Yield Curve Range Since 2011

from here

Watch the World Get Better

Press play on the embedded image and watch the world get better for a change.

Fail Rate Estimates vs. Number of Simulation Runs

The Votes Are In

My reader poll is done.  The question was whether I should keep doing this or move on.  Ignore the fact that I've found this "what I've been reading lately" linkfest to be totally ruinous to my eyes, the weight of the poll is upon me especially since I got a 100% "keep going" vote.  We'll also ignore that it was one vote. I think the mandate is clear.

Weekend Links

QUOTE OF THE WEEK

If you drove drunk but got home unscathed, you wouldn’t wake up the next morning and think, “I guess it’s okay to get behind the wheel after 13 beers.” Yet, when handling our finances, we do that all the time.  Jonathan Clements

CHART OF THE WEEK

RETIREMENT FINANCE AND PLANNING

Reverse Mortgages: When the Last Resort is the Best Resort, Dirk Cotton.  If you expect to remain in your home throughout retirement, my advice is to consider opening a HECM line of credit today, while interest rates are low and the maximum HECM loan value is high, but to hold off on spending much of it until you see what life has in store. Often when spending home equity, the last resort will prove the best. 

How Variable Withdrawals Improve Retirement Outcomes, Joe Tomlinson.  Once a retiree secures funding for essential spending needs, the remaining assets are “liberated” and can be invested more aggressively. [comment: I can't recall a single article by Joe that I have not found useful and insightful] 

I'm Not Immune to the Charms of a Possible Silver Trade

I was looking at silver futures today and I'm thinking it's possible there are some opportunities on the short side of future's options.  My point of view on fundamentals is that I don't think it's going to run a lot either way...but I can't support that here in a post very well since I don't have a lot of research at my finger tips.  Technically, the signals aren't stacking up strongly either way as far as I can tell so selling premium might not hurt.  The premiums seem to be ok -- not perfect, just ok -- and far enough out in a lower risk zone that it might be worth a look.  I'll be keeping an eye on this over the next week and doing a little research to see what I can gin up.  So far, as of today, this is what it looks like to me, with strike prices on the x axes.  Getting 2-300 for deltas under 10 for a couple months of time decay isn't too bad but I might be wrong. No doubt I'm missing something so I'll take my time.

A Dirty Little Piece of Braggadocio

I run, as a sideline, a hobby perhaps, though with a just-slightly-less-than-trivial grubstake, a systematic alt risk strategy that is more or less this: (fixed income momentum)+(macro)+(short vol)+(other).  Let's call it an incoherent hodgepodge of non-correlation strategies I thought I could manage based on all sorts of things I've picked up here and there over the years working in areas like consulting, trading, hedge funds, etc.  I have posted a bit on this elsewhere.  Mostly, if not entirely, rule based, I've been running this thing from somewhere around Q2 2011 [red flag: I am not tested by '07-'09!] thru today with minor twists and turns in strategy here and there over the years.  I have to say that during most days, weeks, months and years over that entire slice of time I have had serious and entrenched and ongoing doubts about whether what I am doing is accretive, on the margin, to my family's financial world, a financial world where the mistakes could be fatal to me and my kids if I get it wrong (that means I test everything, all the time, to make sure).  That also means that I have had a total commitment, every step of the way, to the proposition that the absolute millisecond I am convinced that it, this thing I do, is not adding to my overall efficiency, I will walk away...with no regrets...ever.    On the other hand, for a brief shining moment, I think I can say that I am doing ok. Tomorrow is another story but today is ok.  This is what I see YTD 2016:


+04.70%   S&P total returns
+04.29%   Barclays Hedge Fund Index
+00.15%   Barclays CTA index
- 01.56%   Credit Suisse Hedge Fund index
- 01.08%   Credit Suisse Global Macro index
- 03.24%   AQR Managed Futures returns
+04.30%   AOM asset allocation ETF*

+08.90%  RiversHedge "junk" strategy


Ah, but what about volatility you say?  I have no idea right now but every time I've checked on this over the last 5 years, the RiversHedge "junk" strategy has had substantially lower vol than all of that other stuff. Every time I put this on a mean variance map I seem to do ok (there are posts on the site that have the goods on this). I was too lazy to look at this issue for this particular post but I am confident that my Sharpe Ratio is on pretty solid ground here.  This is not a public accounting kinda thing so I guess you'll have to trust me for now.  Like I said in the title, I'm just doing a dirty little bit of bragging before everything goes south.  You know, a pride-and-fall kind of thing.





* Last time I checked this was 40-60 to 50-50 stocks/bonds.  Depends on when one looks.  I also need to dbl chk returns of AOM and S&P since the allocation index returns are a little too close to the S&P.  That confuses me but I will retreat to the hedge I've used before: no one reads this stuff so the stakes are low...

Weekend Links

QOTD

It’s hard to know the difference between “Be patient” and “Change your mind when the facts change.”  Morgan Housel

CHART OF THE DAY

      Withdrawal rates in retirement vs retirement duration in terms of fail rate estimates. 

       If I remember correctly this was from retirementresearcher.com.

      

RETIREMENT FINANCE AND PLANNING

Seeking A Fixed Percentage Approach To Retirement Spending, Pfau. 

Pension Section News – Sep. 2016, Society of Actuaries. Selected Articles:

• Thinking About Spending in Retirement: Findings From SOA and EBRI Research By Anna M. Rappaport
• Decumulation Strategy for Retirees: Which Assets to Liquidate  By Charles S. Yanikoski
• Decumulation for a New Generation  By Elizabeth Bauer
• Multiple Objective Asset Allocation for Retirees Using Simulation By Kailan Shang and Lingyan Jiang
• Decisions Misaligned With Priorities: The Non- Annuitization of Retirement Savings By Paul J. Yakoboski

Trading Time for Money

I keep bumping up against various option selling pros both online and in books that are pretty convincing about the idea of "trading time for money" -- by which they mean: get away from the common wisdom of option sellers that are focused on less-than-30-day time decay range "standard" -- in order to collect more premium for less risk. This is taking liberties with paraphrasing, of course, but their main case, which I think in general is more correct than not, is that by going further out in tenure (2-6 months tenure rather than 30 days or less) there is a sweet spot in time decay that provides some benefits like:

Another Case for Selling Options

This post is a pass thru post but I thought, since I often write options, that EconomPic.com had some good points on short-option strategies in an expensive market that were worth pulling out of the usual linkfest I do on Fridays.

     The Case for Put Writing in an Expensive Market

Hurricane in my hood

Weekend Links

QUOTE OF THE DAY

Google-Image search him, and you’re likely to see him smirking, with a boarding school-worthy forelock of hair and bow tie that combine to frame a perfect strike zone for your fist.  --Sam Grobart on someone or other...

CHART OF THE DAY

RETIREMENT FINANCE AND PLANNING

How to Get More Pleasure Out of Retirement Spending, WSJ.  … retirement planning is far more complicated than choosing which chocolate to eat. Yet, they do have something important in common: in both instances, we’re trying to maximize the pleasure of a scarce resource.  

Child Labor

From OurWorldInData.com

Highway 12

For all of my two, maybe three, readers: if you missed my "weekend links" last week that is because I was on the road.  US highway 12 to be specific.  Why 12? Well, because when I was a kid, before I94 even existed, US12 was the main (only) east-west highway going through Minneapolis.  It was like a river (had to throw than in for "RiversHedge" sake) flowing west.  When I finally figured out later that it went from all the way from Detroit to the Pacific, that particular fact tweaked my imagination and I decided I wanted to drive it all the way to the end some day, which I did, finally, carbon-shame notwithstanding, last week (except for the DTW to MSP leg which I had already driven). 

I won't describe the entire drive here as a blog post but my advice for anyone that has not seen the US or for anyone that has not gone west of the 100th meridian is to consider the Hwy 12 route/methodology.  This is for several reasons which I will describe here:

Recalling 1987

Yesterday's correction made me think about the 1987 crash especially after I tried to convey the sense of radical shock to my college-age daughter.  I'm not sure I communicated it well so I came back to look at it here.  I told her that I was in graduate school at the time and that we all stood in front of TVs more or less slack-jawed and agog at the "market chart line" that was not just straight down but relentlessly going further down every minute, every hour, every day.  I had a friend that had been in the workforce for a while and had accumulated a decent pile of retirement savings.  He turned to me and said at one point after a couple days (2 days?!) "I think I just lost half of everything I ever saved." Me? I had only pennies to my name so all of this was more or less abstract to me but I could feel the fear emanating from those around me.  On the other hand it all turned out ok so I guess that was the real lesson rather than "the world was ending" or as a trading mentor later told me in 2009 "the American economy is NOT going out of business" which is why I feel like I can afford to be a little blasé about these assertive moves that come and go over the years.  

Just for fun, though, and I don't think I got the scale right, but this is what it looked like, 1987 on the left, 2016 on the right.

On the Virtue of Risk Management Rules

About 10 years ago I gave over my trading to a systematic, rules based approach.  That helped turn the corner for me on trading i.e., from loser to profitable.  Fear and greed yielded to zen-ish disinterest and the impact of individual trades became only mildly interesting to me as a vague concept that was somehow related to the marginal economic impact of risk/return on a continuous trading system or a perpetual trading "machine."  I was reminded of the benefits of rules-based systems again today.  Since I run a strategy that shorts volatility by selling options on futures -- what I call a type-2 system: probability rich but with inverted risk return -- I tend to have high probability trades that are exposed to enormous risk for any given dollar in expected profit.  This week I happened to have a short put on the e-mini (ES) S&P futures Sep16 contract.  The strike was 2135 and at the time the trade was opened I believe that the option strike was > 2 standard deviations from the price level prevailing at that time (depending, that is, on one's assumptions about volatility and fat tails and such) so probability was in my favor, all else being equal.  All else was not equal because the market knew I was going out of town (ok, I don't really anthropomorphize the market and I take responsibility for my own trading decisions and risk...but this is a blog...) and decided to school me in risk just for the hell of it.  This is what it looked like today (as of 4pm ET). Keep in mind that low-probability-of-being-reached 2135 strike:

Now, without rules this would have been agony and as it was it wasn't all that much fun to have my expectations broken but at least I didn't get taken to the cleaners and the loss didn't bother me all that much. A 2:1 or 3:1 inverted risk:return realized via a rule could have turned into something like 20:1 and ruined my trading machine which I kind of want to keep around for a while.  So, the rules are the key -- and here it really doesn't matter what they are: chart based, premium based, indicators, whatever -- because they allow one to detach and dispassionately pull the safety triggers when all hell is breaking loose.  If it's a system, follow the rules.

Weekend Links

QUOTE OF THE WEEK

Most of the best financial decisions are slightly uncomfortable at the time you make them. -Ben Carlson


CHART OF THE WEEK

RETIREMENT FINANCE AND PLANNING

Prepare for the Rising Cost of Living in Retirement, US News. the average annual inflation rate since the government started keeping track in 1913 is approximately 3.2 percent. That doesn't sound too bad until you realize that at that rate, prices will double every 20 years. The fact is that everything will be more expensive and that needs to be factored in when determining how much you really need to save. 

How Much You Should Spend In Retirement Depends On How LongYou Think You’ll Live, Retirement Researcher (McDonald).  Using the RMD rules to set withdrawal rates for each year of retirement presents a viable alternative to using constant inflation-adjusted withdrawal amounts.  

Recommended Assumed Annual Rate of Investment Return LoweredAgain, Ken Steiner.  Based on the data in the table above, I have decided to lower my recommended discount rate and inflation rate by 0.5% to: Recommended discount rate: 4.0% Recommended inflation rate:2.0%  

One View of Simulated Return-Sequence Risk

I thought I'd take a quick look at what sequence risk looks like in my simulator.  To do that I compared the compound annual geometric return for the first 10 years of simulated return data to the simulated end state terminal wealth (net of consumption) in terms of the compound annual growth rate for the number of years lived in the model.[1]  I ran 10,000 simulations. It looked more or less like this:

This was not an "everyman" or every-person type analysis, though.  This was a custom simulation tuned to some particulars I happened to be looking at.  Assumptions of note included:

-Age 58 start with stochastic longevity within a Gompertz distribution (87.5/9.5).
-Constant spend with probability based step-downs at age 68 and 85
-Spend rate of initial step is unusually low (<=3%)
-Inflation random, bootstrapped off history
-Stock/Bond returns random, boostrapped off history[2]
-Stock/Bond Return Correlation
-Allocation: 60/40 stocks/bonds, 70/30 tbills/tbond
-.6% fees and simulated tax drag
-Longevity capped at 105
-Tactical suppression of near term (10 years) returns

The fail rate, for what it's worth, was 4.1%.[3]

Weekend Links

QUOTE OF THE DAY

Sometimes to understand more, you need to know less.  

     -- 1483, Sir Thomas Lemuel Hawke of Cornwall, 20 Rules for a Knight

CHART OF THE DAY

RETIREMENT FINANCE AND PLANNING

The Intertemporal Persistence of Risk Tolerance Scores, Grable, Heo, & Kruger.  The results from this study suggest clients’ financial risk tolerance attitudes, as measured by a valid and reliable test, exhibit some degree of persistence over time. This finding aligns well with similar reports by Gerrans and his associates (2015) and Guillemette and Finke (2014). Findings also provide support for the notion that financial risk tolerance is much more akin to a trait than a passing emotional disposition (Eysenck and Eysenck 1977), and that previous criticisms of risk tolerance tests in general may be overstated.  

The Perils of Early Retirement.  RetireBy40.org I’ve been retired only 4 years and I’m already skeptical about the 4% SWR.  

Should You Plan On Your Retirement Lasting 30 Years Or 40?  Pfau at Forbes.  “What possible sense does it make to tell your client that she can spend more money now because you’re assuming in some of the Monte Carlo iterations that she’ll die early? How does a person die ‘some of the time?’”   

On Hacking Out A Home Brew Version of Interactive Brokers Probability Lab

I trade options every now and then for a variety of reasons and I often use Interactive Brokers to execute.  They have a relatively new (late 2013) feature called the Probability Lab.  I like, but don't exactly love, their implementation and even if I did I probably would not need it to be super precise for what I personally do since I am not trying to land a manned-module on the moon,  I am just trying to sell a few options here and there and I am trying to get the expected value of my trades as high as I can get and my risk as low as I can go per dollar of return.  While they (IB) seem to have a great thing going and it is probably helpful to the people engaged in complex combination trades it sometimes bothers me that I can't extract their data to do my simple thing on my own  (I like to do things myself). So, a few weeks ago I thought I'd try to hack out my own version to see if I could even get close.  My main goal was just to see if I could do it while my secondary goal was to add another tool to the tool belt that helps me manage finite resources for my family over an uncertain future without being beholden to someone else's black box.