QUOTE OF THE DAY
We might retire from the workforce, but we should never
retire from the pursuit of a fulfilling life. - Johnathan Clements
RETIREMENT FINANCE AND PLANNING
How to Invest and Spend Wealth in Retirement? A Utility-Based Analysis. Bilsen, Bovenberg, Laeven.
This paper explores the optimal consumption and investment
behavior of a retiree who derives utility from the ratio between consumption
and an endogenous habit. By developing a non-trivial linearization to the
budget constraint, we are able to derive closed-form policies. This enables us
to explicitly characterize how the preference parameters determine the optimal
return and consumption smoothing mechanism and investment strategy. We also
consider an extension which decouples relative risk aversion from the
elasticity of intertemporal substitution. We show that under this extension
habit formation no longer leads to unrealistically high median growth rates of
consumption at the end of life.
Hello, I’m Not Mr. Money Mustache, Chris Mamula @
canIretireyet.com
While people “outside the cult” waste time arguing over why
someone else is not really retired, they miss the much bigger point.
That’s why you have your money: so that you can do what you
want with it. But the odds of you going home with more money than you started
with are vanishingly small. It’s possible…
Minimizing Regret, Dirk Cotton.
We can't make a blanket statement about the outcomes, true
enough, but we can make a blanket statement about the quality of the decision…The
dollar amount of regret can be defined as the difference between the outcome
you expect and the outcome that would have resulted from clairvoyance [Markowitz once admitted to defaulting to a
50/50 asset allocation based on a theory of regret. I am not immune to the allure of regret-based
analysis]
Traditional finance theory assumes that risk aversion is not
time varying, but a growing
body of empirical research suggests that risk preferences
change with market conditions
and over time. Using a unique dataset with daily responses
to a risk tolerance
questionnaire completed by participants in US defined
contribution plans, the authors
find significant evidence that risk aversion is time varying
for older investors.
The Three Levels Of Financial Independence:Because Money Is Only Part Of The Equation, financialsamurai.com
Contrary to what you may think, financial independence is
not all about having enough money to cover all your expenses and then some. Financial
independence also means being able to overcome your psychological fears to
truly live free.
MARKETS AND INVESTING
The Long-Run Drivers of Stock Returns: Total Payouts and theReal Economy, alphaarchitect.com.
Results show that total payouts are a more stable proxy for
corporate payouts than dividends. Inconsistent with previous research, this
study provides evidence that long-run growth in total payouts can be estimated
from the long run growth in the real economy.
ALTERNATIVE RISK
Managed futures is not trend-following but it is close -Broadening the product spectrum has added strategy complexity, Mark Rzepczynski
There may be more money coming into managed futures but it
is at lower fees; consequently, there has been a move to develop new strategies
that are explicitly marketed as non-trend-following quant or trend-following
plus. These products have added models
attached to a core strategy. Complexity has been added to either justify higher
fees or to differentiate product offering from the core trend product.
Do you really want to live with a 60/40 allocation in 2018?- Follow the numbers and you will likely underperform; Mark Rzepczynski
If you want to beat your target return and the 60/40
average, you will need to look outside the usual asset allocation box.
Bitcoin and Portfolio Diversification: Evidence from Portfolios of U.S.,European and Chinese Assets, Kajtazi & Moro
This research explores the effects of adding bitcoin to an
optimal portfolio (naïve, long-only, unconstrained and semi-constrained) by
relying on a mean-CVaR approach. We explore bitcoin’s role in portfolios of U.S. ,
European and Chinese assets. We back-test to compare the performance of
portfolios with and without bitcoin for each scenario. The results show that by
adding bitcoin, the portfolio performance improves; but this depends more on
the increase in returns than in the reduction of volatility. In addition, the
overall benefit is mainly the result of the high returns obtained in 2013 with
marginal advantage thereafter. We conclude that bitcoin may have a role in
portfolio diversification even if our analysis confirms its speculative
characteristics.
Systematic Investment Strategies, Daniel Giamouridis in FAJ
One of the most important developments in institutional investing in recent years is the shift to systematic, rules-based
investment strategies—of any kind—from purely passive (index investing)
to
semi-passive (smart beta) to quant (factor-based) and other
investment strategies.
A case for Levered ETFs.
NewFound
Levered ETFs are often dismissed as trading vehicles, not
suited for buy-and-hold investors due to the so-called “volatility drag.” We
show that the volatility drag is a component of all compounding returns,
whether they are levered or not. We explore the impact that the reset period
can have on Levered ETFs and demonstrate how these ETFs may be used in the
context of a portfolio to introduce diversifying, alternative exposures.
SOCIETY AND CAPITAL
The Math Doesn’t Work, Michael Batnick
if we do enter an environment where stocks do 5% and bonds
do 3%, then the chances that $75 billion (22% of $341B) can generate returns of
16% is slim to none. One step that pension funds can make is to lower the
assumed rate of return. Unfortunately, there are real costs involved in doing
this.
When Invoking Poverty and Necessity is a Ruse ,
Tim Taylor.
I'm often in favor of programs that transfer resources to
the poor--and only to the poor. But it's worth being wary of the political
dynamic which uses the poor as as stalking horse for policies and programs with
rather different effects.
Property tax update, John Cochrane
People with lower incomes spend a larger fraction of income
on housing, and so pay more property taxes as a function of income…this fact is
not commonly recognized when assessing the progressivity of taxes.
Number of deaths from natural disasters, All natural disasters, Ourworldindata
Greed as a Source of Polarization, Philly Fed.
In this paper, we show that, in standard models of lobbying
and electoral competition, a free-rider problem amongst potential
contributors leads naturally to a divergence in campaign contributors without
any divergence in candidates’ policy positions. However, we go on to show that
a modest departure from standard assumptions — allowing candidates to directly
value campaign contributions (because of “ego rents” or because
lax auditing allows them to misappropriate some of these funds) — delivers the
ability of campaign contributions to cause policy divergence.
Why Hackers Hack: Motives Behind Cyberattacks, Visual
Capitalist
Cyberattacks caused $450 billion of damage to the global
economy in 2016, and this number is predicted to keep rising as we keep adding
more connected devices to the mix. The magnitude of this impact should not be
understated. It’s bigger than the size of notable economies like the UAE
($371B) or Norway
($370B) – which is why it’s no surprise to see organizations putting major
resources to shore up their internal defenses and to reduce the risk of
threats. But while the origins of this cybersecurity boom may be clear, what is
less obvious is why all of this hacking is happening in the first place.
Since 2014, the plant has been extracting heat from
underground, capturing the carbon dioxide released in the process, mixing it
with water, and injecting it back down beneath the earth, about 700 meters
(2,300 ft) deep. The carbon dioxide in the water reacts with the minerals at
that depth to form rock, where it stays trapped. ... In other words,
Hellisheidi is now a zero-emissions plant that turns a greenhouse gas to stone.
... Critics laughed at those pursuing a moonshot in “direct-air capture” only a
decade ago. Now Climeworks is one of three startups—along with Carbon
Engineering in Canada
and Global Thermostat in the US —to
have shown the technology is feasible. The Hellisheidi carbon-sucking machine
is the second Climeworks has installed in 2017. If it continues to find the money,
the startup hopes its installations will capture as much as 1% of annual global
emissions by 2025, sequestering about 400 million metric tons of carbon dioxide
per year.
Dolphin Capital Theory, Alex Tabarrok at Marginalrevolution
The dolphins are not only gaming the system they are saving
and using a capital structure to increase total output.
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