Jul 5, 2018

RH Links - 7/5/18

QUOTE OF THE DAY

Historical data shows that you haven’t died, yet it would be foolish to consider yourself immortal.  Ron Piccinini 

RETIREMENT FINANCE AND PLANNING

Building a Safe Floor of Retirement Income — in Advance. Mike Piper
The solution, rather than buying a bunch of bonds that mature when you turn 70, would be to work on building bond holdings that, when you turn 70, will still have a duration roughly equal to that of the annuity you expect to purchase. This way, the market value of your bonds will rise/fall along with the cost of such an annuity, helping to offset the interest rate risk that you face with the annuity purchase. https://obliviousinvestor.com/building-a-safe-floor-in-advance/

The New Glide Path, Corey Hoffstein
In practice, investors and institutions alike have spending patterns that makes the sequence of market returns a relevant risk factor… For retirees making constant withdrawals, sustained declines in portfolio value represent a significant risk. Trend-following has demonstrated historical success in helping reduce the risk these types of losses… Using backward induction and a number of simplifying assumptions, we generate a glide path based upon investor age and level of wealth. We find that trend-following receives a significant allocation – largely in lieu of equity exposure – for investors early in retirement and whose initial consumption rate closely reflects the 4% level…. we find that trend following commands a significant allocation, particularly in the years and wealth levels where sequence risk is highest, and often is allocated to in lieu of equities themselves.  https://blog.thinknewfound.com/2018/07/the-new-glide-path/

Insights from Life-Cycle Financial Planning, Joe Tomlinson
Research on life-cycle economics and consumption smoothing has a rich history in economics stretching back almost 100 years, and more than a dozen Nobel laureates have contributed to the field of study. Unfortunately, this economics approach has not crossed over to the mainstream financial advice community. But, for the types of issues advisors encounter, it provides both a general unifying theme as well as sensible approaches for particular issues, and therefore deserves more attention. https://www.advisorperspectives.com/articles/2018/07/02/insights-from-life-cycle-financial-planning 



Are Your Clients Not Spending Enough in Retirement? M Statman
Self-control can be excessive. Indeed, excessive self-control is as prevalent as insufficient self-control. Excessive self-control is evident in the tendency to spend less today than our ideal level of spending, driving tightwads to extremes beyond frugality. The prospect of spending money inflicts emotional pain on tightwads even when it might otherwise be in their interest to spend. .. Balance, while we have the resources to seek balance, is important to a fulfilling retirement. [keep in mind this is written by someone not retired.  Also, using Taleb’s framework, we can maybe say that as one gets less stingy and closer to this writer’s “balance” the retiree will move from anti fragile towards fragile…at a non linear rate of change.  Beware of working PhD’s bearing advice] https://www.onefpa.org/journal/Pages/NOV17-Are-Your-Clients-Not-Spending-Enough-in-Retirement.aspx

In the Cards, Andrew Grossman at Humble Dollar
some questions just don’t matter. The financial world is unendingly complex, and it can be easy to get distracted by arcane questions that appear to be important. Whenever a question comes to mind, always ask yourself whether it would make any difference to your financial future. That may allow you to tune out questions that otherwise would consume unnecessary mental energy. http://www.humbledollar.com/2018/07/in-the-cards/

The Ideal Financial Scenario In Retirement: Conservative Returns, Steady Income, Fin. Samurai
Financial loss creates stress. And given stress kills, your goal as a retiree should be to remove as much stress from your life to live as long and happy as possible. https://www.financialsamurai.com/ideal-retirement-scenario-conservative-returns-and-a-steady-income/

Ten things the “Makers” of the 4% Rule don’t want you to know, ERN
I started out as a skeptic about the so-called “4% Rule” and I thought it might the time to poke a little bit of fun at the “makers of the 4% Rule.” Just to be clear, this post and the title are a bit tongue-in-cheek. Obviously, the “makers” of the 4% Rule, the academics, financial planners and bloggers that have popularized the rule aren’t part of any conspiracy to keep us in the dark. Sometimes I have the feeling they are still in the dark themselves! So here are my top ten things the Makers of the 4% Rule don’t want you to know… https://earlyretirementnow.com/2018/06/27/ten-things-the-makers-of-the-4-rule-dont-want-you-to-know/

Understanding FIRE: a philosophy for financial independence and retiring early, work.QZ

The biggest challenges of early retirement, businessinsider
“While I have not experienced much of any of the downsides associated with early retirement, I have followed the subject closely for years and realize there are some. With that said, I'd like to share ten early retirement downsides to consider as part of an early retirement decision. I'll also include ways I've overcome some of these, plus suggestions for avoiding them.” [highly relatable except for 4 and 9] https://amp-businessinsider-com.cdn.ampproject.org/c/s/amp.businessinsider.com/challenges-downsides-early-retirement-advice-2018-6

The Advisor & The Quant: Is the 4% Rule Dead? Thinkadvisor
When we pair new research with the practical challenges of actually implementing a 4% rule, the result should be clear. The 4% rule is dead. In retirement, the stakes are simply too high to rely on a rule of thumb. Strong financial planners use strong tools to come up with reasonable “crash tests” based on the holdings of the portfolio. They consider lumpy cash flows, Social Security and other guaranteed income sources and account for taxes and fees to arrive at a reasonable withdrawal strategy. https://www.thinkadvisor.com/2018/07/03/the-advisor-the-quant-is-the-4-rule-dead/

1972 Retirement, a type 2 error, EREVN
As humans we tend to care more about downside than upside, so missing out on the big upside of high withdrawals at age 90 isn’t a big negative. https://medium.com/@justusjp/1972-retirement-a-type-2-error-94c8760787fd


MARKETS AND INVESTING


It Ain't What You Don't Know That Gets You Into Trouble, Asness
The size effect paper is the easier one to discuss in a short blog. There isn’t one. That is, there isn’t a pure size effect (there is a paper). In fact, there never was a size effect. https://www.aqr.com/Insights/Perspectives/It-Aint-What-You-Dont-Know-That-Gets-You-Into-Trouble

Dividend Policy & Stock Returns, Swedroe
The implication of Mozes’ work is that, at least at the country level, investors interpret changes in dividend policy in the way economic theory would predict: Increases in dividend payout rates signify a reduction in a country’s investment opportunity set and so are interpreted by investors as bad news. The reverse holds as well.  http://www.etf.com/sections/index-investor-corner/swedroe-dividend-policy-stock-returns

The Knowing-Doing Gap in Behavioral Finance, cfainstitute
Even those who value behavioral finance insights tend only to use them to demonstrate their awareness of cognitive biases, not to apply behavioral finance solutions to improve decision making. https://blogs.cfainstitute.org/investor/2018/07/03/the-knowing-doing-gap-in-behavioral-finance/

Updated “Lecture Notes,” ergodicity economics  https://ergodicityeconomics.com/lecture-notes/
Ch.1: discussion of random variable, stochastic processes, ergodicity.
Ch.2: general mapping dynamics utility function (beyond Kelly, includes historical example of square-root Cramer utility).
Ch.3: log-normals vs. power laws, sums of log-normals, random-energy model.
Ch.4: New chapter. Re-allocating Geometric Brownian Motion (RGBM). Analytic solution of RGBM. Analysis of US wealth data.
Ch.5: Applications of stochastic market efficiency: solution of the equity premium puzzle, central-bank interest rate setting, fraud detection, a theory of noise. New data analysis, including tests of predictions for SP500 total return, DAX, bitcoin, Bernie Madoff’s Ponzi scheme.


ALTERNATIVE RISK

Term premia and macro factors, sr-sv
long-term inflation expectations plausibly shape the long-term trend in yield levels. Also cyclical fluctuations in inflation and unemployment explain slope and curvature to some extent. A recent IMF paper proposes a methodology for integrating macroeconomic variables in a conventional affine term structure model.  http://www.sr-sv.com/term-premia-and-macro-factors/

SOCIETY AND CAPITAL

There are plenty of ways to get rich — start a business, save & invest wisely, inherit money, get lucky, etc. But staying rich involves just a few simple things — self-awareness, modesty, and the ability to delay gratification with a portion of your capital. Ben Carlson http://awealthofcommonsense.com/2018/07/sustaining-wealth-is-harder-than-getting-rich/

The Myth of Dynastic Wealth: The Rich Get Poorer, Arnott, Woo, Bernstein 2015
Ten of these forces are identified by Arnott, Bernstein, and Wu. They include low security returns, investment expenses, income and capital gains taxes, performance chasing and poor investment decisions, charitable giving, hedonic readjustment of the standard of living, division among heirs, estate taxes, estate and tax battles, and last but not least, spending. They estimate the cost of these forces to be 10% a year of return (1% for each) over an investment portfolio’s lifetime. This assumption translates into a real return for an investment portfolio of −5% a year, given Piketty’s assumption of a 5% real return. That means real net worth would be slashed in half every 14 years—and the authors believe this to be a best case scenario. https://www.researchaffiliates.com/en_us/publications/journal-papers/359_the_myth_of_dynastic_wealth_the_rich_get_poorer.html

The Sum of the Sandbags Doesn’t Equal the Sandbag of the Sum, www.probabilitymanagement.org
Sandbagging is the practice of padding one’s budget to avoid running out of money in the face of an uncertain forecast… To achieve the desired 90% confidence, the CFO might need only $105M, which we refer to as the Sandbag of the Sum. So, in this case, $5M is just lying around gathering dust instead of being available as investment capital. If you don’t think that’s a big deal, go out and try raising $5M sometime. And this problem only compounds as you roll up layers upon layers of fat through a multi-tiered organization.

Black-White Income and Wealth Gaps, Tim Taylor
African-American households are experiencing real and severe economic disadvantages in the US economy. https://conversableeconomist.blogspot.com/2018/07/black-white-income-and-wealth-gaps.html

Soros to Bankroll Personal Injury Lawsuits, CIO
The billionaire’s Soros Fund Management ($27 billion) is bankrolling a company called Mighty Group, which gives cash advances to plaintiffs in hopes of settlements, and takes a cut of the money https://www.ai-cio.com/news/soros-bankroll-personal-injury-lawsuits/



No comments:

Post a Comment