Nov 30, 2016

3D Mean-Variance-Diversification Model 2014-2016

This was kind of fun.  This is the mean-variance space for portfolios of SPY AGG EFA GLD IYR ~2014-thru-Nov2016 but with a third dimension added based on a diversification function (e.g., low value is concentrated 100% in one asset class; a high value would mean the allocation is spread evenly across 5 asset classes). This 3d space is an efficient frontier using something like 1% of possible allocations of 5 assets if done in 1% allocation increments (~4500).

Nov 29, 2016

Book Mention: Quantitative Momentum by Gray and Vogel

This does not rise to the level of a "review" so we'll call it a mention.

Quantitative Momentum (Wiley Finance, 2016. 208 pages)  is a great new work on momentum investing by Wesley Gray and Jack Vogel. It follows a previous work (not read by me yet) Quantitative Value.  QM is a well researched and appropriately analytical contribution to the literature on the momentum anomaly.  It is good, as would be expected, at giving a background and rationale for the momentum effect.  The book also makes a good case for the place for momentum in a portfolio while also being particularly helpful with some of the concepts of implementation.  It is not over-the-top technical in terms of academic finance and mathematics (no calculus or limits or summation notation as far as I saw in a brief read) and I think it is approachable to a retail investor who has at least a little background in or exposure to the various concepts involved in understanding alternative risk.  

Nov 27, 2016

Simple Deterministic View of the PV of Spending Rates vs Longevity

I had no real reason for doing this other than I was curious what it looked like plus my SO forced me to think about this after I got a "don't worry, pat on the head" kind of thing.  No one seems to think much about longevity uncertainty these days except the academic researchers.

Nov 25, 2016

Weekend Links - Thanksgiving Edition


More technically, to implement the portfolio construction suggested by modern financial theory, one needs to know the entire joint probability distribution of all assets for the entire future, plus the exact utility function for wealth at all future times. And without errors! … We are lucky if we can know what we will eat for lunch tomorrow –how can we figure out the dynamics until the end of time?
   --Nassim Taleb 

Efficiency is Beauty.  -- Mr. Money Mustache



Joe Tomlinson on Variable Withdrawal and ImprovingRetirement Outcomes, my post on his post...  Optimal asset allocations for variable withdrawal strategies are quite different from the research findings and rules of thumb based on fixed strategies. Indeed, the implications go beyond asset allocation and show, for example, that equity glide paths in retirement are relatively unimportant. 

Savings after Retirement: A Survey, Nardi et al.  NBER and Fed (Chicago and Richmond).  The saving patterns of retired US households pose a challenge to the basic life-cycle model of saving. The observed patterns of out-of-pocket medical expenses, which rise quickly with age and income during retirement, and heterogeneous life span risk can explain a significant portion of US saving during retirement. However, more work is needed to distinguish these precautionary saving motives from other motives, such as the desire to leave bequests. Progress toward disentangling these motivations has been made by matching other features of the data, such as public and private insurance choices. An improved understanding of whether intended bequests left to children and spouses are due to altruism, risk sharing, exchange motivations, or a combination of these factors is an important direction for future research.  

Retirement Spending, the RMD, and the PMT() Function. Blanchett, Maciej, and Chen (2012) and Sun and Webb (2012) both studied the RMD rule as a spending option and found it to be a reasonable strategy that roughly approximates more sophisticated attempts to optimize spending... Though these methods are more sophisticated, the underlying PMT formula remains as the philosophical core of the spending recommendations.  [comment: I have posted on this (i.e., PMT()) before in a discussion of Waring and Seigel's Annually Recalculated Virtual Annuity(ARVA)]

Nov 21, 2016

On Being Careful - Dividends, Part 2

I wanted to take one more look at this question of dividends that I started to address in a previous post On Being Careful… .   And it is not because I am a partisan of dividends or because I wholly buy the party line of dividend-growth-ers. In my calmer moments I still feel that total return is a game to aspire to especially if one has very long timeframes and does not have a large spending requirement, requirements that if turned the other way around might actually give me pause when contemplating concepts like MPT and total return .  I want to take a look at this again because the "emphatic absoluteness" of the statement by an industry expert (“there is literally no logical reason for anyone to have a preference for dividends”) is still ringing in my ears.  

Nov 19, 2016

Joe Tomlinson on Variable Withdrawal and Improving Retirement Outcomes

I might have linked to this article before but Joe Tomlinson, in a recent article at Advisor Perspectives (How Variable Withdrawals Improve Retirement Outcomes, Joe Tomlinson. 10/17/16), had a nice distillation of his recent thinking and research on variable withdrawals, asset allocation, and the use of annuities to improve retiree outcomes in terms of consumption, shortfall risk, and legacy planning. I thought I'd add a little personal commentary.  It is a short article that is easy enough to read and it probably does not require a set of bullet point extracts but here they are anyway:

Nov 18, 2016

Weekend Links


Those that prosper consistently will think deeply, reevaluate, adapt, and continually evolve. That is the nature of a competitive world.  -- Farnham Street, Moneyball edition  

“No one can afford anything anymore.” SquaredAway Blog



U.S.Life Expectancy Now 6 Months Shorter, FinancialAdvisor Mag.  The average 65-year-old American man should die a few months short of his 86th birthday, while the average 65-year-old woman gets an additional two years, barely missing age 88. This new data turns out to be a disappointment. Over the past several years, the health of Americans has deteriorated—particularly that of middle-aged non-Hispanic whites. Among the culprits are drug overdoses, suicide, alcohol poisoning, and liver disease, according to a Princeton University study issued in December…This is bad news for almost everyone but pension fund managers…Still, the bottom line is that longevity’s rise has slowed way down.    

Nov 17, 2016

The Other Inflation

The results are in for 2017. All I have to say is that if you have an ACA subsidy or if you are employed or if you are over 65, go hug your family and tell them it could be worse.  Me? The spread between health care inflation and "normal inflation" for early retirees who are on their own without a subsidy means they need to take money from one pot (let's say kids or future retirement capital or current lifestyle for example) to pour into another (incremental increases in health care costs under the ACA).  And this time its not pretty.  I finally get, viscerally, the concept of inflation as a tax. Here's what it looks like for me going as far back as 2010:

The top is time series change of costs since 2010. That's regular inflation in red (CPI-U and average employer based insurance, single coverage, in grey (Kaiser Family Foundation Survey 2016). My health data is in dark blue.  The bottom in light blue is year over year % change.

My 2016-2017 % change: ~47%
My 2010-2017 annualized rate: 16.3%

Nov 12, 2016

An Epidemic of Despair

"Quiet ‘Epidemic’ Has Killed Half a Million Middle-Aged White Americans"

"Despite advances in health care and quality of life, white middle-aged Americans have seen overall mortality rates increase over the past 15 years, representing an overlooked "epidemic" with deaths comparable to the number of Americans who have died of AIDS, according to new Princeton University research."

"The results are published in a new paper in the Proceedings of the National Academy of Sciences from Anne Case, the Alexander Stewart 1886 Professor of Economics and Public Affairs, and Angus Deaton, the 2015 Nobel laureate in economics and the Dwight D. Eisenhower Professor of International Affairs and professor of economics and international affairs."
The items above are from "Rising morbidity and mortality in midlife among white non-Hispanic Americans in the 21st century" Woodrow Wilson School, Princeton

from Proceedings of the National Academy of Sciences

[Comment: This graph above is one of the more interesting, if not startling, ones I've seen this year]

Nov 11, 2016

Weekend Links - Election Week


After all, civility doesn’t require consensus or the suspension of criticism. It is simply the ability to disagree productively with others while respecting their sincerity and decency. That can be hard to do when emotions run so high. But if we understand better the psychological causes of our current animosity, we can all take some simple steps to turn it down, free ourselves from hatred and make the next four years better for ourselves and the country.   - Jonathan Haidt and  Ravi Iyer in the WSJ



How to Navigate and Prep for a Surprise Early Retirement, WSJ.  Understanding where you are financially will give you a sense of control amid a retirement that may be out of your control, financial advisers say. 

A Portfolio Approach to Retirement Income Security, Steve Vernon.  With the decline of traditional pensions, many older workers and retirees urgently need to decide how to make their retirement generate income that lasts for the rest of their lives. With retirements that can last 20 to 30 years or more, this is indeed a daunting challenge for those fortunate enough to have significant savings by the time they retire. 

Before Retiring, Take This Simple Test, WSJ. Many choose to retire too early, much to their regret financially  

Retirement health care estimates vs. reality,  Health care costs are one of the largest—and potentially most variable—expenses in retirement. Unfortunately, many clients either ignore these expenses when they make a retirement income plan or make woefully inadequate estimates. A study of almost 2,000 adults by Fidelity Investments found that 48% of respondents estimated they would spend $50,000 per person for health care in retirement. That's a low number according to most published research. Most data illustrates a starkly different scenario, suggesting substantially higher costs.  

The Downside of Retirement, Darrow Kirkpatrick.  Yes, retiring is great fun for most people, at first. 

Nov 10, 2016

On Being Careful - Dividend Edition

"In theory there is no difference between theory and practice. In practice there is."
            -- Generally attributed to Yogi Berra

I think that really smart guys that have a little above average visibility in the financial blogosphere have a slightly higher bar than others when it comes to being careful in their commentary.  Me? I could sling whatever I want around my blog and it means almost nothing.  This thought came to me as I was listening to a blog/podcast at Meb Faber's site that consisted of a conversation between Meb (a blogger I like and respect and whose blog I read often -- co-founder and the Chief Investment Officer of Cambria Investment Management) and Larry Swedroe (another guy I like and respect -- principal and director of research for Buckingham, an independent member of the BAM Alliance and a contributor to many finance conversations, especially at on dividend strategies.   

What got me going was the title of the podcast: Episode #28: Larry Swedroe “There Is Literally No Logical Reason For Anyone To Have A Preference For Dividends” November 9, 2016.    My first reaction was not necessarily that I disagree, it was that as an early retiree I know that a few holes can be punched in the absolute apodictic certainty of the tone of that title. Let's try to lay out what I think I mean here.

Nov 9, 2016

Longevity and Uncertainty 2

I was looking back at some of the longevity stats in my previous posts and realized that the mean and standard deviation are less helpful in non-normal distributions -- the distribution implied in the SS tables is clearly not normal -- so I thought I'd recast it in quartiles to see what it looks like.  Not sure if I got this completely right; maybe some math-enabled person can correct me at some point.

Nov 8, 2016

Polling gap

This is already 24 hrs old but I thought it was interesting going into today's final lap.

Nov 5, 2016

Longevity as a Moving Target

I've seen this (and posted on it) before elsewhere but this is what happens to your longevity estimate in your retirement plan when you get the good news you have survived yet another year. This ignores medical advancements that will change the equation, too. Don't forget that if you have some socio-economic edge, the estimates will nudge up as well.

It's been A Long Trip Down "Trading Lane"

I remember reading "Trading for a Living" by Alexander Elder back in 2005 when I was just starting to dabble in trading systems.  I can't remember if it was in that book or in some article I read or in some conversation with a trading mentor but the prevailing idea has always been that 95% of people that attempt to trade (usually middle aged guys [and it's almost always guys isn't it], say 40-55, with a technical or professional background in engineering or software or law or medicine who think that success in one field logically and necessarily translates to the next…maybe a little like Michael Jordan trying to play baseball, for example. I fit this profile, too, btw.) fail when starting to trade and they usually fail three times -- the first time with their own bankroll, the second time with someone else's money and the third time with the last few desperate pennies extracted from the tightly closed fists of friends and family.  The idea out there was also that there was some kind of multi- year process where it took something like 2 years (maybe more) to lose money, then 2 years (maybe more) to break even, then 2 years (maybe more) to make a modest profit, and thereafter it is supposed to work out OK.  Keep in mind I am talking here about retail traders that are doing it solo without the institutional support and systems and mentorship that can make corporate 20-somethings wildly successful and rich.    I was also advised once that since people can't expect to become a successful engineer or a cardiologist or an attorney without sinking some serious time (years) and effort and money (100s of thousands in those examples) into education, apprenticeship, and career development, they can't then expect to just step right up to a computer and shake a stick at a few moving averages and make a mint.  I, of course, believed none of it.  I thought that, like an alchemist looking at a chunk of lead, I could unlock riches just doing a little magic here and there.  

Nov 4, 2016

Short Crude Puts Might Be Worth a Look?

Weekend Links - Fri Nov 4, 2016


The future always will be uncertain. With the progression of time, the expected outcome is overruled by the realized outcome. Goals evolve. Longevity expectations change. Returns are realized—above or below prior expectations. In reality, we must adapt to new information. Recourse decisions are made in the future based on information that becomes available only in the future. -- Peter Mladina



Retirement Income Showdown: Risk Pooling vs. Risk Premium, Wade Pfau; ssrn.  Abstract: The retirement income showdown regards finding the most efficient approach for meeting retirement spending goals: obtaining mortality credits through risk pooling with an income annuity, or investing for upside growth through the stock risk premium. Analyzing the question involves understanding how clients view a hierarchy of retirement goals related to spending, liquidity and legacy. Client attitudes toward longevity risk aversion also matter: how fearful is the client of outliving their investment portfolio? Risk pooling offers a unique source of returns not available from an investment portfolio: those in the risk pool who experience shorter lives subsidize the payments to those in the pool who experience longer lives (mortality credits). Risk pooling may provide a cheaper way to meet a spending goal, leaving more assets to cover contingencies and support legacy. The primary advantage of an investments-only strategy is that it can support greater legacy in the short-term compared to a partial-annuitization strategy that uses risk pooling to meet spending goals and investments to meet liquidity and legacy goals. Risk averse retirees, though, may feel obligated to earmark a larger portion of their portfolio to spending goals, which leaves less true liquidity, while also exposing the spending goal to the risk of portfolio depletion. The advantages of risk pooling include a contractual guarantee to support lifetime spending, the ability to meet spending goals with a smaller portion of assets that creates greater true liquidity for the retirement income plan, and the potential to support a larger legacy in the event of a long life. 

Nov 1, 2016

Life Expectancy and Uncertainty

A better title to this post is the question I really wanted to ask: "how wide is one standard deviation in life expectancy estimates for a 58 year old guy in Florida." The answer to this kind of question is more than likely covered better elsewhere in some kind of technical finance literature.  It's probably also only one Google search away but I wanted to run it out myself just to see how it went.