GOATs and Asset Allocation
Why you'll be climbing Mt. Everest at 80 and how to fund that trip
In the 90's, people thought tennis players peaked in their mid-20s and many retired by the time they turned 30. Stefan Edberg, Pete Sampras, Steffi Graff - all retired at or around 30.
All that changed with the arrival of the 4 GOATs (Federer, Nadal, Djokovic and Serena) in early 2000s, each playing at the top of their games well into their mid-late 30s. And lets not forget King James (37) and Tom Brady (45!).
If a typical sports career starts at 18, the difference between retiring at 30 vs. 36, is the same as a someone in your traditional 9-5 retiring at 80 instead of 60. A 50% longer career.
We don't know the limits of how long human beings are capable of being at the top of their game, active and productive. The best sportspeople may be showing us what is in store for the rest of us. If their body can remain in peak condition for 50% longer, who's to say the same will not be true of our bodies and minds.
But isn't this already happening? After all my own parents were practicing medicine into their 80s till the pandemic put them into house arrest. After a few hiccups recently, they plan to resume soon.
Increasing life expectancy isn't new but it is still unusual to see Warren Buffet (92) and Charlie Munger (98) at the top of their game. I suspect in 30 years that will no longer be the case. 90 will be the new 60.
Why so optimistic?
By one measure tennis became big business in mid-80s - the Wimbledon winner's purse went from 2x Britain's per capital GDP in 1980 to 12x in 1984 (55x in 2019!). It took 20 years for sports medicine / science / psychology to then advance the working life of superstars by 50%.
In 1980, there were 20 million people over 80 in the world (0.5% of population). That number is 147 million today (1.5%) and WHO expects it to cross 420 million in 2050 (5%).
20 million on their death bed and spread all over a world without internet isn't much of a market. Half a billion of the World's richest sitting a click away is a different ball game.
A lot of the work that's already been done getting Tom Brady to sprint like a spring chicken at 45, is going to trickle down to the rest of us in next 10-20 years.
What is all this talk doing in a personal finance newsletter?
People have been studying the impact of an ageing society on government finances and social security for a long time.
Anecdotally, though, I don't get the sense that most people have thought about what happens to them if they are alive and active at 95 or 100.
Now, this is not just a personal finance question but it is most definitely a personal finance question.
A quick google search shows that rules of thumb like "Equity allocation = 100 - your age" or 4-5% savings withdrawal rate in retirement are still fairly popular.
But this rule was set up when life expectancy was 75, with years beyond 65 spent gardening in your backyard. How well will it work when life expectancy is 85 with a relatively active lifestyle throughout? How will you fund that trip to Mt. Everest at 80?
And remember, if you're reading this newsletter, chances are you have a well above average education, income and appearance! So you should replace that 85 with maybe even a 90.
I plan to explore these questions and more over the next few months and hopefully come up with some actionable advice. Maybe that is just "Equity allocation = 120 - your age" or maybe we can do better. Let's see.
The nudge
Rebalance your portfolio.
The markets have been volatile this year and the start of the 4th quarter may be a good time to rebalance.
Of course, this is only relevant if you have a target asset allocation in the first place and know if your actual allocation is different from the target.
For the rest of you, this is a nudge to find what your current allocation is and to start thinking about what your target should be.
If your assets are spread out over many banks, brokers, fintechs and in multi (geography, asset class, currency) instruments, this can be a proper project.
Then there is the question of how "granular" do you want to be in calculating it.
Is it enough to know the breakdown by asset class (Equity / Fixed Income / Real Estate / Cash) or do you need to break it down by geography?
How do you allocated a Mutual Fund that contains both equity and fixed income? What about an ETF with exposure to many countries? The mortgaged property? That structured product?
Let's start with creating a spreadsheet and listing all your financial accounts & their balances. Most of you, of course, already did this in August, when you prepared your will. Right? Right?
If you're anything like me a few years ago, this exercise will throw up a lot of food for thought.
Munch on that as we dig into the asset allocation question, and hopefully by the start of the new year we will all have the perfectly allocated and balanced portfolio.
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moolahgeeks this September
UCITS ETFs
UCITS ETF’s liquidity is less than ideal given their many other advantages. The average UCITS ETF trades somewhere between one-tenth to one-hundredth as much as a similar US-listed ETF.
Is this a problem?
Last month I concluded it wasn’t a huge problem for retail investors if they stick to the ETFs we recommended. Those had enough liquidity to support investments for portfolios up to S$10 million.
I started off September by digging into the market microstructure for UCITS ETFs. I concluded that while nothing beats daily liquidity in the 100’s of millions of dollars, most people should not have any difficulty buying or selling these UCITS ETFs even for larger portfolios.
ETF listing rules in London call for at least one and ideally two registered market makers for each ETF. These market makers are required to provide “competitive and continuous two way quotes” with “minimum size and maximum spread” constraints.
The market makers have many options to manage their risk including getting Authorized Participants to create or redeem ETFs and hedging with similar ETFs on other exchanges.
Execution costs for US Market
Next I looked at work by some very inspirational geeks, who spent more than $40K of their own money to estimate the cost of execution for stock trading in US.
They define execution costs as the difference in the price your order was filled at and the mid-price for the stock. This cost does not show up on your broking statement and is very hard to figure out otherwise.
Sadly, the best broker in Singapore, Interactive Brokers (IBKR), had the highest execution cost (0.45%) of the 6 brokers they compared.
It looks like IBKR is a victim of its own success. IBKR may be getting worse execution from wholesale brokers because they (i.e. IBKR) have the most informed investors!
I still think IBKR is the best option for most people in Singapore. Even including this execution cost, its the 2nd cheapest broker for US and remains the cheapest by a wide margin in other markets. They also have much better tools and data.
If you only trade US though, TD Ameritrade may be worth a look. They had the lowest execution cost of the 6 brokers at 0.07% and offer commission free trading.
Two things held me back from recommending TD Ameritrade for everyone. First, they don’t let you trade any market other than US. Second, they offer no disclosure on the FX spread they charge and you cannot choose when or at what exchange rate your funds are converted.
Since the FX spread was the largest component of trading cost at most other brokers, I am uncomfortable not knowing this.
Trust Bank
The launch of the first digital-only bank by Standard Chartered and NTUC in Singapore was the big news of September. I signed up for an account with Trust Bank and was sorely disappointed.
They signed up more than 100K users in the first week but judging by the response in the Singapore blogosphere, I wasn’t the only one saying “meh”.
They have launched before the systems were ready.
I have more screenshots. You can argue this shows a start-up culture although I wonder how MAS feels about that. What really disappointed was the lack of any product innovation.
They have 3 products right now - a savings account, a credit card and personal accident insurance.
The insurance cover is only S$8K and you can only get it when you are signing up for the credit card. If you miss checking the box then, you cannot buy it anywhere else in the app. Can you really count that as a separate product?
The credit card has a rewards program that is nearly identical to the NTUC co-branded card OCBC used to have till recently. A single physical card can be used as both, a debit and a credit card. I wasn’t able to test that because <cringes> if you sign up for a savings account first, you cannot get a credit card.
I know a lot of these teething troubles will get fixed but it was a bit of a downer that most of the “innovation” was in pricing - low fees and high deposit rates.
Singapore Savings Bonds
I don’t know how to feel about the fact that MAS is possibly more innovative than Trust Bank.
But the Singapore Savings Bonds are definitely an innovation you can use. A government guaranteed bond with step up coupon and an American put option may just be the perfect place to park your cash while you wait for markets and rates to settle.
Sadly, MAS issues these bonds in limited amounts but if you can get your hands on some, I say go for it. That American put is worth a fair bit in a rising rate environment.
Around the Web
FIRE: Most people still want to retire in their 50’s and 60’s. They should subscribe to this newsletter. Share!
Why so passive?: “If only 9.1% of large-cap equity fund managers beat the S&P 500 from 2019 to 2021, then being in an S&P 500 index fund means you would’ve beat 91% of the pros during the period.”
Horrendous chart at the link.
Told ya!: “An important mechanism reconciling the evidence of reduced spending and greater economic satisfaction at older ages may be that individuals’ enjoyment of several activities declines with worsening health, widowing, and increasing age, leading to a lessening desire to spend on them. We find strong support for this hypothesis.”
If you’re going to be fitter at 80, you need to be richer too.
Get that password manager: Here’s what a professional password cracker has to say, “Most passwords are stolen in plain text, not from these hashed databases that people like me try to crack. They are stolen through phishing attacks, or malware, or shoulder surfing. So length and complexity don’t matter. Using unique passwords for each account is what matters because it prevents the attacker who has stolen one of your passwords from accessing more than one of your accounts. It contains the scope of the breach to only the single compromised account.”
The Mind-Body Connection: We should be investing billions in this space. People hate the “its all in your mind” diagnosis but I keep getting surprised at how often this turns out to be correct. Doesn’t mean you (or I) are crazy and doesn’t mean it can’t be fixed. RCTs may not be the answer though, if the cause and effect is different for everyone. New analytical methods are needed.
The Oldest Government in History: “Today, about a quarter of Congress is over the age of 70, the highest percentage ever. At the same time, while half the country is aged 38 or younger, just 5 percent of Congress can say the same.”
It’s happening people.