Living Off Your Money by Michael McClung

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NotSoERN
Posts: 3
Joined: Sun May 02, 2021 10:21 am

Re: Living Off Your Money by Michael McClung

Post by NotSoERN »

This has been a fascinating thread having just read McClung's book (well almost, I'm still on the final chapter on GI).
Just wondering if you had seen any reference to investment management/platform/fund fees (aside from in the GI chapter)? Presumably these have to be taken into account as an 'expense' that the SWR has to cover? I listed to a recent webinar interviewing Bill Bengen (originator of the '4% rule') who made a brief comment that his calculations assumed very low costs. But he didn't elaborate. Just wondering what McClung would have to say about this.

Scott 2
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Joined: Sun Feb 12, 2012 10:34 pm

Re: Living Off Your Money by Michael McClung

Post by Scott 2 »

While his why is great, I found McClung's treatment of exactly what to buy and how cursory. His example funds directed me to factor based investing, specifically this book:

https://www.amazon.com/Your-Complete-Gu ... 0692783652

McClung didn't go deeply on fees. A big problem I had, was finding access to factor based funds or ETFs. The dimensional funds he lists, are typically offered via financial advisors, charging significant asset management fees. This is 50-100 basis points, on top of the individual fund fees. When you are looking at SWR in the 3-4% range, that's a big chunk. It seems to eat the possible superior returns.

From what I read, the last decade of bull market returns has not been kind to financial advisors using McClung style portfolios. Protection from the bad returns comes at a limiting of the good returns. During a long bull market, people wonder why they are paying for underperformance (tracking error) and leave. I think this created pressure on Dimensional to offer ETFs to the public.

Launch of the Avantis factor ETFs applied additional pressure. Dimensional has responded by offering some ETFs to the public. From what I could tell, it's now possible to build a McClung style portfolio with reasonable fees.


After reading the factor based investing book above, and heavily assessing my own personal situation, I decided not to pursue it.

The gap from my starting point was just too high. I'd never even bought an ETF before. Simply implementing a tax efficient, low cost, 4 fund portfolio required me to learn a bunch. I screwed that up a little. Maybe more important - I could see the gamification of modern investment tools easily drawing me into rash decisions.

I struggled with the idea of buying an international REIT or specific emerging market fund. I have no idea what those really are - funds of what? It's not houses. I wasn't making time to resolve my ignorance, so such purchases felt like speculation.

It also looked to me like the premium associated with a specific factor decreases over time, as the broader investing community learns of it. I saw the book linked to above, as well as factor based funds being offered to the public, as symptoms of that erosion. I don't want to continually learn about new factors.

The final nail in the coffin, was wanting a strategy my wife could understand and follow herself. She has zero interest and limited aptitude for this stuff. McClung's portfolio was too complex.

We copied the vanguard 60/40 life strategy portfolio and adjusted SWR downwards to accommodate.

NotSoERN
Posts: 3
Joined: Sun May 02, 2021 10:21 am

Re: Living Off Your Money by Michael McClung

Post by NotSoERN »

Thanks for your tip on factor based investing - something I've not come across. I'm not at the stage of building the retirement portfolio but trying to build a McClung style portfolio with reasonable fees would be the aim. Reference to Dimensional is handy - I'm UK-based so finding an equivalent may be interesting. Vanguard is growing in the UK and the low fees are attracting a lot of business (including some from me via their life strategy portfolios as part of the accumulation phase). Like some people I expect, I do have concerns around how McClung's Prime Harvesting and other recommendations will work with market values high (particularly in the US) alongside the increasing risk to bond values with very low interest rates and expectations for inflation.

Scott 2
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Re: Living Off Your Money by Michael McClung

Post by Scott 2 »

I am using prime harvesting. With US valuations so high, I expect it to act like a bond tent. From what I've seen in other sources (including ERN) the bond tent tests well for mitigating sequence of returns risks in a high CAPE environment.

Personally, I found the arguments against prime harvesting more theoretical than practical. The spreadsheet makes it easy to implement. Also, when it comes to explaining things to my wife, there is benefit to a well documented strategy provided by an unbiased third party.


I don't know anything about investing in the UK.

When it comes to investing in the US - buying life strategy funds, instead of the underlying funds (and rebalancing), was the biggest chunk of "sure" money I left on the table. It's impossible to build a tax efficient portfolio when one fund owns all asset classes. I could have saved a couple thousand dollars per year, had I been more tax efficient.

NotSoERN
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Joined: Sun May 02, 2021 10:21 am

Re: Living Off Your Money by Michael McClung

Post by NotSoERN »

Thanks for your comments - nice to hear you're using Prime Harvesting. As I read/learn more no doubt I'll return to this.

LookingInward
Posts: 46
Joined: Tue Nov 14, 2017 4:51 am

Re: Living Off Your Money by Michael McClung

Post by LookingInward »

Sorry for digging this thread out of the grave but I am also reading Mcclung's book and am finding it to be very good.

A side question: what do you guys mean by ERN?

And two questions more related to the book:
* how would you adapt his portfolio recommendations for non-americans? Still own a buch of US stock?
* do you guys know of similar resources but for those in the accumulation phase? The book mostly focuses on retirees or people entering that stage in their lives.

Thanks

mathiverse
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Joined: Fri Feb 01, 2019 8:40 pm

Re: Living Off Your Money by Michael McClung

Post by mathiverse »

LookingInward wrote:
Thu Apr 21, 2022 9:59 am
A side question: what do you guys mean by ERN?
ERN - Early Retirement Now website

Scott 2
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Joined: Sun Feb 12, 2012 10:34 pm

Re: Living Off Your Money by Michael McClung

Post by Scott 2 »

As a non-American, if you take a sample portfolio from the book, you will expose yourself to currency risk.

To approach this problem from a non-US country, I'd probably try to adopt principles from the book, but weight more heavily in local investments. I'd look at online tools to explore the what-ifs of theoretical portfolios:

https://portfoliocharts.com/
https://www.morningstar.com/instant-x-ray
https://www.portfoliovisualizer.com/

For an ERE or even FIRE accumulation phase, I think the investment strategies are pretty reasonable. I'd opt for a lower weighting of the fixed income portion of the portfolio, based upon time horizon to retirement. Since you're not looking at a traditional accumulation phase duration, growth from contributions will dominate anyways. IMO the learning from running your eventual retirement portfolio offers greater value than attempting to optimize for accumulation phase returns.

I say this all as someone with zero investing interest. I was 100% target retirement funds until after I retired. I wish I had run my retirement portfolio during accumulation instead. The transition was tremendously stressful, one of the mentally hardest weeks of my life.

steveo73
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Joined: Sat Jul 06, 2013 6:52 pm

Re: Living Off Your Money by Michael McClung

Post by steveo73 »

Scott 2 wrote:
Thu Apr 21, 2022 11:48 am
As a non-American, if you take a sample portfolio from the book, you will expose yourself to currency risk.
I would use the book as a way to generate ideas about your portfolio in relation to the lifecycle of your investing life. McClung is really really good in describing an effective withdrawal strategy.

These videos have I think great information on investing if you aren't a US citizen. I think you could use these ideas though just as well if you are a US citizen. The idea is you need 2 investments. One is an international stock index and the other is a domestic currency bond fund. The domestic currency bond fund is used for all the currency risk.

https://www.youtube.com/c/LarsKroijer

Portfolio charts gives heaps of more complex options.
Scott 2 wrote:
Thu Apr 21, 2022 11:48 am
I say this all as someone with zero investing interest. I was 100% target retirement funds until after I retired. I wish I had run my retirement portfolio during accumulation instead. The transition was tremendously stressful, one of the mentally hardest weeks of my life.
This is interesting. I've managed my investments through the accumulation phase and now in retirement I feel really good about our investments. There are other issues though. My old boss has contacted me about returning to work. I also have to ensure that I'm doing stuff I feel to improve myself. If I'm not doing enough positive stuff I feel I should go back to work. I suppose finances are only one piece of the puzzle.

LookingInward
Posts: 46
Joined: Tue Nov 14, 2017 4:51 am

Re: Living Off Your Money by Michael McClung

Post by LookingInward »

Scott 2 wrote:
Thu Apr 21, 2022 11:48 am
As a non-American, if you take a sample portfolio from the book, you will expose yourself to currency risk.
You already do that even if you are from the US. The Emerging Markets and TIPS are exposing you to currency risk.

I have to read the last chapter of the book and then I will go back to some chapters to write down the principles.

Scott 2
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Joined: Sun Feb 12, 2012 10:34 pm

Re: Living Off Your Money by Michael McClung

Post by Scott 2 »

Maybe I don't understand currency risk fully.

With TIPS being backed by the US government and tied to inflation, I thought they were intended to help protect against a weak US dollar. For investors in the US, I believe the weak dollar is also a smaller risk. Their neighbors will be dealing with a similar erosion of purchasing power, meaning competition for scarce goods remains level, locally.

His bond positions are based entirely on US securities. With prime harvesting selling bonds first, I think the combination ties someone outside of the US closely to the US dollar. A weak dollar could take a strong bite out of your portfolio. Caveat being - I don't understand the trade off of replacing US bonds with international. I know he was a big fan of US bonds.

He also weights around 40% of his equities in the US markets. Similar concerns, though much smaller there.

LookingInward
Posts: 46
Joined: Tue Nov 14, 2017 4:51 am

Re: Living Off Your Money by Michael McClung

Post by LookingInward »

Sorry I misread TIPS as REITs lol

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