J.D. Moyer

beat maker, sci-fi writer, self-experimenter

Month: January 2016

Investing a Lump Sum, Part I: The Dangers of Wealthfront

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Ready to stuff under the mattress.

Wealthfront is a new company that manages your investments according to an allocation plan that you decide. Primarily they invest in low-fee ETFs. Generally I like the idea of what Wealthfront offers, but there are some significant risks.

Generally I think asset allocation is a good investment strategy. Pick sectors that don’t usually correlate (bonds, stocks, possibly real estate, gold, commodities), decide on percentages that make sense given your age and risk tolerance (your age in bonds, as a percentage, is a common rule of thumb), and rebalance every year or so. I provide details on exactly how to do that in my post How to Get Rich Slowly Without a High-Paying Job, including Google Sheet examples and projections.

However …

I’m concerned about the following scenario:

  1. Millennials, many of whom are more financially savvy and conservative than they are given credit for, choose services like Wealthfront to automate an asset allocation investment approach.
  2. After answering the questions in the Wealthfront asset allocation questionnaire, they select an allocation plan that is something like 80% stocks. This is because they are all young and all think they have a high tolerance for risk (most of them will find out later that losing money isn’t as fun as they thought it would be).
  3. They invest their hard-earned savings nut, buying into the stock market when the Shiller PE Ratio is well-above 20 (months ago it was up to 26). The Shiller PE Ratio, which includes historical earnings in its calculation, isn’t meant to be used as a market timing indicator, but historically it has predicted long-term returns quite accurately.

Investing 80% of your life savings in the stock market when the Shiller PE Ratio is this high is not wise. So what’s an alternative approach?

Choose an Automated Plan, but Lean Conservative (and Adjust Later)

I like the Wealthfront service. If I were to create my own investment management company, it would operate pretty much in the same way. Though I’m not an early adopter, I might even use it myself down the road (though probably not — I enjoy managing my own investments). But I wouldn’t rule it out. For the ostrich investor, it’s an ideal service.

My only criticism is from what I can tell, it’s too easy to end up with a very high stock allocation, which, under these market conditions, is damn risky. If your initial nut is $1000 and you are investing $1000 a month, the initial allocation doesn’t matter as much. Over time, you’ll be buying low more often than not (the automated allocation algorithm will do that for you–if the stock market plummets then the algorithm will have to buy more stocks to maintain your allocation percentage).

But if you invest $20K and then add $500 a month, the initial allocation makes a big difference. If you are 80% stocks, and the stock market tanks hard over the next few years (look how much it has gone down just in the last few months) then you’ve just taken a big hit, especially if you consider how much that initial investment can compound over 30+ years.

My simple advice for new Wealthfront investors is this: don’t go over 50% allocation in stocks while the Shiller PE Ratio is over 20, no matter what your allocation questionnaire results say, if you are investing a significant initial amount. Start with a more conservative allocation, then take a look in a few years. If the Shiller PE is closer to 15, or even 18, then up your stock allocation percentage (risk tolerance) as high as you want.

Usually asset allocation percentage adjustments go the other way — reduce your stock market exposure as you get older. But for young investors I would recommend the opposite at this point.

Is this strategy the same as trying to “time the market”? The Wealthfront blog offers a good argument as to why you shouldn’t change your risk tolerance score all willy nilly every time the market moves. You’ll end up selling low.

I’m simply suggesting that you don’t buy high, with all your money. If you want to make money long-term in the stock market you need to get in somehow, but there’s no reason you can’t limp in. It’s just safer that way.

Of course I could be wrong. The biggest stock market rally of all time could be about to begin, defying all historical trends. What do I know? I’ve made every investment mistake in the book.

Kleidosty – Strange Skin (and choosing the creative life)

LQ-1189_800I was up at the Echo Lake Berkeley Family Camp with my family and Jason Kleidosty’s family. Jason had brought his laptop and headphones and worked on his ambient music in the evenings, drinking a beer and watching the post-sunset glow from a cliff-top bench. I left my computer at home but did my fiction scribblings each morning in my notebook, drinking high-octane coffee from the bottomless cafeteria urns. Early mornings and late evenings were the quiet times of the day — family waking hours were filled with the sounds of screaming children (some joyful, some tantrums). Children love to scream.

Nobody was making us work. The rewards? Who knows. Is anyone besides Boards of Canada making a living from ambient music? Some science fiction writers I idolize, and who have tens of thousands of fans (or at least Twitter followers) toil away at day jobs. Creative efforts, even from the most talented and hardworking, don’t always make ends meet. I make most of my money solving database problems. Sometimes I fantasize about alternatives. I suppose I could write and sell a hair-regrowth eBook, but I can’t bring myself to do it. I’d rather write a long treatise on medieval polearms and sell it on dmsguild.com. I’ll bet I could make dozens of dollars. But I need an illustrator.

The reason we create, and keep creating, is because the reward is immediate. The process is the payoff. If it isn’t, find something else to do. If you succeed at the activity, the reward is doing more of that activity. Are you okay with that? Spend time doing things you enjoy, period.

Why would someone write a sixteen minute instrumental track with no hummable melody? Well, I’m glad he did. I get lost in the track. I can’t stop listening to And/Or. Just pop off the top of my skull and wire up my brain with the intergalactic quantum orchestral strings.

Which is to say, Strange Skin, the new album from Kleidosty, is out today. Please rate if you purchase, and leave a review if you like.

Paleo-Vegan Meal

Paleo-vegan lunch.

Paleo-vegan lunch.

Lately I’ve been eating a bit lighter to compensate for some overindulgence over the holidays. January is typically no-sugar month around here (fresh fruit allowed) but the meal pictured above goes a bit further: no animal products, no grains, no legumes. I wouldn’t recommend paleo-vegan as a diet (not enough protein, hard to get enough calcium, B12, and calories) but if you want a filling, inexpensive, nutrient-dense meal with a light environmental footprint, you could do worse. The salad above includes the following:

  • organic greens
  • olive-oil roasted yam cubes
  • cherry tomatoes
  • mini-bell peppers
  • raw sauerkraut
  • avocado
  • tangerine
  • roasted sunflower seeds
  • roasted almonds
  • seasoned with olive oil, balsamic vinegar, and paprika

It’s easy to get too much protein on a paleo diet (eggs for breakfast, chicken lunch, steak for dinner, etc.). Too much protein is acidifying and can potentially leach calcium from bones. Animal protein is generally expensive too. There’s no reason to eat more than you need.

The ingredients to make the salad above cost less than $2.00. With the exception of the roasted yam cubes that were leftovers from another meal, assembly (including “clean as you go”) took less than 10 minutes.

The salad lunch is a good way to go even if you throw some blue cheese or sardines in there. Fast, cheap, nutritious, delicious, and no post-meal sleepiness.

Please be respectful of other people’s dietary requirements and choices in the comments. This post may be worth a re-read.

Good health to you!

The System is the Result

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Goals are useful. A goal points you in the direction you want to go, gives you a metric by which to measure progress, and ideally provides the motivation to get there.

But goals don’t produce results. A behavioral system (including automated behaviors) produce the actual results. Your system of diet and exercise will produce physical and health results. Your system of saving and investing will produce wealth results. Your system of communicating and being kind and generous to people will produce relationship results.

They may not always be great results. That depends on the quality of your system, your compatibility with the system you’ve chosen, and how effectively you implement it.

I’ve managed to overcome health problems by tweaking my diet and supplements, and those system continue to work well for me. I feel pretty good about my saving and investing system too. My chess system, on the other hand, needs a lot of work. I only know a few openings, I fall into simple traps, and I too often impulsively make the first decent move I see without considering other options. But I’m working on it.

Writing, chess, and racquetball are three skills I’m actively developing. Some of the work is just doing the thing a lot. Learning new techniques and practicing those techniques — actively pushing the boundaries of your skill and paying the learning tax — is a big part of getting better. So where does the system part come in? What does that even mean?

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2016 Blog Preview

On track for 2016.

On track for 2016.

About once a year I blog about this blog. It’s an opportunity for me to reevaluate why I blog, and an opportunity for you to evaluate why you read it, and what you might expect in the coming year.

Currently, the main reason I blog is to better understand the topics that interest me. Writing about these topics publicly forces me to think more clearly, do the research (even if my findings disrupt my preconceptions), and ultimately commit to a course of action or lifestyle change based on how the writing process changes my beliefs.

What I’m personally interested in doesn’t always correspond with what you, the readers, are most interested in. A disproportionate amount of interest in this blog is dedicated to the health and nutrition posts. That’s fine with me, but I’m not writing as many in-depth posts on these topics as I have in years past. That said, I do plan to write a detailed post on lifestyle and diet changes that may help prevent cancer, and the research behind such recommendations. I’ll look at fasting, ketosis, exercise, and various culinary seasonings (like turmeric and garlic).

There has also been a bit of interest in my scalp massage hair regrowth experiment. I’m still doing the head massage technique, but only for about 5-10 minutes a day. I’m not sure if my hair regrowth has plateaued or if my hairline is continuing to advance. Remember this is a slow technique — I didn’t see any regrowth at all for the first four months. I will do an update post, probably this summer, even if my hairline hasn’t changed much.

So what about this coming year? I plan to keep writing about work habits for creative types, making and reaching goals, sector investing, lifestyle experiments, family life, and the like. I’ll probably weigh in on a few political and environmental topics as well. In terms of post frequency, I’m shooting for once a week, slightly more than my historical average. Currently I have no shortage of ideas. Here’s a short selection of possible posts I’m taking notes on or have drafted to some extent:

  • Calling Your Shots (Why We Like Conor McGregor)
  • How To Invest a Lump Sum
  • The Effectuation Method
  • Quantity = Quality (More On Creative Work Quotas)
  • Visualizing Your Ideal Life While Feeling Gratitude for What You Have
  • Stresstitlement
  • One Month No Car Experiment

I hope that gives you some idea of what to expect from this blog in 2016. Feel free to holler back!

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