Weekend Links on Retirement Finance, Markets, and Alt Risk

QUOTE OF THE DAY

Luck is not something you can mention in the presence of self-made men. -E. B. White

CHART OF THE DAY

MARKETS AND INVESTING

The Behavioral Continuum: What’s the Best Behavioral Bias?, CFA Institute. 

The Black Swan Siren Song, Pension Partners. “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch  

Big Returns, Narrow Doors. AlephBlog.com.  "The easiest way to kill a good strategy is to oversaturate it [with] too much money." 

180 Years of Market Drawdowns. AWealthOfCommonSense.com  "In a sense risk is easier to predict than returns.  Market losses are the one constant that don’t change over time — get used to it." 

‘Off Benchmarking’ Fixed Income ETFs, Newfound Research & ETF.com. "While investors might be trying to achieve the same 4% distribution target they earned a decade ago, 4% represents a very different risk level today. Due to this evolving landscape, we advocate for embracing a dynamic, quantitative process that constantly evaluates the investment universe."

RETIREMENT AND PLANNING

Adding Risk to the Model, Part 2, Dirk Cotton, TheRetirementCafe. "Once we lay out an estimate of the cost of the standard of living we desire in retirement (the expenses), estimate the amount of income we might be able to generate from all available wealth resources, and choose a life expectancy for planning purposes, there will be a large range of potential retirement strategies still at our disposal. Different households with virtually the same expected income, expenses, and lifetimes may plan very differently because their risk tolerances differ. We need to add risk tolerance to the model. The primary risk of retirement is that of losing our standard of living… Retirement planning isn't a one-time decision.  It's a series of moves in a sequential financial game." 

Better Financial Security in Retirement? Realizing the Promise of Longevity Annuities, Abraham and Harris, Brookings Institute.  "In this paper, we highlight how recent trends have precipitated a need for products that offer protection against longevity risk, consider whether longevity annuities can improve retirement security, highlight barriers to more widespread take-up of longevity annuities, and offer a menu of potential reforms to bolster this fledgling market." 

Please Call Off the Search for a Safe Withdrawal Rate, Ken Steiner. "For the umpteenth time, I will summarize some of the major downsides using a safe withdrawal rate approach…" 

Thinking Beyond Money in Retirement, NYT.  

What Is A Safety-First Retirement Plan? Wade Pfau at Forbes.  In my mind, this covers known territory but the points are very important and under-appreciated.  My comments on this article are here: Wade Pfau on Modern Retirement Theory at Forbes.

Protecting Retirees From Sequence Risk, WSJ.  "The effect of that string of early negative returns, in tandem with beginning portfolio withdrawals, can be colossal when it comes to the portfolio’s total value in the long term." 

You Are Responsible For Your Retirement Savings, Jason Zweig WSJ.  "…remember that no regulation, and no adviser, can eliminate all conflicts of interest. Long ago, no less an authority than the U.S. Supreme Court held that the most insidious financial conflicts are unconscious — driven by biases that advisers themselves might deny." 

Who Exhibits Time Varying Risk Aversion? Blanchett, Finke & Guillemette. " There is growing empirical evidence that risk preferences change based on financial market conditions… We find that older investors (ages 51-65) are more susceptible to time varying risk aversion. Among older investors, variable risk preference was greatest for participants with the smallest account balances and the lowest incomes, but was unrelated to equity allocation within their retirement portfolio. Much of the variation in the aggregate risk tolerance score can be attributed to variation in future long-term equity performance expectations among older investors. We discuss how target-date funds have the potential to reduce losses from poor market timing that may result from time varying risk aversion." 

Certainty of Lifestyle: Contrasting a Simulation Over aFixed Period Versus Multiple Period. Fran & Brayman.  "The purpose of this paper is to demonstrate the differences between the commonly used Monte Carlo simulations that assume a static withdrawal based on a fixed mortality period and initial capital, versus the use of Monte Carlo simulations that re-estimate withdrawal amounts utilizing period life tables for longevity, in addition to the variable remaining capital of each simulation.." [Opinion: this is a little technical but I only put it here because I built a simulator earlier this year to address the same problems and I came up with similar though ever so slightly more distressing conclusions. Basically I found that allowing longevity to vary according to a life table rather using a fixed term increases uncertainty in long term planning and risk of running out of money within a simulation.  That is without a doubt common sense and one does not need a simulator to figure it out. Moshe Milevsky recently wrote a piece about how simulator-based risk of ruin analysis can sometimes be overblown. Let's make that same conclusion here.] 

Long-term Care Options for Early Retirees, RetireBy40.org.  "Early retirees are usually young and healthy so we think we can keep the same budget. However, LTC is very expensive in the United States. A frugal budget probably can’t cover the cost of LTC." 

Early Retirement Is Exactly Like Being An Entrepreneur:Awesome! FinancialSamurai.com.  

Fewer Retirees Enjoying Their Golden Years, ERBI. “The drop in ‘very satisfied’ retirees is not limited to any particular economic group. This is clearly a more general trend,” says Sudipto Banerjee, EBRI research associate and author of the study. “What’s not yet clear is exactly why this is happening.” 

Modern Retirement Income Planning Techniques, W. Pfau at Forbes. "…retirement income planning is still a field in flux."  

ALTERNATIVE RISK

Moving Average Research, Alpha Architect. 

Minimum volatility: what's in a name? FactorInvestor.com "I dive into the characteristics of a popular Low Vol ETF that has garnered $12 billion in assets in five years… If the long-term benefits of Low Vol investing are actually associated with some sort of Value premium, then current Low Vol investors should beware. Valuation for Low Vol stocks is expensive. A once good idea has run its course… Low Vol seems destined for mediocre future returns." 

Tough Times For Hedge Funds. financial-math.org  "It is hard to bet against random noise and make money!" 

3 Alternative Strategies to Watch, ThinkAdvisor. "There are three alternative strategies where Tom Florence, president and CEO of 361 Capital, sees a lot of interest growing among investors and their advisors." 

Will Smart Beta Be the Next Industry Disruption? CFA Institute. "According to Morningstar, smart-beta exchange-traded funds (ETFs) are significantly cheaper to own than active funds, but these ETFs are three times as expensive as their cap-weighted counterparts." 

A Black Box May Be A Good Choice, Priceactionlab.com.  "The space got crowded because of a race in the blogosphere who is going to get the most credit for disclosing strategies in that domain. Many thought they can use the XYZ or ABC rotational portfolio or the X-month moving average and start a hedge fund or invest their own money and profit... The S&P 500 entered the longest consolidation period in the past 70 years rendering most of the momentum strategies ineffective." 

Fundamental Vs. Factor Investing, ETF.com. “Certain factors have historically earned a long-term risk premium and represent exposure to systematic sources of risk… “Factor investing is the investment process that aims to harvest…risk premia through exposure to factors" … picking factors amounts to an intentional exposure to risk premium. Fundamental indexing, on the other hand, is a “strategy-based” decision—it has more to do with the weighting methodology of a portfolio, the ranking of securities.  “Strategy-based exposures are factor exposures in disguise…” 

CTA Woes Continue in 2016, priceactionlab.com. "Top 50 CTA performance results for the first four months of this year are estimated to be negative by BarclayHedge, after positive returns in the first two months. If this year’s performance is negative, it will be the fifth yearly loss in the last eight years… Except for the 2016 estimates for March and April, the results show that after 2004, or about since 12 years ago, trend-following started losing any edge that it [might have] had left. Trend-following is slowly being converted into an asset/risk allocation method to survive, in hope of better returns in the future." 

Managed Futures vs. S&P in Terms of Drawdown. A riff by Attain Capital on a recent article by Ben Carlson at AWealthOfCommonSense.com  

SOCIETY AND CAPITAL

Personal Finance is Personal, Ben Carlson @ A wealth of Common Sense. " There are so many factors that affect a person or family’s finances — where you live, what career path you take, how much financial support you receive from family, how your family and friends view money, good luck, bad luck, how much money you make, poor choices, hard work, student loans, healthcare spending, a lack of education or understanding about how to run your own finances, what your lifestyle inflation looks like, what your personal relationship is with money and the list could go on and on."

The Real Reason Women Are Leaving STEM Jobs, Fast Company.

Turning OceanWaves Into Electricity. CNN Money.

Why Luck Matters More Than You Might Think, The Atlantic. "…many of us seem uncomfortable with the possibility that personal success might depend to any significant extent on chance. As E. B. White once wrote, “Luck is not something you can mention in the presence of self-made men.”"

Teaching Exponential Function and Inflation in Math Class, American Institute for Economic Research.

5 Critical Issues That Will Make or Break an Aging America, ThinkAdvisor. "[There] are five critical issues that … need to be addressed in order for America’s “newfound longevity” to be a “triumph rather than a tragedy”

The Problem of Intra-Personal Cost, Georgetown Univ Law Center. [Opinion: This is a good example of how smart, well intentioned people seduce us away from liberty ever so slowly and one teeny tiny rationalization at a time]

The Postwar Conquest of the Home Ownership Dream. St. Louis Fed. " The key driver in understanding this boom is an asymmetric productivity change that favors the goods sector relative to the construction sector. Other factors such as demographics, income risk, and government policy are important determinants of the homeownership rate but have small effect on house prices."

The American Middle Class is no Longer the World's Richest, NYT.

GeoFRED Reveals The Aging Of The World by Nation, Federal Reserve of St. Louis.

Should the Rich Pay Higher Rents? FinancialSamurai.com.

If you want to be like Warren Buffett and Bill Gates, adopt theirvoracious reading habits, Quartz.

Why So Many Smart People Aren’t Happy. The Atlantic. "If you were to go back to the three things that people need—mastery, belonging, and autonomy—I'd add a fourth, after basic necessities have been met. It’s the attitude or the worldview that you bring to life. And that worldview can be characterized, just for simplicity, in one of two fashions: One extreme is a kind of scarcity-minded approach, that my win is going to come at somebody else's loss, which makes you engage in social comparisons. And the other view is what I would call a more abundance-oriented approach, that there's room for everybody to grow."

The Crisis Bigger than Global Warning, Robert Huebscher, Advisor Perspectives. "Manufacturing is dying on a global basis…and its collapse will mean the demise of economies – like China – that are highly dependent on exported goods...productivity is growing in the manufacturing sector – roughly twice as fast as the demand for those products. If third-world countries don’t adjust their economies to reflect this reality…it would be a “crisis greater than global warming.”

Economic Wellness: Why We Live Beyond Our Means, AIER. "From consumer goods to junk food to narcotics, we have trouble making decisions when instant gratification is available for costs that only come down the road. These problems increase when society and technology make the quick payoff more available."

The New Estate Planning That’s Critical for Clients, WSJ. " People need a plan for how their online presence will be handled at death…"

Pull Yourself Up By Your (Parents') Bootstraps, American Institute for Economic Research. Perhaps the most intuitive mechanism through which income levels are transmitted across generations is education. Parents with relatively high levels of education also have relatively high levels of income. Therefore, these parents are more able to provide financial access to education to their child, which in turn, increases the child’s adulthood income level. This is called the “selection” effect of education on

The Divorce Gap, The Atlantic. "Despite the common perception that women make out better than men in divorce proceedings, women who worked before, during, or after their marriages see a 20 percent decline in income when their marriages end, according to Stephen Jenkins, a professor at the London School of Economics. His research found that men, meanwhile, tend to see their incomes rise more than 30 percent post-divorce. Meanwhile, the poverty rate for separated women is 27 percent, nearly triple the figure for separated men."

Don’t Know Where Your Money Goes? That’s a Problem, WSJ "But even for people who don’t have any immediate need to cut back on spending, knowing what they spend is critical. Expenses are a key factor in making decisions about retirement timing, launching a new business or making a big purchase, such as a vacation home."

State-Run Retirement Plans March Ahead, ThinkAdvisor.

Is the Number of Stay-at-Home Dads Going Up or Down? Federal Reserve Bank of Atlanta