Hi, there. If you’ve come across this blog and it’s interesting to you, I’m honored. I now write and speak via brianherriot.com. I’m also a financial advisor for entrepreneurs at Herriot Financial, LLC. I hope to see you soon!

April’s Fast Follow Investor (FFI) trades increased my stock ownership by 20%. I added 10% to international stocks and 10% to U.S. high-tech stocks.

I could try to explain why high tech is trending up, but I won’t try. Because it doesn’t matter. Instead, I’ll follow the model. It’s like buy & hold passive index investing: you gotta stick with it!

The Fast Follow Investor portfolio on April 1, 2023 (approx.):

• 45% International stocks
• 15% U.S. stocks, mostly high tech
• 15% Gold
• 25% Cash

It’s 15 trading days into the month and my portfolio is up 1% so far. That return has doubled my gains this year.

Would I have made the U.S. high-tech trade without the model telling me to do so? Likely not.

But, the model knows better than me. It’s founded on finance and grounded in math. Over the long term, it always beats any of my so-called expertise. My predictions for how markets move are guesswork.

See you next month!

P.S. If you are an FFI member, I email you my trades each month. It looks like this:

Then, it’s your choice for how to use the information:

• Many start out by setting up a “no money” portfolio to learn more.
• Others try it on a modest account, perhaps $10,000.

I recommend both. Always start small until you fully understand any new investment strategy.

Here is how it works, in short:

I use the model’s holding %s to determine ETFs to own over the next month. Given the ETFs I already own, my calculations result in either ETF sales or ETF purchases (my trades).

As an FFI member, I’ll send you detailed instructions and templates to track your own investments and monthly trades.

I complete my trades 30 minutes after the market opens on the first trading day of the month. After that, I do nothing until receiving a new set of FFI model holding %s for the next month. I’m set!

Rinse and repeat (takes 30 min) each month…forever.

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What is Fast Follow Investing?

• Start with buy & hold passive indexing.
• Then, 1) expand beyond stocks and bonds and 2) cut off severe market losses at the knees.
• Grow your lifetime savings at 12% to enjoy a 5% forever rate of withdrawal in retirement.
• Fast Follow Investing (based on Tactical Asset Allocation) is finally here for small investors like you and me.

So join me!

Holding cash can be a strategic investment move! Cash helps you take advantage of market downturns. With cash, you can shop for value when others are selling at a loss. Look no further than Warren Buffett for how to take advantage of this strategy.

Imagine your cash savings like a red fox standing watch over a gopher hole. It stays there quiet…for an excruciatingly long time. Then, at a moment’s notice, when the gopher’s head surfaces…it pounces!

In this post, you will learn how holding cash in your investment portfolio creates wealth. Cash savings is a key part of the Idols Framework for wealth building. Cash provides a “margin of safety” which keeps you in the investing game. Experts teach you to have a strong defense and build an emergency fund.

But cash - which to most appears boring, tired, and too low-yielding - is also a stealthy and opportunistic investment.

Main topics covered

• History provides illustrative examples of great wealth built with cash savings. This approach is time-tested.
• Holding cash is not just for emergencies. Yes, cash provides protection against loss. It also offers purchasing power when great investments “go on sale”.
• I analyze several options. Then, I share my favorite places to store cash and thoughts on how much to hold in your portfolio.
  
  

Detailed table of contents

1.0 Why keep cash savings?
  1.1 My 1997 cash savings example
  1.2 Warren Buffett is the master
  1.3 More historical examples
  1.4 Deals come along often

2.0 Earning the best possible return
  2.1 Defining the term “best”
  2.2 High-yield savings accounts >$250,000
  2.3 Short-term treasuries (T-bills)
   2.3.1 TreasuryDirect.gov
   2.3.2 Treasuries via your brokerage
   2.3.3 Ultra-short-term bond funds
  2.4 Money markets backed by the U.S. government
   2.4.1 Sweep accounts
   2.4.2 Purchased money funds
  2.5 Summary table with recommendations
  2.6 Point-in-time analysis: April 2023

3.0 How much cash to hold?
  3.1 Emergency fund and more
  3.2 Opportunistic mountain of cash
  3.3 Real-world considerations

4.0 Cash savings summary
5.0 Related posts

Why keep cash savings?

Charlie Munger, Warren Buffett’s wise partner at Berkshire Hathaway, said “It is not brains but temperament that makes you rich. Have patience! And don’t do anything stupid.”

Holding cash in your portfolio is the ultimate exercise in patience and levelheaded temperament. It is hard to sit on a mountain of cash when stock (or crypto) investments go up and up in the final years of an expansion. “Blow-off tops” can run for years!

Why quietly stare at that gopher hole for so long?

My 1997 cash savings example

Let’s explore a scenario at a point in time: 1997, the year I graduated and started working. Imagine we are 7 years after the most recent market correction (October 1990).

Seven years post-crash, the economy and markets have likely recovered. It is when growth starts getting a little crazy and too much money floods the markets. (It would for another 3 years through 1999.)

In this example, let’s invest $100,000. (This part does not reflect my personal reality in 1997 upon graduating!) A single $100,000 investment keeps the math simpler. Later, I’ll show that markets turn south every ~10 years. So, at this point, our investment will grow for 3 years.

Consider these two cases:

Case 1: What I did in 1997

• Put the money into a stock index fund and keep $100,000 invested for 3 years at 8%.
• It grows to $126,000 over 3 years (1999).
• When the market drops 40% (end of 2002), the investment is worth $75,000.

Case 2: What I could have done in 1997

• Sit tight and put $100,000 in a cash savings account, invested for 3 years at 3%.
• It grows to $109,000 over 3 years (1999).
• As the stock market drops, stay put and savings grow to $120,000 (2002).

In Case 2, I’m up $45,000 over Case 1. In 2003, I move my cash into a stock index fund that is on sale.

In this example, I’m looking backward. You could argue that I’m cherry-picking data to prove my point. That is true. But the key point is this: “Markets turn south every ~10 years”.

In 2023, a correction could come soon. The stock market has expanded for 15 years! As bubbles form, smart investors set aside more of their portfolio in cash. Cash gives you options, and options are valuable. With cash, you are able to move fast when you find an edge.

How much cash to stash varies with your specific situation and other investment opportunities. (More on that later.) But, the lesson here is that you should hold some!

Warren Buffett is the master

Berkshire Hathaway keeps 10-20% of its investment portfolio in cash. The money is ready when great companies become available to buy at great prices.

Charlie Munger reminds us:

• “It’s in the nature of stocks that they go down from time to time.”
• “Cyclical financial crises are in the nature of capitalism.”
• “Random recessions and crashes are programmed in.”

In other words, markets will crash. You’d be irresponsible not to prepare for it.

Berkeley Hathaway flips a market crash on its head. It’s not horrific, but delightful:

In 1988, Warren noticed a unique opportunity in Coca-Cola’s tragic New Coke experiment. He began to accumulate shares of the beaten-down stock. As of this writing, COKE’s stock price is $61. His $1.3 billion stake has grown to $24.2 billion in 27 years. That’s an almost 19-fold gain.

Here’s another example. Warren swooped in during the 2008 financial crisis. He invested $5 billion in Goldman Sachs. In 2011, Goldman Sachs redeemed the shares, earning Berkshire Hathaway a profit of $3.7 billion.

There are many examples from history

While Berkshire has perfected this approach, it is not new. The smartest investors learn from history. Here are three more:

• Hetty Green was a shrewd and frugal American businesswoman and investor in the late 19th and early 20th centuries. She amassed great wealth by investing in railroads, real estate, and government bonds. After market crashes, Hetty preyed on low prices, and she became the richest woman in America.
• Alfred Lee Loomis was a successful American attorney, investment banker, and scientist who gained prominence during the early-to-mid-20th century. Alfred made several strategic investments in the aftermath of the 1929 stock market crash. His opportunistic investing helped him grow his wealth during difficult economic times.
• Issy Sharp is the 91-year-old founder of the Four Seasons Hotels. Issy developed his edge in the hospitality industry. He used market crashes to invest in luxury hotels and pick up great properties at great prices. Issy capitalized on these opportunities to expand the Four Seasons brand worldwide.
  
  

Deals come along more often than you think

Recent history reminds us how often deals come along. We experienced major market drops in 1973, 1987, 2000, 2008, and 2020. That is 5 times in the last 50 years or roughly once every 10 years. Ten years is a long time. This is a true lesson in patience!

• 2020: The Covid Crash, S&P 500 loss: 34%
• 2008: The Subprime Mortgage Crisis, S&P 500 loss: 57%
• 2000: The Dotcom Bubble, Nasdaq loss: 77%
• 1987: The Black Monday Crash, Market loss: 34%
• 1973: The Oil Crisis and Economic Recession, Market loss: 48%

Before 1973, crashes were even more frequent. These earlier crashes (known then as “financial panics”) include the 1929 Crash (and the ensuing Great Depression). The worst crash in history resulted in the Dow Jones index losing 89%.

I’m not going out on a limb to say that we can expect a crash of 30-50% or more, and likely soon.

How to earn the best possible return while you wait

There are several places where you can stash your cash. The recent run on Silicon Valley Bank reminds us that every option must be safe and as riskless as possible.

The options I examine will be either:

• Direct investments in short-term U.S. government securities
• Short-term investments backed by the full faith and credit of the U.S. government

I’m not messing around here. These cash investments are safe.

Thus, I’ll examine:

• High yield savings accounts >$250,000 FDIC-insured limit
• Very short-term U.S. treasuries: Treasury bills
• Money market funds holding assets backed by the U.S. government
  
  

Definition of “best” return

These 4 criteria combined make up my definition of “best”.

1. Safe and riskless - All cash investments meet this criterion with the U.S. government’s backing. The securities have short durations, which means that sudden interest increases do not destroy their value.
2. Cheap - As with all investments, fees reduce the investment return that you earn. The lowest fee option is the best.
3. Highest yielding - When equally safe and riskless, the highest-yielding investment is preferred. Earning interest is not the primary purpose of holding cash, but why not earn the best possible yield?
4. Easy to manage - How difficult is it to keep this money safe? This may not seem important if you’re thinking only of keeping a savings account. It will be when we discuss how to buy Treasury bills direct from the U.S. government. It’s not easy!

My analysis searches for the optimal combination of 1) net yield (return after fees) and 2) ease of holding and transacting. The U.S. government backs all options and guarantees their safety.

I will assess various cash savings options first without considering point-in-time investment yields and costs. Then, I will include these details as of April 2023. I share current net yields with Fast Follow Investor community members.

Let’s get started.

High-yield savings accounts >$250,000

Let’s start with the passbook savings account you got as a kid from your hometown bank. Now, we’ll make some improvements to it:

• You’re older now and have more money. Always open enough accounts so each holds less than the FDIC-insured maximum of $250,000. Most of us have less than $500,000 of savings, so keeping it in two accounts isn’t too much hassle.
• Instead of the local bank, use an online bank which has lower operating costs. Online banks pass these savings to you in the form of higher interest rates. Online banking is more convenient too, so this is easy to do.
• Choose the online bank offering the highest yield on savings. This is more difficult. If you’re like me, you’ve looked at sites like Bankrate, Nerdwallet, and Investopedia that compare savings rates. But banks are always jockeying for the top spot. To continue earning the most optimal savings yield, you must continually move your savings from bank to bank (to bank)! That’s impractical.
  
  

An example:

MaxMyInterest or MAX is a service that rotates customers' savings account balances to maximize yields. Always earning the highest savings yield would be too difficult without such a service.

With MAX, you set up a series of savings accounts in your name one time. Then, you pay a fee based on cash savings invested for MAX to move your savings to the highest yielding accounts (in amounts less than $250k) each month.

Here is a list of 18 banks that work with MAX as of this writing: Ally Bank, American Express Bank, Bank of America, Barclays, BrioDirect by Webster Bank, Charles Schwab Bank, Citibank, Customers Bank, Discover Bank, Fidelity CMA accounts, First Republic Bank, JPMorgan Chase, Marcus by Goldman Sachs, Quontic Bank, Synchrony, UFB Direct, USAA, and Wells Fargo.

My analysis:
With a service like MAX, you can realistically earn a high savings rate each month. Its practicality makes me comfortable analyzing it.

To do so, I’ll take the average of the top 5 high-yielding savings accounts for a given month using the list at Investopedia. By choosing the top 5, I’m making an assumption that while MAX may not achieve the top rate, it will be close. To arrive at a net savings yield, I subtract the fee for the service MAX provides.

This savings option is easy to use. It requires time up front to establish a series of bank accounts. After that, MAX moves money automatically for you each month. If you’re the type of person who likes to optimize your credit cards for points, you could be a fit for this service.

High-yield savings accounts are a valid option for stashing cash. Later, we’ll look at specific, point-in-time yields and fees to help you decide if it’s for you.

Note: Robo-advisors like Betterment, Wealthfront, and Robinhood have a different take on the MAX service. As of this writing, Wealthfront brokerage sweeps uninvested cash among 12 partner banks each offering $250,000 in FDIC insurance ($3 million total). The three Robo-advisors offer yields that are ~85% of the top 5 banks' average savings yield. That’s pretty good, especially given the convenience.

Short-term treasuries (T-bills)

This option for holding cash is Warren Buffett’s favorite. He recommends that the average investor hold cash savings equal to 10% of their portfolio in U.S. Treasury bills.

Unfortunately, I find it difficult for the average investor to hold T-bills. There are three ways to do it, and I’ll examine each.

TreasuryDirect.gov

Individuals can buy T-bills directly from the U.S. Treasury in amounts as low as $100 at TreasuryDirect.gov or by visiting a Federal Reserve Bank. First, you must establish an account online with the U.S. Treasury. It is incredibly tedious, and the site looks like it’s from the late 1990s.

Beyond struggling to navigate the site, purchasing T-bills requires a lot of coordination. You must calculate how much to buy, when T-bills come due, and repeat the process monthly (unless you choose auto-reinvestment for up to 2 years).

An example:
This is what it looks like to access a personal TreasuryDirect account.

To log in, enter your password by clicking virtual keys on a keyboard viewable on the screen- it’s clunky! Then, elect to buy Treasury bills. You can buy bills offered in 4, 8, 13, 26, or 52-week durations. The shorter duration bills (up to 13 weeks) have the lowest interest rate risk and are less likely to decrease in value if rates spike. Select Yes to “Schedule Reinvestment” to simplify the process.

My analysis:
Treasury bill rates are pure since the U.S. Treasury sells them directly. The yields are decent. Fees are zero.

The most significant downside to stashing your cash in this way is the inconvenience of it.

• The buying process is cumbersome.
• Treasury bills can be reinvested for up to two years, but that limits flexibility when transferring or selling.
• T-bills are usually held to maturity when bought this way. Assume an opportunity comes along that requires you to invest quickly. You may not be able to access your TreasuryDirect T-bills fast enough and could miss out.

Some finer details:
According to the TreasuryDirect.gov FAQs: “You can transfer any security in TreasuryDirect to an account in the Commercial Book-Entry System. If you hold your security in the Commercial Book-Entry System, contact your broker, dealer, or financial institution or investment advisor. Normally there is a fee for this service.” I couldn’t bring myself to dig deeper to find out more. It’s too complicated.

Treasuries via your brokerage

Individuals can also buy Treasury bills within their brokerages (e.g. Vanguard for no fee, or Public.com which charges a small fee). The key improvement over TreasuryDirect is the user experience. Yet, several downsides still exist. And the same complexity exists for selling T-bills before they mature.

From the Vanguard website:
“Vanguard Brokerage doesn’t make a market in Treasury securities. If you wish to sell your Treasury securities prior to maturity, Vanguard Brokerage can provide access to a secondary over-the-counter market.” Complicated.

An example:
This is what you see when you access the “Trade Bonds & U.S. Treasuries” section of the Vanguard Brokerage site.

My analysis:
This method is also very safe and nearly risk-free. T-bill rates are pure, so the yield is decent. Fees are zero at best, and minimal at worst.

The most significant downside continues to be its inconvenience. Your broker’s user interface is likely better than TreasuryDirect. But mine (Vanguard) isn’t much better!

Exchange-traded funds (ETFs) holding T-bills

It is possible to buy an ultra-short-term bond fund to stash your cash.

Buying a low-cost ETF that holds very short-duration bonds is an easy way to own Treasury bills. Treasury bills reach maturity within 1-3 months. So their returns depend primarily on the stated yield (interest rate). The value of the ETF itself can increase or decrease, but not by much.

An example:
Two high-performing ETFs are SGOV and BIL. You can buy both inside a brokerage account.

Why are they great options? Their basic structural factors are sound:

• They have low fees
• They are liquid and easy to trade
• They minimize trading costs

Again, the goal here is to be 100% safe. BIL is the largest in the industry, but SGOV is very competitive and growing.

For a full assessment of both and others, see this link.

My analysis:
The two best options in this space are indeed:

• The iShares 0-3 Month Treasury Bond ETF (ticker: SGOV) offered by BlackRock
• The SPDR Bloomberg 1-3 Month T-Bill ETF (ticker: BIL) offered by State Street Global Advisors

SGOV and BIL buy U.S. Treasury securities which are riskless.

Yields and fees will vary at specific points in time, so I won’t discuss that here. On average, yields are right below the pure yield on Treasury bills. And fees are very low… like “Vanguard bond index fund” low.

Purchasing either ETF via a brokerage account is easy. The funds themselves handle the more tedious purchasing (and selling) of individual lots of Treasury bills auctioned by the U.S. government.

Also worth mentioning for my Vanguard fans: VUSB is Vanguard ultra-short-term bond ETF. But it invests in investment-grade corporate bonds, not U.S. Treasury bills. I recommend not using it.

Money markets backed by the U.S. government

Money market funds aim to keep a $1.00/share value and pay a 7-day yield in line with the short-term Federal interest rate. You can buy money market funds at your brokerage. Some even offer check-writing features.

A convenient way to own them is via the “sweep” account inside your brokerage. The sweep account is a money market account that holds excess cash after making other investments. For example, let’s assume you have $5,000 available to invest and buy shares in a stock ETF worth $4,960. Your remaining $40 flows to your sweep account, earning interest at the money market rate.

An example:
If you invest at Vanguard, you’ll recognize that it has replaced its sweep account within the last few years. Its Prime Money Market is now the Federal Money Market (VMFXX). And 99.5% of VMFXX’s invested assets are U.S. government-backed. It’s very safe!

Fidelity’s sweep account is its Government Cash Reserves (FDRXX) and is also 99.5% guaranteed.

My analysis:
Let’s assess VMFXX and FDRXX. Both are extremely safe and essentially riskless given their federal government backing.

Yields and fees will vary at specific points in time, so I won’t discuss them yet. Like ultra-short-term bond funds, yields are usually right below rates on Treasury bills. And fees are very low, especially Vanguard’s VMFXX.

The big “watch out” is if you use Schwab for your brokerage. Schwab’s sweep account pays much, much less. Schwab’s business model relies on earning a spread on customers' sweep accounts. (Vanguard and Fidelity do not. Their business models rely on fees from mutual and exchange-traded funds.)

Stashing cash in your brokerage account without having to buy a money market fund separately is extremely convenient.

This assumes that you do not use Schwab as your brokerage. In that case, you could buy a money fund with cash available in your sweep account. It’s a bit less convenient. If you must stay in the Schwab ecosystem, I would buy the Schwab Government Money Fund (ticker: SNVXX). If not, the Vanguard Federal Money Market Fund (ticker: VMFXX) is a better option.

Summary and recommendations

All options for stashing cash discussed so far are safe. To pick the best solution, look at net yield and ease of managing the account. Individual situations (e.g. the institution that holds your brokerage account) also play a factor.

Here is a summary and also my recommendations.

Strong choices:

Best
A money market sweep account is the absolute easiest way to earn a very safe, near-riskless, strongly competitive net yield on your cash. It works best for those using Vanguard’s brokerage. It’s pretty darn good for those with a Fidelity brokerage account. It is so easy, you don’t even need to think about it.

Very good
After a one-time set-up, optimizing cash holdings across many savings accounts is a very good solution. This works best if you’re the type of person who likes optimizing your use of credit cards for points. If you are, you should investigate MaxMyInterest.

Very good
Two other good choices are buying:

• The highest-yielding (net) money market fund
• An ultra-short-term bond fund holding government securities

Both require a bit more work. You should look across products to understand net savings yields at specific points in time. To make it easy, I do this for members of the Fast Follow Investor community. If you’re interested, you can sign up here. This solution works best if you cannot drop Charles Schwab as your brokerage.

Point-in-time analysis: April 2023

Here is a summary of net interest yields as of April 5, 2023.

The highest-yielding cash investments (after fees) are:

• Top high-yield savings accounts
• Treasury bills, themselves
• Vanguard’s Federal Money Market Fund Highlighted in green, each is averaging ~4.6% net yield.

The worst yield is Schwab’s sweep account. Schwab’s “uninvested cash in your brokerage or retirement accounts” yields 0.45% net interest.

When choosing your optimal cash savings solution, always consider:

• Current net yields
• The ease of managing your cash savings
• Your personal situation, like where you maintain your brokerage
  
  

Links to cash investment product research:

• High-yield savings
• Treasury bills
• SGOV ultra-short ETF
• BIL ultra-short ETF
• VMFXX money market
• FDRXX money market
• Uninvested cash (Schwab)
• SNVXX money market

And always remember: this analysis is in no way financial advice. It’s financial education.

Determining how much cash to hold

Before diving in, let’s take stock of what we know.

1. Cash provides a great cushion in bad times. It helps us be opportunistic when investments go on sale after a market loss.
2. Many great investors have used cash to take advantage of turbulent times in U.S. markets. We should too.
3. There are many places to hold your cash. The most convenient and highest yielding (net) are:

• Brokerage sweep accounts (not Charles Schwab)
• Other low-cost money market funds
• Ultra-short-term bond funds that hold Treasury bills

So, now: How much cash should we hold?

The short answer:
It depends on your personal situation and what opportunities exist to earn better returns.

A better answer:
How about a general rule gleaned from the greatest investor of all time?

• Warren Buffett recommends that investors hold 10% of their portfolios in safe, short-term Treasury bills or “cash”.
• Meanwhile, Berkshire Hathaway holds up to 20% of its investment portfolio in cash. Over time, its cash holdings have averaged 10-15%.

So, a general rule of thumb: Hold 10-15% of your investment portfolio in cash, on average. Hold up to 20% when markets become overheated.

The best answer:
A detailed analysis can be conducted at certain points in your investing journey.

• First, we’ll examine someone starting out (small investment portfolio).
• Then, we’ll examine someone late in their investing journey (large investment portfolio).
  
  

Emergency fund and more

This is especially important when early in your investing journey.

Many personal finance pundits recommend building an emergency fund. Do this immediately after paying off non-mortgage debts. This is good advice, but for different reasons than often cited.

Financial advisors recommend putting aside 1-3 months of living expenses into cash savings. Some suggest 3-6 months and others 6-12 months. Its purpose is to “give you a cushion to find another job”.

But I look at an emergency fund differently. I’m solving for something even more important.

Let’s flip this scenario on its head: A job loss (whether forced or chosen) is not negative. In fact, it can be a huge opportunity. So, how can you position yourself to be ready?

I recommend saving up to 3 years of living expenses. Why so much? It’s not because it will take you 3 years to get a job. If you read this blog, you are smart and resourceful.

I recommend extra cash savings for two reasons:

1. The savings give you time to find the right job which may take longer than 3 months. The right job is one that builds the essential skills you need to go into business for yourself. These are skills like sales and marketing, programming, finance, leadership, and management.
2. With 3 years' worth saved up, perhaps now is the time to start your micro-business! Don’t worry if you’ve lost your job in a poor economy. There is no better time to start a business. Difficult times reward only the best ideas, and talent is available and cheap.

An example:
Assume an individual is early in her investing journey. With a $150,000 portfolio where she spends $60,000 a year, she should continue saving ($30,000 more). Save until reaching $180,000 (3 years of expenses) in cash before investing in retirement and other higher-yielding accounts.

As shared earlier, this is not what I did in 1997 when starting my career. Instead, I maxed out my 401(k). But, I wouldn’t do it that way again.

• I got lucky by saving during the second 20 years of a 40-year bull market. I got lucky while having no meaningful cash savings cushion.
• Also, retirement savings is slow growth savings. When you are young, you have a chance to hit it big. So, start that micro-business. Maybe it will turn into a big success.
  
  

Opportunistic mountain of cash

This is especially important when late in your investing journey.

I’ll start this analysis in the same way. Many personal finance pundits recommend staying fully invested. This means holding only enough cash for a small emergency fund. They say that cash savings' low(er) yield is a drag on your investment portfolio.

Why hold cash when it drags down your return for most of the time you hold it?

Again, let’s flip this scenario on its head. A stock market loss is not a bad thing! It can be a huge opportunity. So, how do you position yourself to take advantage?

I recommend saving up to 20% of your entire investment portfolio in cash. Why so much?

I recommend holding extra cash for two reasons:

#1 - If you are later in your investing journey, you are close to retirement. Holding extra cash reduces the chance you must withdraw from investment accounts when they are down. This is called sequence of returns risk. (Please ignore that confusing term. The term is not important.)

If you invest alongside the Fast Follow Investor portfolio, any negative drawdown in value will recover within 3 years. Thus, if you can cover 3 years of living expenses and not withdraw from investments, you’re set.

This is especially helpful during the “retirement risk zone”. The risk zone is the 5 years before and 5 years after your retirement date. If you are heads-down saving and investing, you likely haven’t thought about this 10-year span. But, it will make or break your retirement.

• In the 5 years before retirement: Should the market fall, you risk not reaching your savings goal. The solution? Work longer :-(
• In the 5 years after retirement: Should the market fall, you risk withdrawing savings as your balances decline. The solution? Go back to work :-(

#2 - You can be greedy when others are fearful. Having cash after markets drop lets you buy wonderful investments on the cheap! Selecting high-performing investments during market downturns is smart.

An example:
Remember the individual from the earlier example? Assume she is now further along on her investing journey. With a $2 million portfolio where she spends $120,000 per year, she should save up to $400,000 (20%) in cash. Invest the remaining $1.6 million (80%) of her portfolio in Fast Follow Investor or buy & hold indexed investments.

This is what I’m doing. Apart from the pure financial arguments for doing so, having cash on hand helps me emotionally. I sleep better at night. I’ve learned it is really hard to stomach large portfolio swings of tens and sometimes hundreds of thousands of dollars as markets move…and I’m a pretty even-keeled guy. I have to think that holding cash will help you too.

That said, I don’t recommend stashing any more than 20% in cash. Greater expected returns are indeed found elsewhere. This argument is absolutely valid. Your wealth growth will lag with a cash position greater than 20%.

Real-world considerations drive exceptions

In the earlier example, I recommended holding between $180,000 and $400,000 in cash throughout life. When could it be less?

While there are no hard and fast rules, I can offer several situations to consider. There is nuance here (as in most areas of life).

The first two consider opportunities. Here, you play offense with your cash.

1. You spend it to pursue the opportunity you’ve been saving for. Then, build your cash savings back up. In the early-stage example, she’s saving $180,000 to start a micro-business. Once she hits that milestone, she should go for it!
2. Suppose investors have a sour taste for stocks after a severe decline (e.g. the Great Financial Crisis of 2008-9). When markets are undervalued, it is smart to move cash to investments with higher expected returns. In the late-stage example, she could move much of her $400,000 savings into a passive stock index fund. She should certainly do it if the Shiller PE (CAPE) Ratio shows the market is on sale.

The next two consider the insurance that cash provides. Cash is defensive, but how much insurance do you need?

1. You have passive income that covers some living expenses. Let’s say that our early-stage saver generates $80,000 in passive income to help cover $180,000 of expenses over 3 years. In that case, she need only save another $100,000.
2. You have access to cash that you might pay interest on in the short term. But it keeps you from withdrawing from investment accounts.

Some examples are:

• 401(k) - You can withdraw as much as 50% of your savings, up to $50,000 within a 12-month period. Double it if your spouse has an account.
• Cash value life insurance - I don’t recommend you get it. But if you happen to have it, you can borrow against it.
• Home equity line of credit - Be sure to get your credit line in good economic times.

There are other options too. But I don’t recommend credit cards…the interest you pay is too high.

In the late-stage example, assume she borrowed $100,000 in total from her 401(k) and her spouse’s 401(k). Instead of holding $400,000 in cash, she now needs only $300,000 or a little more to account for interest charges.

In summary, I recommend holding cash in an amount greater than 3 years of living expenses or 20% of your investment portfolio. Your cash will drop upon pursuing an opportunity where you have an edge. This could be a micro-business or other higher-yielding market investment. You can also get away with holding less if you have access to cash through a 401(k) or cash-value life insurance policy.

Cash savings summary

We have covered a lot. And now you know the importance of cash savings when ascribing to the Idols Framework for building wealth.

• Cash is defensive and opportunistic.
• Historically, it’s generated huge wealth in turbulent economic times.
• It has never been easier to generate great returns using high-yield savings accounts, ultra-short-term bond funds, and money markets funds. If you have the right brokerage, your sweep account handles it automatically.
• And we optimized how much cash to hold given the stage of your investing journey.

Cash is king! Don’t let anyone tell you otherwise.

Related posts

Read more about the Idols Framework for wealth creation.

• Idols Framework overview
• Part 1: Cash savings and margin of safety
• Part 2: Starting a micro-business
• Part 3: Buy & hold index investing
• Part 4: Fast Follow Investing gives you control
  
  

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What is Fast Follow Investing?

• Start with buy & hold passive indexing.
• Then, 1) expand beyond stocks and bonds and 2) cut off severe market losses at the knees.
• Grow your lifetime savings at 12% to enjoy a 5% forever rate of withdrawal in retirement.
• Fast Follow Investing (based on Tactical Asset Allocation) is finally here for small investors like you and me.

So join me!

Buy & hold is a well-known, well-documented investment strategy. It works, and I include it as one part of the Idols Framework for building wealth. But, you must be judicious in how you use it.


I recently heard the story of David & Goliath as told by Malcolm Gladwell in his 2013 Ted Talk. His talk flips the classic story on its head and proves that Goliath was the underdog. What? The talk upset me because I thought I understood the story. Check it out here.

The lesson? Never stop confirming what you know and believe. Seek out differing and dissenting perspectives to continually test your opinions.

Until 2020, I held buy & hold investing in the highest regard. It worked well for me for over 25 years. But, the Covid stock market crash scared me. It forced me to reexamine what I thought about buy & hold.

In this post, I break down the pros and cons of buy & hold passive stock index investing. Then, I discuss how and when you should use it.

The punchline: In April 2023, I have no money invested in buy & hold. One thing needs to happen for me to get back into buy & hold…

Table of contents

1. Buy & hold investing defined
2. Pros of buy & hold investing
3. Cons of buy & hold investing
4. When to invest using buy & hold
   
   

What is buy & hold investing?

Buy & hold is a passive investment strategy that tracks a stock market index over the long term. You don’t trade stocks or exchange-traded funds (ETFs) based on market timing. Instead, investors buy and hold them regardless of changes in the stock market.

The buy & hold strategy is popular with financial independence/retire early (FI/RE) advocates. (These are my people!)

Pros of buy & hold investing

I see four key benefits of buy & hold investing.

• Buy & hold’s appeal is simplicity. Buy & hold is a mechanical strategy. Investors can tune out pundits offering advice based on market news, which is largely noise.
• Passive indexing ETFs have very low costs, especially at Vanguard. With little buying and selling, buy & holders get favorable tax treatment. These low costs increase returns. Reduced costs guarantee higher returns.
• Buy & hold stock ETFs outperform other investments like bonds, real estate, and cash savings in the long term. Since 1900, investors have reaped 8-10% returns annually (based on exactly how returns are measured).
• Buy & hold investing comes with immense social proof. The greatest investors of all time recommend it. Top buy & holders include Warren Buffett, Jack Bogle, and Peter Lynch. Visible leaders in the FI/RE movement advocate for it in podcasts and blogs.
  
  

Cons of buy & hold investing

No investment strategy is perfect. I see four major downsides to buy & hold.

• Buy & hold is inherently focused on stocks and stock ETFs. Stocks are high-performing investments, but not always the best choice throughout history.
• Buy & hold investing implies that prices don’t matter. Does buy & hold’s investment style change when stocks are at very high valuations? No. Does buy & hold respect the concept of “mean reversion”? No. (Mean reversion means that an investment’s price tends to converge to a long-run average price over time.)
• Long-term returns are just that. Ten-year periods of negative investment returns for stocks are common. Long-term losses can devastate retirement plans. You need only ask anyone starting retirement in 2000 or 2008. Buy & hold also has a large opportunity cost: investments are tied up for the long haul.
• Buy & hold ignores defensive approaches for managing risk. Buy & hold accepts market risk. Unfortunately, investment losses are asymmetric and compound exponentially. This volatility hurts returns, especially in the short term.
  
  

When to use buy & hold

Use buy & hold investing strategically when ascribing to the Idols Framework.

Consider it when:

• Stock market valuations are low enough to warrant strong future investment returns. Buy & hold investing works, but it depends on when you start your investing journey. At greater than 20x CAPE*, stock market returns over the next 10-20 years will likely be disappointing.

Here is a graph of forward-looking 10-year real investment return at given CAPE levels.


*The cyclically adjusted price-to-earnings ratio, commonly known as CAPE, Shiller P/E, or P/E 10 ratio, is a valuation measure usually applied to the U.S. S&P 500 stock market. It is the market price divided by the average of ten years of earnings (moving average), adjusted for inflation.

• Your investment time horizon is adequately long. Buy & hold investing over 10-20 years will nearly always produce a positive return. But, if you need the money in fewer than 10 years, buy & hold is not the right strategy. When nearing retirement, keep money for immediate needs in cash.

I include buy & hold investing as part of my Idols Framework for wealth creation.

But am I using it now? No. Why?

• At 29x CAPE in April 2023, I estimate a 1-2% forward-looking 10-year real return. It’s not worth taking the investment risk. There are safer investments with similar real (stated, nominal return less inflation) returns.
• I’m looking to retire in fewer than 10 years and will live on my portfolio. My investment time horizon is too short.

What must happen for me to get back in? When CAPE drops to 15x (estimated), I will put some of my long-term investment portfolio into buy & hold. But not yet!

Remember that buy & hold passive stock index investing has benefits and drawbacks. Watch CAPE levels and remember your investing time horizon. Use both to find the optimal time to use a buy & hold strategy. Most importantly, keep investigating buy & hold. Learn more. Maybe you’ll uncover your own inverted story of David and Goliath.

Reference articles

1. The Case for Buy & Hold
2. The Buy & Hold Myth
   
   

Related posts

Read more about the Idols Framework for wealth creation.

• Idols Framework overview
• Part 1: Cash savings and margin of safety
• Part 2: Starting a micro-business
• Part 3: Buy & hold index investing
• Part 4: Fast Follow Investing gives you control
  
  

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What is Fast Follow Investing?

• Start with buy & hold passive indexing.
• Then, 1) expand beyond stocks and bonds and 2) cut off severe market losses at the knees.
• Grow your lifetime savings at 12% to enjoy a 5% forever rate of withdrawal in retirement.
• Fast Follow Investing (based on Tactical Asset Allocation) is finally here for small investors like you and me.

So join me!

Buy the dip? No. Dollar-cost average? Maybe. This is a case study in second-level thinking.

Responding to the COVID crash

You were 44 years old. It was Apr 1, 2020, and in March, the stock market crashed. The S&P 500 stood at 2,470. It was down 20% from its high four months earlier.

You knew stocks offered the best return, and it’s exciting to get them on the cheap. In fact, in the last 10 years, the S&P grew by 3.5X. The market had become inflated. Many were calling it a bubble. Finally, a buying opportunity…

You moved some cash and bond funds into stock funds. It wasn’t extreme…enough to get your stock allocation back up to 80%.

• You bought the dip.
• Your target date fund made life even easier. The fund automatically bought more of its stock index fund.
• You continued to save monthly and dollar-cost average.

Well done! As of this writing in March 2023, the S&P 500 index has just eclipsed 4,000 for a 3-year return of more than 60%. You’re now 47 years old and riding high.

Let’s repeat the story, but with the Dow

You were 44 years old. It was September and in January, the stock market crashed. The Dow Jones Industrial Average (the Dow) was down 23% from its high eight months earlier.

You knew stocks offered the best return, and it’s exciting to get them on the cheap. In fact, in the last 20 years, the Dow grew by 5X. The market had become inflated. Many were calling it a bubble. Finally, a buying opportunity…

You moved some cash and bond funds into stock funds. It wasn’t extreme…enough to get your stock allocation back up to 80%.

• You bought the dip.
• You continued to save monthly and dollar-cost average.

But wait, this was 1966!

• There was no such thing as a target date fund.

The differences continued.

This was September 1966 and in January 1966, the stock market started tumbling. The Dow now stood at 7,083.

Ready for a rebound?

Unfortunately, no:

• 16 years later, in July 1982, the Dow stood at 2,480 for a negative 65% return. You turned 60 years old.
• 27 years later, in February 1993, the Dow finally crossed above 7,000 again for a 0% return. You turned 71 years old.

Really? Yes! Humans have a difficult time remembering the distant past.

Revisiting conventional wisdom

I’m not cherry-picking this scenario, unfortunately. Assume you joined the workforce in 1943, and you too invested your lifetime savings in the Dow. Your return over the next 40 years -your entire working career- was 1%.

• Dow in June 1943 - 2,451
• Dow in July 1982 - 2,480

Thank goodness for pensions.

Imagine your 60-year-old self in 1982. You started work at 20 years old in 1943. You earned 1% in the stock market over your entire 40-year career.

What was conventional wisdom then?

It’s easy: “Do not invest in the stock market!”

• “Do not buy the dip”
• “Do not dollar-cost average into a no-growth investment”
• “I don’t know what a target date fund is?! But if it has to do with stocks, I don’t want one!”

The crazy thing? Using 1982 conventional wisdom, you would have missed out on 40 years of incredible gains in U.S. stocks.

What to do?

Here’s what I recommend

1) Refresh your study of second-level thinking.
Ignore sound bites and look for the more nuanced, deeper truths.

• I started this post with two 44-year-olds. Each responded similarly to a ~20% drop in the stock market. The results varied wildly.
• We’ve learned that conventional wisdom has a short memory. Today’s conventional wisdom about buying the dip, dollar-cost averaging, and target date funds could be off base.

Be wary of what you want to believe!

2) Pose some questions.
In the year 2023, are we in a 1982 situation? Or is it more like 1966? When will we recover? Will it take 27 years? Will U.S. stocks continue to be dominant? Is there something else? How would I handle a stock market return of 0% over 10 years or longer?

Consider that we are sitting on 40 years of U.S. stock market growth since 1982 (when I was 6 years old!).

3) Next, answer all the prior questions with “I don’t know”.
I don’t know what the future holds. Nor does anyone else (without getting lucky).

4) Devise an investing strategy that gives us options and allows those options to flex as financial conditions change.
Hint: it’s Fast Follow Investing.

My main takeaway for you: Think twice. We are so very colored by our past, especially our recent past. It’s another one of those human biases that we need to overcome!

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What is Fast Follow Investing?

• Start with buy & hold passive indexing.
• Then, 1) expand beyond stocks and bonds and 2) cut off severe market losses at the knees.
• Grow your lifetime savings at 12% to enjoy a 5% forever rate of withdrawal in retirement.
• Fast Follow Investing (based on Tactical Asset Allocation) is finally here for small investors like you and me.

So join me!

Use these 3 strategies to shave 70% off your supposed retirement savings.

Your retirement savings target (your “number”) is less than you think you need.

In 2019, personal finance guru Suze Orman announced you need $5 Million to live a happy retirement.

That’s wrong, wrong, wrong, wrong, wrong. Very wrong.

Suze is misinforming those of us working hard to achieve financial independence.

In this post, I will show you how to shave $3.4 Million off this misguided $5 Million savings target. All you must do is 1) Review your large expenses, 2) Turn your hobby into a micro-business, and 3) Invest smarter.

Before we dive in, think about this:

“How much longer would you need to work to save an additional $3.4 Million dollars?”

I hope the answer is “far too long to even consider it!”. In fact, it’s likely not even possible for most of us.

First, let’s clarify a $5 Million retirement.

The often-used 4% rule translates $5 Million of retirement savings to living on $200,000 annually for 30 years. (More on this 30-year timeframe, later).

Next, we can reduce this $5 Million savings target by ~70% using three strategies.

To do so, we’ll build a case to adjust needing $200,000 annually. Then, we’ll back into the reduced savings target. And, we’ll do this all without sacrificing quality of life in retirement.

#1: Investigate large expenses to reduce spending

What is the best way to reduce the income needed in retirement? The best way is the most direct way: eliminate unnecessary living expenses.

Please take note! This is not an act of frugality or meant to reduce your quality of life in retirement. I’m willing to bet that you can comfortably live on 20% less. Let’s shave off $40,000 in spending without feeling it.

Exercise #1:
Look at your annual expenses and do the necessary work to curb your spending. Start with the big expenses: home, car, and health. Can you refinance your mortgage? How about selling a car and biking instead? Have you signed up for a subsidized Affordable Care Act (ACA) health plan at healthcare.gov?

Exericise #2:
Imagine you are an entrepreneur, and it is “Day 1”. Assume that you can only afford 25% of what you had planned for. In this scenario, your $200,000 annual spend becomes $50,000. What unique changes can you make? This exercise results in extreme ideas that you could later change to be less severe.

Exercise #3:
Learn from others who have come before you. Here are 10 ideas that members of the Fast Follow Investor community have shared with me. You need NOT downsize your home, reduce the # of vacations you take, or eliminate a daily coffee habit!

Instead, you might:

1. Cancel subscriptions that you no longer use - save $1,000 each year
2. Eliminate or reduce insurance premiums (life, long-term disability, auto) - $10,000
3. Read/listen to books using Libby instead of purchasing on Amazon - $1,000
4. Program your thermostat and lower the temperature on your water heater - $3,000
5. Ask for coupon codes via a company website’s chatbot before buying online - $1,000
6. Transition to one car and save on maintenance, licensing, and insurance - $6,000
7. Switch to a subsidized healthcare plan through healthcare.gov - $10,000
8. Refinance your mortgage - $3,000
9. Stop supporting your kids (cell phone bills, bank overdraft fees). They are adults now. - $1,000
10. Commit to “wait one week to buy” after placing an item in your Amazon shopping cart - $4,000

Total annual savings: $40,000

And don’t fret about inflation. Even with inflation, studies show that the average retiree’s spending drops by 25% for every 10 years in retirement. If you retire early, you should adjust that assumption. But, in case you don’t believe me: think about how much your 85-year-old mother spends on travel, for example. Spending in real terms declines as you age.

Calculation: ($200K less $40K saved = $160K needed)/4% = $4M savings target, updated.

With reduced spending, we are now living a $5 Million retirement on $4 Million in savings.

That’s $1 Million less savings required! How many fewer years of work is that? 10 years? More?

But we can do better…

#2: You will want to stay busy, so get paid for it.

Any income earned in retirement is that much less you need to save!

I often hear this concern: “But wait, if I’m working then I’m not retired.” Yes and no. It depends on how you’re earning this retirement income. Also, after relaxing in retirement for a while, you may realize you need some purpose back in your life. Earning money on your terms this time is a way to get it. For example, why not work a few half days at a local cafe? It’s a great way to stay connected with friends and the community.

My grandfather and my father-in-law both worked in retirement for reasons beyond money.

• My grandpa Kenny’s career as a plumber lead him to work as a sales associate at his local Ace Hardware. Before taking the job, he confided in me about his boredom: “Brian, I can only rotate the wheels on the vacuum cleaner so many times.” At Ace Hardware, he helped customers find what they needed. But mostly, he loved chatting with them. My grandpa was an expert joke teller.
• My father-in-law, Robin’s situation was similar. He loves golf. Robin works several days a week now as a starter at his favorite golf course. He jokes with the golfing regulars all day. He spins his yarns. And he gets a paycheck. And free golf!

I can think of several options for making money when retired.

1. Rent out that extra room in your basement. Or, if you travel for part of the year, rent out your house during that time.
2. While very few kickback permanently in retirement, it’s especially true of early retirees. Those quicker to find financial independence are especially likely to pick up a new job or career.

• Do you like people? Work part-time at your favorite coffee house.
• Do you like books? Work at the library.
• Are you fortunate enough to have seasonal skills? A retired accountant could pick up work during the busy tax season, then be off in time for the summer.
• Do you like your former colleagues? You could consult with your former employer for part of the year.

3. Perhaps you have a hobby or passion project. Find 1,000 true fans and watch the money roll in. My uncle-in-law, Howard, is the foremost expert on Mazda RX-7 and RX-8 cars. He’s an absolute true fan of the Rotary engine. And he’s an expert. Each year, Mazda RX fans spend oodles of time and money working with Howard.

The options are endless.

Here are a few opportunities that add up to $80,000 per year:

• Put your house on Airbnb or VRBO. Rent it out during an extended trip you take to earn $10,000.
• Do seasonal work or part-time consulting. Charge $15,000 for each of the 3 months and earn $45,000.
• Monetize a hobby or passion. Sell $250 worth of something to 100 true fans to earn $25,000.
  
  

Calculation: ($160K less $80K earned = $80K needed)/4% = $2M savings target, updated.

With some income in retirement, we are now living a $5 Million retirement on $2 Million in savings.

That’s another $2 Million less savings required! Wow. Let’s find more…

#3: Maximize the withdrawal rate on your savings

The final strategy is the easiest to implement. You need not cut spending or monetize hobbies. Instead, just invest your nest egg smarter.

Let’s revisit the 4% rule that I used earlier. The rule first appeared in 1994 after studying a 60%-40% U.S. stock-to-bond portfolio over different 30 years periods in history. But, using a 4% safe withdrawal rate (SWR) is inaccurate for two important reasons.

1. It is based on an inferior investment strategy (60/40). You can invest for greater return and less risk.
2. It is timebound to 30 years. What if you want to stay retired for 35 years? 50 years? Or longer?

Instead, let’s use 5% as the corrected, perpetual withdrawal rate (PWR). To do so, the Fast Follow Investor strategy is necessary. I break it down further in this [post](to update with SWR/PWR post).

So, our $80,000 annual income in retirement no longer requires $2 Million in savings.

Calculation: $80K needed/updated 5% withdrawal rate = $1.6M savings target, updated.

This is $400,000 less savings required.

In total, the three strategies reduced our retirement savings required by $3.4 Million.

So there you have it: with a little work, your $5 Million nest egg need only be $1.6 Million!

$1.6 Million still requires work to build. To do it, I urge you to follow the Idols Framework for smarter wealth creation. But it is calming to know you needn’t stay in your job decades longer to save an unnecessary, extra $3.4 Million.

Please, do this analysis for yourselves!

I suspect many of you reading this are financially independent NOW. But, you may not have realized it. Make the jump. Take the plunge. You can do it.

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What is Fast Follow Investing?
Start with buy & hold passive indexing. Then, expand beyond stocks and bonds & cut off severe market losses at the knees. Grow your lifetime savings at 12% to enjoy a 5% forever rate of withdrawal in retirement. Fast Follow Investing (based on Tactical Asset Allocation) is finally here for small investors like you and me. So join me!

“In like a lion, out like a lamb” (hopefully)
-Old Farmer’s Alamanac (except the hopefully part)

This weather folklore stems from ancestral beliefs in balance. If the weather at the start of March is bad (roaring, like a roaring lion), the month should end with good weather (gentle, like a lamb).

Let’s also hope that is the case for the Fast Follow Investor portfolio.

This month’s changes

My portfolio changes as of March 1, 2023:

• Eliminate US Mortgage REITs: ~10% 🔽
• Reduce International Stocks: ~10% 🔽
• Reduce exposure to Gold: ~25% 🔽
• Increase Cash, once again(!): ~45% 🔼

The resulting March 2023 Fast Follow Investor portfolio: roughly 35% international stocks, 15% gold, and 50% cash.

February’s performance

So far, so bad. :-(

February was a difficult month with nearly all flavors of investments declining in value. Everything! Stocks, bonds, gold, and commodities. All of January’s gains have been more than wiped out.

Fast Follow Investor model performance. Feb 2023: -5.1% 2023 YTD: -1.2%

Always think long-term

In difficult months like this one, remember critical facts about the portfolio:

• A long-term annual return of >12%
• Recovers to a positive return in 3 years or less (currently negative for 14 months)
• Touts a 5% “forever” rate for retirement withdrawals… this is huge!

Never forget the 36 years performance graph, for reference:

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The 4% Rule is a dangerous myth based on a faulty premise. Ignore Safe Withdrawal Rate (SWR) and maximize Perpetual Withdrawal Rate (PWR) to enjoy 50+ years of financial freedom.

Why do we save? For nearly all of us, we save for retirement income later in life.

We use the 4% rule to estimate how much we can withdraw each year of a 30-year retirement. We use 3.5% if we plan to retire early.

I would like to introduce you to the “5% Forever” Rule.

You and I want more than 30 years of financial freedom.

My goal is financial independence at 50 years old. With medical advancements, I expect to live until 100 years old. So, I need my savings to last me 50 years.

The 4% rule governs the land. It’s close to becoming conventional wisdom. And I’m not a big fan of conventional wisdom.

Some quick history.

A financial planner named Bill Bengen first advocated the 4% rule over 25 years ago, in 1994. His clients had questions about how much they could safely withdraw from their nest eggs.

Bengen looked at U.S. market data from 1926 to 1992. He determined that given a portfolio split between stocks and bonds would survive a 4% safe withdrawal rate (SWR) for a retirement lasting 30 years.

4% withdrawn annually would not deplete a portfolio of U.S. stocks (60%) and bonds (40%).

But, consider where Bengen’s analysis wouldn’t hold up:

1. Most other time periods in U.S. history.
2. Anywhere other than the United States.
3. For a time period any longer than 30 years.

The 4% rule was built on shaky ground. It’s not a very robust #.

In fact, since it was published in 1994, a lot of work has been done to validate 4%. It now appears the more robust % for a 60/40 portfolio is 3.5%. The problem is that “4% rule” is so nice and memorable. And now it’s hard to change.

I recommend thinking in terms of a forever rate, or as it is more commonly called, a perpetual withdrawal rate (PWR). At what rate, can you withdraw from savings forever?

Three factors determine how much you can spend each year.

With financial experts recently suggesting that 4% be lowered to 3.5%, how can I advocate raising it to 5%?

The short answer is to adjust how the underlying investment portfolio is constructed. There is a better solution than U.S. stocks (60%) and bonds (40%).

But first, let’s investigate what factors impact the withdrawal rate. There are three.

No. 1 and the most well-known is investment rate of return. A greater investment return is, of course, better. Growing your portfolio faster supports the ability to withdraw larger sums. But this is just one factor.

No. 2 is inflation. If inflation stays low, the cost of living stays low. And investments can grow to easily cover the cost of future expenses.

Inflation can be addressed in your portfolio by owning Treasury Inflations Protected Bond Securities (TIPS). But I recommend doing so only as part of the Fast Follow Investor portfolio.

A better way to protect against inflation is to control how and where you spend money. I call it smart spending. For example, when egg prices are outrageous, buy milk, yogurt, and cheese for protein.

No. 3 will make sense but is discussed much less: investment return volatility. Low volatility means that your nest egg is protected from steep and severe losses. When volatility is high and investments decline sharply, you’re forced to withdraw savings when portfolio values are low. This is commonly called “sequence of return risk”. (Why are financial terms made to be so complicated?)

In summary, to maximize your forever rate, control inflation with smart spending. Then, invest in a portfolio that offers high returns with low volatility.

Use the Fast Follow Investor portfolio to withdraw at 5% forever.

The Fast Follow Investor portfolio offers strong, stable investment growth. It’s predicted to earn 12% annually through all economic cycles.

But, the best feature of the Fast Follow Investor portfolio is its 3-year positive return profile. This means a negative return recovers to neutral within 3 years. It’s only possible because it manages losses, limiting them to a 3-year period historically. This is kind of amazing.

Think about it. Start with $50,000 invested. Once it goes negative (which it will), the portfolio will find its way back to $50,000 again within 3 years. Compare that to 10 years for the U.S. stock market. The stock market return for the lost decade of 2000-2010 was 0%!

The Fast Follow Investor portfolio’s 12% return and 3-year positive return profile work together to achieve a 5% annual withdrawal rate…to infinity.

And that is the 5% Forever Rule!

Retire whenever you’d like to and comfortably withdraw more of your invested savings. Just be sure your savings align with the Fast Follow Investor portfolio.

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How takeout and a sitter can lead to deeper connection, more wealth, and a life with purpose.

My wife and I sat in a church basement completing worksheets of chores we would each do when married. It was then that we identified our key to a happy marriage: a dishwasher. Thank goodness for this marriage preparedness class!

We married in 2001. Both 25 years old, we had no grand plan for what life together would look like. Beyond getting a dishwasher, life was open-ended. I assumed “things would just work out”.

The first 20 years

The years passed and life happened. Personal goals. Professional goals. Our son was born in 2011. We traversed life “just fine”. I didn’t think about it too much. I put my head down, went to work, made money, vacationed, hung out with the family, and repeated it for years.

It took me 20 years to finally see that I had no vision for what I wanted our lives to be. I was 45.

Conversely, my wife only seemed to think about big things. Why are we here? Where are we going? What is our purpose?

Up to that point:

• I handled work and “tasks”. She carried the emotional burden.
• I lived in the present. She looked to the future.
• I thought about money. She thought about life.

We needed a solution for combining forces. We could no longer “wing it”. We would need to work together to design a purposeful and more connected life.

It continues to be our goal for the next 20 years.

Trial and error

My epiphany for planning a well-intentioned life didn’t happen all at once. It took place over many months. Covid-19 shook me out of a life of “going through the motions”.

To improve our unity and direction, my wife and I decided to meet weekly and make some plans. We mapped out what needed doing that week, fun weekend plans, and long-term activities to work on together. The discussions morphed from tactical to aspirational and back again.

But we had many fits and starts.

• Talking at night didn’t work. That kid kept interrupting.
• In the morning failed. We have different sleep schedules.
• We committed to meeting in person, but that also proved unreliable.
• We settled on mid-day meetings by Zoom. And, yes! It worked for a while.
• But then, we’d miss a week and the schedule unraveled for two more.

In the end, for us, the weekly meeting became too much. We couldn’t get it to fit in with many, other commitments.

Our efforts were completely derailed for several months, until my wife recognized it. Since our time meeting weekly, we had both grown. We learned some things…

Monthly date night

We now meet monthly. We like it, because it’s efficient and with only 12 dates a year, there is absolutely no reason to miss. For us, these are date nights. You might also call them meet-ups. Over the course an evening, we discuss all aspects of our lives.

At first, the dates were tactical.

We would:

• Arrange for our son to be away.
• Order takeout.
• Discuss plans for the coming month. That was it!

The next stage became more strategic.

Additionally, we would:

• Revisit one life and one money goal we set for the year.
• Plan an interesting activity for the month (to “make a memory!").
• Find new ways to connect with each other.

Now, the date night looks like this:

• Sometimes we do takeout and sometimes we go out!
• We pick and choose our conversation topics. Some months we cover life or connection or money or a combination.

But, we never miss a date.

Why does it work?

I truly believe that a monthly date night leads to deeper connections, more wealth, and a more well-intentioned life.

And now, I think I know why. I recently read Charles Duhigg’s book, The Power of Habit. In it, he describes the keystone habit.

A keystone habit is one that leads to a cascade of other positive actions. It’s a habit that has a ripple effect…from it, other good habits form.

The book offers two examples…

1. Sleep. Commit to 8 hours of sleep a night and wake up rested and ready to make many other good decisions throughout the day.
2. Exercise. Commit to 30 minutes in the morning and feel better all day. You’ll think clearer and tend to eat more healthy foods.

Life is hard. Work. Relationships. Kids. Friendships. Health. There is so much to think about and work on.

Can’t I just focus on one thing to jump-start everything else?

Well, maybe not one. But, how about three things?

First, focus on yourself: 1) get enough sleep and 2) exercise daily and other dominoes will start to fall.

Then, 3) commit to a monthly date night! With proper guidance, it can lead to a deeper relationship, more money, and a better life. I will help you.

I cannot wait to see what the next 20 years have in store for us…

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Second-level thinking is a form of deep learning that can help you develop an edge. I call this principle “Think Again”, and it is foundational to smart investors.

I offer my thesis, the “Idols Framework for wealth creation”, for your review. Calling for 25% Buffett, 25% Walton, 25% Bogle, and 25% Thorpe, it’s a recipe for you to absorb, adopt, and adapt.

I have refined my formula for smart wealth creation in the last five years. Is it a secret formula? No. Is it prescriptive or one-size-fits-all? No, and no.

But, the formula has merit. And I wish I had known it earlier. The Idols Framework is foundational. With it in place, I can enjoy the adventure of life.

Enjoyable, stress-free wealth accumulation

You can determine the value of your time by calculating your earnings per hour worked. It makes sense to hire out jobs costing less than this measure. Unless you enjoy the job for other reasons (a hobby, for instance)…

Successful individuals like Ed Thorpe drive the measure higher: What is the most money you could earn for the least amount of work?

My variation on personal earnings per hour adjusts the factors slightly.

1. Instead of earnings, I’m interested in wealth.
2. I redefine time spent (per hour) to stress-level.

My measure becomes wealth created per stress endured. The goal is a high score.

Two scenarios produce a high score:

1. “The Bezos” This is extreme wealth with significant stress. The high score is due to a large wealth factor.
2. “The Vagabond” This is modest, even minimal wealth, with near zero stress. The high score can be attributed to a small stress factor.

If I had to pick one, I prefer “The Vagabond”. Stress is real, and it shortens lives. In the end, all we have is time. Also, does extreme wealth make us happier?!

But, I’m shooting for somewhere in the middle. Likely, we all are. We would like enough wealth accumulated for the least stress. (Enough means financially independent.)

How then?

Idols Framework for wealth creation

We will create wealth using the Idols Framework. It is a loose business and investment portfolio that I will dissect in great detail in future posts. For now, know that the Idols Framework starts with equal parts Buffett, Walton, Bogle, and Thorpe:

• 25% Warren Buffett, of Berkshire Hathaway fame [margin of safety]
• 25% Sam Walton, from Walmart [micro-business]
• 25% John Bogle, founder of Vanguard [buy & hold indexing]
• 25% Ed Thorpe, math genius who beat Vegas and Wall Street [quantitative trend]

The prerequisite to employing the Idols Framework is simple. You must be great (top quartile) at two or more skills that you combine to provide unique value to a niche market.

The perfect example is Scott Adams, cartoonist. He combined his skills of 1) drawing 2) comedy and 3) corporate experience to produce the successful “Dilbert” cartoon series. Here is his take.

Early in life, you will build your skills and also your margin of safety. Also called an emergency fund, this is the Buffett slice of the Idols Framework. It provides work flexibility.

Later, use this money to be opportunistic. With it, you can take advantage of major market declines (black swan events). Buy when everyone else is selling.

Next, create a micro-business. Walton is the second slice, but not because Walmart is so giant. I choose Walton to emulate because he’s claimed he didn’t create anything original. Sam Walton learned his best ideas from others. Then, he combined and aligned the ideas with his vision.

I love this fact because it means anyone can start a business. Keep it very small (micro) to maintain sole control. Then, you alone can steer the business to low-stress waters.

Real estate investment makes me anxious. I fear waking from a deep slumber to replace toilets in the middle of the night. But many disagree with me. Small-scale real estate investment also qualifies as a micro-business. In fact, I’m advising my son to buy two four-plexes early in life.

At last, the Bogle and Thorpe slices work together to compound your savings. I invest in two Vanguard index funds: 60% in VTI (US) and 40% in VXUS (non-US). These percentages align with the market capitalization of the world stock market.

The Idols Framework’s last slice is my Fast Follow Investor strategy. It replicates quantitative trend models built on Ed Thorpe’s early work. The strategy provides deep diversification alongside market-based, passive, buy & hold indexing (VTI/ VXUS).

These investment models need no investment expertise. But you must stay diligent. This is easier said than done. In fact, it’s the human side of investing that is the most difficult.

One can practice a level-headed temperament with good planning, habit-building, and support. I write a lot about this.

I list the four slices of the Idols framework at 25% each, but percentages do vary for me. And they will for you. In fact, they should flex as you move through life. They will vary based on life stage, the economy, and when opportunities or risks present themselves.

Putting it all together

Now, let’s revisit our wealth created per stress endured measure. We achieve a high score by accumulating enough wealth with very little stress:

• The Bogle and Thorpe investment models are proven and mindless to use.
• With Walton, you stay small (micro!) and navigate your work life as you see fit.
• And Buffett’s margin of safety provides additional padding… so you can “be greedy when others are fearful”.

Great wealth with little stress. Magic.

Follow the Idols Framework to run a self-directed, micro-business with cash on hand to take advantage of undervalued assets all the while producing high investment returns that are fully diversified.

That sentence is long. But, I’ll keep this post short. I have so much more to share. Please stay tuned.

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Every blog or website should feature an “About You” page.

When writing for an audience, experts instruct us to niche down. “Write for a very small audience, one that you understand deeply.” A narrow and deep niche helps us provide worthy advice.

Don’t try to be everything to everyone. It’s the rule behind the wonderful 1000 true fans model for creators. The recipe:

1. Discover yourself and your passion.
2. Share that passion.
3. Then, rely on the power of the internet: your tribe will find you.

Niche. Tribe. There are many names: target market, micro-niche, intended reader, marketing persona, target audience, and avatar. I’m sure there are more.

My Intended Reader

Simply put, I write fastfollowinvestor.com for me. I write for me as someone who is 5 years from finding financial freedom. But, I also write for my younger self…on lessons I wish I had known earlier. I also write for my future self…helping me visualize what I want my life to become.

You may not be a 47-year-old, married, father of one who is a management consultant by day and lover of great biographies by night. (P.S. I recommend Ben Franklin, Charlie Munger, and Ed Thorpe). Still, I hope you find my ramblings helpful as you pursue your well-intentioned life.

Now you know who I’m writing for. But, why do I do it? Why do I share personal experiences about wealth building, investing, and living a meaningful life? There are three reasons.

1. Writing what I learned (or am learning) clarifies my thinking and reinforces lessons.
2. I hope my son learns from my experiences early and gets a jump on living his best life.
3. After I die, I wish for future generations to know me and my beliefs. I wish not to be long forgotten.

Defining Traits

Here is a list of my typical reader’s traits and experiences. If you identify with a majority, this blog is for you.

Who you are:

• You know more about money and investing than the average person.
• You know debt is bad, and so you don’t have any. That is, except for your home or other real estate.
• And, you use credit cards but only for cash back and points.
• You have the right insurance on your life, your earnings (long-term disability), and your property. You have added liability coverage (umbrella).
• You know high fees are bad and watch for that in your mutual and exchange-traded funds.
• You know indexing is good.
• You know commissioned investments are bad.
• An insurance salesman has burned you early in life. Whole-life, anyone?
• You work with a financial advisor, but on a fee-only or assets-under-management arrangement.
• You’re not a professional investor nor do you want to be. You don’t follow macro-trends, interest rate moves, or credit spreads.
• You know the market moves irrationally, and that you cannot predict it in the short-term.
• You know that the stock market eventually goes up. At least, it has for the past 40 years!
• You don’t pay for investment newsletters.
• Vanguard is your friend. You respect John Bogle.
• You find Warren Buffett interesting but don’t know who Edward Thorpe is.
• You work hard and may find yourself in a corporate job…
• But you dream of working for yourself…
• And of retiring early, the ultimate form of independence. You’ve dabbled in the F.I.R.E movement.
• You watch your living expenses but splurge every so often.
• You max out your 401k. You invested in a Roth IRA until your salary got too high, and now you wonder if it makes sense to fund a traditional IRA.
• You work hard with your head down. Retirement seems pretty far away (though it doesn’t have to be).
• When you did take a moment to think about retirement, you discovered Required Minimum Distributions. :-(
• You were taught “if it’s too good to be true, it likely is” and so are wary of get-rich-quick schemes. But it still would be nice to win the lottery…

Who you want to be:

• You want to work in a job you enjoy.
• You want less stress.
• You want to travel more.
• You don’t necessarily seek high pay, but most definitely do seek more wealth.
• You desire financial freedom sooner than most, so you can enjoy life…perhaps doing something different.
• To get there faster, you seek out new ways to improve on the great foundation that you’ve already built: retirement plan(s), low-cost mutual funds, emergency cash reserve, and possibly even a rental property.
• You want to provide the best possible life for yourself and your family.

Is This You?

Do you find yourself in any of these situations?

1. You are unhappy in your current job. Or, you find yourself using financial calculators to estimate how much you need to retire. Whatever the case, you want to speed up financial independence (a.k.a. retire early).
2. You’ve taken the plunge. You’re retired. It’s more nerve-racking than you anticipated. Without your full-time job, you no longer add to your savings each month. The thought of a stock market drop of 35% freaks you out.
3. You have recently come into an inheritance. Congratulations! But, you’re worried about investing it into a frothy, even bubbly stock market. Should you dollar cost average? What if the 2020s turn into a lost decade?
4. Your problem is not financial, but psychological. You no longer have the fortitude to stick with an investing approach. Perhaps, like me, you experienced an investment loss of your own doing (or had a near miss). Your emotions took hold in a way you didn’t expect.

Tell me, did any of these resonate with you?

If yes, you, my friend, are my intended reader.

Welcome one and all!

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Ed Thorpe is a mathematical genius, but his approach to life is what most impresses me.

Ed Thorpe is a beacon to me. I finished his autobiography last week. He offers a great personal blueprint for living your life. If these highlights inspire you, I urge you to read the entire book. Ed has so much to offer.

I had not known of Ed Thorpe until 2021. He is the first modern mathematician to investigate risk and achieve great financial success doing so. He devised ways to beat the casinos in blackjack and roulette. Later, he used similar techniques to win at investing with his hedge fund, Princeton Newport Partners.

His mathematical perspectives on investments underpin the fastfollowinvestor.com investing strategy. And the book details it in a way we can all understand.

But, Ed’s approach to life serves up even more lessons.

In A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market, Ed takes us on his journey from depression-era Chicago to MIT to mafia-controlled Las Vegas and finally Wall Street. Then, suddenly, he casts all of his professional success aside.

At its core, this is a book about how to live your best life.

“What matters in life is how you spend your time. Life is like reading a novel or running a marathon. It’s not so much about reaching a goal but rather about the journey itself and the experiences along the way.”

Ed learned from Benjamin Franklin (another favorite of mine) who became financially independent at 42 years old. It was Franklin who said:

“Time is the stuff life is made of, and how you spend it makes all the difference."

Franklin followed his own interests in his next 42 years, and his accomplishments are remarkable.

Ed Thorpe advises that we:

• Stay independent and in control of our lives
• Keep humble
• Be great, not grand (Don’t get big for big’s sake.)
• Strive for simplicity
• Develop systems for everything in life

On investing, Ed believes in finding a simple edge and betting on yourself. At the same time, you must control the size of your bets to cap any losses.

• “I also believed then, as I do now after more than fifty years as a money manager, that the surest way to get rich is to play only those gambling games or make those investments where I have an edge.”
• “A good defense keeps other people from taking your money. As Warren Buffett said: ‘In order to succeed you must first survive. You need to avoid ruin. At all costs.’.”

In the book, Ed clarifies these points with a sports analogy. The very best teams have both a very good offense and a very good defense. Neither has to be the best, but both must be strong to win championships.

I’d like to close by giving Ed the last words:

“When Princeton Newport Partners closed, Vivian (Ed’s wife) and I had money enough for the rest of our lives…. it freed us to do more of what we enjoyed most: spend time with each other and the family and friends we loved, travel, and pursue our interests.

Taking to heart the lyrics of the song “Enjoy Yourself (It’s Later than You Think),” Vivian and I would make the most of the one thing we could never have enough of—time together. Success on Wall Street was getting the most money. Success for us was having the best life.

Whatever you do, enjoy your life and the people who share it with you, and leave something good of yourself for the generations to follow. "

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References:

Founder’s podcast Ed Thorpe episode

A dozen lessons from Ed Thorpe blog

Nassim Taleb’s book forward on Medium

Here is my monthly process

Trigger: At 4PM Eastern, the market closes on the last trading day of the month.

1. Immediately, my FastFollowInvestor.com (FFI) model* identifies those investments to add to or reduce.
2. At 5PM Eastern, I email my investment changes** to friends and colleagues.
3. That night, I have a (working) dinner date with my wife. We use a spreadsheet to calculate buy/sell trades in our investment accounts to match the model.***
4. At 10AM Eastern on the first trading day of the next month, I log into our accounts to buy/sell ETFs as we calculated the night before.

This process is repeated every month…forever!

The highlight is definitely dinner with my wife.

But, I should not skip over this fact too quickly. The most difficult part of investing is psychology. How do you stick with it through good times and bad? By tying monthly FFI trades to a dinner date, I’m creating a habit that I can commit to for decades.

What changes did I make in February?

Gold and international equities were winning trades in December and January. The FastFollowInvestor.com model increased both positions in February.

• Gold is now nearly 40% of my portfolio (up 25%)
• International equities stand at 45% (up 10%)

February also brings a new allocation to mortgage REITs (up 10% to 10%).

And, after languishing for 3 months, I hold no more commodities (down 10% to 0%).

What remains is very little cash (less than 5%). It is interesting that just 3 months ago, FFI held an 80% cash position!

One thing I love about this system: I must never decide when to move out of cash and into the market. The model does it for me.

See you next month! :-)

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*FFI is a deeply diversified portfolio of asset allocation, trend-following models for individual investors.

**Broad-based, liquid ETF indices of stocks, bonds, real estate, gold, and commodities are possible FFI investments.

***I think of these trades as monthly rebalancing into the best-trending investments.

Economists say humans are rational and emotionless investors. Wrong! Humans are highly emotional, and it hurts our portfolios. The good news is that we can train ourselves to become more levelheaded investors. Take these 3 specific actions…

On December 9, I shared my December 2022 trades. International markets trended up in November. So, at the direction of the Fast Follow Investor (FFI) model, I moved ~50% of my portfolio from cash to international equities. At the time, I was nervous, noting:

My head and my heart tell me this is a precarious time to “get back in”. But the market and the model disagree.
“When it comes time to buy and it’s the right time, you will not want to. When it comes time to sell and it’s the right time, you will not want to.”
Remember: Just like Buy & Hold, Fast Follow trend investing requires fortitude to stick with it.

Warren Buffett has said: “Success in investing doesn’t correlate with IQ … what you need is the temperament to control the urges that get other people into trouble.”

I agree. Successful investors remain calm when everyone around them is pulling their hair out. A levelheaded temperament helps them stick to the plan. That sounds great. But how, exactly?

There are three things you can do to develop and exploit a calm, levelheaded temperament:

1. Develop your “edge” by picking the right investment system and knowing it better than anyone else.

• Whether in stock selection (Buffett), hedging (Thorpe), real estate investment (any local expert), index funds (Vanguard) or otherwise, choose a system where you know more.
• Then, exploit that knowledge by betting on yourself.
• For me, this is Fast Follow Investing.
  

2. Control your amount of money invested (bet size) so the particular investment system will never wipe you out, even if a black swan event should occur.

• Start slow (to go fast) and ramp up your invested savings over time.
• Bet more when favorable to do so, and less when unfavorable per the Kelly criterion.
• Always keep some of your wealth in cash or U.S. treasury bills. This establishes a margin of safety, as Buffett recommends.
  

Once you 1) find your investing edge and improve on it over time, and all the while 2) protect yourself from major losses, you’re halfway there.

The hardest part is to put systems in place to stay levelheaded and focused, despite difficult times:

3. Finally, turn your positive behaviors into habits. Then, investment decisions (according to your preferred system) become automatic.

• Tie preferred human behaviors to positive external triggers. E.g., review investments as part of a monthly dinner date with your spouse (no kids!).
• Make the impact of not sticking to your habit explicitly known. E.g., project how you’d feel if you missed a future opportunity because it would be too difficult to take action now.
• Establish social support systems to cheer you on in challenging times.
  
  

Fortunately, I made that December 1st trade into international equities. As a result, my portfolio is up 5% in two months. Of course, international equities could have gone down, and the FFI model would have adjusted accordingly. Up or down, I am happy I was able to stick with the system that gives me my edge.

I will continue to find and meet these challenges each month…with some months proving more difficult than others.

By reading these posts, you help hold me accountable! Thank you for cheering me on.

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Tactical Asset Allocation (TAA) adds strong diversification alongside a Buy & Hold investment strategy. I compare the two strategies and highlight their differences.

In my 20s, I consulted for Accenture out of its Milwaukee office. One highlight of working at a big firm in the late 90s was the sometimes extravagant employee perks.

The greatest perk took place one day in October every year. To reward us for a job well-done, Accenture leadership would rent out Six Flags Great America… in its entirety. I would always bring my girlfriend (now wife).

Imagine showing up at Six Flags just north of Chicago, parking in the front row, and walking into an empty park. It wasn’t as empty as Wally World when the Griswolds visited. But close…

Our small group would ride Iron Wolf and American Eagle and our favorite, Raging Bull. At times you needn’t get off to get back on! One year, I think I went on 50 rides in a day.

My wife and I bonded over our shared love for roller coasters and these incredible days at Great America.

In 2018, twenty years later, she and I were living in the Bay Area. That year, we hired a sitter and drove 30 minutes to Six Flags Discovery Kingdom in Vallejo. We got there early. With excitement, we boarded our first ride.

When we got off, we looked at each other and said, almost in unison, “I don’t think I can do another one.” We pushed through it, tried one more, and both nearly lost our breakfast. Dizzying.

The roller coasting chapter of our lives had closed.

My investing roller coaster

I felt the same way when watching my 80/20 investment portfolio crash in March 2020. What hadn’t bothered me in 2001 and 2008 now did. I could no longer stomach the steep losses. Why?

I looked at my now greater savings as the collection of 20+ years of hard work. Watching $300K vanish was hard to take. I remember thinking, “I’ve just lost 6 years of savings…6 years of sacrifice.”

At least I didn’t pass out like I almost did at Six Flags.

Now, let me fast forward through 18 months when I read everything about investing that I could get my hands on.

I had found an investing strategy to complement my Buy & Hold portfolio.

It’s a great diversifier, without dilution. Meaning, it enhances my investment returns. And, best of all, it reduces my risk of severe loss and helps me sleep better at night.

Tactical Asset Allocation (TAA). It’s the investing strategy I teach at FastFollowInvestor.com.

Comparing two strategies

To learn TAA, I checked much of what I already knew about investing at the door. Like Adam Grant recommends in Think Again, I had to 1) unlearn and 2) relearn.

Take a look at these comparisons I’ve drawn:

There is a lot here, I know. It took me almost a year to understand TAA. It’s new and different. And it doesn’t always align with popular beliefs.

So, this is my challenge: How can I best share this strategy so everyone benefits?

Expanding the analogy

Derek Thompson, one of my favorite podcasters, speaks in analogies.

It can help new ideas stick. So let me try one.

I think of Buy & Hold investing like that ride on a roller coaster.

A roller coaster entertains riders with steep climbs and steeper drops.

You must put your trust in the ride because you have no control.

For long stretches, there is a lot of up and down, but you make no vertical progress.

But, riding is easy. You get on the ride and go (think: set it and forget it).

Tactical Asset Allocation (TAA) is more like a mountain trek.

Hiking a mountain takes preparation and, sometimes, training.

You choose your path, and so control your destiny.

While you may need to backtrack, it’s minimal if you plan your route well.

When you reach the summit, you’re exhausted but feel great given the achievement.

Use both for strong diversification

Buy & Hold and TAA are valid investing strategies.

You can expect positive returns from both. But, one may work better than the other in certain situations.

One obvious use case: the new saver has time to reap rewards from Buy & Hold. The soon-to-be retiree does not have the time and should tilt her/his portfolio toward TAA.

Buy & Hold and TAA are excellent diversifying strategies.

Together, they reduce your portfolio’s overall volatility and don’t dilute investment returns. Diversification, not diworsification.

And how fortunate this is! Take a small piece of your Buy & Hold portfolio and try it out. Dipping your toe in the TAA waters is a good way to learn something new and manage risk at the same time.

When you’re ready for more, you can watch my trades monthly in real-time at FastFollowInvestor.com.

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On January 3, my Fast Follow Investor (FFI) model made some portfolio adjustments:

January 2023 Allocations

• ~35% International equities (tickers SCZ, VGK)
• ~25% Gold and commodities (tickers GLD, DBC)
• ~40% Cash

A “Santa Rally” never materialized, and December was a down month for U.S. equities. The S&P 500 was down over 2.5%. The Nasdaq ended down almost 5%. Fortunately, I held only a 3.3% position in U.S. equities.

The FFI portfolio was up and down all month, closing the month down 0.3%.

Most January portfolio adjustments were minor tweaks.

The most significant change: FFI’s cash position increased by 15% after reducing my investment in one international equity ETF (EFA).

My 2022 Performance

For most, 2022 was a difficult (and down) year. It was no different for the Fast Follow Investor portfolio. 2022 ended down 13.1%.

The only good news, if you can call it that, is the standard 60% stock/40% bond portfolio was down 17.6% for 2022.

So, yes, the FFI portfolio fared 26% better. It’s nothing to write home about. But, it does reflect the downside risk protection that Tactical Asset Allocation offers.

When the markets do recover, growth will compound from a higher low. This is rewarding over the long term.

And always remember: The FFI portfolio will never be the top-performing investment strategy in a given year. By design, it cannot be since we wait for an uptrend to buy back in.

Yet, many 2nd and 3rd place finishes added up make for staggering and consistent success.

If you know someone who could learn from my monthly investments or commentary, please point them to fastfollowinvestor.com.

Thanks!

This offer is in no way financial advice. Rather, it is very important financial education!

Spend one weekend alone to make plans for a full and well-intentioned life.

In 2022, I spent a December weekend in Alameda’s beautiful Gold Coast neighborhood.

What started during Covid-19 as a need for some “me time” has become an important, life planning event.

Some do it at the turn of the year. Others do it close to their birthday. My birthday is January 8, so I guess I do both!

I spent a recent December weekend at a local Airbnb reflecting on 2022 and making plans for 2023.

It was an entire weekend for me. An entire weekend not stuck in the daily grind. An entire weekend spent appreciating 2022 and dreaming about 2023.

Think of it as a strategic planning offsite…for you.

I recommend you do it.

Now in my 3rd year, I have insights.

One insight I didn’t expect is how the weekend helps me segment years. Before taking my annual trip, the years ran together.

Now, my life has chapters. The chapters help me fight time which has accelerated as I age. How is my son 11 years old, already?

My second insight tackles how to make the trip’s significance stick.

I propose keeping your life’s plan for the year simple. I prepare 4-5 goals for the year in a Google doc or in Word. You might even choose to handwrite your plan.

Either way, make a hard copy and display it at your desk. Don’t tuck away your life goals for the year!

Please feel free to use my template. I call it my “One Year Life Planning Guide”. You can access it here.

My life’s 46th chapter (2022) started at this humble Airbnb in Forestville, CA.

And one final insight. I find it helpful to create a personal theme for the year. For example, looking back…

My 2021 theme was Lay a solid personal financial groundwork. This translated to 1) Prepare a wealth plan, 2) Learn to invest better, and 3) Become tax efficient.

My 2022 theme was Simplify life by targeting the best opportunities. This translated to 1) Work on the right things and 2) Keep stress-levels low.

Looking ahead, my theme for 2023 is Live a full life and try out retirement. Our family is making a concerted effort to do new and memorable things. I’m going to take some time off work.

Happy planning! Here’s to a great 2023!

After you grab my “One Year Life Planning Guide”, you can check out some other freebies here.

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In the past 40 years, we’ve seen only two types of U.S. economy. A new and different economy could be right around the corner. What is it?

If you’re familiar with San Franciso, you’re familiar with microclimates.

On a summer day, it may be 55 deg. in the City, 75 deg. in Alameda (where I live), and 95. deg in Concord (where my son goes to school).

It’s no wonder that the #1 memento for a San Francisco tourist is a sweatshirt. You think California summer, and you think hot. Nope. Fog covers the City, pulled on shore by the Bay Area’s inland heat. And it’s cold.

The simple lesson? Be ready for all kinds of weather.

All weather investing portfolios

This analogy has infiltrated investment-speak over the years.

The most direct is Ray Dalio’s All Weather investment portfolio (1996). It holds roughly 30% stocks, 40% long-term bonds, 15% short-term bonds, 7.5% gold, and 7.5% commodities.

Other examples:

• Permanent portfolio (1982) from Harry Browne, holding 25% stocks, 25% long-term bonds, 25% cash, and 25% gold.
• Dragon portfolio (2020) from Chris Cole. It holds 20% stocks, 20% long-term bonds, 20% gold, 20% commodity trend, and 20% long volatility.

If this post is getting complicated fast for you, do not worry.

I name these investment portfolios for one reason. Smart investors with very long investment horizons consider all types of U.S. economies. Or as I will call them: economic regimes.

What are the four economic regimes?

Economic regimes depend on two factors that interact: Growth and Inflation.

If we match levels of Growth (positive or negative) with Inflation (yes or no), we arrive at four economic regimes:

• Expansion (real): economic growth and no price inflation
• Expansion (nominal): economic growth with price inflation
• Recession: economic decline and no price inflation
• Stagflation: economic decline with price inflation

Assessing recent history:

• For the last ~40 years (1980 to 2021), we’ve swung between expansion (real) and recession.
• 2021/2 included 18 months of expansion (nominal-with inflation).
• And, as we look to 2023, we are teetering between continued expansion (nominal) and stagflation.
  
  

Why is this important?

Consider these questions:

1. What type of investments work best in expansionary times? Stocks.
2. How about in recessions? Bonds.

This is good: We have access to stocks and bonds in our 401Ks, IRAs, and brokerage accounts.

3. What about expansionary times with inflation? Stocks, yes, but also (and more so) commodities!
4. How about during stagflation? Commodities again. And gold.

This is a problem! Most investors can’t access commodities and gold as investments.

Inflation really messes things up. If it sticks around, we need alternatives to stocks and bonds for continued investment success.

Your easy-to-understand 2x2 matrix

In my 20s, I worked for a manager who looked at life through 2x2 matrices. Every situation. Every decision. Everything could be framed by a 2x2.

Well, so can economic regimes.

The four quadrants that define our four economic regimes are defined here:

For those interested in my research, here is a link to the key chart.

And for even more excruciating details, refer to this.

All Weather portfolios make a comeback

I mentioned early on that several all-weather portfolios do exist. But few know about them, for these reasons:

• They have been out of favor because they have underperformed. We’ve experienced zero inflation in the past 40 years. So, commodities and gold have been a drag on investment returns.
• We aren’t educated on all-weather portfolios. The mutual fund industry -and the stock/bond funds it touts- has grown massively in the last 40 years. And this aligns with just two of four economic regimes. Our own short-term thinking limits us.
• Until recently, portfolios with commodities and gold have been hard to set up. Only hedge funds, family offices, and other “big money” played in these assets.
  

Portfolios that accommodate all economic regimes may have been out of favor for 40 years. But, they may soon make a comeback.

2022 and 2023 appear to be years of economic change. It’s time to learn more!

And, wouldn’t it be cool if there was a more fluid all-weather portfolio?

What if you could move money to the best performers when economic regimes changed?

That’s what I do at fastfollowinvestor.com.

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Humans are not wired to think long-term; yet it’s required to invest well.

Eddie Izzard, of stand-up, film, and TV fame, quips that:

“He grew up in Europe, where the history comes from.”

Like Eddie, I find it difficult for Americans to grasp “long-term”. We’re a young country. Our history is short. It’s not a bad thing… simply a fact.

Later in his bit, Eddie cites a story on TV during a recent hotel stay:

“We’ve redecorated this Miami building to how it looked over 50 years ago.”

You have to see it here.

What is long-term?

Is 50 years long-term? Not to the Long Now Foundation.

From its website:

The Long Now Foundation is a nonprofit established in 01996 to foster long-term thinking. Our work encourages imagination at the timescale of civilization — the next and last 10,000 years — a timespan we call the long now.

Contrast the long now with:

• now (3 days)
• nowadays (3 decades)

I like these definitions. And nowadays is all that the human mind can consider comfortably.

I remember 20 years ago: leaving grad school, getting married, and moving to San Franciso.

I can imagine 10 years from now: my son graduates college, I’m working part-time, and traveling in Europe.

Try it yourself. Pushing beyond a 30-year window is difficult.

Longest standing businesses

If asked to name a long-standing business, the first that comes to mind for me is General Electric.

GE launched in 1892. It’s 130 years old.

Not many make it that long. It’s quite impressive, as GE is having its own issues right now.

But, 130 years is nothing.

Staffelter Hof Winery in Krov, Germany opened in 862.

That’s 1,160 years ago!

I find it hard to wrap my head around that. The winery has been around for ~45 generations.

For a list of the oldest business still operating, check out this site.

Of the oldest companies, the industries with the greatest longevity:

• Banking (36)
• Alcohol (18)
• Postal services (16)

Money, drinking, and communication. In that order. That seems about right.

What this means for investing

Experiences from our own adult lifetimes influence how we invest.

Take me. I started investing in 1997, the year I got my first real job.

My biases (good and bad) stem from the period 15 years prior, when the finance books I read were written, through now.

As a whole, 1982-2022 has been a period of strong growth, low inflation, and a helpful Federal Reserve enabling asset growth.

Stocks and bonds have performed well.

But what if I was born 40 years earlier, in 1936?

A look into the more distant past shows a very different situation. Economic depression, war, and high inflation.

What performed well then? Real assets like gold bars, oil, and other commodity products.

The key takeaways

• The human mind is challenged to comprehend time beyond nowadays (30 years).
• Economic regimes are long (the current one is 40 years) and slow-moving. They trick us into thinking the current one will last forever.
• The truth is, we can’t predict what investment will always perform well. It’s because we can’t predict when an economic regime will change.
• And a lot of bad things can happen. When you expand your frame of reference to 1,000 or even 10,000 years, “once in a lifetime”-type events happen all the time.
  
  

As Eddie Izzard points out in jest, we must elongate our thinking.

And we must translate that long-term thinking into how we invest.

A lot of bad things can happen over the course of many lifetimes.

This means we need to weather a lot of tragedy within our investment approach.

Don’t fret. In my next post, I’ll share how we can do just that. I’ll help you keep your investments performing well throughout your lifetime and beyond.

And the solution is far easier than starting a German winery… which is good news for those of us who don’t live in Germany.

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If you’re curious, here’s my thinking about the name and logo (or should I say mascot).

Fast Follower Technology

The “fast follower” in the name stems from the technology strategy.

A fast follower is not an innovator.

But when innovation takes off, the fast follower quickly jumps in.

The master of this is Microsoft. Its success speaks for itself.

Microsoft has been in the top 3 in market capitalization for over 20 years.

No other company can match it.

Credit Visual Capitalist

The Wall Street Journal again named Microsoft its top-managed firm.

How does it do this?

• Microsoft doesn’t have the biggest cloud business (Amazon Web Services) but they are #2 in market share.
• It isn’t Facebook or Instagram, but Microsoft owns LinkedIn.
• Its Xbox is #2 behind Playstation in gaming consoles.
• Now, Microsoft is moving into video gaming content with its proposed Activision Blizzard acquisition.

Of course, a fast-follower strategy doesn’t work in every situation.

Have you “Binged” anything online lately? Where is your Zune player? Some misses are inevitable.

But…a lot of 2nd place finishes, when added up, make for staggering and consistent success.

Translated to Investing

Fast Follow Investing aims to do the same thing:

• Find the trend that is working, buy into it, and grow with it.
• When the trend becomes unfavorable, get out.

A FastFollowInvestor.com portfolio is never the flashy 1st place finisher.

In fact, it will likely NEVER have the highest return in a given year.

Though stack up many high-place finishes year after year (especially in down years), and you become the winner.

The FastFollowInvestor.com portfolio will be the highest performer over 5 years.

Let’s Make This Fun

My second reason for the name is that Fast Follow Investor simply sounds better!

It’s a catchier name than “Tactical Asset Allocation” or “TAA” (or “T&A” as it’s often misheard.)

In my view, the strategy needs better marketing.

TAA is THE best strategy out there for investment success over the long haul.

Hands down.

But nobody knows about it! And this needs to change.

So maybe a little rebranding will help.

And That Cute Dog

Now, for my beloved mascot. The dog featured everywhere is my pup Izzie.

She follows me everywhere.

I think it has to do with her hearing loss in old age. For fear of being left behind, Izzie follows me all around my house. Upstairs. Downstairs. Inside. Outside.

Izzie puts a lot of trust in me to guide her.

And I know those who follow me do as well.

My wife and I have had Izzie since 2007. She’s almost 15 1/2 years old. :-(

As my mascot, Izzie gets to stay with us a lot longer.

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This month’s trades are in!

On December 1, my Fast Follow Investor model made some big moves:

December 2022 Allocations

• ~50% International equities (tickers SCZ, EFA, VGK)
• ~25% Gold and commodities (tickers GLD, DBC)
• ~25% Cash

“When it comes time to buy and it’s the right time, you will not want to. When it comes time to sell and it’s the right time, you will not want to.”

Remember: Just like Buy & Hold, Fast Follow trend investing requires fortitude to stick with it.

One last point: Notice that last decade’s top performers are completely absent: US equities and big tech! Has the tide turned? Only time will tell…

If you know others who might learn from my monthly investments or commentary, please direct them to fastfollowinvestor.com.

Thanks!

This offer is in no way financial advice. Rather, it is very important financial education!

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Use these quick calculations to determine your savings at a future date…

You can put away your spreadsheet(s). :-) Instead, jot down your:

• Existing savings balance
• Investment rate of return (expected)
• Long-term inflation rate (estimated)
• #years your savings can grow

In this post, I’ll walk you through an example.

In doing so, I’ll introduce you to the Rule of 72, how to calculate real rate of return, how doubling simplifies the compounding calculation and sensitivity analysis (as a bonus).

We’ll use these values:

• Existing savings: $1.75M
• Investment rate of return: 12%
• Inflation rate: 4%
• #years to grow: 45 years
  
  

The Rule of 72

The Rule of 72 is a “back of the envelope” approximation used to estimate the years required to double an amount of money at a given rate of return.

The rule: 72 / “rate of return” = “# years to double”.

Using my #s: 72 / 12 = 6 years to double.

That sounds great. But six years isn’t realistic.

We need to adjust the 12% rate, which is a nominal rate.

Calculating Real Rate of Return

The real rate of return is the annual percentage of profit earned on an investment, adjusted for inflation. The real return rate indicates money’s actual purchasing power over time.

Nominal means that a dollar now is worth a dollar later (years later)…

Given the inflation of late, we can understand why this isn’t realistic. A dollar six years from now won’t buy as much.

So, to account for inflation, we need to use the “real” rate of return. We take the “rate of return” from above and subtract the inflation rate.

For nearly 40 years, inflation hovered near 2%. Right now, it is around 8%.

Many experts believe it will settle around 4% over the long term.

72 / (12 nominal rate - 4 inflation rate) or 72 / 8 = 9 years to double.

Therefore…

The Tactical Asset Allocation (TAA) model I follow doubles my money in real purchasing power every 9 years, assuming a 4% inflation rate.

Power of the Double

The compounded return is the rate of return of an investment over a cumulative series of time. Doubling is a single case of the compound return equation: An initial investment is multiplied by 2 raised to the power of the number of doubles. Such as: $1,000 investment x (2)^5 doubles.

I’m 46 years old, almost 47. I’m also an optimist and expect to live to at least 92.

In that case, I expect to get another:

92 - 47 = 45 years of life.

45 / 9 years to double = 5 more doubles.

Starting with savings of $1.75M:

$1.75M x 2 x 2 x 2 x 2 x 2 = $56M in real terms, at age 92.

I’ll take it.

Pressure-Testing the Outcome

Sensitivity analysis determines how different values of an independent variable affect a particular dependent variable under a given set of assumptions.

In this case, I’ll vary the real rate of return to see its impact on my savings growth.

But first…

What is absolutely necessary to make the $56M outcome possible?

• I need at least a 12% annual return (nominal). This is where my Fast Follow Investor.com TAA strategy comes in.
• I need at most a 4% long-term inflation rate. I must count on the Federal Reserve to help control this!

What happens if my 8% real return drops to 6%?

Perhaps my nominal return comes in at 11% with a long-term inflation rate of 5% (11-5 = 6).

Adjusting the real return from 8% to 6% increases a 9-year double to a 12-year double.

45 / 12 = 3.75 doubles.

3.75 doubles reduce my savings at age 92 from $56M to $23.5M.

It’s certainly less, but I’ll still take it.

So, in Summary

• Investment return minus inflation rate = real return
• 72 / real return = # years to double
• Remaining years of life / # years to double = # of doubles
• Existing savings x 2^(# of doubles) gives you your savings target, in real dollars

Knowing your # of doubles keeps those spreadsheets at bay!

Thank you for supporting Fast Follow Investor.com.

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Like many of you, I am fascinated by the collapse of FTX and its founder, Sam Bankman-Fried. The juicy details will make for a great Netflix series.

But, beyond the high-profile storylines, I have been thinking a lot about how everyone missed this… including me. Why did I miss this?

I have watched crypto from the sidelines for the last 3 years, often thinking I had missed out.

To console myself, I read about the sketchy characters, the crypto bros, and the money laundering. That’s why I’m not in this.

But I couldn’t ignore Sam Bankman-Fried.

He came from traditional finance. He was smart. He (seemingly) supported regulation. He was relatable…a normal guy. He kept me interested enough to think crypto might be for me.

It is human nature to get wrapped up in a one-sided story.

Up until Sunday, Nov 6 these are the headlines associated with Sam.

• The next Warren Buffett? Fortune
• The mogul who mastered Washington. Forbes
• The JP Morgan of crypto. Jim Cramer

And, since Nov 6, he is:

• The Bernie Madoff of crypto
• Sam Bankman-Fraud

The negative articles are coming fast and furious.

Here is one: 8 More Disturbing Revelations About Sam Bankman-Fried By Kevin T. Dugan and Matt Stieb

We love heroes, and we love villains.

But, I have to remind myself: the truth exists somewhere in the middle. It always does.

Life is messy.

“If you only hear one side of the story, you have no understanding at all.”
— Chinua Achebe

I will try to apply this lesson to my own beliefs.

• Seek out counter-arguments
• Assess both sides of the story
• Only then make my judgment
• Find my truths (not blindly adhering to the tribe’s truths)
  
  

A related note about Tactical Asset Allocation (TAA)

This is new. Be open-minded. It will conflict with certain investment beliefs that you may hold.

But also be critical. TAA cannot erase investment risk. The 60/40 buy & hold portfolio doesn’t work in inflationary times. TAA falters when markets whipsaw or experience steep intramonth declines.

The result of learning more?

• At best, I’ll open your mind to a new investing strategy.
• At worst, you’ll consider my evidence and it will further validate your existing strategies.
  
  

Thank you for reading. And for supporting FastFollowInvestor.com.

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Save. Invest.

It’s as easy as that.

Slightly more complicated:

Save a lot early. Transition to investing well later.

More on that here.

Within saving and investing, there are building blocks:

The many ways to build wealth

There are a lot of great personal finance and investment blogs out there.

This one serves a specific niche.

Fast Follow Investor.com teaches Tactical Asset Allocation (TAA).

As shown above:

• It’s on the invest well side of the wealth-building equation…
• Focusing on financial markets, and…
• Primarily for individual investors who are buy & holders
  

Are you a buy & holder? If yes, you should learn more about TAA!

You can do that in one of two ways:

• Follow my writing here.
• Sign up to track my personal investments (made monthly) here.

On Nov 13, the Wall Street Journal published

The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

(the article may be behind a firewall)

My 5 takeaways from the article:

1. Market losses impact real people. There is a community in this, and you are not alone.
2. The article buried the lead: Why isn’t 60/40 working? Inflation. What has worked for the last 40 years will likely be different in the future.
3. Individual investors need a system beyond 60/40 that can adapt to varying economic conditions, not just a disinflationary one.
4. I disagree with blind commitment from financial advisors to stick with 60/40. We can’t know the future. Will it be inflationary or recessionary? Or both? Or neither?!
5. We are resilient. I would be doing exactly what Johnathan Bowden is doing in his situation. I wish everyone featured in the article good fortune, prosperity, and happiness.

Inflation hurts everyone.

And getting it under control must be the Federal Reserve’s highest priority.

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Despite popular belief, you need NOT accept market risk.

Last week I shared that Meta would need to double two times over (grow 300%) to recover from its 75% loss in 2022.

I have been thinking a lot about how to better convey the sheer tragedy of this fact.

Imagine that you are two years to retirement. You’re only two years away from “hanging it up”… “living the good life”. You have $2M in savings and are feeling pretty good.

Then, over the next six months, your investments drops to $500K (75% loss).

How would you feel?

I know how I would. Lots of tears. And then back to work.

Thankfully, you’re not dumb enough to put $2M of retirement savings in Facebook stock alone. (Neither am I.)

Severe losses, though, aren’t limited to individual stocks!

Let’s take a look back at some inopportune years to retire:

2008: The Subprime Mortgage Crisis S&P 500 loss: 57% Time to recover: 17 months

2000: The Dotcom Bubble Nasdaq loss: 77% Time to recover: 15 years

1973: The Oil Crisis and Economic Recession Market loss: 48% Time to recover: 21 months

1929: The Worst Crash in History Dow loss: 89% Time to recover: 25 years.

Entire markets can drop 50%+. And the road to recovery can vary: from 17 months (when the Fed gets involved) to 25 years (when it does not).

Significant market drops are normal.

But accepting market risk is not required.

Fast Follow investors cut our losses. In doing so, we manage market risk.

Take control and never utter “It’s bad timing, I guess. I’m heading back to work."

I hope that you’ve enjoyed my short series on minimizing loss.

In summary:

*Entire markets can drop by 50% or more, setting you way back.

*Investment losses are asymmetric and compound exponentially. Losses take a long time to dig out from.

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This month’s trades are in!

In November, my diversified Fast Follower TAA investment model redeployed some cash:

• 13.5% was allocated to the DBC Commodities ETF. Let’s see how this trade fares given OPEC’s decision to restrict oil drilling and Russia’s exit from the Ukraine grain deal.
• The model inched into the SPY S&P 500 Index ETF. The S&P gained nearly ~8% in October, but the TAA model isn’t convinced we’re in a new bull market.

November 2022 Allocations

If you know others who might learn from my monthly investments or commentary, please direct them to fastfollowinvestor.com

Thanks!

This offer is in no way financial advice. Rather, it is very important financial education!

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This year (as of October 27), six companies together have lost one trillion $$ in market capitalization. They are Apple, Microsoft, Alphabet/Google, Amazon, Tesla, and Meta/Facebook.

Meta has crashed, losing nearly 75% of its value on the year.

Instead of discussing the merits of Facebook’s business or how much money it’s spending on Second Life 2.0, I’d like to highlight the math behind this 75% loss.

The math behind crashes is brutal.

When asked what gain is required to recover from a 75% loss, most people will answer a 75% gain.

Unfortunately, that is not correct. The answer is a 300% gain.

For example, if you lose $75 of an initial $100, you are left with $25. To recover, you must make $75 back (obviously). But, $75 is 3x your (now) $25 investment or a 300% gain.

Here is another way to look at it:

You must double your money twice over: turn $25 into $50, and then $50 into $100. Using an estimated 10% stock market return, it will take you 14.5 years just to break even.

Facebook investors who bought on January 1, 2022 and continue to hold have a long road ahead.

This table shows gains required to recover losses ranging from 5% to 90%. As losses steepen, the pain accelerates.

It makes sense why Warren Buffett’s two rules of investing are:

“Rule #1: Never lose money. Rule #2: Never forget Rule #1.”
-Warren Buffett

Severe losses really set you back.

It’s the math of it!

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I guess it’s better to learn your lesson early in life, when you have less money at stake…

In 1985, I was nine years old and joined my dad for a 45-minute drive to an A&W restaurant in a neighboring town.

The A&W is still there. In fact, I drove through Wautoma, Wisconsin and saw it this summer.

My dad had a business meeting with a man named Vern Taggatz. While the two men spoke, I wasted time in the restaurant parking lot kicking rocks.

My dad was a “businessman”. He worked for Speed Queen, an appliance company, as a middle manager.

On the side (a side gig!), he and my mom invested in a couple of houses, flipping them. I helped paint. And I stayed out of the way.

At the A&W, my dad was discussing an opportunity to invest in a new apartment complex in Plover, Wisconsin.

I thought it was pretty cool.

Little did I know at the time I was part of something that is now all the rage: a commercial real estate syndication.

It took about an hour. Finally, the meeting was over.

On the drive home, I learned that my dad and Vern did the deal.

Years later, I learned that my dad invested about $20,000.

Even more years later, I learned that Vern defrauded my father.

In 1985, several small investors cut checks to Vern Taggatz who ran off with the money.

Ouch.

My dad was smart. He is still smart.

I try to be like him in many ways. Too much, in fact.

I’m in management (management consulting). I’m entrepreneurial. I love investing.

I bought a high-priced, whole life insurance policy right out of college that I did not need nor could afford.

Double ouch.

The lesson?

When presented with an investment opportunity, really question it.

• How exactly does it work?
• Where is the value?
• What is the downside?
• How well do I know this person?

If the investment opportunity doesn’t feel right, it probably isn’t!

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