective revenue boost should prove very helpful.

In addition, the rationalisation of the tax regime should lead to improved productivity and lower compliance costs, as interstate supply chains will basically be treated the same as intrastate production. The government’s recent Economic Survey estimated that Indian interstate trade accounted for 54% of GDP, well below that of the US or China, though higher than Canada or Indonesia, which have more challenging geographical barriers to trade. Assuming a convergence with levels of internal trade in the US or China, the GST could provide a further boost to output growth.

Bank bailout

Another long-standing impediment to growth has been the parlous state of the state-owned banks’ balance sheets. Bad debt ratios doubled over the last year as the Reserve Bank of India (RBI) concluded an asset quality review that forced some accounting realism onto the banks. However, recognising these losses left banks unprofitable, undercapitalised and unable to lend to the real economy. On 24 October, India’s government bowed to the inevitable and announced that it would inject 2.1 trillion rupees into its state-owned banks.

This bank bailout was cleverly structured to take advantage of the demonetisation experiment, which left the banking system flush with excess liquidity as ‘mattress cash’ was converted into deposits. In the scheme, the RBI will drain excess liquidity from the system, and the government will inject 1.35 trillion rupees into the banks as equity capital. All of this should help to unclog the credit channel, and unleash some of the pent-up investment forces.

As a result of these wide-ranging efforts to restructure and streamline the economy, India has leapt up some 30 places to 100 in the World Bank’s Ease of Doing Business report for 2018. Of the 10 areas covered by the report, India made it easier to conduct business in eight of them, with the biggest improvements being seen in the areas of resolving insolvency, getting credit and paying taxes.

Investment conclusion

So, the growth outlook is improving, but what does that mean for investors? The link between the growth of a country’s output and the corporate profits quoted on its domestic indices can be muddy as we’ve explored before. Sector composition, government interference and the influence of overseas profits are among the potentially relevant factors. However, in spite of all this, there has been a statistically substantial relationship between the economic performance of India relative to the wider emerging Asia block and relative equity market performance. With India’s long attractive growth prospects now on a more solid footing, we see Indian stocks as a good addition to our emerging markets triumvirate of China, Korea and Taiwan

A practical guide to burial and cremation

Thinking about your own funeral can be difficult, but there are some practical arrangements you should consider.


Burial vs cremation

Firstly, would you prefer burial, or cremation? Burial is the traditional option for many people. However, there are a number of disadvantages to burial:

  • burial plots can be more expensive over the long term, than memorials which hold ashes
  • burials generally need to be done more quickly than cremations
  • cemetery restrictions may limit personalisation options for graveside adornments, like monuments or flowers, and
  • laws and logistics make it difficult to move a body after it has been buried.

Cremation offers some advantages:

  • returning remains home, for families who live in different countries, is more straightforward with cremations
  • families who want to move overseas can take the ashes of their loved one with them, and
  • cremation allows more time for family members to travel.

It’s possible to have a permanent memorial set up in a cemetery for both burial and cremation. Creating a dedicated place for future generations to pay their respects and reflect on their heritage is a way to keep family legacies alive.

Religious exceptions

With the exception of Buddhism and Hinduism, most religions prefer burial over cremation. There are exceptions, but this should be discussed with your family or religious leader.

Religions that support burial

Judaism, Islam and Eastern Orthodox (including Greek Ortrhodox and Russian Orthodox) faiths will only accept burial, not cremation.

Religions that support cremation

Buddhism and Hinduism both have strong associations with cremation. Followers believe that cremation is required so that the soul can be released from the cycle of reincarnation.

Religions that are open to both burial and cremation

Catholic, Anglican, Methodist and Baptist faiths now accept cremation, although burial has always been the preferred option. Burial and cremation are both accepted in Aboriginal spirituality practices and by Jehovah’s Witnesses.

Cost per state

There are no rules around the cost for funerals, regardless of whether they’re cremations or burials. Like a wedding, more elaborate events will cost more. Adding more expensive coffins, floral arrangements and other features in the service can increase the cost up to more than $15,000.

The average cost for a burial in any Australian State or Territory is just over $7,000 and just under $7,000 for a cremation.

 

City Average burial cost Average cremation cost
Sydney $8,225 $7,607
Perth $8,082 $7,402
Melbourne $7,961 $7,324
Brisbane $7,611 $7,086
Adelaide $6,992 $6,492
Hobart $6,752 $6,389
Canberra $6,399 $6,000
Total average cost $7,432 $6,900

 

Source: finder.com.au. The Cost of a Funeral in Australia

The costs vary greatly between burial and cremation when it comes to the interment, the term for placing a body in the ground or ashes into a memorial. For example, a traditional allotment burial allotment for 99 years at Sydney’s Waverley Cemetery costs around $61,000, while a plaque in the wall of the memorial garden for the same duration will cost around $10,000. Interment is a lot more affordable in country areas, but may not be as easy for family members to visit.

Talk to your family

It’s important to talk to your family about your wishes, and plan ahead, so they know what you want and are set up to be able to provide it. Funeral insurance is a way to make the process easier for your family at an unsettling time so they can confidently celebrate the life you shared together.

Could your savings cover the cost of all the added expenses that come with a funeral? Visit Insuranceline to find out how Funeral Insurance could help alleviate the cost to your family in case something happened to you.

Mapping brain lesions for clues to criminal behavior

Harvard researchers worked with colleagues to map brain lesions in 17 patients who exhibited criminal behavior after — but not before — the lesions appeared.
 Researchers who studied brain lesions in individuals exhibiting criminal behavior found that the injuries fell within a particular brain network involved in moral decision-making.

The findings follow past studies showing that the brains of some criminals exhibit abnormalities, but in most cases without determining a clear association between the injury and the behavior. The new study is published in the Proceedings of the National Academy of Sciences.

“Our lab has developed a new technique for understanding neuropsychiatric symptoms based on focal brain lesions and a wiring diagram of the human brain,” said senior author Michael Fox, an assistant professor of neurology at Harvard Medical School and the associate director of the Deep Brain Stimulation Program at Beth Israel Deaconess Medical Center. “We’ve successfully applied this technique to hallucinations, delusions, involuntary movements, and coma — and in perhaps its most interesting application to date, we applied it to criminality.”

Perhaps the most famous case in decades of interest on possible links between brain injury and criminal behavior is that of Charles Whitman, who was found to have a brain tumor after killing 14 people in the Texas Tower massacre of 1966.

First author Richard Darby, formerly of BIDMC and now an assistant professor of neurology at Vanderbilt University, noted that he personally became interested in how neurological diseases might cause criminal behavior after caring for patients with frontotemporal dementia, who often commit nonviolent crimes as a result of the condition.

To investigate the issue, Fox, Darby, and their colleagues systematically mapped brain lesions in 17 patients who exhibited criminal behavior after — but not before — the lesions appeared. Analyses revealed that the lesions were located in diverse brain regions, but all mapped to a common network.

“We found that this network was involved in moral decision-making in normal people, perhaps giving a reason for why brain lesions in these locations would make patients more likely to behave criminally,” said Darby. The network is not involved with cognition control or empathy.

The findings were supported in tests of a separate group of 23 cases in which the timing between brain lesions and criminal behavior was implied but not definitive.

Researchers were quick to note that not all individuals with brain lesions in the network identified in the study will commit crimes. Genetic, environmental, and social factors are also likely to be important.

“We don’t yet know the predictive value of this approach,” said Fox. “For example, if a brain lesion falls outside our network, does that mean it has nothing to do with criminal behavior? Similarly, we don’t know the percentage of patients with lesions within our network who will commit crimes.”

Darby added that it is important to consider how the study’s findings should not be used.

“Our results can help to understand how brain dysfunction can contribute to criminal behavior, which may serve as an important step toward prevention or even treatment,” he said. “However, the presence of a brain lesion cannot tell us whether or not we should hold someone legally responsible for their behavior. This is ultimately a question society must answer.”

Indeed, doctors, neuroscientists, lawyers, and judges all struggle with criminal behavior when a brain lesion is present. Is the patient responsible? Should he or she be punished in the same way as people without a lesion? Is criminal behavior different than other symptoms suffered by patients after a brain lesion, such as paralysis or speech trouble?

“The results don’t answer these questions, but rather highlight their importance,” said Fox.

This work was supported by funding from the Sidney R. Baer Jr. Foundation, the National Institutes of Health, the Dystonia Foundation, the Nancy Lurie Marks Family Foundation, the Alzheimer’s Association, and the BrightFocus Foundation.

Driven by ego? This book’s for you

Q&A

Mark Epstein

GAZETTE: The subtitle of your new book seems to suggest the impossible. Can you talk about it, and your thoughts on the challenge of making peace with ego?

EPSTEIN: I wanted to write from a place of being a mature therapist. A lot of my earlier books were written from the perspective of having just discovered Buddhism. This is 40 years later and I thought it was worth writing from the place I am at, having had a psychiatry practice for 35 years. I’ve always been very cautious in laying mindfulness on my patients, who might not be so interested. I’ve tried to work in my therapy practice in a traditional manner to let a patient’s concern take the lead, but the Buddhist influence on me, which really came first, does influence the way I think and it must influence the way I work. I was letting it happen on its own accord rather than striking a Buddhist posture. What I realized is that the ego is the common ground between Western psychotherapy and Buddhist psychology. Both recognize that an overreliance on the ego is a cause for suffering.

All too often we think we are the ego and that identification constrains us, limits us, and makes us less than we could be. The ego is all about maintaining control. It comes from a place of fear and separation. It emerges in childhood when we are just beginning to figure out who we are. We need the ego, but if we give it full reign we actually become more insecure. We think of it as giving us high self-esteem, but the ego can be [just] as attached to self-judgment and self-loathing. It’s always trying to think its way out of whatever predicament it finds itself in, and it doesn’t make room for the more mysterious qualities that also constitute us. The point is not to get rid of the ego. It’s to change our relationship to it — it not being our master and we its slave.

GAZETTE: Patients come to you with their own experiences and struggles. How do you determine how to use Buddhism in therapy, and vice versa?

EPSTEIN: The goals of both Buddhism and Western psychotherapy are interlocking. I see them as threefold. Firstly, we all need a sufficient amount of self-esteem. We have to feel good enough about ourselves to function sufficiently in the world. Buddhism recognizes this in the concept of the “precious human birth,” and Western therapy is very concerned with healing the psyche’s childhood scars. Some amount of ego or self is very important. But we also need the ability to observe our own mind, thoughts, and feelings. This is the second important thing. That’s something that both meditation and psychotherapy encourage, in different ways. Therapy is built on a therapeutic split in the ego that promotes a kind of watchfulness of our inner lives. Meditation does that by training the mind to observe itself. Finally, both therapy and meditation can help us get past the ego’s need to control everything. There’s so much in life we can’t control. In my work as a therapist, influenced so much by Buddhism, I think I’m working on all three levels depending on what people need.

GAZETTE: How did Buddhism play a role in your time at Harvard?

EPSTEIN: I was fortunate to actually discover Buddhism in a world religion class my freshman year. It was a class I took by chance because I met someone taking it and she seemed interesting so I followed her. I had no real interest in world religion, but the whole first half of the semester was Eastern religion and I was really excited about what I learned.

We read a collection of Buddhist verse called the Dhammapada, which is written for laypeople. I loved it. It really spoke to me. There is a chapter called “Mind” that I identified with. It described an anxious mind as a fish flapping on dry ground. That opened up the Buddhist world for me. There were a lot of later courses that touched on Buddhism peripherally and I found them all, and created a few for myself in independent study.

«All too often we think we are the ego and that identification constrains us, limits us, and makes us less than we could be.»

— Mark Epstein

© Larry Bercow NYC

 

GAZETTE: You worked as an apprentice for the Dalai Lama’s physician during your time at HMS. How did that experience shape your medical journey?

EPSTEIN: During my fourth year, I, along with a Herbert Benson [a cardiologist and a pioneer in mind-body medicine], got a grant from the National Science Foundation to travel to India to do physiological measurements on the Tibetan monks who were practicing a kind of heat yoga where they could raise their temperatures at will. As part of that, I spent a lot of time with the Dalai Lama’s physician every morning. One of the things I discovered working with the Tibetan Buddhist tradition was that they have an understanding of a meditation-induced anxiety disorder. It’s possible to strive with too much effort, even in meditation, which makes people more stressed. The Buddhists were very familiar with this. As a young psychiatrist in training, I had some indication this might be true, but I was very interested to find that this was a well-documented phenomenon among the Tibetans.

GAZETTE: “Advice Not Given” is filled with personal stories — yours and your patients’. Is there one that stands out?

EPSTEIN: One that comes to mind is of a teacher of Buddhism who discovered he had colon cancer after completing a three-year retreat. One of his students cared for him, and recounted his final words: “No, no, no. Help, help.” She was disturbed because he was so experienced as a meditator: Why would he still have fear at death? But I was comforted by that because it made me feel that any pretense I might have about how it would be for me, I could drop. If there’s one thing we don’t know, it’s how we will be at death. Maybe he was just being honest.

I have some faith as a therapist that if I can encourage my patients to be with their fears in as open and vulnerable a way as this man was, that they will find a way through. It’s the pushing away because we think we’ll be overwhelmed by some sadness or anxiety or shame that keeps us locked up. If we can experience them fully, without aversion, that’s where the sense of freedom comes from.

It’s Okay to not be Okay

We all struggle with moments and experiences that challenge us. That make us scared. Times when we feel frozen, stuck, and hopeless. We feel lost and confused.

Think about a time when you felt this way. What was going on in your head? What emotions were you feeling?

I’m sure I’m not the only one who has felt this way before. A few days ago, I was feeling sick of everything. There was too much to do. I felt like I was running from one thing to the next — and not just physically, but mentally as well. I felt angry at the circumstances I was in, and I desperately wanted it all to just STOP. I needed quiet, peace, and comfort. But in the hustle and bustle of life, I found none.

I felt anxious. Tired. Scared. Angry. Confused. At one point, I even felt that there was simply no point of doing anything at all. Sleep? No. Eat? No. Play? No. Work? No. On the outside, I am sure I looked okay. I can hold things together quite well in times of stress, you see. And so can many of us. We have trained ourselves to appear well and ‘put together’ in these moments because we know that despite feeling frustrated and tired, life still moves on. And so, we ‘suck it up’ and try to carry on.

But inside, I felt awful. I wanted to scream. To tell someone that I was TIRED. I was SAD. I felt so confused at the way I was feeling — I did not want to study or go to work, and yet, I loved these things dearly. I did not want to play or talk to my loved ones or friends, although I knew that these people cared for me. I did not want to sleep, because doing so made me feel like I was running away from my challenges. So, what could I do?

Image result for allow yourself to feel your emotions it is okay to bareAt that moment, I burst. I cried and cried and cried. And you know what? I felt better afterwards. I realized that for so long, I had been holding this pain and stress inside. I was trying so much to show that I was strong, to not let anyone feel my pain. I did not want to hurt my loved ones around me and make them feel sad or worried about me. But crying was immensely therapeutic. Idiscovered that though I am strong, I am also capable of feeling emotions. I am allowed to release my anger, sadness, and frustrations by crying — and that doesn’t make me weak or vulnerable. I am entitled to tell myself when things are tough now, I can still feel worried and scared — and that is normal.

I am learning to let myself feel emotions and express them. This is a big change for me. For so long, I have huddled these feelings inside of me, worried that I will make my family and friends sad. I told myself that I could not cry or be sad because that meant I was weak. But I am learning that all emotions are healthy, as long as I express them in positive and meaningful ways. 

And so after I cried, I felt relieved. Did my problems magically disappear? No. But I felt honest with myself. I realized that I am a strong individual who is not afraid to express sadness, frustration, and fatigue. I am human and I am capable of feeling a range of emotions. That is what makes me in touch with my brain, body, and soul. It is not shameful to cry, just like it is appropriate to laugh. There is a season for all emotions, and expressed appropriately, this can be therapeutic and healthy. And although crying may seem like a ‘depressing’ activity, it is actually very therapeutic to let yourself feel these emotions and take the time to acknowledge that things are tough right now. One day they will get better — and inside, you know that this is true. Your prior experiences have shown you that you are able to defeat these tribulations, and that you are strong enough to pass through your obstacles. 

Image result for this will passYou are okay, just the way you are. Positive emotions, and difficult emotions. Moments of sadness and frustration, and moments of happiness and laughter. You are human — and you are allowed to feel this way. It is okay to not be okay.

But just remember, after you are not ‘okay’, think about what makes you OKAY. Think about how strong, beautiful, capable, and amazing you are. Think about the things that make you proud of yourself. Think about the blessings you have, and the talents you own. Think about the beauties you have experienced, the treasures that make you smile, and the warmth that fills your heart.

Things will be okay. You will be okay. Keep fighting, dear warrior. Because the battle may be tough, but you are tougher.