RETIREMENT FINANCE AND PLANNING
If you are able to be nimble, able to assess the
ever-changing environment and adapt quickly, you'll always carry the advantage
over your opponent.
In between these extremes, the decision can be more
difficult. The best I can recommend is that you imagine that you are 85 and
your upside portfolio balance just went to zero, a victim of sequence of
returns risk. What is the least amount of income you could have remaining that
would not make your life an economic misery? This is the floor level you wish
to have.
What's a Floor? Dirk Cotton
I begin with the goal of a floor portfolio that provides
near-certain safety-net income and I try to fill it with assets that in
combination mitigate inflation risk, capital market risk, and longevity risk to
guarantee that I can survive improbable but worst-case outcomes. Because floors
are expensive, I build mine as low as I think I could tolerate and then I
structure the rest of my retirement plan to minimize my chances of rolling off
the bed.
Second Childhood
Jonathan Clements
As a gut check, I use the strategy I recommend to others:
Occasionally, I will take my portfolio and assume the stock portion loses 35%,
which is the typical decline during a bear market. I’ll then look at the
resulting hit to my overall portfolio’s value and ask myself, “Would you be
okay with that?” [yes, this is, in fact, the correct question to ask oneself]
Working with Retirement Income Buckets – Webinar Q&A,
Pfau
Our recent webinar on the topic of retirement income
buckets, or time segmentation, was a big hit with many questions coming in. In
the past I’ve tried to reply personally to as many of the questions as I could.
But with travel this week, I became overwhelmed. Also, if one person asked a
question, probably many people had the same question in mind. So I thought I’d
instead provide a list of questions and answers for everyone to be able to
read. Let’s get to it…
The slowing pace of life expectancy gains since 1950, Tyler
Cowen
in many United States
Original link here https://bmcpublichealth.biomedcentral.com/articles/10.1186/s12889-018-5058-9
Hyperbolic Discounting Can Be Good for Your Health, Strulik
& Trimborn
We set up a life-cycle model of human aging and longevity in
which individuals discount the future hyperbolically and make time-consistent
decisions. This allows us to disentangle the role of discounting from the time
consistency issue. We show that
hyperbolically discounting individuals, under a reasonable normalization,
invest more in their health than they would if they had a constant rate of time
preference. Using a calibrated life-cycle model of human aging, we predict that
the average U.S. American lives about 4 years longer with hyperbolic
discounting than he would if he had applied a constant discount rate. The
reason is that, under hyperbolic discounting, experiences in old age receive a
relatively high weight in life time utility. In an extension we show that the
introduction of health-dependent survival probability motivates an increasing
discount rate for the elderly and, in the aggregate, a u-shaped pattern of the
discount rate with respect to age. [the sharp-eyed will recall my suggestion
that hyperbolic discounting might be a useful tweak to retirement PV analysis.
I can't follow their math but I get the general point]
From time to time, we receive comments from readers who
wonder why the recommended assumed investment return/discount rate (currently
4% per annum, or 2% in excess of our recommended annual assumed inflation rate)
used to determine one’s Actuarial Budget Benchmark (ABB) is so low.
Flexibility through going back to work and pursuing a side
hustle will certainly solve some of the problems of the 4% rule. But the side
hustle flexibility is no panacea. A side hustle could potentially last so long,
we might as well consider it a multi-decade-long extension of our corporate
career… So, I have a bit of a dim view on this whole “flexibility” and “side
hustle” mantra in early retirement. I’m glad I worked a few extra years beyond 25x
spending and accumulated more assets to lower my effective withdrawal rate for
my 2018 retirement! That last year before retirement in a nice cushy corporate
career with a window office on the 39th floor: it lowered the chance of working
as a greeter at Walmart at age 69. [see the next link for the analysis of working
longer]
The Power of Working Longer; Bronshtein, Scott, Shoven,
Slavov
increasing retirement saving by one percentage point ten
years before retirement has the same impact on the sustainable retirement
standard of living as working a single month longer. [contemplate that sentence for a minute]
How Much Investment Risk To Take In Retirement: Various Portfolio Compositions To Consider; fiancialsamurai.com
Don’t let money get in the way of a wonderful retirement. Your investments should be a relatively worry-free tailwind that ensures you never have to return to the salt mines again.
MARKETS AND INVESTING
Do Bond Prices Have Momentum? Cullen Roche
This raises a couple of important questions: 1) what is this
theory of inflation? And; 2) does inflation (and therefore bond prices) display
momentum? These are big questions …the
interesting thing about using charts to read the bond market tea leaves is that
it implies that interest rates are primarily a momentum phenomenon. In other
words, when interest rates break X% then there’s a probability that they will
continue higher or lower. As I’ve noted before, momentum works in an equity
market index fund for fundamental reasons – the fund is essentially a
rules-based product that sells losers and buys winners thereby attaching itself
to long-term growth in corporate profits. But should momentum work in the bond
market? … There is no evidence to support such thinking.
We find that expected corporate bond returns are related
cross-sectionally to downside risk, credit risk, liquidity risk, and bond
market risk…Our new factors rely on the unique features of corporate bonds that
distinguish from stocks, hence have superior performance in explaining the
cross-section of expected bond returns, than all established stock and bond
market factor models.
On the Risk of Stocks in the Long Run: A Comment, Ferguson
& Leistikow
We show that diametrically opposite conclusions about
stocks’ long-term risk follow from Bodie’s methodology. Bodie’s conclusion that
stock’s risk increases monotonically with the investment horizon is incorrect.
Conventional wisdom about stock’s long-term risk has not been refuted.
Of course, the all stock portfolio is the one that most
people will say they want to own here because the end result is better. But the
all stock portfolio is also the one that exposes you to a lot more behavioral
risk. And I know from decades of experience seeing people’s behavior in the
markets that it’s the bear markets that do the most damage to people’s
portfolios because that’s when they make all the big mistakes. In other words,
portfolio 2 will generate a marginally worse result, but it’s the portfolio
you’re likely to stay invested in when things go south. And that’s why you
diversify even if you are worried that rates are going to rise.
The Power of Dividend Investing, visualcapitalist
The Dutch East India Company was the first company to offer
shares of stock. It famously paid a dividend that averaged around 18% of
capital over the course of the company’s 200-year existence.
ALTERNATIVE RISK
[Simulations] demonstrate that the payoff of the
trend-following strategy is convex and is similar to a long exposure on a
straddle option… Convex beta [with limited downside and unlimited upside] is
precious and scarce. Among risk premia, momentum is one of the few strategies
to offer this…asymmetry.
Keep Up the Momentum, Thierry Roncalli
The answers can already be found in the technical paper
"Understanding the Momentum Risk Premium" published recently by
Jusselin et al. (2017). However, the underlying mathematics can be daunting to
readers. Therefore, this discussion paper presents the key messages and the
associated financial insights behind these results.
Understanding the Momentum Risk Premium: An In-Depth Journey Through Trend-Following Strategies, JUsselin et al.
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.
Blockchain’s Broken Promises, N. Roubini
Boosters of blockchain technology compare its early days to
the early days of the Internet. But whereas the Internet quickly gave rise to
email, the World Wide Web, and millions of commercial ventures, blockchain's
only application – cryptocurrencies such as Bitcoin – does not even fulfill its
stated purpose.
Timing Bonds with Value, Momentum, and Carry; Corey
Hoffstein
With low current rates and higher durations, the stage may
be set for systematic, factor-based bond investing.
The Behavioral and Performance Benefits of Trend Following,
econompicdata
Trend following has historically provided strong long-term
returns with materially reduced drawdowns relative to a traditional buy and
hold investment, but none of this matters if an investor cannot stick with the
strategy through periods of relative underperformance. This “opportunity cost”
is often felt the most during periods when more traditional allocations
outperform.
Value and Momentum Factors in Fixed Income, Andrew Miller
There are so many different factor products available that
just about every fund company seems to offer them…even Vanguard is launching
their own suite of factor-based stock funds. Note that nearly all of these
products are focused on stocks…not bonds. Why the lack of factor love for fixed
income instruments?
Myth and Reality in the World of Factors, Ferguson
One result of competitively marketing quantitative
techniques to investors is that technical literacy has declined. In particular,
the word "factor" is now so ambiguous that it is almost meaningless.
Do Not Follow The System, priceactionlab
Many academics, instead of dealing with the difficult
problem of changes in market conditions, or regime switches, concentrate on the
easy but even wrong problem of over-fitting. They have succeeded in shifting
the attention of many traders and even professionals to that often at a huge
opportunity cost but they have secured positions and tenure in the meantime.
Measuring Momentum’s Duration For The US Stock Market, CapitalSpectator
Research Affiliates recently advised that “momentum can be divided into fresh and stale momentum, with very different results.” In other words, trending behavior has a life cycle, which implies that hopping on the bandwagon in the later stages of a momentum rally carries more risk than establishing new positions relatively early. Quantifying where we are at any given point for a momentum trade, however, is open to debate, but we can start by calculating some basic statistics as a benchmark. … The current momentum rally, approaching its second birthday, may not be stale just yet, but it’s far from fresh. There may be some kick left in this horse, but a sensible interpretation of the data suggests that the easy money has been made.
SOCIETY AND CAPITAL
Visualizing a Global Shift in Wealth Over 10 Years,
visualcapitalist
The small island nation of Mauritius Africa ’s brightest success stories, with a
195% growth in wealth over the last 10 years. With favorable tax policies,
beautiful beaches, and better relative safety ratings, HNWIs have been moving
to the island en masse.
What Loneliness Does to the Human Body, thecut.com
what they came up with was arguably the least fun 20-item
questionnaire in history.
Two Nobelists in economics, George Akerlof and Robert
Shiller, argue in their book “Phishing for Phools” that all of these results of
capitalist competition should have been central to economic theory in the first
place. In my review[i] of their book, I described their argument as “the exact
same free-market process that Adam Smith lauded for doing a great job of
satisfying mutual self-interests, also incentivizes scamming. It is not
possible to separate the two; they must be part and parcel of the same economic
theory.”
What if we made landowners pay for infrastructure and urban
improvements? After all, under a recent proposal from Governor Andrew Cuomo, New
York New York City
Forget About Setting Goals. Focus on This Instead. James
Clear
Commit to a process, not a goal…Goals are strangely at odds
with long-term progress…Goals suggest that you can control things that you have
no control over.
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