QUOTE OF THE DAY
Crash risk has been high throughout the post Financial
Crisis period, yet there has not be a crash. mrzepczynski
…when will the damn break? Or maybe we should be asking will
the damn break? These dizzying returns will stop at some point… but when that
is — is the million dollar question. Which camp are you in? rcmalternatives.com
RETIREMENT FINANCE AND PLANNING
Got “Lumps” in Your Sources of Income or Your Expenses? Smooth Them Out with the Actuarial Approach, Ken Steiner.
It is just kind of silly to assume that your expenses are
going to remain constant in Real Dollars from year to year. At some point during your retirement, you or
your spouse is going to decide that your house needs a new roof, the kitchen
needs to be remodeled, you need one or more new cars, etc. As the old saying goes, “Expenses
Happen.” And these larger expenses are
unlikely to fit into your recurring annual expense budget. This is why
we suggest that you establish reserves for unexpected expenses
and other non-recurring expenses (in addition to your reserves for Long-Term
Care and bequest motives, and general Rainy Day Funds to dip into if your
investments perform poorly). To the
extent that these expenses are covered by reserves for this purpose, there may
be no effect on your annual recurring spending budget (although you may have to
build the reserves up again for the next unexpected expense, and this could
reduce your annual recurring spending budget). [I have not yet found a reason
to disagree with one of Mr Steiner's posts. I have written before that spending
is, contra retirement finance papers written by people that have not retired,
not smooth it is a random variable which has consequences.]
Raising Cash: My Retirement Withdrawal “System” Darrow
Kirkpatrick
Regular readers here might be disappointed that I still
don’t have a consistent personal “system” in place for withdrawing retirement
income. I’m an engineer, after all. I prefer to solve my problems once and for
all, by automating a solution. It would be very appealing to simply have a
retirement “paycheck” show up every month, on autopilot, no human intervention
or decisions required. And that’s my long-term goal. But the reality is that
I’m not there yet.
Optimal Asset Allocation Towards the End of the Life Cycle:To Annuitize or Not to Annuitize? Moshe Milevsky [1996]
As a byproduct, using our own estimates, we are able to
confirm the intuition shared by many in the financial planning community.
Namely, given the empirical evidence on the cost structure of annuities, the
adverse selection implicit in annuity mortality tables together with the long-
run propensity for equities to outperform fixed income investments, otherwise
known as time-diversification, it makes very little sense for consumers under
the age of 80 to annuitize any additional marketable wealth. In essence, the
rate of return from a life annuity can easily be "beaten" using
alternative investment assets. The exception to this rule is the event in which
(mean reverting) interest rates are extraordinarily high or when consumers have
private (asymmetric) health information that would lead them to believe that
they are much healthier than average, both of which rarely occur.
An often-touted advantage of annuities is that they offer
mortality credits due to the pooling of mortality risk – survivors receive a
return boost from those who die. Although the general concept of mortality
credits is widely understood, the underlying math is not. Understanding the
math can help with decisions such as the best age to purchase an annuity and
which type of annuity to purchase. Such an understanding can also be useful in
debunking some popular beliefs about annuities. [editor's choice for today's links]
A retirement plan involves more than just finances. Rather
than beginning at your savings, the starting point for building a retirement
income strategy should be the household balance sheet. [Can't emphasize this
enough. I'm always surprised at how
infrequently this approach is discussed except for at dedicated sites like Ken
Steiner's]
For those who intend to retire early, the end result is that the Social Security Administration’s projected benefits calculation may turn out to be substantially higher than what someone will actually receive if they retire early, and never actually work as many years as anticipated. The lower someone’s lifetime earnings overall, and the earlier he/she retires, the more dramatic the impact can be, commonly reducing benefits by 5% to 10% when retiring early, and potentially far more for “extreme” early retirement. Although the impact is also substantially affected by whether recent earnings were higher or lower than their long-term average… and whether they’ve already paid into the Social Security system for at least 35 working years (or not).
For those who intend to retire early, the end result is that the Social Security Administration’s projected benefits calculation may turn out to be substantially higher than what someone will actually receive if they retire early, and never actually work as many years as anticipated. The lower someone’s lifetime earnings overall, and the earlier he/she retires, the more dramatic the impact can be, commonly reducing benefits by 5% to 10% when retiring early, and potentially far more for “extreme” early retirement. Although the impact is also substantially affected by whether recent earnings were higher or lower than their long-term average… and whether they’ve already paid into the Social Security system for at least 35 working years (or not).
Has the Personal Finance Passive-Pendulum swung too far? Are
we willfully ignoring some useful principles from active investing for fear of
shaking the foundations of the Passive Investing Mantra? … Forget about the 4% Rule!
It’s should be called the 4% Rule of Thumb! Specifically, withdrawal rates
should actively respond to economic fundamentals (in addition to idiosyncratic
factors)
MARKETS AND INVESTING
The Role of Bonds. Batnick
In my view, there are two main reasons to own bonds today.
First, they should provide stability in the event of a shock to the stock
market (high quality bonds, that is). Second, when this happens, they are your
financial and emotional dry powder.
The hidden genius of robo-advice, abnormal returns.
As predicted software moved up the value chain in the
investment world, lowered costs and standardized outcomes. However the genius
of the robo-advisor model isn’t the efficiency of its software. It is getting a
wide swath of American investors to overcome their aversion to algorithms and
let some one else do the driving.
There may be a crash, but let's not get ahead of ourselves, mrzepczynski.
Financial crashes are rare events, but these rare events
have direct impact on any risk assessment, the pricing of risk assets, and
portfolio structuring. The impact of these rare events is through the
probabilities that investor may associate with them. If the price of any
security is the discounted value of future prices times their probability, a
higher weight for negative events will pull down expected prices.
ALTERNATIVE RISK
The Career Risk Traders Are Unaware Of. Sean McLaughlin
But the one thing that was never communicated to me, and I
don’t believe I’ve ever seen written about or rarely talked about, is what
happens to the Trader (like me) who’s been at this business for most of his
professional life, and then finds himself out of money and needing to find some
income — any income — to support his family? I’ll tell you what happens: You
discover that you have a resume that makes a dry desert bed appear fertile. You
discover that you have little or no transferrable skills that “check the right
boxes” for recruiters and machines that scan your online job application. You
find that you’ve spent little time “building your network” because you’ve been
solely focused on building your trading account because that was what was
supposed to take care of you — until it doesn’t anymore. And then you find
yourself seemingly alone, without options, without savings, and desperate.
That’s where I find myself today. [this is really depressing but correct]
The reason for choosing an option that binds behavior is
that the inflexible algorithm is superior in performance relative to the
discretionary flexible choice. The relative difference in performance will
determine the price for maintaining flexibility. If flexibility is painful or
costly, an investor will more likely bind to a rules-based approach. Now, the
research suggests that individuals place more negative weight on model
uncertainty even if an algorithm does better overall than discretion. This
suggests that the pricing of choice (binding versus flexibility) is not easy to
measure.
Risk-managed momentum allows investors to increase the
Sharpe ratio of the momentum strategy and to reduce momentum crashes. Yet, the
improvement in the performance comes at the price of often assuming a levered
position on plain momentum. I show that leverage-constrained investors benefit
from a risk-managed momentum strategy that scales the momentum exposure with
the past realized positive semi-variance of momentum returns rather than with
the past realized variance.
Euphoria, RCM.
While the rest of the world is consumed by what’s happening
in Washington , Wall Street (and
the equivalent Avenues, Boulevards, and so forth across the world) seem they
couldn’t care less about the drama as they keep putting in new all-time highs.
These days, with friends and family asking about shorting volatility, it
doesn’t seem like an investor can make a wrong decision about broad based stock
indices, with World Stocks up near 20% YTD, U.S. Stocks at +12% YTD, and nearly
every other asset class making gains in July. Even the dismal long-only
commodity sector made gains to break a string of six straight months of losses.
SOCIETY AND CAPITAL
In Sierra County , California Nemaha County ,
Kansas
When Income Is More Important Than Net Worth, Financial
Samurai.
But after I left the workforce, my entire money ideology
shifted towards a net worth mindset because I wanted to take a break and
preserve capital. In essence, a net worth mindset reflected a burnt out man who
didn’t want to hustle any longer. .. Net worth is still more important than
income when it comes to financial freedom. Just don’t get carried away by
completely forsaking your income generating abilities once you’ve achieved a
comfortable number, especially during a bull market. At least find ways to make
money through activities you truly enjoy. Who knows. You might surprise
yourself one day!
In a world of many languages, it is efficient if
everyone shares a second language. In a world of many currencies, it is
efficient if everyone shares a second currency. In the current world economy,
that common second language has been English and the common second currency has
now been the US dollar for a half-century…As Kindleberger points out in the
essay, debates over a widely shared second language or second currency are
inevitably controversial in political
terms, because culture and prestige are at stake. He writes: "The basic
question that will be left unanswered is whether economic efficiency is less
important in these matters than political appearances, which many other
observers would probably call political reality. It is possible that it is, but
economists are accustomed to having doubts. At the least, I would insist that
there is a trade-off between economic inefficiency and political appearances
which must be explicitly evaluated to see whether the cost in one is worth the
benefit in the other."
This article examines the eight largest global data sets of
terrorist group longevity, covering 1968-2013. The samples vary considerably,
but the percent of groups that do not survive beyond their first year in these
relevant data sets is between 25-74 percent. Across all data sets, on average
about 50 percent of terrorist organizations do not make it past their first
year. There is some variation depending on group motivations, consistent with
Rapoport’s “wave” theory. However, overall, terrorist organizations appear to
be more durable than the conventional wisdom suggests.
Shariah-compliant equity portfolios (SCEP), Raza and Ashraf.
Does the Application of Smart Beta Strategies Enhance
Portfolio Performance? The Case of Islamic Equity Investments @ ssrn. The empirical findings suggest smart beta
SCEPs not only outperform traditional market capitalization-weighted (MCW)
portfolios but also SCEPs following a MCW strategy. Low-risk SBs yield the
highest risk-adjusted returns and reduction in the probability of fund
redemption across all regions. The supremacy of the SBs clearly indicates the
value proposition for investors and fund managers alike.
Does Government Crowd Out the Family? Yanovskiy
We show that mandatory pension insurance might contribute to
the reduction in fertility, with a lag of 40 years. Legislation encouraging a
high level of female employment and mandating no-fault divorce rules is tested
as an additional factor contributing to the divorce rate hike and birth rate
fall. [this paper would probably garner a "trigger warning" in most
western liberal arts colleges -- a transnational micro aggression, perhaps…]
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