I think the maximum extent to which we can quantify risk
premia is with a 0 or a 1. Either the premium exists based on a sufficient set
of broad criteria, or it doesn’t. Trying to quantify the absolute or relative
value of premia is a fool’s errand, which makes strategic asset allocation
based on even the most robust mean-variance optimization equally foolish. -
Adam Butler
CHART OF THE DAY
RETIREMENT FINANCE AND PLANNING
To Enhance Lifetime Retirement Security, Use ReverseMortgages or Immediate Annuities? Warshawsky, JFP. Results show that for three timeframes with
different interest rate levels, the life annuity produced higher income for
individuals of almost all ages and both genders in retirement, while for
couples, the reverse mortgage produced generally higher incomes, although the
income from the annuity improves relatively when the age spread among the
couple widens and as they are older.
Spending from a Portfolio in Retirement, Mike Piper. there are three broad questions you have to
answer: 1. Which account(s) to spend from each year (i.e., Roth, tax-deferred,
taxable), 2. Which assets to spend from (i.e., stocks first, bonds first, or
both at the same time), and 3. How much to spend per year.
Taleb, the Barbell Portfolio and Safety-First Financial Planning, Michael Edesess. An important
question is, does such a strategy pay too much for too absolute a level of
protection (and therefore sacrifice too much upside)? Analogies abound. How
much is it worth paying to make your travel by automobile absolutely safe?
Should you drive a Sherman tank? Is
it worth it?... This is a very difficult question to answer conclusively. There
is no clear method of cost-benefit analysis that can answer it. Along with the safety benefit of the
safety-net approach, one important benefit is that it should drastically reduce
the investor’s vulnerability to panic…Whatever is the right way to look at how
to control risk in a portfolio (and there can never be only one “right” way,
because people’s concepts of risk are kaleidoscopic), it is a breath of fresh
air to read a paper that doesn’t automatically assume that risk is the standard
deviation of a portfolio’s returns distribution. We need, in order to give
meaningful practical advice on investing in real-world circumstances, to break
free of the straitjacket of modern portfolio theory.
[comment: good article. Passing through the gateway into retirement changes portfolio management, for me, from risk-return thinking to outcome management. In my own plan I need to make sure two things happen: 1) a bare minimum lifestyle that is slightly better than sleeping under a bridge must be guaranteed (independent of social security), and 2) I must, by portfolio design or some kind of self-improvement process, protect myself from my own behavioral biases…like panic selling when things are bad. My portfolio design flows from those principles and it sometimes, not always, looks different than accumulation/MPT/total-return portfolios.]
Companion link to the above.
Tail Risk Constraints and Maximum Entropy. Geman, Geman, Taleb. …we derive the shape of
portfolio distributions which have maximum entropy subject to real-world
left-tail constraints and other expectations. Two consequences are (i) the
left-tail constraints are sufficiently powerful to overide other considerations
in the conventional theory, rendering individual portfolio components of
limited relevance; and (ii) the "barbell" payoff (maximal
certainty/low risk on one side, maximum uncertainty on the other) emerges
naturally from this construction.
[comment:
this article is totally beyond me…but…it does in fact connect to practice in the real
world. If I happen to have 60-80% of my
portfolio "committed" to a floor, and kinda I do (it's an at-risk floor to be sure), then
100% of the "excess" is in risk assets. That's the same as the article but with
less math. Barbell strategy, floor-and-upside, whatever you want to call it
it's the same thing, and I did not have to do any calculus to get there.]
The Life Cycle Model, Replacement Rates, And Retirement Income Adequacy, Andrew Biggs. If a
replacement rate measure is to be broadly consistent with the life cycle model,
it seems that it should compare retirement incomes to an average of real annual
pre-retirement earnings measured over some extended period of time.
Which Is Better For Retirement Portfolios: TIPS OrTraditional Treasuries? Pfau. I tend to lean toward TIPS as a default choice,
but individual circumstances could certainly warrant a more mixed approach.
How Investors Underestimate How Long They’ll Live in Retirement, WSJ. In fact, the most
likely age for a 50-year-old woman to die is 88 and the most like age for a man
is 85. A woman is more likely to die at age 92 than at her life expectancy age
of 83, and a man is more likely to die at age 89 than 80. So it’s best to plan
to live longer and adjust accordingly.
-The Home as a Risky Asset
-The Impact of Rates of Return on Roth Conversion Decisions
-Do Financial Advisors Follow Their Own Advice? Evidence
from 2008-2011
-Expected vs. Actual Retirement Savings Behavior of Highly
Educated Individuals
-Risk Tolerance and Goals-based Savings Behavior of
Households:
-Preventing Financial Elder Abuse.
[comment: I recommend this issue for no other reason than
that one of the authors of one of the articles is named Jesse Outlaw. Now I want that name.]
How Does the Level of Household Savings Affect Preference for Immediate Annuities? EBRI. Regression
results show that people at the bottom- and top-ends of the savings
distribution (those with the least and most assets) are more likely to buy
annuities than people in the middle of the savings distribution. Also, savings
has a large positive effect on preference for annuities only for those in the
highest savings category. Possible explanations for such behavior follow.
MARKETS AND INVESTING
Social influence and the rise of index investing,
abnormalreturns.com
Alpha or Assets, investorfieldguide.com
Role of Valuation Changes in Rolling Equity Returns,
thinkNewfound.com Inflation and
dividend yield together drive 90%+ of 30-year returns on average
The Financial Advisor’s Guide to Asset Allocation, Ben
Carlson. The perfect allocation will
only be known in hindsight…The majority of the time, doing nothing is the best
decision you can make.
Refining the Failure Rate, Estrada IESE.
What Do TIPS Tell Us About Future Inflation Rates? W
Pfau . Despite the other
factors of TIPS pricing, the difference between Treasury and TIPS rates for the
same maturity represents a reasonable market estimate of future inflation
expectations.
Research Review | 10 February 2017 | Portfolio Strategy, Capital Spectator.
-Liquid Alternative Mutual Funds versus Hedge Funds
-Asset Allocation Strategies, the 1/N Rule, and Data
Snooping
-Undiversifying During Crises: Is It a Good Idea?
-Beating the Market: Dynamic Asset Allocation with a Market
Portfolio Benchmark
-The Impact of Global Uncertainty on the Global Economy…
-Factor Investing: The Rocky Road from Long Only to Long
Short
-Systematic Tail Risk
-Managing Risks in Institutional Portfolios
Lessons from long-term global equity performance, sr-sv.com. When the two signals agree—for example, in
the market-timing context when the market is cheap and has recently begun to
improve—the double signal is especially strong… Over long horizons, value and
yield indicators tend to have the best predictive ability; over short horizons,
momentum and macro indicators are more helpful. No tactical indicators are
particularly reliable for near-term market timing.
ALTERNATIVE RISK
DIY hedge fund, Alpha Architect.
Betting Against Correlation: Testing Theories of theLow-Risk Effect, Cliff Asness et al, AQR.
Consistent with both leverage and lottery theories contributing to the
low-risk effect, we find that BAC is related to margin debt while idiosyncratic
risk factors are related to sentiment.
Are Hedge Funds Betting Against Low-Volatility Stocks?
Quantpedia.com The finding that the
multi-trillion hedge fund industry is not arbitraging but contributing to the
low-volatility anomaly also argues against the popular notion that the anomaly
is disappearing or becoming an ‘overcrowded’ trade.
Factors v implementation, Morningstar.
The Dynamics of Belief Formation and Price Momentum, Dontoh
et al. NYU. …unsystematic random
fluctuations in observed prices arising from factors such as liquidity trading
affect Bayesian belief formation, and thereby trading strategies, in such a way
that equilibrium price changes can manifest both momentum and reversals.
SOCIETY AND CAPITAL
The Middle Income Trap and Governance Issues, Timothy
Taylor. In short, economic growth and
development isn't just about pulling the right economic policy
levers--government budgets, monetary policy, investment in education, foreign
aid, and the like. It's also about the extent to which economic forces have
flexibility to function within the political and legal institutions of that
society.
The Happy City, Mr. Money Mustache.
Findings from a Pilot Study to Measure Financial Fraud inthe United States, Finra and Stanford University - Stanford Center on Longevity.
Half of the survey respondents reported victimization by one or more major
category of fraud in the past year. This is much higher than the Federal Trade
Commission’s (FTC, 2013) estimate that 10.8% of U.S. adults were defrauded in
2011, and also higher than the National White Collar Crime Center’s (NWC3)
prevalence rate of 16.7% (Huff et al., 2010). Consumer products and services
fraud was reported with the highest frequency — nearly 43% of the sample reported experiencing one or more of these types of scams.
An Ivy League professor who spent 4 months working in a South Bronx check-cashing store says we're getting it all wrong. Businessinsider.com
Update on the Social Cost of Carbon, Tim Taylor.
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