The primary determinant of retirement cost is longevity.
Dirk Cotton
GRAPHIC OF THE DAY
from: 3D "utility surface" in a Wealth Depletion Time model by, well...by me.
RETIREMENT FINANCE AND PLANNING
What asset classes – if any – are useful in hedging against
inflation? Simple question, not an easy answer. It all depends on the horizon!
… In fact, the only asset class that had any chance at all to not just keep up
with inflation but also supports a withdrawal rate in the neighborhood of
3.5-4% would be equities. … With bonds,
you trade lower short-term volatility for a higher probability of running out
of money in the long-term! What would I do
personally?... I am probably going to increase our real estate investments
going forward.
Exploring the Low-Volatility Phenomenon: An Interview with Pim van Vliet, PhD, fortune financial advisors
How a New Bond Can Greatly Improve Retirement Security,
Kobor & Mralindhar
All else equal, individuals retiring a few years apart can
have vastly different retirement income outcomes (making retirement outcome a
function of one’s conception date). A new bond has been proposed to improve
retirement security – with a forward-start (tied to date of retirement),
income-only (as individuals need steady income), real cash flow stream (linked
to appropriate indices), for a fixed period (tied to average life expectancy).
This paper examines standard portfolio choices (60/40, target date funds),
along with holding this new bond in isolation, from a retirement income
perspective to demonstrate how this new bond, either individually or when used
in standard portfolio choices could greatly improve retirement outcomes. The
paper concludes with a Monte-Carlo simulation that further validates the value
of this new bond given the potential risks to all investment choices given
future equity, interest rate and inflation scenarios. [Comment: and after the fixed period?]
The “Future” of Retirement Planning, Dirk Cotton
The primary determinant of retirement cost is longevity. …
We develop retirement plans using models of the future but some models are much
better than others. Nor is the model a plan…. Though it is true that we can't
foresee our future path, it is also irrelevant — the purpose of the Monte
Carlo model isn’t to predict an individual retiree’s path through
the future (that’s impossible) but to explore a broad range of possible
scenarios and develop some estimate of the probability of each actually being
realized. Simulation is essentially a gigantic "what-if" analysis.
How to cope with Sequence of Returns Risk, omnipathfinancial
[wait for it….] "What else can be done? There is one
option. Instead of the fixed amount, if they target the withdrawal as the % of
the portfolio"
Mortality Models Incorporating Long Memory Improves LifeTable Estimation: A Comprehensive Analysis; Yan, Peters, Chan
We demonstrate in this work that the existence of long
memory in mortality data improves the understanding of mortality and the model
incorporating a long memory structure provides a new approach to enhance the
mortality forecasts…On comparing different life expectancy estimates, results
show the Lee Carter model without the long memory component may provide
underestimates of life expectancy. This underestimation has great impact on the
old-age support programs in social security and pension and may eventually lead
to insufficient funds in a pension scheme. In summary, it is crucial to
investigate how the long memory feature in mortality influences life
expectancies in the construction of life tables.
a well informed skeptic with a seasoned sensibility and at least some knowledge of how the underlying processes work can look at any tool's output and use it to their advantage while seeing and then discounting the weaknesses. [question: "doesn't seem weird to quote yourself?" "yes"]
MARKETS AND INVESTING
Question: Assume you are advising a pension fund, endowment
or foundation. What is a reasonable long-term expectation for real returns for
a well-diversified portfolio? Support as you see fit.
The plausible consequences of the passive investment boom
include [i] less information efficiency of markets, [ii] greater incentive for
low-quality issuance and corporate leverage, [iii] greater price correlation
across securities, and [iv] stronger transmission of financial shocks into
emerging economies.
[link from reader David C. I thought this was
interesting and worthy. I skipped over the risk parity sections, though.
A reader would be at least as well served by going to Markowitz's own comments
on Markowitz and Kelly in his 2016 book vs. indirectly via a PIMCO analyst but
this is a good, robust interpretation and cover. Regarding the authors reverence for utility:
academics and advanced practitioners take a fair amount of risk in disagreeing
with this reverence. Amateurs can (even though I just did some utility work myself) say: "uh....yeah...whatever."
Worth a look, though.]
Failing Slow, Failing Fast, and Failing Very Fast, Justin
Sibears, NewFound
For most investors, failure means not meeting one’s
financial objectives. In the portfolio
management context, failure comes in two flavors: slow failure results from
taking too little risk and fast failure results from taking too much risk.
ALTERNATIVE RISK
Inflation Protection Trade - TIPS Are Not Enough, Mark
Rzepczynski
The solution to inflation protection is to think outside the
immediate inflation securities box. Three alternatives come to mind, real
estate, systematic trading, and commodity risk premium portfolios. Each offers
a slightly different approach to providing inflation protection… A relatively
new strategy would be to invest in a commodity portfolio that is based on
commodity risk premiums. Instead of investing in a long-only basket with fixed
commodity weights, investors would build a commodity portfolio based on
well-defined risk premiums such as carry (backwardation/contango), momentum
(trend), value, and volatility. This portfolio will be uncorrelated with core
traditional assets and should be positioned to take advantage of inflation
increases. [I have a slice of commodity
futures vol]
Systematic strategies, by design, have a natural order flow,
leading to coordinated portfolio trade lists.
The execution of these trade lists increases covariances and
correlations of intraday returns and volume, both contributing to variability
of observed execution costs… Academic evidence suggests that reducing tracking
error (active risk) during times of high volatility in the market is an
effective strategy for avoiding “bad” times in factor investing… The issue of whether or not “machine
learning” is actually a new paradigm for systematic strategies has not been
determined. It is undeniable that quants
have always used “big data” and statistical methods which are the commonly
accepted hallmarks of machine learning.
Can other machine learning approaches such as pattern recognition,
outperform the traditional application of linear regression to factor investing
and trading? The empirical evidence with
respect to the application of machine learning to all aspects of investing:
alpha, beta, risk management, trading and execution is yet to be explored.
Yale Endowment – A Levered 60/40? Markovprocesses.com
So, when things are brought to the same common denominator –
risk-wise – we estimate the Yale endowment underperforms (after fees) both a
leveraged version of the 60/40 portfolio and an auto-pilot Risk Parity
portfolio. Though we believe there is a
role for alternatives and active management in a portfolio, when we factor in
risk to the Yale endowment performance puzzle, we’re on the side of Buffett in
this duel.
SOCIETY AND CAPITAL
Is It Costly to Introduce SRI into Islamic Portfolios? Erragragui
Elias
This research seeks to determine the financial price of
being both Sharī ‘ahcompliant and socially responsible. We
examine the financial performance of self-composed Islamic portfolios with
varying ESG scoring. The results indicate no adverse effect on returns due to
the application of Islamic and ESG screens, with a substantially higher
performance for positive screening on governance during post subprime crisis’
period. Significant outperformance still arises for portfolios with bad records
in community and human rights though. Performances are controlled for market
sensitivity, investment style, momentum factor and sector exposure.
A Generation of Interest Rate Illiterates, Brian Wesbury,
Robert Stein of First Trust Advisors,
An entire generation of investors has been misled about
interest rates: where they come from, what they mean, how they're determined.
Miami is racingagainst time to keep up with sea-level rise, businessinsider
The ground under the cities of South Florida
is largely porous limestone, which means water will eventually rise up through
it. [my home sweet home]
The Scientific Paper Is Obsolete, theatlantic.com
The more sophisticated science becomes, the harder it is to
communicate results. Papers today are longer than ever and full of jargon and
symbols. They depend on chains of computer programs that generate data, and
clean up data, and plot data, and run statistical models on data. These
programs tend to be both so sloppily written and so central to the results that
it’s contributed to a replication crisis, or put another way, a failure of the
paper to perform its most basic task: to report what you’ve actually
discovered, clearly enough that someone else can discover it for themselves.
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