Reminder: Pearl Harbor Day
QUOTE OF THE DAY
Even the most pessimistic forecasts of household undersaving
fall short of the most optimistic estimates of government retirement plan
underfunding. Andrew Biggs
RETIREMENT FINANCE AND PLANNING
It’s Not About the Money- On Lifestyle Diversification in Retirement, ofdollarsanddata
I understand the skepticism you may have listening to a 27
year old financial blogger tell you that retirement isn’t only about the money.
However, the fact remains that once you have some base level of financial
security, your day to day happiness in retirement will be more heavily impacted
by your relationships, your hobbies, and your sense of purpose than your
financial assets. I completely relate to this as my day to day happiness is
effected far more by my dating life and blogging life than what is happening
with the S&P 500.
SeLFIES address many of these issues. Governments could
issue a new, low-cost, liquid and safe ultra-long bond instrument. SeLFIES
start paying investors upon retirement and pay real coupons only—say,
$5—indexed to aggregate per capita consumption—for a period equal to the
average life expectancy at retirement, e.g., another 20 years. Instead of
current bonds that index solely to inflation, SeLFIES cover both the risk of
inflation and standard-of-living improvements.
For those who don’t actually need to use their retirement
accounts – yet, or at all – the mandatory withdrawals of the RMD obligation
presents a substantial tax challenge, as the forced distributions not only
trigger taxes on the RMD amount itself, but also risks driving the retiree up
into a higher tax bracket when stacked on top of all of his/her other
retirement income as well. Fortunately, though, the reality is that there are
numerous strategies that can be leveraged to manage and minimize required
minimum distributions – both for those who have already reached the RMD phase,
and also those still accumulating towards it, who want to plan ahead to
minimize the bite of RMDs in the future.
How to Hedge Your Retirement Plan, Kirkpatrick
There are many things that blow up the best laid plans. Some we can control and some we can’t. Below is a list of big risks and some ideas
about hedging them based on my own experiences and what we’ve observed from our
retirement planning users.
Social Security Benefits: the Big Picture, Dirk Cotton
Although I prefer the second strategy to the first, both are
missing critical elements of the decision by proposing that we claim Social Security
benefits as an isolated exercise. In reality, the correct claiming decision is
largely influenced by the composition of the remainder of our retirement plan…The
key point is that a retirement plan is a portfolio of income-generating assets
that interact with one another in much the same way as do stocks and bonds in
an investment portfolio. Choosing a Social Security benefits-claiming strategy
in isolation from the other decisions of the retirement portfolio excludes
critical considerations and is likely to provide sub-optimal choices. It's like
trying to pick a stock investment without considering what's already in your
portfolio.
MARKETS AND INVESTING
Five Simple Behavioural Tips For Better Long-Term Investment Decision Making, behaviouralinvestment.com
The purpose of this short piece is to highlight five ideas,
influenced by behavioural science, which could lead to better long-term
investment decisions:
Ways To Manage Risk, Blue Sky Asset Mgmt
It is critical to construct portfolios that investors can
live with through both good and bad times. In order to do so, we believe the
approach needs to be systematic to attempt to remove the behavioral biases that
can hurt investor returns. We also believe the approach needs to be responsive
to market changes where we can make adjustments that can help avoid prolonged
bear market losses while attempting to capture bull market gains. Of course,
this is can be a very difficult balance to meet – there are no silver bullets.
Investors in risk managed strategies like we’ve described, will most likely see
relative under-performance during bull markets due to the risk management
strategies that are employed to protect their capital, and out-performance when
the risk management pays off as markets decline.
Some Words of Caution About the 2/10 Spread,
crossingwallstreet
With the 2/10, we gain a rare example of a forward indicator
with a decent track record but it comes at the expense of timing. To put it in
clearer words, the world doesn’t automatically explode once the 2/10 gets
inverted.
Building Your Fortune Through Time, whitecoatinvestor
This is a guest post from an endowment fund investment
manager and a blogger who blogs at Our Family Fortune. We have no financial
relationship. Today he walks us through the various decades of our lives and
where we should be focusing.
The Unique Risks of Portfolio Leverage: Why Modern Portfolio Theory Fails and How to Fix it, Jacobs & Levy
MPT can be fixed by explicitly incorporating a term for
investor leverage aversion, as well as volatility aversion, allowing each
investor to determine the right amount of leverage given that investor’s
preferred trade-offs between expected return, volatility risk and leverage
risk. Incorporating leverage aversion into the portfolio optimization process
produces portfolios that better reflect investor preferences. 9
Diversification is Not Always a Free Lunch, Alphaarchitect
The authors find that as we move toward 10 fund managers
(aka portfolios, aka strategies), it becomes exceedingly difficult to a create
a blend with active risk greater than 2%, suggesting that even if pension funds
are determined to maintain high levels of active risk, it becomes practically
impossible to do so. Similarly active share and stock specific risk decline.
If individuals want to assess the probability of the event
actually happening in order to make portfolio decisions, then they have to
focus on the real-world probabilities.
Ultimately, an investor’s cost function associated with market events
depends more on life circumstances. While a bad state of the world for an
investor can coincide with a bad state of the world for the market (e.g. losing
a job when the market tanks), risk in an individual’s portfolio should be
managed for the individual, not the “typical household”.
ALTERNATIVE RISK
Momentum is one of the strongest, if not the strongest, of
the major market “anomalies” documented in the literature. But most academic
studies ignore real world costs and other forms of slippage when examining factors,
which is likely a larger issue for momentum due to its higher turnover. The
concern is that momentum is so costly to trade that its return premium is
diminished in the real world…We don’t address this in the paper, but I would
argue that this finding — that momentum is implementable at low cost — holds
even more strongly when it’s part of a multi-factor portfolio, where factors
that complement momentum, like value, will dampen turnover. All considered, we
find that momentum is quite implementable in real life.
we show that a bottom-up approach to multi-factor portfolio
construction can produce superior results than a combination of individual
single factor portfolios, at least for well-known factors such as Value,
Quality, Low Volatility, and Momentum. Because the bottom-up approach assigns
weights to securities on multiple factor dimensions simultaneously, it accounts
for cross-sectional interaction effects in a way that combining single factor
portfolios does not.
This chapter delves deeply into an area of rules based
portfolio construction which has largely been overlooked. … we demonstrate a
closed form solution to the maximum effective multiplier under a certain set of
conditions. Importantly, we highlight that screening and weighting decisions
interact, and should therefore not be made independently. Ultimately, the
performance and characteristics of a portfolio is linked to the combined effect
of screening and weighting decisions through the maximum effective multiplier.
Essentially, bitcoin's cash market is like a river. Its flow
is dependent on constants and so it generally flows in one direction. The
bitcoin futures market, on the other hand, is like an ocean with thermohaline
circulation: its flow is dependent on several variables. Marine life in the futures market is not as friendly.
The waters are infested with killer whales. Apex predators that feed on other
whales. They even feed on themselves.
Wes Gray on Momentum at The Capital Spectator
Momentum Leaves Other Factor Strategies In The Dust ThisYear, capitalspectator
All the major equity factor strategies are posting solid
gains for the one-year trend through yesterday’s close (Dec. 6), which makes
momentum’s run all the more impressive. Indeed, the strategy’s return edge over
the rest of the field has continued to accelerate since our update a month ago.
SOCIETY AND CAPITAL
The Effect of Education on Health and Mortality: A Review of
Experimental and Quasi-Experimental Evidence. RAND , Princeton ,
Erasmus U
There is no convincing evidence of an effect of education on
obesity, and the effects on smoking are only apparent when schooling reforms
affect individuals’ track or their peer group, but not when they simply
increase the duration of schooling. An effect of education on mortality exists
in some contexts but not in others, and seems to depend on (i) gender; (ii) the
labor market returns to education; (iii) the quality of education; and (iv)
whether education affects the quality of individuals’ peers.
The Curse of the Young Millionaire, Ben Carlson
Making tons of money at an early age is probably a
combination of the best and worst thing that can happen to you. It gives you
tons of possibilities but also opens you up to potential problem situations if
you’re not equipped to handle it…One of the biggest problems with becoming
wealthy, especially when it happens really fast, is that people become
overconfident and assume wealth equals better decision-making ability. If
anything, more money often causes people to make worse decisions. Success early
on in life can also give you a false sense of intelligence or skill.
Filial Support Laws: “A Sleeping Giant” CFAinstitute
…filial support laws “could be a sleeping giant.” Why?
Because they could make adult children legally responsible for long-term-care
expenses — such as nursing home bills — should a parent be unable to pay. While
these statutes are not new, their enforcement is.
Risk and Returns in Shariah Compliant Cross-Section Stocks:
Evidence From an Emerging Market, Hanif & Shah
This study is intends to understand and document the impact
of market-based — market returns and momentum — as well as firm-specific —
size, book to market ratio (B/M), price to earnings ratio (PER) and cash flow
(CF) — factors on pricing of Shari’a compliant securities as explanation of
variations in stock returns in an emerging market
It’s no secret house prices differ across the U.S.
There are also large differences in how these prices change over time. In the
short-term, the data include a lot of noise and temporary regional
peculiarities. Over the longer haul, though, clear trends can emerge…
Map: Visualizing Every Ship at Sea in Real-Time,
visualcapitalist
It covers over 70% of the Earth’s surface, is home to
millions of species of life, and it makes up 97% of all water on the planet.
But, with this massive size and ubiquity also comes a significant challenge for
humans interested in trade: it must be constantly traversed in order for us to
move goods around.
Why More Americans Seem Stuck in Place, Tim Taylor
A series of studies shows that the interstate migration rate
has fallen substantially since the 1980s. Americans now move less often than
Canadians, and no more than Finns or Danes. ... [M]obility rates are lower
among disadvantaged groups and that mobility has not increased despite becoming
“more important” to individual economic advancement.
Dalio then described how the dynamic works, similar to his
economic cycles explanation in his 2003 paper “How the Economic Machine Works.”
As SALT rates and debts rise due to shortfalls, high-income taxpayers will move
from high SALT locations to low SALT locations
to temporarily escape these issues. As this increasingly happens, the
value of the higher SALT locations depreciates because there is now less
spending in those locations, while the opposite occurs in the low SALT areas thanks
to their new inhabitants. This eventually bottoms out when the SALT ratios
switch. Unfortunately, the process creates more polarity between the “haves”
and the “have nots” as neighborhoods change to accommodate the “haves” while
the “have nots” are essentially pushed out due to the realization that they can
no longer afford to live in their neighborhoods. Dalio points to the recent
gentrification of downtown Manhattan
and Brooklyn as an example.
“I think it’s a harbinger of things to come, I think this is
a Trojan Horse,” said Charles Skorina in an interview with CIO. Skorina is the
founder of San Francisco-based Charles Skorina & Co., which recruits CIOs
and asset managers for endowments, foundations, and institutional investment
firms. “Congress has wanted to tax non-profit entities, and I think this is the
foot in the door. Some in Congress have regularly railed against tax-exempt
organizations.”
There has been a strong upward trend in collateralization
since the great financial crisis. Suitable collateral, such as government
bonds, is essential for financial transactions, particularly repurchase
agreements and derivative contracts. Increased collateralization poses new
risks. Collateral prices and haircuts are pro-cyclical, which means that
collateralized transactions flourish when assets values rise and slump when
asset values decline. This creates links between leverage, asset prices,
hedging costs and liquidity across many markets. Trends are mutually
reinforcing and can escalate into fire sales and market paralysis. Central
clearing cannot eliminate this escalation risk. The collateral policies of
central banks have become more important.
No comments:
Post a Comment