Wednesday, October 25, 2023

#7 The Missing Billionaires - How to spend like you can live forever.

[This series is a slow chapter-by-chapter review of the book The Missing Billionaires by James White and Victor Haghani. It's getting special treatment on this blog because it is novel and can potentially result in a new Dr Wealth course. To understand it all, the best option is to read the book. Otherwise, you may need to read from the first instalment of this series here. We are currently at Chapter 10 of the book] 

Who doesn't want to live forever? A few months ago, I attended a seminar by Mito Health with a few other finance forum regulars. This seminar was organized by Kenneth Lou who was the founder of Seedly. I really liked the logical no-nonsense approach of that seminar and was hearted that I probably already have more longevity drugs in my system than that entire panel of speakers. ( Namely Metformin, Jardiance, Acarbose and Vit D)

The after-seminar discussions were more valuable and we concluded that longevity can only be a great asset if life is worth living, and we can't conclude that is the case for all Singaporeans. For the wealthy, there's definitely a desire to be immortal. For the middle class who have to deal with rising costs and workplace stress, maybe it's time to die when your time is up.

If you aspire to live forever, then you need to run your investment portfolio like an endowment. Assuming a return of 5.4%, the standard deviation of risk assets of 18%. There are three conventional ways to spend your assets.

a) Spending $5.40 a year and then adjusting it by inflation.

This is closest to the conventional 4% withdrawal rule by Bengen that withdraws a fixed amount and adjusts it by inflation every year. At 5.4%, this is unsustainable because sequence of risk returns. This clearly plagues the FIRE community and a lot of ink and computer code has been spilled to solve this issue.

b) Spending a variable 5.4% of total portfolio assets every year.

This is slightly better because you spend less after your portfolio takes a beating, but this approach is also unsustainable after a while even though it is slightly better than the earlier option. It also means that you are flexible enough to adjust your expenses as you get older and face a bad year in the markets. So only wealthy folks can do this.

c) Spending a variable 4.1% of total portfolio assets every year.

To account for volatility drag, we have to adjust the 5.4% downwards to match geometric mean returns. This approach was found to be sustainable over a long period and also has stricter assumptions as the 5.4% rule. Only the wealthy can have this flexibility.

d) Account for maximum utility. personal risk tolerance and time preference

Naturally, as financial consultants, authors want to improve on conventional approaches to spending. The trick is that if you withdraw too much at the start, you may lose out on higher spending in the future, which you may enjoy.

Just a hint on how the maths works

The authors used a typical risk aversion lambda of 2 and came to the conclusion that you will be very much closer to spending about 2.4-2.5% of your total wealth every year.

While the authors mentioned that this approach does not see rapid adoption in the industry, do they look familiar to you as a Singaporean?

I believe that Singapore is run in this manner. We get to enjoy 50% of the NIRC from our international investments. If conservative returns are pegged around 5%, then this is exactly about 2.5% of our portfolio. 

This also explains why Singaporeans may not like the way Singapore funds are government. 

Our government invests as if Singapore will be around forever.

Individual Singaporeans somehow die on average at 84. 

They prefer to spend more each year. 


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