"The bucket approach differs from the view we have taken in this book, particularly with regard to the design of decision support systems (DSS). Specifically we seek systems that are robust with respect to innumerable possible scenarios -- many more scenarios than anyone would seriously suggest forming physical or mental accounts. In a given situation there are many possibilities that can affect the supply of, and demand for, an investors wealth. We can perhaps itemize a representative set of these possibilities, but what lies beyond our enumeration capabilities is the myriad of possible combinations with respect to the timing of these. Perhaps some unfavorable event happens early in the investor's trajectory, or almost at retirement time, or during retirement. Or two unfavorable events happen back to back. Or a favorable or unfavorable market event happens in close proximity to some favorable or unfavorable event affecting the need for ready cash. The possible combinations of these--over many years until retirement and/or in retirement--can be astronomical."
Markowitz, Risk-Return Analysis Vol. 2, 2016 p 252.
CHART OF THE DAY
RETIREMENT FINANCE AND PLANNING
Tontines, NYT.
Time Segmentation as the Compromise Solution for RetirementIncome, Pfau. The Financial Planning
Association (FPA) divides retirement income strategies into three categories:
systematic withdrawals, time-based segmentation and
essential-versus-discretionary income. Time-based segmentation provides a
middle ground between the two extremes represented by systematic withdrawals
(relying on a total-return investment portfolio for all distributions) and
essential-versus-discretionary (using insurance-based products to implement a
lifetime-income floor before considering investments). In occupying this middle
ground, time segmentation is wildly popular in practice and it goes by many
different names. But it is also the least studied retirement income approach.
MARKETS AND INVESTING
More good finance articles, John Cochrane. For instance, the growth tilt of
entrepreneurs can be attributed both to exposure to private business risk
(Heaton and Lucas (2000), Moskowitz and Vissing-Jørgensen (2002)) and to marked
overconfidence in own decision-making skills (Busenitz and Barney (1997))
Why Passive Is a Risky Choice for Global Bonds,
abglobal.com. apan, for example, is by
far the largest share of the global bond universe, but it offers negative
yields. In contrast, some of the most attractive opportunities today—for
example, Australian sovereigns or Japanese inflation-protected debt—are either
small components of the index or aren’t in the benchmark at all. That means
passive portfolios don’t take advantage of them.
Investors Underperforming Their Own Investments,
thereformedbroker.com. "The
brokerages don’t care if this happens – and, in fact, some of them actively
encourage it given the fact that they get paid on the trading you do, and not
the sitting. Volatility avoidance is what crushes long-term returns,
which is very counterintuitive. Vol is not the enemy because it causes
fluctuation – rather, it is the enemy because it drives bad decisions."
[emphasis added]
[comment: The
prev. post is incorrect except about the "bad decisions". Crappy behavioral biases acted-upon using a
single period mindset will crush long term returns; that's the bad decision
part. What little I know -- of things like
geometric returns, of sequence risk over multiple periods in the face of a
consumption requirement, of geometric return frontiers over some N number of periods
-- tells me that passively sitting on high volatility portfolios can also crush
multi-period outcomes. And in retirement it's all about the outcomes.]
Four centuries of return predictability, Golez and
Koudijs. We combine annual stock market
data for the most important equity markets of the last four centuries: the
Netherlands/U.K. (1629-1812), U.K.
(1813-1870) and U.S.
(1871-2015). We show that dividend yields are stationary and consistently
forecast returns. The documented predictability holds for annual and
multi-annual horizons and works both in and out-of-sample, providing strong
evidence that expected returns in stock markets are time-varying. Much of this
variation is related to the business cycle, with expected returns increasing in
recessions. We also find that, except for the period after 1945, dividend
yields predict dividend growth rates.
Sensible Tips For Constructing A Well-Balanced Portfolio,
FMD. Jumbling together a random series
of stocks or funds without any sense of cohesion makes it more likely that you
will abandon them at random (inopportune) moments. That path leads to uncertainty of past
decisions, weak correlation with the markets, and streaky performance at
best. Instead, matching all the right
pieces together to suit your risk tolerance and investment strategy will have a
meaningful impact on your behavioral choices through good times and bad.
The 'Fundamental Law of Active Management' is No Law ofAnything, Michaud. Roughly half of all
professionally managed funds globally employ optimized portfolio design
principles that are applications of Grinold’s “Fundamental Law of Active
Management.” These include: Invest in many securities, use many factors to
forecast return, trade frequently, and optimize with minimal constraints. We
show with simple examples followed by rigorous simulation proofs that these
proposals are invalid and self-defeating. This is because estimation error and
required economically valid constraints are ignored in derivations. These
flawed principles have been unchallenged by academics and practitioners for
nearly twenty-five years and may adversely impact a trillion dollars or more in
current fund management.
Rebalance Your Portfolio? You Are A Market Timer And Here’sWhat To Consider, alphaarchitect.com To reiterate, rebalancing is an active
market timing consideration and should not be a decision that is taken lightly.
The decision is just as active as deciding between buying a passive market-cap
weighted index or a portfolio of concentrated value and momentum stocks. And
like all active decisions, one should carefully consider the evidence and the
actions of other market participants when rebalancing a portfolio. Rebalancing
decisions and processes don’t need to be complex, but they do need to be
considered.
ALTERNATIVE RISK
Will The Rise of Factors Kill Factor Investors? Michael
Batnick what should investors make of
the explosive rise in smart-beta strategies? Won’t every potential advantage
they offer be arbed out by their popularity? Maybe. But maybe not.
All About Factors & Smart Beta, Corey Hoffstein. This week's commentary is a long-form
presentation all about factor investing and smart beta. We cover four topics.
In the first section, we explore the basics of factors: what
are they and where do they come from? The second topic explores why
implementation details matter and why long-only factor investing can be significantly
different than long/short academic research.
We then explore the current debate about whether factors can
be timed using value spreads. Finally, we look at current research in
developing diversified, multi-factor portfolios.
Measurement, Kinlaw, Kritzman, Turkington. [underestimating vol when multiplying
standard deviation by the square root of 12]
SOCIETY AND CAPITAL
Poverty in America- An analysis of the difficulties of measuring poverty FRED. This map shows, in some way, poverty across U.S.
counties. We say “in some way” because poverty isn’t a well-defined or
stationary object. Today’s poor in the U.S.
could be rich in another country or in another century. So it’s important to
understand what is measured when people talk about poverty rates.
Truth Trust and Lying.
Thehappyphilosopher.com
Black America’s New Retirement Issue, SquaredAwayBlog. [SAB] looks at the recent erosion in homeownership among black Americans since 2000, which threatens to further undermine their retirement security – Generation X is most at risk.
Gender Differences in Financial Risk Tolerance
sciencedirect.com. Income uncertainty
and net worth have different relationships with having high risk tolerance for
men and women. Income uncertainty is negatively associated with high risk
tolerance for women but a positive association exists for men. Net worth has a
significantly positive relationship with high risk tolerance for men, but not
women.
How Between-Firm Inequality Drives Economic and SocialInequality, Tim Taylor. I believe that
much of the rise of between-firm inequality, and therefore inequality in
general, can be attributed to three factors: the rise of outsourcing, the
adoption of IT, and the cumulative effects of winner-take-most competition…Employees
inside winning companies enjoy rising incomes and interesting cognitive
challenges. Workers outside this charmed circle experience something quite
different. For example, contract janitors no longer receive the benefits or pay
premium tied to a job at a big company. Their wages have been squeezed as their
employers routinely bid to retain outsourcing contracts, a process ensuring
that labor costs remain low or go ever lower. Their earnings have also come
under pressure as the pool of less-skilled job seekers has expanded, due to
automation, trade, and the Great Recession. In the process, work has begun to
mirror neighborhoods — sharply segregated along economic and educational lines.
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