Real GDP per capita 1950 - 2014

On Real Risk and Selling Options

I never thought I'd put a wine collecting metaphor together with the topic of writing options.  But I've been provoked.  The occasion was provided to me by my reading, for some unknown reason, all of the several hundred comments that followed two or three different web-posts on the practice of selling options.  First of all let me say -- and this is mostly unrelated to the main point I'll try to make -- that my capacity for surprise at the uncouth commentariat that derives its strength from internet anonymity and at what passes for their attempt at "dialogue" is born again each time I read this kind of stuff. Sifting through all this dreck, though, I found at least one consistent, grating, repetitive theme emerging, voiced more often than not with either passive or active hostility: the simplistic and black-and-white opinion that option selling has infinite risk and limited gain and therefore is a waste of time; a single trade can waste a whole year's worth of gains -- gains that are too small to be worthwhile in the first place -- so don't bother.  Hmmm. My mind wanders to my wine metaphor.

Weekend Links

QUOTE OF THE WEEK

“Cupidity is seldom circumspect.” Anonymous Investor 

CHART OF THE WEEK

                  College and childcare cost more but toys and TV less.  Um....yea? Maybe not.

RETIREMENT FINANCE AND PLANNING

What Type Of Retirement Spender Will You Be? Pfau at Forbes.  And so, what is the best baseline assumption to use: constant inflation-adjusted spending, decreased spending, or a retirement spending smile as you age? This is a big question that is still not fully resolved.  

Achieving American Retirement Prosperity by Changing Americans' Thinking About Retirement, Peter Huang; Univ. of CO Law School.  Ineffective retirement planning causes Americans to experience decreased financial wealth, health, objective living standards, and subjective well-being in addition to suffer increased anxiety, depression, stress, and worry. This Article advocates and analyzes changing Americans’ thinking about retirement by educating Americans to utilize the thinking tools of thinking architecture and thinking technology in addition to thinking more mindfully and socially about retirement. This Article’s proposals are based on and introduce to economic analysis of law the field of cognitive economics. 

Weekend Links, a day early...

...in honor of my daughter coming home...so I am not on the computer when she's here.


QUOTE OF THE DAY 

“A successful book agent I know tells me that at least half the people he meets who are writing their first book, are doing so not because they have anything particularly interesting to say, but because the idea of “the writer’s life” appeals to them. Tweed jackets, smoking a pipe, sitting out in the gazebo and getting sloshed on Mint Juleps, pensively typing away at an old black Remington. Bantering wittily at all the right parties. Or whatever. Anybody who wants to write books for this reason deserves to suffer. And happily, many of them do.”  --Hugh Macleod 

CHART OF THE DAY

                                courtesy of Visual Capitalist.

RETIREMENT FINANCE AND PLANNING

New Approaches to Retirement Income: An Evaluation ofCombination Laddered Strategies, Mark Warshawsky. A combination strategy of laddered purchases of immediate life annuities and fixed percentage withdrawals from a portfolio whose assets are being dynamically allocated represents a promising way for retirees to manage their retirement assets in order to get lifetime income in a flexible manner while still maintaining growth, liquidity, and bequest potentials. 

How Much Should DC Savers Worry About Expected Returns? AQR.  DC savings analyses typically anchor on long-term stock and bond returns when estimating retirement income. We make the case that these historical returns may not be achievable in the future, and quantify the impact this could have on savers’ retirement income replacement ratios (RR). We find that required savings rates nearly double when return prospects are reduced by ~2% to be more in line with current yields.  

Euro Trust

Living in Extreme Poverty (Our World in Data)

3 Digit Zip Matched to the Game of Monopoly

Fail Rates: Is there Any Simplicity To Be Found On The Far Side Of Complexity?

SIMPLICITY vs COMPLEXITY

Larry Rosenberger, a former CEO of Fair Isaac Corp -- a company where if you open the hood carefully you realize it isn't, or at least wasn't at the time, all that much more than a whole bunch of really, really smart quant PhDs creating and selling complex risk models -- once told me that there is almost always simplicity on the far side of complexity.  This came to mind recently because I have been processing through an article I read earlier this year by Moshe Milevsky about the idea of avoiding ruin rate analysis and simulators in retirement planning earlier than is necessary or useful (It's Time To Retire Ruin Probabilities). In that article he gives complexity a proper thrashing especially for advisors and their clients (with an elbow nudge towards the client) that have not taken baby steps in common sense before they jump into the abyss of deeper, stochastic retirement analysis.  In general and up to a point I totally agree with that point of view but I also wanted to personally see if there might be elements of simplicity on both sides of this ruin complexity problem and whether we can redeem anything from simulation tools by using some simple questions for ourselves.

Here are some bullet points from the article that capture the main points he is trying to make, a list that runs the risk of recapitulating the whole article:

Weekend Links

QUOTE OF THE DAY

The brave choice is always family.  

CHART OF THE DAY 

RETIREMENT FINANCE AND PLANNING

Don’t Forget Inflation in Your Retirement Plan, RetireBy40.com  I guess I haven’t been there in a while because now the lunch special cost $7.  

Getting Real With Inflation, PFE  

Providing Better Retirement Statements, Joe Tomlinson.  Advisors can help overcome the shortcomings; clients need more frequent reporting that goes beyond asset-value statements and shows what their income in retirement will be. I’ll propose the improvements that are needed.  

Five Really Simple, Useful and Free Retirement Formulas

Here are five great, simple little formulas for retirement planning -- all of which are not, you'll notice, the 4% rule. Retirement planning can often be complex if not a completely unanswerable problem domain or as Wade Pfau once opined: "A truly safe withdrawal rate is unknown and unknowable". On the other hand, by using some simple, deterministic formulas to wrap your head around what might or might not work before you get into the deep weeds with a planner and his or her complex, proprietary models I think you can, if not necessarily DIY, at least save a little time and money and make the conversations-to-come more efficient. Moshe Milevsky, in a great article on de-emphasizing complex simulator-based retirement ruin calculations (It’s Time to Retire Ruin (Probabilities) ), points out the pros and big cons of stochastic modeling (e.g., simulators). He tells us, helpfully, that "the highly technical and subtle stochastic 2.0 lecture makes no sense until the deterministic 1.0 lecture is crystal clear." This just means walk with simple formulas before you run with a heavy duty model. So this post is part of the 1.0-walk "lecture." In my mind, some of the benefits of starting with the deterministic 1.0 level include:

How Many Allocations Are There If...?

How many asset allocation combinations are there if one has five assets and allocations can be made in one percent increments?

Now, I'll be the first one to step up here and say that this question has no real practical application in my, or almost anyone's, day-to-day investment decisions except in an abstract, in-the-background kind of way.  The question came up recently, though, when I was trying to build a tool that generates a representation of an efficient frontier for 5 assets so that I could get some context for the return and variation of a strategy I run. 

One might think that the portfolio return or standard deviation might be the hard part, especially since the covariance formula for five terms looks like this:

Checking Out an Old Rule of Thumb for Forward Price Probability For Option Trades

This brief post tries to compare an old option trader's rule of thumb (for a one standard deviation range/move of a stock at future dates) that I once learned from an old-school trader against the new-ish Interactive Brokers "market (option) implied probability" in their Probability Lab. I just wanted to see how the quick-and-dirty rule stacked up in very, very general terms to something that attempts to go a step further and mathematically infer probability from market (option price) data.  I claim no skill in options trading...or numeracy in statistics (or options) for that matter.   Just checking it out the best I can. 

Weekend Links

QUOTE OF THE DAY

The reason that most of us are unhappy most of the time is that we set our goals not for the person we’re going to be when we reach them, but we set our goals for the person we are when we set them.  Jim Coudal

CHART OF THE DAY

    Consols, if I have it right, have infinite duration.

RETIREMENT FINANCE AND PLANNING

Retired Actuary Calls for Actuarial Profession to AdvocateTrue Social Security Sustainability, KenSteiner.  

Quantitative Easing: The Challenge for Households Long-TermSavings and Financial Security.  Thimann, Paris School of Economics.  The extremely low long-term interest rates in capital markets, to a relevant extent induced by quantitative easing, imply significant challenges for retirement saving and the stability of households’ purchasing power over the long-term. The reason is that prices for the two most important long-term savings objectives – housing and healthcare – are rising substantially, while long-term return in safe instruments is virtually zero.  

Update on a Systematic Alt Risk Strategy

Early this year I wrote a post on self-managed Systematic Alternative Risk strategies for retail investors.  I had been managing an amateur version of a strategy in that area for a while and had pitched some its benefits for the right kind of investor.  The general idea at the time was that if one were to have the background, inclination, and a rudimentary set of skills necessary to manage systematic rules-driven risk/return, I didn't think it was necessarily a bad bet going into a what sounds like the cloud of crummy expectations about future returns that is in the air these days.  Here is an update on the strategy and some comments on where I think I'm headed now.