“Nothing ought to be unexpected by us. We should send our minds forward in advance to meet all problems, and we should consider not what is wont (accustomed) to happen, but what can happen.”
Seneca
My Personal Financial Plan - Safal Niveshak
In the blog post "My Personal Financial Plan" on Safal Niveshak, Vishal Khandelwal shares his approach to personal finance, emphasizing simplicity and clarity in managing finances. Vishal highlights his two-decade experience in investing, during which he has observed a common bias among investors towards complicating their financial strategies. He argues instead for a straightforward, less complex approach to personal finance. His financial plan includes earning more than he spends, saving diligently, maintaining an emergency fund, securing appropriate insurance, investing strategically based on the time horizon of financial needs, avoiding high-cost debt, documenting financial plans, and regularly reviewing the financial strategy to adjust as necessary.
Key Points
Simplicity in Finance: Vishal advocates for a straightforward financial plan to avoid unnecessary complexity.
Financial Strategies:
Earn more money than I need now (amidst too much focus on saving money, working hard to earn more is an underrated idea, but I believe it holds great importance. I can only save so much, but I can work hard to earn much more.)
Save money (first save, then spend)
Emergency fund (around 8-12 months of household expenses, saved in a bank account or liquid fund)
Medical and life/term insurance (I do not need any other forms of insurance)
Invest the rest – (a) Money needed in <5 years – Allocate more to debt (this is money I would need in the short term, and so I focus more on capital protection here than any return), and (b) Money needed in >5 years – Allocate more to equity (this is money I would need in the long term, and so I focus more on capital appreciation that’s faster than rate of inflation. Also, I avoid investments that can destroy this money permanently)
Write a Will (I understood the importance late, but now working towards it)
Avoid debt (all high-cost debt, like credit card debt, personal loans, etc.)
Document (so important to let myself and my family know what I am up to)
Review every 6 months (maybe 12 months. Not to tinker around, but to check if things are moving in the right direction).
Philosophical Insights:
Quotes from Oliver Wendell Holmes and Steve Jobs emphasize the value of achieving simplicity after understanding complexity.
Paul Samuelson’s view aligns with Vishal’s on treating investing as a mundane, not an entertaining, activity, suggesting that excitement in investing often correlates with poor long-term returns.
Key Quotes
“Advice doesn’t have to be complicated to be good.” — Reflecting the overarching theme of simplicity in financial advice.
“Simple can be harder than complex... But it’s worth it in the end because once you get there, you can move mountains.” — Steve Jobs, cited to underscore the efficacy of simplicity.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” — Paul Samuelson, emphasizing the need for a steady, patient approach to investing rather than seeking a thrill.
Why It Matters
Vishal’s approach is significant because it addresses a common pitfall among investors and individuals managing personal finances: the allure of complexity and the mistaken belief that more complicated financial strategies yield better results. By advocating for a simpler, more methodical approach, Vishal provides a blueprint to help individuals avoid common financial mistakes, focus on what truly matters in personal finance, and achieve long-term financial stability and growth. His advice is grounded in decades of personal experience and supported by insights from renowned thinkers, making it practical and philosophically sound. This approach is particularly valuable in an era where financial products and markets are increasingly complex and where there is a risk of being overwhelmed by too many options and too much information.
Cognitive Dissonance (aqr.com)
Cliff Asness of AQR Capital Management explores various paradoxes and contradictions inherent in the investment community's beliefs and practices in his article "Cognitive Dissonance." He points out how investors often hold conflicting views that logically should be hard to reconcile, yet they manage to do so. Asness humorously and critically examines these contradictions, ranging from views on international diversification and ESG investments to attitudes towards private investments, illiquidity, and active management.
Key Points
International Diversification: Asness notes the contradiction in how U.S. investors view international diversification as less beneficial than non-U.S. investors, who see it as perpetually advantageous.
ESG Investments: Investors believe that avoiding "bad companies" improves the world, yet paradoxically, they don't believe shorting these companies could be even more impactful.
Private Investments: The article highlights the irony in investors valuing private investments for making them more patient despite the continuous price changes that they choose to ignore.
Illiquidity: There's a double standard in treating illiquidity as a "bug" that should command a return premium and a "feature" that makes private assets easier to hold without affecting expected returns.
Stock Investments and Alternatives: Investors trust in the long-term benefits of stocks despite potential severe downturns, yet they lack patience with uncorrelated alternatives during their down periods.
Active Management: There's a belief in active managers' success in long-only stock picks, but skepticism remains if the no-shorting constraint is relaxed.
Market Efficiency and Technology: Asness discusses the belief in market efficiency increasing due to technological advances despite evidence of inefficiencies like meme stocks and high valuations for speculative assets.
Leverage vs. Concentrated Bets: There is an inconsistency in viewing modest leverage as risky while considering large, concentrated bets, such as being 100% in equities, as acceptable.
Performance Evaluation: The practice of performance chasing and evaluating managers based on short-term returns is criticized despite being known as ineffective.
Key Quotes
"It’s not just managers; investors are kind of in on the game."
"Illiquidity is a 'bug'... but illiquidity is also something that makes private assets easier to hold (a 'feature')."
"We believe in stocks for the long run... but if an uncorrelated alternative has a terrible period... we get out."
"We believe we have found skillful active managers... but if we relax the no-shorting constraint, they won’t do a single drop better."
Why It Matters
The discussion of cognitive dissonance in investment strategies is crucial because it highlights the psychological and behavioral challenges facing investors and managers alike. Recognizing these contradictions can lead to more informed, rational decision-making processes in investment management. By addressing these inconsistencies, investors and managers can improve their strategies, align their practices with their beliefs more closely, and ultimately enhance investment outcomes. This article encourages the investment community to acknowledge and address their biases, essential for progress in a complex financial landscape.
Which Alternatives Fit Into Your Portfolio? | Morningstar
The article "Which Alternatives Fit Into Your Portfolio?" by Karen Zaya, Ph.D., on Morningstar, discusses the role and performance of alternative investment strategies. It emphasizes how these alternatives can enhance portfolio diversification beyond traditional asset classes like stocks and bonds. The discussion is anchored around Morningstar's 2024 Diversification Landscape report, which examines various alternative strategies, their market correlations, performance trends, and their role in risk management and portfolio stabilization.
Key Points
Definition and Function of Alternatives: Alternative investments differ fundamentally from standard asset classes, aiming to modify, diversify, or eliminate traditional market risks. They include equity market-neutral, event-driven strategies, options trading, relative value arbitrage, and multi-strategy.
Performance and Correlation: The performance of these alternatives in 2023 varied, with some showing gains (e.g., the options-trading category with a 17.1% return) and others losses (e.g., the systematic trend category with a -4.4% return). Correlation to the equity market also varied, influencing their performance during different market conditions.
Role in Diversification: Alternatives are not primarily seen as return generators in bullish markets but are valued for reducing drawdowns and providing stability. This is evident from their performance during market selloffs, where they tended to lose less or even gain value.
Historical and Longer-Term Trends: Over a longer period, these alternative strategies' correlation and beta values to the equity market have shown significant variation, highlighting their evolving roles in diversification.
Portfolio Implications: Despite underperforming the Morningstar US Market Index in seven out of the past ten years, having a portion of alternatives in a portfolio could improve or match risk-adjusted returns compared to traditional all-equity or balanced portfolios.
Key Quotes
"Not all alternatives offer the same diversification benefits—and even when correlations look high, the degree of market sensitivity makes a big difference here."
"Alternative strategies offer something fundamentally different from mainstream asset classes."
"In seven out of the past 10 calendar years, all seven alternative categories underperformed the Morningstar US Market Index, often by substantial margins."
Why It Matters
The importance of incorporating alternative investments into a portfolio lies in their ability to provide diversification and stability, particularly during volatile or bearish market conditions. By understanding different alternative strategies' specific characteristics and performance metrics, investors and financial advisors can better tailor portfolios to meet long-term financial goals while managing risk effectively. This is especially crucial in a financial landscape where traditional markets may exhibit significant fluctuations, necessitating more robust and diversified investment approaches to safeguard and potentially enhance investor capital.
50 Shades of Passive Investing - The Best Interest
The article "50 Shades of Passive Investing" by Jesse Cramer on The Best Interest blog discusses the complexities and misunderstandings surrounding passive investing. It begins by addressing a common misconception among DIY investors who believe that adopting a passive investment strategy is sufficient for financial success. Cramer highlights that not all passive investments are created equal, with some portfolios being dangerously concentrated and not truly reflective of the broader market.
He explains the fundamental differences between passive and active investing. Passive investing aims to replicate the performance of a market index with minimal management intervention and lower fees, while active investing seeks to outperform the market at potentially higher costs. Cramer argues that passive investing generally outperforms active investing due to lower fees, but it doesn't automatically qualify as a sound investment strategy.
The article points out the pitfalls of overly concentrated passive funds like QQQ, which is heavily tilted towards the technology sector and primarily includes U.S.-based companies, making it risky as a standalone investment strategy. Instead, Cramer promotes diversification and low fees as essential elements for long-term investing, exemplified by funds like VTWAX that offer broad global exposure.
Cramer also discusses the importance of active decision-making in asset allocation within a portfolio that primarily holds passive funds. He explains how investors can still make active choices about their investment proportions and sectors, significantly impacting their portfolio's performance.
Lastly, the piece encourages investors to critically assess their investment choices, understand the roles of various asset classes in their portfolios, and recognize how these decisions align with their financial goals.
Key Points
Misconception of Passive Investing: Many investors mistakenly believe that any form of passive investing guarantees positive outcomes, ignoring the risk of concentration in certain passive funds.
Passive vs. Active Investing: Passive investing typically has lower fees and seeks to match market indices, while active investing aims to outperform the market but often falls short due to higher fees.
Dangers of Concentration: Funds like QQQ demonstrate that passive funds can be overly concentrated in specific sectors or regions, which introduces risk and limits diversification.
Importance of Diversification: Successful long-term investing strategies should involve diversified passive funds like VTWAX, which covers various sectors and geographies.
Active Allocation Decisions: Even within a passive investment framework, allocating assets (e.g., allocating 60% to stocks and 40% to bonds) is an active decision that impacts portfolio performance.
Key Quotes
"Not all passive portfolios are built the same. While some genuinely reflect global investment markets, others are dangerously concentrated."
"Passive investing tends to outperform active investing over long periods, simply as a function of different fees."
"But is QQQ alone a sound investing strategy? No way."
Why It Matters
Understanding the nuances of passive investing is crucial for individual investors aiming to build sustainable, long-term investment portfolios. The article sheds light on the potential pitfalls of poorly understood passive strategies and emphasizes the importance of diversification and informed asset allocation. By highlighting these aspects, Cramer provides valuable insights to help investors avoid common mistakes and make more educated decisions aligning with their financial goals. This is essential in an era where DIY investing is increasingly accessible but often oversimplified in public discourse.
IQ and Job Performance - a brief review (sebjenseb.net)
The article "IQ and Job Performance - a brief review" by Sebastian Jensen discusses the historical and contemporary debates surrounding the use of IQ tests for employee selection and their predictive validity regarding job performance. The article highlights notable legal cases and scientific studies that have influenced perceptions and practices around workplace IQ testing.
Historically, IQ tests were introduced in workplaces like Duke Power’s Dan River Steam Station. This led to a pivotal lawsuit when racial disparities prompted by such tests led to accusations of discriminatory practices. This case culminated in a Supreme Court ruling stating that employment tests must be closely related to job performance if they disproportionately affect minority groups.
The article further discusses a related case involving the New Haven Fire Department, in which the Supreme Court ruled against the invalidation of promotion test results due to racial performance disparities, reinforcing the use of valid tests for employment decisions.
Jensen reviews several scientific debates on the correlation between IQ and job performance, particularly highlighting a meta-analysis by Hunter & Schmidt that found a moderate correlation. This finding is contested and defended in various academic responses that argue over methodological issues such as the correction for test reliability and the construct validity of IQ tests.
Recent studies in military settings, which Jensen references, indicate a stable validity of general cognitive ability (g) in predicting job performance across different jobs and levels of job experience. These findings suggest that cognitive ability remains a significant predictor of job performance.
Key Points
Historical Context: The use of IQ tests in employment settings has a controversial history, often associated with racial discrimination, leading to significant legal challenges.
Supreme Court Decisions: Landmark rulings have clarified that while IQ tests can be used for employment decisions, they must be directly relevant to job performance and not lead to discriminatory impacts.
Scientific Debate: There is ongoing academic debate regarding the predictive validity of IQ tests for job performance. Critics argue about the appropriateness of various statistical corrections and these tests' overall reliability and validity.
Recent Research: Modern studies, particularly in military contexts, support the significance of general cognitive ability as a predictor of job performance, even across diverse jobs and levels of experience.
Practical Implications: The findings have important implications for employment practices, suggesting that intelligently designed cognitive tests can be valuable tools for selecting suitable candidates.
Key Quotes
"Broad aptitude tests used in hiring practices that disparately impact ethnic minorities must be reasonably related to the job."
"Measures of general cognitive ability (g) consistently and positively predict job-specific performance to a statistically and practically significant degree across jobs."
"It’s better to use the best studies (large samples, wide range of jobs, corrections for reliability/RR within sample) from the literature to estimate the true correlation."
Why It Matters
The discussion on IQ and job performance is crucial because it touches upon fairness, efficiency, and legal standards in employment practices. When implemented correctly, the ability to accurately predict job performance using standardized tests can enhance organizational efficiency and provide fair employment opportunities. However, the potential for misuse and the impact of such tests on minority groups necessitate ongoing scrutiny and regulation. This debate also has broader implications for how society values and measures intelligence and competency in professional settings.
10 truths about the stock market 📈 - by Sam Ro, CFA (tker.co)
In his article "10 truths about the stock market," Sam Ro, CFA provides a practical and insightful mental framework for understanding stock market dynamics. The article covers ten foundational truths that help demystify common misconceptions and provide clarity to both novice and seasoned investors. Ro emphasizes the long-term resilience of the market, the inevitability of short-term volatility, and the importance of earnings in driving stock prices. He also discusses the limited predictive power of valuations over short periods and the ever-present nature of market risks. Additionally, Ro highlights the high turnover in the stock market and the distinct differences between the stock market and the broader economy.
Detailed Key Points:
The Long Game Wins: Over the long term, the stock market has overcome numerous global crises and economic downturns, demonstrating consistent growth over decades.
Short-Term Volatility: Despite the general upward trend, the stock market experiences significant drawdowns annually, with bear markets occurring rapidly and recovering over time.
Unpredictable Yearly Returns: The stock market rarely yields average returns in any given year, making it challenging to predict short-term performance based on historical averages.
Asymmetric Upside Potential: While a stock’s value can drop to zero, its potential for gain is unlimited, highlighting the skewed potential rewards of investing in stocks.
Earnings as a Key Driver: Long-term stock prices are fundamentally driven by the underlying companies' earnings, influenced by economic and policy changes.
Valuations and Short-Term Predictions: While useful for long-term insights, valuation metrics are unreliable indicators of stock price movements over short periods.
Inherent Market Risks: Investing in stocks always carries risks, but the potential for relatively high returns accompanies these risks.
Unanticipated Risks: The most destabilizing market risks are those that are least expected and not widely discussed.
Market Turnover: The composition of indices like the S&P 500 changes significantly over time, reflecting the dynamic nature of the market.
Market vs. Economy: The stock market and the economy are linked but not synonymous; the market often reflects the performance and prospects of large, globally engaged companies rather than the domestic economy.
Key Quotes:
"Over the long term, the stock market news will be good" – Warren Buffett.
"While stocks usually go up over much shorter periods, the odds of positive returns improve as you lengthen your time horizon."
"Don’t ever expect average."
"The most destabilizing risks are the ones people aren’t talking about."
Why It Matters:
Understanding these truths about the stock market is crucial for investors to set realistic expectations and develop effective investment strategies. By acknowledging the inherent volatility and complexities of the market, investors can better prepare themselves to withstand short-term fluctuations and focus on long-term gains. Furthermore, recognizing the difference between the stock market and the economy can help investors avoid common pitfalls and make more informed decisions based on broader economic indicators and individual company performance. This knowledge ultimately empowers investors to navigate the stock market with greater confidence and insight.
In China: The 100-Year Storm on the Horizon and How the Five Big Forces Are Playing Out | LinkedIn
In his article "In China: The 100-Year Storm on the Horizon and How the Five Big Forces Are Playing Out," Ray Dalio discusses China's evolving socio-economic and political landscape in the context of what he identifies as a "100-year big storm." This concept, initially alluded to by President Xi Jinping, signifies a period of significant upheaval influenced by a convergence of forces. Dalio uses historical and contemporary analysis to forecast the challenges China is facing and how these could affect global dynamics.
Historical Context
Dalio parallels the current situation in China and historical "big storms." He recounts the period from 1930 to 1945, marked by the Great Depression, civil and international conflicts, disruptive natural events, and significant technological changes. This period's end saw a new global and domestic order established post-World War II and the Chinese Civil War.
The Boom Period
Under Deng Xiaoping's leadership, China experienced economic liberalization from 1978 to 1979, which spurred significant growth and prosperity. This period was characterized by increased openness to foreign investment and ideas, a shift towards market-driven economics, and substantial improvements in living standards.
Xi Jinping's Leadership
Dalio discusses the shift under Xi Jinping's leadership, beginning in 2012. Initially, Xi focused on economic reforms and anti-corruption measures. However, as China's economic conditions changed and wealth gaps widened, Xi's administration moved towards a more nationalist and autocratic stance, particularly in his second term. This shift was partly in response to perceived threats from the United States and the broader context of great power competition.
Current Challenges
The confluence of drives the "100-year big storm" that Dalio refers to:
Debt and Economic Challenges: China's massive debt accumulation has led to economic vulnerabilities.
Wealth Disparities: Increasing inequality has led to social tension.
Great Power Conflicts: Escalating tensions with the United States and other countries.
Natural Disasters and Pandemics: COVID-19 has further strained China's economy and social fabric.
Technological Changes: Rapid technological advancements are reshaping industries and national security dynamics.
Xi's Approach and Future Outlook
Dalio suggests that these historical and current pressures shape Xi's leadership style and decisions. The leader's approach tends to become more autocratic in such turbulent times, which is seen as a method to maintain stability and control. Dalio predicts that Xi's current and future policies will continue to reflect a stringent, centralized governance model to navigate the storm.
Key Points
Historical Parallels: Dalio links the current socio-political climate in China to past cycles of upheaval and renewal.
Economic Transition: The shift from a booming, open economic period under Deng to a more controlled and nationalist approach under Xi.
Leadership Style: Xi Jinping's leadership is portrayed as a response to internal and external challenges, with a significant tilt towards autocracy.
Forces Driving the "Big Storm": A combination of economic, social, political, and environmental factors contributed to China's period of significant difficulty.
Key Quotes
"As is typical of the early days of a hurricane, one can now feel it."
"The most joyous and productive environments are ones that have freedom, civility, and creativity."
"The classic convergence of forces led to the formation of the '100-year big storm.'"
"Destiny put Xi in the position he is in, and how he plays his hand will reflect where he is coming from."
Why It Matters
Understanding the dynamics at play in China is crucial due to the country's significant role in the global economy and international politics. The outcomes of China's internal strategies and how it handles its "100-year storm" will have far-reaching implications for global trade, security, and economic stability. Dalio's analysis provides insights into the potential shifts in global power structures and other nations' strategies in response to China's actions.