QUOTE OF THE WEEK
"Everything simple is false. Everything which is
complex is unusable."[1] Paul Valéry
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http://conversableeconomist.blogspot.com/2017/09/interview-with-lawrence-katz-inequality.html
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RETIREMENT FINANCE AND PLANNING
What Age Do Most People Retire In America ?
Financialsamurai
The reason why most Americans are able to retire by 66
despite so little wealth is due to Social Security, a traditional pension, and
retirement work plans. LIMRA reports that some 41% of retirees have annual
income less than $25,000. Of retirees with income over $50,000 a year, about
80% draw from a pension or retirement plan… Unfortunately, virtually nobody
under 40 is going to have a traditional pension any more.
What’s Happening to U.S. Mortality Rates? Boston
College
The cycles over the last 40 years have reflected
developments in medical drugs and technology, access to health care, and risky
behaviors such as smoking and those associated with obesity. The gains in
mortality improvement have been skewed toward those with higher educational attainment and more income...The
key debate is whether the future will mirror the past, with average rates of
improvement of about 1 percent, or whether the pace of progress will slow.
while the IRS RMD SWP may be a tad simpler than the
Actuarial Approach, we believe that doing the more exact actuarial calculations
is definitely worthwhile and can improve retirement outcomes even more. This is why our website tagline reads, “The
spending budget website for intelligent retirees and pre-retirees (and their
financial advisors) who aren't afraid to do a little number crunching to get
the right answer.” The following
paragraphs discuss why we believe you or your financial advisor may be making a
mistake using the “simpler” IRS RMD SWP advocated by Mr. Tomlinson to determine
your spending budget in retirement or to determine when you should retire or
how much you should be saving for retirement.
MARKETS AND INVESTING
A new research paper applies complexity theory to changes in
euro area fixed income markets that arose from non-conventional policy. It finds
that quantitative indicators heralded critical structural shifts in unsecured
money markets and high-grade bond markets.
Surviorship bias, Ben Carlson
If any of these 110 people worked in the investment business
they probably would have started their own newsletter — My Secret Formula for
Winning the Lottery. … most people are better off learning how to get their
personal finances in order and investing in themselves than trying to find home
run investments that will change their lives.
Rule of thumb myths, Ben Carlson
you have to think in terms of total returns to understand
the relationship between bond performance and interest rates.
Major Asset Classes | September 2017 | Performance Review,
CapitalSpectator
The Frustrating Law of Active Management. Corey Hoffstein -
Newfound
…for a strategy to outperform in the long run, it has to be
hard enough to stick with in the short run that it causes investors to “fold,”
passing the alpha to those with the fortitude to “hold.” In other words, for a
strategy to outperform in the long run, it must underperform in the short
run.
Dispelling a Myth About Stock Market Volatility, Aaron Brown
I think the reason the myth is popular among economists
insulated from markets is that they assume anything that reduces leverage, even
a bubble, reduces risk. This is one reason regulators seek risk in the wrong
places: They look where prices have fallen and apparent leverage is high; while
the risk is mostly where prices have risen and apparent leverage is low.
We argue that investors are better off using the implied
cost of capital based on analysts' earnings forecasts as a forward-looking
return estimate. Correcting for predictable analyst forecast errors, we
demonstrate that mean-variance optimized portfolios based on these estimates
outperform on both an absolute and a risk-adjusted basis the minimum volatility
portfolio as well as naive benchmarks, such as the value-weighted and
equally-weighted market portfolio. The results continue to hold when extending
the sample to international markets, using different methods for estimating the
forward-looking return, including transaction costs, and using different
optimization constraints.
ALTERNATIVE RISK
Challenge and reality for hedge funds - Beating the stock-bond blend, Mark Rzepczynski
Nonetheless, instead of comparing performance or value-added
to a stock index, the relevant benchmark should be a stock-bond blend. This is
a higher hurdle for hedge fund value-added, but is more realistic because
investors are already starting with a diversified portfolio. Hedge fund
relevance is based on the marginal contribution to an existing portfolio not
against a single asset class. [of course
it is; this is how I've benchmarked alt since ~2005]
it’s always better to be the uniquely informed investor. We
don’t pretend otherwise. But unique is also much harder to evaluate (skill
versus luck, real versus data mining versus lucky good draw) and much harder to
find and invest in scale. Known strategies have the advantage of, well, you
know about them! And they are often available in scale. If the known strategies
make sense to you, if they have a great body of in- and out-of-sample evidence
behind them, and if they pass some basic intuitive tests of whether they’ve
been arbitraged away or not, then it makes no sense to ignore them. Don’t be
blasé about the potential problems that might come with extreme crowding into
these strategies, but also don’t assume that once something is known it’s gone
forever from that day onward, and thus ignore good diversifying strategies that
we believe will be with us for quite a while — and are needed now more than
ever!
Volatility Risk Endures, Swedroe
However, among the many alternatives from which to choose,
there are really only a few you should contemplate. They …Are supported by the
academic literature, meaning they have provided premiums that have been both
persistent and pervasive, come with intuitive risk-based or behavioral-based
explanations, and survive implementation costs.
Can be implemented using products under SEC regulation. Tend
to have low correlation with the returns of traditional portfolio assets. May
not necessarily be cheap by index fund or ETF standards, but don’t come with
the typical “2-and-20” hedge fund fees.
Risk Premia and the Preference for Asymmetric Gambles,
Conine Jr. et al.
Recent research has studied the impact of asymmetry on cost
of capital estimation, performance evaluation, and optimal portfolio
composition. This study examines the impact of skewness preference on the risk
premium of a gamble. The three-moment analogue of the Pratt-Arrow risk premium
is derived for asymmetric gambles that are not necessarily actuarially neutral.
It is seen that the standard Pratt-Arrow risk premium is biased down (up) for
an actuarially neutral gamble that has positive (negative) skew. [I won't
pretend that I understand the paper but this is a type of confirmation of a
behavioral bias towards positive skews, gambling and lotteries. Since casinos and insurance companies make
money taking the other side, this is also confirmation of the potential for
positive risk premia in selling options/volatility where there is a different type of skew, which I have been known to
do. This tags along well with the previous link]
Asset allocation dispersion risk - The cost of wrong allocation picks is significant, so you need macro gamma, Mark Rzepczynski
We believe that this is one of the chief reasons for holding
global macro and managed futures. Managed futures will provide for better
downside protection during those times when the market is in turmoil and there
is a chance for a large market decline. The manager can switch exposures quickly
through trading futures both long and short.
Alternative Risk Premia: Is the Selection Process Important?
Naya, Haute école de gestion (HEG) de Fribourg
To summarize, this research paper shows that investors need
to take no short cuts. When it comes to allocate capital to ARP, an extensive
due diligence process is required to select both the indices and their
providers.
SOCIETY AND CAPITAL
On Productivity, Morgan Housel
…we underestimate our potential when we only view
productivity through the lens of creating new inventions, ignoring how much
unnecessary productivity-sapping social nonsense we put up with, but shouldn’t.
Out-of-school children of primary school age by world region,
Ourworldindata.org
2,000 Years of Economic History in One Chart,
visualcapitalist
Incentives, Farnamstreet
You do not want to be in a perverse incentive system that’s
causing you to behave more and more foolishly or worse and worse — incentives
are too powerful a control over human cognition or human behavior. If you’re in
one [of these systems], I don’t have a solution for you. You’ll have to figure
it out for yourself, but it’s a significant problem.
Katz (together with co-author Claudia Goldin) have argued
that the most important reason behind rising wage inequality is that in the
race between rising demand for skilled labor and rising supply of skilled
labor, demand has surged ahead. The implication is that the appropriate
long-run response to address inequality would be to aim at a dramatic increase
in the share of Americans receiving higher education. However, others have
emphasized other issues that might relate to the role of inequality, like
effects from increased international competition, or have pointed out that the
rising incomes of top corporate executives doesn't seem to have an obvious link
to a shortage of skilled college-educated workers. In this interview, Katz
argues that rising demand for skilled labor remains the primary cause of
greater wage inequality, and that a substantial increase in the share of
Americans receiving quality higher education from the public sector is the
appropriate answer.
Faux male feminists, NYT
Saving Money and Running Backwards, Morgan Housel
But tons of savings, in the eyes of those who saved it,
represents tons of hard work – from you, or someone who left it for you. You
worked your ass off for it. So of course you’re paranoid about losing it. And
of course it’s a treadmill, because savings often only scales when you
sacrifice more. This also explains why people who didn’t work hard for their
money – lottery winners, for example – often go broke. They have no sweat
equity in their bank account… the dream perpetually feels better than the
accomplishment.
On Finding Your Purpose and the Beauty in Investing.
Ofdollarsanddata.com
Investing is the grand equalizer of the world. It does not
care about your gender, race, religion, sexual orientation, or any other aspect
of your identity. Market returns do not discriminate. Gains and losses are
shared without prejudice. And, no matter how smart you are, you cannot outsmart
the market consistently. This fact is humbling and showcases the incredible
power of the market. It is amazing to me how the market acts more like a
biological system than almost anything humans have ever created. The market has
fractal properties and it’s always evolving. Morgan Housel calls it the
unsolvable puzzle.
Is There a Retirement Crisis? Examining Retirement Planningin the Household and Government Sectors, Andrew Biggs
This paper reviews a range of studies of the adequacy of
household saving, comparing estimated dollar savings shortfalls with unfunded
liabilities in Social Security, in federal employee and uniformed military
pensions, and in state and local government retirement plans. Even the most
pessimistic forecasts of household undersaving fall short of the most
optimistic estimates of government retirement plan underfunding. It appears
that, on average, households are doing at least as well in saving for
retirement as governments are in funding retirement plans on households’
behalf.
Global Warming Asset Pricing, Tirodkar, U Aukland
I find no evidence for the existence of a cross-sectional
temperature risk premium. Furthermore, industry temperature betas do not
predict outcomes of the 2015 Paris Agreement, and firm temperature betas do not
correlate with self-disclosed exposures to environmental risk. Trading
strategies also reveal that a long-short temperature portfolio does not
generate significantly negative abnormal returns. Results provide no evidence
of priced temperature risk in U.S.
markets. I attribute the lack of results to the long time horizons of climate
change induced disasters and investor diversification options.
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