Weekend Links: Retirement Finance, Markets, Alt Risk

QUOTE OF THE DAY

No contriving reality to suit the self.  --Dōgen

CHART OF THE DAY 

From: Sensitivity of Safe Withdrawal Rates to Longevity, Market and Failure Risk Preferences with Implications for Asset Allocation. Butler, Philbrick et al. 

RETIREMENT FINANCE AND PLANNING

Markowitz, 1991: Individual versus Institutional Investing "…financial research for the individual…is not my specialty…an evening of reflection convinced me that there were clear differences in the central features of investment for institutions and investment for individuals, that these differences suggest differences in desirable research methodology, and that a note on these differences may be of value."    Also, here is Pfau on Markowitz: "In 1991, Nobel laureate and MPT founder Harry Markowitz wrote about how MPT was never meant to apply to the investment problems of a household. Rather, it was for large institutions with indefinite lifespans and no specific spending objectives for the portfolio. This should have been a eureka moment for the entire retirement income industry, but MPT is still misapplied today." 

Stress is One Reason People Retire, Center for Retirement Research Boston College. " A new study by researchers from the University of Michigan and the Rand Corporation uncovered three characteristics that promote working longer that exist in a variety of jobs: low stress, stable job demands and duties, and the ability to transition to part-time work." 

A Random Walk, A Sequential Game, Part 3, Dirk Cotton, Retirementcafe.com.  "Retirement finance is not a “set-and-forget” decision that we implement and never revisit. It's a series of moves in a sequential game…This series or “chain” of discrete states (ages) has the characteristic that the values of next year's state are dependent only upon the information provided in the current state and what happens this year. Anything that happened before reaching the current state is no longer relevant. (Mathematicians refer to this as a discrete-time Markov chain.)"   See Also: Use the Actuarial Approach to Win the “Retirement Finance Game”  Ken Steiner.  

Housing, Health Are 1/2 of Elderly’s Costs, CRR Boston College.

The Value Of Sound Financial Decisions, Wade Pfau at Forbes.com. "The research identifies how good decision making can enhance sustainable lifetime income on a risk-adjusted basis. The ability to spend more than you could have otherwise effectively means your assets are generating a higher net return after accounting for taxes, fees, and good decision making, which makes the higher spending possible." 

The Value of Sound Financial Decisions: From Alpha to Gamma, Wade Pfau at Forbes.com.  "By making…improved financial decisions, retirement income can be increased dramatically…[in one example] on a risk-adjusted basis, retirement income is 31.8% higher for the individual making good financial planning decisions relative to someone making naïve planning decisions." 

One Retirement Number You Can’t Afford to Get Wrong, Darrow Kirkpatrick.  "…when it comes time for the major financial decisions, like leaving a career, or choosing an investment strategy in retirement, you can’t afford to ignore taxes." 

What Would A Good Retirement Plan Look Like? Dirk Cotton.  "A good retirement plan, viewed in retrospect, would be one that had a high probability of achieving the individual household’s retirement goals. In other words, it was a good bet." [Opinion: Good article and I hang on most of Dirks words but I think the metaphor is a little off here.  I understand that Dirk likes Game Theory but I also think that a good bet (his metaphor for retirement) like a good trade is different than a retirement plan in the sense that bets and trades work over the long run of many trades/bets/games (probability plus risk/return combine to produce a positive outcome over many tries) where retirement, on the other hand, is a single bet/trade/game that even with positive probability can fail.  In trading you can have a 40% win rate but if you have high and well controlled risk/return, over enough trades (or bets or games) you make money.  In retirement if you have a plan with 90% probability of "winning" you have to deal the following: a) you must accept the 10% chance of loss, and b) you can't play it again.] 

How To Not Run Out Of Money In Retirement, NPR  

Retiring After 65 May Help People Live Longer, WSJ  

Forecasts vs. Future Planning, Pragmatic Capitalism.  "…these critics are missing the very important point that one should conclude here: not that we can correctly predict the future, but that we should establish realistic and high probability expectations for the future so we can plan appropriately. When you hear someone say that future market returns might be lower you shouldn’t run out and sell all of your stocks and invest in a bunker. Good financial planners and advisers establish future return expectations so they can establish financial plans that have a high probability of success." 

Sensitivity of Safe Withdrawal Rates to Longevity, Market and Failure Risk Preferences with Implications for Asset Allocation. Butler, Philbrick et al. "…a forecast model is proposed to link Safe Withdrawal Rates to contemporaneous stock market valuations and interest rates, with strong statistical significance." 

Confusion Reigns On Retirement Spending Strategies, CNBC. 

Average American Household Approaching Retirement Has ThisMuch Saved Up. Motley Fool on USAToday. "This means the median household approaching retirement has a nest egg of between $10,000 and $20,000. This number is drawn down significantly because 41% of these households have no retirement savings whatsoever." 

The median retirement account balance for workers age 55-64 is $76,381, according to Vanguard.

The Role of Exponential-Growth Bias and Present Bias inRetirement Savings, Stanford Institute for Economic Policy Research. "This study provides important insights as to the prevalence and influence of cognitive and motivational barriers toretirement savings. In particular, we measure the presence of EG bias and present bias, relate them to retirement savings behavior, and assess how treatments designed to mitigate these biases affect response to hypothetical opportunities for saving within an employer-provided retirement plan." 

MARKETS AND INVESTING

For Bondholders, Rising Interest Rates Can Have An Upside. Vanguard. "Conventional wisdom holds that interest rate increases are bad for bond portfolios. But in fact, depending on your time horizon, you can benefit from rising rates." [Opinion: It took me a couple of years to internalize the same logic but under select scenarios, he is correct.] 

8 Reasons You Should Be Your Own Financial Advisor. White Coat Investor. 

The Evolution of the “Hussman Chart.”  Jeff Miller of NewArc Investments, Inc.  "Be careful about investing your money using analysis you do not really understand!" 

Another Bull$%^* McKinsey Prediction,  Barry Ritholtz. "This report does one of the things I like least: It makes a forecast." 

The Mistake That Separates Most Traders From the Pros, BloombergView. Goetzmann and his coauthors hypothesize that because of availability bias, investors give too much weight to recent information in assessing crash probabilities. They speculated that whenever the media reports on bad news about the stock market, investors will overreact…. [result:] After the media speak in negative terms, investors end up giving a significantly higher estimate of the crash risk. The front page is what drives this result."  

Take a Hint from Goldman: Squeeze More Out of Your Cash. Jason Zweig, WSJ. "Getting extra yield without extra risk takes a bit of work. But cash accounts are perhaps the only area of investing where you can increase your returns 25-fold — or more — without incurring greater risk. For larger investors, wringing out more yield this way can add up to hundreds, even thousands, of dollars in extra income annually."  

Behavioral Finance Not Just About Chasing Returns. ThinkAdvisor.com.  "Crosby, author of the forthcoming book “The Laws of Wealth: Psychology and the Secret to Investing Success,” designed Nocturne to practice behaviorally informed investing “from top to bottom.” The firm’s products are designed for investors keen on socially responsible and values-based investing."  

Finding The Optimal Rebalancing Frequency – Time Horizons Vs Tolerance Bands, Michael Kitces.  "the research suggests a superior rebalancing methodology is to allow portfolio allocations to drift slightly, and trigger a rebalancing trade only if a target threshold is reached. If the investments grow in line and the relative weightings don’t change, no rebalancing trade occurs. However, if these “rebalancing tolerance bands” are breached, the investment – and only the investment – that crosses the line, is then bought or sold to bring it back within the bands." 

Put Buffett's Advice Into Action With These Two ETFs, Bloomberg. “My advice to the trustee could not be more simple. Put 10% of the cash in short‐term government bonds and 90% in a very low‐cost S&P 500 index fund. I believe the trust’s long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions, individuals—who employ high fee managers.” 

Misbehavioral Finance: Countering Emotional InvestmentDecisions, Goldman Sachs at Advisor Perspectives. "… we believe today’s environment demands a renewed focus on “softer” skills such as managing behavior. Here are five common behavioral biases we often see in the marketplace as well as potential solutions…"  

The Worst Bear Market That Nobody Ever Talks About, theIrrelevantInvestor.com.  "The longest bear market didn’t begin in 1929 or 2007, but rather on January 11, 1973.  The 437 days from peak-to-trough gave birth to many well-known value investors and also left in its wake a generation of brokers that would never return to Wall Street." 

How Much Are Those Dividends Costing You? Meb Faber. 

Indexed Annuity: Masking Risk, Not Destroying It, ThinkNewFound. "Fortunately, indexed annuity-like payoff structures can be created with stocks, bonds, and options.  By evaluating these replicating portfolios, we can start to develop a more complete cost/benefit analysis and perhaps better understand how these types of products may or may not fit into certain client portfolios." https://blog.thinknewfound.com/2016/05/indexed-annuity-masking-risk-not-destroying/

Markowitz’s Portfolio Selection, The Personal Financial Engineer. "The major problem is the misunderstanding and misapplication of his work by practitioners on how to properly use his models. The concept of the optimized efficient portfolio teaches us to diversify among uncorrelated assets, but it is up to us as investors to understand the expected behavior of those assets and the risks that we are taking." 

The Impact of Index Investing: A Follow-Up, Philosophical Economics.  "…the decision of what asset classes to invest in more broadly, or whether and when to invest at all–whether to just keep the money in the bank, and for how long–is a decision that is much more difficult to offload onto someone else, or onto a systematic process.  Even if an advisor is used, the client still has to make the decision to get started, and then the decision to stick with the plan…Naturally, we should expect a space in which unskilled investors are forced to make these decisions for themselves–without experts or indices to rely on–to exhibit greater inefficiency, and greater opportunity."  [The AbnormalReturns link title for this: "The case for a truly global, passive, multi-asset class ETF."] 

Costs Really Are Good Predictors of Success, Morningstar.com.  "All told, cheapest-quintile funds were 3 times as likely to succeed as the priciest quintile." 

ALTERNATIVE RISK

What You Should Remember About the Markets (psychology of trend following), Dualmomentum.net.   If we do not have systematic investment rules, it is easy to succumb to our emotions that cause us to buy and sell at inappropriate times. 

Activists Have Declared War on Hedge Funds — and They MightBe Winning, NYMag.com.  "The perception that hedge funds are a raw deal for everyone but their fee-fattened managers has not only become mainstream with astonishing speed, it has begun to pose a threat to an industry that pretty recently seemed to be on top of the world."  

Smart Beta Investing Awaits Its Advocate. Bloomberg. "The financial industry is littered with fake “innovations” that claim to be a godsend for investors, but in reality are just the latest cash cow for financial institutions. Smart beta, however, may actually be the real thing -- if it can deliver on its promise of automating the best of traditional active management and then bring that service, affordably, to investors." 

Momentum Rules the Markets; Investors Should be Wary, WSJ.  "“These rallies are starting to feed on themselves,” cautioned Edward Meir, a strategist at INTL FCStone." 

How Secretive Hedge Funds Hurt Investors, WSJ. "A new study finds that secretive hedge funds outperform their more transparent peers when the market is rising. But when the market crashes, the secretive funds lose significantly more money."  

Low-Vol Investors: Beware of Rising Rates.  Chief Investment Officer.  "Don’t mistake low-volatility strategies’ strong historical performance for return premiums, Greenline Partners has warned." 

Smart Beta Indexes Fall Short of Factor Investing, CIO.  " Research shows popular smart beta indexes fail to fully capture factor exposures." 

Is Tactical Broken, Corey Hoffstein at thinknewfound. "We find it highly unlikely that humans have stopped exhibiting these behavioral biases since they are deeply rooted in human psychology and present in many walks of life, not just investing.  Therefore, for trend-following to be “broken,” we’d have to believe that trends have been eliminated by increased efficiency or market manipulation."  

Smart Beta In Fixed Income, Nathan Faber at thinknewfound. "While there is a limited set of smart beta fixed income ETFs available in the market, thoughtful strategies can mimic some of the benefits of smart beta fixed income, leading to portfolios with better overall risk management."  

In Defense of Hedge Funds (Or Is It a Hedge Fund HorrorShow?) BloombergGadfly. 

A Primer on Alternative Risk Premia, Hamdan et al. SSRN. "It appears that many traditional risk factors, with the exception of long equity and credit exposure on developed markets, vanish when we include alternative risk premia." 

Momentum and Fractal Math [not read], Berghorn & Otto. 

SOCIETY AND CAPITAL

Frugality is Hard to Afford, Orhun & Palazzolo, University of Michigan. Abstract: Households commonly utilize strategies that provide long-term savings for everyday purchases in exchange for an increase in their short-term expenditures. They buy larger packages of non-perishable goods to take advantage of bulk discounts, and accelerate their purchases to take advantage of temporary discounts. We document that low income households are less likely to utilize these strategies even though they have greater incentives to do so. Moreover, results suggest a compounding effect: the inability to buy in bulk inhibits the ability to time purchases to take advantage of sales, and the inability to accelerate purchase timing to buy on sale inhibits the ability to buy in bulk. We find that the financial losses low income households incur due to underutilization of these strategies can be as large as half of the savings they accrue by purchasing cheaper brands. We provide causal evidence that liquidity constraints inhibit the use of these money-saving strategies.  

Rise in Fraud Reports is Unrelenting, SquaredAwayBlog, Boston College. " Not surprisingly, the FTC said Florida had the highest rate of reported fraud per resident last year." [ I live in FL ] 

To Break a Phone Addiction, Turn Your Screen Gray. The Atlantic. 

Key Environmental Metrics for Investors: It’s not JustCarbon. S&P Dow Jones Indices. "…investors may want to make sure that carbon is not the only environmental factor they consider. It is clear, for example, that water is increasingly becoming an investment issue."  

Falling Job Tenure in one Graph, Conversable Economist.  "…in the US economy, job tenure is falling. Julie L. Hotchkiss and Christopher J. Macpherson of the Federal Reserve Bank of Atlanta provide a useful figure illustrating the pattern." 

A Fun Animation of Global Shipping Routes. UCL Energy Institute. 

The Super Rich Were the First to Bail During the FinancialCrisis, Bloomberg. " When the going gets rough, the 1 percent start selling. That’s the finding of a new paper that says people with the highest income bailed from stocks disproportionately on the worst days of the financial crisis. " 

The Poverty of the Wealth Effect, Barry Ritholtz at Bloomberg. 

Growth is Everything (with a decent chart). John Chochrane.  

The Top 1 Percent Income Levels By Age Group, Financial Samurai. 

Negative Interest Rates: A Tax in Sheep's Clothing, St. Louis Federal Reserve.  "…a negative interest rate is just a tax on the banks’ reserves. The tax has to be borne by someone…At the end of the day, negative interest rates are taxes in sheep’s clothing. Few economists would ever claim that raising taxes on households will stimulate spending. So why would they think negative interest rates will?"  

To Escape Stress, Some Workers Retire, CRR Boston College. 

Word of the Week: Backpfeifengesicht, "a face that's begging to be slapped." (German)  

So, Something Interesting Happens To Weed After It’s Legal, Washington Post. "The effects on public health and safety and on the relationship of law enforcement to minority communities will take years to manifest fully, but one impact has become abundantly clear: Legalized marijuana is getting very cheap very quickly." 

Taking Stock: Income Inequality and the Stock Market, St. Louis Federal Reserve Bank. "Comove­ment between stock prices and income inequality results from the fact that gains in the stock market tend to benefit those in the wealthiest portion of the income distribution, who have better access to and higher participation in these asset markets. This type of comovement does not translate through to all asset markets, as short-term interest rates appear uncorrelated with rising income inequality. Rates are countercyclical, lowered during downturns in the business cycle and during times of financial stress, making any effect on inequality short-term." 

Does Buffett Have Lessons For Systematic Value Investors? Alpha Architect. 

Wonderful Worlds (That Never Existed), The Motley Fool.  " a lot of the "good old days" we look back on never actually happened. Here are three worlds we nostalgically remember that only occurred in our heads."  

Emotions Increase Susceptibility to Fraud in Older Adults: Research from Stanford, FINRA Foundation and AARP.  "The findings suggest that older adults’ intention to purchase was not based on perceived credibility, but rather on the emotional states they were experiencing. Another insight is that the direction of the emotional state – positive or negative – didn’t matter, an indication that both emotional states have a broad influence on older adults’ susceptibility to fraud." 

The Circles of American Financial Hell, The Atlantic.  " Today, many are suffering from another problem that has no name, and it’s manifested in the  bleak financial situations of millions of middle-class—and even upper-middle-class—American households…This is not poverty. So what is it?"  

Income vs. Wealth Inequality, Washington Post.