“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.” -- NYT ( Seth J. Masters,
chief investment officer of Bernstein Private Wealth Management, predicted [in 2012]
that the Dow Jones industrial average would reach 20,000 within the decade)
CHART OF THE DAY
RETIREMENT FINANCE AND PLANNING
The Opening, the Middle Game and the Endgame, Dirk Cotton,
TheRetirementCafe.com key characteristics of retirement finance change as
retirement progresses and create what are essentially distinct phases – early
retirement, mid-retirement and late retirement – that require unique
strategies. A single retirement finance strategy is unlikely to be optimal in
all three stages.
Investing in Retirement with Floor and Upside Utility.
Gordon Irlam. First I discussed the
economics concept of utility, and why it is important. And what a floor and
upside utility function looks like. The floor is highly risk averse, while the
upside is less risk averse. In retirement planning you want to maximize
expected utility of consumption, not consumption itself, and never maximize wealth. Then I discussed how by
treating the retirement problem as a mathematical problem of optimization under
uncertainty, you could use stochastic dynamic programming to compute the
optimal strategy. Something which is difficult to do using trial and
error.
[comment: I'm interested in his math and I like his
confidence and capabilities but my guess is that he has never retired and is probably not close to
retirement. There are no doubt many optimal
paths in math but not in life. I'm sure there were Russian depositors in Cyprus
that thought they had optimality a few years back. Likewise Icelandic bankers or perhaps clients
of Bernie M. Let's consider residents of Dresden ,
Krakov, and Western Ukraine Circa 1929 or sailors in Pearl Harbor
on Dec 6 '41 . Maybe imagine yourself a partner at Arthur Andersen before
Enron: you probably thought you had some type of optimality, too. Things can always look optimal for at least a little while but they
are unlikely to stay there for long. The best we can do is have a few strategic
scenarios with action plans in our head, an ability to triangulate amongst what we know and
an open mind to what we don't, and a healthy predisposition to being able to
adapt to changing circumstances. Use the
math as much as you like, and I do, but have a plan B or even C at the ready]
Squaring-The-Survival-Curve And What It Means For RetirementPlanning, Kitces.com But the fundamental point is simply to understand that the
ongoing rise in life expectancies doesn’t necessarily mean that someday
everyone is going to live to age 150 and beyond. It may simply mean that more
of us will live to approach what appears to be a “maximum” human lifespan
around age 115… and in fact, recent shifts in who is living longer (and who is
not) suggests that we may have already hit that longevity wall.
MARKETS AND INVESTING
Lower-Cost T Shares Coming to a Fund Near You,
Morningstar. As for A shares, it seems they must die. A shares may continue
to be used for situations that fall outside the Department of Labor’s
jurisdiction, for example taxable accounts or tax-sheltered college savings
plans. However, it’s hard to imagine how they can survive the competition of T
shares, which will be available to all retail accounts. Which investors will
pay 4.75% when the identical fund is available for 2.5%? Cro-Magnon Man, your
time appears to be just about up.
Dividend Stocks Are The Worst, Meb Faber. The basic summary is that:
- Dividend yield investing is rooted in value investing.
- Historically, focusing on dividend yields rather than value, has been a suboptimal way to express value.
- If you have to focus on dividends, you MUST include a valuation screen or process to avoid high yielding but expensive, junky stocks.
- The hunt for yield has caused dividend stocks to reach valuations levels never seen before relative to the overall market.
- Since dividend stocks are currently expensive, we prefer a shareholder yield approach combined with a value composite screen.
- Once
you have a preferred value methodology, AVOIDING dividend stocks in the
strategy could results in additional post tax alpha of approximately 0.3%
to 4.5% for taxable investors.
[comment: generally speaking he is probably right but for
non-institutional investors that have finite time frames, a consumption
requirement, and non-trivial fail rate risk, then dividend stocks along with
other income producing assets have an important role to play. On the timing issue I am silent]
In defense of Dividends, Todd Wenning. [good cover on how, ModiglianiMiller and
double taxation notwithstanding, retention of dividends can destroy money that
rightfully belongs to you]
Was 2016 Boring? AQR
The Myths and Fallacies about Diversified Portfolios,
Michael Edesess. The answer is simply
that there is no such thing in practice as maximum diversification. It’s no
more than a theoretical concept.
ALTERNATIVE RISK
The Beginning Of The End Of Hedge Funds As We’ve Known Them? Alphabaskets.com. Now is not the end of hedge funds as we know
them. The fees have been going down for a while, assets may have flowed out in
2016 but at some point hedge funds will have a run of doing relatively well and
money will flow back in.
It's 2017: Do You Know Where Your Risk Is? Corey Hoffstein.
Non-traditional exposures, now available as low-cost ETFs, can help introduce
non-standard risk exposures. By combining non-traditional exposures, we can
build a portfolio that has a similar overall risk profile as a traditional
stock/bond portfolio, but with greater diversification in contributing
risks.
[comment: I think these guys are on a good track. Their article profiles an approach that looks
very much like mine. In fact, if you
took their approach, broadened the universe of alt-like ETFs a bit (e.g., added to
their list more items that are similar to what they have plus things like
utilities, private equity, geo-macro and some other stuff) and then added some
overlays and other components like: short vol via options, a little forex here
and there, p2p and p2b lending, baby bonds (exchange traded debt), and a
momentum overlay over a medium sized chunk of it -- you'd kind of have my
systematic alt risk strategy discussed elsewhere. It's what has allowed me to pop the efficient
frontier a bit in the last three years (ignore that 10-12% of my exposure has
risk that is less about variance than it is permanent loss of capital so that
comment on the EF may be a little bold but why not? No one pays me anything for
anything so I can say (almost) anything, right?]
What Can Managed Futures Expect From ‘The Great Rotation’?
RCM-attain. If we see that the down
trend [e.g., t-bond futures] isn’t as profitable as the up trend was – there’s
a whole lot of money in large managers skewed towards just these markets that
isn’t going to like the return profile they’ve suddenly found themselves with.
Stay tuned.
Go Skew Yourself With Managed Futures, alphaarchitect. One potential positive skew asset is
trend-following managed futures. Managed futures have historically enjoyed
positive skewness. To understand why
Managed Futures have positive skewness, watch this great TED talk by Kathyrn
Kaminski, PhD on convergent versus divergent strategies...
SOCIETY AND CAPITAL
There’s Almost No Way Energy Policy Can Satisfy Everyone,
fivethirtyeight. When it comes to
energy, there’s almost no way to make everybody happy. And I’m not just talking
about obvious conflicts between the renewable energy industry and the fossil
fuel industry. Consider, for example, the needs of the petrochemical industry
versus the petroleum industry…Companies like Dow and DuPont want cheap natural
gas…So they’ve been fighting against natural gas exports— which would raise the
price of gas here at home…The oil and gas industry likes the idea of selling
its wares abroad, which would reduce the supply of natural gas available in
U.S. markets, thus driving up prices and revenues…Conflicts like this have
significant political implications…
What’s the Truth About the Blue Zones? Medium. Observers have noted that social cohesion is
a common factor in the Blue Zones. Even among the Adventists, who are mainly of
European origin, their minority religious status ensures that they stick
together. Church attendance is also associated with longer life. How would social cohesion make people live longer? Probably
by giving older people a sense of purpose and belonging, leading them to
actively participate in family and society.
… Television viewing time
independently raises the risk of death; each 1 hour of viewing associates with
an additional 4% risk of death. Whether that’s due to lack of physical
activity, decreased social cohesion, genetic confounds, or demoralization from
crap TV shows, can’t be determined. But it seems doubtful that people in the
Blue Zones are watching TV that much.
Narrative Economics and the Laffer Curve, Timothy
Taylor. The point of Shiller's talk is
that while a homo sapiens discussion of the empirical evidence behind the
Laffer curve can be interesting in its own way, understanding the political and
cultural impulse behind tax-cutting from the late 1970s up to the present
requires genuine intellectual opennees to a homo narrativus explanation--that
is, an understanding of what narratives have force at certain times, how such
narratives come into being, why the narratives are powerful, and how the
narratives affect various forms of economic behavior.
Demographic Trends for the 50-and-Older Work Force, Advisor
Perspectives. It might seem intuitive
that the participation rate for the older workers would have declined the
fastest. But exactly the opposite has been the case.
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