Nov 15, 2018

RH Links - 11/15/2018

QUOTE OF THE DAY

Mathematics, like medieval Latin, is a medium of disputation in economics wherein those skillful in its use can subdue those who are not, independent of any substantive economic meaning. Elton McGoun


RETIREMENT FINANCE AND PLANNING

So what, we retired at the peak of the bull market? Here are seven reasons why we’re not yet worried… ERN
…it looks like I might become my very own poster child of Sequence Risk. https://earlyretirementnow.com/2018/11/05/retired-at-the-market-peak-still-not-worried/

The New Three-Legged Retirement Stool: You, You, And You, FinancialSamurai
The new three-legged retirement stool now consists of: 1) Personal pre-tax savings (You) 2) Personal after-tax savings (You) 3) Personal hustle (You)  https://www.financialsamurai.com/new-three-legged-stool-for-retirement/
Change is Coming to the Retirement Landscape, Franklin Templeton Investments
This past year we’ve seen heightened buzz in Washington DC about retirement. Issues and proposals have included debate over the definition of “fiduciary,” treatment of multiple employer retirement plans (MEPs), and how to help more Americans better save for retirement, including those saddled with student debt. We think the big takeaway is “Change is coming.” It’s no longer a question of if, but when. https://www.advisorperspectives.com/commentaries/2018/11/02/change-is-coming-to-the-retirement-landscape

How to Determine How Long Your Portfolio Could Last in Retirement, M Milevsky
Heyday contributor, author and professor of finance at York University, Dr. Moshe Milevsky, explains the mathematical equation retirees can use to calculate their portfolio longevity.  https://www.heydayretirement.com/heyday-blogs/how-to-determine-how-long-your-portfolio-could-last-in-retirement

Budgeting for Real-World Situations, Ken Steiner
Because SWPs don’t coordinate with other sources of income and are simply drawdown algorithms, their use is frequently inconsistent with a couple’s (or single individual’s) retirement goals in these real-world situations.  Since SSPs focus on spending and not withdrawals from accumulated savings, they can be tailored to address these real-world situations to better meet retirement objectives. http://howmuchcaniaffordtospendinretirement.blogspot.com/2018/11/budgeting-for-real-world-situations.html


Our #1 Challenge: Retirement Insecurity, Charles Ellis
One of the consequences of the shift in corporate retirement plans from defined benefit to defined contribution is widespread retirement insecurity. Although most people in the top one-third of economic affluence will be fine, for the other two-thirds—particularly the bottom one-third—the problem is a serious threat. We can prevent this painful future if we act sensibly and soon by raising the alarm with our corporate and government leaders.  https://www.cfapubs.org/doi/full/10.2469/faj.v74.n4.2

Evaluating Spending Policies in a Low-Return Environment, Wang et al
For an endowment seeking to minimize payout variability while preserving the long-run health of the institution, appropriate spending policy is a crucial choice. We study two competing methods for setting spending policy—the “moving-average” method and the “snake-in-the-tunnel” (SIT) approach. We show that the SIT approach may significantly decrease the possibility of spending reductions in the short run. Additionally, the SIT approach with 3%–7% bands allows for a smooth evolution of payouts over time, which enhances spending predictability while preserving the endowment’s real (inflation-adjusted) long-run purchasing power.  https://www.cfapubs.org/doi/abs/10.2469/faj.v74.n4.1

Worry of Waning Retirement Income Big Reason for Annuity Purchases: Study, M Satter
Consumers looking to bolster their Social Security or pension income, or looking for a guaranteed lifetime income, are buying annuities.  Those are the top two reasons for annuity purchases, according to a LIMRA Secure Retirement Income study of annuity owners. According to its research, the primary source of income for 70 percent of retirees is expected to change from the current primary sources of Social Security and pensions. https://www.thinkadvisor.com/2018/10/31/worry-of-waning-retirement-income-big-reason-for-a/


MARKETS AND INVESTING

The Wall Street Math Hustle, How the financial industry’s embrace of bad math is BS.
Richard Wiggins & Michael Edesess @ Institutional Investor.
The financial industry uses mathematics in a manner that would be mortifying to any other field of science. Academic literature and industry research are rife with pseudo-mathematical nonsense. You don’t have to look far to see where the motivation lies: Many of the authors are either employed by or retained by richly paid investment management and consulting firms. Faced with soaring investor interest in algorithm-powered investment strategies, the habit — indeed, the requirement — today is for firms to use scientific language and notation to nourish the idea that they’ve proved mathematically that there’s a way to systematically beat the market.  They haven’t.  …  these new, risk-based approaches will work no better than a prayer for a plague to pass you by.  https://www.institutionalinvestor.com/article/b1bpqyp4684v06/The-Wall-Street-Math-Hustle

How convenience yields have compressed real interest rates, sr-sv.com
Real interest rates on ‘safe’ assets such as high-quality government bonds had been stationary around 2% for more than a century until the 1980s. Since then they have witnessed an unprecedented global decline, with most developed markets converging on the U.S. market trend. There is evidence that this trend decline and convergence of real rates has been due prominently to rising convenience yields of safe assets, i.e. greater willingness to pay up for  safety and liquidity. This finding resonates with the historic surge in official foreign exchange reserves, the rising demand for high-quality liquid assets for securitized transactions and the preferential treatment of government bonds in capital and liquidity regulation  http://www.sr-sv.com/how-convenience-yields-have-compressed-real-interest-rates/

When Things Get Wild, Morgan Housel
Every past decline looks like an opportunity, every future decline looks like a risk. https://www.collaborativefund.com/blog/when-things-get-wild/

Volatility Lessons, Fama & French FAJ 2018 Q3
The average monthly premium of the Market return over the one-month T-bill return is substantial, as are average premiums of value and small stocks over Market. As the return horizon increases, premium distributions become more disperse, but they move to the right (toward higher values) faster than they become more disperse. There is, however, some bad news. Even if future expected premiums match high past averages, high volatility means that for the 3- and 5-year periods commonly used to evaluate asset allocations, the probabilities of negative realized premiums are substantial, and the probabilities are nontrivial for 10- and 20-year periods. https://www.cfapubs.org/doi/abs/10.2469/faj.v74.n3.6

When Diversification Fails. Page and Panariello FAJ
One of the most vexing problems in investment management is that diversification seems to disappear when investors need it the most. We surmise that many investors still do not fully appreciate the impact of extreme correlations on portfolio efficiency—in particular, on exposure to loss. We take an in-depth look at what drives the stock-to-credit, stock-to–hedge fund, stock-to–private asset, stock-to–risk factors, and stock-to-bond correlations during tail events. We introduce a data-augmentation technique to improve the robustness of tail correlation estimates. Finally, we discuss implications for multi-asset investing. https://www.cfapubs.org/doi/abs/10.2469/faj.v74.n3.3

The Yield is Gravity, Corey Hoffstein
Using several fixed income ETFs, we demonstrate that yield remains the dominant force of returns over time, though price volatility and default risks are necessary components if we expect to earn anything above the risk-free rate. Like gravity, yield serves as a constant attracting force for portfolio returns…  https://blog.thinknewfound.com/2018/11/the-yield-is-gravity/

  
ALTERNATIVE RISK

Managed futures beat both stocks and bonds over short-run, yet many are not feeling good, Mark Rzepczynski
Expectations for correlation also matter. Correlations change through time and are different based on the time frame reviewed. The benefits of diversification are time dependent. An investor's feeling about the quality of an investment is very much dependent on the time frame used for comparison and these factors can be subjective. October reinforces the not often discussed problem of determining how much time is necessary to measure success or failure for diversification. Good investment time perception means being a patient investor, and patience cannot be found in one month of performance, but how long is enough?  http://mrzepczynski.blogspot.com/2018/11/managed-futures-beat-both-stocks-and.html

Understanding Momentum and Reversal, Kelly Moskowitz Pruitt
We show that the momentum and long-term reversal effects are explained by a conditional factor pricing model. We use instrumented principal components analysis to construct an improved conditional model in which dynamic loadings are functions of observable firm characteristics. Model-based expected returns, which are solely determined by exposures to systematic risk factors, provide much stronger predictive power for future realized returns than momentum or long-term reversal. We show that these return trend variables "work" because they are imperfect proxies for time-varying beta compensation, and that properly measured conditional betas render the effects of momentum and long-term reversal small and insignificant. In contrast, the short-term reversal phenomenon is distinct from the conditional pricing model, consistent with a pure liquidity effect. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3269897

25 years after Jegadeesh and Titman - The Momentum Revolution
25 years later, momentum and trend-following are a core part of investment thinking. These are not just considered investment strategies but fundamental risk premia. The discussion has moved from thinking about ways to dismiss these risk premia to offering reasons for their existence. What trend-followers knew but may mot have clearly articulated is that behavior creates slower reaction to news. Biases drive trends.  ,,, 25 years into momentum and trend style acceptance, researchers have looked at an ever-increasing set of data over markets and time to show that trends exist. Of course, there is an ebb and flow with returns associated with these strategies but over the long run, you can go to the bank that the risk premia is present. http://mrzepczynski.blogspot.com/2018/11/25-years-after-jegadeesh-and-titman.html

Portfolio Optimization and the Sharpe Multiplier: A Case Study on Managed Futures, Adam Butler
Futures exhibit several features that make them challenging from a portfolio optimization perspective. In particular, there can be mathematical issues with large correlation matrices, and certain futures markets may exhibit high correlation in certain periods. However, for practitioners that are willing to make the effort, the extreme diversity offered by futures markets represents a lucrative opportunity to improve results through portfolio optimization. https://www.advisorperspectives.com/articles/2018/11/12/portfolio-optimization-and-the-sharpe-multiplier-a-case-study-on-managed-futures

Momentum Distinctions, Swedroe
Goyal and Jegadeesh suggest that trend-following strategies really just provide exposure to CS momentum with an additional time-varying net long investment in risky assets. While net long over the longer term, managed futures will be net short at certain periods—for example, trend-following strategies generally tend to be net short when markets are in crisis. This is an attractive property, since trend-following has historically provided a left-tail (the risk of large losses) hedging property during poor market periods. https://www.etf.com/sections/index-investor-corner/swedroe-momentum-distinctions/page/0/2

No diversification in Mudville - Time to try different risk premia styles. Mark Rzepczynski
An alternative form of diversification is to breakout of asset class risk and switch to style risk that is focused on alternative risk premia. The concept of alternative risk premia is to isolate the risk within an asset class to some constituent components like value, carry, or momentum. This diversifies risk on another level beyond asset class or beta exposure. When blended across a number of premia, this diversification can be done with or without making a focused class decision. http://mrzepczynski.blogspot.com/2018/11/no-diversification-in-mudville-time-to.html


SOCIETY AND CAPITAL

The Scandinavian Style of Capitalism, Tim Taylor
Referring to "socialism" gives them that that college-sophomore thrill of being daringly different and appalling the bourgeoisie.  But when asked for real-world examples, they do not typically point to other countries which display primarily government ownership of the means of production. Instead, they point to national health insurance and to various European countries--in particular, to northern European countries like Sweden, Denmark, Norway, and sometimes Finland. The true socialists I know see this point of view as selling out to capitalism.  http://conversableeconomist.blogspot.com/2018/11/the-scandinavian-style-of-capitalism.html

Carbon Tax, John Cochrane
You can't blame the suspicious Washington State voter from wondering if perhaps a larger agenda isn't being financed here. There is a sensible middle. Voters who want to do something about carbon, but not finance massive boondoggles or a collectivist progressive agenda. Environmentalists who want to do something about carbon that actually will work. Skeptics who understand, as long as we're going to so something, let's do it efficiently via a carbon fee rather than at massive cost as we are doing now.  https://johnhcochrane.blogspot.com/2018/11/carbon-tax.html


How systemic financial risk is measured. Sr-sv.com
Public institutions have developed a wide range of methods to track systemic financial risk. What most of them have in common is reliance on financial market data. This implies that systemic risk indicators typically only show what the market has already priced, in form of correlation, volatility or value. They cannot anticipate market crises. Their main use is to predict when and how market turmoil begins to sap the functioning of the financial system.  http://www.sr-sv.com/how-to-track-systemic-crisis-risk/


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