Weekend Links - 3/17/17

QUOTE OF THE DAY

Luck is the second-most important factor for retirement planning; second only to withdrawal rate. Retirementoptimizer.com

CHART OF THE DAY

RETIREMENT FINANCE AND PLANNING

Psychology Of Retirement Income Satisfaction, American College of Fin Services.  Studies comparing the levels of satisfaction among retirees with different levels of guaranteed retirement income found those with higher levels of guarantees were more satisfied than those with less. What is rather surprising, however, was the revelation that a retiree’s income satisfaction does not have a linear relationship with the amount of wealth he or she has saved for retirement… “Once we start viewing money as wealth, as a stock of money and not necessarily as a flow, then we seem to get less happiness out of spending it than we do from money that’s automatically turned into a flow,” Dr. Finke said.   

Retirement Income Library, Portfolio Charts.   

Calculating Perpetual Withdrawal Rates, Jim Otar.  

Let Me Convince You To Save Money. Morgan Housel. ...since you can build wealth without a high income but have no chance without a high savings rate, it’s clear which one matters more. 

Risks in Advanced Age, Texas Tech U, dept of personal financial planning.  This article outlines risks retirees face and possible solutions to help them overcome behavioral hurdles. A preference for certainty has been observed in advanced age and older defined contribution investors exhibit equity-varying risk aversion. Clients face declining cognitive ability over time, which corresponds with a decrease in investment performance. Financial literacy skills decline in advanced age but confidence does not, which may lead to older clients being overconfident in their financial literacy abilities. A retirement consumption puzzle has been observed as wealthy individuals do not decumulate portfolio assets efficiently during retirement. 

Life-Cycle Consumption, Investment, and Voluntary Retirementwith Cointegration between the Stock and Labor Markets, National University of Singapore (NUS) - Department of Mathematics.  We present an optimal life-cycle consumption, investment, and voluntary retirement model for a borrowing and short sale constrained investor who faces cointegration between the stock and labor markets. With reasonable parameter values, there exists a target wealth-to-income ratio under which the investor does not participate in the stock market at all, whereas above which the investor increases the proportion of financial wealth invested in the stock market as she accumulates wealth. We analyze the effects on investment of retirement flexibility with and without cointegration. We also isolate the effects on retirement of risk aversion with and without uninsurable income risks.   

Future Retirees Could Be More Reliant on Social Security, Thinkadvisor, Employer-sponsored retirement plans are providing less retirement income today than in the past, according to a new analysis from the Center for Retirement Research.  And, if this doesn’t change, “future retirees will be much more dependent on Social Security than those in the past, which is problematic given the reduced support due to the rising full retirement age and the need to close the program’s long-term funding gap,” according to the report, which was written by Alicia H. Munnell, Wenliang Hou, Anthony Webb and Yinji Li.  

MARKETS AND INVESTING 

Explaining a Paradox: Why Good (Bad) Companies can be Bad(Good) Investments! Damodaran.  

Digging Deeper for Municipal Bond Income, abglobal.  

The ETF Canaries Signaling Danger in the Credit Coal Mine. Bloomberg.  

Cash hoarding and market dynamics, sr-sv.com.  A new empirical analysis shows that cash hoarding, a rise in funds’ cash positions in times of redemptions, is the norm. Cash hoarding seems to be particularly pronounced in less liquid markets and is a rational response if fire sale haircuts are prone to escalate with growing flows, i.e. if liquidating late is disproportionately costly. Investment opportunities arise initially from timely positioning and subsequently from the detection of flow-driven price distortions. 

ALTERNATIVE RISK

Eight trading lessons from a proprietary trading desk. SMB.  

Adding Factors,  peterlazaroff.com  And although it seems obvious, don’t invest in something you couldn’t live with for multiple decades. Like all strategies, factor investing doesn’t always work. You knowingly accept tracking error, which can be negative for long stretches of time, in return for the opportunity to earn excess returns. Successful factor investing requires a long time horizon in order to give the underlying theory enough time to work.  

How Hedge Funds Use ETFs, ETF.com 

Process Based vs Outcome Based Strategies. Seitmarket.com 

Contrarian Factor Timing is Deceptively Difficult, Asness et al.  The increasing popularity of factor investing has led to valuation concerns among some contrarian-minded investors, and fears of imminent mean-reversion and underperformance. In this paper, the authors find that despite their recent popularity the most common factors or styles, namely the value, momentum and defensive styles, are not, in general, markedly over-valued as measured by their value spreads. 

Fractal Optimization as Generator of Market Neutral Long-Short Portfolio, 

TAA Strategy Combining Risk Parity & Trend Following, allocatesmartly.com.  The tactical asset allocation strategy presented here combines trend-following with risk parity, and while it has struggled to produce outsized gains, it has done an excellent job historically managing losses and minimizing volatility. 

Why The Financial Media Is Wrong About The Rally In Gold.  Priceactionlab.com …history shows that Treasury bonds are a better hedge against a market crash. Gold is financialized to a large extent and may also drop during a rapid stock decline. 

The Continuing Evolution Of Volatility Trading, rcm.  Yes, gone are the days of a steady diet of vanilla options selling in the volatility space. What was once a purely short volatility space is rapidly becoming more and more of a volatility trading space (VIX Futures strategies), able to profit from either increases or decreases in volatility, as well as the volatility of volatility itself. 

Hedge Funds Eschew Low Vol Anomaly, Swedroe. one of the big problems for the first formal capital asset pricing model (CAPM) developed by financial economists was that it predicted a positive relation between risk and return. But empirical studies have found the actual relation to be flat, or even negative. 

SOCIETY AND CAPITAL

The Rise and Fall of Personal Interest Income, Timothy Taylor.  …spare a thought for those, including retirees, insurance companies, and pension funds, who depend on investments that make interest payments as part of their portfolio. One obvious consequence of the low interest rates in recent [sic] is that personal income received in the form of interest payments has also declined. 

Blockchain: Government and Civil Liberties, AIER.  This article looks at how blockchain technology interacts with two core civil liberties, privacy and property ownership, as well as how it may change some of the basic functions of government, such as currency and taxation. 

The Effect of Aging on Wealth Inequality, St Louis. Vandenbroucke and Zhu noted that an aging population may reduce wealth inequality, but this is far from certain. They added that their example should be interpreted with caution. “It does not imply that the forecasted aging of the U.S. population will be accompanied by a reduction in wealth inequality,” they wrote. “The calculation presented here abstracts from other forms of inequality not related to age. It is conceivable that these other forms of inequality may increase as the population becomes older and offset the effects described here.”