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
CHART OF THE DAY
RETIREMENT FINANCE AND PLANNING
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,
financial-planning.com. 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.
The Retiree Nest Egg--Navigating the Risks, Mark Shemtob, Member
American Academy
The Original Retirement Spending Decision Rules, Wade
Pfau.
MARKETS AND INVESTING
Inflation is back, Josh Brown. health care costs are shooting up and
contributing a lot to what we’re seeing in the inflation numbers these days.
Along with gasoline prices, the fluctuation in health care costs are a big
driver of the monthly CPI print.
This Bull Market Has Room to Run, Barry Rithotz. These things are always terribly clear in
hindsight; in real time, they are more challenging to discern. It is easy to
say 1982 to 2000 was a secular bull market, but read the commentary at the
time. It was hardly definitive while it was happening.
Risk Matters: An Ounce of Prevention Is Worth a Pound ofCure, Milliman FRM. One clear takeaway from these charts is that mitigating the
most severe negative returns has a bigger absolute effect than failing to
capture the highest positive returns.
The Nine-Day Losing Streak In S&P 500 Is A RandomPattern, PriceActionLab. The current
nine-day losing streak is a 3.07% drop, less than 1% more than the average of
2.17%. The standard deviation is 2.11% and three standard deviations away from
the average are at -8.55%. Therefore, the current streak is a random event with
no significance. We could even get 12 or 15 down days in S&P 500 with no
causal connection to future direction, up or down.
Are Index Funds the Best Wayto Own Preferred Stocks? CFA Institute. Large
amounts of capital haphazardly chasing a narrow asset class should alarm any
value-conscious investor. Moreover, the diversification investors expect from
owning an index fund is muted by the high industry and issuer concentration
found in preferred stock indices. As of the end of October, roughly 73% of the
constituents in the S&P US Preferred Stock Index were classified as financials,
and the same large US
bank issued three of the top 10 constituents.
Dumb Alpha, CFA Institute.
Assume an equity portfolio with a 10% annual return and volatility of
15%. The probability of a positive return over any given year is 93%. As a
result, an investor who evaluates the portfolio once a year will experience a
loss once every 10 years or so. If the same portfolio is evaluated quarterly, a
loss will occur about once every four quarters, or once a year. And if that
portfolio is evaluated daily, roughly 120 days a year will register losses. It
takes superhuman discipline not to change a portfolio when you are confronted
with losses 120 times a year. But the best returns in the long run are
achieved by adhering to a well-diversified investment strategy that lets you
reap the benefits of the different risk premia available to long-term
investors. To stay calm and measured, you need to turn off your Bloomberg
screen, close your Excel spreadsheets, look at your performance only
sporadically, and avoid the temptation to tinker too often with your portfolio.
A Stock Market Stress Indicator Starts to Look Ominous Aheadof Election, WSJ. Correlations can
bounce around, and relationships can dissipate just as quickly as they form.
But if everything starts to look the same, it’s a sign fear is building. And
that may extend beyond Tuesday vote. “People should see it as a little scary,
and a signal that there’s underlying risk out there that might be beyond the
election,” said Jim Strugger, a derivatives strategist at MKM Partners. [comment: relax, the American economy is not
going out of business…this year, anyway]
Bitcoin's at It Again, Christopher Langner. Bitcoin tends to dance to its own tune, but
when volatility rises, it's been in lockstep with gold…It's still a good reason
not to use Bitcoin as a hedge against the expected market sell-off an electoral
victory by Donald Trump would entail. There
are other reasons, too.For one, Bitcoin is quickly becoming a thing of the
past. As Bloomberg View's Elaine Ou pointed out this week, some of the newest
cryptocurrencies such as Zcash and Monero have gained popularity fast because
unlike Bitcoin they offer the ability to keep transactions confidential.Then
there's the threat of proper central bank-backed digital currencies, which are
expected to come into existence soon and may take much of the sheen off
Bitcoin. [comment: I have a tiny position in Bitcoin and often wonder why]
Active vs. Passive Investing and the “Suckers at the PokerTable” Fallacy, CFA Institute. investing
is not a zero-sum game, dumb money is not the primary driver of returns for
most strategies, and the “suckers at the poker table” is not a useful analogy
for most long-term investors.
Sharpening the Arithmetic of Active Management, Lasse Heje
Pedersen. Abstract: I challenge Sharpe’s
(1991) famous equality that “the return on the average actively managed dollar
will equal the return on the average passively managed dollar.” This equality
does not hold in general. It is based on the implicit assumption that the
market portfolio never changes, which does not hold in the real world because
new shares are issued and others are repurchased. Hence, even “passive”
investors must trade regularly in order to maintain their market-weighted
portfolios. Since passive investors may trade at less favorable prices than
active managers, Sharpe’s equality is broken. The changes of the market
portfolio are large enough that active managers can add noticeable returns.
Hence, active managers can be worth positive fees, which allow them to provide
an important, beneficial, role in the economy — helping to allocate resources
efficiently. Passive investing also plays a useful role, especially since the
average active mutual fund manager has charged larger fees than their value
added.
The importance of statistical programming for investmentmanagers, sr-sv.com [comment: I learned a little bit of R programming for the reasons listed in the
post]
How Risk & Uncertainty Affect Returns, Larry Swedroe. According
to the authors’ model, the premium on equity is made up of two separate terms.
The first term compensates for standard market risk. The second term represents
an additional premium for variance risk.
Five Concerns with the Five-Factor Model, Blitz et a Robeco Asset Mgmt. Although the 5-factor model exhibits significantly improved explanatory power, we identify five concerns with regard to the new model. First, it maintains the CAPM relation between market beta and return, despite mounting evidence that the empirical relation is flat, or even negative. Second, it continues to ignore the, by now, widely accepted momentum effect. Third, there are a number of robustness concerns with regard to the two new factors. Fourth, whereas risk-based explanations were key for justifying the factors in the 3-factor model, the economic rationale for the two new factors is much less clear. Fifth and finally, it does not seem likely that the 5-factor model is going to settle the main asset pricing debates or lead to consensus.
ALTERNATIVE RISK
The Psychology of Trading Panic, TraderFeed. Sometimes, however, our imagination runs wild and entertains the worst possible outcomes for our trades. This is when the normal fear of loss can become panic. When we panic, we respond to the threats--not the opportunities--generated by imagination.
Why is it so hard to be inactive? catalystsminusheadwinds.com
If I’ve already recognized that my system doesn’t work when there is no
identifiable trend, and there is no identifiable trend (A.K.A the market is
choppy), then I need to stop trading.
If the 60/40 portfolio really is dead, here’s one way to respond, Citywire. Alternative assets are another option for those who feel the returns offered by mainstream stocks and bonds to be too meager. It’s within that section of the market that JPMorgan made a rare upgrade to growth forecasts compared to last year’s estimates, predicting 3.75% annualised growth.
Commodities for the Long Run, Ari Levine et al.
AQR+NYU/NBER. This paper analyzes a novel data set of commodity futures prices
over a long sample period starting in 1877, which allows us to shed new light
on several important and controversial questions. We document that commodity
futures returns: (1) have been positive on average; (2) vary significantly across business
cycles, inflation episodes, and periods of backwardation versus contango, (3)
are driven mostly by variation of spot returns and therefore closely linked to
the underlying commodity spot market;
(4) perform well during inflation cycles and provide more return in
backwardated states; and (5) display low
correlation with stocks and bonds. These
long-run stylized facts imply that commodity futures can add value to a
diversified portfolio from an asset allocation perspective.
The irrational neglect of optimal betting strategies,
sr-sv.com. The straightforward notion of taking a constant and moderate amount
of risk and letting the odds work in one’s favor just doesn’t seem obvious to
most people
SOCIETY AND CAPITAL
Food for Thought: Inspecting Public Pension Plans, Advisor
Perspectives. What ERISA did not do, however, is apply these quality assurance
standards to public pension plans - and this is an important distinction.
Public pension plans, in contrast to private ones, generally provide much
stronger guarantees. As a result, when private plans go bust retirees lose
their benefits, but when public plans go bust they normally have to tap
taxpayers to make up the difference. That makes the underfunded status of
public plans an investment problem for everyone who lives in their
jurisdictions.
Declining Trends In The Real Interest Rate And Inflation:The Role Of Aging, Philly Fed. This paper explores a causal link between aging
of the labor force and declining
trends in the real interest rate and inflation in Japan …The
model suggests that aging of the labor force accounts for roughly 40% of the
declines in the real interest rate observed
between the 1980s and 2000s in Japan .
More Americans Leave Expensive Metro Areas for AffordableOnes, WSJ. Americans are leaving the
costliest metro areas for more affordable parts of the country at a faster rate
than they are being replaced, according to an analysis of census data,
reflecting the impact of housing costs on domestic migration patterns.
The most Active Celebrity Investors, VisualCapitalist.com Yet, you might be surprised to learn that
celebrities have quietly been funding some of today’s fastest-growing startups.
Today’s infographic from CB Insights ranks celebrity investors based on the
number of private tech companies they’ve invested in over the last decade.
Inflation Is a Valuable Tool. Too Bad We Can't Use It. Tyler
Cowen, Bloomberg. My biggest worry is about the politics, not the economics. I
am not sure that the American system of government, in its current state, could
handle a vigorous debate about inflation, which has become a tough sell.
Why Has the Unemployment Rate Fared Better than GDP Growth?
Stanford. Answer: Between 2007 and 2014,
GDP growth was held back by shortfalls of
4.4 percent in productivity, 4.0
percent in capital input, 3.6 percent in labor-force participation, 2.2 percent
in growth of the working-age population.
Breaking the Rules: Moneyball Edition, Farnham
Street . An
ideal situation for simple rules is something repetitive, giving you constant
feedback so you can course correct as you go. But what if your rules stop
working and you need to start over completely?
Becoming an Expert: The Elements of Success, www.farnamstreetblog.com.
Mere experience, if it is not matched by deep concentration, does not translate
into excellence.
Calculating Expected Social Security Benefits by Race,Education and Claiming Age, Boston College
Discrimination, Social Risk, and Portfolio Choice, Bonaparte
et al. U Colorado
and Univ of Miami . Consistent with our conjecture, we find that
minorities with high social risk participate less in the stock market and
allocate a lower proportion of their wealth to risky assets. These results
indicate that non-financial risks, such as social risk, influence financial
risk-taking behavior of U.S.
households.
The Differences Between Selective and Nonselective in HigherEducation, Timothy Taylor. Hoxby's
analysis also suggests that if our social goal is to expand the number of
students in college, it makes more sense to focus more heavily on improving K-12
education so that a greater number of students are college-ready, rather than
just offering more loans or aid for college students. If improvements in K-12
education led to a substantially higher share of students being college-ready,
then it would actually make sense from a social point of view to dramatically
expand college spending per student--because students who are more
college-ready would be positioned to take greater advantage of what college has
to offer. In contrast, providing additinoal financing to send a greater share
of students with low test scores to less-selective colleges may not have much
social payoff.
How to defeat dementia, Stanford
Center
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