If attaining reliable lifetime income is the goal, let’s
start with this: The DB pension
architecture is the best system yet devised for spreading
the income from one’s
working life over one’s whole life. Laurence Siegel
CHART OF THE WEEK
This is an impressionistic riff on skewed risk by
earlyretirementnow.com Explains why I avoid lotteries,
extended warranties, and long options and also why
I short options instead.
RETIREMENT FINANCE AND PLANNING
The next asset section of the
RIO Map™ framework is the diversified portfolio. The diversified portfolio can
be used most effectively to meet lifestyle and legacy goals, which translate
into the liabilities related to discretionary expenses and legacy. Here we
review your investments as well as your views, attitudes, and knowledge about
investing.
Generating Retirement Income Before Age 59-½, Darrow
Kirkpatrick.
you could still have a big
problem, even if you have enough money saved in your retirement accounts….
I retired at 52 with a $3 million net worth — here are 10 things that surprised me about early retirement. Businessinsider.com
[ok, for
what it's worth he's only 9 months in so it reads like one those giddy articles
that new parents write about their new babies in parenting mags. I'd much rather have his perspective after
9 years. I'm almost 9 years in, btw]
How to Maintain Liquidity in Retirement, Wade Pfau
The final component of your assets is your reserves. In
building our retirement income frameworks, we identify how well-positioned you
are to absorb any potential external shocks to your retirement income streams,
and how well-planned your asset-transfer strategies are. The primary purpose of
reserves is to maintain liquidity to meet contingencies in retirement…Another
subtle point about the importance of reserves relates to longevity risk
aversion. When relying on an investment portfolio to cover retirement expenses,
people may spend less because they have a somewhat amorphous mental account in
their mind about using assets.
Now, That’s What I’m Talking About, Ken Steiner.
In this column, Dr. Milevsky cautions us to
be suspicious about retirement plan strategies (such as those that may be
developed using Monte Carlo modeling or safe withdrawal approaches) that appear
to offer higher levels of spending at little or no perceived additional risk.
What Does Retirement Really Cost? Moshe Milevsky 2011.
So, time to take-up smoking, boozing and
ditch the exercise bike? … Assuming a
more aggressive portfolio, in the hopes that you can move to the upper
right-hand corner of the table — and hence require a smaller nest egg for
retirement — is a mirage. You can’t tweak expected return (a.k.a. asset
allocations) assumptions until you get the numbers that you like. … In fact, this sort of thinking is precisely
the mistake that got the pension fund industry (and many of their actuaries)
into big trouble. …Here is my view. If you don’t like how big this number looks
— and you want certainty — then save more, retire later and plan to spend less.
Assuming or expecting or anticipating 6.5% or planning to age 90 (only) won’t
solve a structural funding problem. Greece
is a nice place to retire, but not a very good role model for how to manage
retirement finances.
The Returned, sexhealthmoneydeath.com
So I’ve returned to full time, paid employment. I’m still
thinking about retirement, but my experience has put a different perspective on
my plans. In fact, I’m thinking that maybe I should be planning to work in some
way, shape or form until I’m either mentally or physically unable to do it!
It’s likely that this will be part time (and it’s likely that I’ll want it to
be part time too) so I need to make plans. That’s what I failed to do last time
‘round. I’d only planned the financial part of early retirement, not the rest
of what to do with my time. Hopefully I won’t be repeating that mistake going
forward!
As acronyms go, we could do worse. FIRE has connotations of
danger and emergency, which is how some people see their working life (or their
bank balance). But for me yoking the concept of financial independence together
with retiring early is not ideal. I just don’t see them as uniquely wedded at
the hip. Also, I suspect it causes confusion about goals, and even cultivates
outrage from those dreaded ‘retirement police’ who get angry if a FIRE-ee earns
a few bob on the side.
The conventional wisdom says no. But that isn’t necessarily
the case.
Floods And Deserts: Why The Dream Of A Secure Pension ForEveryone Is Still Unattained, Stephen C. Sexauer and Laurence B. Siegel Nov
2016
If attaining reliable lifetime income is the goal, let’s
start with this: The DB pension architecture is the best system yet devised for
spreading the income from one’s working life over one’s whole life. … Pension
systems are not in crisis because they are structurally flawed, or because they
have been looted by evildoers. The crisis comes from sponsors anchoring on
periods of extraordinarily high returns to overpromise and underfund pension
promises and then applying the ultra-low interest rates of this era of
financial repression to those same pension promises. [I might've linked to this
before]
The Role of Long‑Maturity TIPS in RetirementPortfolios, sapra and Pedersen
[PIMCO whitepaper]
Your Home Country Is Inseparable From Your Withdrawal Rate,
PortfolioCharts
Just give up and hope for the best?… Don’t simply depend on
popular canned US-centric advice to plan your own retirement. Your decision requires the best data
available for you
Why I go to Australia.A Lot. Institutional Investor
In sum, Australia
seems to have found a successful recipe for retirement success that combines
high savings rates at a low cost to government with professional investment
management. In my view, it is the most interesting pension and investment place
on earth today — more valuable as a role model than Canada or the Netherlands
or the U.K. — and that’s why I’ve been spending so much time flying over the
Pacific.
MARKETS AND INVESTING
We are so skewed! Earlyretirementnow.com
The problem is: negative skewness is where the juicy returns
are. And positive skewness is where the sucker bets reside… What’s the explanation? Say thanks to basic
mathematics and statistics, in particular, the “Central Limit Theorem.” It
states that the average outcome from independent draws from even very non-Normal
distributions (e.g. very negatively skewed distributions) will look more and
more “Normal” and thus unskewed. [this is both why I sell options and why it
is psychologically and behaviorally hard]
Do Security Analyst Recommendations Bet On Or Against Academic Findings? Alphaarchitect.com
Given that security analysts are supposed to be
sophisticated investors, and all the anomalies analyzed were in the publicly
available literature, it is surprising to find that while analysts’ return
forecasts predict stock returns, they do so in the wrong direction. It’s
particularly puzzling given the finding from prior research that short sellers
(typically thought of as sophisticated institutional investors, such as hedge
funds) tend to target stocks in anomaly-short portfolios, and that this effect
increases after a paper has been published. It’s also puzzling in light of the
fact that Paul Calluzzo, Fabio Moneta and Selim Topaloglu, authors of the 2015 study
“Institutional Trading and Anomalies,” found that institutions do follow
anomaly strategies, although only after the anomaly is highlighted in an
academic publication.
Fractals themselves will not do anything for you, but
understanding compound interest and how it behaves fractally can make you rich.
What's the Point of Investing? Michael Finke.
…the spending goal should drive the investment strategy. An
investor can be relatively risk tolerant, but if their spending goal is not
flexible (for example, medical spending or living expenses in retirement) then
the investment portfolio should reflect the inflexibility of the future goal.
And the investments selected today to meet that future goal should be those
that offer the highest expected after-tax payout for the amount of spending
flexibility an investor is willing to accept. In a 2012 article in the Journal
of Financial Planning, Duncan Williams of the University of Georgia, Wade Pfau
of The American College and I argued that spending flexibility is how we should
define risk tolerance when matching a portfolio allocation to a future spending
goal. If we can be more flexible with our spending goal, then we can take on
more investment risk.
Perceived Versus Real Risk Tolerance, AlephBlog.com
Investment entities, both people and institutions, often say
one thing and mean another with respect to risk. They can keep a straight face with respect to
minor market gyrations. But major market
changes leading to the possible or actual questioning of whether they will have
enough money to meet stated goals is what really matters to them. There are six
factors that go into any true risk analysis (I will handle them in order):
Retiring in Japan1990. EREVN at medium.com
Last time I looked at the big crashes in US history and
wondered how many people really would have pulled the trigger and retired right
before or during the crash. [can't put my finger on it but I'm not 100% on board with the post yet.]
ALTERNATIVE RISK
Alternative Risk Premia Investing, allaboutalpha.com
the authors deny the idea that ARP constitutes a “passing
fad.” These premia constitute a real solution for investors. But those
investors “should choose which strategy to invest in with considerable care: in
particular, different strategies with the same name cane provide very different
return streams.” Investors should also pay heed to how the ARP portion of their
portfolio is “designed and implemented, as a simplistic approach may lead to
unwelcome surprises.”
In this paper we look at the theory behind alternative risk
premia before discussing some of the practical considerations that should help
investors get the most out of their allocation to these innovative investment
strategies.
Sometimes we feel there is nothing new when it comes to momentum.
However, a new momentum investing paper, “Overpriced Winners,” by Profs Kent
Daniel, Alexander Klos, and Simon Rottke, is really cool and worth
consideration. One key chart from the paper sums up everything:
we also recognize that utilizing style premia in a
multi-asset fashion can introduce complexities, that when unaddressed, can lead
to unexpected (read: poor) performance.
Caveat emptor: understanding how a manager addresses these problems is
critical for establishing long-term expectations.
Trend-following - A century of data suggests there is value,
mrzepczynski.blogspot
The research numbers shows that trend-following is effective
across all major market sectors and long time periods. The Sharpe ratios net of
fees are all positive for every decade since the 1880's. Additionally
diversification with equities is strong with correlation with stock indices
ranging between -.34 and .33. Both short and long-term trend-following is
effective but not necessarily at the same time. The research shows that long-term
trend-following is not sensitive to a lagging or delay of the signals.
In an out-of-sample exercise, we use an asset-pricing model
to simulate returns and we establish that observed portfolios imply that the
share of total wealth held by the top 0.01% should grow on average by 4.5% per
year on average if households simply capitalise their returns, a pace of
increase that is comparable to recent US
estimates. The projected increase in wealth inequality is almost entirely
driven by the fact that the rich hold both more systematic risk (generating
high returns) and more idiosyncratic risk (generating exploding fortunes at the
top), and invest in highly levered private firms (generating returns with a fat
right tail). [ this in my mind is a relatively invisible
source of income inequality pointed out by Piketty in 2014; it's not just that
the wealthy can take more discretionary risk on the margin it's also that they have access to
top tier managers and funds and return profiles that you and I don't due to things like high minimums, investor status, already closed funds they are already in, lockups etc. etc. A retail investor can get access to some of the AQR funds in terms of some of the liquid alts but not so much to Rennaisance, David Tepper, PE funds, Cohen, Louis Bacon, etc. Maybe via pension funds but that is another story altogether worthy of its own post someday. ]
Book Review: Household Finance, CFA Institute.
The three volumes of Household Finance are organized
thematically, affording the reader multiple perspectives on seminal issues in
household finance and investing. These issues include asset allocation and
location, risk aversion, stock trading behavior, underdiversification,
financial literacy, financial advice, influences of culture and heredity on
financial behavior, credit card behavior, and homeownership risk. Most of the
pieces date from 2000 or later and thus address the increased number and
complexity of financial decisions over the past 17 years. In addition, the
writings consider household wealth from a global perspective…The $1,368 price
tag puts this collection beyond the reach of most individual investors but well
within a library’s budget. It is an invaluable reference for researchers,
economists, students of behavioral finance, private wealth managers, product
managers, and public policymakers. Most individuals will not have time to read
all three volumes in their entirety, nor is it necessary to do so.
Collectively, they are a reference work to be accessed for particular areas of
interest. Best suited to an academic or technical readership, the individual
contributions demand rigorous study, for in many instances they use
quantitative methods and statistical analysis to support the authors’
hypotheses.
Homeless Beds V. Local Jail Beds, MetricMaps
Women worldwide in the labor force. FRED blog
A nation’s employment-to-population ratio can provide an
indicator of the health of its labor markets—specifically, how much of the
workforce participates in the formal economy. The map shows worldwide
employment-to-population ratios in 2016, where lighter-colored countries have
higher employment ratios. The data reflect the proportion of the working age
population in various countries employed during the reference period.
Here’s How Americans Spend Their Time, Sorted by Income,
VisualCapitalist
Zero — Invented or Discovered? FarnamStreet
It seems almost a bizarre question. Who thinks about whether
zero was invented or discovered? And why is it important? …. Further
contemplation might illuminate that the zero has something to teach us about
existence as well. If we accept zero, the symbol, as being discovered as part
of our realization about the existence of nothingness, then trying to
understand the zero can teach us a lot about moving beyond the binary of
alive/not alive to explore other ways of conceptualizing what it means to be.
Tally Sticks and the Fundamentals of Money, Tim Taylor
Do you know the true story of how a careless clerk, while
burning up some outdated money, caused the Great Fire of 1834 which destroyed
both Houses of the British Parliament, along with large portions of the Palace
of Westminster? Tim Harford tells the tale in "What tally sticks tell us
about how money works"
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