The Illusion of Control: A Prudent F.I. YouTuber’s Hidden Blind Spot

Is it wrong to second guess your investment decision?

I think that is an interesting question. My gut feel is that second guessing happens more often than we dare to admit.

I was watching this episode of Two Sides of FI titled: What Should We Do With Bonds and Cash in a Crazy Market?

Two Sides of FI is a great podcast conversation between a guy Eric who has not reached financial independence yet with Jason a guy who has been financially independent and stop work for a while. Eric tried his best to learn about various aspect about FI. You might like this podcast because it is like two friends talking.

Long story short, Eric reached FI not too long ago and his wife stopped work but he still has some income coming in. This is a deep conversation about their asset allocation decision. Eric was dissatisfied with one of his broker and so decide to liquidate and move his fixed income investment assets from one broker to another.

This was his original allocation when he was with the old broker:

But now as he moved to a new broker… he started having second thoughts. He started to consider:

1. Is the interest rates going to go lower?
2. All signs on the ground seems to point to higher inflation?

So currently, all his fixed income allocation is in SGOV which is iShares 0-3 Month Treasury Bond ETF. Part of the discussion is Eric asking Jason why not just keep the money in SGOV and move to a higher maturity bonds why the Fed starts lowering rates.

If this feels awfully familiar it is because most likely some of you are entertaining the same thoughts!

The interesting thing to you may be:

1. Short term rates are so glaring high. It does not make sense to allocate to longer maturity fixed income.
2. When the Fed starts lowering rates to zero, I can start re-allocating to longer maturity fixed income.
3. If inflation remains persistently high at least I don’t suffer losses from my exposure to longer duration.
4. The returns of longer maturity fixed income is not that much higher than short term rates such that it is worth it to invest in longer maturity fixed income.
5. 0-3 month fixed income can still help me reduce the volatility of the portfolio.

They all sound very correct until you went through a period where the yield curve is in normal steepness. Then you will start getting itchy how you can earn slightly more but not increase the volatility.

This is a prevalent problem I see.

I frame it as: Letting the current environment lead to investment decisions/strategies/allocation that you want to be very strategic or long term.

I see this again and again and again.

And I can recognize it because I have been in that same position as Eric. Not once but countless of times.

Before I lose track, I want to make some harsh criticism about Eric’s situation from the conversation, so that we can be more introspective about it:

1. He thinks he understands fixed income enough and so decide to invest 30% of his hard-earn money into it. In truth, his understanding leans towards more superficial.
2. The environment today surfaces risks that is all the while there… but hasn’t happen during the period he got acquainted with fixed income.
3. Failed to recognized that his 70% equity 30% fixed income have historically handled persistently high inflation environments. Both Eric and Jason have brought on Karstan Jeske of Early Retirement Now not just once but few times, who is suppose to be the best person to advise them on this. Either he did not comprehend deep enough about the rigors of the safe withdrawal rate or completely forgot about it.
4. Decide to be more active in his investment management, due to his sudden fear, when his original plan is for a more strategic and passive strategy ( I am inferring here, and you can correct me if I am wrong. How many people want a strategy that is more active if a more passive strategy is available?). Proceeds to rationalize that at this stage of his FI, he can have a higher equity allocation if needed or can be more active, when the real reason for his activeness is that he has a lower risk tolerance.
5. He may extrapolate that current yield curve shape is more prevalent, or common than the reality.

You might realize that we can replace that fixed income with no-earnings fast growing SAAS business, REITs, Ark Innovation, Natural Gas ETF, gold, crypto, China stocks, Keppel Corp and the 5 of them won’t seem out of place.

Some folks don’t seem to realize they keep doing the same thing again and again. They conclude the problem is this investment and that investment.

For some after a while, they realize that something is not very right. Either they have poor luck… or the problem is deeper than it is.

They might soon realize the problem is themselves.

It is clear from the YouTube that Jason thought about this more deeply.

• “You and I are both making decisions from a Today’s perspective. We don’t know where we are going to find ourselves 10-15 years out. Because then you get into this idea of adjusting your asset allocation. e.g. rising equity glidepath. But no matter what time period, we are beholden to the sequence of return risk. That lessons when we are 10-15 years out. While we are not there yet it is good that we talk about it before we get there.”
• “At the end of the day, we just want to make good decisions.”

Is there a general answer to solving this personal wealth management problem?

There are no straight forward answers but if we can criticize the above, the answers might be to invert:

1. You might want to revisit and relearn about something. Usually means you got to go deeper. That might put some concerns in a different light. It might raise concerns that are not easily solved.
2. If you want a strategy that is more passive, you might need to evaluate each potential strategy with greater radical candor. You can’t be putting everything that you like or feels its good today into the portfolio, or invest in it because it might work now but will something always work? If it doesn’t always work, does that mean you shouldn’t have it in the first place?
3. Acknowledge that the only constant might be change and uncertainty in investing. What you feel about today are likely to become better/worse a couple of years later. If so what does this mean?

I think we need enough headspace to mentally reflect upon things. It is not a coincidence many came to Providend or seek help during Covid because they reflected more within the confines of work-from-home. This shows how critical it is to not be working in investing, but also have enough room away from investing.

Philosophically, while most say they are happy or they could be very hands-on, my general feel is that people either didn’t realize there is a phase or secretly cherish a more passive state. Unless you ask the hard question about “Is this strategy sustainable? Even without me as the portfolio or wealth manager?”, you will make investment, wealth and portfolio strategy decisions purely on a superficial level.

If you want to trade these stocks I mentioned, you can open an account with Interactive Brokers. Interactive Brokers is the leading low-cost and efficient broker I use and trust to invest & trade my holdings in Singapore, the United States, London Stock Exchange and Hong Kong Stock Exchange. They allow you to trade stocks, ETFs, options, futures, forex, bonds and funds worldwide from a single integrated account.

You can read more about my thoughts about Interactive Brokers in this Interactive Brokers Deep Dive Series, starting with how to create & fund your Interactive Brokers account easily.

Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.

Readers also follow Kyith to learn how to plan well for Financial Security and Financial Independence.

Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.

You can view Kyith’s current portfolio here, which uses his Free Google Stock Portfolio Tracker.

His investment broker of choice is Interactive Brokers, which allows him to invest in securities from different exchanges all over the world, at very low commission rates, without custodian fees, near spot currency rates.

You can read more about Kyith here.