Risk and Reward

Happy New Year! I wish everyone a year of balanced risk and reward in 2013.

Here’s my take on risk and reward, starting with style.

Given the controversy WendyB’s STFU and IDGAF necklaces stirred up among several bloggers I love to read, I’d planned to write about enjoying my STFU necklace as a private joke to myself, but then Martin took this up-close shot which makes the letters stand out like nobody’s business, so I decided to hold back and wait until we could get a shot at normal standing distance or I could think of a different angle on why I love it.

My different angle is that it is a style risk worth taking, for the fun rewards it offers.

The above shot was taken with the lens practically in contact with my chest, not standing distance, but even at standing distance a few people (relatives and close friends standing very close) have asked about it. In each case I said “why of course it stands for Sweet Things For U” (using texting lingo U for You).  A blogger friend pointed out that no one is fooled by my “cute” but not widely recognized acronym definition.

Okay, I’m busted. If you get close enough to me when I am wearing this necklace you can make out the letters and you know exactly what they stand for, but that still doesn’t mean I’m swearing at you and everyone else within earshot. How do you know that? Well, if you’re standing that close to me you probably know me, for one thing, which means you know I don’t go around swearing in capital letters at people. Like Wendy’s Mom’s, my “read” on this necklace is that it is cute and funny. It’s funny on me because it’s so unlike me to do or wear anything edgy. And it’s cute because the necklace is very delicate and feminine, like a young girl’s necklace. I also like it because when I wear it I feel like I’ve got on a bit of protective armor, like a motorcycle jacket. I don’t want to say “don’t mess with me” out loud but I love the idea of communicating a little bit of delicate edginess, from a distance, and enjoy fantasizing about really saying it to obnoxious people, like loud cell-phone users in public spaces.

There’s also my apparently incurable naughty streak. When the blogger dust-up happened I learned the phrase épater la bourgeoisie reading Wendy’s post and I couldn’t stop laughing! Maybe you’ll disagree but I think a little shock once in awhile is good for us. If we never challenge our sensibilities life gets overly dull, don’t you think?

You’re thinking wait, wasn’t this supposed to be a financial post? Yes, in the previous post I mentioned doing a post on being seriously risky investors.

What I meant by “serious” is that we take calculated risks and we take our risks seriously. This means we are prepared for whatever happens, loss or gain, and we wait patiently for gains, sometimes years and years, like the 2007 to 2012 span, during which my portfolio lost 33% of its value, then gradually recovered, then featured modest gains. It still hasn’t fully recovered.

This is what I think of as normal portfolio risk, not at all like the mad-hatter level of risk involved in accumulating the portfolio funds in the first place via wild speculation on Adobe stock, years ago.

When the portfolio was at 33% reduced value we reduced our draws by 33% and our living expenses by about 45%. This was necessary because the taxable part of the portfolio we have access to (before we can access tax-deferred funds at age 59.5) has all of the risky stock securities it is unwise to sell when stocks are down, and at the same time we needed to budget for higher education expenses. You might wonder why did we put the risky assets in the part we need access to for living expenses before age 59.5? Good question. We took the risk of designing it this way because there’s no tax advantage in putting risky growth securities in tax-deferred accounts. Anything you put into a tax-deferred account will be drawn out as ordinary income no matter what it started out as in the first place, e.g., a risky growth security. If you can avoid it, there’s no point in taking on the risk of growth if you know it will taxed as ordinary income. Ultimately, as our US tax climate changes (as it should by the way — I always vote against my own personal financial interest!), I’ll make adjustments.

In short, our income (safe rate of withdrawal) from my portfolio goes up and down with the markets, by design, to optimize taxes and to manage the extra built-in portfolio risk needed to help the portfolio last longer than normal. (I had to retire earlier than normal due to severe tendonitis in both hands/forearms from 20+ years intensive keyboarding.)

When the markets go up, we look for outsized gains and take some profit, because doing so reduces overall risk. That happened with one fund this year. It felt like a luxury event and that helped justify spending the extra funds on luxury jewelry.

I think you need a photo break.

Since that tax-deferred account has a longer time-horizon way off in the blurry future, I revved up a little risk in there too, investing in a relatively safe junk-bond fund (IMO) throwing off high yields that helped dampen the severe impact of the downturn.

The other risky thing we do is manage cash loosely or tightly, depending on economic conditions.

In 2007, when I realized there was going to be bad economic trouble, I opened a HELOC (Home Equity Line of Credit) on the house while the rates were still cheap and the banks weren’t checking documentation too carefully. I then transferred a chunk of that HELOC to my portfolio (we worried banks would start canceling unactivated HELOCs) and invested it in a California MUNI fund. I know it sounds crazy but we read the prospectus of this very respectable fund and had a good feeling about the holdings (I’d just finished taking some graduate level accounting and finance classes so I had a good trust level re: municipals). We knew what was going on in CA but we felt that over time the fund would pay off, even if it temporarily lost value (it did). That one investment has returned far more than the cost of interest for the HELOC, which itself is somewhat offset by the mortgage interest deduction (which may, and should be going away).

The MUNI and unactivated portion of our still cheap HELOC are cash reserves on hand in case we have to weather more economic storms in the years ahead.

What I mean by loose vs. tight is that we make sure we reserve more cash when conditions look bad and invest more when conditions brighten. For example, we recently siphoned off some of the MUNI and re-situated the funds in riskier growth stocks.

Remember, this isn’t financial advice! I used to never write publicly about what I/we do because I worried about having my CA investment adviser license audited by FINRA/CA Dept. of Corps. At this point I’m happy to make a paper airplane out of it if they don’t like what I write about. But again, please don’t try any of the above at home because you read this post.

Lastly, in terms of taking risks, we’ve invested in various career possibilities for me, none of which has turned out, sadly. I hate to admit this but I am not happy in the MA program and plan to withdraw. I don’t want to write very much about it publicly because I met many wonderful people last semester and think the program is perfect for them. It isn’t perfect for me though. This article by Professor X, although overstated, gets at some of my concerns.

If I were happier in the program I guess I wouldn’t mind continuing to read several hundred pages of dense journal articles per week and write 4-6 1000-word blog posts about them, but it’s hard to look forward to spending that much time engaged in activities I’m not enjoying. All of this effort was taking close to thirty hours a week sitting on my couch, usually with bad laptop posture. (That same kind of bad posture recently lead to a painful coccyx injury that is still healing.)

What I really want to do in 2013 is cultivate a healthier, more active lifestyle. For health reasons, I must lose twenty five pounds and look forward to making it happen by living a less sedentary lifestyle.