"We never want to count on the kindness of strangers in
order to meet tomorrow's obligations." - attributed to Buffet (I am not necessarily a big fan of Buffett hagiography or quotes...but I do like this one for reasons that are all my own).
CHART OF THE DAY
RETIREMENT FINANCE AND PLANNING
My Favorite Blogs: 2016, Darrow Kirkatrick.
How Home Equity Extraction and Reverse Mortgages Affect theCredit Outcomes of Senior Households, ssrn.
We find that otherwise similar HECM borrowers have larger reductions in
credit card debt post-extraction than other equity borrowers and non-borrowers,
with no significant difference in the rates of delinquency on non-housing debt
post extraction. For HECM borrowers, we find that increased initial withdrawal
and increased monthly cash flow contribute to the reduction in credit card
debt.
Warning Labels Needed for Systematic Withdrawal Plans(SWPs)? Ken Steiner. SWPs are withdrawal
approaches, not strategies focused on sustainable spending.
Recommended Smoothing Approach for Actuarially CalculatedSpending Budget in Retirement, Ken Steiner.
The recommended smoothing algorithm involves taking the spending budget
amount from the previous year, increasing that amount by the desired increase
in spending budget for the previous year (relative to actual inflation) and
testing that the resulting value is not more than 110% of, and not less than
90% of, the current year’s actuarially determined value. If the previous year’s adjusted value falls
within this corridor, that adjusted value becomes the spending budget for the
current year. If the previous year’s
adjusted value falls above or below the corridor limit, the applicable corridor
value is used as the current year’s budget.
[comment on above: I haven't bothered to make the
effort to go look but I think this is more or less a cousin to how David
Swenson does this at the Yale endowment.
I think in very very practical terms this is probably on pretty solid
ground both in terms of actuarial risk management and as well in terms of
simplicity of application and therefore, without a lot of analysis, probably
well recommended. I had a version of this that I adapted from Yale for myself
but never really truly implemented it because in some years you just spend what
you spend and there is not a lot of willfulness or planning to it. The further I go, though, the more I will
probably formalize budgeting and spending like this and then I will land with something vaguely similar. I still don't see, though, how
this kind of rule can deal with modest shocks like a new roof or a year of spending unwisely and
un-thoughtfully, or a year where it just
can be controlled. Sometime spending is
just what it is..and what it is sometimes looks nothing like the textbook
discussion of "withdrawal." Maybe that's why the wise sometimes modestly partake of low-rate lines of credit if they have one...]
Kitces: A better baseline for retirement planning - AgeBanding and Spending Declines, Kitces in Financial-Planning.com. Research around the spending habits of
retirees is debunking old myths. Rather than assuming a stable standard of
living throughout retirement, this growing volume of research looks more
directly at not just the composition of a retiree’s spending goals, but also at
how expenses change as the retiree moves through different age bands.
[comment: my own planning anticipates 3 age bands: now to 68 when last child leaves college; 68 to 85 an age when I'll either be dead or in a slow-go mode; and then 85 to infinity and beyond. I'm assuming spending net of health care will be different in each of those bands and I am planning accordingly]
How Did You Do Last Year? Ken Steiner. If your history shows that you have
constantly overspent your spending budget (in total or by expense type), you
may be understating your spending needs when developing your budget. Or, if your history shows that your
overspending relative to your budget is increasing from year to year, this can
be a signal of financial problems on the horizon. On the other hand, a history of ever widening
under-spending relative to your spending budget provides evidence that you may
be too conservative with your spending.
3 Types Of Retirement And Their Very Different SavingsStrategies, Kitces. With planned
semi-retirement or sequential temporary retirements, retirement savings will
not be invested nearly as long term (which demands a different portfolio
composition), and will never accumulate as high (since there isn’t nearly as
long of a non-work period). In turn, emergency savings and disability insurance
become even more important
How To Retire At 30 (Part 2). Retirement being about the value of time is a
very important concept.
MARKETS AND INVESTING
Wall Street’s Annual Stock Forecasts: Bullish, and OftenWrong, NYT “It may be a more difficult
time for investors,” Mr. Masters said. But he wouldn’t issue stock market price
targets. “I don’t think it makes sense to do that very often,” he said. “The
world is too complex for that. We can analyze trends, we can give some
probabilities — we can’t really predict the future.” ( Seth J. Masters, chief investment officer
of Bernstein Private Wealth Management, predicted [in2012] that the Dow Jones
industrial average would reach 20,000 within the decade)
Soros, Fallibility, Reflexivity, and the Importance ofAdapting, CFA Institute. Eternal market
truths are hard to find and difficult for us fallible humans to understand. In
the end, this highlights the importance of ongoing education and research
efforts, as well as the responsibility of analysts to focus on their continuing
education.
Asset Allocation: Mike and the Robos, Dirk Cotton. If you use an asset allocation calculator,
use a good one like AACalc that asks all the important financial questions
instead of a pretty app with a lot of marketing pizazz and "ease-of-use"
that doesn't. At this point, however, as a planner and a programmer, I prefer
skilled humans.
Optimal Trade Sizing in a Game with Favourable Odds: TheStock Market, Victor Haghani & Andrew Morton. As can be seen from the diagram, if you
invest double your
optimal allocation, you’ve thrown away all the benefit of
the investment, and things get worse at an increasing rate from there. This
means we should err on the side of taking less risk in the face of uncertainty
about the probabilities of future returns."
Count on Low Expected Returns, Says Antti Ilmanen, CFA
Institute, “It is not only a low interest rate world, it is also a low expected
return world on any long-only investment…Low expected returns are going to
anchor bad news for all of us for the rest of our working lifetimes…And maybe
beyond."
How Pensions and Social Security Affect Asset Allocation,
Oblivious Investor.
2016 Was Not a Particularly Volatile Year, Cliff
Asness. Maybe it’s just me but a lot of
end-of-year commentary about financial markets in 2016, implicitly and
sometimes explicitly, makes it sound as if it was a crazy year. It wasn’t. In
fact, it was amazingly normal.
ALTERNATIVE RISK
Factor Rotation: Possible, but Worth It? NewFound. We find factor rotation to have outperformed
a passive multi-factor portfolio by 1.32% per year. However, we believe that
after fees (i.e. manager fees and transaction costs), the added performance may
not be worth the headaches of multi-year drawdowns relative to the simpler
approach.If 2016 was the year of multi-factor products, we expect that 2017
will be the year of factor rotation products.
How Behavioral Biases Lead To Hard-To-Capture ButSustainable Alpha, M Kitces. a growing
base of data suggests that the amount of available alpha is shrinking, a
combination of both the paradox of skill itself, and the mere fact that more
and more investment research is revealing previously unknown investment factors
that, once known, can no longer be exploited the way they were in the
past. Yet despite this trend, a number
of known investment opportunities have continued to persist, even though
they’re widely known. For instance, it’s long since been documented that small
cap outperforms large cap, that value generates a long term premium over
growth, and that stocks exhibit momentum effects. But for all the research
showing these outperformance opportunities to be available, investors fail to
invest sufficiently to fully take advantage of them.
Factors and Patience, bpsandpieces.com. We have decades upon decades of data and
evidence that support the notion that stocks with certain characteristics, or
factor exposures, have higher expected returns than the broad market. But historical returns alone are not
enough. A factor is meaningless if
either a) its just noise or b) its very discovery in academia has led to it
being arbitraged away in the real world.
In other words, you want a fair amount of confidence in a particular
factor’s ability to continue generating excess returns going forward.
A Modern, Behavior-Aware Approach to Asset Allocation andPortfolio Construction, Newfound Research.
In this paper, we outlined our process for constructing behavior-aware
portfolios that address many of MPT’s flaws and provide investors with
outcome-oriented portfolios that mitigate the influence of behavioral
biases.
Using trend-following rules to enhance factor performance,
Alpha Architect. The results show that
firms with higher information uncertainty (higher idiosyncratic volatility,
younger age, covered by fewer analyst)
benefit the most from the simple MA rule. The authors suggest that this
may be because the annual characteristics used to form the anomaly portfolios
are a less reliable signal for these firms, than for firms with lower
information uncertainty. But there could
be more bad news: It may be that firms with higher information uncertainty are
also more costly and difficult to short.
Use Algos to Fight The Algos. priceactionlab.com. Programming skills are necessary for
systematic trading. There is also software that generates code but there is
often need for modifications. Traders who cannot program have very low chances
of success in this new environment unless they partner with someone who does
that. This is an algo game. Whoever tells you otherwise is either naive or a
liar. Nearly 80% of exchange volume is generated by algos.
SOCIETY AND CAPITAL
The New Suburbia: More Urban, NYT. Young professionals seeking more space than
they can afford in Manhattan or Brooklyn ,
empty nesters looking to downsize and leave the snow shoveling to others and,
to a lesser extent, millennials moving out of their parents’ basements are
leading the charge to a more urbanized suburbia.
Is Private Grade School K-12 Worth It? FainacialSamurai.com. A quality education is one of the best gifts
a parent could ever give. Why not pay up for a broader curriculum with
dedicated teachers and a nice campus if you can afford to. Whether they go to
Harvard or State U doesn’t matter so long as they turn out to be good people.
Americans are Moving Less, Timothy Taylor. Americans are moving less… Back in the 1940s
and 1950s, it wasn't unusual to have 20% of Americans move in a year, but now
it's down to about 12%.
The Champions of the 401(k) Lament the Revolution TheyStarted, WSJ. The dominant vehicle for
retirement savings has fallen short of its early backers’ rosy expectations;
longer life spans, high fees and stock-market declines [comment: lament they should]
Gender Retirement Gap, Garnick, Booth school.
Education, Income, and Wealth, St.
Louis Fed. Americans
have among the highest living standards in the world and have enjoyed rising
living standards for decades. Median household income in the United
States in 2015 was $56,516, up from $49,276
in 2010.2 However, gains in household income have not been evenly distributed
across all income groups. Income inequality has been increasing in the United
States since the 1970s, peaking in 20133
(Figure 1). A 2015 Gallup poll
found that 63 percent of Americans feel that the distribution of U.S.
money and wealth is unfair.4 While many factors contribute to income and wealth
inequality, the role of education is a key piece of the puzzle.
Interactive: Least Affordable Housing in the U.S.,
VisualCapitalist.com The least
affordable housing in the U.S. falls into two categories: places that you would
expect (San Francisco, New York City) and counties that may be off your radar,
such as a few in Massachusetts, Washington, or Wyoming.
Dissecting the Falling Labor Force Participation Rate,
FRED. Economist Paulina
Restrepo-Echavarria and Senior Research Associate Maria A. Arias outlined two
general views for this decline, as discussed by St. Louis Fed President James
Bullard:1 [a] The “bad omen” view, which says that the declines in the LFP rate
are due to people leaving the labor force because of the poor state of the
economy [, and b] The “demographics” view, which states that the changes in the
rate are a reflection of changes in the demographics of the labor force
Why Doesn't Capital Always Flow to High-Growth Areas? FRED, It seems natural that capital would flow into
countries with higher capital productivity and economic growth. A recent
Economic Synopses essay, however, explores why capital doesn’t always flow to
the highest growth regions.
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