I have a different perspective. I fear it’s now so easy to avoid doing any real work on our financial planning that many of us have lost – or never gained – a real understanding of how and why all the numbers fit together. -Monevator
CHART OF THE DAY
RETIREMENT FINANCE AND PLANNING
Importance of Individual Account Retirement Plans and Home Equity in Family Total Wealth, ERBI. …when measuring families’ financial asset
holdings at retirement, it is overwhelmingly the case that just IA assets plus
home equity represent almost all of what families have for retirement outside
of Social Security and defined benefit pension plans.
A Proven Way to Budget Clients’ Spending, Ken Steiner at advisorperspectives.com. Using Monte Carlo
modeling to develop client spending budgets is an effective approach but not a
perfect solution. In addition to using historical data to forecast future
investment performance, many clients don’t fully understand the
probability-of-success output. Some advisors use even less effective approaches
to develop spending budgets for their clients, such as adding “safe”
withdrawals from an investment portfolio to income from other sources. Rather
than requiring clients to have faith that these approaches will produce results
consistent with their financial objectives, advisors should supplement their
current approach by calculating and communicating an ABB to enable their
clients to make better budgeting and investment decisions. Adding this
additional data point to advisor-client discussions will reduce your fiduciary
risk and will result in better informed and more satisfied clients. [comment: Ken Steiner is on solid ground. In a future post I'll try to explain why
Ken's actuarial method is one of at least three main legs of a retirement "table"]
Taking Portfolio Spending into the Real World For Retirees, Pfau. The authors [Milevsky and Huang] summarize the rational
investor’s decision-making process as, “Wealth managers should advocate dynamic
spending in proportion to survival probabilities, adjusted up for exogenous
pension income and down for longevity risk aversion.” … both of these factors will be tempered
somewhat to the extent that a retiree is particularly fearful of outliving
their financial portfolio. Greater longevity risk aversion requires spending
less in order to maintain the portfolio over a longer time horizon.
Annuities and Retirement Income Planning, CFA
Institute. This CFA Institute Research
Foundation brief provides a broad-brush survey of the US
annuity marketplace as of the end of 2014. It is a short and generic
introduction to currently available annuity contracts. It is oriented toward
both investors who are contemplating the use of annuities to generate income
and hedge longevity risk and their advisers.
MARKETS AND INVESTING
Trust, But Verify: The Potential Problems Of Blind Investing,
AlphaArchitect.com. What
could go wrong?
Cutting off your nose to spite your face,
AbnormalReturns.com The private equity industry would do well to take recent
criticism, on fees and governance, to heart. However reducing fees without
taking into account the opportunity cost smacks of cutting off your nose to
spite your face.
Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting, Stafford ,
HBS. A passive portfolio of small, low
EBITDA multiple stocks with modest amounts of leverage and hold-to-maturity
accounting of net asset value produces an unconditional return distribution
that is highly consistent with that of the pre-fee aggregate private equity
index. … The results indicate that sophisticated institutional investors appear
to significantly overpay for the portfolio management services associated with
private equity investments.
Big Little Details, Newfound. Small details can have an outsized impact on
performance, especially if they can compound upon one another.
The End is Everything Why Timing of Investment Returns Matters and What To Do About It, ofdollarsanddata.com.
ALTERNATIVE RISK
Are Managed-Futures Funds a Thing of the Past?
Morningstar. in prolonged bear markets
or rapidly rising inflation scenarios, longer-term trends are more likely to
emerge, creating a more fertile ground for these funds to generate returns.
Until then, rangebound markets might continue hurting systematic
trend-followers in the short run. These funds are approaching an inflection
point where additional losses may trigger further investor redemptions, as has
happened several times in the managed-futures industry before the strategy
gained popularity in the mutual fund space.
The Value Premium: Risk Or Mispricing? Alphaarchitect.com One
of the great debates in finance is whether the source of the value premium is
risk-based or a behavioral anomaly. In our book, “Your Complete Guide to
Factor-Based Investing,” my co-author Andrew Berkin and I present the evidence
showing that there are good arguments on both sides.
Quants’ Best Strategy Is From The 17th Century. WSJ Without
continually iterating through the steps of hypothesis formulation and testing,
however, the exercise becomes something less than empirical—and the results may
be disappointing.
Fooled By Monte Carlo Simulation, medium.com. …methods for determining risk of ruin,
initial capital and maximum expected drawdown are quite involved and are
considered an integral part of a trading edge by many quants. Simple
reshuffling methods [Monte Carlo ] cannot
fulfill this purpose.
Is there out-of-sample (OOS) evidence for factor investing?
AlphaArchitect. With the caveat that
momentum premium can go through periods of substantial underperformance and
drawdowns, it (in the words of the authors) “can generate a disturbingly large
abnormal return.”
The “low risk effect” in financial markets, sr-sv.com. Their plausible cause is many investors’
limited access to leverage and willingness to pay a premium for securities with
greater exposure to market performance. Some investors may also pay a premium
for lottery-like payoffs with large upside potential. For leveraged portfolio
managers this creates relative value opportunities in form of ‘betting against
market correlation’ or ‘betting against volatility’.
LendingClub 10 Years Later: A P2P Investing Update.
Financialsamurai.com [I'm less optimistic than LC and FS. My experience is more
muted than that reported for quality loans and declining steadily; see posts
elsewhere on this blog]
Portfolio Rebalancing Research: Momentum And Tolerance Bands,
alphaarchitect. The rebalancing strategy that one chooses to implement
shouldn’t be taken for granted as any decision to rebalancing is an active
market timing decision. Knowing that a
decision to rebalance is an active market timing decision, one can use prior
research to help develop a rebalancing strategy to improve portfolio
performance. Using prior research on
optimal rebalancing strategies (20% Tolerance Bands) and prior research on
market timing strategies (trend following or absolute momentum) can create a
rebalancing strategy that has historically improved results.
Single payer food? Cochrane.
"To help poor children, I am going to launch flaming accordions
into the Grand Canyon ." "That's stupid."
"WHY DO YOU HATE POOR CHILDREN?"
Which Was Bigger: The 2009 Recovery Act or FDR's New Deal? stlouisfed.org Which was larger: the American Recovery and
Reinvestment Act of 2009 or the New Deal of the 1930s? It depends how the
recovery programs are measured, according to an article in The Regional
Economist.
This is why baby boomers are divorcing at a stunning rate.
MarketWatch. “What’s pushing gray
divorce is people are living longer and they feel more entitled to living
fully. They’ve contributed to raising children, they want an emotional journey,
it’s their time now,” says Lili Vasileff, a certified financial planner and
president of Divorce and Money Matters, which specializes in divorce financial
planning. “They may have (decades) ahead and don’t want to be unhappy anymore.”
Scarier than the Living Dead, Josh Brown. Biden’s audience – remember, we’re talking
about Cornell graduates and their families – is extraordinarily divorced from
Trump’s audience. They won’t compete for jobs or real estate or potential mates
with the Trumpists. They’ll consume information from different sources and have
an almost entirely different life experience as they build their careers and
raise their families in the coming years. It’s sad that this is where we are.
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