[strategy decay] doesn’t happen in a field like physics. Gravity doesn’t
get arbitraged away due to popularity. Morgan Housel
GRAPHIC OF THE DAY
RETIREMENT FINANCE AND PLANNING
This is how much fees are hurting your retirement,
MarketWatch
All together, by slashing fund expense ratios from 1.0% to
.10% and the advisory fee from 1% to .40%, the retiree could receive $32,000
additional annual retirement income — or roughly $2,600 more each month between
the ages of 70 and 95. Clearly, the impact of portfolio costs is huge.
Managing Sequence of Return Risk, Ben Carlson
Risk really matters when you no longer have human capital
and are planning to live off your investment earnings for the remainder of your
days…Sequence of return risk can be painful if you’re on the wrong end of it
but it becomes a double whammy if you end up being a forced seller of stocks
when they’re down. This can be avoided through portfolio design,
diversification and intelligent deployment of cash flows.
If you over-estimate your future spending liabilities, you
run the risk of underspending today. If
you under-estimate your future spending liabilities, you run the risk of
overspending today. Clearly, the more
“conservative” strategy is to over-estimate your future spending liabilities
and spend less today. On the other hand,
if you are too conservative, you may be denying yourself the lifestyle you
really want to enjoy today and may be unintentionally increasing the amount you
ultimately leave to your heirs. This is
perhaps one of the most difficult trade-offs that you (possibly with the help
of your financial advisor) will have to face in your financial planning. [He
estimates a 22% reduction at 65. I estimate a ~17% reduction at 68. In addition I get even more aggressive after
85-86 where I assume I am statistically dead and then factor in a very-minimal
"income"/expense for a longer superannuation regime between 85 and
?]
MARKETS AND INVESTING
On the surface, the fact that a portfolio steeply declines
in value may be the primary concern, and for retirement and other spending
events, this is indeed a very important consideration. But large drawdowns
create strong emotional responses even for investors who can, at least on
paper, weather them. These emotional times are when well-intentioned plans are
often abandoned, locking in losses and putting the portfolio on a rough road
going forward.
Abusing ETFs, alphaarchitect
The authors find that there is no distinct investor group
that significantly benefits from ETF use or that experiences significant
increase in diversification. Differently, they also find that no group will
lose by investing in the right market ETF.
Are Individual Bonds Safer than Bond Funds? Cullen Roche
the ability to see your daily price fluctuations in bond
funds significantly increases the behaviorally induced risk of short-termism in
bonds. This is important.
Behavioral bond bucketing, abnormalreturns
risk cannot be erased it can only be transferred (or hidden
from plain sight)… A bond fund is just a collection of bonds. If that
collection of bonds does not fit with your particular risk profile don’t buy it.
What I think is way more interesting about this debate is the behavioral aspect
of owning individual bonds vs. owning a bond fund.
Kelly Criterion for Multivariate Portfolios: A Model-Free Approach, Nekrasov [2013]
We briefly introduce the Kelly criterion and then present
its multivariate version based only on the first and the second moments of the
asset excess returns. Additionally, we provide a simple numerical algorithm to
manage virtually arbitrarily large portfolios according to so-called fractional
Kelly strategies. [ I made it to about page 4 before I hit the wall but still
interesting]
Avoid Unintended Bets in Your Investment Portfolio, cfa
institute
once the allocations are put in place, how do you know you
are getting the exposures you were looking for? And how do you avoid assuming
unintended risks?
Even though we do think we have useful tactical signals for
making predictions about future returns, we believe that no tactical signal is
powerful enough to warrant wholesale changes to a well-balanced strategic asset
allocation…. The decisions we do make, particularly on asset allocation, affect
only excess returns, about which the low yield environment says little. Our
conclusion then is that the odd environment that prevailed in 2016 and persists
in 2017 does not contradict the strategic case to maintain a diversified asset
allocation. Rather, it highlights the continued need for investors to diversify
across more traditional and alternative return sources and size those return
sources so they matter in their portfolio.
ALTERNATIVE RISK
Managed futures as an alternative to corporate bonds, mrzepczynski.blogspot.com
So what can be a good alternative to corporate bonds? We
think it needs three things: a stand alone return of Treasury yields plus the
corporate spreads, an uncorrelated return to corporate spread widening, a risk
that is symmetric and not skewed to higher spread duration. …Managed futures or
global macro could be a good alternative. …Switching to managed futures from
corporate bods achieves three goals: 1. a reduction in credit risk; 2. a switch
into a strategy that may have more upside potential; and 3. an increase in the
diversification within the overall portfolio.
Alt Lending Has Many Benefits, Swedroe
This process benefits everyone: the borrower, who gets a
lower rate and better service; individuals, who have access to attractive
investments; and our economy, which now has less systemic risk concentrated in
a few major financial institutions. [ sure, but...]
Fear of drawdown, sr-sv.com
Experimental research suggests that probability of outright
loss rather than volatility is the key driver of investor risk perceptions.
Moreover, fear of drawdown causes significant differences of prices for assets
with roughly equal expected returns and standard deviations. Investors forfeit
significant expected returns for the sake of not showing an outright loss at
the end of the investment period. This suggests that trading strategies with a
high probability of outright losses produce superior volatility-adjusted
returns. Rational acceptance of regular periodic drawdowns or “bad years”
should raise long-term Sharpe ratios.
Decomposing recent CTA performance, twosigma
A factor-based approach to analyze CTA performance may put
some more color on the recent trend as it helps decompose it in the main
driving risk factors. Four factors, representing the global fixed-income and
U.S. stock markets, currency (EUR-USD), and crude oil collectively appears to
explain about 60 percent of its weekly performance over the last year.³ During
the last week of June and the first week of July, the simultaneous declines in
US equity prices, global bond returns, and a weakening of the USD proved
especially painful to CTAs.
SOCIETY AND CAPITAL
Purposeful Capitalism and Risk Management: Lutfey Siddiqi,
CFA
Purpose can provide organizational framework and strategic
direction at a time of industry-wide structural change. Purpose can provide an
avenue of employee motivation, engagement, and retention. Purpose — when
clearly articulated and followed through with action — can also build
organizational goodwill.
Is there a really inescapable economic reason why immigrants
are so essential to the country’s economic future? There might be. That reason
is agglomeration -- the tendency of economic activity to cluster in highly
productive cities…businesses need to be near their customers, while customers
-- who are also workers -- need to live near their employers. …a second reason
cities are so crucial to a nation’s productivity. When knowledge workers --
engineers, designers, managers and other creative folks -- live near each
other, ideas tend to flow freely between them, increasing innovation and
progress. Companies that rely on these workers can also take advantage of
having a lot of them in a small area -- an effect known as a thick market. The
innovative potential of cities is especially key to the modern knowledge
economy…This is why immigrants are so vital. With a growing population,
agglomeration effects work their magic.
Life expectancy gains have stalled. The grim silver lining?
Lower pension costs
Economics and Race - 18 studies, nationalaffairs.com
Blockchain is a technology that offers reliable by
decentralized record-keeping. The best-known applications of
"blockchain" technology are still the alternative currencies, of
which Bitcoin remains most prominent. But it looks more and more as if the main
near-term expansions of blockchain technology are not going to be about
currencies, but instead relate to other kinds of ownership, transactions, and
record-keeping. A couple of recent
studies emphasizing this theme are "How blockchain technology could change
our lives," written by Philip Boucher, Susana Nascimento, and Mihalis
Kritikos for the European Parliamentary Research Service (February 2017), and
"Blockchain and Economic Development: Hype vs. Reality," written by
Michael Pisa and Matt Juden for the Center for Global Development (CGD Policy
Paper #107, July 2017).
Density grid - confederate monuments, metricmaps.org
Farmland is in retreat. We should make the most of that,
newscientist
it won’t be easy to win broad acceptance that some
agricultural landscapes might be better off returned to the wild – or to agree
what “wild” really means. And even when land is seen as useless for farming,
it’s not enough to just switch off the tractors and walk away. Land that’s no
longer irrigated is prone to fires and drought; and what initially finds root
in worn-out soil may be less than ideal in an ecological sense.
Who really owns American farmland? Newfoodeconomy.com
It’s a tenuous predicament, growing low-cost food, feed, and fuel (corn-based ethanol) on ever-more-expensive land, and it raises a host of questions. Is this a sustainable situation? What happens to small farmers? And are we looking at a bubble that will burst? …there’s an additional factor: well-heeled investors are snapping up farmland, driving prices up. Here’s how the Economist explained it: “Institutional investors such as pension funds see farmland as fertile ground to plough, either doing their own deals or farming them out to specialist funds. Some act as landlords by buying land and leasing it out. Others buy plots of low-value land, such as pastures, and upgrade them to higher-yielding orchards.”
The Computer Models Say That Diversity Helps, Bloomberg
"One winter in 1995, to have a little fun I constructed
a computer model of diverse problem solvers confronting a difficult problem.
Put aside for now what counts for fun at CalTech; "fun" at CalTech
rarely makes sense to the outside world. In my model, I represented diversity
as differences in the ways problem solvers encoded the problem and searched for
solutions. I referred to these ways of solving problems as tools. In working
through the implications of my model, I stumbled upon a counter-intuitive
finding: diverse groups of problem solvers -- groups of people with diverse
tools -- consistently outperformed groups of the best and the brightest."
The U.S. Labor Participation Problem, squaredawayblog
The [negative] superlatives come fast and furious in the
spate of reports coming out on the dwindling participation in the labor force
by Americans still in their prime working years. … “We have won the race to the bottom…”
…whatever party wants to take this on would need to keep its
own extremists in check.
Why Housing Has Outperformed Equities Over the Long Run, policytensor
Put another way, the risk premium on property is high
because property returns are low when the marginal value of wealth to the
marginal investor is high (ie, when times are bad for the average homeowner)
and high precisely when the marginal value of wealth to the marginal investor
is low (ie, when times are good for the average homeowner). This is as it
should be given the relatively progressive vertical distribution of housing
wealth. [right out of the gate this comes across as politically tendentious but
interesting nonetheless]
The public-sector pension industry is claiming a comeback
from losses suffered during the Great Recession. But this recovery is greatly
exaggerated: even years past the end of the recession, most pension sponsors
are unable to their full annual contributions, and pensions are taking as much
investment risk as ever. The first step to effective pension reforms is an honest,
accurate view of the costs and risks that public plans impose on government
budgets and taxpayers. [he wrote an under-informed editorial in today's wsj on retirement finance so I'm not sure how much cred he has anymore...]
Financial Incentives Beat Social Norms: A Field Experimenton Retirement Information Search, Bauer - Maastricht
University
A lack of pension knowledge undermines adequate savings
decisions. To understand what motivates individuals to inform themselves about
their pension situation, we conducted a field experiment with 245,712 pension
fund participants. We find that a small financial incentive is cost-effective
and increases the rate by which individuals visit their personal pension
website by 70%. Our experiment directly compares the effect of financial
incentives to different social norms, which turn out to be ineffective in the
pension domain. Financial incentives are effective regardless of gender, age
and income, while nudges are ineffective for each subgroup.
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