“if people are envious by caring about relative wealth, then
free trade may make all parties richer, but may cause envious people to be less
happy. If economics misunderstands human nature, then free trade may
simultaneously increase wealth and unhappiness.”
IMAGE OF THE DAY
RETIREMENT FINANCE AND PLANNING
High Equity Valuations and Retirement,
blog.thinknewfound.com
High valuations suggest that retirement withdrawal rates
that were once safe may now deliver success rates that are no better - or even
worse - than a coin flip. This outlook
is by no means a call for despair, but rather highlights the increasing need
for taking control of one’s destiny by controlling both investment and
non-investment factors that can improve the odds of successfully meeting one’s
retirement goals. [I haven't thought of
Newfound as a retirement or lifecycle finance gurus before but this is pretty
insightful]
A study of 100% stocks and FIRE -- USA 1871-2015, 1-7% withdrawal rate for different periods. zaladin on Reddit.
Using Robert Shillers data, I have plotted all possible
retirement periods from 1871 in the following graphs. Comments are located
within the images. Black color inside a square means "portfolio
failure" (value is less than zero). All returns are real, meaning
including inflation and with reinvested dividends. Diagonal lines show 30-year,
45-year and 60-year periods. Compared to
the Swedish stock market, the US
markets appear much more stable, especially around the world wars. On the other
hand, the 70s seem to have been harder for the US
than for Sweden . [cool charts]
We examine the consequences of alternative popular
investment strategies for the decumulation of funds invested for retirement
through a defined contribution pension scheme. We examine in detail the
viability of specific ‘safe’ withdrawal rates including the ‘4%-rule’ of Bengen
(1994). We find two powerful conclusions; first that smoothing the returns on
individual assets by simple trend following techniques is a potent tool to
enhance withdrawal rates. Secondly, we show that while diversification across
asset classes does lead to higher withdrawal rates than simple equity/bond
portfolios, ’smoothing’ returns in itself is far more powerful a tool for
raising withdrawal rates. in fact, smoothing the popular equity/bond portfolios
(such as the 60/40 portfolio) is in itself an excellent and simple solution to
constructing a retirement portfolio. Alternatively, trend following enables
portfolios to contain more risky assets, and the greater upside they offer, for
the same level of overall risk compared to standard portfolios.
MARKETS AND INVESTING
Unlike the traditional theory of portfolio growth, this
paper imports ideas from evolutionary biology and population genetics, focusing
on the relative wealth of an investor rather than on the absolute wealth.
Relative wealth is important financially because success and satisfaction are
sometimes measured by investors relative to the success of others (Robson 1992,
Bakshi and Chen 1996, Clark and Oswald 1996, Clark, Frijters, and Shields 2008,
Corneo and Jeanne 1997, Frank 1990, Frank 2011). When one investor is wealthier
than the other, that investor should roughly mimic the other’s behavior in
being more or less aggressive than the Kelly criterion. Conversely, when one
investor is poorer than the other, that investor should roughly act in the
opposite manner of the other investor (Orr 2017). https://ssrn.com/abstract=2900509
derives optimal strategy for a game with known payouts and
probability, but uncertain limits on total payout and number of betting
opportunities. It further develops some general gambling principles applicable
to practical risk taking situations in which all parameters are uncertain and
robust approximate simple solutions are required. [interesting but everything I've ever read from Aaron Brown is more opaque than necessary. It's not just that it is complex it seems like he goes the extra mile to purposely obscure the main point. This is especially true of his book on risk management]
The Problem With too Much Portfolio Diversification, Corey
Hoffstein, WSJ
With too many levers to pull, we run the risk of quibbling
about a 3% position in gold instead of focusing on the things we can
control–and are likely more important–like our risk tolerance or our savings
rate. [Mr. Hoffstein, on the other hand, contra the previous comment, is both smart and readable, quantitatively skilled, and gets to the point.]
Human Capital, Social Security, and Asset Allocation, Gordon
Irlam
Numerical stochastic dynamic programming is used to explore
the effects of stochastic human capital and Social Security on optimal asset
allocation and consumption decisions over the lifecycle for typical
individuals. Optimal asset allocations are very stock heavy pre-retirement, and
quite stock heavy post retirement. Individuals should adopt declining equity
allocations while employed, and level to slightly rising equity allocations
during a stochastic retirement. Early in the working years almost the entire
income should be consumed. Consumption should typically continue to increase
until late in retirement, when it will be forced to fall. [I generally make sure I read every word of what G Irlam puts out. He is very severely under-recognized as a savant in the retirement and lifecycle finance universe and probably should be...recognized, that is]
On advisor fees, Bloomberg.
“There are people charging 2 percent or more,” he said. “I
don’t know how they get away with it.” … “If financial planning is going to be
a profession,” he said, “there’s going to be a need to be a tighter match
between what you charge and the service you provide.”
[This is a ssrn repost of a 2007/9 paper. This compliments and reiterates many of the ideas in posts I have done in the past on geometric returns and geometric frontiers,
posts that I created after reading a number of papers by R Michaud, Mindlin,
Meucci, and others. ]
of Asset Markets. Belkov et al.
In other words, the group of investors using the portfolio
rule λ* drives all the others
out of the market, which is interpreted in Evolutionary Finance as the property
of global (holding for all initial states) evolutionary stability of λ*. [all this is above my paygrade
but having taken a rudimentary class in game theory two years ago, I thought the idea in the paper was
interesting. Maybe someone with more
math can decode this for me. The interest is also because I just read the book by Andrew Lo on evolutionary finance (more accessible. Expect to see more of this type of thing in the future.]
ALTERNATIVE RISK
The Quant Quake, 10 years on, extracalpha
there’s more risk of another Quake than there was 10 years ago.
In 2017 we’re seeing evidence of crowdedness and poor performance in standard
strategies, with alternative data sets exhibiting far stronger performance.
Quants need to build systematic processes for evaluating new data sources, and
should view alternative data as a prime directive
YES. When combined into a multifactor bond portfolio, large
reductions in tracking error, increases in the information ratio as well as
significant alphas were observed. Outperformance relative to the IG and HY bond
markets were .78% (sig) for the IG multifactor bond portfolio and
3.31%(sig) for the HY multifactor bond
portfolio. [interesting because I attempt a factor type strategy on fixed income that works pretty well.]
Fluxionization Trading Strategy For S&P 100 Stocks,
priceactionlab
Isaac Newton’s idea of fluents and fluxions changed
mathematics, physics and the world. Very briefly, a fluxion is the
instantaneous rate of change of a fluent at a given point in time. The
Fluxionization™ strategy makes use of these ideas and probability theory to
trade long-only S&P 100 stocks. [I believe that Fluxionization goes by another name: calculus. Also not sure why it is proprietary but maybe he has some secret sauce...]
Insights from the World’s Top Academic FX Researcher,
Alphaarchitect.com
We identify a ‘slope’ factor in exchange rates. High
interest rate currencies load more on this slope factor than low interest rate
currencies. This factor accounts for most of the cross-sectional variation in
average excess returns between high and low interest rate currencies. A
standard, no-arbitrage model of interest rates with two factors – a
country-specific factor and a global factor – can replicate these findings,
provided there is sufficient heterogeneity in exposure to global or common innovations.
We show that our slope factor identifies these common shocks, and we provide
empirical evidence that it is related to changes in global equity market
volatility. By investing in high interest rate currencies and borrowing in low
interest rate currencies, US investors load up on global risk.
When Winning Isn’t Enough, Sean McLaughlin
Let’s say this new market wizard is pulling 5–10% profits on
his capital out of the market consistently every month. These are BIG TIME
numbers. Legends are born with these numbers. But if he’s trading a $25,000
account, this means his net profits are $1250-$2500 per month. Respectable, but
tough to pay for rent/mortgage, debts, car payments, and groceries. And God
forbid he should experience a garden variety pullback in his performance! [While I find his recent string of posts to be depressing, he does speak the truth to trading platitudes]
Skewness and Momentum, Yuecheng Jia and Shu Yan
We document two opposite effects of return skewness on
momentum profits. For individual stocks, momentum profits decrease with
skewness while for industry portfolios, momentum profits increase with
skewness. The findings cannot be explained by existing risk factors and stock
characteristics. For individual stocks, the evidence is consistent with the
behavioral theory of return skewness as well as the skewness preference theory.
For industry portfolios, the evidence is consistent with the interpretation of
portfolio skewness as a measure of asymmetric inefficiency.
SOCIETY AND CAPITAL
Of all the corrupters of moral sentiments, therefore,
faction and fanaticism have always been by far the greatest."
Visualizing the Diversity of the Tech Industry,
visualcapitalist.com
Today’s infographic from Information is Beautiful breaks
down the demographics of 23 major tech companies, based on statistics from
2016. It also provides comparisons to the composition of the U.S.
population in general, the top 50 U.S.
companies, Congress, and Fortune 500 CEOs.
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