If we were indifferent to risk, much of finance would
collapse. Mihir Desai
CHART OF THE DAY
Pension fund funded ratios for single
employer, multi-employer and large
city public plans
RETIREMENT FINANCE AND PLANNING
Monte Carlo Investment Assumptions In Your Retirement Planning Projections, Kitces.com if you don’t recognize how
high the correlations really are, you end up grossly overstating how much
diversification is actually helping you, and understating the risk. Which
ironically means, if the reason you don’t like doing things like Monte
Carlo analysis in the first place is you don’t think it takes into
account the risks of the marketplace when you try to add in more investments,
then adding more investments without accounting for correlations, actually
makes it worse.
Kitces on Simulation, RiversHedge. Well…maybe not in his software…
Managing Retirement Decisions, Society of Actuaries.
The Difference Between ‘Safe’ and ‘Optimal’ Withdrawal Rates for Retirement Spending , Pfau. Also,
instead of focusing on the traditional objective of worrying only about using a
low failure rate, we sought a better balance between two competing tradeoffs:
(1) wanting to spend and enjoy more while you are still alive and healthy, and
(2) not wanting to deplete the investment portfolio and rely only on
non-portfolio income sources in later retirement… In practical terms, retirees
who are more longevity-risk averse and less flexible with spending would like
to smooth spending over retirement… someone with greater spending flexibility
and more outside sources of income may be willing to accept rather high failure
rates as a part of balancing these competing tradeoffs… we found that with
those capital market expectations, the 4 percent retirement withdrawal rate
strategy may only be appropriate for more risk-averse retirees with moderate
guaranteed income sources… there is an important point to re-emphasize here. In
one case in the article we identify a 7 percent withdrawal rate as “optimal.”
That is not a “safe” withdrawal rate [comment: no sh*t…unless you are about 85
or older]. With the market assumptions in the article, the 7 percent withdrawal
rate has a 57 percent chance of failure over a thirty-year retirement.
What Makes Us Happy, Dirk Cotton. Claiming Social Security benefits, buying
fixed annuities, setting a portfolio spending rate and investing retirement
savings are common retirement decisions that can play economic theory against
client happiness.
Dynamic Retirement Spending Adjustments: Small-But-Permanent Vs Large-But-Temporary, Derek Tharp @ kitces.com The bottom line, though, is simply to
recognize that the ability to make mid-course adjustments to a retirement plan
helps…
The Ultimate Guide to Safe Withdrawal Rates – Part 16: Early Retirement in a Low-Return World (and why we don’t worry about Jack Bogle’s
return prediction), Earlyretirementnow.com
There is no hiding from the Bogle scenario.
Planning a Rewarding Retirement, Part 5: Wealthy Living in Retirement, Robert Cochrane. …it is
often difficult to flip a mental switch when it comes to spending habits.
Your Secret Weapon and Financial Independence,
whitcoatinvestor.com You can do an awful
lot about how much you spend. That’s your secret weapon.
Retirement Income Scenario Matrices, William F. Sharpe. [at least I can say I tried…]
Tackling 'Nastiest, Hardest Problem in Finance' Ritholtz on Sharpe at ThinkAdvisor. Comprehending the range of possible future
scenarios from any retirement income strategy is difficult; choosing the proper
strategy seems to be an almost impossible task.
MARKETS AND INVESTING
The Dividend Disconnect: Behavioral Finance Strikes Again,
Alphaarchitect.com. [ I think this is mostly right but I do not
have the full capability or energy to quibble on the margins which I would if I
did ]
Exploring Rates Sensitivity, AQR. All the asset classes we study have performed
worse during Fed hiking periods than nonhiking periods, with the clear
exception being commodities.
A Tale of Two Markets: Politics and Investing! Aswath
Damodaran. Given the index level and
cash flows on June 1, 2017 ,
the expected annual return on stocks (the IRR of the cash flows) is 7.50%.
Netting out the 10-year treasury bond rate (2.21%) on June 1 yields an implied
equity risk premium of 5.29%.
If we had a 1,000 years of market data what kinds of things would get validated? What things would lack support in the data?
Abnormalreturns.com …Buggy whip manufacturers would have been the greatest
investment of all time–except they listened to consultants who told them that
dividends were archaic and tax-inefficient, so they kept plowing earnings back
into the business. … 1000 years of data would validate the fact that we would
still want 2000 years of data! … If we had 1000 years of market data, we would
probably be more confused than we are now.
The Next 'Free Lunches',
Mindlin, As demonstrated in this
article, the MPT “free lunch” – called “Free Lunch” 1.0 – is essentially an
outcome optimizing methodology for a single-period funding problem. Yet there
is a multitude of investors with multi-period funding problems (e.g. retirement
investors) that require optimizing series of portfolios (a.k.a. glide paths)
that extend throughout the investor’s time horizon. Just like portfolios, glide
paths can be efficient and inefficient.
ALTERNATIVE RISK
Explaining The Low Vol Anomaly, Swedroe. The authors go on to explain that relative
risk and career risk keep the pros away from low-risk stocks, and the unloved
strategies become underowned, providing opportunities for individuals to
exploit—as long as they don’t care about relative risk (how they are doing
relative to some market benchmark). In other words, individuals are less constrained
then professionals… They provide another explanation for the anomaly. The
research shows that, in general, individual investors have a preference for
high-risk stocks, otherwise known as the “lottery effect.” Investors have a
“taste” for exciting, high-risk investments and they overinvest in these
“lottery tickets.”
Return-Based Factors for Corporate Bonds, ssrn. We demonstrate significant return reversals
and momentum in the cross-section of corporate bonds using comprehensive
transaction-based data. We then introduce return-based factors of corporate
bonds, and show that these new factors based on short/long-term reversals, and
momentum, have economically and statistically significant premia, which cannot
be explained by long-established stock and bond market factors. We further show
that the newly proposed factors provide significant explanatory power for the
returns of the industry-sorted and size/rating/maturity-sorted portfolios of
corporate bonds. We also provide an illiquidity-based explanation of short-term
reversal, and show that momentum and long-term reversals are prevalent mainly
in the high credit risk sector. [translation:
"junk bonds trend." Yes. I
have made money off high risk credit momentum for ~5 years. I hope no one else
finds out about this]
A Modern, Behavior-Aware Approach to Asset Allocation and Portfolio Construction, Corey Hoffstein et al.
With the benefit of perfect hindsight, the diversified portfolio will
never be return optimal. It will always contain asset classes that disappoint.
To judge the outcome of diversification after the fog of uncertainty has lifted,
however, misses the point. Diversification is valuable precisely because
investors don’t know what the future holds. We can be vaguely right instead of
precisely wrong. This paper outlines our views about the appropriate asset mix
for different types of investors and explains our process for constructing a
diversified portfolio that includes many of these new diversification
opportunities. Most importantly, it highlights the steps that can be taken
within asset allocation to address the behavioral shortcomings of investors.
Our ultimate goal is to acknowledge that the optimal investment plan is, first
and foremost, the one the investor can stick with.
SOCIETY AND CAPITAL
Can You Afford to Reach 100?, John Maudlin. The solution may
turn out to be something presently unimaginable. … What if the next time around
we got not just President Bernie Sanders but a Bernie Sanders-compatible House
and Senate? Could we see a wealth tax in addition to a whole slew of other
taxes? Would our dear leaders be willing to tax your retirement plan so that
people without adequate savings could enjoy a more pleasant retirement? Forget
fairness to you as an individual, because they will be arguing about fairness
to everyone in the country.
Andrew W. Lo, Adaptive Markets, medium.com. The search for deterministic laws as
universal as gravity and the identification of agents as mindless as the
molecules of thermodynamics have defined the scope and purpose of economics and
finance since the “marginalist” revolution some 130 years ago. Lo directly
confronts the mathematical instantiation of neoclassical economics that saw off
Keynes’ assault on the economic thinking that had failed in the face of
financial crisis and economic depression in the 1930s, an achievement forever
associated with the work of the great MIT economist Paul Samuelson. In its
place, Lo proposes that we look to evolutionary biology as the relevant,
framing metaphor for understanding the behavior of markets — markets for goods,
and services, and money and capital — and of the human beings that populate and
depend upon those markets.
U.S.Colleges Have $500 Billion to Invest. Now Where Are All the Green Deals?
Bloomberg. …finding the right ones isn't
easy.
Visualizing the Jobs Lost to Automation, Visual
Capitalist.
The world’s most valuable resource is no longer oil, butdata, economist.com
Rural AmericaIs The New ‘Inner City’ WSJ. since the 1990s, sparsely populated counties
have replaced large cities as America’s most troubled areas by key measures of
socioeconomic well-being—a decline that’s accelerating
Slightly More Seniors Living With Family, boston
college. Sharing living expenses with
family members doesn’t always solve a senior’s financial problems, the study
suggested, and can even have a “destabilizing effect on seniors’ economic
conditions.”
The Slow-Motion Crisis in Government Pensions, Tim
Taylor. The needs and expectations of an
aging population are a tectonic shift under our current political and economic
understandings, and will cause some earthquakes before it's done.
The Pension Fund Private Equity Hail Mary, Ben Carlson. The outcomes — none of which are appealing to
lawmakers — will probably entail some combination of higher taxes, broken
promises to retirees or fewer dollars to allocate to other government services.
Poor planning, generous promises to employees and a lack of accountability have
created these unsustainable pension obligations, but in many cases the money
management at these funds has also left much to be desired.
Are public jobs more stable? FRED blog. the public layoff rate is significantly
lower.
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