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
2018 US volcano footprint and threat level https://metricmaps.org/2018/10/27/2018-us-volcano-footprint-and-threat-level/
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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