"I really wish my dad had spent more time at work
instead of with me when I was a kid." <-- Said no one, ever. Vhalros onRedditt
But yeah, if you aren't a raging failure of a human being
and actually enrich your children's lives, then [early retirement] is
definitely the best thing you can do with your time. Csp256 on Redditt
GRAPHIC OF THE WEEK
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| The Shape of Ruin Risk 60 year old with moderate assumptions for net real returns - RiversHedge |
RETIREMENT FINANCE AND PLANNING
Two smarter ways to determine how much you can safely withdraw funds in retirement, The Globe and Mail
If you want to see a group of financial experts brawl, ask
them how much it's safe to withdraw from your investment portfolio each year in
retirement. One of the most common answers is to suggest some variation of the
4 per cent rule. Under this guideline, a retiree would take out 4 per cent of
his or her original portfolio in the first year and continue to withdraw the
same amount – but adjusted for inflation – each subsequent year. The 4 per cent
rule offers the undeniable attraction of simplicity. But the more you examine
it, the more unsatisfactory it becomes.
Tactical, But When? Corey Hoffstein, NewFound
"we believe that investors should most actively seek to
manage risk when they are most susceptible to sequence-of-return risk. In this commentary, we seek to identify
exactly when that is."
[COMMENT: I put this link under "retirement finance and
planning" rather than "markets and investing" because I find it
gratifying that the new breed of ETF strategists are not just flogging cool ETF
combinations, returns and fees, they are actually thinking way beyond a
"normal" one-period institutional-investing asset allocation point of
view and are actually thinking about short to medium horizons and the
multi-period effects of a spending constraint on outcomes. This is what I call retirement finance at its
best. This post in particular I think is
a useful extension to the concept of return sequence risk. While this pushes the boundary a bit in terms
of thinking about the positive impact on typical retirees who engage in well-thought-through
tactical approaches I would love to see this type of analysis in the future
feather in a much closer look at: a) younger retirees, say 50 or so, and b)
single premium immediate or deferred annuities as an alternative to a fixed
income positions or tactical allocation. The latter, in
particular, I'm guessing (based on other work I've seen from Pfau and
Tomlinson) would have similar (if not maybe superior?) benefits to outcomes (risk
pooling is one of those few financial instrument that cannot be replicated by a
retail investor): sequence risk is abated, ruin risk declines, and assertive
allocations to equity become almost a no-brainer.]
MARKETS AND INVESTING
When Does Volatility Equal Risk? CFA institute.
A small minority of investors, mostly value investors — a
group to which I belong — take a different view. We think it is the probability
of permanent capital loss, not volatility, that constitutes the real risk.
Neither perspective is entirely correct.
By defining risk as volatility, the random walk theorists
create a paradox. When price fluctuations are less than ± one standard
deviation from the mean, the bell curve has some resemblance to the real world.
In the central region of the bell curve, however, volatility is not risk but a
risk stabilizer. At the tail ends of the bell curve, where real risks reside,
volatility is a meaningless metric because Gaussian statistics no longer work.
…because asset prices exhibit radical randomness, predicting
future returns is futile. Investors should focus on managing risk. To manage
investment risk properly, however, we must first identify what risk truly is.
Unfortunately, the academics view risk as volatility through a distorted random
walk lens.
Correlations v horizon, rcmalternatives
[Embedded quote:] "This example highlights an
omnipresent by rarely discussed challenge with financial time-series.
Specifically, that the measured relationship between variables will almost
always change dramatically across time. This effect is not isolated to
observations over two distinct periods of time; rather, we observe similar
dynamics at play when time series are observed at different frequencies. In
fact, variables can appear to be negatively correlated at one frequency – say
daily – and yet be positively correlated at another frequency – say
monthly!")
So, correlations matter, but like everything in life,
context should come to play. It’s mathematically possible that things not
correlated over long periods are highly correlated over shorter periods (see
our recent post), and likewise possible for negatively correlated time series
over short time periods to be highly correlated over longer ones.
The Philosophy of Goal-based Investment Planning. Michael
Finke
We construct portfolios to minimize risk of annual
volatility. There is little thought given to how and when the money is actually
spent. If the purpose of our savings is to pay for a spending goal such as a
college education or an income in retirement, shouldn’t we focus on how well
the strategy helps us meet our goal? This is the essence of goal-based
investing. … One of the most important benefits of goal-based planning is
simply forcing us to think about what matters most in our lives.
Investors usually understand returns. But risk… risk is more
difficult. Risk involves communicating not just that many outcomes are
possible, but how likely they are.
Investors Do Not Underperform their Investments, Michael
Edesess
sing Pfau’s results, I will prove that the evidence actually
shows that investors do not underperform their investments. I will first
explain DALBAR’s error and then show, using two examples, how serious the error
is. Second, I will describe the conventional wisdom that DALBAR’s error
created, and how deeply entrenched it is. Third, I will explain why this
received wisdom should have been the subject of skepticism in the first place. Fourth,
I will show why Morningstar’s apparent confirmation of the conventional wisdom
is mistaken. Finally, I will discuss another interpretation of poor investment
decision making, and what it may mean.
ALTERNATIVE RISK
The Allure of the Family Office, Institutional Investor
Factor Olympics: Q3 2017, factorresearch
2017 is on track for a good year for factor exposure as most
factors are positive. Quality, Growth, and Momentum are headed for the winners
podium. Value is negative across regions, giving up all of last year’s
gains.
Tail-risk hedging (TRH) strategies profit from significant
market corrections. They may be used alongside or to replace traditional risk
management strategies (e.g., diversification via asset allocation) where the
core portfolios have a significant allocation to equities or other volatile
assets. They may also be used on a standalone basis to profit from market
corrections. [COMMENT: I generally make money on
the other side of this…]
Endowment vs Pension Returns, Karris
the outperformance gap between large endowments and U.S.
public pensions has shrunk since 2008, as pensions have increased allocations
to alternative assets hoping to copy the investment success of endowments… In
the spirit of the more aggressive nature of the Endowment Model, a
well-designed, index fund based strategy could possibly also earn superior,
long-term risk-adjusted returns versus a balanced benchmark. By excluding alternative
assets and focusing on beta to streamline the Endowment Model, it could avoid
many of the drawbacks of the Endowment Model by improving liquidity and
transparency, reducing fees and complexity, and eliminating lock-up provisions
and investment gates.
Lindzon on Momentum , Howard Lindzon
Chart of a momentum ETF...
Momentum Continues To Lead US Equity Factor Strategies.
Capitalspectator
A bull market prevails across all the major US factor
strategies led by momentum, based on one-year returns via a set of proxy ETFs
One former insider at an exchange who reviewed this article
summarized it as the following: The
cryptocurrency world is basically rediscovering a vast framework of securities
and consumer protection laws that already exist; and now they know why they
exist. The cryptocurrency community has created an environment where there are
a lot of small users suffering diffuse negative outcomes (e.g., thefts, market
losses, the eventual loss on ICO projects). And the enormous gains are
extremely concentrated in the hands of a small group of often unaccountable
insiders and “founders.” That type of environment, of fraudulent and deceptive
outcomes, is exactly what consumer and investor protection laws were created
for.
GAM Joins Quant Fund Rush to Sunflower Seeds, Cheese, WSJ
Some investors in the industry have grown concerned about
flagging returns in so-called managed futures, which bet on trends in liquid, mainstream
currency, bond and stock markets. These funds have on average lost money in
both of the previous calendar years. They are down in 2017, according to data
group HFR. That has prompted some
investors to look further afield at harder-to-access markets where fewer hedge
funds have so far ventured.
Using Trend-Following Managed Futures to Increase Expected Withdrawal Rates, Miller Financial. [COMMENT: here is another paper (or, rather: possibly, maybe a tendentious submission to ssrn by a possibly, maybe self-interested individual
party whose site was not available when I looked) on using trend following via
managed futures to improve withdrawal rates.
I use trend following and managed futures so I am not averse to his
arguments. On the other hand I have discussed before here that the impact on
withdrawal that we are/he is talking about comes from volatility reduction and
the making of a portfolio more efficient in a mean-variance sense. That means
that the magic, if any, is not necessarily limited to trend following and/or
managed futures if one wants to improve withdrawal rates, though those two in
particular might be helpful depending on, well, depending on a lot of things.
But I'd have to say Managed Futures, both the publicly available kind as well
as private placements, have sucked a bit of late and by late I mean from about
2010. Or mine have, anyway. That's why links like the one above about GAM
Holding AG exist. My thought? Focus on
efficiency first (and the many ways other than trend following to achieve it) and
then think about trend following in that context second, and then maybe managed
futures as a way to instantiate a trend-following mechanism third if it still
makes sense.]
SOCIETY AND CAPITAL
If we assume that structural and policy changes brought about the reduction in volatility, then, as long as those are maintained, the moderation ought to continue. However, if good fortune is responsible, we may still be waiting for the next shock that will bring about another increase in instability.
Career Or Family? You Only Need To Sacrifice For 5 Years At Most. Financialsamurai
On rational belief equilibria, Kurz Stanford 1994
Holding Rational Beliefs about future prices, producers
maximize expected profits. In a Rational Belief Equilibrium (RBE) agents select
diverse forecast functions but each one is rational in the sense that it is
based on a theory which cannot be rejected by the data. It is shown that there
exists a continuum of RBE's and they could entail very different patterns of
time series for the economy and consequently different aggregate levels of long
term volatility.
The Behavioral and Consumption Effects of Social Security Changes (September 2017). Center for Retirement Research, Hou, Wenliang and
Sanzenbacher, Geoffrey
Policymakers can expect individuals to delay retirement more
in response to Social Security changes that reduce benefits than from changes
that increase revenue. In terms of consumption, policymakers considering
benefit cuts versus revenue increases face a tradeoff: a sharper reduction in
consumption over the shorter span of retirement or a smaller, but more
prolonged, reduction in consumption during the working life.
Hunger Bonds, Tim Taylor interview with Ricardo Hausmann on Venezuela
"So usually you think that the capital markets are
there to provide capital for good ideas that are going to generate value and
pay back the loans and create other benefits for the borrower. So you think of
capital markets as being angels for good in the world. But when capital markets
have to deal with a government that is willing to compromise future cash flows
for any cash up front, and it’s not using the resources to create any good
things for the future, then you’re giving money to an authoritarian regime to
mismanage in the short run and you are condemning the future of the country
with obligations that they will not be able to afford to pay. So that’s why I
call them hunger bonds.
After a review of the literature, we identified three
psychological constructs that help explain the feelings of resentment commonly
felt toward wealthier individuals: (1) money ambivalence and cognitive
dissonance; (2) the psychology of envy; and (3) the theory of relative
deprivation.
But yeah, if you aren't a raging failure of a human being
and actually enrich your children's lives, then [early retirement] is
definitely the best thing you can do with your time. [behold, I am validated]
Rule by Starvation, WSJ book review
About 3.9 million people, or 13% of Ukraine ’s
population, died as Stalin pursued collectivization. Anna Reid reviews ‘Red
Famine’ by Anne Applebaum. “I firmly believed,” remembered one, “that the ends
justified the means. Our great goal was the universal triumph of Communism, and
for the sake of the goal everything was permissible—to lie, to steal, to
destroy hundreds of thousands and even millions of people, all those who were
hindering our work or could hinder it, everyone who stood in the way. And to
hesitate or doubt about all this was to give in to ‘intellectual squeamishness’
and ‘stupid liberalism.’ ” [emphasis added]
Many of the insights of behavioral economics can be viewed
as a very useful warning to be wary of how choices and information are framed
and presented, of how marketing is trying to influence your behavior.
“THE retirement-savings crisis is a women’s crisis,” says
Sallie Krawcheck, co-founder of Ellevest, a financial-advice firm for women in America .
When it comes to retirement income, women are far worse-off than men. The
gender pension-gap may be less well-known than the gender pay-gap, but it is in
fact far larger.
What Income Inequality Means for Economic Growth, John
Balder
This slow rate of growth is linked to the stock of household
debt and income inequality. Part of the political and economic dislocation
within the U.S.
can be traced back to the parlous state of middle class balance sheets
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