1nv35t wrote:Hi RIT.
Found your web pages via your signature ... interesting and thanks for sharing. I've only very briefly browsed your web pages so far but have every intent to return.
I was in a similar position to you more than a decade and a half ago. Since having 'retired' (in my early 40's) I've transitioned from a more diverse (complex) original set of assets (similar to yours), to a more focused/simplified variant. The original move was quite frightening, but with time such fears faded and frugality (but not excessively so, more a case of being careful with money rather than frivolous) has helped endure capital expansion rather than contraction. Original copious amounts of free time has however moved the complete opposite (when commonly known you have 'free time' its amazing how much of that gets eaten up by others requiring your services/time).
You put property as being midway between stock and bonds. For me property and stocks compare. Count share price only appreciation alongside house price appreciation, and then add in dividends and imputed rent benefit ... and broadly they're comparable (broadly they correlate as well). I count both equally as 'equities'. For me, owning a home avoids having to pay rent to someone else. I could sell, invest the proceeds in stocks and perhaps the dividends might cover the rent, whilst share price appreciation might compare to house price appreciation. Owning however is less risky (liability matched), easier to ride through bad times (all rent in effect paid in advance).
Bonds are good when on a gold standard (convertible), but when off the gold standard bonds are riskier. A 50/50 stock/gold barbell (extremes) centralises towards a bond bullet (but the stock/gold barbell is more volatile over interim periods - which is meaningless (paper figure only) unless you are forced to sell)).
Looking at your (tip, try triple clicking to highlight, and the right click and select open in new tab)
https://2.bp.blogspot.com/-K0YQbZcoCJ0/V2V9ieXhaBI/AAAAAAAADLg/xggVwIPh96odB7ihRc1J17H0Jb7HuHZOwCK4B/s320/160618-5.png
image, I see a general form of 65/35 type equity/bond type allocation with the 65 equity being comprised of property, UK/Aus, EM and International; And the 35 being comprised of cash, bond and gold. If the 35 was more gold heavy than that could mentally be combined (as a barbell) with a equal amount of equity to form a bond bullet combination.
https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=2&startYear=1972&endYear=2015&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&rebalanceType=1&portfolio1=Custom&portfolio2=Custom&portfolio3=Custom&TotalStockMarket3=100&LongTermBond1=34&TwoYearTBills1=33&Gold1=33&Gold2=100
Another factor is costs ... which include taxes. If interest rates/inflation are up into double digits, and taxes up to perhaps 33% type basic rate, then costs can be excessive. Tax risk tends to automatically increase at the worst possible time and can compound to significant amounts. In the present day low interest rate/taxation environment that risk can easily be glossed over, however over 30+ years of investment horizon sooner or later that risk could easily become more evident. And you don't want to be stuck with having to (enforced due to ongoing cost) make adjustments (sell/buy) to reduce such costs at the worst possible time (more highly taxed capital gains applied in having to swap assets around).
Personally I'm content to have minimised ongoing taxation (dividends/interest) and instead take income via DIY control of top slicing out of total gain as and when I determine. Something like a three way own home, gold, US stocks ancient Talmud style (third each in land, merchandise, reserves) combination that generates very low levels of ongoing (potentially taxable) income streams. As a interesting exercise add gross rental yields to the house price index figures you already have on your web site and combine that with say BRK-A as a no-dividend US stock index type proxy, along with gold ... and run your own assessment/measure of such a Talmud type asset allocation. I suspect you may be surprised.
Many thanks for a thought provoking post. Far too much in there to respond to all immediately but plenty for lots of DYOR and hopefully thoughtful debate/discussion going forwards. Some initial thoughts that immediately come to mind though.
On the topic of property being mid-way between equities and bonds I believe I took that concept from some work by Tim Hale in Smarter Investing. I will revisit though.
I hear you on the capital appreciation front. All of my backtesting is always based on worst case historic sequences. I actually did some backtesting in August of this year (which I freely published for scrutiny/debate/derision) which showed that if history repeated and I didn't alter spending then in 40 years in real terms average wealth could be 2.9 times what I have today with the median, which is probably the more sensible to use, at 2.2 times. Positively (and not surprisingly given I always look worst case) at no time did I deplete my capital.
Regarding personal property. I'm currently renting but will buy very soon after FIRE'ing (6-12 months). From a financial perspective (there are lots of personal reasons to do it) the way I think about it is that if living off capital we are very exposed to sequence of returns risk particularly in the early years. If I keep the capital and stay renting then that is also exposed to sequence of returns risk where if I buy it isn't. So in a way I see home ownership as a risk reduction measure in FIRE.