Listener Q&A Episode | #36

Episode Summary

Executive Summary: Meb Faber and Jeff Rimsburg discuss year-end portfolio cleanups, robo-advisors, momentum versus performance chasing, long evaluation horizons for strategies, international and country allocation, dividend taxes, trend following, and the use of macro/market indicators. The episode emphasizes rules-based investing, the value of starting from a clean slate, and the importance of tax efficiency, valuation, and behavior in long-term portfolio success.

Main Topics: Zero-based portfolio review (Priority: 5/5): The hosts frame New Year's as a good time to reset finances and portfolios by imagining a fresh start and asking what the ideal portfolio would be today, rather than tweaking a messy legacy allocation. Robo-advisors and automation (Priority: 5/5): They argue robo-advisors are a practical, low-cost, behavior-improving solution for many investors, especially those who would otherwise make emotional or inconsistent decisions. Momentum vs. performance chasing (Priority: 5/5): The discussion distinguishes disciplined, rules-based momentum investing from undisciplined chasing of recent winners, emphasizing that systems with explicit entry/exit rules are fundamentally different from emotional reactions. Time horizons for evaluating strategies (Priority: 4/5): They stress that valid strategies can underperform for years and should be judged over long horizons, with attention to valuation, structural changes, and regime shifts. Global allocation, country risk, and valuation (Priority: 4/5): The conversation covers foreign versus U.S. exposure, country ETFs, frontier-market liquidity limits, and the idea that cheap markets with improving momentum can create the biggest opportunities. Dividend stocks, taxes, and shareholder yield (Priority: 5/5): Meb argues dividend investing is often tax-inefficient and that a value approach avoiding high-yield stocks can preserve or improve performance after taxes. Trend following and macro indicators (Priority: 4/5): They revisit the timing model, trend-following’s purpose as a drawdown reducer, and the use of indicators like the Baltic Dry Index and other econometric signals in asset allocation.

Key Arguments: A clean-slate, zero-based portfolio review is better than incremental tinkering because it forces investors to reconsider goals, constraints, and the actual usefulness of each holding. Robo-advisors can be worth the fee if they reduce behavioral mistakes, lower costs, and provide automation that keeps investors from panic trading. Momentum works when it is rules-based; performance chasing fails because investors buy after runs and sell after losses without a predefined exit. Many good strategies require a decade or more to evaluate because even strong approaches can underperform for long stretches due to valuations or regime shifts. Country domicile matters less in a globalized world than valuation, momentum, and liquidity; frontier markets are more problematic because of illiquidity and concentration. Dividend stocks may outperform pre-tax, but after taxes they often lose to market portfolios; avoiding high yielders in a value framework can improve after-tax returns. Trend following is mainly a drawdown and volatility management tool, though aggressive versions can target higher returns at the cost of larger drawdowns. Macro indicators and econometric composites can be useful, but too many inputs risk curve-fitting; simpler, tested signals often remain more durable.

Data Points: U.S. market return in 2016: about 12% - Meb cites this as part of a broadly strong year for many asset classes. Small-cap return in 2016: about 18% - He notes small caps outperformed the broader U.S. market. Foreign developed return in 2016: around 5% - Used to contrast U.S. performance with developed international markets. Foreign emerging return in 2016: around 12% - Emerging markets had a strong year, comparable to U.S. equities. CAPE/value approach return in 2016: almost 20% / around 17% - Meb says a value/CAPE approach crushed it in 2016. U.S. 10-year Treasury return in 2016: about 1% - He characterizes bonds as doing little beyond yield. Managed futures fund dispersion in 2016: about -15% to +15% - He emphasizes large performance dispersion among managers. Typical robo-advisor fee: 30 bps or less - Vanguard, Schwab, Wealthfront, Betterment and others are discussed in this range. Schwab robo-advisor fee: about 28 bps - Meb compares Schwab’s pricing to Vanguard’s. Potential trading cost on a $100,000 account: 20 to 50 bps - He explains how commissions can matter more than management fees for smaller accounts. Bullish sentiment on AI in early 2016: one of the 10 worst / one of the lowest readings ever - Used as a contrarian signal at the start of the year. Historical forward return after extreme bearish sentiment: about 14% over 10–12 months - Meb cites the study that suggested strong subsequent returns. Coal performance after five down years: up 100% last year - Example of mean reversion after prolonged weakness. Uranium YTD move at time of recording: up 20% - Used as another example of a previously weak asset turning up. Basic timing model holdings: 5 asset classes at 20% each plus a 10-month moving average - The moderate timing model is described as U.S. stocks, foreign stocks, bonds, REITs, and commodities. Historical volatility reduction from timing model: about half the volatility and roughly one-quarter of the drawdown - Meb explains the model’s purpose is lower risk rather than much higher return. Value strategy annual outperformance frequency: about 60% of years - He uses this to show that even good strategies do not win every year. Dividend-stock tax drag from avoiding high yielders: about 50 to 400 bps per year - He says tax efficiency can be a major source of outperformance. Current dividend tax benefit estimate: about 50 to 200 bps per year - A more realistic range under current tax rates. S&P 500 overseas revenue/profit share: 44% - Used in the home-country bias discussion. U.S. share of global market cap: about 54% to 55% - Meb notes the U.S. has become a dominant weight in the global market portfolio. Countries in bear markets: about half the countries in the world - He says many markets still offer mean-reversion potential. Countries down 50% or more: about a dozen - Illustrates how depressed some markets remain.

Pivotal Quotes: "What would I ask? Or, same thing is if you're starting personal finance, you say, All right, I'm cleaning out all these recurring expenses, I'm getting rid of everything." — Meb Faber: Explaining the zero-based budgeting mindset for personal finance and portfolios. "The beauty of momentum is that it has objective rules." — Meb Faber: Distinguishing systematic momentum from emotional performance chasing. "It is a volatility and drawdown reducing strategy, not particularly return-enhancing." — Meb Faber: Describing the main role of trend following and the timing model.

Implications: Listeners are encouraged to simplify portfolios, use rules-based systems, prioritize taxes and behavior, and judge strategies over full cycles rather than short windows. The episode favors valuation-aware global diversification and disciplined automation over reactive investing.