Why I Don’t Post Specific Investment Recommendations

A good question that’s come up is, “Why don’t you post specific investment recommendations on the blog?”

Investment advice is personal and recommendations should be made within the context of an investor’s situation. To make a good recommendation, I’d need to know someone’s ability to take risk, willingness to take risk, time horizon, liquidity needs, tax situation, net worth, account details, and a lot more. I do not know everyone who reads this blog nor their financial details, so how can I make a recommendation? 

To illustrate the above, consider that I will often make different recommendations to the exact same client! Suppose a client has four accounts, but wants to invest all of them identically. I may recommend a specific index fund for one account, a different share class of the same fund for the second account, a different fund targeting the same index for a third account because it is taxed differently than the first two, and a separately managed account targeting the same index for the fourth account due to tax considerations. The client may be purchasing the same underlying holdings in all four accounts, but there are four different recommendations.

If I were to make a specific recommendation on this blog, I’d have to list out all of the nuances, caveats, exceptions, and so on. So I will leave the specific recommendations to the talking heads on CNBC and the writers who contribute to Seeking Alpha. Publishing specific recommendations for the general public is not something I want to do, nor do I believe it is especially helpful to individual investors.

Before You Open a 529…

Many of my friends are having kids these days, which means I’m being asked about 529s more than anything else. Below are just a few of the common questions:

  • “Should I open a 529?”
  • “Which company should I use?”
  • “How much should I contribute?”

Ready for the answers? My answer is:

  • Are you properly insured?
  • Is your estate plan in order?

If not, my advice is generally “Go get properly insured and engage an estate planning attorney. Before investing money for an uncertain future, invest to protect your family should anything unexpected happen.” The baby books don’t cover this, but this is Parenting 101.

Currency Issuers vs Currency Users

I’ve heard a lot of tax policy debates lately, perhaps due to the 2017 Tax Cuts and Jobs Act or perhaps due to growing concerns about inequality. Of course, debating taxes is something of a national pastime (going back to British tax policies preceding the American Revolution) and I live in California (a state known for high income taxes).

An important foundational concept that is almost always overlooked in these debates is that there are two types of taxing authorities. There are currency issuers and there are currency users.

Countries like the US, the UK, Japan, China, Switzerland, and so on create their own currency. They are currency issuers. They do not need to collect taxes in order to spend or operate.

Cities, US states, and members of currency unions (like Eurozone members) use currency, but do not create their own. They are currency users. They cannot operate without tax revenue (unless they have credit and can borrow). 

Failure to distinguish between currency issuers and currency users or speaking about their respective policies synonymously is to misunderstand the nature of taxes.

MSCI World vs MSCI ACWI

Source: Bloomberg

When comparing the MSCI World Index vs the MSCI All-Country World Index the other day, I was surprised by how closely they’ve tracked each other over the past 30+ years. Since their inception in 1988, cumulative returns differ by just 5% while the annualized difference is .02%!

The MSCI World Index only includes stocks of “developed” markets (think the US, Western Europe, Japan, Canada, Australia, etc), while MSCI ACWI includes stocks in both developed and emerging markets (think China, India, Brazil, etc). Since emerging markets have bounced around between 10-15% of global market cap in the past decade (and were much smaller prior to that), the risk and returns of the MSCI World and MSCI ACWI indices have been nearly identical.

What does this mean for investors? Firstly, I think its safe to say that selecting a vehicle and cost structure is more important than deciding between these two indices. A large index fund may have the edge with MSCI ACWI since it will likely have access to local exchanges in emerging markets, while an index-based SMA may hold an edge in MSCI World. Every investor and situation is different and these differences are likely larger than any difference between these two indices.

Secondly, if all else is equal, I would personally opt for MSCI ACWI due to its inclusion of emerging markets. If EM declines as a percentage of global market cap, then MSCI ACWI will likely match MSCI World. If it outperforms and increases as a percent of market cap from 10-15% to 20% or 25%, then there is some relative upside without much relative downside. Of course, all else is rarely equal.

RIP: Jack Bogle

Jack Bogle’s impact on investing is difficult to overstate. Although best known for founding Vanguard and launching the first retail index fund, Bogle’s largest impact may have been saving investors more money than anyone else in history. It still amazes me that someone would willingly turn down the opportunity for millions and billions for no reason other than to give it to others. Bogle was a rare breed and we are lucky to have his example (especially those of us working in the financial services). 

Rather than keeping ownership of Vanguard to himself, he structured the firm as a mutual company effectively owned by its funds’ investors. Bogle could have assured himself a much higher income and would have almost certainly become a billionaire many times over had he owned Vanguard outright. Instead, those billions and billions of potential profits subsidized the expenses of Vanguard’s funds and drove investor costs down. Of course, Vanguard has also driven costs down across the entire money management industry. It is difficult to say what the world would look like without Bogle or Vanguard, but I suspect we would all be paying a lot more expenses. So where does this extreme generosity come from?

Despite growing up in difficult circumstances during and after The Great Depression, Bogle always felt he had enough (he even wrote a book on the topic titled “Enough”). One of Bogle’s favorite stories to share was this one: 

At a party given by a billionaire on Shelter Island, the late Kurt Vonnegut informs his pal, the author Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch 22 over its whole history. Heller responds, “Yes, but I have something he will never have . . . Enough.” 

Bogle shared that Kurt Vonnegut had also taught him that:

“we should catch young people before they become CEOs, investment bankers, consultants, and money managers (and especially hedge fund managers), and do our best to poison their minds with humanity.”

Bogle had enough and he spent a lot of time imploring others to think and reflect on their professional responsibilities (as opposed to their business interests) and recognize the “true treasures” of life (rather than money). 

History is filled with “philosopher” kings and many billionaires grace us with their opinions that we should all adopt a mindset of enough. Yet, Bogle lived it until the very end. Just a few weeks ago, Bogle shared this in an interview:

Jane Wollman Rusoff: Any regrets?

Jack Bogle: No regrets. I’m not a “trillionaire” like Abby Johnson [Fidelity chairwoman], who is supposed to be worth [$15.4 billion]. I wouldn’t even know what to do with a number like that. We have a nice, small house. We have shelter when it rains, snows or is windy. The kids and grandkids are well. I have the Armstrong Foundation, which has now reached a decent size — and I feel like it could do some good for others.

RIP Jack.

World Population Cartogram

I’m continually amazed by the work that Max Roser, of Our World in Data, creates. I feel like I know population sizes fairly well, but I still learn something every time that I look at one of these maps. Click the image for the ginormous hi-res image.

Source: https://ourworldindata.org/world-population-cartogram

Inflation Rates vs Interest Rates

While recent posts have myth-busted the narratives that money printing causes inflation and money printing drives up rates, even a quick glance at the same data shows that there is a stronger relationship between inflation and interest rates. The conventional view is that long-term rates move in response to inflation, although it is worth noting that long-term rates are less volatile than the inflation rates that drive them. Thus, the R² (or goodness of fit) is not that high, but there is a visible correlation nonetheless.

We’ll start with the world’s largest economy, the US:

And the Euro Area:

China:

Japan:

And finally, the UK:

808 Years of Inflation Data!

I was recently looking up some UK inflation data and noticed that the Bank of England publishes inflation data going back to 1210!

Source: Federal Reserve, Bank of England

Since this is a a very short post and the inception of this UK data set slightly predates the life of William Wallace (a resident of the UK’s current borders), I feel compelled to share my favorite Braveheart meme (from the Scottish independence referendum of 2014).

Do Increases In The Money Supply Drive Up Interest Rates?

Similar to last week’s post, we’ll be asking if increases in the money supply lead to higher interest rates?

Let’s look at the money supply and 10-year interest rates in the five largest economies. First up: the US.

The Eurozone:

China:

Japan:

The UK:

The verdict: increases in the money supply do not necessarily lead to higher interest rates. In fact, the above data from the five largest economies during a period of unprecedented expansion in the monetary base shows zero evidence that increases in the money supply drives rates higher. Apologies to the self-described bond vigilantes and Tea Partiers for the cognitive dissonance.

Do increases in the money supply cause or accelerate inflation?

Do increases in the money supply cause or accelerate inflation?

Let’s consider the evidence…

First, a chart of the annualized percentage changes in the money supply (M1) and consumer price index (CPI).

We can also look at the same data, but use the absolute value of the money supply. Again, inflation does not seem correlated with increases in the money supply.

Let’s look at other economies and monetary bases. First up: the Eurozone.

A look at China:

A look at Japan:

And finally, the UK:

Verdict: increases in the money supply do not necessarily cause or accelerate inflation. The above charts represent decades of data from the five largest economies during a period of unprecedented increases in the money supply. I understand that there is a logical rationale and belief that printing money leads to inflation, but it is simply not true. I am not sure what more evidence can be provided, yet the myth persists nonetheless.