Some thoughts on my one night stand with skiing a very long time ago

My older brother, now pushing 70, was (and I think still is) an extreme skier, competitively so in his youth. That means I grew up surrounded by the various indicia of the skiing life: equipment, magazines, posters etc. All that, stacked into my childhood home, had that ubiquitous vibe of alpine rock and snow and pine. That was, and still is, intoxicating to me. So, at 10 or 15 or whatever, I was like: “I want that…”  My problem was, I suppose: lethargy, procrastination, enervation, and other distractions. At 15 or 20 or 30 or 40 I would always tell myself “yeah! Let's go, I still want it, but, um, later.”

Part 6 - Asset Allocation and Portfolio Longevity with a Capital Market Line

This post is part 6 of a series on Portfolio Longevity, a series made up of these links:

• Asset Allocation and Portfolio Longevity with High Spend Rates
• Part 2 - Asset Allocation and Portfolio Longevity with High Spend Rates
• Part 3 - Asset Allocation and Portfolio Longevity with High Spend Rates
• Part 4 - Asset Allocation and Portfolio Longevity with (Moderate) Spend Rates

• Part 5 - Asset Allocation and Portfolio Longevity with (Lower) Spend Rates

The point of this post is to:  

1. Extend the other 5 posts by now adding leverage and a risk free asset. i.e., a capital market line.
   
   
2. Look at the impact of "asset allocation choice" on portfolio longevity, using the same set-up we started with in the first link, and
   
   
3. Compare or contrast the impact of allocation choice along: a) a traditional efficient frontier vs b) the impact of allocation choice along a capital market line.
   
   
4. Try to infer what is going on. Maybe. Sorta.
   
   

Part 5 - Asset Allocation and Portfolio Longevity with (Lower) Spend Rates

 This post is part 5 of a series on Portfolio Longevity, a series made up of these links:

• Asset Allocation and Portfolio Longevity with High Spend Rates
• Part 2 - Asset Allocation and Portfolio Longevity with High Spend Rates
• Part 3 - Asset Allocation and Portfolio Longevity with High Spend Rates
• Part 4 - Asset Allocation and Portfolio Longevity with (Moderate) Spend Rates

The point of this post is to 

- 1) drop the spending from 4% to 3% (i.e., lower spending). and 

- 2) look at the impact of "asset allocation choice" on portfolio longevity, using the same set-up we started with in the first link but with the following provisos for what I have changed since then. Here is what is different now:

Part 4 - Asset Allocation and Portfolio Longevity with (Moderate) Spend Rates

Warning: this is unfinished so TBD...

 This post is an extension of the previous three posts:

• Asset Allocation and Portfolio Longevity with High Spend Rates
• Part 2 - Asset Allocation and Portfolio Longevity with High Spend Rates
• Part 3 - Asset Allocation and Portfolio Longevity with High Spend Rates

where the main explanation of the set-up is in the first link and a revision to some key parameters in the third link. The quick explanation for this post is that I am trying to look at the interaction between: a) an oversimplified and reductive and not all that realistic set of portfolio choices and b) portfolio longevity in years. And I want to take that look without dwelling on planning horizons or human mortality (might here though). 

Part 3 - Asset Allocation and Portfolio Longevity with High Spend Rates

 This is an addendum to the last post

• Part 2 - Asset Allocation and Portfolio Longevity with High Spend Rates

It is also going to be a chart-crime so get out the yellow tape. 

Part 2 - Asset Allocation and Portfolio Longevity with High Spend Rates

The point of this post is to use one alternative way to visualize the interior of the distributions in Figure 2 of the last post

• Asset Allocation and Portfolio Longevity with High Spend Rates

All of the assumptions are the same as in the link. After a reader question: the returns and spend are real but clearly not realistic. I haven't thought about that realism much yet. The reader pointed out the low risk option in real life would be less likely a 0 allocation to the HR strawman and more likely a TIPS ladder or an annuity or something. 

Asset Allocation and Portfolio Longevity with High Spend Rates

The point of this post is: 

Let's look at the response of a particular metric "portfolio longevity in years" (unbounded by human life scales, btw) to asset allocation along an arbitrary but not totally unrealistic efficient frontier...but: in the presence of high spend rates. 

High spend rates here could be interpreted as either: 1) a literal high spend, or 2) as an underfunded retirement. Same thing. There are probably some pension finance corollaries here too while we are at it.  I don't remember but I might have done this before here or I might have at least done some pieces of this before but whatever, let's dive in yet again to see how it looks. That (how things look) is my perennial question that got me from 2012 to 2022 on this blog and its precursors.

On Rivershedge as a Name

The following content was originally solicited by a friend on Twitter: Hooafury.com or @HooaFury. I wrote it just for fun for him and he put it to his blog recently with a lot of complimentary intro context. Thanks brother.  Minor edits here. I figured this blog needed an explanation.

A Short Test of the Ed Thorp-ian 2% Rule

Like a tongue seeks out those annoying imperfections in a tooth, I tend to go back to two things over and over here on the blog: 

1) the Nikkei index after 1989 as an example of a tough market that never recovers (yet), and 

2) the Ed Thorp 2% rule which -- along with simulation I've done a million times -- says 2% is pretty close (on average anyway) to a perpetual spend rate for endowments or long-dated trusts. 

On Adding a Time-Preference Discount

The idea of perpetuities is cool and all but the perpetuality, if real, would demand a certain degree of stability in government, culture, taxation, markets, law, policy, institutions, civilization, etc over very very long timeframes. Me? I'm not so sanguine on that whole set of stability assumptions these days over even short horizons. In a recent paper by Barton Waring, he limits the interval of evaluation of endowments (otherwise a type of perpetuity we might say) to 50 years. His rationale for 50 goes like this: 

In generating our forecast distributions, we’ll use 50 years as our simulation horizon, but that number is arbitrary—we felt it to be a horizon that should represent three to five “generations” of board members or trustees, and one that is also long enough to show the long term trend as time marches on towards the endowment’s hoped-for immortality.

50 is arbitrary so right there he is pitching us an ever so slight preference for the near future over infinity. And in fact in most of the consumption utility math I've ever seen there is a factor or discount for biasing us towards the present a bit. LaChance, following Yarri, presents the evaluative goal like this in continuous form:  

Eq1. Value Function from LaChance 2012

where f(t) is some combo of both longevity and time preference weighting, u(c) is a CRRA utility function, and w is "long age" which is often set up as 120 if not infinity, though here it's 100. I usually don't include the time preference because it is a small factor that can distract from some of the other points I am investigating. I always kinda thought over the long haul that maybe it should be zero. But others use it so I'll throw it in today and see how it moves at least one portfolio parameterization (4/12) of what I have done recently. Haghani (2021) says that the discount can be as high as 5% though he himself settles on 2%. Gordon Irlam, whom I trust, told me in private correspondence that it should be very small, on the order of .5% or less.   

Reprise on Advisory Rationale

From a reader (always surprised when I have a reader...)

"Curious as to why you have an advisor. What services do you think you can't or don't want to do that your advisor provides? Other than handling your divorce which was bungled anyway you seem more than capable of managing your retirement drawdown.

I'm an advisor and big fan of yours thank you for your content and contributions to our industry. I have huge problem with our industry that is focused on training salesman as opposed to actually....advisors..."

On changing advisors

"Live a little bro..."

"I gotta make a (commission) living, too"

These epigraph statements came from the same, now fired, financial advisor. The first one was in response to me describing my careful spend rate -- which I will humbly assert was pretty well-informed at 57 when he said it...after more than 5 years of me doing this blog -- that was designed to confront my long-horizon superannuation risk since I have no major hedge like a pension or annuity. The second statement came not long after -- this after 25 years of paying something like a point and a quarter, btw -- when I insisted that we discuss (negotiate, reduce) fees. After my divorce and retirement fees became an absolute yoke and on the forefront of my consciousness because fees are no more and no less than part of our spend rate.  

Regime Change

 After running through a few posts lately, what do I have? Basically this:

1. Spend 2% if you want your $ to last forever though even a 2% spend could possibly flame out over a long enough horizon if you have a crap portfolio. Probably not a problem for mortals and spending less than 2% would be weird if the whole point is to be using the money for something. Spending more than 2 demands a little extra thought...

Spending at 63 using life expectancy

Based on an email from David C, I had forgotten that a rule of thumb for spending is 1/e where e is remaining lifetime. The super quick look here is from a page from Gordon Irlam's aacalc.com site: 

• Simple Rules of Thumb for Investing

where the operative text is this:

Perhaps less well known than Markowitz's modern portfolio theory (MPT) is the subsequent work of Merton and Samuelson. This is a shame because while MPT only concerns itself with optimizing investing in a single time period, Merton's portfolio model concerns itself with optimizing over time, where it is possible to change asset allocation and consumption in response to portfolio performance. This is far closer to the problem faced by most investors. Unfortunately the math involved is quite complex. I've been trying to derive some very simple rules of thumb for stock/bond asset allocation and consumption planning using Merton's portfolio model and the current returns environment as a guide. Here is what I came up with: 

My Horizon Spending

This is the last post of 3 part series.  The previous two were on long-horizon spending, the first one was about a kind of an endowment-ish thing that looked at spend distribution "medians" at the 50 year mark and the second was a consumption utility framework for what I'll call "very very long retirement:" 

• On the Behavior of Long Horizon Adaptive Spending
• Long Horizon Spending (con't.)

This post, however, is all about me. Dang, I feel like an Instagram model when I say that ;-) but thankfully you will not be subjected to 10,000 pictures of nothing but selfies of me in a bikini. We'll leave that to our nightmares. What I will do is adapt my software -- this is, I think, the fourth consumption utility sim I've written [1] -- to my own personal parameters to see where it goes with my data in the context of what I have done before in at least the last couple of posts. Again, no charts, just some basic spend rates if I can get away with it. 

Long Horizon Spending (con't.)

This post, still about "Long Horizon Spending," follows the last post on the same topic:

• On the Behavior of Long Horizon Adaptive Spending

where I was playing around with what a percent-of-portfolio approach does to spending and portfolios at a 50 year mark. 50 is pretty arbitrary but one of the cited papers used 50 years for some kind of reasonable endowment policy cycle. 50 years is pretty long and not a typical assumption in the retirement finance I read but it is not terribly unreasonable were we to be given both early retirements and extended longevity.[1]  

On the Behavior of Long Horizon Adaptive Spending

I always assume that the constant spend assumption -- set spending at the beginning of some interval and then adjust it for inflation -- is well known to be an active risk position because that approach guarantees, in the absence of mortality, that it will someday stop working where "stop working" means zero[1]. But maybe that isn't as obvious as I think since I look at this stuff all the time and others don't.  

On the other hand, I've also heard "% of portfolio" touted often because it kinda-sorta lasts forever. But that is an active risk position as well for a couple reasons:

• Spend volatility becomes high (ignoring that irl that spending is, in fact, even more random than just the portfolio effects and sticky to the down side while loose to the upside). 
• Over long horizons the higher spend rates keeps chipping away at the portfolio and so: while it lasts forever, that high spend also eventually diminishes what one can spend in real dollars over time. 
• Since there is uncertainty, the spending possibilities at some distant horizon are best viewed as a distribution rather than a number if we can even think in distributions anymore. 

Some thoughts on force of mortality and hazard rates

I mis-titled. This post is really more about spending but hazard is not un-implicated... 

When endowments -- or long dated trusts or, dare I say, early retirees -- spend the idea is that whether one spends in constant dollars or even within a rule-set one can't spend too much too soon because the money has to last a long time and it has to anticipate a lot of problems: from adverse spending to adverse markets to sequence of returns risk, etc (we can also talk about intergenerational fairness here too). This is true for both constant spend and other rules. Constant-spend, btw, incurs a penalty in the sense that there is a time distribution of unavoidable, over enough time, depletion cliffs. Rules, and rules all the way to the % of portfolio rule, incur either the former in a now slightly deferred way or a distribution of lifestyles (consumption) at time x that might disappoint expectations if one were to happen to land in the left tail of of the consumption distribution at that time. Or we can say: "perpetuities are hard."

On some futility in thinking about consumption smoothing rules

I spent the better part of an afternoon trying to excelify some math on consumption smoothing, succeeded, and then gave up after the fact for reasons below.

Let's say, as a convenient-for-me strawman, that there are four broad categories of spending in Ret-fin models:

• Constant inflation-adjusted spend
• Percent of portfolio
• Honorable attempts to be somewhere in the middle of the last two for reasons, and
• Irrational or non-mathematically necessary rules or heuristics that might/not accidentally work

On preservation of capital over long horizons

I know I've done the kind of charts in this post before, but whatever. David C pointed out to me I've been kinda re-hashing my past stuff lately but sometimes that's necessary to pound it into one's own head. Here  (Figure 1) I was running a "portfolio longevity" calc for a .04/.12 consumption portfolio (different spend rates) 4 million times (uh, there is a reason for that big nbr) to see how many portfolios "tip over" into portfolios that last to infinity (or in this case 100 years which is a convenient proxy for forever but not really).