Friday, November 24, 2023

Is there Right and Wrong in Personal Finance?

As I continue to run into the rabbit hole of finance discussion groups on Telegram, I'm beginning to see a common phenomenon where useful discussions sometimes get derailed by "peacekeepers".

These peacekeepers often use some common tools like "different strokes for different folks". Some variant argument that says in effect "to each his own". As personal finance is personal, therefore argument of right or wrong or any value judgment is incorrect and affects the harmony of the environment. A variant of this system of argument goes on to accuse people of trying to enforce their views on others, being unaware that enforcing peace is also another form of enforcement and tyranny.

I'm not going to swap one tyrant for another because I actually believe that some financial moves are objectively better than others and just abdicating for the sake of harmony is not just sweeping the problem under the carpet, it betrays a lack of intellectual rigour and creative imagination.

My first argument is that "different strokes for different folks" will not cut it in a finance forum. I notice that when anyone mentions ILPs, almost 100% will agree unanimously that ILPs are a bad thing, so exceptions to the "different strokes" argument do exist.

My second argument is that some very similar strategies can be differentiated with financial metrics, like the Sharpe Ratio. Even extremely personalised and subjective metrics exist in the field of economics like Expected Utility. There are equations that describe their behaviour. We can estimate how much utility a strategy can bring for the user if we can do a bit of coding.

Take for example, that growth investing guru who likes to troll dividends investing forums. Arguments are almost childish. To these guys, Ali Baba and Tesla represent an investment into innovation and the future. Dividends are a dead-end strategy for boring boomers. Using a simple ratio like the Sharpe Ratio, maybe this guru is right, or maybe he is wrong, but at least we will know where he is coming from. It is also more likely dividend investors sacrifice some returns to take on lower volatility.  

I hope I can get some time to work on more complicated strategies like the rate of withdrawals in retirement. It may be possible to answer this question objectively using expected utility and time preference discounting. 

Current arguments on the rate of withdrawal have stopped being objective in any way. If the author of such strategies is concerned about every single tiny piece of risk in the future, then the only smart thing to do is to reduce the safe rate of withdrawal, blithely ignoring the fact that normal people do get satisfaction from spending some money. What is the point of following these arguments if they keep channelling fear and race to the bottom?

To give everyone an idea of what I'm working on next, I am beginning to suspect that spending 4% and then locking it down at the inflation rate may not anyone any favours if their portfolio actually does well. However, the alternative to spending 3% of the prevalent portfolio size at the time of the withdrawal may be better over the long term. 

I don't know which is better, but I have the mathematical tools and programming knowledge to get this matter settled once and for all. 


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