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
CHART OF THE DAY
RETIREMENT FINANCE AND PLANNING
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
A New Tool to Visualize Retirement Planning, Bob Veres.
Deferring Commencement of Social Security Benefits is Ok,Deferring Retirement is Better—Part II, Ken Steiner.
The Only Withdrawal Plan You Will Ever Need, Ken
Steiner. It seems like every other week
we read … in the retirement planning media about the latest and greatest
strategic withdrawal plan (SWP) to use to tap one’s savings in retirement. The
new and improved strategy may be fixed, variable or a hybrid of the two. It may
use a safe withdrawal rate. It may have guardrails, floors or ceilings. It may
be a variation of the IRS required minimum distribution (RMD) rules. It may
involve using the Excel payment (PMT) function. It may calculate a rate that
retirees should “feel free” withdrawing, or it may be one of the many
approaches that adjusts the 4% rule in some manner to supposedly make it
better…All of these…approaches miss an important point.
The Case For Buying Bonds: Living For Free And OtherBenefits, Financial Samurai. There’s no
greater joy than being able to live freely…But what if you could live freely AND
live for free? That would be heavenly.
MARKETS AND INVESTING
The Bright Side of Rising Interest Rates, Ben Carlson Higher
rates are still not a foregone conclusion. Markets are never that easy. But if
higher rates do finally materialize, investors should welcome this development,
not fear it. The only path to eventual higher fixed income returns is through
higher interest rates. If you have a
time horizon of 5 years or longer, you should actually hope for a rising rate
environment. You’ll be better off for it in the end.
The World is Flat (Sometimes), the Personal Financial
Engineer. Diversification isn’t just
about reducing volatility. It’s also about providing options.
What Trump Means for Interest Rates, Mohamed A. El-Erian. If he continues to emphasize the positive
elements of his economic agenda, refrains from the actions that risk
stagflation, and if all this is reflected in a constructive implementation
effort with Congress, his administration has the potential to encourage
interest-rate convergence consistent with higher economic growth and greater
financial stability.
Five points of caution for dividend investors,
FactorInvestor.com. As this cache of
wealth is in or approaches the distribution phase of the investment lifecycle,
the thirst for income generating assets will be unquenchable. Most retirement
models are predicated on a 4% annual withdrawal from retirement assets. In a
world of sub-2% equity and bond yields, such a large annual withdrawal seems
optimistic and susceptible to substantial sequence-of-return risk…McKinsey
captured the outcome of this phenomenon in a recent report, which suggested
that investors are laser focused on: 1) protecting principal, 2) hedging
against severe downside risks, 3) minimizing volatility and 4) generating
income.
Bond Yields Are Now Higher than Stock Yields,
crossingwallstreet.com.
Term premia in the times of “lift-off”, sr-sv.com. term premium uncertainty would be highest at
the time of “lift-off”, when policy rates are expected to move upward from near
zero.
Has Goals-Based Investing Ruined Modern Portfolio Theory(MPT)? Hansi Mehrotra CFA Institute. Modern
or mean-variance portfolio theory (MPT) is an important financial concept. But
it has little practical value for retail investors when it to comes to asset
allocation.
Beyond Markowitz: A Comprehensive Wealth Allocation Framework forIndividual Investors, Ashvin B. Chhabra.
Institute for Advanced Study. In
sharp contrast to the recommendations of Modern Portfolio Theory (MPT), a vast
majority of investors are not well diversified. This neglect of diversification
is seen across all wealth segments, including the affluent. This paper attempts
to provide a solution to this "diversification paradox," by expanding
the Markowitz Framework of diversifying market risk to also include the
concepts of Personal Risk and Aspirational Goals…A major conclusion of this
work is that, for the individual investor, Risk Allocation should precede Asset
Allocation.
ALTERNATIVE RISK
Long-Short Investing Might Shorten Your Investment Lifespan,
AlphaArchitect. The main takeaway is
that the benefits of long-short investing derive primarily from their use as
diversifiers to strategies that include market exposures, due to low
correlations between the strategies and the market… While academic studies
offer the tantalizing prospect of superior long-short and long-only
performance, the devil is in the details. If we relax academic “zero-cost”
assumptions, and account for market cap/liquidity considerations, rebates,
transaction costs, bid-ask spreads, cost of capital, and management fees, all
of which occur in the real world, the benefits are not as great as they may
appear from looking at an academic paper.
Momentum: Letting the Cheap Get Cheaper? Newfound
Research. Using historical US
sector data, we find that both cross-sectional and time-series momentum
strategies may serve as good diversifiers to the potential risks of large
structural repricing events in environments of high absolute valuations.
The $64 trillion question: Convergence in asset management.
McKinsey&Co. The mainstreaming of alternatives is now driving a convergence
of traditional and alternative asset management—two big players in the $64
trillion wealth-management industry. The two sides will increasingly battle for
an overlapping set of client and product opportunities in the growing
alternatives market.
Another Angle On Factor Diversification, Swedroe. Rather than viewing a portfolio as a
collection of asset classes, we can view it as a collection of diversifying
factors… because we cannot know which factor will deliver the highest premiums,
or even a premium, over even long periods of time, the prudent strategy
whenever we don’t have a clear crystal ball is to diversify broadly across many
factors.
Harnessing Momentum With Indexes and ETFs, Morningstar.
Insurers Up Risk, Alts Amid Interest Rate Uncertainty,
CIO. Insurance companies are increasing
their exposure to risk assets to meet their return targets…With the low
interest rate environment continuing to impact insurers’ businesses, these
investors are relying on diversified sources of income and return to meet their
investment goals…
Rising Bond Yields Smash REITs. What Happens Next? charlessizemore.com. So in a nutshell, REITs are pretty reasonably
priced right now. If you’re bearish, you’re essentially betting that the
10-year Treasury yield is going north of 3% within the next year or that
earnings ar about to fall off a cliff. While I suppose either of those outcomes
could happen, I wouldn’t bet on it. I would expect REITs to enjoy another solid
rally… just as they did the last two times they sold off on yield fears.
An Evidence-Based Low Volatility Investing Discussion,
AlphaArchitect. Bottom line: The low
volatility anomaly is complex, uncertain, and may not be worth the brain damage
for most investors. Unless you are a sophisticated buyer, can ask the right
questions, and understand explicitly how the allocation adds value to a
diversified global portfolio with value and momentum already in place, we’d
recommend that investors remain skeptical when a new low-volatility fund
wholesaler shows up to the door.
The Air Has Come Out of One of 2016's Most Popular Trades,
Bloomberg. iShares Edge MSCI Min Vol
EAFE ETF saw record one-day outflows of more than $300 million on Wednesday.
A New Framework for Analyzing Alternative Mutual Funds,
Morningstar.
SOCIETY AND CAPITAL
Sea Levels Will Rise Faster Than Ever, Scientific American. The
Atlantic coast of North America will be one of the worst-hit areas as melting
glaciers cause the sea level to rise over the next century, a new study
published yesterday in the Proceedings of the National Academy of Sciences
finds.
An Epidemic of Despair, me on the Princeton Study. 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
The convergence of income across U.S.states, St. Louis Fed. The graphs
suggest that state incomes have gradually converged from 1929 to the early
1980s. However, this convergence seems to have stopped since then. In fact, in
some cases, state incomes seem to be diverging again.
An example of the "City vs Rural" political cage match - since 2008
Blame Rich, Overeducated Elites as Society Frays, P.
Turchin. Complex human societies,
including our own, are fragile. They are held together by an invisible web of
mutual trust and social cooperation. This web can fray easily, resulting in a
wave of political instability, internal conflict and, sometimes, outright
social collapse.
Chart: The End of World Poverty is in Sight, Visual
Capitalist. The Number Of People In
Extreme Poverty Has Been Cut In Half Since 1990.
Housing Has Become More Affordable over the Long Term, St.
Louis Fed.
Big Farms Are Getting Bigger And Most Small Farms Aren’t Really Farms AtAll, FiveThirtyEight. In fact, the people who own them tend to have
incomes above the median for America
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