Renting Gives a Freedom Mindset

Something that came to mind as my wife and I are planning a big overseas move is our housing situation. Renting makes moving so easy! A couple weeks ago we let our landlord know that we are moving. No problem, no costs. We called the utility companies and set a cancellation date. And we have been selling our belongings. We have no emotional attachment to our house because it isn't ours. It's just a comfortable roof over our heads that has served us well for the past two years.

Our stuff, after ten years of relatively minimalist accumulation, is being trimmed down to four suitcases and three boxes (two of them full of books). Aside from clothes, we are taking only those things which are most important to us. Some pictures of families and friends, some small keepsakes from experiences we've had together, a few books, our laptops, and some games. Our emotional attachments are in our photos and adventures, not 2x4 walls or the dining room wainscotting.

Some notable things. We could easily leave to go on our global adventure with little cost or hassle. There are virtually no costs to leave our house or move our financial assets to accounts that will work for us overseas.

Had we owned our house we would have been forced to sell or become absentee landlords. Selling would have costed approximately $20,000 after all fees, legal costs, and taxes are factored in. The $20,000 might be a small amount compared to our total net worth, but it would cover about one year of our expenses in Vietnam! Being landlords would have introduced management, tax, and other financial headaches.

As I've shared before, not owning a house has allowed us to maximize our net cash flow every month for the past three years. We've used that to save aggressively and invest! Our investment gains on these savings alone have been well into six figures.

But more importantly, home ownership can psychologically tie you down. The demand of large mortgage payments every two weeks, taxes every year, insurance every month, and promises of limitless equity can be financially restricting. Plus, the emotional ownership of the work put into your house, whether it is new floors or custom blinds, can give emotional attachment to your house. These things all work together to hold you back from a mindset of freedom and flexibility—the ability to take advantage of every good opportunity!

The Broader Mindset

I'm into thinking about finances, life, and risk in a different way from most. The truth is most of our peers would not be able to do what we are doing. This has little to do with incomes, and not much to do with our career choices. It has a lot to do with spending and priorities. The decisions we make every day.

Much of the poor decision making I see regularly in others can be blamed directly on housing and the immense pressure from your spouse, family, and friends to become a homeowner. Even if it is the riskiest and most restrictive decision you can make. Something to think about is if you owning a house is a good decision for you, or a preferable outcome for them.

In Canada we are in a housing obsessed culture. Last week I was seriously asked if I was buying a house in Vietnam. I laughed and replied, "No!", adding that we've been renting for the past three years in Edmonton. To their further shock of course. Really, you've got to be kidding me! What kind of warped mindset of home ownership is required to think that it would be normal or expected to buy a house, sight unseen, in a developing country with a shaky legal structure and questionable property rights? I'll continue to rent, thank you very much.

While most sane people simply view housing as a form of shelter that should be comfortable and affordable, here in Canada many believe housing is an investment, a never ending improvement project, an ever-expanding HELOC to tap into for consumer spending, and a crucial part of one's identity. This ideology is all backstopped by taxpayer-funded corporations and government policies intent on keeping the party going.

Fear of missing out has driven real estate prices to insane heights in many markets. Prices are not sustainable and have every marker of an inflated asset bubble—the days of the best gains are clearly behind us. A good time to buy was 1995 when a typical house costed three times your dad's salary.

Yet people are frantic, scraping together meager savings, borrowing from family, and binding themselves into monster mortgages just so they can boast of home ownership. This craziness when houses are priced at eight or ten times the average salary in our biggest cities. As students of markets we know insanity can continue for longer than we think, but how much higher can house prices possibly go in the long term relative to incomes?

Too many people are financially stretched thinner than a crêpe. I don't know how much weight I put into the frequent surveys that state more than half of Canadians are a couple hundred bucks away from bankruptcy, but certainly we live a tight, high stress, credit dependent culture. To me this sounds like a population that has about as much house as they can afford (or probably more for most).

Mortgage applications are thought of as a fudge-able subjective process rather than a firm legal contract that is signed and comes complete with a mile of small print. In these applications incomes are stretched, existing debt is hidden, and anticipated life events are not considered and certainly not disclosed. It doesn't matter if the missus is eight months pregnant and the family income will be cut by a third or more starting next month.

Savings and real investments are an afterthought, or nice-to-have, for most. A real investment should generate positive returns over time with some income. It should be liberating, not a source of financial and emotional bondage.

That doesn't mean we should think of investment gains as being a sure thing. They are not. Drops in our portfolios occur regularly and sometimes they are even painful. But nothing beats being able to access some cash for any reason at the click of a button. Nothing is better than the freedom of no emotional attachment to where your money is. The ability to move assets to the safest locations in the world is comforting, no matter where you physically live.

I firmly believe that renting a modest, but comfortable house is a key element of long term prosperity, especially given the prices we are seeing today. Even where house prices are more reasonable, think about the other restrictions you might experience by taking on home ownership. Choose to put freedom first in your decision making.

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Dual Momentum: A Look at Market Cycles

Dual Momentum is one of my favorite investment strategies for do-it-yourself investors. The historical performance of Dual Momentum—even in the now effete twelve month lookback form—has been fantastic going back nearly seven decades.

There is no other strategy I can think of where investors can experience double digit annualized gains over full market cycles with 25 percent drawdowns (in the worst case) and just a couple trades per year.

Although the long backtests are beautiful and the results are solid, Dual Momentum has come under a lot of fire lately. Investors who employed the strategy are losing faith after several shakeouts in the past couple years, the quants are poking holes in the mechanics of the strategy, and the buy-and-holders are flaunting massive gains as the market keeps jumping up on every dip.

An argument that's been made before, and I've been on that side as well, is that we can expect equity trend strategies to underperform the index in the upside portion of market cycles. This is often observed in single market backtests. As a trend strategy, Dual Momentum would fit this argument.

However, Dual Momentum doesn't just beat the benchmark by a few points annualized as we see with single market trend models by avoiding long downtrends. Dual Momentum has crushed the market by also picking the strongest equity class—U.S. or International—in the broader market upwards half-cycle.

I want to focus on the "bull market" or upside half-cycles in U.S. equity markets because this is where trend investing can tend to underperform equity portfolios. To help put this relative performance into a visual format, I decided to look at all the "bull market" phases since 1970. We'll see how a Dual Momentum investor would have felt standing beside the S&P 500 and a balanced portfolio (33.3 percent U.S. stocks, 33.3 percent International stocks, and 33.3 percent bonds).

We know Dual Momentum has avoided the deep drawdowns of extended market downwards half-cycles. In other words, I believe it is unlikely to see a Dual Momentum investor complaining about their recent performance at a time like the summer of 1974, summer 2002, or fall 2008.

July 1970 to December 1972

Credit: TheRichMoose.com, MSCI Inc., FRED-Federal Reserve St. Louis.
Right-click to enlarge image.

In this short bull market Dual Momentum underperformed the benchmark portfolios for more than a year into the cycle. Dual Momentum quickly caught up in the latter half of this half-cycle, essentially meeting U.S. stock performance at the cycle peak.

October 1974 to November 1980

Credit: TheRichMoose.com, MSCI Inc., FRED-Federal Reserve St. Louis.
Right-click to enlarge image.

The dynamics of the late-70s upwards cycle was very similar to the brief earlier cycle. Stocks ran hard at first with Dual Momentum lagging behind for the first half of the cycle. However, later in the cycle Dual Momentum caught up again, barely edging out stocks over the entire half-cycle period.

August 1982 to August 1987

Credit: TheRichMoose.com, MSCI Inc., FRED-Federal Reserve St. Louis.
Right-click to enlarge image.

While the mid-1980s market half-cycle started off similar to the previous bull markets in the 1970s, it certainly finished different. Dual Momentum lagged at first, for approximately a year and a half, but the signal moved the Dual Momentum investor into International stocks. For the next few years International stocks wildly outperformed U.S. stocks and a Dual Momentum investor finished the half-cycle much wealthier than an American focused investor.

Even the normally lagging Balanced Portfolio performed neck-and-neck with U.S. stocks. While the bond component may have held returns back, the International stock allocation gave the Balanced Portfolio a lot of strength into the latter half of the upwards portion of the cycle.

We all know what happened to U.S. stocks in October 1987. What many people don't know is that International stocks did much better in that crash comparatively. By holding International stocks, Dual Momentum did better in that sudden crash, even with a full equity allocation.

November 1987 to August 2000

Credit: TheRichMoose.com, MSCI Inc., FRED-Federal Reserve St. Louis.
Right-click to enlarge image.

As the chart shows, this long market upwards cycle was almost all U.S. stocks driving the performance. Dual Momentum got a bit of an edge on U.S. stocks when the market shifted to bonds in 1990 and to International stocks in 1994.

Overall both Dual Momentum and U.S. stocks gave a 9x return in little more than a decade. The momentum was so strong that the Dual Momentum signal held in U.S. stocks for the 1998 Bond and Currency Crisis, riding to the peak of the U.S. telecom and tech bubble.

October 2002 to October 2007

Credit: TheRichMoose.com, MSCI Inc., FRED-Federal Reserve St. Louis.
Right-click to enlarge image.

This half-cycle we're back to the familiar performance of Dual Momentum lagging the market for the first half of the upwards cycle. Again, Dual Momentum finishes strong as International stocks took off in the mid-2000s. In fact, Dual Momentum had investors in International stocks for the vast majority of this half-cycle.

March 2009 to April 2019

Credit: TheRichMoose.com, MSCI Inc., FRED-Federal Reserve St. Louis.
Right-click to enlarge image.

This market half-cycle has been a significant deviation from the past cycles we've looked at. Normally, a couple years into the cycle, Dual Momentum would surpass the returns of the Balanced Portfolio and U.S. stocks. and pull away from there.

Although I don't have data going as far back as Dual Momentum's publisher, we have never seen Dual Momentum perform this poorly in a market half-cycle. Dual Momentum has never lagged the S&P 500 or a Balanced Portfolio by so much for so long.

For some perspective, U.S. stocks would have to fall 60 percent to match Dual Momentum's returns over this market half-cycle. It would take a 25 percent decline for the Balanced Portfolio. This number isn't impossible. In fact, very prominent market researchers have been suggesting a 60 percent decline in U.S. stocks would be necessary just to get us back to a baseline historical valuation.

For myself, I am not sure where markets are going to go. One thing I do know is that zooming into shorter period performance can help us get a picture of how a strategy performs.

If there are clues that something may be shifting in the performance of a strategy, we need to keep a more careful eye open. In my research I've seen long-term shifts in other investment strategies; once winning strategies becoming laggards. Of course they are only seen in hindsight, but it is important to look for these shifts before they drag down your portfolio returns for decades.

While I'm not abandoning Dual Momentum, I am somewhat less confident in the strategy than I used to be. It would take a pretty solid relative performance in the next downwards half-cycle to renew full confidence in the strategy. Gary Antonacci has previously mentioned that he would look to full market cycle performance to determine the effectiveness of Dual Momentum. I would say that a potential challenge is in the works.

For now, I am still comfortable staying with Dual Momentum for a good portion of my portfolio. However, as I've advocated for many times before, don't put all your money in a single strategy. Mix it up. Spreading your bets across a few strategies can reduce a multitude of risks much better than small adjustments within the strategy that try to adapt to market conditions or reduce some of the risks present the strategy.

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.