In other words, to disagree well you must first understand
well. You have to read deeply, listen carefully, watch closely. You need to
grant your adversary moral respect; give him the intellectual benefit of doubt;
have sympathy for his motives and participate empathically with his line of
reasoning. And you need to allow for the possibility that you might yet be
persuaded of what he has to say. Bret Stephens
GRAPHIC OF THE DAY
RETIREMENT FINANCE AND PLANNING
Coping with Sequence Risk: How Variable Withdrawal and Annuitization Improve Retirement Outcomes, Joe Tomloinson
Both the level and the sequence of investment returns will
have a big impact on retirement outcomes. Poor returns during the early years
of retirement are bad news. However, the particular withdrawal strategy used
affects sequence risk, and an approach where withdrawals are variable and
respond to portfolio performance can improve retirement outcomes. I’ll examine
the evidence and then use my own modeling to show how a strategy that combines
variable withdrawals with partial annuitization using a single-premium
immediate annuity (SPIA) maximizes the cash available for consumption.
A Multi-Objective Decision Framework for Lifecycle Investment, Timmermans et al.
In this paper we propose a multi-objective decision
framework for lifecycle investment choice. Instead of optimizing individual
strategies with respect to a single-valued objective, we suggest evaluation of
classes of strategies in terms of the quality of the tradeoffs that they
provide. The proposed framework takes inspiration from psychological theories
which, on the one hand, assert that humans analyze risky choice situations in
terms of several competing factors, and, on the other hand, recognize that
attribute overload is detrimental to decision making. In particular, we use
SP/A (security-potential/aspiration) theory as developed by Lopes and co-authors.
The proposed approach is illustrated in a simple lifecycle model. As decision
factors, we consider (a) the contribution paid, (b) the ambition level
(targeted level of retirement income), and (c) the guarantee level (a level of
retirement income that will be achieved with high probability). In terms of the
tradeoffs generated between these indices, we compare a class of traditional
lifecycle strategies, defined in terms of a glide path, with a class of so
called collar strategies.
Annuitized Income and Optimal Asset Allocation, Blanchett
and Finke.
An investor who either buys an income annuity at retirement,
or who has a higher level of guaranteed income through a pension or Social
Security, should hold a different asset allocation than an investor who holds
little guaranteed income. We use current annuity and bond prices to estimate
optimal equity allocation for retirees with varying levels of guaranteed income
who have higher and lower preference for income stability and bequests. We find
that increasing annuitized income has a strong impact on optimal equity
allocation. The average retiree will see their optimal equity allocation
increase by roughly one percentage point for each percentage point increase in
annuitized total wealth. Our results provide insight into prudent asset
allocation recommendations for clients who haver higher levels of annuitized
income. [emphasis added]
Framing Longevity Income, Guillemette et al. Texas
Tech
This paper analyzes the effect of framing on the stated
demand for longevity income products. We test whether longevity income framed
as “insurance” is more attractive than longevity income framed as an “annuity,”
since pure life longevity income is consumption protection. In a sample of
1,425 respondents, we find that when longevity “insurance” is shown before a
longevity “annuity” that respondents are less likely to state a demand for a
longevity “annuity.” In addition, we identify characteristics of respondents
who are more likely to succumb to longevity annuity framing effects.
Implications for financial planners and annuity providers are discussed.
Overall, our analysis suggested that retirement withdrawal
rates that were once safe may now deliver success rates that are no better – or
even worse – than a coin flip…[but] When a tactical strategy is combined with
other incremental planning and portfolio improvements, such as prudent
diversification, more accurate spending assessments, tax efficient asset
location, and fee-conscious investing, a modest allocation can greatly boost
likely retirement success and comfort.
this research explores how spending and relationship quality
contribute to life satisfaction in retirement, controlling for financial and
human capital factors. The results provide evidence to suggest that leisure
spending, health status, and spousal and friend relationships have the greatest
impact on creating life satisfaction during retirement, while other type of
spending and children relationships do not.
MARKETS AND INVESTING
Mass Psychology Supports the Pricey Stock Market, Robert Shiller
Investing Is The Ultimate Case Of FOMO, FinancialSamurai
I’ve come to realize that investing may be the ultimate case
of FOMO. Spending all your money on useless things doesn’t even come close. Let
me explain why in three reasons.
Raising Modern Portfolio Theory (MPT) from the Dead, CFA
Institute
MPT is a tool in an adviser’s toolbox — one they can choose
to use or not. Behavioral finance and MPT are not at odds with each other or
mutually exclusive. In fact, they work well together. Investment paradigms
benefit from the mosaic of research and ideas that continue to advance our
field.
Cognitive bias cheat sheet, betterhumans.coach.me
Every cognitive bias is there for a reason — primarily to
save our brains time or energy. If you look at them by the problem they’re
trying to solve, it becomes a lot easier to understand why they exist, how
they’re useful, and the trade-offs (and resulting mental errors) that they
introduce.
ALTERNATIVE RISK
What we don't internalize is confidence. We're never on the front foot when taking
risk because we've programmed ourselves to expect shortcoming.
A 5 Factor Evaluation, Swedroe
All asset pricing models, by definition, are flawed or
wrong. If such models were perfectly correct, they would be laws (such as the
laws we have in physics). But that doesn’t mean asset pricing models don’t
provide value. As Fama and French note in their conclusion: “Complete success
is almost certainly impossible, but less-than-perfect models can provide useful
descriptions of expected returns.”
Riding the wave, aima.org
The paper opens with an overview of the commodity trading
advisor (CTA) sector, highlighting the significant growth that has taken place
in the managed futures industry in recent years and explaining how the managed
futures strategies that CTAs employ work in practice. The breadth of sub-strategies
under the managed futures umbrella are then examined. The third part of the
paper examines the benefits and perceived risks to investors of allocating to
managed futures strategies and also addresses various common misunderstandings
about CTAs. The paper concludes by exploring the common ways as to how
investors can access the various investment strategies that are available.
We are all quants now, abnormalreturns
“Program, program, program, program.”
SOCIETY AND CAPITAL
“You can make the argument that we are living in Peak
Asshole,” says Robert Sutton, a Stanford professor who, as the author of the
iconic 2007 book The No Asshole Rule, is perhaps the world’s leading expert on
the species. According to Sutton, the problem of “disrespectful, demeaning, and
downright mean-spirited behavior” is “worse than ever,” which, while it may be
bad news for humanity, is good news for The Asshole Survival Guide, the book
Sutton came to New York to
promote.
How College Endowments Learned to Love Risk, Bloomberg
The second report, published in 1969, argued that
universities and colleges should aggressively pursue risk in the quest to
increase their endowments. Its principal author, John Barker, an academic and
member of Smith College’s Investment Committee, compiled data on the
performance of 15 elite university and college endowments and found them
lacking. It predicted that a continuation of outmoded investing strategies
would have “highly adverse consequences for long-term endowment values.”
ESG: don’t let perfect be the enemy of good,
abnormalreturns.com
That being said ESG isn’t all about performance. In fact,
those investors who say you can definitely have your ESG (cake) and eat it
(returns) too are likely overstating the case. Cliff Asness at AQR thinks ESG
investors should be willing (and have to) sacrifice returns in order to follow
their conscience.
In the real world, no one has full and complete information
about economic interactions. But is that an argument for or against free
markets? For or against government regulation? The answer seems to be "all
of the above."
Longitudinal Determinants of End-of-Life Wealth Inequality,
Poterba et al.
This paper examines inequality in end-of-life wealth and the
factors that contribute to individuals reaching this life stage with few financial
resources. It analyzes repeated cross-sections of the Health and Retirement
Study, as well as a small longitudinal sample of individuals observed both at
age 65 and shortly before death. Most of those who die with little wealth had
little wealth at retirement. There is strong persistence over time in the
bottom tail of the wealth distribution, but the probability of having low
wealth increases slowly with age after age 65. Those with low lifetime earnings
are much more likely to report low wealth at retirement, and to die with little
wealth, than their higher-earning contemporaries. The onset of a major medical
condition and the loss of a spouse increase in the probability of falling into
the low wealth category at advanced ages, although these factors appear to
contribute to wealth decline for only a small fraction of those who had modest
wealth at age 65 but low wealth at the time of death.
New jobs are clustered in the economy's best-off places,
leaving one of every four new jobs for the bottom 60% of zip codes.
Model Averaging and Persistent Disagreement, St.
Louis Fed
Our paper shows why model selection might not be such a bad
idea after all. The basic problem with averaging is that it forces models to
compete. Competition is great when the rules are fixed and fair. But here, the
time-varying parameter model can effectively alter the rules of the game in its
own favor.
Wealth Patterns in the United States, Tim Taylor
it's broadly true that those who are older or who have better education
levels also tend to have higher net worth. However, mean net worth does tend to
diminish just a bit for the older age groups, which makes some sense if that
group is consuming wealth and passing it wealth to younger groups. The bottom
half or so of the American population has relatively little in net worth, but
it's not obvious from this table how big a problem that is. After all, one
would expect most people in their 20s to have little net worth, and even people
in their 30s who potentially have big home mortgages and high student debts
might not have high net worth. The more troublesome groups, which are not the
focus of this overview report, would be those in their 40s who are not yet
taking real steps to accumulating wealth, or those in their 50s and 60s who are
approaching retirement but have not yet accumulated much wealth.
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