...for many entrepreneurs, they spent a lifetime reaching just beyond their grasp, always reaching for the next goal, he said. “It’s a really lucky person who can say I have enough. I am comfortable with what I have.” NYT on wealth anxiety
IMAGE OF THE MOMENT
may daughter's cat sitting next to me helping with the weekend links...
RETIREMENT FINANCE AND PLANNING
Does Failed Retirement Income Planning Really Result In Bankrupt Financial Ruin? Derek Tharp at Kitces.com
This declining rate of bankruptcy in among retirement-aged
individuals is notable, because the greatest risk for retirees is outliving
their money. Yet with bankruptcy rates decreasing among older adults, the data
suggests that bankruptcy in retirement may not be (at least primarily) the
result of depleting a portfolio due to longevity or inadequate savings going
into retirement! A 2010 study from Deborah Thorne at the University of Ohio on
the interconnected reasons that elder Americans file for bankruptcy found that
credit card debt and illness/injury (which can trigger substantial medical
expenses, which may subsequently turn into unpayable medical debts) were the
two leading causes of bankruptcy among the elderly (based on self-reports from
those who had filed for bankruptcy). As Dirk Cotton has pointed out, sequence
of return risk does not appear to be a significant contributor to bankruptcy among
the elderly, as only 6.7% of filers reported “retirement” as the source of
their bankruptcy, and again bankruptcy rates are highest in the early years of
retirement—when failures due to sequence of return risk (based on reasonable
withdrawal rates) are mostly non-existent.
EarlyRetirementNow.com
How sensitive is the savings horizon to different rates of
returns? What happens if we use historical returns instead of one specific
expected return assumption? How important is the asset allocation (stock vs.
bond weights) on the path to early retirement? How much does the equity
valuation regime (e.g. the initial CAPE ratio when
starting to save) matter?
Annuities and Trusts, John L. Olsen, Michael E. Kitces,
Thinkadvisor
In the following discussion, we will examine some of the
problems advisors may encounter when annuities are owned by, or made payable
to, a trust, and the rules (i.e., the tax rules and the contractual provisions
and administrative policies of annuity issuers) that are not well understood.
Five Common Misperceptions About Using the Actuarial Approach for Personal Financial Planning, Ken Steiner
No one (not even actuaries or financial advisors) knows what
your investments will earn in the future and no one knows how long you (or your
spouse) will live. In fact, what we do
know is that whatever assumptions we make about the future will be wrong, and
future adjustments to spending plans will likely be required. These unknowns make spending budgeting a
difficult task.
Income Annuities: Immediate and Deferred, Dirk Cotton
The most important takeaway is that deferred income
annuities (DIAs) are the most economically-efficient way to fund late
retirement by providing "longevity insurance." Single-Premium Income
Annuities (SPIAs) are a better way to provide income throughout retirement for
retirees with an inadequate "floor" of safe income. The correct
choice depends on the problem or problems you are trying to solve — you might
even need one of each.
MARKETS AND INVESTING
It’s Long/Short Portfolios All The Way Down, Corey Hoffstein
Most investors would actually be better off by splitting the
exposure into cheaper beta solutions and more expensive, high active share
solutions. Bar-belling low fee beta with
high active share, higher fee managers may actually be cheaper to incorporate
than those found the middle of the road. The largest problem with this
approach, in our minds, is behavioral.
The predictability of relative asset returns, sr-sv.com
Empirical research suggests that it is easier to predict
relative returns within an asset class than to predict absolute returns. Also,
out-of-sample value generation with standard factors has been more robust for
relative positions than for outright directional positions. This has been shown
for bond, equity and currency markets. Importantly, directional and relative
predictability have been complementary sources of investment returns,
suggesting that using both will produce best performance.
The upside-downside risk embedded in options Mark Rzepczynski
If we look at the numbers from a year ago, the probability
of a 20% or more down move was more than double the risk of a 20% up move over
the next year; (13% versus 5%). Now, the chance of a 20% down move is
approximately 8% and the chance of an up move is about 2%. The market has a
tighter range but the chan[c]e of a down move is still much higher than an up
move. There is still skew to the downside but likelihoods have fallen.
ALTERNATIVE RISK
Time-Series Momentum Persists, Swedroe
The academic evidence suggests that inclusion of a strategy
targeting time-series momentum in a portfolio improves that portfolio’s
risk-adjusted returns. Strategies that attempt to capture the premium offered
by time-series momentum are often called “managed futures,” as they take long
and short positions in assets via futures markets.
Spider chart tells managed futures story differently. Mark
Rzepczynski
Measuring the Ivy 2017: A Year in the Upside Down forEndowment Returns, markovprocesses.com
FY 2017 was an unusual year for endowment performance. Ivy
League endowment returns were all positive, rebounding from a tough FY 2016.
Traditional under-performers outperformed, with traditional outperformers
posting more moderate returns. Public equity markets rallied strongly, boosting
the returns of the Ivy endowments. Longer term trends show that endowments
continue to increase exposures to illiquid investments, moving more toward the
Yale model of a high-risk, high-return portfolio.
SOCIETY AND CAPITAL
For each possible ameliorative strategy there will be
imperfections and the potential for negative behavioural spillovers (where an
intervention backfires and produces the opposite effect of that intended). However, there is little doubt that the
biases that impact recruitment in the asset management industry are deep-rooted
and material; for meaningful change, bold thinking and actions are required.
Tax Graph. John Cochrane
This is grumpy economist, Saturday morning cartoon edition.
Perhaps a colorful graph will help as you try to explain taxes to relatives
this Thanksgiving.
Suicides as a Response to Adverse Market Sentiment
(1980-2016), SSRN
Financial crises inflict significant human as well as
economic hardship. This paper focuses on the human fallout of capital market
stress. Financial stress-induced behavioral changes can manifest in higher
suicide and murder-suicide rates. We find that these rates also correlate with
the Gross Domestic Product (GDP) growth rate (negatively associated; a -0.25%
drop [in the rate of change in annual suicides for a 1% change in the
independent variable]), unemployment rate (positive link; 0.298% increase),
inflation rate (positive link; 0.169% increase in suicide rate levels) and
stock market returns adjusted for the risk-free T-Bill rate (negative link;
-0.047% drop). Suicides tend to rise during periods of economic turmoil…
The U.S.
retirement system, and the workers and retirees it was designed to help, face
major challenges. Traditional pensions have become much less common, and
individuals are increasingly responsible for planning and managing their own
retirement savings accounts, such as 401(k) plans. Yet research shows that many
households are ill-equipped for this task and have little or no retirement
savings. In this special report, GAO examines these challenges, drawing from
prior work and others’ research, as well as insights from a panel of retirement
experts on how to better ensure a secure and adequate retirement, with dignity,
for all. [I'm all for dignity. Watch
your wallet, though.]
Visualizing Household Income Distribution in the U.S.by State, visualCapitalist.com
How Food Banks Use Markets, Tim Taylor.
"Imagine that someone gave you 300 million pounds of
food and asked you to distribute it to the poor—through food banks—all across
the United States .
The nonprofit Feeding America faces this problem every year. The food in
question is donated to Feeding America by manufacturers and distributors across
the United States .
As an example, a Walmart in Georgia
could have 25,000 pounds of excess tinned fruit at one of its warehouses and
give it to Feeding America to distribute to one of 210 regional food banks. How
should this be accomplished?"
I am opposed to this change, mostly because I don’t like to
see the government deciding to go after a new source of wealth for its tax
base. The focal point of
non-interference ceases to be focal, and excesses and politicization too often
follow. Slippery slope!
“We want the telescope to be limited by fundamental
physics—the wavelength of light and the diameter of the mirror—not the
irregularities on the mirror’s surface,” says optical scientist Buddy Martin,
who oversees the lab's grinding and polishing operations. By “irregularities,”
he’s talking about defects bigger than 20 nanometers—about the size of a small
virus. But when the mirror comes out of the mold, its imperfections can measure
a millimeter or more. [I've built three (or was it four?) telescopes from scratch over the last
40 years so I think this is cool]
The "Paradox of Prudence" - It is real and needs your attention, Mark Rzepczynski
The "Paradox of Prudence" - Each firm tries to
reduce risk exposure and be micro-prudent, but this leads to more systematic
risk and is macro-imprudent. While some behavior can be market risk tampering,
risk management can also be risk amplifying for the economy as a whole.
Attempting to control your risk will spill-over to other firm.
“If someone doesn’t have that money growing up, it’s like
being shot through with too much energy,” she said. “There’s this undercurrent
that money equals love, power, security, control, self-worth, self-love,
freedom, self-esteem — all those loaded things that money supposedly can do,
but doesn’t.” Wealth frequently comes with a bundle of expectations — anxiety
and pressure to make smart money decisions, for example, about how it is
managed, spent, passed on to future generations, or used to create a legacy. There is a degree of fear. “People are afraid of the money,
how it might corrupt them, or make them insensitive to other people’s plights,”
Ms. Mellan said. “They worry about their kids having so much money thrown at
them that they will not be motivated to work for money and have a meaningful
life.”
“there are no “covering laws” which explain England ’s
primacy; the best we can do is to formulate explanatory generalizations with an
error term. Given that the “event” is unique, the tools of statistical
inference are inadequate to explain the timing of decisive innovations . . .
Furthermore, if the Industrial Revolution is thought of as the result of a
stochastic process, the question, “Why was England first?” is misconceived: the
observed result need not imply the superiority of antecedent conditions in
England” (Crafts, 1978).
There is only one power law with a variable exponent, and
it’s considered to be one of the most powerful forces in the universe. It’s
also the most misunderstood. We call it compounding.
The Constant Reminder -- How The Right Decisions And Compounding Can Lead to Huge Results ofdollarsanddata.com
This is the constant reminder. The reminder that the little
things you do, the actions you perform, the habits you build day in and day out
will form your life. Remember, you are a fractal of yourself. What you do on
one day you likely do on most days. You may not notice these actions on a daily
basis just like you probably don’t notice yourself getting fitter and you don’t
notice Voyager 1 moving away from us at 10 miles a second, every second.
However, these effects are still there, compounding away.
A Range of International Poverty Lines, Tim Taylor
"It would take some odd mixture of clueless, heartless,
and moral blindness to argue that poverty in the United
States or other high-income countries should
be defined in the same way as in low-income countries. But…"
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