Last year Morgan Housel observed that hedge funds outnumber Taco Bells (1.6:1). irrelevantinvestor
CHART OF THE DAY
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| this should be handed out to all middle-schoolers |
RETIREMENT FINANCE AND PLANNING
Retirement Floors and Implications for Evensky'sCash-Reserve Strategy, Pfau at Advisor Perspectives.
The Safety-first, Goals-based Approach to Financial Planning,
Pfau at Advisor Perspectives.
Retirement Income Showdown: Risk Pooling Versus Risk Premium,
Wade Pfau in Journal of Financial Planning 30 (2): 40–51 2017. "The main
advantage for the investments-only risk premium strategy was that it allowed
for a larger legacy should the retiree die early, but at the cost of not having
a contractual guarantee for income and with less true liquidity, as more had to
be set aside to provide sufficient confidence that the spending goal could be
funded. In the event of a long retirement, the legacy advantage of the risk
premium strategy gradually declined as partial annuitization could ultimately
support a larger legacy in the long term. These trade-offs suggest that greater
care should be taken by advisers and retirees when considering how a client’s
risk aversion and desires for legacy impact the relative advantages of risk
pooling and the risk premium as strategies to fund retirement spending goals.
It is not obvious that an investments-only retirement income strategy will
outperform a partial annuitization strategy when seeking to meet various client
retirement goals and managing retirement risk….Those favoring spending and true
liquidity will find that it is much more difficult than commonly assumed for an
investments-only strategy to outperform a strategy with partial annuitization." [comment: for some reason, probably because of what I've
been reading and studying lately, this feels like a near flawless cover of the
retirement problem in its very essence. Hyperbolic maybe, but I think this is
hitting on an awful lot of cylinders]
Busting the myth of ‘U-shaped’ retirement spending, UK
finance site (finalytiq.co.uk). "for the majority of people, this idea of
‘U-shaped’ spending in retirement is but a myth…An ideal sustainable withdrawal
strategy should follow the typical spending pattern in retirement."
Five Ways to Increase Your Near-Term Spending, Part II, Ken
Steiner. Considering the growing volume
of research showing declining real dollar spending in retirement, several
retirement experts have suggested that individuals should consider developing
their spending budgets so that they also decline in real terms throughout
retirement. For example, Mr. Okusanya implies that, based on spending research
in the U.S. , it
would be ideal to target inflation minus 1% (or more) for purposes of
developing future spending budgets in the U.S.
Drawing down Retirement Wealth: Interactions between SocialSecurity Wealth and Private Retirement Savings, Armour & Hung,
Cornell/RAND. …households that do delay
claiming as the FRA rises also tend to delay retirement and drawing down their
non-SS retirement assets, indicating complementarity between SS and non-SS
decumulation decisions and strong spillovers from changes in both SS and
private retirement policy.
The Most Basic Missing Instrument in Financial Markets: TheCase for [a new type of bond] for Financial Security, ssrn. This paper argues that governments globally
can address the shortcomings by issuing a new type of bond that matches the
needs of investors saving for retirement. This financial instrument is
basically an inflation-linked bond that pays coupons when you need it. We call
these Bonds for Financial Security (BFFS) and argue that this single instrument
can help investors achieve retirement objectives at lower risk, lower cost, and
with greater liquidity and greater simplicity than portfolios created through a
mix of traditional stocks and bonds followed by annuity purchases.
Adaptive Distribution Theory, Sandidge. Ssrn. This paper reviews the changes in
post-retirement risk and psychology that demand new approaches, offers a
critique of existing retirement-income solutions, and presents an alternate
model called “adaptive distribution theory.” Adaptive distribution theory for
retirement-income portfolios redefines risk and captures investor psychology by
incorporating key features of prospect theory. Risk and cash flow are addressed
by managing the portfolio using acceptable annualized erosion rates and
building a buffer of earnings. [ comment: Maybe a little wordy but I think this guy has a
good bead on the problem and some of his answers are supported by research and
theory he doesn't cite and may not even be aware of]
Optimal Decumulation Strategies During Retirement withDeferred Annuities. City University London . Assuming a world where deferred annuities are
available, we propose two utility maximising decumulation strategies comprising
a deferred annuity purchased at retirement and optimal consumption and savings
before the commencement of the annuity. A retiree who is concerned about
longevity risk and wants to retain a certain level of liquidity is advised to
spend 21.6% on a 15-year deferred annuity or 9.13% on a 20-year deferred
annuity. A retiree who simply wants to use annuities to maximise overall
satisfaction from retirement consumption is advised to spend 61.83% on a 6-year
deferred annuity. We compare our strategies with other available decumulation
strategies in the market, hence verifying the merits of the design. Moreover,
the stability of our results are examined after allowing for consumption
smoothness, social income benefits, a target replacement ratio and a bequest
motive.
MARKETS AND INVESTING
Everyone Is Still Learning, Morgan Housel. Take retirement. Fifty years ago, the entire
concept of retirement was reserved for the wealthy. The majority of men over
age 65 were still in the labor force as recently as the 1950s. Most people
worked until they died. Part of the reason individuals are notoriously bad
investors is because the idea that everyone should invest their own money to
fund 20+ years of retirement is a brand new concept. There’s been little
generational knowledge transfer, and just a few bear markets since the mass
expectation of retirement became a thing. Everyone is still learning how this
works – which means we should be open to new concepts, learning techniques, and
savings systems.
How the Bogle Model Beats the Yale Model, Ben Carlson. I
have to say that the numbers this year surprised me. I would expect the simple
index fund portfolio to beat the average returns (that’s just math), but the
fact that the Bogle Model portfolio was in the top quartile and even top decile
of endowment returns is insane when you consider the depths these universities
will go try to beat the market and how sophisticated they are in the eyes of
other professional investors. These funds are invested in venture capital,
private equity, infrastructure, private real estate, timber, the best hedge
funds money can buy; they have access to the best stock and bond fund managers;
they use leverage; they invest in complicated derivatives; they use the biggest
and most connected consultants, and the vast majority of these funds still fail
to beat a low-cost Vanguard index fund portfolio.
Yield = Poison, Aleph Blog.
Make sure you have a margin of safety.
In a really large crisis, the return on risk assets may look decent from
ten years before to ten years after, but a lot of people get surprised by their
need to draw on those assets at the wrong moment — bad events come in bunches,
when the credit cycle goes bust. Be careful, and don’t reach for yield.
ETF links, Abnormal Returns.
ALTERNATIVE RISK
Factor Investing Is More Art, And Less Science,
alphaArchitect.com. Let’s assume that
the decibel level of Jim Cramer’s voice on CNBC is a proxy for systematic risk
in the economy.
“Alt-beta” funds offer hedge-fund-like investments morecheaply - But they complement rather than replace hedge funds,
economist.com. One reason is that the
hedge funds’ mission—to provide returns uncorrelated with overall market performance—has
been hard to replicate.
Embracing Conflict in Asset Allocation, ThinkNewFound. …no allocation approach has an equal ex ante
probability of success across all market environments. Evidence-based investment processes that are
successful over the long-run can still go in and out of favor over extended
periods of time.
Factors are Not Commodities, investingresearch.net. The
narrative of Smart Beta products is that factors are becoming an investment
commodity. Factors are not commodities, but unique expressions of investment
themes. One Value strategy can be very different from another, and can lead to
very different results. There are many places that factor portfolios can
differ. The difficulty for asset allocators is in identifying how factor
strategies differ from one another, when they all purport to use the same
themes: Value, Momentum and Quality.
A Smoother Path to Outperformance with Multi-Factor SmartBeta Investing, Research Affiliates.
Introduction to Algorithmic Trading. RobotWealth.
Smart Investing in an Environment of Low Expected Returns,
Ilmanen. There’s been a lot of work on tail risks, and the most common way
investors think about hedging tail risk may be through index put buying.
However, when you look at historical data, this is roughly a minus-one Sharpe
ratio strategy. There are some other candidate strategies, and one of my
favorites is trend-following. Trend-following has a clear positive Sharpe
ratio, and it has done well in most of the historical bear markets over the
past one-hundred years. My key message
to investors when it comes to managing tail risk is to go for the cost effective
way of buying tail protection [trend] rather than the expensive way [long put].
…let’s just talk about financial
insurance through volatility selling strategies. I think this is a good source
of long-run return; it’s the flip side of the expensiveness of buying index
puts or some other volatility-buying strategy. Historically, investors have
made good returns by selling volatility or, even more specifically, by selling
puts. [ I enjoyed this article/interview because of
my particular interests. Recommended ]
SOCIETY AND CAPITAL
The Universe in a Cup of Coffee, Scientific American. You
think it's just a beverage, but it's a whole lot more
A less mobile America ,
citylab. "The Census reports that a
record-low share of Americans are moving. A recent paper suggests government
policies might be curbing mobility."
US greener than Germany …
sl-advisors.
The Dream of Cheap Nuclear Power Is Over, Bloomberg.
State-Run Retirement Plans: Are They a Viable Solution?
Keith Clark, Advisor Perspectives.
The Minimum Wage Movement Is Leaving Tipped Workers Behind,
fivethirtyeight.
A startup founder worth $15 million explains whyentrepreneurs should think like farmers, not suits. qz.com
Bubbles are rarer than you think, Economist.com Neither a doubling of the market nor a
historically high valuation are reliable sell signals. Of course, that
shouldn’t be too surprising. If timing the market were easy, big swings in
prices would not happen in the first place.
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