…for psychologists seeking to understand the apparent nexus
of success and abuse, Weinstein’s apparent downfall is just the tip of an
analytic iceberg. -- Persaud & Bruggen
GRAPHIC OF THE WEEK
RETIREMENT FINANCE AND PLANNING
Why a Retiree Might Keep Going Back to that ATM, Dirk Cotton
Households with limited savings, on the other hand, may well
find that their non-discretionary spending gradually overwhelms their portfolio
spending. Even though the portfolio would be doomed by continued spending, they
will still need to pay for groceries and housing and may have little recourse
other than to keep spending and pray for a tremendous bull market. They may
find themselves in a “spending trap” in which they must sustain their level of
spending simply to meet non-discretionary spending demand with the knowledge
that doing so will most likely soon bankrupt them…Sometimes a retiree may keep
returning to that ATM for as long as possible because she has no better
alternative. That's rational.
Life-Cycle Finance in Theory and in Practice, Zvi Bodie
[2002]
The paper suggests ways that advances in the theory of
finance combined with innovations in financial contracting technology might be
used to improve social welfare by designing and producing a new generation of
user-friendly life-cycle products for consumers. It contrasts the old Markowitz
single-period paradigm of efficient diversification with a new Mertonian
paradigm that takes account of multi-period hedging, labor supply flexibility,
and habit formation.
Using the “Rule of 300”, and plugging in the ranges from the
example above means that projected savings needs for health insurance premiums
would range from $24,900 ($83×300) to $232,500 ($775×300). Each of our
individual numbers will vary based on factors such as age and area of
residence. However, the case of this individual is representative of, and
possibly even underestimates, the challenges faced by those planning to retire
early.
Why geographic arbitrage is so important to retire early and what you can do to about it, earlyretirementnow.com
When I decided I was going to retire early, I needed to
select the country I was going to live in. I decided to move to a country that
would allow me to take advantage of geographic arbitrage, which is defined as
the practice of taking advantage of different prices and tax rates in different
markets.
Oftentimes, a lower cost of living is the most prominent
reason for living abroad , said Olivia S. Mitchell, director of the Pension
Research Council at the University of
Pennsylvania Wharton
School
Ultimately, because our clients are most concerned with the
potential downside, and because Monte Carlo
incorporates not only downside risk, but sequence of returns risk as well, we
use it as the best-available tool in our Financial Plans to answer the
question, “do I have enough?” But these inconsistencies at the extremes are
important to acknowledge. As with any model, understanding it’s sensitivities
and limitations is essential so that we don’t use it to answer a question it
isn’t fit to reliably answer.
The best-laid retirement plans take into account
investment-return assumptions and withdrawal rates. They should also include
planning for unexpectedly early departures from the workforce.
MARKETS AND INVESTING
Losing With a Winning Hand, ofdollarsanddata
even when we know we are behaving optimally, we may not
always get the best results. This is especially true with investing where a
diversified portfolio of broad asset classes with low fees can have periods of
underperformance. Some of your individual asset classes are likely to lose
money in every year, but you should expect this. If everything you own is
moving up all of the time, maybe your assets are too correlated and the next
crash will be particularly ugly.
How Time Perception Influences Investing Decisions,
portfoliocharts
Most people intuitively understand that time is a critical
component of investing. Whether it’s the
time it takes to work and save a portion of every paycheck or the miracle of
compound interest that gets better and better as you go, the importance of time
is a central part of any detailed investing discussion. But the human brain is sometimes ill-equipped
to comprehend things that are far away, and that can lead to some mental
over-simplifications that obscure the reality of future uncertainty. For example, let’s talk a bit about a
question I see come up pretty often: Do stocks get less risky the longer you
invest? …Averages are not the same thing as portfolio account
values, and investors who mentally justify a risky portfolio under the belief
that time will reduce risk could be in for a rude awakening!
Shaking the Hourglass, On Time’s Role in Investing,
ofdollarsanddata
Investing and time will forever be linked together. What is
investing but the sacrifice of current consumption in expectation of increased
future consumption? Investors who want to get rich quickly tend to forget this
truism and the importance of being patient. I understand this, but even I am
surprised by the time horizons over which some of the greatest investors tend
to think.
Lessons From The October 1987 Stock Market Crash,
CapitalSpectator
The event (as first argued by N. N. Taleb) was not an
outlier…These events can happen at any time if there is sufficient panic…All
leveraged investors and traders reached uncle point on that day. [COMMENT: I was in grad school in '87. I remember hanging out in a hallway with 10
people staring at a screen. All 11 were standing there slackjawed]
Replicating Anomalies, Wes Gray
Read this paper if you claim to be an evidence-based
investor. Many of the products and investments you currently hold may be
reliant on funky studies. These strategies often use metrics that don’t
replicate.
The asset allocation set by PRINCO is heavy on equities,
with 95% of the portfolio dedicated to them. However, only 10% of the portfolio
is allocated to US equities. Large portions of the portfolio are also allocated
to high-return categories, such as international, hedged, and private
investments.
Different Kind Of Momentum, Swedroe
I will review the historical evidence on the correlation of
time-series momentum in U.S.
stocks and how it performs when equity returns are negative. In the process,
I’ll examine the question of whether the correlation turns negative when
diversification benefits are most needed.
Low Vol In Perspective, Swedroe
One of the significant problems for the first formal asset
pricing model developed by financial economists, the capital asset pricing
model (CAPM), was that it predicts a positive relationship between risk and
return. However, empirical studies have found the actual relationship to be
flat, or even negative.
I got my 60/40 stock/bond blend! Think again, Mark Rzepczynski
There are a number of ways to beat the simple 60/40 blend in
the long-run. One, add diversifying assets from the list used in the graph
above. .... Two, add hedge fund strategies that have diversification of assets
along with diversification of style. This, for example, could be a portfolio of
managed futures programs which already are globally diversified across a broad
set of markets including equities, bonds, rates, currencies and commodities.
Along with the asset class diversification, investors get strategy
diversification that will often weight long and short positions by trends. The
advantage of managed futures is that there is the opportunity for adding
convexity or portfolio gamma.
Understanding the Momentum Risk Premium: An In-Depth Journey Through Trend-Following Strategies,
Jusselin et al. Ecole Polytechnique, Paris .
Momentum risk premium is one of the most important
alternative risk premia. Since it is considered a market anomaly, it is not
always well understood. Many publications on this topic are therefore based on
backtesting and empirical results. However, some academic studies have
developed a theoretical framework that allows us to understand the behavior of
such strategies. In this paper, we extend the model of Bruder and Gaussel
(2011) to the multivariate case. We can find the main properties found in
academic literature, and obtain new theoretical findings on the momentum risk
premium. In particular, we revisit the payoff of trend-following strategies,
and analyze the impact of the asset universe on the risk/return profile. We
also compare empirical stylized facts with the theoretical results obtained
from our model. Finally, we study the hedging properties of trend-following
strategies. … the traditional diversification approach
based on correlations must be supplemented by a payoff approach. However, most
risk premia have a concave payoff. The momentum risk premium thus plays a
central role as it exhibits a convex payoff, and we know that mixing concave
and convex strategies is key for managing skewness risk in bad times. …
Contrary to traditional assets, the returns of a momentum strategy
cannot be approximated by a Gaussian distribution. This is why the momentum
risk premium has a positive skewness contrary to traditional risk premia. This
result makes the momentum very singular in the universe of risk premia, because
it is certainly the only strategy that presents this property of positive
skewness. However, this does not mean that it is not a risky strategy. … In the end, long fixed-income exposures
contributed more to the momentum risk premium in 2008 than short equity
exposures.
Can Momentum Investing Be Saved? Rob Arnott.
On paper, momentum is one of the most compelling factors:
simulated portfolios based on momentum add remarkable value, in most time
periods and in most asset classes, all over the world. So, our title may seem
unduly provocative. However, live results for mutual funds that take on a
momentum factor loading are surprisingly weak. No US-benchmarked mutual fund
with “momentum” in its name has cumulatively outperformed its benchmark since
inception, net of fees and expenses. Worse, because the standard momentum
factor gave up so much ground in the last momentum crash of 2008–2009, it
remains underwater in the United States, not only compared to its 2007 peak,
but even relative to its 1999 performance peak. This means 18 years with no
alpha, before subtracting trading costs and fees!
Time series or cross sectional momentum - which is better?Your choice may matter, Mark Rzepczynski.
A recent paper called "Time-series and cross-sectional
momentum strategies under alternative implementation strategies" suggests
that times series is actually superior because it does not place constraints on
the winner and loser portfolio. This research is focused on a portfolio of
stock indices, but the intuition can be used to help describe different managed
futures approaches. … However, the
research does show that regardless of approach momentum is still a factor worth
pursuing. [related: Time-series and cross-sectional momentum strategies under alternative implementation strategies]
SOCIETY AND CAPITAL
Your Chances Of Becoming A Millionaire By Race, Age, And Education, Financial Samurai
In other words, there are roughly 11 million millionaires in
America . This
count is at a record high thanks to a bull market in stocks, bonds, and real
estate. Although 11 million sounds like a lot, it still only accounts for
roughly 3.5% of the US
population. I suspect the actual number is higher due to stealth wealth and
plenty of unreported or underreported assets.
Why Simple Beats Complex, Ben Carlson from July 2017
I wrote a whole book on this topic that even says “Why
Simplicity Trumps Complexity in Any Investment Plan” in the title. While I
can’t prove this as 100% fact, here are the reasons why I believe simple beats
complex in the investment world:
The Price of Progress, Michael Batnick
The economic machine that we’ve built in the United
States has done extraordinary things and I
can’t wait to see what we come up with in the future. But what do we do when
progress leaves so many behind?
How Americans Differ by Age, visualcapitalist
From the day of birth, most Americans are told by society
that their life should follow a certain trajectory: go to school, get a higher
education, get married, start a career, and retire as soon as they are gray and
old. For many people, their life story
plays out exactly like this – but people actually do it at very different
speeds, or people end up hitting these milestones in different orders.
Meanwhile, some Americans deviate from the typical path altogether, forging
their own unique stories. Interestingly,
all of these landmark life events can be viewed through the lens of
demographics, and today’s charts from Overflow Data help to tell this tale. In
the below charts, we’ll look at education, employment, and marital status all
visualized based on a spectrum of age.
Gender Lens Investing, Wharton
Gender lens investing — using capital to alleviate the
economic plight of women and girls — is gaining steam. From being a blip on the
screen a mere two decades ago, this field is being embraced by more than 100
private and public funds. And their investment products are getting more
targeted: Investors can put money in funds that aim to improve women’s access
to health care, for example.
The Psychology of Superstar Sex Predators, -- Raj Persaud
, Peter Bruggen
One intriguing finding from this research, published in 2016
in the journal Personality and Individual Differences, is that personality
traits associated with a proclivity for harassment may be “specialized
psychological adaptations” that allow individuals to exploit “niches” in
society. In other words, some sexual predators may seek careers in particular
industries that allow them to exploit others…This last trait – also known as
narcissism – is a key component of the dark triad. Narcissists tend to be
convinced of their own magnificence, and believe that other people should be
flattered to be in their company – even if that involves unwanted sexual
advances. …for psychologists seeking to
understand the apparent nexus of success and abuse, Weinstein’s apparent
downfall is just the tip of an analytic iceberg.
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