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
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.
The Titanic Risks of the Retirement System, Mohamed A. El-Erian, Bloomberg. The degree of long-term financial security
that can be assured depends on three elements: future returns, correlations
among different asset classes and volatility. The outlook for all three is
becoming more uncertain. … Absent urgent
change, the retirement system could end up following the example of the
Titanic. Like the ship’s passengers, many individuals would face the risk of
devastating consequences. And like the second- and third-class passengers who
had a hard time getting on lifeboats, the middle- and low-income segments of
the population would be most at risk.
Here's How Much You Really Need To Save For Retirement,
Investors.com
Investors Should Re-Examine Annuity Aversion, Swedroe
ETF.com Numerous academic studies
advocate for the partial-to-full annuitization of financial assets. Yet despite
the evidence, a majority of investors remain reluctant to annuitize for both
behavioral and financial reasons. The reluctance to purchase annuities has been
called the “annuity puzzle.” I’ll try to shed some light on why this puzzle
exists, as well as offer a solution.
Why Aren’t Retirement Savers Choosing Annuities?ThinkAdvisor. Savers turn away from annuities based on behavioral factors, Center for Retirement Research says
What Is Age Banding And What Does It Mean For Retirees? Pfau
at Forbes. …it is not obvious that
retirement spending will decline with age. It may, but rapid growth in health
care expenses could potentially lead to an overall increase in spending needs
at the highest ages.
What It Takes to Retire Early, Ben Carlson. Unless you inherit a boatload of money, there
really is no secret for early retirement. There are no life hacks that will
make it easier. It takes sacrifice and it’s certainly not for everyone… I [also]
don’t really get the feeling that these people want to stop working altogether.
What they really want to do is set their own terms on the kind of work they
would like to do.
How to Retire Early, Ben Carlson.
Tackling Retirement Risks, Laster, Vrdoljac and Suri, Merrill Lynch.
The Legal Conflict at the Heart of U.S.Retirement Plans, Bloomberg. On the one
hand, workers are still expected to navigate the confusing world of retirement
investments on their own. But much of the law governing those investments
relieves employees of that responsibility. Which is it?
How Many Years Can You Do Your Job? Squaredawayblog
BC
MARKETS AND INVESTING
Preferred Stock: This Crazy Market Warps Another Asset,
WSJ. Preferred stocks have been one of
the trendiest investments around--but they may be overheating
REITs vs. Your Home, Altegris
Investment Horizon Risk and Volatility Metrics, SSRN, Univ
of Alberta . We re-examine the literatures’ disparate
conclusions that stock returns are more (less) volatile over longer investment
horizons. We claim that the commonly employed variance ratio is not capable of
exclusively determining whether investment risk increases with investment
horizons. We demonstrate that, irrespective of the model, the use of effective
returns and standard deviation ratios have significantly different results
compared to variance ratios. Using basic return generating processes and
standard deviations, plus a recent well-specified model, we find stocks are
less volatile over long horizons but are more volatile over very long horizons.
The conclusions are consistent with some research for very long horizons but
inconsistent in short to long horizons.
Do Stocks Diversify Bonds? Ben Carlson. Many investors are concerned that stocks and
bonds in the U.S.
are both priced too high at the moment and that each could experience difficult
times ahead. For that to happen over an extended period of time my guess is
that we would need to see higher than expected inflation kick in.
What Nick Saban Can Teach Us About Being Focused, athrasher.com “Do you think I sit around all day looking at magazines or what? I don’t
even know what you’re talking about."
-- Nick Saban
Paper trading is obsolete, Abnormal Returns. The bottom line
is that traders trade. No matter how
small the notional amounts involved there is no substitute for putting real
money on the line.
The Academic Failure to Understand Rebalancing, Michael
Edress. Why does academic finance fill
its articles with mathematical sound and fury that signifies so little? What is
wrong with the field of “mathematical finance” that it can produce such
inferior work, published in peer-reviewed journals, with so little relevance
for anyone who wishes to know whether portfolio rebalancing provides a benefit?
… as time goes to infinity. The result
is that if the average difference between constituent portfolio assets’
expected returns is small, less than about one percent, then rebalancing will,
in the very long run – that is, at eternity – surely beat buy-and-hold; but if
the average difference is greater than that, buy-and-hold will surely beat
rebalancing.
ALTERNATIVE RISK
Energy Transfer’s Gift Is Less Than It Appears, SLAdvisors. One of the powerful features of the GP/MLP
structure is that is allows a business to access different classes of investors
who can have different objectives. As their appetite to provide capital
fluctuates, the GP/MLP can access the more willing investor class.
Seeking Alternatives, the irrelevant investor. It’s not fair
to say liquid alts are bad because there are so many different strategies.
However, because of the behavioral challenges of being different, investors
need to be extra careful and ask themselves a few questions before investing in
alternatives
Taming The Momentum Investing Roller Coaster: Fact OrFiction? AlphaArchitect. Overall, the
stop-loss rules can help with draw downs, but will cause more trading, thus
adding expense and reducing performance. Also, the added complications involved
in running a short book would increase complexity. As with many strategies
coming out of academia that look great at first glance, the devil is clearly in
the details.
ETFs vs Futures, A Shifting Landscape, Institutional
Investor.
Managed Futures vs. Bonds.
Attain.
Some Benefits of Managed Futures, 361Capital.
Clustering CTA's - more than trend-following, Mark
Rzepczynski
Market Timer’s Original Sin, priceactionlab. Arguments in favor of market timing usually
rest on the existence of the momentum premium anomaly and empirical analysis
that shows it can be captured with relatively simple strategies, such as moving
averages and price rate of change. However, these claims are naive because in
addition to the limitations of analysis they conflate state space and time
domain probabilities. [comment: many retirees might recognize "time domain probabilities"
in terms of something more familiar: sequence of returns risk]
Low Vol Strategies Not Low Risk.
NewFound. Low volatility equity
ETFs provide investors with valuable building blocks when constructing
risk-managed portfolios. Yet, low volatility is not low risk. Instead, these
strategies typically trade a bit of market risk for exposure to other risks,
including interest rate risk, client expectation risk, and process risk.
Low Vol Benefits Fading,
Swedroe, ETF.com The bottom line
is that the evidence suggests you would be better served by investing in
vehicles that screen out the high-volatility (or high-beta), high-risk stocks.
In other words, invest directly in size, value and profitability rather than doing
so in the indirect way characteristic of defensive strategies.
Optimal size for hedge funds - Big is not better, mrzepczynski.blogspot The message is the same as with mutual funds.
If you want to find the exceptional managers, go small and when the manager
grows to a certain size, sell, and repeat the process. This takes work be the number suggest that
there is potential reward.
Stick with It: The Key to Factor Investing , Cordant. But,
sticking with your strategy can be difficult as earning a premium over other
investors requires being different than other investors. This can be painful,
especially when a strategy is out of favor. And just because everyone knows
about a strategy, it doesn’t make it easy to get the premium. Phil Huber, the
Chief Investment Officer for Huber Financial Advisors, puts it like this: “An
unfortunate truism in our industry is that investors tend to abandon ship on an
asset class or strategy right around the same time they should be piling into
it.”
Surprise! The Size, Value, And Momentum Anomalies SurviveAfter Trading Costs, AlphaArchitect.com.
In short, the debate over transaction costs is heated, but the consensus
from the research seems to be that anomalies exists net of transaction costs,
but the scalability is limited.
Nothing Recedes Like Success, Josh Brown. Three trillion was the limit. Last December,
trying to reconcile the industry’s lacking performance with the money gushing
in, I said “For awhile there, I started to doubt one of the basic tenets of
capitalism and investing: Money flows to where it is treated best.” But that
turned out to have been the peak.
Rise of the DIY algo traders, FT.com. While a top quant hedge fund might employ
several hundred mathematicians, physicists and programmers, these start-ups
hope they can gain an edge by harnessing the skills of potentially tens of
thousands of tech-savvy people from the US, Europe or Asia. … “We’ve seen very little evidence that lone
geniuses sitting in their living room will be successful. There are some
examples but very few,” argues one quant hedge fund manager. Even superficially
successful ones are vulnerable to sudden reversals. “These guys might not
understand the risks that they’re taking. They might be doing well but they
might be exposed to a huge tail risk they’re just not seeing.”
Hating on Long/short Funds, Bloomberg.
SOCIETY AND CAPITAL
I went 200 days without buying anything new and learned howtoxic our need for possessions is, QZ.com.
An investing hero is not a model for how to reform America’seconomy, Economist.com ...what America
needs right now is more risk-taking, lower prices, higher investment and much
more competition. You won’t find much at all about these ideas in Mr Buffett’s
shareholder letters.
All U.S.Energy Consumption in a Giant Diagram, Visual Capitalist.
What’s So Significant About Significance? FarnamStreet. The phrase “statistically significant” is one
of the more unfortunately misleading ones of our time. The word significant in
the statistical sense — meaning distinguishable from random chance — does not
carry the same meaning in common parlance, in which we mean distinguishable
from something that does not matter. We’ll get to what that means.
Why liability discount rates matter, focus262 it was
disappointing to read that the Society of Actuaries had recently censored a
paper authored by the Pension Finance Task Force that suggests discounting
public pension liabilities at a risk-free rate.
Further research on the limits of solar energy, Tyler
Cowen.
The Cost of Cheap: Slavery in the Supply Chain, CFA
Institute.
Sexism still rife in asset management, FT.com. A lot has changed in the asset management
industry over the past four years, but one aspect has remained the same: the
high number of women reporting sexism or sexual harassment in the workplace.
Lessons from a Ponzi Scheme,
Robert Huebscher. Personal
relationships were destroyed … There are now villages in Finland
where nobody talks to one another. Those tragedies are small, though, compared
to the divorces and suicides...
flip a coin on important life decisions, Wash Post . A
few years ago, economist Steve Levitt embarked on one of the strangest, and
arguably most megalomaniacal, experiments in history.
Income Persists More than Wealth between Generations, St.
Louis Fed. “Once
the wealth distribution with both positive and negative net worth is accounted
for, labor market earnings appear to be 33 percent more persistent than
wealth.”
Economic Mobility, Residual Wealth and Policy Implications, St. Louis
Fed. Gayle and Hincapié wrote: “This
evidence suggests that policies aimed at human capital advancement, e.g., free
preschool for everyone, may be as effective at combating inequality as those
aimed at limiting the advantage of the wealthy, e.g., a policy of a high
inheritance tax.”
Denmark'sNice, Yes, But Danes Live Better in U.S.
Tyler Cowen.
The Toilet Revolution. Project Syndicate. Modi has declared
building toilets more important than building temples
The “Why” In Wage Segregation, NiskanenCenter Wages are also becoming increasingly
segregated by firm—meaning, high wage employees are increasingly working in
high wage firms and low wage employees work in low wage firms, rather than in
firms with a mix of both.
U.S. Healthcare is a Global Outlier, and Not in a Good Way, Visual Capitalist.
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