Weekend Links - Retirement Finance

QUOTE OF THE DAY

It is questionable, for that matter, whether success is an adequate response to life. -Tom Robbins

CHART OF THE DAY

MARKETS AND INVESTING

Performance vs. Outcomes, Motley Fool. "Outcomes are determined by performance within the context of expectations, with importance heavily weighted toward the latter. And if predicting future performance is hard, calibrating them against expectations is close to sorcery."

Cognitive Biases, StockCharts.com.  "Cognitive Biases describe the innate tendencies of the human mind to think, judge, and behave in irrational ways that often violate sensible logic, sound reason or good judgement. The average human – and the average investor – is largely unaware of these inherent psychological inefficiencies despite the frequency with which they arise in our daily lives and the regularity with which we fall victim to them. While the complete list of cognitive biases is extensive, this article focuses on eleven of the most common tendencies, chosen for both their prevalence in human nature and their relevance to investing in the financial markets. The purpose of this article is to educate you on these psychological predispositions so that you can better recognize and overcome them in your own decision making."  

Interview with a Trader: Inside the Mind of Jesse Felder.  

Getting What You Pay For, Meb Faber. "If you are going to stray from market cap weighting, it pays to be concentrated and very different. Otherwise, what’s the point?... Concentration and equal weighting lead to portfolios which have better average excess returns and higher active shares. The equal weighted portfolios outperform cap-weighted and cap-adjusted value portfolios by an average of 1.8% and 2.0% per year, respectively—a wide margin in the U.S. large cap market. More concentrated portfolios have a much better valuation edge: stocks in the portfolio have much cheaper average value percentile scores.”" 

 Rethinking the Risk-Free Rate, Exploding a Fundamental Assumption, Jason Voss on LinkedIn. "…there is no such thing as a risk-free rate of return…"  

Mean Reversion From the Lost Decade, Ben Carlson CFA. "Diversification isn’t just about spreading your bets and ensuring that you’re likely to participate in the best performing asset class or strategy; it’s about ensuring that you’re not overly exposed to the worst performer."   
See also: How scary can investing be? Monevator.com 

From Ritholtz.com

Negative Rates Are Creating A Tax, Not A Stimulus, Blu Putnam, OpenMarkets.com. "negative rate policies from a central bank may be more correctly interpreted as a tax increase and a tightening of policy.  This interpretation helps to explain why the exchange rate has appreciated in the aftermath of the introduction of more negative rate policies.  As countries balance the adverse impact on the banking system from negative rates, we expect they will choose alternative policies which might be more effective."  

The Rise of the Most Powerful Idea in Investing, Noah Smith, BloombergView. 

RETIREMENT AND PLANNING 

A Model of Retirement Planning, Part 1 The Retirement Café, Dirk Cotton. "Life expectancy and spending are the two largest determinants of retirement cost and, as I have pointed out, both are unpredictable. So, when someone asks how much money they will need to retire or how much retirement will cost, the correct answer is, “We can't say with any certainty, at all. We can tell you what typically happens, but your retirement may not be typical.” That rules out waiting until you're certain you can afford it to retire. Certainty is absurd." 

Spending Typically Declines as We Age, Dirk Cotton. " The most common assumption of retirement spending strategies is that real (inflation-adjusted) spending from savings will be flat throughout retirement, yet most studies of actual retiree household expenditures show that constant real spending is atypical. For most retirees, expenditures decline pretty consistently as we age." 

Improving Withdrawal Rates in a Low-Yield World, Andrew Miller, Journal of Financial Planning.  "Determining a safe initial withdrawal rate from a portfolio at the start of retirement may be one of the most important decisions an investor makes…Recent research shows that if one adjusts return assumptions using valuation and/or current bond yields, the failure rate of an initial 4 percent withdrawal rate increases dramatically to between 18 and 57 percent, depending on the assumptions. Because low bond yields are the primary cause of the increase in failure rates of an initial 4 percent withdrawal rate, it is possible to create an investment portfolio with the same stock market beta of a 50/50 stock/bond portfolio, but with a smaller allocation to bonds [by replacing it with an allocation to the low volatility stock anomaly]."   

How Rising Health Care Costs Are Wrecking Retirement Savings, Money. "Seven in 10 workers report their medical costs have gone up the past two years, and the vast majority says the additional expenses are significant enough to force them to save less for retirement. Driving costs up are things like higher deductibles and co-pays, which have risen as employers and insurers, as well as the government, seek to have more individuals covered and paying part of the costs. This trend will only worsen the looming retirement crisis. Even now, nearly half of boomers report having zero retirement savings. And a rising percentage say that Social Security will be a major source of retirement income." 

Cash-Strapped Boomer? You Can Retire Using Home Equity, CNBC. "Home-sharing, HELOCs, HECMs and sale-leasebacks are all strategies that can help retirees access their home equity today and remain in their home. Retirees simply cannot afford to continue to ignore home equity as an income source and still meet their retirement goals."  

Comparing Retirement Wealth Trajectories on Both Sides of the Pond, Blundell et al. "We use comparable data from the US and England to examine similarities and differences in the level and trajectories of assets among households aged 70 and over. We find that in the US assets on average decline gradually with age, while in England older households actually accumulate wealth. These differences appear to be driven largely, though not entirely, by housing wealth: over the period we consider house price growth drove increases in housing wealth in England that more than offset the slow draw down of non-housing wealth. This suggests the illiquid nature of housing is likely to be an important factor in explaining wealth drawdown at older ages. We also consider the potential importance of bequest motives and savings to insure against the risk of medical and long-term care expenses."  

The Math of Retirement Saving and Spending, WSJ.  "Are you saving too little for retirement? Are you spending too much in retirement? Are you maximizing your Social Security benefits? Those are among the questions retirees and soon-to-be retirees often grapple with. The Wall Street Journal’s Experts panel recently addressed some of those and other concerns–with a fresh perspective on some of the conventional wisdom. The Experts are a group of industry and academic thought leaders who weigh in on topics covered in the Journal Report." 

The 4% Rule And The Search For A Safe Withdrawal Rate, Pfau. "Though acknowledgment is made that a new worst-case scenario is possible in the future and mid-course corrections might be needed, users of safe withdrawal rates generally treat 4% as a reasonably safe worst-case sustainable withdrawal rate for a thirty-year retirement period."  

Book Excerpt: Do You Need a Financial Advisor?, Darrow Kirkpatrick, CanIRetireYet.com "…understand that many financial advisors are more expert in how to sell financial products and conform to the thicket of government regulations for their work, than they are technical experts on retirement finance…After many years of reading every investment book I could get my hands on, talking to numerous players inside and outside of financial services, making my own mistakes in the real world, and enduring several major market meltdowns, I’ve learned to simply accept the uncertainty." 

Opinion: What To Do When It’s Time To Prune Your Funds Portfolio. MarketWatch. "An unwieldy array of investments is a common problem among do-it-yourselfers."  

Quasi-Hyperbolic Discounting and the Existence of Time-Inconsistent Retirement, Findley & Feigenbaum.  "The retirement decision is one of the most important choices that an individual can make during his lifetime [emphasis added; on this I will agree with them], since the timing of retirement determines the life-cycle budget constraint to a large degree… we find that it is possible for the use of a quasi-hyperbolic discount function to induce an individual to retire earlier than what was initially planned. " [ Ok, this is a very very nerdy link and, spoiler alert, there is nothing (in my mind) to be gained from reading this paper.  Way back in the 1980's they did not teach hyperbolic discounting in my grad program (maybe it was a Minnesota thing or maybe it is a newer concept than I thought.  I had to learn it from Prof Geanakoplos on OpenYale Finance Theory a couple years ago).  The basic idea, however, is this: in finance the "exponential present value" discount (i.e., the standard theory) tends to mis-represent some net cash flows over very long time periods.  Think of some manufacturing investment decision where in year 1 there is an investment of some kind and then in year 2 through 20 there is a net inflow.  One can easily calculate the net present value of that cash flow.  But wait, in year 50 or 100 or 200 there is a really big, massive, nasty environmental debacle, the costs of which should really accrue to the original decision.  Under the standard theory the huge costs at year 100+ are rendered practically zero in the present due to exponential discounting math. Enter hyperbolic discounting.  One adds a mathematical factor to the discount that gives more weight to the 100 year cash flow and more often than not less weight to the near-term cash flows.  Different NPV, different decision.  Now in this paper's case, even though I get the math (ok not really so much the specific stuff), the idea they are pitching is, to me, either too opaque or totally vacuous.  I'll assume the latter until otherwise proven by more human language and better interpretation. In the end, I suspect that retirement finance could probably benefit from this type of thinking but I also think that this type of stuff is too wonky and narrow and mis-directed.  For example, whatever tiny differences may exist between exponential discount math and hyperbolic math in retirement finance…those differences would be totally swamped by way bigger issues like spending chaos and bankruptcy risk due to health care costs or other unanticipated spending disasters. See Dirk Cotton on this kind of thing at www.theretirementcafe.com]  

3 Proven Ways to Increase Your Income in Retirement. Motley Fool. "…according to the 2016 Retirement Confidence Survey of the Employee Benefit Research Institute, about 26% of respondents said they had less than $1,000 saved for retirement, suggesting that many people are not going to have adequate funds come retirement. What can you do if you're one of them, and even if you're not but just want maximum income in your golden years? Well, here are three proven ways to boost your income in retirement, according to our contributors."  

Determining the Retirement Income Strategy that is Best for You is Not Necessarily an Easy Task, Ken Steiner.  

If you want to be confident in Plan A, make a Plan B, Plan C, Plan D. Marketwatch. "Workers are increasingly confident in their ability to retire comfortably. That's largely because they haven't retired yet."  

Use the Logical “Big Picture” Retirement Budget Setting Alternative, Ken Steiner. "...spending the same real dollar amount from a pool of risky assets for every year of retirement is a pipe dream… safe withdrawal rate strategies are not “Big Picture” strategies as they generally ignore other sources of retirement income and rarely focus on all expenses the retiree can expect."  

ALTERNATIVE RISK 

Expanding The Efficient Frontier With Value And Momentum Strategies, AlphaArchitect. "…counter-intuitively, adding highly volatile assets sometimes expands the MV frontier, if the volatility associated with the portfolio being added is unrelated to the other assets already included in the portfolio. An example of this situation is when one adds concentrated “factor” portfolios to a broader diversified portfolio. On a stand-alone basis, these concentrated exposures appear ugly, but in a portfolio context, they are much more interesting."   

Fees Eat Diversification’s Lunch, Jennings & Payne, Financial Analysts Journal. "More-exotic asset classes come with higher investment management fees. In some cases, the extra fees overwhelm the diversification benefit—that is, fees can offset the return benefit of many seemingly-attractive diversifiers."  

Can Currency Competition Work? Sanchez, Fed Resv of Phil.  "Can competition work among privately issued at currencies such as Bitcoin or Ethereum? Only sometimes. To show this, we build a model of competition among privately issued at currencies. We modify the current workhorse of monetary economics, the Lagos-Wright environment, by including entrepreneurs who can issue their own at currencies in order to maximize their utility. Otherwise, the model is standard. We show that there exists an equilibrium in which price stability is consistent with competing private monies but also that there exists a continuum of equilibrium trajectories with the property that the value of private currencies monotonically converges to zero. These latter equilibria disappear, however, when we introduce productive capital."  

Should We Embrace The "Dark Side" Of Factors? Corey Hoffstein. "So while expensive may indeed diversify cheap, we’re probably better off working in a diversifying factor that actually has positive expected returns."  

Key Smart Beta Questions To Ask. ETF.com "Although they’re often grouped together, smart-beta strategies can differ depending on the underlying index construction methodology. Investors should start with a short checklist"  

Factor Investing: Good in Theory, Difficult in Practice. Haran Karunakaran, Joe Steidl of PIMCO. "Constructing a portfolio that systematically captures these factors can potentially deliver a return above that of the broader equity market at a much lower cost than traditional active strategies. But investors should be careful - poor implementation can erode a factor's return benefits and lead to sub-par (and often unexpected) outcomes."   [Opinion: While investing in a "factor" should of course have a positive expected return from something that is economically and empirically proven about that factor (and yes costs can swamp the implementation) and the factor risk premium should be more or less non-diversifiable within its own class, the real kicker from factor investing (i.e., allocating a bit to one's portfolio) comes from non-correlation with equity and credit risk. For that reason I think the focus of these authors is off a bit. That, and they are also talking their own book/services.] 

The Big Flaw Few are Talking About in Fintech.  Fortune. "That can work for a while. The trouble is that if quality is bad, the actual lenders, that is the hedge funds and others that fund the loans are going to stop coming back for more. And that’s exactly what’s going on." 

SOCIETY AND CAPITAL 

The Munger Operating System: How to Live a Life That Really Works, Farnamstreetblog.  

Research Backs Up The Instinct That Walking Improves Creativity. Qz.com " Last year, researchers at Stanford found that people perform better on creative divergent thinking tests during and immediately after walking. The effect was similar regardless of whether participants took a stroll inside or stayed inside, walking on a treadmill and staring at a wall. The act of walking itself, rather than the sights encountered on a saunter, was key to improving creativity, they found."   

1400 Miles of Non-Driving, Mr Money Mustache. " This whole enormous scene we’ve come to accept as “normal”, with the burning gas and crushed bodies, endless parking lots and driveways and traffic jams is balanced exactly where your bulky monochrome cell phone with the pull-up antenna was sitting in 1996."   

Here's Why Raising The Retirement Age Is A Terrible Idea, LA Times. "Through its benefit structure, which provides lower-income workers with a higher benefit proportional to their earnings than it gives higher-income workers, Social Security redistributes wealth from rich to poor. That's fairly well understood. What's less well understood is that it also redistributes from those who die young to those who die older, since the latter collect benefits for a longer period."  

The Myth of Declining American Living Standards, Cullen Roche.  

Consider Trusteed IRAs for Clients With Alzheimer’s, WSJ. "Once clients receive an Alzheimer’s diagnosis, your first objective should be to promote a frank and open discussion between them and their loved ones about what it means for them going forward. This is a difficult conversation to have, but it can empower everyone involved by defining the needs and preferences of family members who have been diagnosed. These may include where these people want to receive care, who will manage their finances, how their spouses will be provided for and ultimately how their estates will be passed down to descendants."  

Farm to Fable, Tampa Bay Times.  [this keeps showing up on a bunch of sites] 

Unhedgeable Risk: How Climate Change Sentiment Impacts Investment, University of Cambridge. "Short-term shifts in market sentiment induced by awareness of future climate risks could lead to economic shocks and losses of up to 45 per cent in an equity investment portfolio value (23 per cent loss for fixed income portfolio). Around half (53 per cent) of this decline is “hedgeable” if investments are reallocated effectively, but the other half (47 per cent) is “unhedgeable,” meaning investors and asset owners are exposed unless some system-wide action is taken to address the risks. Long-term analysis: Economic growth is highest in the long term if society is dealing successfully with climate change, per the recommendations of the Intergovernmental Panel on Climate Change (IPCC) – with long term annual growth rates of 3.5 per cent." [maybe. I'll take this with a grain…]  

When to Retire? Millennials Look to Their Wallets, Not Their Calendars.ThinkAdvisor.  "Forty-one percent of millennials surveyed said they expected to retire when they reached a certain financial milestone or savings goal, compared with 29% of Gen X and 18% of boomer respondents. Twenty-nine percent of millennials also said they would retire at a certain point in their career. In contrast, 35% of boomers in the poll said expected to retire when they hit a certain age, compared with 28% of millennials, and 33% of boomers and Gen Xers said they would retire when health concerns rendered them unable to work, compared with 25% of millennials."  

OPEC and Game Theory, AlephBlog.  

Paying Up for Being Poor, Bloomberg.  "…individual experiences of inflation can differ, depending on what a person buys. Some spend more on Hamptons real estate and high-end art, while others are just trying to put food on the table. To get a sense of what inflation might look like for different income groups, I combined data on prices with estimates of spending on specific categories of goods and services."  

Maximizing Your Philanthropic Impact, CFA Institute. " In the investing world, an adviser who is unconcerned about risk and return would undoubtedly be breaching fiduciary duties. With charitable giving, if you’re not focused on the evidence behind your approach and the potential outcomes, then you’re flying blind with respect to impact."  

Changes in Life Expectancy by Race and Gender, WSJ, CDC. " Life expectancy fell for the U.S. white population in 2014 and remained flat for all population groups combined, according to data released Wednesday by the Centers for Disease Control and Prevention, showing how increases in death rates from suicides, drug overdoses and related causes are threatening an important measure of health and prosperity."  

The Costs of Financial Isolation, The Atlantic.  "Although money mistakes often arise from innumeracy or simple planning errors, they at least as frequently result from more intimate reasons of psychology and our personal histories."  

Annuity Markets in Comparative Perspective: Do Consumers Get Their Money's Worth? World Bank. "Private annuity markets are not well developed even in the most advanced OECD countries. But they are growing rapidly in some countries, in response to mandatory retirement savings plans. Preliminary results show that in these countries the cost of annuities is lower than might be expected."