Bryan Caplan  

Since You Asked

The Financial Regulation Probl... Regulatory Arbitrage, AIG Edit...
In his defense of non-betting, Tyler has said this:
How would you feel about an obligation (if only a moral one) for scholars and commentators to publicly reveal the content of their investment portfolios?  Those portfolios are their real bets.  Yet I still favor the privacy norm and I should note that Bryan never has (nor need he) revealed his portfolio to others at GMU, much less to the broader public.
He repeats his point in a followup post:
Nor have I seen the critics [of non-bettors] publicly revealing their equity and other asset portfolios, the real bets which matter in financial terms.
Even an avid bettor might be afraid of scam artists and/or spousal disapproval of a full public revelation.  But it's worth facing Tyler's challenge head on.  Here are the basic facts about my portfolio:

1. I have saved roughly 30% of my after-tax income for my whole working life.  I max out all of my options to invest out of pre-tax dollars.

2. I own a home with a 30-year fixed rate mortgage, and pay it back as slowly as possible.

3. My liquid portfolio consists 100% in internationally diversified equity index funds.

4. I have never actively traded.  I seriously considered it once, in September 2008, when I thought that perhaps I should sell all of my stock.  Doh!

OK, now that you know this, what bets am I effectively making?

Comments and Sharing

COMMENTS (18 to date)
chipotle writes:

1) You're betting against scam-artists and spousal disapproval.

2) 30% savings of after-tax income and maxing out pre-tax dollars? You save A LOT! You seem to be planning for old age. You're betting against imminent global catastrophe.

3) There's a lot of deferred gratification. You could have spent your money on traveling, living the high life, seeing new things, getting into adventures and cultural consumption. Maybe these are pleasures unique to your 20s and 30s that you've completely failed to enjoy? Instead of maximizing the number/range of pleasant/rewarding experiences, you decided to spend your time and money on making and maintaining babies, and investing in a house. You have a conservative temperament, some would say it's based on a narrow and/or unsophisticated outlook.

4) By putting down roots, you've revealed that don't foresee yourself needing to flee rampant social violence, economic catastrophe, a collapse in public higher education in Northern Virginia, or a significantly better job offer than GMU.

Dan writes:

1. We won't have hyperinflation or a global catastrophe.

2. Your investment returns will be greater than the interest on your mortgage.

3. The global economy will do well in the long run.

4. You cannot beat a diversified portfolio in the long run through active trading.

Jacob Miller writes:

Looking at only your savings rate, it seems that you could be betting on any combination of these things:

1) You will live a long time.
2) You will be incapacitated
3) Your children will derive utility from your wealth (e.g., inheritance, piano lessons, ivy league schools).
4) Your children will be incompetent or incapacitated. (I doubt it, but I included it because it's a plausible explanation.)

Maybe hedge is a better word than bet, but then your savings might be labeled as a "hedge fund," and that could bring down the fury of the SEC.

Stewart writes:

A while back, there was a post on either the Austrian Economists or elsewhere, asking who had called the current financial crisis. Of course, many people called it, but what does this mean without the subsequent shorts?

Eric Rall writes:

By investing in index funds rather than individual stock, you are betting on the efficient market hypothesis with regards to equity markets.

By investing in internationally diversified funds rather than domestic funds, you are doing one of the following: betting that the US dollar will decline relative to other major currencies, betting that the US economy will grow slower than other major markets, or hedging against the risk of a collapse of the US economy (using foreign equities to diversify the risk from the US economy to your future earnings).

By investing in 100% equities rather than using a portion of your savings to buy bonds or pay down the leverage on your home at an accelerated rate, you are betting that the equity premium is real.

Geoffrey writes:

"Bryan never has (nor need he) revealed his portfolio to others at GMU, much less to the broader public."

If I remember correctly, you pretty much publically reveal your investment portfolio in the PhD Micro II course.

Matthew C. writes:

Wow Bryan I'm very sorry to hear you didn't follow your gut and sell.

I sold some in summer of 2007 and was out completely by May 2008.

There are a lot of investment strategies that are safer than buying equities in a stock market, I hope you will consider them in the future.

Dan Weber writes:

By saving so much, you're betting that you won't have any significant wealth or consumption taxes.

By paying off your 30-year mortgage as slowly as possible, you're betting that you can continue to make payments after you retire.

By investing in equities, you're betting that the market will behave more like the 17 year period from ~1983 to ~2000 (where stocks ruled over bonds) than from the 17 year period immediately before it (where stocks were flat). And by investing internationally, you are betting that there will be no serious international incidents that prevent your redeeming of assets stored overseas.

(I heard that "17-year itch" theory back around 2001, and it sure seems like we're in a 17-year period in which stocks will be flat.)

Jayson Virissimo writes:

Bryan, how could I adjust my investment portfolio to short Western Europe and go long on Singapore? (Obviously, you aren't a financial advisor, but I am curious about what you think)

Les writes:

I think you are betting that your education and experience in economics are valid.

It seems to me that's a very good bet.

Zac writes:

Several people have commented on the 30% savings (plus maxing pre-tax investment opportunities), characterizing Bryan as a miserly saver. I'd suggest his relatively high marginal propensity to save stems mostly from his relatively high household income and a diminished marginal utility from consumption. Really, I wouldn't read too much into his savings rate.

I agree that he's betting that one cannot beat a globally diversified portfolio in the long run through active trading, and that he expects his investment returns (plus his interest write-off) will be greater than his mortgage interest payments. Even in September 2008, he trusted the efficient market hypothesis over his own strong intuitions (like most of us).

Matthew C. writes:

sorry that should have read "bubble-valuation stock market" like we had in 2000 and 2007.

Matthew C. writes:

BTW anyone interested in a practical repudiation of the EMH should go look at this.

Nick writes:

He pays his mortgage as slowly as possible, because he believes that inflation will outpace his mortgage rate-probably by a substantial amount, because a person who saves 30% generally is looking to hold assets rather than liabilities. (This could also reflect a belief that his job is secure.)

Since he holds no bonds, he believes that bonds will not outperform inflation. He may also believe that the price of stocks will roughly index to inflation.

The internationally diversified portfolio is probably to increase diversification-and is not necessarily a bet against the US economy.

Pierpaolo Sommacal writes:

Eric Rall:

By investing in index funds rather than individual stock, you are betting on the efficient market hypothesis with regards to equity markets.

Not necessarily. He may simply believe that the higher returns from proper security analysis do not compensate the greater effort required.

Max writes:

You are betting that your human capital is uncorrelated with stocks.

tom h writes:

I seriously considered it once, in September 2008, when I thought that perhaps I should sell all of my stock. Doh!

And you're making a side bet that you'll get less flak for using the sterile Oxford English Dictionary spelling than the traditional and far more expressive D'oh!

Or, in the case that you like flak, the opposite bet.

Jim O'Toole writes:


What is the reasoning behind paying off the 30 year mortgage as slowly as possible? Is it a personal choice or a weighed conclusion?

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