The Voluntary Life: 124 Four Ways To Quit The Rat Race

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6 September 2013

124 Four Ways To Quit The Rat Race

Listen to Episode 124

Audio from a presentation given at the 2013 Libertopia conference. The talk explains how I quit the rat race aged 38 and what I have learned about different ways that other people have found to do so. There are four basic ways to quit the rat race presented in the talk:
  • Unjobbing
  • Intensive Saving
  • Passive Income
  • Selling A Business

Show Notes:
Michael Fogler's book Un-Jobbing
Linda Breen Pierce's book Choosing Simplicity
Elliot Hulse
Your Money or Your Life
Amy Dacyczyn's book The Complete Tightwad Gazette
Early Retirement Extreme blog and book
Mr Money Moustache
Introduction to the Permanent Portfolio
Smart Passive Income
Tim Ferriss' blog and book The 4-Hour Workweek
Laura Roeder
Derek Sivers' book Anything You Want

Podcast Episode 124

4 comments:

  1. Jake, this is a great talk. I don't think I've seen the four routes to quitting the rat race presented together before.

    But there's one thing you said, here and elsewhere, that I take issue with. It relates to the rebalancing of the permanent portfolio.

    You said that rebalancing means that you automatically sell high and buy low, but that's not the case. What rebalancing actually causes is selling on a rising price and buying on a falling price. The mechanism is symmetric, so in the long run a permanent portfolio with rebalancing gains nothing from the rebalancing. This is important!

    Consider a volatile gold price (relative to the other investments in the portfolio). As the gold price goes up, you sell a tranche of gold every time you rebalance. But when the price of gold goes down again, you buy a tranche of gold each time you rebalance, and at similar prices to which you previously sold.

    So there's no ratcheting effect. That would be nice, but the only way to get that is if you didn't rebalance while the price of gold was decreasing, but only when it reached its low point and was about to turn around. Of course there's no way to know when this turnaround will occur, which is why an algorithmic strategy can't profit from this volatility.

    The commonly-accepted safe withdrawal rate of 4% per annum is calculated based on a stock portfolio. In the long term, gold doesn't increase much after inflation. Since 1900 the average (geometrical mean) has been 1% after inflation. If 4% is a safe withdrawal rate for a stock portfolio, then the corresponding rate for a portfolio of 75% stocks and 25% gold would be around 3%. If some of the portfolio is held as bonds and/or cash, the rate would be lower still.

    Here's a good source for long-term returns after inflation:
    http://www.mymoneyblog.com/impact-of-inflation-on-stocks-bonds-housing-and-gold-1900-2011.html
    The "real" annual returns (i.e. inflation-adjusted geometric mean) from 1900 to 2011 were: stocks 5.4%, corporate bonds 1.7%, property 1.3%, gold 1.0% and treasury bonds 0.9%.

    The above link quotes a Credit Suisse report, which I thoroughly recommend. It's a rigorous statistical analysis of investment returns, globally and for individual countries, with every figure inflation-adjusted.

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    Replies
    1. Hi Roger, thanks for your feedback. I think you have in mind a different kind of rebalancing to me. I rebalance when I hit a band: i.e. when one asset's value reaches 35% of my portfolio, not just when a value rises. There can be a lot of up and down before an asset hits a rebalancing band and I only want to capture larger volatility, to keep trading costs low. That means, by definition, I do in fact only sell when an asset's value has gone up (got more expensive) relative to other assets and indeed I only buy when an asset has got cheaper. It's true, that the PP can't predict a bottom, so it could be that I sell an asset and then sell even more on the next rebalance to gain even more from a huge upswing. It's not happened to me yet, but it could do I suppose. I can't see why that would be a problem myself. Regarding safe withdrawal rates and investment returns for individual assets, the long term return of a single asset isn't very interesting unless you only hold that asset. The portfolio returns come from the volatility harvesting and the fact that the different assets tend to perform well in different circumstances, enabling this harvesting. Therefore you could still make out like a bandit if you held an asset with 0% long term return that had significant volatility advantages relative to other assets.

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  2. This was the first podcast of yours that I listened to. (Just found your site.) I think people just don't realize the liberating power of earning an income via the internet. Among other benefits, it facilitates 'intensive saving' by allowing a person to live somewhere inexpensive while earning generously. I've been doing this since 2001 and I'm a true believer.

    Thanks for making this podcast.

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