The trade-offs and interaction between rebalancing and trend-following

From "Bending the return curve with rebalancing using trend-following," by Mark Rzepczynski at Disciplined Systematic Global Macro Views http://mrzepczynski.blogspot.com

A frequent rebalancing strategy is like selling straddles. Alternatively, trend-following is similar to buying straddles. Hence, incorporating a trend component with rebalancing will change the portfolio return convexity. There may be a middle ground whereby rebalancing is done in conjunction with following trends. This may allow the best of both strategies. If markets are trending, delay rebalancing. If they are not trending, follow a regular rebalancing schedule.

I like it, but what signal or signals for the trend, Mark?

Ken Steiner on Actuarial Balance Sheets

Ken Steiner just put out a new post (Yes, Determining How Much You Can Afford to Spend in Retirement is More Difficult than Saving for Retirement. April 26 2019) at http://howmuchcaniaffordtospendinretirement.blogspot.com

Not only do I think this is the correct method, and not only do I think this conveys the correct tone and sensibility and skepticism, this is also almost* exactly how I manage my own process.

"almost*" means two things because I enhance the ABB with a couple things:

Adding Monevator to my blog list plus the false precision of spend rates

*(I think abnormal returns was directing you here???--> A hidden variable if the link was about errors in spending or wealth compounding over time)

I was reading an enjoyably reasonable post at the Monevator (How to improve your sustainable withdrawal rate) yesterday.  One of the things I like about what I read is that it looks like he/she has skin in the game when it comes to the idea of decumulation. That makes the content, right or wrong, worth 10 times a lot of the academic dreck that I read.  The exploration feels essential.  Few have "it." Dirk Cotton does. Darrow Kirkpatrick does. Francois Gadenne is not a blogger, but he does. Ken Steiner does. Most academics with W2 income and pensions don't really feel it as far as I can tell.  Most quant-finance bloggers are hyper focused on portfolios, single period math and haven't even thought about consumption or longevity yet. Newfound Research is an exception. Moshe Milevsky is an academic but he's also a genius retirement-quant and knows this stuff to a depth I can't even aspire to.  I want to lease part of his brain for a year or two.  Monevator?  I will add it to my blog list.

20 year Trend Index Returns

I'm not totally sure why I wanted to see this. I think it's because I'm turning 61 this year and a horizon of 20 years would put me at ~80.  By 80 I'm probably going to be very slowed down -- most of my family has either had heart attacks or become demented by then -- and I think I want to annuitize a fair chunk of what's left of capital by then in order to hedge out what's left of lifetime consumption over a period where I am less concerned about what happens.  That means my planning horizon (today) is shortening but it's not tiny and I need to make sure I am judicious about how I manage what I have between now and then.  20 years seems like a reasonable look-forward horizon. 

Overthinking Social Security Claim Age

I've lost count of the number of articles on social security claiming strategies I haven't read.  I've skipped them because I just assume age 70 as a policy choice. But since I am turning 61 this year I should just confirm that policy...maybe sooner rather than later.  I have no real idea what the un-read articles argue but my thought is that it has to be, should be, based on longevity expectations assuming that one is not in dire straights and needs the cash now.  Maybe a reader can help me out on this. 

Newfound on withdrawal rates and path-dependency

It's hard to convey how refreshing it is to see asset managers and quants show respect for decumulation analytics.  It is a lot more rare than you think it is.  Here is a recent post from Newfound Research on path dependency and perfect withdrawal rates (The Path-Dependent Nature of Perfect Withdrawal Rates). I have no comment other than "I'm glad." Some selected excerpts (some redundancy due to excerpting from the summaries and conclusions but it's worth it to emphasize key points) below but you can read it for yourself:

Pictures and Fear

I copied the following in its entirety from statmodeling.stat.columbia.edu because it might as well be the RH anthem:

“Sometimes all we have left are pictures and fear”: Dan Simpson talk in Columbia stat dept, 4pm Monday  

Posted by Andrew on 17 April 2019, 8:16 pm  

4:10pm Monday, April 22 in Social Work Bldg room 903:
Data is getting weirder. Statistical models and techniques are more complex than they have ever been. No one understand what code does. But at the same time, statistical tools are being used by a wider range of people than at any time in the past. And they are not just using our well-trodden, classical tools. They are working at the bleeding edge of what is possible. With this in mind, this talk will look at how much we can trust our tools. Do we ever really compute the thing we think we do? Can we ever be sure our code worked? Are there ways that it’s not safe to use the output? While “reproducibility” may be the watchword of the new scientific era, if we also want to ensure safety maybe all we have to lean on are pictures and fear.
Important stuff.

A hidden variable

I haven't thought this through very carefully but I thought I'd throw out a quick impressionistic riff anyway.  The idea here came from some past work where I convinced myself that even though the 4% "rule" is common in the personal finance literature and even though consumption smoothing (e.g., the 4% rule's method) is considered to be an expression of risk aversion in the macro-econ lit, a 4% constant inflation-adjusted spend is actually quite risk-seeking due to the compounding effects of errors.

Trend Following and Portfolio Longevity

In a previous post (Trial run: effects on "Perfect Withdrawal Rates" from allocations to trend following) I tried to make a case that trend following, if an allocation to that particular alt-risk could actually trim some left-tail return risk, might be able to expand spending capacity over a lifetime. I didn't say it at the time but that is more or less also saying that trend following, given the same caveat but with the added constraint that spending stays the same (and constant...yes I know, an unfortunate assumption), can enhance portfolio longevity. This would look like a non trivial outcome if one were to happen to be at the end of one's portfolio and one realizes that one forgot about portfolio design and alternative risk. I guess that's kind of obvious but the purpose of this post is to take a closer look at this idea.
Let's set up a fake world in the RH lab (tm) to test it out.  We'll start with some cagey steps into the assumptions that will let us look at this, not all of which even I buy. 

Trend Following and Commitment

I've done a couple posts on trend following in retirement portfolios over the last month. NewFound Research has a new Trend Equity index out so I thought I'd take that for a spin. Their index is what they call a "specification-neutral implementation of the trend equity style" which means that that it is a multi-model, mix parameterization and tranched-rebalance approach and therefore, I guess, lends itself to reducing inter-model comparative idiosyncrasies. Plus it goes back to 1928. We'll use it.

The question is something like this: "If I were to allocate to something that behaves like the index, what happens to convexity and returns if I hold it for different horizons."

Stochastic Retirement Start Age - Blanchett on Retirement Starts

I feel partially vindicated.  David Blanchett has a 2018 paper (Blanchett, David M. 2018. “The Impact of Retirement Age Uncertainty on Retirement Outcomes.” Journal of Financial Planning 31 (9): 36–45) that finally broaches a point I made as recently as 2017 -- but predates my blog at least back to 2015 when I was trying to post stuff on LinkedIn -- that retirement start age is underappreciated as a random variable. Here are some excerpts from Blanchett:

• Research suggests people tend to retire earlier than expected. Retiring early can have a significant (negative) impact on a retiree’s likelihood of achieving retirement success.

• A nonlinear relation exists between actual and expected retirement age, where individuals targeting retirement before age 61 tend to retire later than expected, and those targeting retirement at an age after 61 generally retire approximately a half-year early for each additional year targeted past age 61

• Incorporating retirement age uncertainty into a financial plan can have a significant impact on required retirement savings levels. 

Selected excerpts from G Irlam's "Asset Allocation Confidence Intervals in Retirement"

With apologies for the double negative, I am never not interested in Gordon Irlam's work. Someday in the hall of retirement finance he will have his statue, the more-so for not being (as far as I can tell) a formal academic or practitioner though he has got more than enough capability for both.

I found this 2015 paper (Asset Allocation Confidence Intervals in Retirement SSRN 2675390 Oct 16 2015) interesting for it's conclusions which are more thorough, but not totally divorced from, some points I've made here, but at a much more rudimentary level: asset allocation matters but only within a pretty broad range of weights.

With almost no comment, here were some of the points I pulled out: