40% In Bitcoin You Say?

Let's start with this;

The quote is of course all about optionality. He pretty much says that. That is a huge life priority for me so the idea of optionality makes its way into a lot of the content we explore here. Talking about optionality can go in quite a few different directions. Jack is obviously referring to physical optionality which is well worth the time needed to achieve. There's more than feeling good, being able bodied and not spending a ton of money on medicine to manage chronic maladies that might be reversible and we'll get to that in moment.

Then there is the notion of financial optionality which we've long described as having a high savings rate, starting early on then getting into your 40's or 50's and deciding you want or need to do something completely different even if it pays less money. A high savings rate from your first career-type job well into your 40's allows this sort of life change, maybe it's an existential change, financially possible. After we stumbled into that idea way back when, the financial independence/retire early FIRE movement became popular and then after that came what is called Coast FIRE which is what we just described with optionality of being financially able to leave your career to go to some more purposeful even if lower paying work. 

Living a $50,000 lifestyle on a $110,000 income for a long time makes it plausible at 45 or 50 to start living a $50,000 lifestyle on a $50,000 income. At 50, it is not a stretch that a retirement account balance could double over the next 15 years even if there are no more contributions. Not having to continue making retirement contributions at 50 creates all kinds of freedom and optionality which is where we can tie in the physical optionality in the above Tweet. The combination of financial freedom with being very physically capable is a great place to be. You have enough money to be comfortable in a way that at 25 you probably do not but you can still physically get it done maybe not too far from what you could do at 25.

Well known advisor Ric Edelman caused a ruckus over the weekend saying that everyone should have "crypto" but I am guessing he meant Bitcoin more specifically. Edelman said "the correct" allocation for conservative investors is 10%, moderate investors should have 25% and aggressive investors should have 40%. Owning it is not speculative he said, not owning it is. To not own it is to effectively short it. "There's no logic to omitting an asset class that has outperformed all others and is widely projected to do so for the next decade or more."

This is a behavioral festival that looks backwards at a narrow exposure and then just extrapolates it forward. By all means own some, I do, but model out those weightings to Bitcoin.

It is easy to say put 40% into Bitcoin within a percent or three from the all-time high. The odds of succumbing to emotion when a 40% position turns into a 25% while the rest of the portfolio is down 10-15% are very high. The next time Bitcoin cuts in half, what happens if it never snaps back? The "fundamental" argument for now boils down to more people are going to use it because more people are going to use it so the price will go to $1 million. 

My context for Bitcoin has always been as an asymmetric opportunity, it could go to a bazillion or it could crap out. My current position started small in late 2018 and has grown into not a life changing piece of money but a useful piece of money.

Here is where we can tie back into Coast FIRE. A small bet, it was a bet, I bet on a positive asymmetric outcome, with very little consequence if it goes wrong that ends up working out very well....what might that pay for? I frame this out as focusing on my resiliency if something goes very wrong with our financial plan. My Plan A is to delay SS until I am 70 so my wife gets a larger payout if I die young. 

I am 11 years from 70. If things went horribly sideways for us in a way I can't imagine, we have enough in Bitcoin to cover a little over a year's worth of regular expenses. I appreciate that doesn't sound like much, it is not life changing, but 10% of what we need to get to 70 for when I want to take SS is absolutely useful. If in this scenario we could not last until 70, maybe the Bitcoin would be the difference between taking SS at 67 instead of 66 which would be meaningful. And if Bitcoin does go to $1 million before I needed to start spending it, then it would have become a life changing piece of money.

Or I could put 40% in right now, oops it craps out and I am in serious trouble. No need to worry because Michael Saylor told Bloomberg "the accounting has been fixed." Anyone have the first fricking clue what that means? 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Is It Time To Salvage Underwater Fixed Income?

A couple of quick hits from this weekend's Barron's. 

There was a write up about how well equity momentum funds are doing this year. At one point during the April carnage, momentum funds were reportedly doing poorly but have turned it around? JP Morgan has a momentum ETF with symbol JMOM. I hadn't heard of it but it has been trading since 2017. 

One line is JMOM, the other is Vanguard S&P 500.

If you're interested in broad based factor investing it must be because you are interested in capturing some sort of differentiated trait, otherwise why do it? JMOM is from JP Morgan so the AUM is huge but it's probably been enough time for the fund to set an expectation of how much or how little differentiation it can offer. It appears to me, not much. The stock weightings and the sector weighting do differ from VOO currently but it's hard to find meaningful differentiation. To be fair, this year JMOM is 400 bp ahead of VOO after a slightly larger drawdown at the April low.

The other article was titled Bonds Have Underperformed. Why You Should Own Them Now. The title was a little misleading, it was more of a rundown of funds to use to access various income market niches like MBS, REITs and so on.

Lisa Shalett from Morgan Stanley is quoted "now is not the time to abandon fixed income." She might be right, I have no idea but am grateful that I don't have to think about that with regard to duration. Anyone who's had duration as part of their portfolio is probably very underwater so from that standpoint, locking in a 20-30% loss takes some number crunching. 

A portfolio with a bunch of different issues maturing in 10-15 years, down 20% and yielding 2% from what they paid seven years ago might be better off trading one or two of those positions out for a catastrophe bond fund (not mentioned) yielding low double digits. As long as things don't go terrible for the cat bond fund (so not saying no triggering events in the fund, just not a lot of them all at once), the recovery wouldn't take that long but keep that kind of sizing small. Cat bonds are not riskless. 

Maybe, there are one or two other specialized income niches that have similar yields to cat bonds but that are vulnerable to completely different risk factors that can be swapped in a similar fashion. All of sudden maybe the damage from taking on duration at wrong time can be recovered five years earlier than hoped for. 

Again, this idea is risky but has a reasonable probability of working out. 

I did not take the article as being worried about duration but please leave a comment if you read it differently. Duration equals volatility and there was no mention of trying to offset volatility along the lines of the RISR/MBB combo we've looked at a few times over the last month or so. 

MBB's volatility is pretty much completely offset by RISR. It's not quite as straight of a line as client holding BOXX but it is close and has churned out a growth rate that drifts into low vol equity territory with less than half the volatility. 

The reason I threw MBB and RISR individually onto the back test is that the blue line can't be owned. However volatile MBB and RISR look to you, remember they are each fixed income niches, that's what MBB/RISR owners would have to live with. Building this sort of trade requires the ability to ignore live item risk. This is probably an example of working against this trade's ergodicity and rebalancing based on some sort of threshold. 

Finding this sort of simple offset to other income segments with duration is not easy, I've tried over the years but where there's one, there must be others. 

A lot of fire department stuff lately. On the weekends during fire season we offer paid station manning shifts. There's been a lot of interest this year. Some guys take pay and some do not. As a matter of circumstance I was at the station house when they were starting today and we had a quick briefing/BS session about a few things. 

One of the guys is exactly my age, 59, and joined late last year. He's retired from is career job and has jumped in with both feet into the fire department. The other firefighter is one of the couple of guys who is younger than the yellow shirt I've been fighting fire in since 2003.

So more than 35 years difference between the two and they had to figure it out to get some stuff done and hopefully have fun. It's easy after retiring to become disconnected from younger people but it is important to maintain these connections to stay current with the world which is a big deal. For the younger firefighter, it was a chance figure out how to relate to someone much older which can be difficult beyond your parents. A kid in his 20's is probably going need to know how get along well with much older bosses at some point so maybe this helps him a little. 

I'm not worried that anything negative happened on their shift but am hopeful it was a very positive experience for both of them. 

If you didn't hear, Hall of Famer Dave Parker passed away on Saturday.

If you're a baseball fan, you know how great he was. The Baseball Writers did him dirty with regard to the Hall of Fame. He wasn't voted in until this past winter with the induction ceremony scheduled next month. He should have been in years ago. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Fighting Over The Last Remaining Bitcoin

Is there a salary number that would make you feel secure?

The way I've thought about this was not with a number but an idea. In years past I've said "if you make enough to pay the bills and save a little for the future with a little left over to have some fun, then you're doing pretty well." 

I view the question of financial security as being about how long you can last financially if things go really sideways. The simplest example is the one we talk about all the time where someone in their 50's has their hand forced at work into early retirement or a serious underemployment. I've framed out a thought process previous posts, can I make it to penalty free IRA withdrawals at 59 1/2 and then, can I make it to claiming Social Security early at 62 and if I can last until 62, how much further beyond 62 can I make it (assumes this person's Plan A was to take SS later not earlier)?

In your 30's, you hopefully/probably have an easier time being able to replace your income in a new job and so you don't need to be able to last as long financially. I was 35 when I got laid off at Schwab in 2001 and it took me two months to find a job and it turned out to be a higher paying job. When my old firm got shut down a couple of years ago (partner malfeasance having nothing to do with me, I was never a partner) I was 56. I was emotionally prepared to not be able to land anywhere. It turned to take less than two months but that may have been 100% luck, there's no way to know. 

The ReturnStacked guys had a post about crowding into certain alternative strategies and whether too much AUM could influence the outcome. TBH, that part of it wasn't compelling but this sentence was a succinct explanation for using several alts. "By carefully selecting a mix of divergence and convergence premia, investors can potentially build more robust portfolios that are resilient to crowding risks." Divergence and convergence as they are using the words is just a fancy way of saying diversify your diversifiers. Instead of more resilient to crowding risks, it's simpler to frame it as resilient to a diversifier doing poorly like managed futures has been lately. 

Obviously the post was in support of their version of portable alpha. I built the following to see what 40% leverage to add a diverse basket of alts would do. MERIX is a client/personal holding.

Portfolio 3 is plain vanilla 60/40.

First, I can never get what they talk about to work well. I don't think it is their process, I think it's the bonds they are willing to hold. If you've decided to not have AGG-like exposure or treasuries with duration then the appeal of leverage, if there's any appeal, is lessened. 

I would not assume the the return outperformance would stay the same going forward but attributes related to volatility, maintaining a better Sharpe Ratio, Calmar and kurtosis have a better chance of being reliable going forward.

Speaking of reliability. Bloomberg quoted Alex Brazier of Blackrock as saying “The stock-bond correlation now is much less reliable than it used to be. Portfolios are shifting both from sort of 60/40 to be more 50/30/20 as you get more private markets and the investable universe expands. Within the public market sleeve, people are looking much more now at strategies that are market-neutral."

This conversation is one that has been happening here forever. The issue with bonds was an obvious problem for years before late 2021. For anyone new, I blogged about it at the AdvisorShares blog and then at ETFmaven after that long before bonds finally cracked. You don't need an (deep cut alert) HP 12C to understand that getting 2% or less for ten years takes a lot of risk with very little reward. The ReturnStacked guys argue for 60/40 and then leveraging up to get alt exposure which avoids tracking error (their argument). I don't see the appeal of maintaining the traditional 40.

Politico wrote about a new bubble not in crypto broadly but in Bitcoin treasury companies like Strategy (MSTR) that leverage their balance sheet issuing convertibles and preferreds to buy Bitcoin. On the positive side of the ledger is the Bitcoin mining operation in Bhutan which has had a huge impact on the country. It is not a wealthy country and its Bitcoin cache accounts for about 40% of the GDP.  The country has abundant hydroelectric power which makes mining much cheaper than other places which contributes to how this all can work. 

As I read both of these articles, it clicked in my head that Bitcoin will never be what the touts say it will be. I've owned Bitcoin for a while and I am not selling but I have also been skeptical the whole time. It is never going to be the currency solution for the planet. That doesn't mean it will disappear. It can go to $1 million like Michael Saylor recently said or maybe even $3 million like Tom Lee recently said or it could go down 99.9% (literally going to zero is off the table) which has nothing to do with whether it becomes the universal means of payment. It could continue to be a wildly successful, speculative asset as it has been.

It's a fixed supply at 21 million that has kind been cornered with others also trying to corner it. 21 million isn't really the number. The real number is more like 17 million. About four million Bitcoin are gone due to lost hardware and lost passwords. "Satoshi Nakamoto" owns about 1 million Bitcoin. All of the ETFs combined are getting close to that number. Strategy owns a little over 500,000 Bitcoin. How many Bitcoin might the other Bitcoin might the other companies pursuing the Bitcoin treasury end up with? I don't know but this doesn't add up to being anything like the global currency to replace anything. Are 10  constituencies going to own 5 million Bitcoin while the rest of the planet fights out for the other 12? 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Are They Really Going To Cut Medicaid?

Barron's had an article about cuts to Medicaid proposed in the current budget bill working through the legislative process. Does anyone know what is actually going on? I do not, meaning I do not know what is true or what are scare tactics and maybe congress doesn't know either. Note that any comments expressing political ideology will be deleted as soon as I see them. I am expressing confusion being propagated by both major parties. 

There's a stat in the article that in 75% of couples, at least one partner will need some variation of long term care with the expectation that by 2025 that could cost $200,000 in less expensive areas and cited the cost in Boston being $400,000. FWIW, a decent sample size living in Walker where the population has always skewed older, that 75% number is way too high. You have observations please leave a comment. 

I Tweeted out the article and put it on Bluesky too saying "I have no idea what the outcome will be. Guys, get in the gym and maintain the ability to deadlift your bodyweight for reps and stay lean by eating less sugar and processed foods."

Yes that is probably harsh but depending on your age, this will either soon be very important or it already is. The reason to refer to deadlift that way is that the exercise is literally bending down to pick up something heavy. It also exercises legs and grip which are both vitally important too. Benchpress and curls are less so.

We start to see consequences of poor decisions related to diet and exercise, maybe other bad decisions related to partying at younger ages, pop up in 40's and 50's. I've seen it in all my constituencies, finance bros, college buddies, high school friends and sometimes in fire circles. Not so much here, but I see news reports of 50 year old firefighters dying from heart attacks kind of frequently.

A few weeks ago, I shared an anecdote about a former fire chief who at 81 is still active in our department as our station boss (oversees getting personnel onto trucks and out the door) and fixing things that get broken. He doesn't think twice about climbing on top of one of our engines or water tenders. He's always been active, is thin like a kid and plays pickle ball. Another guy up here not connected with the department is 97 walks constantly, thin like a kid; he called the department once for a fire alarm problem. He has very tall ceilings and was going to climb up the ladder while we were there. Of course he was only 95 then.

Body composition is crucial for favorable outcomes. Follow @mangan150 on Twitter to get into the details, I mean really into the details of the various beneficial metabolic processes, but no gut combined with decent muscle mass prevents/solves a lot of problems.

I've been banging this drum one way or another forever. It is very simple even if not easy. Cut sugar/carb consumption as well as eating less processed food and lift weights. We need to maintain/build muscle mass to stave off frailty. Nothing does that as well as lifting weights and many popular forms of exercise don't build muscle mass at all. Done with the right intensity, lifting weights is aerobic. All "right intensity" means is using enough weight that it forces you to move slowly and not resting too long in between sets.

This combo of diet and exercise improves the odds of not needing prescriptions to manage chronic maladies, wards off frailty, decreases the odds of Alzheimer's and dementia (Google Type 3 Diabetes) all of which means much less spent on health cares costs and being less likely to need prolonged advanced care.

Twenty years ago, a blog reader was fond of saying he expected to get shot by a jealous husband when he was 110 as how he would go out. If that doesn't quite work out, where there is an inevitability here, it would be nice to live on your own terms for a very long time, needing no more than a couple of months of help.

There are no absolutes but the way to improve the odds is pretty simple. Cut carbs and lift weights and the reality of whatever is coming with Medicaid might matter a whole lot less to you.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Getting The Bond Effect Without Bonds

Morningstar has a writeup about interval funds that led me down a little bit of a rabbit hole looking at a couple of interval funds that focus on infrastructure. I found three of them via Intervalfundtracker. I would guess there are more than three but that's what they had.

• Meketa Infrastructure Fund (MAFIX)
• Cantor Fitzgerald Infrastructure Fund (CAFIX)
• Stepstone Private Infrastructure Fund (STDUX)

Interval funds usually have a mutual fund-like symbol but they cannot be sold anytime you want. Usually there is a limit to how much of the fund can be redeemed so if you had to get out for some reason, it could take a long time.

The link in the name of two of the funds above goes to a schedule of holdings. I couldn't find one for CAFIX. MAFIX is supposed to have 80% in private investments, 10% in cash and 10% in publicly traded securities but it looks like the weightings to cash and public companies is higher than the stated targets. The Stepstone fund appears to be all private holdings. 

IFRA has been much more volatile than the others and IGF obviously has been the best performer. If an infrastructure fund owns a lot of utilities as some do, it will be less volatile and if it owns a lot of industrial stocks it should be expected to be more volatile. If CAFIX targets more utilities then the modest return with less volatility is what should be expected or we could be seeing the result of infrequent marking to market or as Cliff Asness calls it, volatility laundering. Utilities are the largest sector in IFRA but industrials, materials and energy add up to more. 

It is my nature to want to learn about this stuff. The ETFs are competitive with the interval funds, so far. That could change, If you think the managers of the interval funds might know what they are doing then we might be able to learn something new about portfolio construction even with delayed reporting. 

Speaking of things that are worth learning about even if you never use them, Calamos just launched an Autocallable Income ETF (CAIE). It appears that it is somewhere in the defined outcome/buffer/derivative income fund realm. The literature refers to it being like a structured product. I signed up for a webinar to learn more but it purports to have income and low volatility. Based on reading what is available, it makes it seem like it could be similar to catastrophe bonds.

Finally, as we look at getting the bond effect without bonds, I wanted to revisit the Innovator Defined Wealth Shield ETF (BALT) which is a buffer fund. During the April panic, I blogged about whether BALT was malfunctioning. I got feedback on Twitter that it should square up at the end of the quarter. I'm not sure if it squared up or just got lucky in the market but the April drop has been recovered. The decline was very modest but more than someone might expect at 3.4% per Yahoo. 

I am a hard no on using buffer funds for equity exposure but there is something to them, BALT anyway, as a fixed income substitute. 

Using BALT instead of AGG has given a higher compounded return with less volatility. The outperformance isn't solely because of 2022, VOO/BALT outperformed in partial year, 2021, 2023 and 2024. This year it is trailing a little bit.

The volatility of BALT seems similar to SHRIX but obviously SHRIX which is catastrophe bonds has outperformed considerably. That big drop in SHRIX in late 2022 was from the threat of Hurricane Ian but it turned out there was no triggering event from that one. I threw in XYLD which is a long standing covered call fund. I don't think that one works in the context of a bond substitute. It looks like bonds on the way up but it looks like stocks on the way down. The 3.4% drop for BALT appears to me to be it's largest drop and as Dennis Eckersly would say when he was calling Red Sox games, AGG goes down 3.4% "just to stay in shape."

This last backtest has interesting results. As great as I think catastrophe bonds are, I wouldn't put anywhere near 40% in them IRL. I wouldn't put anywhere near 20%. The point is that BALT and SHRIX are just two examples that could be blended in with others that have similar attributes and maybe CAIE will too, we'll see. Having four of these that have different risk factors, weighted at 10% each seems like a reasonable risk. 

I don't use BALT and I am unlikely to do so but the exercise of looking for a different effect than the stated objective is worthwhile.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

The Importance Of Doing Very Little

The war between Israel and Iran appears to be over. The US is saying it is over and so is Iran....apparently. Hopefully that is correct and as I type this, after hours futures trading certainly implies that the news reports are correct. 

The phrase don't just do something, stand there in an investment context is attributed to Jack Bogle. I talked about this a little bit yesterday and of course we have almost the exact same conversation anytime something bad for markets...or potentially bad anyway.

Military escalations certainly have the potential to be bad for markets but when the reactions have been negative, they have tended to snap back quickly which magnifies the mistake of selling this sort of headline. The duration of this one as a military events was pretty short and it didn't even move the needle for the equity market which when I posted on Sunday night was down about 30 basis points. Pretty much a shrug.

The above is a simulated result based on real data. Going back to 1962, 60% SPY/40% TLT compounded at 8.98% despite quite a few hideous drawdowns. I frequently say that plain vanilla 60/40 can get the job done provided there is an adequate savings rate. I don't believe this sort of 60/40 is optimal but it can be adequate. 

This argues in favor of the Bogle quote. The more trading done against whatever allocation an investor believes is right for them the more they are fighting against whatever their long term CAGR will be. It is an argument to do less. 

Looking at these type of charts and studying them offers great lessons about not panicking. 

Amazon has endured plenty of brutal declines. Brutal. Despite how bad the drawdown chart looks, the stock has compounded at 31% since it started trading. Going forward, I have no idea what Amazon stock will do but it is pretty clear that none of us are likely to use our Amazon accounts less than we do, anytime soon. I am not making an argument to buy it, I am making an argument to not panic sell it the next time it cuts in half. It has almost 30 years of going up more than the broad market on the way up and going down more on the way down. Client exposure is through XLY which I first bought in November, 2008. 

I mentioned this scene from A River Runs Through It recently. I also referenced it at fire training over the weekend. For anyone who is an investor, as opposed to some sort of trader, I would encourage less trading, trade less. Never trading is not realistic but less trading is. Trade less.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Surviving Uncertainty, Not Predicting It

Walker Fire had quite the week. First was a medical call Saturday night 6/14, a wildland fire on Father's day, a multiple vehicle fire that also took out a couple of sheds and caused a small ground fire on Tuesday and then on the holiday we had a call for an ATV accident that turned into a low level technical rescue because the patient was a long way down a hill very close to a wash. 

On our Sunday morning hike today, we saw a very large horny toad for the first time in several years. We've only seen very small ones lately. 

Morningstar had an article titled How Does Your 60/40 Portfolio Allocation Compare With The Pros? and included the following consensus mix.

I wouldn't say I am particularly contrarian but I do think of myself as knowing when to be orthogonal to the consensus as we've looked at in countless other posts. 

I think it is important for a portfolio to differentiate and of course the consensus does not...by definition. 

Sorry but there is nothing robust about consensus-type bonds funds. Jon Davi from Astoria was quoted in this article at Bloomberg via Yahoo that portfolios are "meant to survive uncertainty, not predict it” which very concisely sums up what we talk about constantly. 

At fire training on Saturday, another firefighter asked me what I thought would happen with markets if the thing with Iran escalated (then of course it did escalate). I gave a very wishy washy answer because I don't know. MLK Day 1991 is an example of markets skyrocketing when the bombs dropped after a long buildup to that day that saw stocks go down. Another firefighter chipped in that 1991 was before he was born. 

My thing is to have exposure to a few things that will probably go up if stocks go down a lot. It makes the most sense to me as a way to avoid the full brunt of large declines. As I type this, Yahoo shows very little reaction to the Iran news, great from a markets perspective if that is correct but I don't care about predicting what the market will do as opposed to being ready in case there is some sort of serious decline that accompanies this event. 

If it is bad, then we know that the decline would end at some point and then the market would start going back up and eventually making a new high. The only variable would be how long that would take. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Lazy Advisors?

Some quick hits today.

A comment on an article at Yahoo about retirement mistakes said the following;

The thing to really do is 5 years before you are required to take the money you have in an IRA is Transfer all the money in your IRA into your Roth account.

Hopefully, everyone here realizes this would be a woefully tax-inefficient way to do a conversion for just about every circumstance. If someone has $500,000 in their rollover IRA and they convert it all at once and assuming no other income, the effective tax rate would be about 28% or $140,000. Converting $100,000/yr five times and assuming no other income would have an effective tax rate of about 8% or $8000/yr for a total of $40,000, $100,000 less in taxes. 

I doubt anyone's situation has that few moving parts but you get the idea and do you're own diligence on effective tax rates. There are a lot of ways to get these this wrong. Slow down, do some research and number crunching to make sure you get it right or maybe even just less wrong. 

Somehow I missed it but GraniteShares launched several new YieldBOOST ETFs. This is the suite of funds that sells put options on 2x levered ETFs.

As a reminder, I would think of these not as proxies for the underlying like Nvidia or the NASDAQ 100, they are products that sell the volatility of the underlying and there's a difference. It wouldn't make sense to buy NVYY if you're not favorably disposed to NVDA common stock but over time it won't look like the common on a price basis but might not be that far away on a total return basis. The chart is price only. NVVY has paid out about $1.80 so far which would add another 7% into the price based return.

I don't use these or any of the crazy high yielders but we've mapped out possible utility in the context of barbelling yield which is why I follow the space closely, maybe at some point it will make sense to do something with these. 

The late Paul Sherwen regularly used the phrase threw a cat amongst the pigeons as Phil Liggett's wingman commentating on the Tour de France. ETF.com may have done exactly that by asking Are Financial Advisors Lazy To Recommend Active ETFs? 

Actually the article is very thin and might not be worth using one of your free articles. Side note, the content quality at ETF.com has fallen off a cliff in the last few years, maybe more but at least they are now charging for access. 

I'll broaden my comment to include mutual funds as well as ETFs. With regard to ETFs, there are many types of funds that technically are actively managed that have nothing to do with old tyme stock picking. Earlier in the week I mentioned client holding Alpha Architect Box ETF (BOXX). It's a substitute for T-bills that the typical advisor would not be able to implement themselves. It's active but it doesn't pick stocks or bonds. 

How many times have I lauded merger arbitrage or client personal holding BTAL? Managed futures? Get out of here. The idea of trying to do merger arb or the others directly in a client's $800,000 IRA would be beyond stupid. I am obviously not a huge fan of the crazy high yielding, single stock ETFs but they are active and the AUM is collectively huge but again that they are actively managed is more of a technicality.

What about a stock fund that does do old tyme stock picking? I don't have any of those in my ownership universe but I do not think it is lazy. It may not be optimal with respect to a broad based fund like Fidelity Magellan. There's no way to have current information on the fund's sector allocation. Maybe a portfolio has an S&P 500 fund for beta exposure and Magellan for alpha. If S&P 500 has 40% combined in tech and communications and Magellan is 80% in those two (that's made up, I have no idea), then the portfolio could be taking on a lot more sector risk than an advisor or their client would like. This would be less of an issue with a stock picking, active ETF because of the transparency. 

Part of what advisors do is try to help people have enough when they need it. Part of having success on that front is minimizing behavioral mistakes that a client might be inclined to make. If an advisor can figure a way to do that by including stock picking mutual funds, it works and is good for the client, then why not? 

The comment about an index fund for beta and Magellan for alpha wasn't a random comment. Torsten Slok had a micro blog laying out the following allocation idea. 

There were no percentages given but the idea of fixed income replacements is something we've been talking about for many years. We've tried to find different types of strategies and niches that do what I think people hope that bonds will do. I don't believe that too many investors would want to load up on parts of the bond market that are capable of dropping 15-20% like AGG and longer dated treasury funds did in 2022. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Social Security Might Be In Trouble

The title to this post is a little snarky as latest report from the trustees of Social Security and Medicare is out and it reiterates Social Security running out of money in the mid-2030's at which time, everything else being equal, will require a 23% reduction. The date and the percentage to be cut moves around a little bit every year but for now, 2034 and 23%. 

We've been having this same conversation since I don't know when. The way in which Social Security is operated, payouts would have to be cut as a matter of law. Other pools of money cannot pay SS benefits. My understanding is that at a very high level, preventing cuts to payouts would require that the relevant laws be changed. 

Here news accounts about this from the Washington Post, Bloomberg, NY Times and Yahoo. Between the four articles, there were theories that tariff induced price inflation would put further strain on the program because of larger cost of living adjustments. Another potential strain would be the deportation of illegal immigrants paying in but not taking out. Per a Google search a couple of months ago, it was something like low to mid single digit percentage of the population participate in this manner.

Before getting any further into this, there is no way that some sort of benefit cut should catch anyone off guard. I really don't know how many years we've been talking about this outcome and it is still eight or nine years away. I would also repeat from previous posts that thinking in terms of fair or unfair is irrelevant. Yes cuts of any sort would be unfair but other than members of the legislature, none of us are going to impact whether there are cuts, who will have their benefit cut or who will not. To focus on the unfairness is to worry about things beyond our control.

The focus here has always been trying to create streams of income out of some sort of activity or endeavor that you enjoy, know something about or a combo of the two. If you have to work beyond the typical retirement age or beyond the age you hoped to retire, what is the one job or the one type of work you do not want to do, that you would hate to do, that would be depressing or defeating? 

If it looks like a cut to Social Security is coming, someone who hasn't worked on mitigating that outcome they least want has a high chance of ending up in that lousy, for them, situation. 

The approach of cultivating long term interests into a possible income stream does a couple of things. First, the obvious benefit of a better chance for avoiding a bad outcome like expecting $4000/mo from SS and only getting $3000. It also makes for a more interesting life. My life is far more interesting for my fire department involvement and in the last few years with the Del E Webb Foundation. I've already monetized the fire department work a couple of times with incident management work and could do more if I needed to but I've dialed that back for now. Starting next year, I will get a small stipend as a board member for Del E Webb. Stipend is a good word, it's not a big income but would help if things ever get tough for us. 

I've been talking about the fire stuff for many years which speaks to the point of taking a long runway to cultivate post retirement income streams. If I ever have to rely on these, it will be work/activity that I enjoy not a job that I'd have to take out of desperation.

As far as what might actually happen to Social Security, I've said before that I don't believe anyone born before a certain year, I guessed 1975, will have their payouts cut. There's some logic there but it could be incorrect. Somewhere, I saw the idea that as the 78 million baby boomers age out, that could provide some relief. Gen-X has about 65 million, both numbers per Google. 

In the past, I have floated the idea that people should expect means testing or maybe phasing out the spousal benefit. In that scenario a non-working spouse would get the survivor benefit but not spousal benefit while the working spouse was alive. 

If they do anything, it will be unfair to someone, maybe everyone. Languishing in the unfairness solves nothing.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Skewing To An Unrealistically Good Result

All sorts of fun stuff today but no post yesterday because we had this going on. 

Two fires in three days doesn't happen here very often. I was first on scene with another firefighter. We knew other resources were coming so the immediate objective was to try to prevent it from getting worse and start to knock it down. Despite what it looks like, I am not directly under the power line.

We'll kick off with comments that Ken Griffin gave to Bloomberg, he said that diversification is the most important thing for newer investors because "your likelihood of beating the pros as a novice investor is low." I would argue of course that "beating the pros" is the about the last thing any investor should worry about, new or otherwise. 

Here's the one thing, with regard to portfolio outcomes, that matters most. Do you have enough money when you need it, for as long as you need it? That's it. Dusting off an old one, quick, without looking, what did the S&P 500 do in 2017 and did you outperform or lag? That odds that anyone knows without looking are microscopic because it doesn't matter. If you're 50 and only have 1/3 of what you should have by now, you're not going to outperform your way up to where you should be. If you're 85 and very fit but out of money, whether you outperformed from 1990 to 2000 means nothing. 

This is part of the reason we spend so much time here trying to figure out how to make the ride smoother over the long term. A very volatile portfolio increases the likelihood of panicking or making some other behavioral mistake. 

On Tuesday, I sat in on a webinar from ReturnStacked about the newest ETF that leverages up to own stocks, gold and Bitcoin that has symbol RSSX which we've looked at a couple of times. I won't bore you with more about that fund but they made a high level characterization of their strategy that I thought was interesting. Most of their funds they said offer a very basic asset class with an alternative added on top. The benefit as they see it is when deciding to use alts, you have to figure where to take from, stocks or bonds, to add the exposure. So 60/40 might become 50/30/20. With their funds, it can be 60/40/20.

The AQR fund QSPIX is the sole alt in portfolios 2, 3 and 4. I chose QSPIX because it has been around for a while and doesn't have a return that is so good that it might not be repeatable. And despite the so-so CAGR, it appears to have been an effective diversifier over the years. 

Looking at portfolios 3 and 4, the leverage gets you nothing. It lagged by a basis point so ok, it's a push and Portfolio 4 was a hair more volatile. Maybe it is something about my method but it is difficult to put something together using retail accessible funds to get their concept to work. I go through this so often trying to find a compelling result and it is just hard to do. 

In a similar vein, Simplify posted a paper in support of some of their alt funds. They tilted to 50/30/20 but they made a useful point about needing to discern between alts that actually offer differentiation versus equities and fixed income. Private credit is often considered an alt but they question private credit's usefulness as an alt. Maybe some private credit fund you might access will outperform regular credit or maybe not, but there's not a lot of differentiation. 

The paper highlights their managed futures fund, the new currency fund with symbol FOXY, their commodity fund and the new high yielding fund that uses something called barrier put options, symbol XV. Taking the 20 in the 50/30/20 and dividing it up equally with similar, but older funds and building out a 50/30/20 with the following.

So there is some differentiation. This 50/30/20 lags a little is a little less volatile, it did noticeably better in 2022 but not the other drawdowns.

What I built though may not be fair to Simplify. Their currency fund FOXY might end up being much better than CEW. Some of the Simplify funds do fantastically well and FOXY could be one of those but obviously at this point there is no way to know. 

We'll close out with a couple of new funds. I've mentioned client holding Alpha Architect Box ETF (BOXX). It is long and short S&P 500 calls and puts in such a way that the return mimics the yield on T-bills without owning T-bills. The much newer Twin Oak Short Horizon Absolute Return ETF (TOAK) appears to seek the same outcome with a slightly different option strategy. TOAK appears to be long a couple of straddles but not short any options. 

I threw in client and personal holding MERIX for a little context. MERIX is essentially a horizontal like that tilts upward yet it looks far more volatile than BOXX or TOAK. I own BOXX for clients to have a little less direct Treasury exposure in case there is some sort of unforced error with something like the debt ceiling. To be clear, I am not worried about the US being unable to pay it's bills, more like congressional dysfunction leading to something stupid. If a strategy like BOXX or TOAK interests you, I would not own both, I believe they are too similar to own both. 

Finally, WisdomTree launched a new capital efficient (leveraged) fund that focuses on inflation, the WisdomTree Inflation Plus (WTIP). The breakdown is 10% cash for collateral, 85% in TIPS, 5-10% to Bitcoin and 95% in commodities of which, 15% is long gold and silver. The other 80% of the commodity sleeve can be long, short or flat energy, metals, grains and softs based on momentum. 

Trying to backtest the WTIP allocation might not be too helpful. If the results of Bitcoin are not repeatable, it going up 10x would be less of a gain than looking backwards, then any sort of backtest will skew to an unrealistically good result. 

Capital efficiency is of course a fascinating method (I think it is anyway). I don't employ it with traditional leverage. If I do anything with it, it is with leveraging down as we have described it before with a small allocation to BTAL as more of a long term hold and a couple of others that are a little more tactical. We're seeing more fund providers start to offer capital efficient funds. This is something that would be easy to misuse or otherwise get wrong. Relative to the providers out there, I  think WisdomTree has it pretty dialed in as far as funds meeting expectations.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

"Prosperity Paradox"

Well known minimalist Joshua Becker wrote about the crossover between minimalism and financial independence. The first level of this is easy to piece together, spending less on unnecessary crap is a path to financial independence. 

There are also psychological factors at play here too. As some point, people become overwhelmed by their stuff/junk for whatever reason and life becomes more difficult than it needs to be. Woven in there was what Becker referred to as the "prosperity paradox." The more money we have, the more we think we need which creates a tough, emotional treadmill. 

The one story about the prosperity paradox I've shared was a former co-worker when I was at Charles Schwab. I worked on a three person trading desk and one of the other two guys had been with the company going back into the 80's. The third guy and I each started in January 1993. By 1999, Schwab's common stock was getting close to $100 and my colleague had well over $1 million in company stock. 

Part of our compensation was stock and the way it was structured, the only we he could have accessed it would have been to quit/retire once vested. We urged him to do just that and he said, I need $5 million. You know the rest. The internet bubble popped and Schwab stock, which is a client holding, fell 84%. Schwab didn't retake that high until early 2017. I got laid off in Sept 2001 so I don't know how long he stayed at Schwab but if it was a long time, then he obviously accumulated a lot more stock at lower prices. 

An idea from many years ago that we revisit occasionally is figuring out what we really value and then saving or planning toward that correct outcome. Too many people have trouble figuring that out for themselves and they end up saving or planning for what turns out to be the wrong (for them) outcome. 

I've told the story 100 times about not wanting to be a partner at my old firm. Not realizing that many years later, one of the partners would turnout to trade illegally and that the other would let it happen, I disagreed with the complexity they seemed to embrace buying a building and starting a private equity fund among other things. I was reminded of another point in this post from Michael Batnick. I used to say this exact thing all the time. The job of running an advisory is much different than simply being an advisor. 

If someone wants to be an advisor because on some level they enjoy markets, helping people or some combo of both, time spent running the business isn't either of those things. 

Every aspect of life is easier when you know what you actually care about and what you actually want.

And a quick correction from yesterday, the picture of me spraying wet stuff on the hot stuff. I don't think that was me actually. White helmet (usually chief color) and tan pants is me but what little you can see of the glasses is wrong. He must have been part of the task force that showed up later. The other picture of me where I say I look like Vincent from Pulp Fiction, that was me.   

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Wildland Fire Today

Saturday was Walker Day which is our big, annual fundraising event and then Sunday morning we were dispatched out to a wildfire shortly after 4am and I didn't get home until about 3:45 the afternoon so no blog post but some pictures,

I started out as the Incident Commander (IC). I called it in at two acres, the final count was 2.9. There is a thing where volunteer departments are known to call in much bigger acreage than it really is so I felt good about that. 

From a few miles away.

We got lucky with a weather phenomenon known as the inversion layer and the fire laid down. 

The sun started to hit it, heating things up a little bit.

I can't believe our department has a truck like this. We sort of actually have two of them!

I turned over IC to the Forest Service after about an hour or hour and a half. That is some of their folks,

A little more technical, I established and Alpha division and a Zulu division. Our personnel took Alpha side and that is what they had to climb in the dark. Zulu started out with city resources but then we all engine crews were released.

From around 8am until 4:30 pm we provided water tender support (brown water truck is one of them)

That's me putting wet stuff on the hot stuff.

I look like Vincent in Pulp Fiction when he's picking up Mrs Wallace and he's looking around confused when she calls him on the intercom. It's a little hard to see but I am wearing a bladder bag which is a backpack sort of thing that holds 5 gallons of water and and the way it works, you can put out a lot of fire with them. 

We got lucky with a lot of things but our tactics weren't wrong, we had a tremendous number of resources respond and were able to take care of business. Our crews did a fantastic job.

Twitter Experts

One of funniest aspects of Twitter is in the immediate aftermath of some event like yesterday plane crash in India (not funny), there will then be a lot of opinions voiced to dissect the news/event. The funny part is the Tweets that say something to the effect, here come the Twitter experts on aviation safety or vaccinations or whatever. 

I have opinions on what has gone on in the middle east since October a year and half ago of course and I take in the news like many people. While we are all entitled to our opinions, I am certainly no expert of the geopolitics of the middle east or anywhere else. In terms of managing client portfolios, I believe the important thing is making portfolios robust in the face of whatever might come along to create an adverse market reaction. 

Something like Israel attacking Iran would seem to have the potential to cause a market decline but I have no idea. As opposed to trying to predict the effect some event will have on markets, I want portfolios to be generally ready for whatever negative surprise might come along regardless of my ability to analyze that event.

That brings us to the prompt for today's post from Bob Elliott who posted a short video saying "most investors are totally unprepared for war." He went on to talk about the shortcomings of the typical 60/40 portfolio in terms of lacking robustness in the face of war and I would add, in the face of just about any serious event that takes markets down. 

Specific to war, Bob says that stocks and bonds underperform. Owning just stocks and bonds, Bob says, is a huge bet on growth and low inflation. He suggests owning gold and commodities and keeping in the same vein I would add commodity stocks to Bob's comments. 

The way we've talked about first responder defensives and second responders hopefully is useful for readers, it is for me. No matter what causes the market to go down, an inverse fund is going to go up. Client/personal holding BTAL has been extremely reliable in this regard but is not infallible. 

Loading up on just one defensive is a bad idea in case something goes wrong but for me, after an inverse fund and BTAL it boils down to assessing reliability or maybe predictability is a better word. How reliable do you think gold and other commodities are in a defensive context? If you believe in any of this then I'd suggest going through a similar process of weighing out what the correct expectation is for any alt you own and any you'd consider.

Down a lot, up a lot, flat or bouncing all over the place, the result for client/personal holding Merger Fund this year is exactly what I would hope for in all market types. 

We spend a lot of time here trying to better understand what to expect from managed futures. It worked so fantastically well in 2022 and struggled badly in recent times. In 2022 in the face of fantastic outcomes and calls for 20 or more percent in managed futures I was very clear about what a bad idea I thought 20% was because you never know when it won't "work." Work is obviously not the correct word, it's doing exactly what it is supposed to do, it's just that the trendless nature of quite a few markets don't let themselves to favorable result. If you have 5% in managed futures as one of several alts, then the result this year can just be a shoulder shrug. With a 20% allocation, the impact is more serious. 

The ReturnStacked guys have another paper out in support of their version of portable alpha, leveraging up to add managed futures. 

Citing work from the Man Institute with the above chart, you can see the results of adding a larger allocation with leverage. Just looking at the chart you can see a lot of outperformance in the popping of the internet bubble. There was outperformance in the Financial Crisis, it's visible on chart but a little harder to see. We do have a fund we can look at for 2008 with what started out as the Rydex Managed Futures Fund that still trades with symbol RYMFX. That fund was up just over 6% in 2008. And again, if you look closely you can see outperformance in 2022. 

I can't seem to ever recreate the results with funds however. I couldn't recreate the above result. I pretty much go through the same exercise when I see different models that have large weightings to managed futures and I can't get there. It could be me, clearly. But it also could be that it can't be recreated using brokerage accessible funds and that is probably the only way most of us can access the strategy. 

A 5% weighting to a managed futures fund that goes up 20% in a year like 2022 adds 100 basis points of positive return to a portfolio's result. As opposed to using leverage to add the 5% (in my example), if that 5% avoids exposure to something that goes down 15 or 20% (AGG or SPY) then the portfolio is spared another 75-100 basis points of negative performance. When you need managed futures the most, you don't want full equity exposure like in a portable alpha strategy, you want less, managed futures tend to go up when stocks are going down even if that is not infallible. 

Barron's wrote about a survey showing that 94% of advisors believe they don't own enough alternatives while 57% said they don't know enough about them. The context was mostly private equity and private credit but not exclusively I don't believe. My use and our conversation started before the word alternatives started being used. For anyone willing to make the time to learn, prudent use of alts, not 20% in one type of alt, I think they can make adverse market events much easier to endure. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.