But in investing, it doesn’t work that way. More resources,
more time spent, more effort, etc to do not necessarily lead to better outcomes...
If it were simply a case of effort, then the people who trade all day, every
day, and never turn off the screens would be the wealthiest. Josh Brown
CHART OF THE DAY
RETIREMENT FINANCE AND PLANNING
Annuities: All or Nothing, Dirk Cotton. Economic studies are
much better at teaching us how things work than at predicting outcomes for an
individual household…Milevsky [2007] shows that the optimal age to buy an
All-or-Nothing annuity is when the retiree values the return on an annuity the
same as she values the return that she expects from her investments.
Longevity Risk: To Bear or to Insure? Boon Briere Werker. Tilburg
Univ.
Diversification: More Important Now Than Ever. Cordant. For anyone nearing retirement, and therefore nearing the end of the capital accumulation phase of life, reducing the magnitude and duration of losses is crucial. Not only does it matter from a capital preservation and return compounding perspective, but also it’s critical from a behavior perspective… But, perhaps the biggest benefit to building a diversified portfolio is an increased safe withdrawal rate—meaning additional spending in retirement… And, even making the simple change of moving from the 60/40
Do Households Have A Good Sense Of Their RetirementPreparedness? Munnell, Boston
College
The Consequences of Overestimating Retirement Expenses, Ken
Steiner at Advisor Perspectives. Abraham Okunsanya, in his February 1, 2017 , UK Finalytiq blog post, Busting the
Myth of ‘U-Shaped’ Retirement Spending, cited research by the International
Longevity Center-UK to support his statement, “An ideal sustainable withdrawal
strategy should follow the typical spending pattern in retirement. This allows
higher withdrawal at the early part of retirement and should progressively fall
(at least in real terms) over their retirement period”… Despite research
showing we spend less in real dollars as we age in retirement, many financial
advisors continue to target constant real-dollar spending for their clients. In
many cases, this is a result of inertia or software limitations.
[comment: many years ago, before I had read a
single blog or research paper on retirement I had instantiated an age banding
approach to retirement planning. Seems
like common sense.]
Selected titles…
- Management of Post-Retirement Finances for the Age 85 and
Over Population
- Risk Strategies Pertaining to the Many and Diverse Risks
Found in Retirement
- News Flash: Retirement Takes Over Long-Term Care
- How the American Retirement Savings System Magnifies
Wealth Inequality
- Diverse Risks and Considerations in Retirement
- Women and Retirement Risk…
- Enhanced Risk Sharing Savings Accounts
- Dealing with Multiple Post-Retirement Risks in the Middle
Market
- Understanding Reverse Mortgages:
- Bringing Economics and Actuarial Science Together: An
Interview
10 Common Estate Planning Mistakes, onefpa.
Planning for a More Expensive Retirement, Blanchett, Finke,
Pfau. An important finding from this
study is that a low-return environment would have a negative impact on client
spending throughout their life cycle.
How clients can retire happily on less than $1M: RetirementScan, financial-planning.com
Retirement’s Routes To Failure, Swedroe. For example, Estrada shows that over the 86
30-year retirement periods he considered, a 4% withdrawal strategy from a
global 60/40 portfolio would have failed 20 times, or in 23% of the periods.
However, those 20 failures looked very different. In some cases, the plan
failed with only two years remaining; in others, it failed with 14 years
remaining. Those are two very different outcomes, with very different
consequences. Yet they both count the same way in informing the failure rate.
MARKETS AND INVESTING
Contradicting Warren Buffett: When Volatility is Risk, Isaac
Presley Cordant. . [ he is correct. This is a common mistake made when one is
over focused on single-period finance as in mean variance optimization. In multi-period lifecycle finance, like
retirement, where there are consumption constraints (leading to sequence risk and
fail rates) and chaos processes from positive feedback loops (think bankruptcy
when you weren't planning for it) vol can suck the wind out of your sails. This is why some academics, economists among
them, sometimes consider personal finance among the very hardest of economic
problems. Warren
for all his genius is a single period guy not a lifecycle guy.]
The emotional experience of investing, longboardfunds.
Who are you competing with? Josh Brown Individual investors are
lucky. They don’t need to engage in the type of short-termist behavior that
monthly and quarterly performance measurement engenders. There’s no
institutional imperative to be be seen as having been in the winning group for
any particular period. There’s nothing wrong with average, if average is good
enough to grow a portfolio toward the goals the investors have set for
themselves.
The Biggest Myths in Investing, Part 7 – Fees are a SmallPrice to Pay for Expert Advice, Cullen Roche.
I’m not gonna tip toe around this topic. My career in finance has
convinced me that most financial firms charge way too much in exchange for the
value they provide. The financial industry has gotten away with this for a long
time because the average investor is woefully uninformed about financial
matters, but as the Internet has democratized information and helped firms
scale their businesses the high fee financial firms have come under fire. This
is a fantastic development.
A Study of Real Real Returns Now in its Third Decade,
Thornburg. Investors often focus only on
nominal returns for portfolio construction, without considering the impact on
inflation, taxes, and expenses… Instead of focusing on nominal returns,
investors should consider the potential real real return of each asset class.
The generation of real wealth, depends on it.
Return Expectations Going Forward, Ben Carlson.
The Golden Age of Hedge Funds, Ben Carlson. “There are about 8,000 planes in the air and
100 really good pilots.” [quote from Ray Dalio] In 1998, there were around
3,200 hedge funds with roughly $210 billion in assets under management,
according to estimates. Today, there are northwards of 11,000 hedge funds with
assets totaling over $3 trillion. Size is the enemy of outperformance, and
hedge funds are a perfect example of this… All of the new money that rushed
into hedge funds created more competition for alpha. When hedge funds were
smaller and nimbler, there was enough outperformance to go around. Now there
are so many funds, algorithms, PhDs, mathematicians, computer scientists, and
MBAs competing for pieces of a much smaller alpha pie. When you add in the exorbitant
fees, what you get is worse performance.
Firm-Specific Information And Momentum Investing,
AlphaArchitect. When it comes to
momentum investing, everyone is always looking for a better way to implement a
momentum-based stock selection strategy (the same goes for a value strategy).
We highlight a few methods in our book, Quantitative Momentum, as well as on
our blog. We recently came across a paper from 2006 that has an improvement on
a baseline momentum investing strategy, titled “Firm-specific attributes and
the cross-section of momentum.”
How Bitcoin Reached Parity With Gold, VisualCapitalist.
11 Stunning Visualizations of Gold Show Its Value and Rarity,
VisualCapitalist
Visualizing the Anxiety of Active Strategies, Newfound.
Fake alpha, sr-sv.com
Statistical alpha can be divided into fake alpha, which is a premium for
non-directional systematic risk, and true alpha, which reflects the quality of
the investment process. Fake alpha arises from exposure to conventional factors
that are not correlated with the market portfolio. Failing to distinguish fake
and true alpha can be costly for investors and strategy developers. Fake alpha
is easy and cheap to produce and after periods of high risk premia on
conventional factors it can post impressive performance statistics (or
backtests). Subsequently, investors overload on managers or strategies that use
these factors and related performance inevitably deteriorates. This goes some
way in explaining the negative historic alpha on actively managed funds.
Moral Hazard In Hedge Fund Fees, Swedroe. The HWM feature is
highly asymmetric and can be expressed as a long call-option position with a
strike at the HWM. Therefore, hedge fund managers face a moral hazard issue
because they have an incentive to increase risk when their previous performance
has been disappointing.
Investors Need to Get Comfortable with Being Uncomfortable,
Adam Butler. This new definition of risk profoundly shifts the conversation away from
volatility and losses, and toward strategies that also achieve minimum required
returns. From this new perspective, it is not sufficient to manage risk and
provide downside protection; an investment strategy must also produce returns
that fulfill long-term goals. Moreover, the strategy must account for the fact
that investors are susceptible to shorter-term dynamics, such as tracking error
relative to domestic benchmarks, which may run counter to the objective of
long-term wealth maximization. In other words, advisors need to build
portfolios that are financially optimal, but that investors can stick with over
time.
SOCIETY AND CAPITAL
International Corporate Tax Rates: Some Comparisons, Timothy
Taylor. It's common to think of the US
as the rip-roaring home of market capitalism, at least as compared to most
other high-income countries round the world. But this belief sits uncomfortably
with the fact that US corporate tax rates are among the highest in the world.
India’sDemonetization Experiment, AIER. In this article, I will consider the
potential rationale for banning most cash in India
and some of the bad outcomes that can arise from such a decision. For such a
policy to be defensible, it needed to do two things very effectively. First, it
needed to have a well-functioning system in place to quickly replace the cash
and reduce the burden on the millions of regular Indians who stood to be
negatively affected. Second, it had to have major success in cracking down on
the corruption it was meant to rein in. Only if both aims could be met would
such a policy potentially be justified. Unfortunately, the early returns are
not good on either score.
Disturbing New Facts About American Capitalism, Jason Zweig,
WSJ. Modern capitalism is built on the
idea that as companies get big, they become fat and happy, opening themselves
up to lean and hungry competitors who can underprice and overtake them. That
cycle of creative destruction may be changing in ways that help explain the
seemingly unstoppable rise of the stock market.
Sources of Income Inequality among Households 65 and Older:Can Individual Choice, Markets and Public Policy Increase Equality? This paper
explores the sources of income inequality among households aged 65 and older
and the extent to which individual actions, competitive markets, and public
policy can improve the financial well-being of those with low income. Three
different types of retirement wealth are identified on the basis that they 1)
are acquired in very different ways; 2) vary in their contribution to income
inequality among older households; and 3) require unique individual behaviors
and public policies to increase the income that they generate.
Using Panel Tax Data to Examine the Transition to Retirement.
Investment Company Institute and IRS. Using
panel data from the Internal Revenue Service’s Statistics of Income (SOI)
Division, we find that most individuals do not experience a reduction in
inflation-adjusted spendable income after claiming Social Security. We also
examine the composition of income after claiming and find that both Social
Security benefits and non-Social Security retirement distributions typically
represent substantial shares of income.
Extreme Poverty and Child Mortality
(embedded and animated. Hit the play button and watch China
for example)
Californiaexports its poor to Texas, otherstates, while wealthier people move in, Scramento Bee. California
exports more than commodities such as movies, new technologies and produce. It
also exports truck drivers, cooks and cashiers. Every year from 2000 through
2015, more people left California
than moved in from other states. This migration was not spread evenly across
all income groups, a Sacramento Bee review of U.S. Census Bureau data found.
The people leaving tend to be relatively poor, and many lack college degrees.
Move higher up the income spectrum, and slightly more people are coming than
going.
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