The Mexican Fisherman

The famous “Mexican Fisherman” story is at least fifty years old, but it is a timeless tale that is both revealing and enlightening. Below is one version of the story:

An American investment banker was taking a much-needed vacation in a small coastal Mexican village when a small boat with just one fisherman docked. The boat had several large, fresh fish in it.

The investment banker was impressed by the quality of the fish and asked the Mexican how long it took to catch them. The Mexican replied, “Only a little while.” The banker then asked why he didn’t stay out longer and catch more fish?

The Mexican fisherman replied he had enough to support his family’s immediate needs.

The American then asked “But what do you do with the rest of your time?”

The Mexican fisherman replied, “I sleep late, fish a little, play with my children, take siesta with my wife, stroll into the village each evening where I sip wine and play guitar with my amigos: I have a full and busy life, señor.”

The investment banker scoffed, “I am an Ivy League MBA, and I could help you. You could spend more time fishing and with the proceeds buy a bigger boat, and with the proceeds from the bigger boat you could buy several boats until eventually you would have a whole fleet of fishing boats. Instead of selling your catch to the middleman you could sell directly to the processor, eventually opening your own cannery. You could control the product, processing and distribution.”

Then he added, “Of course, you would need to leave this small coastal fishing village and move to Mexico City where you would run your growing enterprise.”

The Mexican fisherman asked, “But señor, how long will this all take?”

To which the American replied, “15–20 years.”

“But what then?” asked the Mexican.

The American laughed and said, “That’s the best part. When the time is right you would announce an IPO and sell your company stock to the public and become very rich. You could make millions.”

“Millions, señor? Then what?”

To which the investment banker replied, “Then you would retire. You could move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”

(This story was originally written by Heinrich Böll, although Tim Ferriss published the above adapted version which can be found across the internet.)

Parenting 101

“Do you have any financial advice for new parents?”

A handful of friends have asked this question in the past week. The question often relates to childcare expenses or college savings plans, but I usually advise new parents to prioritize the below items before anything else:

  • Buy enough term life insurance to provide for your family if you and/or your spouse die prematurely. There’s no “right” amount, so ask yourself what you would want covered if you passed. Your salary of x years? Your spouse’s salary so he/she wouldn’t have to work for y years? Childcare expenses for z years? Payoff a mortgage? College tuition? Other expenses? Add those numbers up and go get some quotes.
  • Establish an estate plan, including a revocable living trust and will. The will should appoint a guardian for your children if you pass away while they’re still minors, although the courts do have the final say. The will also directs what to do with assets that were excluded from the trust (or forgotten to be put in the trust, which I see very often!). The trust should help avoid probate for assets placed within it and provide for supervision of the assets for the benefit of the children.

Buying insurance and establishing an estate plan are simple steps, but each does require some time and money. Fortunately, each item can be a one-time decision, which is a relief for many new parents who are completely overwhelmed with the chaos of parenthood!

The above is educational and is not legal or financial advice. Every situation is different and I’m not an insurance agent or an attorney. 

2s10s

One of the most-watched economic indicators is the 2s10s spread, which is simply the difference between the 10-year US Treasury yield and the 2-year US Treasury yield. Below is a chart of the 2s10s through time.

We can see how the 2s10s spread is calculated below, by simply subtracting the 2-year yield (red line) from the 10-year yield (blue line).

The 2s10s spread is often referenced because it provides a quick and simple indication of the slope of the yield curve. Historically, steep yield curves (indicated by a high 2s10s reading) are often followed by strong economic and financial market performance, while flat yield curves (indicated by low 2s10s readings) are followed by weaker performance.

Sometimes the yield curve flattens so much that it “inverts” and shorter-term rates are higher than longer-term rates (and the 2s10s reading goes negative). An “inverted yield curve” is typically seen as a warning sign as inverted yield curves are often followed by recessions (shown as vertical gray bars in both charts).

It is worth pointing out that the 2-year yield (red line) moves quite a bit more than the 10-year yield (blue line). In other words, the slope of the yield curve is often driven by the movements in shorter-term rates, which happen to be more closely linked with conventional monetary policy rates (such as the Fed Funds rate). Thus, rate hikes often flatten curve while rate cuts often steepen the curve, which makes sense when we think about the goals of monetary policy and economic performance following steep/flat yield curves.

The 2s10s is just one of many similar measures and curious minds can just as easily look up the 2s30s, 5s10s, 5s30s, and so on. Yet the 2s10s is one that many people watch and I believe it is worth watching as well.

Note: the above graphs are embedded directly from the Federal Reserve, so they should always show “live” data. However, you may have to hold your mobile device horizontally for them to render correctly.

MSCI World vs MSCI ACWI

Source: Bloomberg

When comparing the MSCI World Index vs the MSCI All-Country World Index (ACWI) the other day, I was surprised by how closely they’ve tracked each other over the past 30+ years. Since their inception in 1988, the annualized difference is just .05%!

The MSCI World Index only includes stocks of developed markets (think the US, Western Europe, Japan, Canada, Australia, etc), while MSCI ACWI includes stocks in both developed and emerging markets (think China, India, Brazil, etc). Since emerging markets have bounced around between 10-15% of global market cap in the past decade (and were much smaller prior to that), the risk and returns of the MSCI World and MSCI ACWI indices have been nearly identical.

What does this mean for investors? Since the risks and returns of the indices are nearly identical, selecting an investment vehicle and cost structure may matter more than selecting the index. A fund investor might select MSCI ACWI due to the greater geographic diversification (especially with a large index fund that invests in local exchanges), while an SMA investor might opt for MSCI World due to cost considerations. Of course, the next 30 years could be completely different than the past 30 years!