Picture Credit: Roadsidepictures from The Little Engine That Could By Watty Piper, Illustrated By George & Doris Hauman | That said, for every one that COULD, at least two COULDN’T


So what do you think of the market?  Why are both actual and implied volatility so low?  Why are the moves so small, but predominantly up?  Is this the closest impression of the Chinese Water Torture that a stock market can pull off?

Why doesn’t the market care about external and internal risks?  Doesn’t it know that we have divisive, seemingly incompetent President who looks like he doesn’t know how to do much more than poke people in the eyes, figuratively?  Doesn’t it know that we have a divided, incompetent Congress that can’t get anything of significance done?

Leaving aside the possibility of a war that we blunder into (look at history), what if the inability of Washington DC to do anything is a plus?  Government on autopilot for four years, maybe eight if we decide we are better of without change — is that a plus or minus?  Just ignore the noise, Trump, other politicians, media… ahh, the quiet could be nice.

Then think about Baby Boomers showing up late for retirement, and wondering what they are going to do.  Then think about their surrogates, the few who still have defined benefit pension plans.  What are they going to do?  Say that the rate that they are targeting for investment earnings is 7%/year forever.  Even if my model for investment returns is wrong in a pessimistic way — i.e., my 4% nominal should be 6%/year nominal, you still can’t hit your funding target.  As for those with defined contribution plans, when you are way behind, even contributing more won’t do much unless investment earnings provide some oomph.

I am personally not a fan of TINA — “there is no alternative” to stocks in the market, but I recognize the power of the idea with some.  It is my opinion that more people and their agents will run above average risks in order to try to hit an unlikely target rather than lock in a loss versus what is planned.  Most will “muddle in the middle” taking some risk even with a high market, and realizing that they aren’t going to get there, but maybe a late retirement is better than none.

That’s the power of bonds returning 3% at best over the forecast horizon, unless interest rates jump, and then we have other problems, like risk assets repricing.  If you are older, almost no plan is achievable at reasonable cost if you are coming to the game now, rather than starting 15+ years ago.

And so I come to “the little market that could…” for now.  My view is that those with retirement obligations to fund are bidding up the market now.  That does two things.  Shares of risk assets (stocks) move from the hands of stronger investors to weaker investors, while cash flows the opposite direction.  In the process, prices for risk assets get bid up relative to their future free cash flows.

Unlike “the little engine that could,” the little market that could has climbed some small hills relative to the funding targets that investors need. Ready for the Himalayas?  The trouble with those targets is that regardless of what the trading price of the risk assets is, the cash flows that they produce will not support those targets.

Thought experiment: imagine that the stock market was gone and all the shares we held were of private companies that were difficult and expensive to trade.   Pension plans would estimate ability to meet targets by looking at forecasts of the underlying returns of their private investments, rather than a total return measure.

Well, guess what?  In the long run, the returns from public stock investments reflect just that — the distributable amount of earnings that they generate, regardless of what a marginal bidder is willing to pay for them at any point in time.  Stocks aren’t magic, any more than the firms that they represent ownership in.

So… we can puzzle over the current moment and wonder why the market is behaving in a placid, slow-climbing manner.  Or, we can look at the likely inadequacy of asset cash flows versus future demands for those cash flows for retirement, etc.  Personally, I think they are related as I have stated above, but the second view, that asset returns will not be able to fund all planned retirement needs is far more certain, and is one mountain that “the little market that could” cannot climb.

Thus, consider the security of your own plans, and adjust accordingly.  As I commented recently, for older folks with enough assets, maybe it is time to lock in gains.  For others, figure out what adjustments and compromises will need to be made if your assets can’t deliver enough.

Tough stuff, I know.  But better to be realistic about this than to be surprised when funding targets are not reached.


Recently I read Jonathan Clements’ piece Enough Already.  The basic idea was to encourage older investors who have made gains in the risk assets, typically stocks, though it would apply to high yield bonds and other non-guaranteed investments that are highly correlated with stocks.  His pithy way of phrasing it is:

If I have already won the game, why would I keep playing?

His inspiration for the piece stems from a another piece by William Bernstein [at the WSJ] How to Tell if Your Retirement Nest Egg Is Big Enough.  He asked a question like this (these are my words) back in early 2015, “Why keep taking risk if your performance has been good enough to let you reduce risk and live on the assets, rather than run the possibility of a fall in the market spoiling your ability to retire comfortably?”

Decent question.  If you are young enough, your time horizon is long enough that you can ignore it.  But if you are older, you might want to consider it.

Here’s the problem, though.  What do you reinvest in?  My article How to Invest Carefully for Mom took up some of the problem — if I were reducing exposure to stocks, I would invest in high quality short and long bonds, probably weighted 50/50 to 70/30 in that range.  Examples of tickers that I might consider be MINT and TLT.  Trouble is, you only get a yield of 2% on the mix.  The short bonds help if there is inflation, the long bonds help if there is deflation.  Both remove the risk of the stock market.

I’m also happier in running with my mix of international stocks and quality US value investments versus holding the S&P 500, because foreign and value have underperformed for so long, almost feels like 1999, minus the crazed atmosphere.

Now, Clements at the end of the exercise doesn’t want to make any big changes.  He still wants to play on at the ripe old age of 54.  He is concerned that his nest egg isn’t big enough.  Also, he thinks stocks will return 5-6%/year over the long haul (undefined), versus my model that says 2-6%/year over the next ten years.

What would I say?  I would say “do half.”  Whatever the amount you would cut from stocks to move to bonds if you were certain of it, do half of it.  If disaster strikes, you will pat yourself on the back for doing something.  If the market rallies further, you will be glad you didn’t do the whole thing.

What’s that, you say?  What am I doing?  At age 56, I am playing on, but 10-12% higher in the S&P 500, and I will hedge.  At levels like that future market outcomes are poor under almost every historical scenario, and even if the market doesn’t seem nuts in terms of qualitative signals, the amount you leave on the table is piddly over a 10-year horizon.  If I see more genuine nuttiness beyond certain logic-free zones in the market, I could act sooner, but for now, like Jonathan, I play on.

Full disclosure: long MINT and TLT for me and my fixed income clients

Photo Credit: Christopher || Maintaining a marriage is simple… if you do it right…


There are at least eight reasons why taking a simple approach to investing is a wise thing to do.

  1. Understandable
  2. Explainable
  3. Reduced “Too smart for you own good risk”
  4. Clearer risk management
  5. Less trading
  6. Taxes are likely easier
  7. Not Trendy
  8. Cheap


You have to understand your investments, even if it’s just at the highest overview level.  If you don’t have that level of understanding, then at some point you will be tempted to change your investments during a period of market duress, and it will likely be a mistake.  Panic never pays.  How to avoid panic?  Knowledge reduces panic.  Whatever the strategy is, follow it in good times and bad.  Understand how bad things can get before you start an investment program.  Make changes if needed when things are calm, not in the midst of terror.


You should be able to explain your investment strategy at a basic level, enough that you can convey it to a friend of equal intelligence.  Only then will you know that you truly understand it.  Also, in trying to explain it you will discover whether your investments are truly simple or not.  Does your friend get it, even if he may not want to imitate what you are doing?

Take an index card and write out the strategy in outline form.  Would you feel confident talking for one minute about it from the outline?

Reduced “Too smart for your own good risk”

If you have simple investments, you will tend not to get unexpected surprises.  One reason the rating agencies did so badly in the last crisis was that they were forced to rate stuff for which they did not have good models.  The complexity level was too high, but the regulators required ratings for assets held by banks and insurers, and so the rating agencies did it, earning money for it, but also at significant reputational risk.

Why did the investment banks get into trouble during the financial crisis?  They didn’t keep things simple.  They held a wide variety of complex, illiquid investments on their balance sheets, financed with short-term lending.  When there was doubt about the value of those assets, their lenders refused to roll over their debts, and so they foundered, and most died, or were forced into mergers.

I try to keep things simple.  Stocks that possess a margin of safety and high quality bonds are good investments.  Stocks have enough risk, and high quality bonds are one of the few assets that truly diversify, along with cash.  That makes sense from a structural standpoint, because fixed claims on future cash are different than participating in current profits, and the change in expectations for future profits.

Clearer risk management

When assets are relatively simple, risk management gets simple as well.  Assets should succeed for the reasons that you thought they would in advance of purchase.  Risk assets should primarily generate capital gains over a full market cycle.  fixed Income assets help provide a floor, and limit downside, so long as inflation remains in check.

With simple asset allocations, you don’t tend to get negative surprises.  Does an income portfolio fall apart when the stock market does?  It probably was not high quality enough.  Does you asset allocation give large negative surprises close to retirement?  Maybe there were too many risk assets in the portfolio after a long bull run.

Cash and commodities (in small amounts) can help as well.  Those don’t have yield, and don’t typically provide capital gains, but they would help if inflation returned.

Less trading

Simplicity in asset allocation means you can sleep at night.  You’ve already determined how much you are willing to lose over the bear portion of a market cycle, so you aren’t looking to complicate your life through trying to time the market.  Few people have the disposition to sell near near top, and few have the disposition to buy near near the bottom.  Almost no one can do both.  (I’m better at bottoms…)

Pick a day of the year — maybe use your half-birthday (as some of my kids would say — it is six months after your birthday).  Look at your portfolio, and adjust back to target percentages, if you need to do that.  Then put the portfolio away.  If you have set your asset allocation conservatively, you won’t feel the need to make radical changes, and over time, your assets should grow at a reasonable rate.  Remember, the more conservative asset allocation that you can live with permanently is far better than the less conservative one that you will panic over at the wrong time.

Taxes are likely easier

Not that many people have taxable accounts, though half the assets that I manage are taxable, but if you don’t trade a lot, taxes from your accounts are relatively easy.  Unrealized capital gains compound untaxed over time, and there is the option to donate appreciated stock if you want to get a write-off and eliminate taxes at the same time.

Not Trendy

You won’t get caught in fads that eventually blow up if you keep things simple.  You may be pleasantly surprised that you buy low more frequently than your trendy neighbors.  Remember, people always brag about their wins, but they never tell you about the losses, particularly the worst ones.  Those who don’t lose much, and take moderate risks typically win in the end.


Simple investment strategies tend to have lower management fees, and fewer “soft” costs because they don’t trade as much.  That can be a help over the long run.

That’s all for this piece.  For most investors, simplicity pays off — it is that simple.

I was pleasantly surprised to be invited to contribute a chapter to this book.  I am going to encourage you to buy this book, but let me give some of the reasons not to buy this book:

  • Don’t buy it to give me something.  I don’t get anything from sales of this book.  Neither does Mebane Faber, who is giving all of the profits to charity.
  • Don’t buy it to read my article.  You can read it for free here.  Better, you can read the updated version of the article, which I publish quarterly, here.  (Those reading this at Amazon, there are links at my blog.  Google “Alephblog The Best Investment Writing” to find them.)
  • Don’t buy it to get current ideas.  There are none here.  The weakness of the book is that the articles are dated by 9-21 months or so, BUT… that doesn’t keep the book from being relevant.
  • Don’t buy it if you want one consistent theme.  It’s like reading RealMoney.com, except with a broader array of authors.  There is no “house view.”
  • Don’t buy it for the graphics in the book.  The grayscale images in the book are good for black & white, but some are hard to read.  The graphs for my article are far better at my blog.

The book is a good one because there is something for everyone here.  Do you want quantitative finance?  There is a good selection here. Do you want good basic articles about how to think about investing?  There are a good number of those as well, particularly from well-known financial journalists, and some of the most well-regarded bloggers.  Do you want a few unusual articles that might cause you consider some asset sub-classes or techniques that you haven’t considered before?  They are here too.

The writers fall into four buckets — journalists, asset managers, pundits/authors, and those who sell information at their websites.  I will tell you that my personal favorites from this volume are Tom Tresidder, Mebane Faber, Chris Meredith, Ben Carlson (how was he the only one with two articles in the book?), Jason Hsu & John West, and Cullen Roche.

Don’t get me wrong, I like almost all of the authors in this volume, and am proud to be featured among them.  For a number of them, though, I would have picked other things they have written in 2016 that had more punch, and offered more of a difference in perspective.

Why buy this?  After you read this, you will be a smarter, more well-rounded investor.  In my calculations, that’s  pretty good — 32 articles that will take you 4 hours to read.  Got seven minutes?  Read an article; it just might help you a great deal.


Already stated, though if you don’t like statistics, one-third of the articles may not appeal to you.  Also, a few articles veer into political commentary (not that I would ever do that 😉 ).

Summary / Who Would Benefit from this Book

Though almost anyone could benefit from this book, it is geared toward investors with intermediate-to-higher levels of knowledge and experience.  If you want to buy it, you can buy it here: The Best Investment Writing: Selected writing from leading investors and authors.

Full disclosure: I received two free copies of the book for contributing the article.  That’s all, unless someone buys the book through the link above.

If you enter Amazon through my site, and you buy anything, including books, I get a small commission. This is my main source of blog revenue. I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip. Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book. Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website. Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites. Whether you buy at Amazon directly or enter via my site, your prices don’t change.