Weekend Links - 3/24/2017

QUOTE OF THE DAY

Past a certain level of income, what you need is just what sits below your ego. Morgan Housel 

CHART OF THE DAY

RETIREMENT FINANCE AND PLANNING

Here’s an ‘income menu’ that could help retirees make theirsavings last, Marketwatch.com.  Here’s the idea: Just as retirement savers need to be diversified and consider how their savings are “allocated” so their money doesn’t disappear in a market free fall, people in retirement need diversified sources of income. The study’s authors call these “retirement income generators,” or RIGs. Those RIGs — or, at least, information about them — should be part of employers’ retirement plans, according to Steve Vernon, a research scholar at the Stanford Center on Longevity and a co-author of the study. 

Foundations in Research for Regulatory Guidelines on the Design& Operation of Retirement Income Solutions in DC Plans, Steve Vernon Stanford. Joint research sponsored by the Stanford Center on Longevity (SCL) and the Society of Actuaries’

Committee on Post-Retirement Needs and Risks (SOA-CPRNR) concluded that it would be very desirable for defined contribution (DC) retirement plans to include an organized approach to providing retirement income with the potential to last the life of a plan participant. 

You Can Spend It Now or You (or Your Heirs) Can Spend ItLater – Part II, Ken Steiner.  This post is a follow-up to our post of October 24, 2014, which pointed out that determining the right amount to spend each year is a balancing act.  If you spend too much early in your retirement, you may fall short later when you get older.  If you spend too little early in your retirement, you may have more assets than energy when you get older.

Annuities: Anything Anytime, Dirk Cotton on Milevsky and Young.  In other words, this research finds that the optimal annuitization path for a utility-seeking retiree is to start with a base of annuity income at the beginning of retirement and ratchet it upward if and when her wealth increases relative to her annuity income. 

Factor Human Capital Into Your Financial Plans, Swedroe.  However, there is a fourth factor impacting the ability to take risk: one that is often overlooked even by many advisors—the stability of one’s human (labor) capital. 

The Evolution Of The Four Pillars For Retirement IncomePortfolios Kitces.com.  But again, that’s actually the whole point of relying on (all) four pillars of retirement income. You don’t necessarily know which one will produce the desired results from year to year, but diversification gives you the best shot to get it from somewhere, without taking on excessive risk or portfolio concentration in stretching for yield along the way. 

A Strong Marriage in Retirement, Darrow Kirkpatrick. A stable marriage is the bedrock of personal and financial success for many of us. 

  

MARKETS AND INVESTING 

Pathetic Protection: The Elusive Benefits of Protective Puts, AQR.  Put options are only effective in reducing drawdowns in the unusual circumstance that options are priced with no volatility risk premium and equity drawdowns precisely coincide with the option holding period. 

The Biggest Myths in Investing, Part 9 – Risk Is Somethingwe Can Quantify, Cullen Roche. 

It takes three to tango in ETF-land, abnormalreturns.com  ETFs are like, the financial blogosphere itself, an “imperfect meritocracy.” By and large the cream rises to the top. There is more than enough criticism to go around for all three constituents in ETF-land: sponsors, the SEC and investors alike. In light of all that ETFs have done in reducing fees and increasing access for investors it seems silly to say you are “against ETFs.”

 Rebalance Your Portfolio? You Are A Market Timer And Here’sWhat To Consider. AlphaArchitect.com One thing I find very interesting is that their portfolio spends very little time actually at the target allocation because the price of stocks and bonds is ever changing.  Therefore, any asset allocation deviation from the target allocation is an active (i.e., market timing) decision. 

ALTERNATIVE RISK

Diversification in Multi-Factor Portfolios, thinknewfound.com.  The ActiveBeta team at Goldman Sachs finds new evidence that composite diversification approaches can offer a higher information ratio than integrated approaches due to interaction effects at low-to-moderate factor concentration levels.  

The Dirtiest Word In Finance: Market Timing, AlphaArchitect.  Yes, you can time the market, but you may or may not be successful.  If you time the market based on economic forecasts, valuations, elections, or your gut, it seems unlikely that you’ll either beat the market or lower the overall volatility of your portfolio.  If you time the market using some kind of trend-following approach like managed futures, you may or may not earn better returns; I think that the jury is still out.  

Tracking The Smart Beta Horse Race With ETFs, capitalspectator.com You may not be drinking the factor Kool-Aid, but it’s still worthwhile to check in on these risk premia periodically for some context on what’s driving equity performance generally. With that in mind, let’s review a set of eight ETFs that represent the usual suspects in the US equity factor space. 

Momentum v Mean reversion. Econompicdata. Asset classes mean revert over longer periods, but this analysis provides a good starting point for the hypothesis that it can can be captured more effectively through momentum than by allocating to a down-an-out area of the market. 

Asset Pricing Anomalies: Two Hedge Factors with NegativeRisk Premia Embedded in Portfolios! Muralidhar, ssrn.  two results stand out: (i) Valuation seems to be a very robust strategy; and (ii) early movers probably benefit before these strategies get incorporated into the industry-wide SAA and then lose significance – a seemingly obvious result but validated in the context of a robust asset pricing model, thereby also serving as a first test of (a special case of) the Adaptive Markets Hypothesis. 

Research Review | 17 March 2017 | Risk Factors, Capital Spectator.  

Can Investor Sentiment Be a Momentum Time-Series Predictor? Evidence from China  As an important piece of "out-of-sample" evidence, we document that investor sentiment in China is a reliable momentum signal at monthly frequency. The strong momentum predictability is robust under both single- and multi-regressor settings, and is statistically and economically significant both in and out of sample, enhancing portfolio performance  

Naive Risk Parity Portfolio with Fractal Estimation ofVolatility, Drozdov and Kemenshchikov.  Implementation of fractal estimator of volatility improves all performance metrics of portfolio in comparison to the standard estimator of volatility. The efficiency of fractal estimator plays a significant protective role for the periods of market abnormal volatility and drawdowns, 

  

SOCIETY AND CAPITAL

PassiveBeat: Our corporate welfare ETF; no taxes andoutperformance, citywireusa.com  It stands to reason that tax-shy companies outperform, so why not create an ETF for them? 

Is Private Equity Good for Consumers? Cesare Fracassi UT at Austin.  These results are stronger for private firm targets, suggesting that private equity could ease financial constraints and provide the expertise to manage growth. Contrary to the common view that private equity leads to substantial price increases, this evidence suggests that consumers could benefit from private equity deals through an increase in product variety. 

The Economic Toll of High Suicide Rates in Japanand South Korea, Wharton 

What's the Value of US Household Production? Timothy Taylor.  The value of household services was equal to about 37% of GDP in 1965, but is currently equal to about 23% of GDP. 

Investment Portfolios in a Carbon Constrained World: TheSecond Annual Report of the Portfolio Decarbonization Coalition, U of Leeds.  There is clear evidence that decarbonization efforts are improving the carbon characteristics of PDC members’ investment portfolios and funds. However, it is not yet possible to offer a definitive view on how portfolio decarbonization efforts – individually or in aggregate – will affect the real economy. It will take time for high level portfolio commitments to translate into tangible on-the ground changes. 

Are we paying more taxes than before? FRED blog 

The Sad Stateof America’sInfrastructure in One Infographic, VisualCapitalist.com 

Class Action Suits Involving Public Pensions Continue toRise, CIO.