October 2022: Portfolio Performance, Net Worth

Throughout October, I spent much of my free time inputting all of my trades into the application Portfolio Performance.

I wanted to answer the question: am I any good at this? What have I gained by trading individual stocks? I'm not interested in bullshitting myself or anyone who reads this, and so despite the tedious nature of inputting hundreds of transactions and the RSI issues of sitting at a computer that long, I just took the time and did it.

The answer was mixed.

There were many times that I groaned at an ill timed buy or sell. But there were also times when my instincts served me well and saved me from a painful drawdown. It's not a stellar record by any means, but it's not horrible either for someone who barely knows what he's doing.

To summarize: I stumbled along and avoided doing anything disastrous. However, all my efforts added up to underperforming the S&P significantly.

One major takeaway is how fees add up. In my Interactive Brokers account, I've paid over $1,000 just in fees since 2017. Their fees are low, so it's hard to see just how they add up over time. That doesn't include interest costs from using margin either.

It's also clear that maintaining a steady asset allocation somewhere in there is important. The decision to implement the Wiseguy Portfolio was a good one. I'm a mediocre stock picker, and I shouldn't keep all my money in individual names.

The project isn't totally finished; I still want to enter my high yield savings account, since that has been my preferred holding place for cash the past few years. I also need to include the loan I took out, but that's trickier. My goal is an honest accounting, but that's easier said than done.

Here's an image for you though:

Image: Portfolio performance in 2022

Notice how the blue line drops a bit then flat lines with small ticks upwards? That's my IRA gone to cash in February 2022 when the trend following rule was hit and receiving monthly interest payments. This tweet from Cliff Asness sums it up:

Net Worth

As of October 31, our net worth rose in October 4.06% in USD and 3.14% in EUR to $121,828 and €123,220 respectively. Liquid net worth sits at $93,016 and €94,078.

Image: Net worth chart in USD

The stock market did well, and my various portfolios also performed well:

Image: October's portfolio performance chart

You can see that they underperformed the S&P 500 (red line), though my individual stock holdings (yellow line) traded places throughout the month. The Wiseguy Portfolio (green line) fared less well.

The euro strengthened, which lowered the value of USD assets relative to euros and raised the burden of our euro debt relative to dollars. However, my general belief is that I win either way: a strengthening euro is a raise for my income, while a strengthening dollar makes me richer in Europe. It's not a terrible position.

Image: net worth chart in euros

Portfolio Changes

After selling Store Capital at the end of September, I used the money to add to Enbridge, Alphabet, Lowe's and Ally Financial while starting new positions in Pepsico, Exxon Mobile, and Cloudflare.

Purchases

I bought an iPad Air. I love the thing. They've improved so much since my last iPad, and I used Amazon's incremental payments scheme to spread the cost over five months (reflected in the additional euro liabilities burden).

November Outlook

There have been some big portfolio changes in November, sadly. Namely, I sold Ally and spread that around to other companies. That was a long holding, and I hope to re-enter one day, but I would like to lower my tax burden before the end of the year, and selling at a loss can do that.

Otherwise, it's a normal month. Until next time, take care of yourselves and those you love.

September Update: Electricity Reduction, Net Worth, Wiseguy, Euro

My work picked up in September, and life felt like it regained a some sense of normalcy. I was concerned with the ongoings at my job, and there were work politics and friendships to manage. Since I'm not traveling, I could devote myself to my hobbies and to fitness. My wife took new bold steps in her business and is attracting new better-paying customers.

With a moment's reflection, it becomes clear that things are not normal. For one example, we've done a good job lowering our electricity usage by reducing the temperature of our showers. Lukewarm is the best description. We've relegated using our clothes drier to being emergency use only. I've tuned our Synology to only turn on and back up our computers at night. I wake up and immediately unplug the chargers in my bedside table, since they're mini computers, drawing a small current at all times. Lights come on and are shut off quickly. The fridge and freezer are less cold. The kitchen water heater isn't as hot. I cook food in bulk and eat it throughout the week.

We also haven't used our radiators at all yet. It's starting to get chilly in Germany, but we are resisting using them until it's absolutely necessary. We've always kept hot water bottles, and so we've used those when the chill was too oppressive.

For our efforts, our electricity was reduced to 193.4 kWh in September, down from an average of 259.75 kWh per month in the first half of 2022. That's about a 26% reduction. As the weather cools and the sunshine becomes ever shorter, our usage will inevitably creep back up, but I continue to look for other ways to reduce our demand here.

Net Worth Changes

Image: our net worth in a stacked bar chart. The dark blue line is the net sum of assets and liabilities.

Our net worth fell 3.66% in USD and 1.89% in EUR to $117,080 and €119,469 respectively.

For this month, it was entirely due to declines in our stock and ETF portfolios. There was one area of - short term - good news, when Store Capital agreed to be bought out at a premium to what I paid, which brought in a sudden burst of profit. However, this could not counteract the declines elsewhere.

Cash

I continue to hold what are, for me, substantial cash positions. Additionally, my IRA remains in a money market fund as the trend following rule triggering a purchase has not been met. As interest rates rise, these sums bring in ever greater monthly income. However, that is not enough to counteract the S&P 500's regular down 1% days in any meaningful way.

Wiseguy Portfolio

Image: The Wiseguy Portfolio (green line) vs. S&P 500 (red line) in September

The Wiseguy Portfolio did what it should have in September, but it was cold comfort. It "only" fell by 8.51% vs. the S&P 500's 9.87%. I continue to add to it, however, and I add to that which has done most poorly. In October, I added exclusively to the international small cap value fund, since that had been the most battered. In September, unfortunately, we didn't have the income to make a purchase.

Euro

The euro continues to decline, which leaves me conflicted. On the one hand, I'm worried because I earn euros, and although a $500 addition per month to the Wiseguy Portfolio will likely be enough on its own to make us wealthy over time, if $500 per month becomes out of reach, my plan may come undone.

Image: Our net worth in euros over time. Notice the lower volatility.

On the other, I feel ganz schön clever for having all these dollar assets, because in euros, our net worth has been much more stable than the dollar equivalent. My US bank accounts have grown in euros over time by just sitting there.

As I said. Conflicted.

Life Goes On

Despite all the worries, we're trying to live our lives as happily as we can. I have lived without hot water entirely at one point in my life, and it had no effect on my happiness. Ultimately, relationships are wealth, and we've had some social occasions this last month that reinforced that truth. Additionally, we expect my sibling to visit in Christmas, which excites me to no end.

It's a frightening time, but human life is more than the numbers and more than the creature comforts.

Until next time, stay healthy and hug those who need hugging.

July and August 2022 Updates: Travel, Inflation, Rent

In most of July and early August, I was taking advantage of my summer vacation to travel through Europe and the United States. Meanwhile, Europe's bad news kept piling up.

With power prices rising and the rivers drying up and a war and the currency falling in value, it's a worrying moment here. To put it mildly. I've been captivated by the potential for major disruptions to our lives and for the lives of millions of Europeans whose livelihoods rely on industries, which themselves rely on inputs such as natural gas and electricity, both of which have exploded in price.

What does Germany do if its major industries shut down? I don't know.

That said, even while vacationing within Europe, it all felt far away. Shops were open and happy to sell over-priced chocolates or locally made clothing. The wine and cheese in France were still excellent. Paris is still beautiful. The museums remain treasures. People were generally pleasant and happy to see us. My family who visited France loved it and some said they wanted to move there.

To be fair, when I visited the US, all of its problems felt far away too. American food is great. Everyone is nice in a way that feels increasingly foreign and yet increasingly welcome. I think "Maybe I should move back!" after I've touristed in the US, but when I speak to my younger family members about their jobs, the prospect seems less appealing.

All of them are in the rat race. All of them are working their butts off. All of them don't get enough vacation time. I didn't ask about health care, but I know what that's like. All of them are likely earning more than I do, but the price for that is enormous uncertainty and very little freedom with their time. Whenever I spoke about my job, I couldn't help but feel like I was bragging, even though I'm somewhat unhappy with my career and am considering other prospects.

But as soon as the words leave my lips, "Six weeks summer vacation.... yes, it's paid," I know I have something valuable that my working-age American family doesn't have. It's a tricky social minefield, and it's an inevitable topic of conversation because I just have so much free time in the summer. Meanwhile, my American loved ones balance seeing me with their work schedules.

We'll see though. If Germany can't manage its current troubles, it's possible that the system that supports me and my colleagues falls apart. That's unlikely, but it can't be ruled out.

Net Worth: Inflation and Stocks

Our net worth increased 7.46% in July ($123,947) and fell 2.01% in August ($121,453) in USD. In euros, it rose 9.45% in July (€121,160) and rose .44% in August (€121,697). Liquid net worth at the end of August stood at $89,890 and €90,070.

Image: Chart of our USD net worth over time. Notice the value of euro debt decreasing quickly.

The falling euro is scary. On the one hand, my euro wealth continues to rise because of my overwhelming reliance on dollar assets for my savings. On the other, I have received a large pay cut relative to the US, which I felt acutely whenever I paid for a restaurant bill in the US. Inflation in the US plus a falling euro equals pain for euro jobbers like me.

The upsides are that if there's an emergency over here, my USD cash has become more valuable in euros. Likewise, the value of my European debt has decreased significantly in dollar terms.

Stock Market

The stock market since June has been volatile. The S&P 500 rose in price in July to touch the 200 day moving average and has since fallen. My assumption is that it's in a downtrend, and so my IRA remains in a money market account. Ironically, my lack of action since February in the IRA has been the best trade of my life. The interest I earn in it has gone up over time even as the overall market continues trending downwards.

So far, despite the new downward price action, I don't feel any urge to make major portfolio changes.

My Evolving Rent Thoughts

I have to admit: I've been triggered by the rent increase we got in June. Until then, I'd never had a landlord increase their rent on me. And for him to do it then, just as all our economic realities were getting more precarious, felt especially grating.

I admit that this is irrational. He's also an investor, and investors want rising cash flows from their investments. I get it. But I don't like being a landlord's cash flow¹, and so we've been looking at buying properties again. I still hate the upfront cost of buying something here, but man, I hate having my rent raised. So I'll keep looking.

For a few weeks there, I felt like I was in a rush to buy something. But that has subsided. I've calmed down. I'm still worried about a potential rent increase next year too, but I see that our requirements for a property are specific enough that I can't and shouldn't just buy any old thing.

Other Notes: Computer, Refund, €9 ticket

In July, we bought a new computer for my wife. Her's starting crashing, and since she relies on a stable computer for her work, we bought a new MacBook Air for her. We were going to pay for this from occupational cash flow, but amazingly we finally got the second federal stimulus payment in the form of our 2020 tax return refund. Plus interest! That more or less covered the cost, and it came at a perfect time.

That said, we're going to be financially tight for awhile here. She's making a major change in her business, and the short term effects are likely to be reduced cash flow in the short term with increased cash flow later since she'll be in greater control of her time and pricing. She's being bold, and I'm happy for her.

Finally, we will both miss Germany's €9 ticket, which allowed us both to travel throughout Germany for €18 total per month in June, July, and August. It's back to the old complicated expensive system here, and we'll mourn grievously.

That's all I have for this time around. Take care of yourselves and your families. Until next time.

---

1. Especially for this landlord. I like our apartment and its location, but his management of this building leaves a lot to be desired, and we're currently fighting with him about our Nebenkosten. ↩︎

Update June 2022: Bear Market, Options, Life in Germany

In June, our net worth fell by 5.93% in USD and 3.04% in EUR to $115,344 and €110,695 respectively. Liquid net worth was at $83,151/€79,800.

The Bear Market

The S&P 500 officially entered a bear market in June, but this has felt like a bear market to me for awhile. I was holding stocks like Netflix, Facebook, Amazon, Paypal, and Cloudflare from 2021 into 2022, and they're down much more than 20%. It's funny: I knew holding that stuff was really risky, but I couldn't see a way out. I didn't want to sell and pay taxes, so I just held and watched money evaporate. Dumb.

However, even when I did sell, I'd often buy shares in a different company that hadn't started falling yet but inevitably would. For example, if I sold Cloudflare or Square I'd put the money in Amazon. So there was this sense that there was nowhere to run: stay in the name and lose money or sell to buy something "safer" and still lose money.

The names in my individual stock portfolio have gotten progressively more boring. One advantage is that they aren't nearly as correlated, even though on the really bad days, they still all fall together. But at least it's not one big tech trade, which rises or falls based on how the world is viewing tech as a whole.

Painful as this has been, I have learned a lot:

• Be careful of correlations.
• Valuation eventually does matter.
• Paying taxes is better than a crash.

Lastly, this experience has convinced me that most of my money should be in a basket of diversified ETFs, where single stock risk won't wreck my day.

Options Trading

In June, I bought and sold my first options contracts. This is small potatoes, but I bought a call option and sold it the same day, and I'm holding on to a few puts on the overall stock market.

I've long wanted to be able to buy this kind of insurance on my portfolio, but I just didn't follow through with my broker. That said, because it's new, and because it's risky, I don't want to commit a lot of money to this. I remember on Reddit's /r/Wallstreetsbets when there were a few weeks of easy gains for the guys who bought weekly calls on SPY. Inevitably a bunch of other people followed and bet huge sums only to see their options expire worthless.

I recognize the risk that goes along with options trading, and I'll size accordingly.

Life in Germany Right Now

The other day, my wife and I along with a group of others assisted a Ukrainian family move in to a new home. They obviously don't know anyone, so organizations have sprung up to help house them. The family, like many such families coming to Germany, consisted of a mother and her children: the men tend to stay behind in Ukraine.

During this last week, the power company Uniper said that they might need financial assistance from the Bundesregierung due to rising gas prices in addition to lower gas flows from Russia. As I wrote in my last piece, we were asked by our local power company to pay more for our electricity due to the current price realities. When we first moved in, our electricity was around 24 cents per kWh vs. the 39 cents we're now paying. Electricity prices have always felt high here, but now every click of a light bulb or every drop of warm water feels consequential.

The whole situation is unsettling, and it's only summer now: few people use air conditioning here. What happens in the winter when we're all cranking up the heat? I don't know.

There are shortages too, though they're limited to specific items. For example, my employer told us to conserve paper due to a paper shortage. Canola oil in Germany is now basically a distant memory.

Weird as it may sound, I've begun asking myself what event would cause me to buy some plane tickets and bail on Germany. My usual trigger is something like the war expanding into other countries or hitting a NATO country.

I don't want to leave though. It's really a very pleasant country to live in. So let's hope for some kind of peaceful resolution to this violent madness.

Forecasting

My wife and I will be leaving this week to enjoy our summer vacations. We're going to France, so there's clearly still plenty of fun to be had in Europe, despite the present reminders of hardship. Afterwards I'll be flying to the US. I need to hug my family members and, ahem, log into my US accounts from the address I claim as my residence (haha).

And with a vacation comes expenses, but it also comes with my employer's summer bonus. So I've sent off a lot of money - for me - to the various savings account, and I think I've set aside enough for the two of us to enjoy ourselves. My wife also needs a new computer, so that will take a bite out of us.

Until next time, take care. Enjoy yourself in whatever way makes you happiest.

Inflation Bites: Action vs. Acceptance

Image: Consumer prices in Germany broken out by sector, from Destatis

When I woke up this morning, it really hit me for the first time: we aren't in total control of our expenses. I kind of freaked.

Electricity

In the past month, we've been hit with two disturbing price increases. First, we were hit with a price increase for our electricity. It's gone from 31.345 cents/kWh to 39.827 cents/kWh, which is a 27% jump. It would be even worse if we changed contracts, since existing customers get slightly better deals than new customers, so there's nowhere to run.

Right now, we're trying to get our electricity use under control; shorter more precise showers, bulk food prep, and turning electronics off and unplugging them are some of the steps we're taking. So far, it's only made a slight difference.

I've considered buying more efficient electronics (a new stove or refrigerator), but would these new objects actually pay for themselves fast enough to be worth it? I doubt it.

Rent

Even worse, our rent was raised by 17%. Back when we signed our lease, we agreed to have our rent tied to the Verbraucherpreisindex (the German consumer price index). The landlord explained this to us, and I even remember him telling us, but I didn't totally understand what it meant because, well, not understanding everything you're hearing is just part of the immigrant experience¹.

However, I didn't really understand what I was signing. I feel both like an idiot and like I'm sitting on a time bomb. If inflation continues rising in Germany, we could not only be priced out of our existing apartment, but we could be priced out of our neighborhood entirely, forcing us to downsize our living space and move much further from my employer.

German housing sucks right now. I looked around the city to see what prices are like for buying apartments and houses, and it's all bad news. From an American perspective, houses are laughably small and are often comparable to apartments in terms of actual living space. However, they are still expensive and often situated away from good public transport.

Apartments are probably a better option, but they come with mandatory building expenses and neighbors. To be fair, both apartments and houses are often joined to a neighbor's structure, and although I'd like to have some real privacy, privacy is out of our budget.

Let's not forget that mortgages have also gotten more expensive, so previously affordable mortgages are now priced out. Naturally, my German savings account still pays me nothing.

Running the Numbers

As I mentioned in a previous article, you take a huge loss up front when you buy property here. If we saved up €50,000 for a down payment on a place, it's likely that most of that would just go to the Grundsteuer, the Makler, the registration costs and so on. It's a pure loss up front, and it's the kind of thing that leads to sunk cost fallacies: no matter how much I'd want to make a life change, I'd always have this huge expense in the back of my mind.

So I'm trying to look at the numbers rationally and chill out. The rent increase is about 112 EUR. Divide €50,000 by €112, and that's 446 months or 36.16 years. So does it make sense to spend €50,000 to save myself from 36 years of this rent increase?

No, damn it, it doesn't make sense².

Remodeling as Further Disincentive

Another number to consider: if we moved, we'd likely have to remodel in some fashion. German houses and apartments often come without floors, for example, or toilets or kitchens. All of that costs money. So let's say we moved and remodeled, and it cost us €20,000 on top of the €50k we already spent on taxes and fees. That another 178.57 months of this rent increase or just under 15 years.

The risk, of course, is that this isn't the only rent increase. The German CPI jumped by 17% year over year in May, so let's extrapolate into the future. If rent increased again by 17% from our new level, that would be a €129.61 increase. Combined with the previous raise that's a €242 additional payment. So €70,000/242 = 289 months or 24 years. So would it make sense to save and then spend €70,000 up front in order to spare myself 24 years of a worst case scenario rent increase?

I don't think so. But now I'm less certain. And if it happened for a third and fourth year in a row, the numbers start to get worrying very fast. I have to remind myself however, that even if we owned a place, a world in which prices are rising by 17% every year is a world where we're still on the hook to buy things that are increasing 17% every year. If a water heater breaks or if the roof needs repairs or whatever, that would be on us.

I don't have a good answer, and I think I'll have to live with that. My hope is that our incomes will also rise to meet this new challenge, but I can't guarantee it.

Accepting a Loss of Control

Image: various price changes from Destatis

I'm not happy with it, but I have to live with being out of control to some extent. Otherwise I'll drive myself crazy. We do have control over some things, such as our groceries, which have also gone up in price. In that realm, we still have some maneuverability, so we'll have to do what we can there to feel like we have some power.

Hopefully, this doesn't go on forever. And hopefully, I won't be writing a similar article a year from now, chastising myself for not seeing the signs of impending doom via inflation and taking decision action. I'm not sure what action is best besides trying to earn more and spend less.

I'm sure you're feeling some pain from inflation. This is a difficult period for everyone. Just make sure you look at the numbers before taking some kind of drastic action to save yourself from it. It might not be worth it.

---

1. This is a relatively new method for German landlords to extract higher rents since the default method is for rent increases to be determined by the city. ↩︎

2. I would like to own property one day, but the upfront costs continue to dissuade me from going too far down this path. ↩︎

May 2022 Update: Net Worth, Pension Valuation, Crypto, ETFs

In May, our month over month net worth declined by .73% in USD and 2.31% in EUR to $122,613 and €114,165 respectively. Our liquid net worth was $89,945/€83,747 after closing on the last day of May.

May was a surprisingly busy month. Some major changes:

• I've valued my defined benefit pension and added that to the illiquid part of our net worth.
• I've exited all cryptocurrency positions.
• I've transferred a sizable amount of money away from individual stocks to my so-called Wiseguy Portfolio.

Valuing a Pension

Defined benefit pensions are still a thing in Germany, and since I've been working here, I've been steadily adding value to mine. My employer has never mentioned my pension to me (which is just baffling), but I can see the withdrawals from my paycheck every month, and the pension plan custodian contacted me shortly after moving here. I knew it existed, but it's only been the past few years that I've paid much mind to it.

The pension works like an annuity:

• My employer and I both pay 50/50 into the plan.
• The contributions are payments for promised future income streams.
• The income I can expect from each contribution is the contribution amount multiplied by an annuity rate, which is - I believe - calculated by combining my expected retirement date, current expected returns, and life expectancy. This exact formula is opaque, but they publish their annuity rates regularly.
• If I die before my wife, she's entitled to half the annuity stream until her death.
• The payouts are adjusted by cost of living changes. Theoretically, there's not much risk from inflation.
• I am required to pay into this plan as long as I'm working within this career.

Every year, the pension provider sends me a letter telling me the previous year's contributions and my expected yearly pension. From that I can divine a value of this income stream.

To do that, I first value the income stream as if I were about to enter retirement. That's done by using a present value calculation, which discounts future cashflows to a start date. My assumptions are a 2% discount rate (debatable), and my life expectancy limits the years of payments (also debatable).

That value then gets discounted to today. For that I'm using the years until my legal retirement age as the number of periods, and I'm using the 10-year Treasury bill as the discount rate.

All this adds up to a value that is much less than the value of the contributions that my employer and I have spent on this plan. Since I can't touch that money no matter what, it's only a minor intellectual annoyance. But the value of this annuity only really makes sense if my wife and I live well beyond our life expectancies.

Since I'm using fluctuating Treasury rates as my discount rate, and since that discounting process has an outsized impact on the value of the pension today, our net worth has been negatively impacted by the upward movement of interest rates. Had I been factoring in the pension all along, its value would have cratered these past few months.

This is purely a "time value of money" phenomenon and doesn't mean a loss of current purchasing power. However, I want the net worth calculation to accurately reflect how assets and cash flows sources are accruing over time, and similar to valuing a home - the value of which is at least somewhat fictive - this pension should be included. Otherwise it means that the money spent on it is basically lost, which is not the case.

Leaving Crypto

Image: the collapse of Terra was a scary event for anyone in the vicinity of crypto. I feel bad for all the people who've lost money in that scheme.

Crypto is in a world of pain right now, and since it's so speculative, I didn't want to stick around. It's as simple as that. I took a small loss, and the cash helped me buy a present for my wife.

Using ETFs

As I've written about extensively, I'm going to be adding most of my savings to a basket of ETFs that I'm calling the Wiseguy Portfolio. I sold off some of my stocks to get started on this. Some positions were closed entirely, and some others were merely trimmed since they were outsized positions that were larger than I could actually handle when the going got rough.

It's easy to think you can handle a bunch of risk, but it's harder to actually live with the consequences of taking on too much risk. It's better to underestimate what you can handle. Additionally, is extra risk necessary for your goals? Do you need to hit a home run with a specific investment or are steady gains enough?

Increasingly, I also feel like the time spent analyzing stocks is mostly a waste of time. I've been asking myself a lot recently whether I'm getting much value from it. Does the worry pay for itself? Could my ears be doing something more productive than listening to earnings calls? In my daily/weekly/monthly stress allotment, should I be using so much on this one activity?

I went into stock picking because Germany and the United States both had punitive tax regimes towards "foreign" funds. Germany's system has relaxed a lot, and the worst thing about using ETFs is that I need a U.S. broker to whom I'm lying about my actual residence, and I have to keep track of all tax information myself and translate it back to euros (thanks MiFID ii!). But if that's the worst thing, it sure beats the terror of wondering whether company x will ever regain some high price that I was anchored to.

Spending and EOC

Since it's summer, and since that means a lovely European summer break, we've spent some money on vacations. It hasn't been too much, but it's definitely a cost.

I've been re-listening to the Millionaire Next Door, and it's been hitting me differently this time around. I always learn something from it, and this time it has to do with Economic Outpatient Care. Am I spending more than I otherwise would because I get monetary gifts (usually small ones) from my family? Do I feel wealthier than I am thanks to subsidies from family? It's a question I have to untangle, and if I come to any conclusions, I'll share them here.

Until next time, stay healthy, and give your friends and family big hugs.

The Wiseguy Portfolio

Since I've decided to allocate the majority of my future savings into ETFs, I needed to craft an asset allocation that will:

• Grow enough to meet my future needs.
• Have gentler drawdowns than the overall U.S. stock market.
• Avoid lost decades.
• Avoid bubbles that take down the entire portfolio.
• Allow me to remain sane as the markets bounce around and as different asset classes do better than others.
• Beating the S&P 500 is not the goal, though it wouldn't be unwelcome either.

I've settled on an arrangement I'm calling the Wiseguy Portfolio.

There are two versions. The first is a more aggressive allocation with 75% stocks and 25% protective assets:

• 25% Small Cap Value
• 25% Ex-US Small Cap Value
• 25% U.S. Large Cap Growth
• 20% Long Term U.S. Bonds
• 5% Gold

The less aggressive version is a 60% stocks to 40% protective mix:

• 20% Small Cap Value
• 20% Ex-US Small Cap Value
• 20% U.S. Large Cap Growth
• 30% Long Term U.S. Bonds
• 10% Gold

The Wiseguy name is a crack at myself for trying to out think my emotions. I'm both trying to have strong exposure to factors that the evidence suggests will work over time (small, value, international), while also second guessing that because of my inevitable sense of FOMO around missing out on things like American growth stocks and the occasional big gold move.

U.S. Small Cap Value

Image: the absolute dominance of small cap value since 1972.

There are several reason to include a small cap value tilt in a portfolio:

• Both value and size are factors that tend to lead towards outperformance over time.
• By its very nature, it's unlikely to enter a bubble. If some companies grow more quickly than their fundamentals, by definition, they will leave the small cap factor, the value factor, or both.
• Even when it's not outperforming, its performance is likely to be good enough for my goals.

The downsides are:

• Drawdowns can be nasty. For example, the March 2020 drawdown for the overall U.S. market was 20%, but for small cap value it was 35%.
• There's no guarantee that small cap value outperforms ever again.

However, the bet is asymmetrical: if small cap value doesn't outperform, the likely worst that happens is that it performs well enough for my needs, likely in line with the market over time. The inverse is not automatically true.

ETFs: AVUV, DFSV, VBR

Ex-US Small Cap Value

Everything written above about U.S. SCV applies to ex-U.S. SCV as well, with the added wrinkle that it's not U.S. companies. Depending on your point of view, that's a good thing or a bad thing. Let's take a look at some factors to consider:

• First, like the United States, small caps outside the U.S. tend to outperform the total ex-US combined stock markets.
• Ex-US value tends to outperform the broader ex-US market as well.

Image: a comparison of $10,000 invested in ex-US stocks (blue), ex-US small cap (red), and ex-US value (yellow)

• The world stock market without the U.S. stock market has been under performing for years now.
• In the past it has outperformed.
• It is unlikely that the United States stock market will outperform in perpetuity.

Image found here from Reddit user /u/misnamed

• Some exposure to ex-US stocks, therefore, is a logical bet to make, and within that broader category, small cap value is probably the best place to focus.

Even with this 25% allocation, the Wiseguy Portfolio is heavily U.S. weighted. But if the rest of the world ever does outperform the United States, this portfolio will capture some of that performance.

I'll also add: the dividends from companies outside of the U.S. are often very good. They come in fits and bursts, and it's rough for your taxes, but you can get large cash flows in some years.

Image: shows the dividends from a portfolio with a $500 monthly dollar cost average into Dimensional's international small cap value fund in blue vs the Vanguard S&P 500 fund in red.

ETFs: AVDV, DISVX, VSS (no value aspect)

U.S. Large Cap Growth

Similar to the Weird Portfolio, I was considering sticking with small cap value for my stock allocation. If small-cap value works as it has in the past, it can carry a portfolio, even when adding in heavy allocations to safe assets like bonds.

However, that just didn't feel right to me. Since one of my goals with this portfolio is to avoid feeling FOMO - which I hope will help me hold on in difficult times - having zero exposure to the most high profile stocks feels intellectually possible but practically impossible. In periods where the market does well and beats everything else, I want to at least feel like I'm part of it. Otherwise, I might just give up and buy the S&P 500.

The risk with growth is bubble risk. Investors extrapolate good news to infinity, and no price becomes too high. These bubbles can take years to work out (see Japan and the dot-com bubble). Many argue that we're currently in a bubble, and the poster child for this fear is the growth stocks, many of which have plunged in value over the past year after having exploded higher in price and valuation over the prior year.

That said, there's value to these bubbles if you can rebalance out of them. As the bubble forms, it provides an area of relative outperformance within a portfolio, which can then be rebalanced. When the weaker parts of the portfolio eventually outperform, they are in a good position to take over as the previous winning assets starts to decline.

With both growth and value, there's a timing risk inherent in buying one strategy at any given time. Growth sometimes does better, and sometimes value does better. If you get it wrong, you're going to be looking at major underperformance that may be difficult to recover from. Therefore, mixing the two with a strong tilt towards value strikes me as a compromise. I don't know if we're entering a period of value or growth outperforming, so I'm hedging my bets here.

An obvious question is why not just buy the S&P 500 for this asset? I originally looked at this, but after tinkering, it became clear that it wasn't different enough when compared to a pure growth fund. The S&P 500 is loaded with growth stocks to be sure, and it definitely goes along for the ride on bubble misadventures. But it also has value stocks as well as stocks that aren't really one or the other. Since I'm trying to capture a rebalancing premium, I wanted the factors to be as different as possible. Using large cap growth as opposed to overall U.S. large cap (which is what the S&P500 is basically) was a purer way to capture this difference.

ETFs: VUG, QQQ

Long Term Bonds

Image: a comparison of a 100% stocks portfolio to a 60/40 and 40/60 portfolio. Notice how bonds smooth the ride, and stocks alone have trouble outperforming forever.

I view long-term bonds as serving three goals:

• One, they usually reduce the severity of drawdowns.
• Two, they provide interest income.
• Three, they provide an asset to rebalance into in times of strong stock growth and as a source of funds to rebalance out of during stock drawdowns.

Bonds are not the primary return vehicle in the portfolio, but because they often zig when other parts of the portfolio are zagging, they serve a useful purpose.

The arguments against holding bonds are compelling if not entirely convincing:

• Interest rates are at all time lows. Therefore, the return from bonds will be paltry.
• In 2022, bonds have dropped alongside stocks. Where is the drawdown protection in that?

Both those things are true, but I allay my fears with a few reminders. Yes, interest rates are low, but we have no idea what the future will bring. They might continue to go lower over the long term. Should they rise substantially, the limited 15% position should be protective. Since I'm a net saver over time, future purchases at higher yields are advantageous.

Second, bonds have dropped alongside stocks, but a total bond portfolio (such as ETF:BND) has dropped less. Long term bonds, admittedly, have underperformed the S&P 500 this year, but this is also an outlier drawdown year for bonds. I'm not making this portfolio for 2022 alone. It's supposed to do well enough over various regimes without impacting growth too much. There will come a day when bonds counteract stock drops as they have in the past.

Why long-term bonds (a mixture of corporate and treasuries) rather than just long-term treasuries? In my backtests, a mixture does well. Sometimes a mixture beats treasuries alone and sometimes not. Part of this is my increasing distrust of the U.S. federal government. Despite that, long-term treasuries alone will likely serve just as well.

And why long-term bonds rather than total bonds? Right now, I view my time horizon as long-term. Long term bonds tend to outperform total bonds over the long-term with greater volatility. Big surprise. It may be that as I get older, allocating a larger portion to short-term bonds or a total bond market will make more sense. But today is not that day.

ETFs: BLV, TLT, VGLT

Gold

Image: compares a 100% gold position (blue line) to 100% U.S. stocks (red line) and a 50/50 mix of the two since 1972 (yellow line). Notice the lower drawdowns and more steady rise of the mixed portfolio.

The 5% allocation to gold is a "What if?" allocation. When looking at a performance chart of gold compared to stocks, gold tends to have idiosyncratic performance that makes it an ideal rebalancing vehicle. It can outperform during periods of great financial distress and in inflationary periods. To have no gold at all risks missing out on this performance when the rest of the portfolio may be experiencing extended drawdowns. Since the Wiseguy Portfolio has "keep me sane" as a prerogative, I would hate to leave it out entirely.

That said, I won't ever hold an outsized proportion of my net worth in gold. It is an unproductive asset that requires basic supply and demand dynamics to work in the holder's favor. It will send me no dividends, and gold has no management that is trying to improve it. It is an element that has certain inherent qualities that we humans believe have value. That's why I'm limiting it to 5% in the riskier portfolio and 10% in the more risk-averse portfolio. I personally can't bring myself to approach the heavy allocations to gold that the Permanent Portfolio and the Weird Portfolio have.

ETFs: SGOL, GLD

Performance Characteristics

(Image: a backtest since 1995 using the most approximate funds that I can. In this scenario, the riskier version (red line) has returned 9.99% annually while the risk-averse version (blue line) has returned 9.56% annually. The risk-averse version's max drawdown however was limited to -33.65% while the riskier was down 41.17% in 2008-9. Both had lower drawdowns than the S&P 500's 50.97% and higher than a 60/40 portfolio's -15.06%. The safe withdrawal rate of this backtest is 9.7% and the perpetual withdrawal rate is 6.97%.)

It's hard to get a precise long-term view of how the portfolio will do. Each element will behave differently depending on the environment. In the 90's, the bonds and growth stocks would have done very well, while the international ex-U.S. stocks would have muted growth. In the 2000's, small-cap value, ex-US, and gold would have crushed growth. The 70's were like the latter, and the 80's were a mix, since ex-U.S. stocks were strong then.

Since 2009, the Wiseguy Portfolio has underperformed the S&P 500. So has practically everything else except for some individual stocks or pure growth strategies. That's just the kind of environment it's been, and after you stare at these charts long enough, it becomes clear that environments change. Some day, U.S. stocks and growth stocks won't be the dominant force they've been since the Great Recession, and I believe the Wiseguy Portfolio will do well in those environments while not doing horribly in strong growth environments.

With that, I hope the Wiseguy Portfolio and this article have at least whetted your appetite to consider your options more broadly. Wish me luck, and I wish you luck on your progress.