QUOTE OF THE WEEK
No matter how you build your portfolio, hindsight will show
it to be the objectively sub-optimal decision if your goal is only to maximize
returns. Corey Hoffstein
RETIREMENT FINANCE AND PLANNING
Chapter 19: Individual Biases in Retirement Planning and Wealth Management, independent. This
chapter … describes giving nudges to help individuals close the savings,
investing, and behavior gaps that will improve their total wealth and
wealth-transfer picture.
The Most Important Factor in Determining Your Retirement Withdrawal Rate, retirementreseacher.com.
Blanchett found the level of guaranteed income to be by far the most
important factor in explaining optimal spending rates from investments.
Withdrawal rates were up to four percentage points higher across the range of
guaranteed income levels he examined. …Optimal success rates vary based on
individual circumstances, but as a general rule of thumb, Blanchett finds a 75
percent success rate is generally a more acceptable target than one of 90 or 95
percent…A simple focus on a retirement income strategy that applies a low
failure rate for the investment portfolio is woefully incomplete….An over
reliance on only spending at a “safe” withdrawal rate may unduly sacrifice lifestyle
in early retirement.
Delaying Social Security Claims (or Not), Dirk Cotton. If you expect a short retirement but
experience a long one, you may well regret having claimed Social Security
benefits early…Delaying Social Security benefits is like saving some acorns for
a long winter. You have to strike a
balance between how much you eat today and how much you will have to eat if the
winter is exceptionally long.
Using the Actuarial Budget Benchmark (ABB) to Find Your Retirement Spending Comfort Zone, Ken Steiner Annually benchmarking your
spending budget against your ABB provides you with a measure of how aggressive
your current investment and spending strategy is relative to a relatively
low-risk annuity-based pricing strategy.
And while we also agree with Dr. Pfau’s conclusion as it also applies to
investment strategies, we will not “wade” into that area, as it is not within
our field of expertise. We do, however,
believe that the answers to these questions, in combination with using the ABB,
can help retirees find their retirement spending comfort zone.
The ERN Family Early Retirement Capital Preservation Plan, earlyretirementnow.com
There is no one-size-fits-all solution. Everybody’s situation is different
because everybody has different preferences, constraints, risk aversion
attitudes, etc. For example, the safe withdrawal rate changes over time depending
on equity valuations and the safe withdrawal rate can be vastly different
depending on your age and expectations about Social Security
Retire on the House: The Possible Use of Reverse Mortgages to Enhance Retirement Security, Warshawsky at ssrn. This paper focuses on the use of reverse
mortgages or home equity conversion mortgages (HECMs) to enhance retirement
security. If present trends continue, many American households working today
will face a significant retirement funding gap, and this study asks whether
reverse mortgages can be used to fill at least some of this estimated gap. This
study provides a detailed description of the features and history of reverse
mortgages; reviews the existing literature on the motivations people have to
use their houses to pay for retirement expenses, especially for long-term
services and supports; and, in original empirical simulations, finds that only
12–14 percent of all retired households are suitable for, and might sensibly
use, home equity conversion mortgages.
MARKETS AND INVESTING
What Do We Know about Investor Irrationality? Michael
Edesess at advisorperspectives.com. To
the extent that an advisor’s counsel is simply to refrain from trying to time
the market, it may well add value.
Strategy Entropy, NYT. No single strategy is likely to beat
the market forever.
Has the meteoric rise of passive investing generated the“greatest bubble ever”? 13D.com “It seems algos are programmed with a bias to
buy. Individual stocks have risen to ludicrous levels that leave rational
humans scratching their heads. But since everything always goes up, and even
small dips are big buying opportunities for these algos, machine learning
teaches algos precisely that, and it becomes a self-propagating machine, until
something trips a limit somewhere.”
Optimal Portfolio Choice with Benchmarks, Bernard et al. Grenoble ,
Ghent , & Vrije. We construct an algorithm that makes it
possible to numerically obtain an investor’s optimal portfolio under general
preferences. In particular, the objective function and risks constraints may be
driven by benchmarks (reflecting state-dependent preferences). We apply the
algorithm to various classic optimal portfolio problems for which explicit
solutions are available and show that our numerical solutions are compatible with
them. This observation allows us to conclude that the algorithm can be trusted
as a viable way to deal with portfolio optimization problems for which explicit
solutions are not in reach. [ I understand none of this ]
Staying out of the ETF Graveyard, Factset. [relevant: I just got liquidated out of an
ETF that closed down].
What We Can Learn from Andrew Lo’s Adaptive Markets, Laurence
Siegel. In the modern study of capital
markets there have been two kinds of innovation: (1) insights that contribute
to our ability to make better judgments, as found in the brilliant work of
Fischer Black, Peter Bernstein, Marty Leibowitz, and many others; and (2) true
hypotheses and theories, which are testable and, as I’ll explain shortly,
falsifiable. The latter are few and far between. Andrew Lo’s book aims to
present a new theory of capital markets, but, while it does not really do so,
it is full of brilliant insights into behavior, evolution and the ways in which
these factors help us to better understand how capital markets work… It’s an
intellectual adventure – a very long one – for people whose interest in markets
and behavior has led them to pursue a liberal arts self-education strategy. [half way thru this…]
How much do Treasuries tell us about recessions? FRED Blog. On
the other hand, narrowing spreads (including negative spreads) may signal
worsening conditions.
ALTERNATIVE RISK
Factors & Financial Planning, Corey Hoffstein. We ask the question: “should our relative
allocation to different factor products differ based upon our risk tolerance?”
Academic Research Insight: Factors And The Road To Retirement, AlphaArchitect. Can factor
premia (value, size, momentum and quality) help the aspiring retiree achieve
the goal of accumulating enough to meet his retirement spending needs? … YES-
Factor premia (except for size) can enhance the distribution of terminal wealth
compared to the core portfolio of global equities. The authors simulate two
robustness checks where they hypothesize lower future mean returns of factor
premia and skill based market timing of the global equity manager. Results of
the factor premia enhancement properties seem to hold up.
Factor Investing: Evidence Based Insights,
alphaarchitect.com "To me, evidence based investing means reviewing all
the relevant research on a topic, viewing this body of research as a whole,
understanding the economic/human underpinnings of the finding, and then making
an informed decision that is as objective as possible. Achieving the title of
being an “evidence based investor” sounds easy, but the reality is that this is
incredibly difficult. This difficulty is only magnified by the sheer amount of
information and (so-called) research being distributed into the marketplace. To
solve this information overload problem investors often get complacent and rely
on a single firm’s research (or research group) to inform their opinion on all
matters. This approach will likely turn you into a faith based investor, not an
evidence based investor (see here for a piece on the subject). And when it
comes to factor investing, we often see well-meaning investors, who want to be
evidence-based investors, quickly devolving into faith based investors who are
no longer critically reviewing and assessing the available research."
Duration Timing with Style Premia, Newfound. In timing our duration exposure, we are
effectively trying to time the bond risk premium (“BRP”). The BRP is the expected extra return earned
from holding longer-duration government bonds over shorter-term government
bonds…Risk averse investors will require a premium for the uncertainty
associated with rolling over the short-term bonds at uncertain future interest
rates. In an effort to time the BRP, we explore the tried-and-true style
premia: value, carry, and momentum. We
also seek to explicitly measure BRP and use it as a timing mechanism.
Mixing collateral with a managed futures portfolio - Need to know marginal contributions, mrzepczynski.blogspot. The premise is simple. If only limited funds
are used for margin, the majority of cash associated with a managed futures
investment are held in low interest investments. This portion of the managed
futures capital can be better deployed to increase returns. Similarly, managed
futures can be used as an overlay to an existing portfolio to better use cash.
Is Value-Added and Opportunistic Real Estate Investing Beneficial? If So, Why ? Shilling (2013).
Results demonstrate that while value-added and opportunistic private
equity real estate investments have higher returns than core investments, their
superior returns are driven primarily by market conditions and the use of cheap
debt rather than by risk exposure.
Dynamic Asset Allocation for Practitioners, Part 2: The Many Faces of Price Momentum, ReSolve. In this second article on Dynamic Asset
Allocation for Practitioners we will explore several methods for measuring
price momentum to compare and contrast their utility under different portfolio
concentration and asset universe specifications.
SOCIETY AND CAPITAL
Understanding the Determinants of Financial Outcomes and Choices: The Role of Non cognitive Abilities, BIS. …we find that people in the bottom decile of noncognitive abilities are five times more likely to experience financial distress compared to those in the top decile. Relatedly, individuals with lower noncognitive abilities make financial choices that increase their likelihood of distress: They are less likely to plan for retirement and save, and more likely to buy impulsively and to have unsecured debt. Causality is shown using childhood trauma as an instrument.
Chapter 15: Psychological Aspect of Financial Planning. Ageno School. Financial planning draws from various disciplines, including counseling, psychology, finance, economics, and law. It includes budgeting and cash flow planning, risk management, insurance planning, investment planning, retirement and employee benefits planning, tax planning, and estate planning. The strategic process whereby financial planners develop integrated strategies that draw from all these fields in pursuit of client goals is the profession’s unique domain. Heuristics and mental biases to which clients may be prone overlay the entire financial planning process, however. Financial planners should understand and consider these issues when developing recommendations uniquely suited to each client, maximizing the probability that the client will embrace and implement the recommended strategies.
Should Governments Invest More in Nudging? Ssrn.
The rise (and fall?) of the cost of education, FRED blog. Education inflation appears to be converging with general inflation, at least for now
Seattle’s Minimum Wage Hike May Have Gone Too Far, 538. New research released Monday by a team of economists at the University of Washington suggests the wage hike may have come at a significant cost: The increase led to steep declines in employment for low-wage workers, and a drop in hours for those who kept their jobs. Crucially, the negative impact of lost jobs and hours more than offset the benefits of higher wages — on average, low-wage workers earned $125 per month less because of the higher wage, a small but significant decline…Even some liberal economists have expressed concern, often privately, that employers might respond differently to a minimum wage of $12 or $15, which would affect a far broader swath of workers than the part-time fast-food and retail employees who typically dominate the ranks of minimum-wage earners. Other economists said there simply wasn’t enough evidence to predict the impact of minimum wages that high. …“Nobody in their right mind would say that raising the minimum wage to $25 an hour would have no effect on employment,” Autor said. “The question is where is the point where it becomes relevant. And apparently in Seattle, it’s around $13.”
Higher Local Minimum Wages: Updating Results from Seattle, Timothy Taylor. As I've said before, I'm happy to let the empirical patterns tell me what to believe. Based on this evidence, jacking up what is already a very high city-level minimum wage to even higher levels is bad for the total earnings of low-wage workers in that city.
The Challenge of Electrifying Africa, Tim Taylor. Perhaps just as disturbing as the lack of electricity across many areas of Africa is that even the seemingly aggressive plans in place--essentially, to triple electricity capacity by 2030--would lead to less than half of what is needed to provide provide full access to Africa's population at that time (leaving aside the question of what quantity will be available on a per capita basis).
Deep State’s Regulatory Binge Creating Thin Wallets, AIER. If U.S. regulation were a country, its cost would rank behind the GDP of India and ahead of that of Italy, CEI said… The stealth tax amounts to nearly $15,000 per U.S. household
Work and incentives. Cochrane. our government is quickly creating a legal class system based on income… "Socialist" Sweden turned out to be remarkably hard nosed about incentives. If they can do it, so can we.
Watch Us Prison System Grow, metricmaps.
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