In high school, I was a nerd and a loner. Harry Markowitz in 2016 interview.
GRAPHIC OF THE WEEK
RETIREMENT FINANCE AND PLANNING
Deciding Whether to Take a Pension Lump Sum: The 2 Opposing Methods, Darrow Kirkpatrick.
Despite the fact that a lump sum is a losing mathematical
proposition, people will still consider taking the lump sum for any number of
reasons based on their personal situation. Those reasons may range from pure
want to true need. In some rare cases where inflation plays a role, the math
may even make sense. Other pensioners may simply not realize a lump sum comes
at a discount (for the pension fund)
Self-Annuitization, Ruin Risk in Retirement and Asset Allocation: The Annuity Benchmark, Albrecht and Maurer, Univ. of Manheim [2001]
The present paper considers a retiree of a certain age with
an initial endowment of investable wealth facing the following alternative
investment opportunities. One possibility is to buy a single premium immediate
annuity-contract. This insurance contract pays a life-long constant pension
payment of a certain amount, depending e.g. on the age of the retiree, the
operating cost of the insurance company and the return the company is able to
realize from its investments. The alternative possibility is to invest the
single premium into a portfolio of mutual funds and to periodically withdraw a
fixed amount, in the present paper chosen to be equivalent to the consumption
stream generated by the annuity . The particular advantage of this self
annuitization strategy compared to the life annuity is its greater liquidity.
However, the risk of the second opportunity is to outlive the income stream
generated by this investment. The risk in this sense is specified by
considering the probability of running out of money before the uncertain date
of death. The determination of this personal ruin probability with respect to
German mortality and capital market conditions is the objective of the
following paper.
Annuity Valuation, Long-term Care, and Bequest Motives, John
Ameriks, Andrew Caplin, Steven Laufer, and Stijn Van Nieuwerburgh Pension
Research Council Working Paper [2007]
Financial security in retirement has traditionally meant
having a steady flow of annuity income as long as one lives, a definition
enshrined in the Social Security system. Our earlier research has stressed a
more holistic approach, which focuses on the match between resources and
spending needs. This formulation enables us to estimate annuity values given
long term care concerns and bequest motives, where these estimated values are
consistent with low observed demand for standard annuities. This chapter uses
this model to value non-standard annuities with various security-enhancing
features that we believe may be of value to retirees.
Rational Decumulation, Babbel & Merrill
In particular, high levels of annuitization are shown to be
rational under a wide range of risk aversion levels, even when stock market
returns and annuity price loadings are assumed to be much greater than is
generally the case. Ours is also the first study to model individual behavior
under the possibility of default by the insurer issuing annuities. We find that
even a little default risk can have a very large impact on annuity purchase
decisions.
Measures of Retirement Benefit Adequacy - Society of
Actuaries 2013, Bajtelsmit
This report focuses on measuring retirement benefit adequacy
in light of both expected and unexpected expenses in retirement and linking the
measurement to the needs and objectives of different stakeholder groups. The
report begins with a conceptual discussion of benefit adequacy and the various
ways it has been and can be measured. Adequacy measures examined include
replacement ratios, projected expenditures, and minimum societal standards.
Both income needs and lump sum equivalents are considered. Different measures
are better suited to the needs of different stakeholders and at different life
stages.
Personal finance health by whitecoatinvestor.com
Get married and stay that way. One house. One job. One
spouse.
Have a high salary
Career longevity
Insure against catastrophe
Live well below your means
Don’t sell low
Buy and hold reasonable portfolio
Be uncomfortable with debt
Limit educational costs
Pursue inexpensive hobbies
How to Spend Less, peterlazaroff.com
For starters, let’s redefine what we’re talking about.
Forget calling this ‘Saving.’ From now on this is called ‘Prioritizing.’
Fixed Living costs. Humbledollar
Why are fixed living costs so important? There are five
reasons.
Three Tips for Evidence-Based Retirement Plans, cfainstitute
When it comes to distributing a portfolio, there are
specific factors to pay attention to. Here are a few suggestions to put a
little evidence-based thinking into your clients’ retirement plans.
Active Won’t Save Your Retirement, Swedroe
There’s nothing new about these types of claims. You hear
them all the time from active managers. But do they contain any real
truths? To investigate that question,
I’ll offer a different perspective on these assertions, and provide the
appropriate historical evidence, so you can draw your own
Evaluating the Advanced Life Deferred Annuity: An Annuity People Might Actually Buy, Gong & Webb [2007]
Using numerical optimization techniques, we show that this
product would provide a substantial proportion of the longevity insurance
provided by an immediate annuity, at a small fraction of the cost. At plausible
levels of actuarial unfairness, households should prefer it to both immediate
and postponed annuitization, and an optimal decumulation of unannuitized
wealth. We show that few households would suffer significant losses were it used
as a 401(k) plan default.
The cost of health care, particularly for those on Medicare,
is a prime example of a financial planning assumption that gets a lot of new
research. This research causes us to evaluate whether our current estimates are
ones with which we are still comfortable. With that in mind, I'd like to review
our current assumption for health care costs in retirement, consider recent
research, and evaluate whether we need to adjust.
The Impact of Guaranteed Income and Dynamic Withdrawals on Safe Initial Withdrawal Rates, David Blanchett, JFP
Results from this analysis suggest that optimal initial safe
withdrawal rates varied significantly when guaranteed income was considered,
from approximately 6 percent when 95 percent of wealth was in guaranteed
income, versus approximately 2 percent when only 5 percent of wealth was in
guaranteed income. Safe initial withdrawal rates also varied when using dynamic
withdrawal strategies and forward-looking investment return projections, but
the impact was more muted (less than 1 percentage point).
MARKETS AND INVESTING
The growing danger from a market that is complacent of risk,
Mark Rzepczynski
Low volatility is a variation on the prosperity argument
used by Minksy to start the cycle of speculative excess. Low volatility lulls
investors into thinking risk is actually lower than reality just like
prosperity or no economic downturn will cause bankers to change lending
practices. Because perceived risk is lower, there is a willingness to increase
leverage and increase investment in riskier assets. Risky assets are bid higher
which are then used as collateral for further leverage. This volatility
argument is separate from the reach for yield because of low interest rates.
Risk-taking on low volatility makes the financial system more fragile.
Defining an Asset Class, windhamlabs
Asset allocation is one of the most important decisions
faced by investors, however there are no universally accepted criteria that
define exactly what an asset class is.
Caution Alone is Not an Investment Strategy, Ben Carlson
If markets are unable do the heavy lifting for a portfolio,
investors are going to have to pick up the slack elsewhere and learn to behave
enough to earn their fair share of market returns. Lower market returns likely
mean people should save more, make more, work longer, spend less or adjust
their lifestyle in retirement.
How to Balance Short and Long term Goals in Asset Allocation.
alphaArchitect
Investors following a purely quantitative approach to asset
allocation are often left with unintuitive portfolios with high turnover. On
the other hand, those who pursue ad-hoc approaches face uncertainty about the
portfolio’s risk level and the suitability of the allocation to reach specific
goals.
Can asset bubbles be mathematically quantified before they burst? AlphaArchitect
The history of bubbles and crashes in markets is well documented,
but rarely is there agreement about bubbles until after they burst. With this
simple formula, bubbles can be mathematically identified and categorized BEFORE
they burst. In addition, options traders should consider this formula in their
pricing algorithms, otherwise, the out-of-the-money puts will likely be
mispriced.
A Case Against Overweighting International Equity.
ThinkNewFound
In the case of U.S.
versus International, not only do we not expect the two baskets to share
similar characteristics, but the construction of the trade ensures it. This is important because both sides are now
exposed to different risk factors that can cause the trade to go off-course. For example, higher relative economic growth
in the U.S. may
help neutralize a higher relative valuation.
Introducing a variety of unintended risk factors means a diluted trade.
The Risk Of Estimating Risk, capitalspectator
Ultimately, the rationale for practicing some
risk-management analysis is bound up with the empirical fact that market
history repeats, albeit without a pre-determined time table. High-priced assets
beget low and negative returns, and vice versa… eventually. Accordingly,
prudent investors make reasonable rebalancing decisions based on a clear-eyed
view of risk through time. It could be different this time, of course. But
betting the farm on the notion that risk is no longer relevant isn’t investing
or even speculation – it’s hallucinating.
The Value of a Gamma-Efficient Portfolio, Blanchett [2017]
Based on our empirical tests and existing research, we
estimate that the “average” investor is likely to benefit significantly from
working with a financial advisor, so long as the advisor provides comprehensive,
high-quality portfolio services for a reasonable fee. The potential benefits
associated with making better portfolio decisions will vary considerably by
investor.
ALTERNATIVE RISK
Being short volatility is risky in a crisis - Do you know your volatility premium exposure? Mark Rzepczynski
The numbers suggest that being short volatility gave you a
positive premium in a stable world, but when the world is less stable, (higher
realized volatility), you do not want to be a vol seller. The chart suggests
that there can still be a positive risk premium when realized volatility is
high, but the odds work against you. It is a way to get to a realized
volatility of more than 20% at current levels, but that world can become a
reality quickly if there is an equity sell-off.
SOCIETY AND CAPITAL
Choice and Health Insurance Coverage, Tim Taylor
If you think if Medicare and Medicaid as examples of
"single payer" health insurance plan, you are at best partially
correct.
Why nothing can go faster than the speed of light,
cosmosmagazine
- Spacetime, not space and time
- we all travel in spacetime at a single speed "c"
- no more speed to gain
Portfolios of the Rich, Carroll, NBER [2000]
This paper documents another large difference between the
rich and the rest of the population: portfolios of the rich are heavily skewed
toward risky assets, particularly investments in their own privately held
businesses. The paper explores three possible explanations of these facts.
Rethinking Development: Larry Summers, Tim Taylor
"There has been more convergence between poor people in
poor countries and rich people in rich countries over the last generation than
in any generation in human history. The dramatic way to say it is that between
the time of Pericles and London in
1800, standards of living rose about 75 percent in 2,300 years. They called it
the Industrial Revolution because for the first time in human history,
standards of living were visibly and 2 meaningfully different at the end of a
human lifespan than they had been at the beginning of a human lifespan, perhaps
50 percent higher during the Industrial Revolution. Fifty percent is the growth
that has been achieved in a variety of six-year periods in China
over the last generation and in many other countries, as well. And so if you
look at material standards of living, we have seen more progress for more
people and more catching up than ever before. That is not simply about things
that are material and things that are reflected in GDP. ... [I]f current trends
continue, with significant effort from the global community, it is reasonable
to hope that in 2035 the global child mortality rate will be lower than the US
child mortality rate was when my children were born in 1990. That is a
staggering human achievement. It is already the case that in large parts of China ,
life expectancy is greater than it is in large parts of the United
States ."
As The Economist pointed out, “Measuring the economic impact
of all the ways the internet has changed people’s lives is devilishly difficult
because so much of it has no price.… This problem is an old one in economics.
GDP measures monetary transactions, not welfare.”
Registered mobile money accounts by region, Our World in
Data
Who Pays More In Salary Us State Or Federal Jobs? Metricmaps
13D
In the wake of the Harvey Weinstein accusations, women all
over the world are coming together in stunning numbers to name the men that
have hurt or humiliated them for so long. Unlike high profile sexual harassment
cases in the past — Anita Hill or Paula Jones come to mind — something feels
different this time. Public outrage is deeper and more sustained. No doubt many
powerful men across the professional spectrum are not sleeping well. As The New
York Times wrote over the weekend: “Several experts likened it to a dam
breaking, the cumulative effect of harassment claims over decades and
especially the last few years…Maybe it’s reflective of a specific period in
American history, in which working women of a new generation — those who had
grown up with working mothers — decided that enough was enough.” [even male retirement-finance bloggers could, theoretically, say #metoo but that is another story. Let's give this epochal change in the world to the women in our lives and world who can, should, and will lead the way]
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