“The single greatest challenge you face as an investor is
handling the truth about yourself.” – Jason Zweig [delete "as an investor" and we are closer to the truth]
RETIREMENT FINANCE AND PLANNING
Robert Merton on the Promise of Reverse Mortgages and the Peril of Target-Date Funds, advisorperspectives.com
For every retirement product, Merton said, the measurement
of success should be income. …“Why would think that it would be remotely
possible that a single statistic – age – would be good enough to get you to a
decent retirement?” Merton asked. … “One
of the biggest global issues is how to fund retirement,” Merton said. “It is
faced by every country – large and small.”
… The implication of longevity means that we go from a 40-year working
career and a 10-year retirement to a 40-year career and a 20-year retirement.
The implication, approximately speaking, is that we must save 33% of our
working earnings for retirement instead of 20%. Without reverse mortgages, the
alternative, Merton said, is to reduce consumption or work longer. … If we can find ways to get more out of the
assets we accumulate, Merton said, then we can enjoy greater longevity without
sacrificing standard of living…The house should be viewed as an annuity while
you live in it and a financial asset that ultimately gets sold.
The Crisis in Retirement Planning, Robert C. Merton, HBR
[2014]
The trouble is that investment value and asset volatility
are simply the wrong measures if your goal is to obtain a particular future
income. Communicating with savers in those terms, therefore, is unhelpful—even
misleading. To see why, imagine that you are a 45-year-old individual looking
to ensure a specific level of retirement income to kick in at age 65. Let’s
assume for simplicity’s sake that we know for certain you will live to age 85.
The safe, risk-free asset today that guarantees your objective is an
inflation-protected annuity that makes no payouts for 20 years and then pays
the same amount (adjusted for inflation) each year for 20 years. If you had
enough money in your retirement account and wanted to lock in that income, the
obvious decision is to buy the annuity … Ironically, therefore, laws intended
to protect consumers would have the unintended consequence of prohibiting
savers from holding the risk-free income asset … The seeds of an investment
crisis have been sown. The only way to avoid a catastrophe is for plan
participants, professionals, and regulators to shift the mind-set and metrics
from asset value to income. … So what should retirement planners be investing
in? The particulars are, of course, somewhat technical, but in general, they
should continue to follow portfolio theory: The investment manager invests in a
mixture of risky assets (mainly equity) and risk-free assets, with the balance
of risky and risk-free shifting over time so as to optimize the likelihood of
achieving the investment goal. The difference is that risk should be defined
from an income perspective, and the risk-free assets should be deferred
inflation-indexed annuities.
Lifecycle Portfolio Choice With Systematic Longevity Risk And Variable Investment-Linked Deferred Annuities, Maurer, Kartashov et. al [2013]
This paper assesses the impact of variable investment-linked
deferred annuities (VILDAs) on lifecycle consumption, saving, and portfolio
allocation patterns given stochastic and systematic mortality.
Three Tips for Evidence-Based Retirement Plans, CFA
institute
the evidence as it relates to retirement planning —
specifically the distribution phase of an investing lifecycle — is often left
out of the discussion. … What is the advantage of applying a little
evidence to the process? Assume a $2-million portfolio split 70% in a
traditional IRA, 20% in a taxable account, and 10% in a Roth IRA. There is an
initial $50,000 withdrawal rate. The evidence suggests that an additional
$400,000 of wealth is gained and $225,000 less in taxes are paid over a 30-year
retirement period by switching from the “Common Rule” method to the
evidence-based “Informed TDD” strategy. Minor change. Major payoff.
Tax-Efficient Retirement Withdrawal Planning Using a Comprehensive Tax Model, Sumutka, Sumutka, and Coopersmith
Base model results show that the tax-efficient strategy
(TDD) is achieved by long-term income stability and characterized by low
withdrawal rates early in retirement, sequenced as follows: tax-deferred assets
up to tax deductions, the rapid depletion of taxable assets, tax-free assets,
and tax-deferred assets, preserved throughout the planning horizon. This
strategy produces the highest final total account balance, gained through an
average 4.5/6.6 percent pre-/post-RMD withdrawal rate, respectively….Strategies
that produce the highest final total account balance rarely produce the lowest
total taxes. Several common tax minimization and estate planning strategies do
not produce optimal results.
Life-Cycle Asset Allocation with Annuity Markets: Is Longevity Insurance a Good Deal? Horneff, Maurer, Stamos [2007]
In a final welfare analysis, we findnd welfare gains from
participating in annuity
markets to be around 10 percent at age 60. In our realistic
life-cycle setting, benefits
from annuitization are not as high as reported in previous
studies, for instance Brown
et al. (2001) who find welfare gains of around 40 percent.
Nevertheless, utility gains
from purchasing annuities are still substantial. This
suggests that behavioral factors
might explain the remaining part of the annuity puzzle.
MARKETS AND INVESTING
Perceiving the Real Value: How Inflation Communication Affects the Attractiveness of Long-Term Investments, Univ. Muenster
In an experimental study, we explore how different forms of
inflation communication affect the attractiveness of investing and thus the
propensity to delay consumption. Using a novel experimental approach that
mimics the distinction between nominal wealth and real purchasing power by a
declining conversion rate mechanism, we find systematic behavioral patterns
that are subtler than the naïve intuition suggests.
However, since 2000, the fraction of firms paying dividends
has been increasing. Unlike the disappearing dividends phenomenon, the
occurrence of reappearing dividends is almost exclusively attributed to
changing dividend elasticity (not to changes in firms' characteristics). The
time series changes in the dividend elasticity are driven by high- and
mid-profitability firms, especially those with volatile earnings. Finally,
although substitution of repurchases for dividends accounts for four-fifths of
the changing dividend elasticity seen during the 1978-2000 period, it does not
help explain the reappearance of dividends from 2000 on.
While firms connected to capital returns negligibly increase
their own buyback and dividend activities, they significantly increase their
equity issuance in the medium to long horizon.
The Information Content of Dividends, Cornell, Bocconi U,
Univ of Chicago
Contrary to the central prediction of signaling models,
changes in profits do not empirically follow changes in dividends. We show both
theoretically and empirically that dividends signal safer, rather than higher,
future profits… cash-flow volatility changes in the opposite direction from
that of dividend changes and larger changes in volatility come with larger
announcement returns… Crucially, the data supports the prediction — unique to
our model — that the cost of the signal is foregone investment opportunities.
We conclude that payout policy conveys information about future cash flow
volatility.
Strategic Asset Allocation: Combining Science and Judgment to Balance Short-Term and Long-Term Goals, Wang & Spinney [2017; not avail
for download]
…as the spending rate increases…endowments that overreach on
spending policy are particularly exposed to a requirement to earn more from
investment portfolios to prevent long term ruin…even small increases in the
spending rate can have meaningful consequences to long-term funding as well as
to the risk profile of the portfolio.
10 Steps to Investing Success, Darrow Kirkpatrick
“…the issue isn’t managing your investments, it’s managing
yourself while you manage your investments.” –Charles Hugh Smith
Black was right: Price is within a factor 2 of Value,
Capital Fund Management, Paris
We provide further evidence that markets trend on the medium
term (months) and mean-revert on the long term (several years). Our results bolster Black’s intuition that
prices tend to be off roughly by a factor of 2, and take years to equilibrate.
The story behind these results fits well with the existence of two types of
behaviour in financial markets: “chartists”, who act as trend followers, and
“fundamentalists”, who set in when the price is clearly out of line. Mean-reversion is a
self-correcting mechanism, tempering (albeit only weakly) the exuberance of
financial markets. … it takes roughly six years for the price of an asset with
20 % annual volatility to vary by 50 %.
… From a very practical point of
view, our results suggest that universal trend following strategies should be
supplemented by universal price-based “value” strategies that mean-revert on
long term returns.2 As is well known, trend following strategies offer an hedge
against market drawdowns (see e.g. [19]); value strategies offer a hedge
against over-exploited trends. As a consequence, we find that mixing both
strategies significantly improves the profitability of the resulting
portfolios.
ALTERNATIVE RISK
Risk Parity: How Much Data Should We Use When Estimating Volatilities and Correlations? ThinkNewFound.
We test lookback periods ranging from one quarter to
twenty-five years and conclude that risk parity results are robust to the
lookback period selected. This is good news as it means we don’t have to worry
too much about choosing the “right” parameter.
A simple approach given these results is to use a range of lookback
periods when calculating volatilities and correlations for a risk parity
implementation.
Why Trend-Following Works, Swedroe
They noted that trend-following has done particularly well
in extreme up or down years for the stock market, including the most recent
global financial crisis of 2008. In fact, they found that during the 10 largest
drawdowns experienced by the traditional 60/40 portfolio over the past 135
years, the time-series momentum strategy experienced positive returns in eight
of these stress periods and delivered significant positive returns during a
number of these events.
SOCIETY AND CAPITAL
Retirement-Related Economic Damages Calculations and the Fair Calculations in Civil Damages Act of 2016, Boston
College
Generally speaking, we find that the Act’s broad-brush
attempt to correct for possible gender discrimination would introduce more
distortions than it would resolve, and likely exacerbate the degree of
discrimination in economic damages calculations. A more effective approach to
address the possibility of gender discrimination is to allow forensic
economists to take gender into account (or not) on a case-by-case basis.
Purification of Shariah–Compliant Stocks: Problems and Solutions, Imam Muhammad ibn Saud Islamic University
There is no doubt that the phenomenon of investment and
trading in shares of mixed companies is one of the most important contemporary
issues which inspired the attention of a large segment of individuals who have
raised many fiqh and financial questions. Researchers have worked hard in the
field of fiqh and Islamic finance in developing solutions to these questions
through purification processes in order to make it a Sharīʿah-compliant
investment. However, there are still many problems related to cleansing which
make the practices in this area subject to continuous improvement. This study
aims to present an important aspect relating to the financial sector, i.e.,
purifying the equity market for it to be Sharīʿah-compliant
Islamic Versus Conventional Mutual Funds Performance in Saudi Arabia: A Case Study, Univ of New
Orleans .
We find that Islamic funds underperform Conventional funds
during full period and bullish period, but they overperform conventional funds
during bearish and financial crisis period. Such results are consistent with
prior studies with other Islamic and conventional mutual funds…One important
portfolio lesson from this case study is that Islamic mutual funds do offer
hedging opportunity for investors during economic downturns because of the
restrictions that Islamic law imposes on portfolio selection.
Shingles vaccine. NYT
Get it.
The Cost of Thanksgiving. FRED blog
Being in Control of Your Own Time, Ben Carlson
In many ways, a career is a lot like an investment philosophy.
There are no perfect jobs (or investment portfolios). Step one is finding a job
(or investment stance) that works for you. Steps two through one-hundred are
dealing with and accepting the drawbacks to your job (or investment strategy)
and being content with your chosen path.
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