Jun 8, 2017

Weekend Links - 6/8/17

QUOTE OF THE DAY

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. 



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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