De-Risking The Portfolio

crispydoc Uncategorized 5 Comments

Right Place, Right Time: Case Study #1

Me: "I'm so relieved you came straight to the Emergency Department."

Patient: "I'll take lucky over smart any day, Doc!"

This comment came from a patient with a long and checkered cardiac history who walked into a smaller local ED complaining of chest pain, only to experience a witnessed cardiac arrest from a typically lethal arrhythmia (ventricular fibrillation).

The emergency team immediately shocked him with a defibrillator (I'm told he was back to wisecracking in seconds) and summoned an ambulance to transport him to our larger hospital where a cardiologist and cath lab team immediately addressed a plumbing problem in his right coronary artery.

I'd bet he's waited longer for a burger than he did to get a stent.

He got lucky.

Right Place, Right Time: Case Study #2

I had just broken up with a girlfriend of nearly two years. It was a serious relationship that I thought was going to be the one. We'd relocated from the West Coast to the East Coast together, and spent all our time together.

Now my free time consisted of an unlimited plan at the Blockbuster Video a couple of blocks away (it was the Late Cretaceous period before Netflix crawled from the primordial cloud, a time when VHS ruled the land and pterodactyls filled the skies).

Some emergency medicine residents at the program where I was a junior faculty member decided to lay a guilt trip on me about how I never joined them for social events, ultimately persuading me to drive a carload of them up to an event in Providence, Rhode Island.

An attending physician from the residency's sister hospital was similarly suckered into driving a second carload of residents. She was attractive, and I thoroughly enjoyed our conversation, but I was still in the depths of grieving the loss of my relationship and was not looking to date.

Six months later, my funk finally lifted and I called her out of the blue to invite her to dinner. She's now my wife.

I got lucky.

Right Place, Right Time: Case Study #3

In late 2007, we were ready to purchase a home. We liquidated our taxable brokerage account to prepare the largest down payment we could afford. House prices were soaring, and we were concerned that the high cost of living area where we were looking to buy would escape both our price range and the tethers of reality at any moment.

I was itching to leave our apartment after a peripatetic existence. I wanted fruit trees and a garden instead of a couple of potted plants.

The following winter, the Great Recession hit and prices began dropping back to earth. I was still chomping at the bit to put down roots, but my wife tempered my madness. I'd estimate we viewed 60+ homes during our search.

In early 2009, we found out we were expecting a second child. In mid 2009, my wife began wearing the same baggy sweatshirts she'd donned as an undergrad to avoid giving the seller's agent any unnecessary information about our soon to enlarge family.

In the spring of 2009 we closed on our place and moved out of our apartment. My son would be born 4 months later.

It turned out to be near the market nadir.

We got lucky.

Right Place, Right Time: Case Study #4

After purchasing the house, we plowed money into retirement and taxable accounts during the second half of my front-loaded workhorse stage in medicine.

We had an advisor we met with annually. He used jargon we didn't understand at every meeting, referencing current events that were affecting the markets.

We were grateful that we did not have to assume the responsibility for failure if our investments did poorly. We were paying dearly for a scapegoat we didn't need.

Suddenly I hit a wall at work. Burnout set in, and I became desperate to reclaim control of my time.

In researching how much longer I needed to remain in medicine before I could bail out entirely, I came across a fringe movement of people pursuing financial independence and physician financial literacy.

I became part of the fringe. We broke up with our financial advisor. I became a DIY investor, started a blog, attended FinCon, and found a virtual doctors' lounge full of folks who were weird in the same way I was.

I suggested changes to how we ran our democratic group so each member could better control his or her clinical commitment. Over time these policy changes were adopted and, eventually, regarded with enthusiasm.

I got back my time and found my mojo.

I unexpectedly fell back in love with the job I'd been so desperate to leave a couple of years earlier.

I got lucky.

Right Place, Right Time: Case Study #5

Over the past several years we invested aggressively into taxable and retirement accounts, even trialing a year as super-savers.

We expanded our tax-protected accounts by adding defined benefits, backdoor Roth and HSA space for making contributions.

We transitioned from having an advisor to a DIY portfolio of passively managed, extremely low cost index funds almost entirely at Vanguard.

Our expenses went from 1% of assets under management plus load funds with high fees to a mean expense ratio of .06% across our entire portfolio.

We formalized our charitable giving via a donor-advised fund, which had the benefit of making us more generous givers.

Most importantly (and least within our control), we invested during the longest bull market in history.

This led me to re-evaluate our asset allocation. For the past 9 months I'd been uneasy - not because I intended to time the market, but because when I reviewed our original investor policy statement, it seemed crafted with the folly and hypertrophic genitalia of youth.

We were 80/20 for a while, and every time I looked all I could see were big red flags. I overestimated our risk tolerance.

Thanks to the bull market, we are closer than we'd expected to our magic number.

Bernstein's refrain rang in our ears: When you've won the game, stop playing. We hadn't won, but we'd gained a comfortable lead, and we risked losing it.

After the waiting period called for in our IPS, we have right-sized our risk tolerance to fit my revised appraisal of gonadal size.

We are now where we should have been.

We got lucky.

Comments 5

  1. Better to be lucky than good and congrats on having a lot of big pieces fall your way, most importantly the one about meeting your wife.

    I recently de-risked my portfolio and had to go through a lot of emotions as it was hard to reduce my equity component after it performing so well for so long. But now that I am entering my planned 5 year window to exit stage left it made sense to do it and logic eventually won out.

    Only time will tell what the financial ramifications from this decision will be (good or bad) but I am going to be content either way

    1. Hi Crispydoc and Xrayvsn,
      I have a different reaction. It reminds me of Guy Raz asking entrepreneurs, “How much of this is hard work and how much is luck?” Of course you need both.

      Case 1: patient chose to go the ER. Yes, it was lucky he was there, but he knew something was wrong. That’s why he went.

      Case 2: You chose to go out and to call that cool physician 6 months later. The luck was that she was still single, because she could easily have picked someone else in the meantime.

      That said, I believe that people who work hard and consider themselves lucky tend to be happier than those who work hard and grumble about how they need more or how the world owes them A to Z.

      So enjoy your luck!

      1. Post
        Author

        Melissa,

        You remind me of the quote attributed to Seneca: Luck is when preparation meets opportunity. I could not agree more that framing your underlying work ethic with a disposition to gratitude rather than entitlement makes all the difference.

        Thanks for stopping by, my friend.

        CD

    2. Post
      Author

      Xrayvsn,

      I loved reading about your own derisking strategy. It must be such a shift in mindset to remove risk after living with it all these years, but at the same time there’s comfort in the Bernstein practice of quitting once you’ve mostly won the game.

      I laud your move and the peace of mind that it is buying.

      Cost of reducing equity stake? Real, to be determined.
      Cost of protecting your retirement bucket? Priceless.

      Fondly,

      CD

  2. We all got lucky. 100 years ago people were born into a time of horse travel, keeping a garden to feed the folks and canning the produce for the winter. Dad needing to kill and butcher a buck for any hope of having meat through the winter as well as keeping some chickens etc. Every so often someone would have a phone so transactions were done by mail. It was common to complete the 4th grade. If you didn’t work a farm, you worked a store or factory. The notion of trading stocks was possible but not at all done like today. Stocks were traded locally at places called bucket shops, which were closer to gambling parlors than securities establishments. Gold was common currency. You didn’t rip off your neighbor much because you’d wind up lynched.

    Life was about survival. Kid’s died 1/3 and oldsters barely made 65 on the average. It was a far more grim existence but hugely improved from the Civil war era or the Indian wars. My uncles were from that 1900’s time and the family didn’t have heat in the winter except they went to the train tracks, hopped a freight bound for the steel mill and knocked some coal off the car and took it home.

    We live in a time of great abundance, privilege and complacency. We are so wealthy we get to sit around and take Joe’s money and give it to Jake through the power of government without Joe going to war, and then sit around smugly thinking what great humanitarians we are. We spend money we don’t have on things we don’t need. Above all we bitch bitch about how we are getting gypped totally forgoing the amazement, gratitude and social cohesion we should be feeling. This is called living in a delusion. There isn’t a future in living in a delusion. At some point the denial breaks and once broken the pieces can not be reconstructed. Right sizing risk and living essentially is what follows the dissolution of denial. What happened to the NFL?

    I recently checked out of some FI social media forums. My denial has been broken. I just can no longer stomach what gets sold as fact by so called “experts”, experts in that they write a blog or have published some book or provide some lecture drivel on “this is how you do it”. I just can’t help noticing the emperor has no clothes. I’m not disillusioned in trying to divine an essential future. I think there is a way forward but I think the present system is way too leveraged. 1929 was a system way too leveraged. 2000 was a system way too leveraged. 2008 was a system way to leveraged. The present has not quite cracked yet but it is clearly way too leveraged. Right sizing the risk and true diversification is paramount to survival IMHO.

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