Friday Mailbox

I get a steady stream of questions from readers in my inbox. I try to respond to as many as I can but thought it would be a good idea to start answering some of those questions here on the blog. I’ll try to do this once a month so feel free to email me with any questions you may have.

Here goes…

Q: Curious what, if any, podcasts you frequently listen to. 

I’m a huge fan of podcasts. While my new office is now much closer to my house — thus cutting down on stress from a longer commute — it does cut down on my podcast time. I now listen to podcasts when I jog or basically anytime I’m in the car and my daughter is not there to highjack my stereo with nursery rhymes. Here are some of my favorites, both investing and otherwise:

  • Malcolm Gladwell’s Revisionist History. Best new podcast of 2016, by far.
  • Dan Carlin’s Hardcore History. I wish they would have used this to teach history when I was in school. The WWI series is epic.
  • Masters in Business with Barry Ritholtz. Barry gets some of the greatest minds in finance and elsewhere to share their backstories in a very conversational manner.
  • WTF with Marc Maron. I’m a huge movie and TV buff so I love when he gets celebs to open up on his show.
  • The Tim Ferriss Show. Ferriss has one of the most eclectic group of guests and does a great job deconstructing how people in various fields were able to achieve success.
  • Full Disclosure with Roben Farzad. Farzad is not only hilarious but he also asks questions that few people would ask of their guests, who are typically finance-related people.
  • The Meb Faber Show. Meb has a great new investing podcast that even involves a few beers with his guests. My favorite wrinkle is when he reads the guests’ most popular tweets to use as a talking point.

A few others I check in from time to time: Odd Lots, FT Alphachatterbox, a16z, Econtalk, Freakonomics, The James Altucher Show, Trend Following with Michael Covel and the Longform Podcast. Also, I know my friend Patrick O’Shaughnessy is working on rolling out a pod of his own, which is sure to be great.

Q: I plan to invest 50% of my portfolio in emerging markets index fund. I plan to invest for 30-40 years (I am young). What do You think?

I can’t give specific allocation advice (there’s no perfect allocation anyways) but here are some pros and cons on this question.

Pros:

  • By nearly every metric you look at emerging markets are cheaper than developed markets right now.
  • Emerging markets may have more room to run than developed markets as their economies and markets grow and mature. People forget that the U.S. was once an emerging market.
  • You’ll be different than most portfolios. Emerging markets only make up roughly 10% of the world stock markets. To do better than other investors you have to be willing to be different and this is certainly that.

Cons:

  • There is a higher government risk in emerging market companies as the rule of law is typically stronger in developed markets.
  • You’ll be different than most portfolios. Since 1988, emerging markets have had 13 down years — almost 50% of the time — while the S&P 500 has had just 5 down years, or less than 20% of the time.
  • Emerging markets are also much more volatile than developed markets. You have to be a very disciplined investor to stick with this type of allocation.

Q: How many years’ worth of spending in cash equivalents is going to give you the piece of mind to be able to take some risk with the remainder of your portfolio?

One of the most overused phrases in the investment profession is probably ‘help you sleep at night.’ Investors are constantly looking for the right investments/allocation/spending rate to help them sleep at night. The problem is that the most comfortable position is not always the right one that you need. Most of the best financial decisions are slightly uncomfortable at the time you make them.

For instance, you have to build a portfolio that takes into account not only the amount of right you want to take, but also the amount of risk you need to take and the amount of risk you have the ability to accept.

The same applies to spending or liquidity needs. Here are a few things to consider in this decision:

  • What constitutes cash equivalents when coming to this decision? Do you include high quality bonds? A 50/50 portfolio would have over 12 years’ worth of current spending needs in bonds (assuming they’re high quality and intermediate term in maturity) if you’re using a 4% withdrawal rate. A 60/40 portfolio would have 10 years’ worth of current spending needs. This should be taken into account when considering cash holdings.
  • If you’re building a portfolio this way it probably makes sense to figure how what percentage of your overall portfolio one years’ worth of spending accounts for to see how this decision affects your asset allocation. It might feel better to have 5 years’ worth in cash but if that constitutes 50% of your portfolio you may not have enough growth to hit your long term needs.
  • It’s a good thing to have rules around this stuff but it’s okay to change them as your circumstances change over time. No one spends the exact same amount each and every year because life gets in the way so have a plan but be flexible as well.

Further Reading:
10 Questions I’m Thinking About

 

 
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