Getting An Inheritance? Don't Mess It Up

A couple of retirement related items. First up is a thin article about the psychology that might go with inheriting money. There can be feelings of "guilt and grief." My tiny sample size with clients, there's never been guilt but grief happens, a loved one just died. 

I'm about to talk out of both sides of my mouth but while relying on getting an inheritance is a bad idea, you do need to know if it is likely and need to do some planning. If you're going to inherit some or all of one of your parents' IRA accounts, you need to plan for taking all the money out over ten years. I can't believe they made that a requirement but they did. 

You have the option of waiting until year ten to get the max tax deferred growth but if it is a lot of money, then you might be paying tax at 37% in ten years when you take it out. If you're still working ten years from now and inherit a $400,000 IRA today and want to wait to take it out in ten years, that $400,000 invested in VBAIX might double. $400,000 into VBAIX in 2016 is worth $992,000 now. That's an enormous tax bill. Maybe for someone, this scenario is their best outcome, or not, but there is no reason not to think this through well ahead of time. 

Taking out $40,000/yr in this scenario might end up in a similar net dollar amount but paying less taxes, sort of a wash? Putting $400,000 into VBAIX in this scenario ten years ago, letting it sit untouched until April 13, 2022, it would have grown to $701,000. Then there's four years to take out the money, maybe $175,000 per year...sort of. The money not yet taken out is still growing. Pretend they just took the last $175,000 out today, there would still be $109,000 from price appreciation of VBAIX to take out in addition to this year's $175,000 and now the account is depleted. 

Figure these people earn $150,000, then add the $175,000 they take from the inherited IRA. They are in the 24% bracket with an effective rate of 19.3%. In the last year, adding the final $109,000, they do get up into the 32% bracket on a few of their dollars earned but the calculator at taxact.com has the effective tax rate at 20.89%.

One way they might be able to cut their tax bill is contributing to their 401k. Having earned income makes you eligible to contribute and the limits of course can be quite high. If you've been living on $150,000 and get an extra $175,000 from an inherited IRA then there's a good chance you can fully fund your 401k...assuming you're eligible of course. 

Does this seem like a lot of detail? We didn't even get into inheriting money not in an IRA, like maybe from the sale of a house or maybe the parents just had their money in taxable accounts. 

I realize don't rely on it but plan for it is contradictory but I think it is prudent to understand the probabilities of your situation and do a little planning. Then if it actually happens, do some serious planning. Use AI if you want, it's probably a good idea, if nothing else, maybe AI helps you avoid a really bad strategy even if it doesn't get you to an optimal strategy. 

The other article was about whether or not to pay off your mortgage from Barron's. In terms of the math, paying off a mortgage with a low rate is not optimal. Again, that is just the math and ignores the emotional value of being mortgage free. The idea is that it is reasonable to think you'd get a better return investing the money than paying off a 3% or 4% mortgage. That idea is less compelling though with a mortgage at 6% or higher. 

VBAIX failed to return above 4% about 1/3 of the time, eight out of 25 years, since it started trading. We are all going to draw our own conclusion about what makes sense in this regard. The mortgage on our Airbnb rental is 3.5% and we are not paying it off early. It's a 15 year that will be paid off in 2032. The mortgage we just took out for the house in Tucson is 6.375% and we plan to pay that down very aggressively over the next four years +/- by not contributing to my 401k. If we get it paid off when I am 64 or 65 and I am still working (that is the plan), then we can resume 401k contributions. 

Being able to do this is a function of the optionality I think my wife and I created for ourselves when we were younger.

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 Two Best Defensive Strategies?

A research paper from Robeco concluded that the two best defensive strategies are trend and Defensive Absolute Return (DAR) which is a fairly new idea built of course on plenty of data, 220 year's worth from the Robeco paper. We've looked at trend a couple of hundred times so let's focus on DAR, what is it?

Basically, DAR goes short the equity factors with the highest correlation to a 60/40 portfolio and long the equity factors with the lowest correlation to a 60/40 portfolio all as an overlay. We'll use VBAIX as a proxy for 60/40.

I asked Grok to layout whatever factors it could find and build a table of correlations.

From that list, the obvious observation is that all the correlations seem pretty close to each other. Is this going to work? Here's how I tested DAR; with leverage, no leverage and then the Research Affiliates idea of blending momentum, quality and value in a long only fashion which seems like an effective way to use factors. 

The time period is short to easier observe the 2020 Pandemic Crash and the 2022 bear market. 

The drawdown screen grab hovers over the 2022 low and you can see both versions of DAR helped a little. At the low of the Pandemic Crash, the unlevered DAR was the best of the bunch, about 500 basis points better than VBAIX.

There might be something to it but I don't think it lends itself at this point being easily implemented with ETFs. VettaFi doesn't show any inverse factor funds available so anyone wanting to actually do this would need to be able to short the factor ETFs. This would also require monitoring correlations of the various factors as there can be volatility in correlations. The current level from Portfoliovisualizer is much different than what Grok found.

A quick pivot to an old article from the Washington Post about lifting weights, especially for your legs. There was a study cited in the article that said the heavier you lift, the more benefit you get. Well, no kidding. Heavy is relative. Whatever your max is, per the article, do 70-85% of that max for reps. It doesn't matter whether your max for something is 20 pounds or 200 pounds, you should be able to do reps at 70-85% of that number. 

"Leg strength is a critical indicator of wider health and mobility among older people." They also mentioned staving off frailty. Leg strength helps with balance and mobility which leads to much better outcomes in terms of quality of life and independence. 

Do more squats and learn about creatine. Squats doesn't have to mean what is probably the most common version, the back squat. This guy's form is an injury waiting to happen.

I typically do a set of landmine squats

A set of leg press

And then maybe goblet squat, Bulgarian split squat or something that kind of looks like this but with a kettlebell where I only hinge at the knees; it blasts my quads;

Deadlifts and farmers carry also hit the legs. Jump rope, which I do a ton of, helps with calves and more importantly with balance. 

These exercises don't threaten injury the way that back squats do. As far as creatine, I take it. All I am saying here though is to learn about it and decide for yourself. Don't just take it because I said so, as far as that goes I am just some guy on the internet. The way it works is it retains more water in the muscles which expands the surface space of the muscles which in turn makes you stronger and a little bigger. You will not get too big. It is important to drink water regularly. I know one downside is that some people feel bloated, my wife gets that sensation from creatine so she doesn't take it. 

Doing more squats might be the best defensive strategy for aging successfully. 

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.

Do Some Sector Math

Both Barron's and the WSJ wrote about private equity/credit funds over the weekend. Barron's picked the idea floating around that somehow, investors who put money in to private assets didn't realize the difficulty they would have getting money out and offered a few ideas to help. 

Apparently if someone has to take required minimum distributions then the fund companies need to honor those redemption requests. Also there are secondary markets where someone might be able to sell but do so at a discount. It's not so much markets to do this as companies that can facilitate this sort of trade. 

The WSJ reported that private equity is a the larger asset class but that most of the trouble is in private credit. I asked Copilot to weigh in.

First I asked it to quantify the risks. How many funds might go under.

Category	Realistic Failure Estimate	Notes
Private Equity (company‑level)	20–30% fail to meet expectations	Well‑documented; bankruptcy spikes in 2024.
Private Equity (fund‑level)	5–10% may return <1.0x	Depends heavily on vintage and leverage.
Private Credit (loan‑level)	10–20% impairment in downturn	IMF/OFR highlight fragility and opacity.
Private Credit (fund‑level)	0–5% severe distress	True failures rare so far; untested at scale.
Gated vehicles (interval, evergreen)	5–15% material stress; 1–3% structural failure	Liquidity mismatch is the key risk.

Then I asked about systemic risk.

There is no systemic crisis coming from private markets in the classic sense. But there will be real pain, especially in semi‑liquid vehicles and highly levered sponsor‑owned companies. The risks are not existential — they are structural, slow‑moving, and unevenly distributed.

I don't know a whole lot here but have studied it some. I don't know a whole lot because I don't need to. This space was so clearly and obviously headache and hassle at a minimum or maybe "severe distress" waiting to happen that it was easy to avoid. If you think there is a way to replicate private assets via a wrapper with daily liquidity and want that exposure, go for it. If it goes poorly but you sized it correctly, ok, you can get out. 

These things usually need to be accessed via an advisor of some sort so I am trying to wrap my head around an advisor letting a client get to the point where the fund company must accommodate the redemption request so the client can take their RMD.

The Journal also had an article about emerging market ETF picks from various types of participants. The group seemed to favor South Korea and Taiwan ETFs. I have no opinion either way on adding those two countries but make sure you do some sector math so you don't get caught off guard. iShares Taiwan (EWT) has 39% in technology and iShares South Korea (EWY) has 47%. The S&P 500 has 44% in tech plus communications. 

We just wrote about country funds a couple of weeks ago. 

It looks like nothing, but the drawdown in domestic tech represented by XLK was more than 10%. You can see EWY and EWT starting their declines at the same time but with much bigger drops and then the lift from the last few days is also much bigger. 

This isn't automatically a problem if you have done some sector math to know how much tech you are actually carrying and you have the right expectations and understanding about volatility. An extra layer here is that these dynamics change over time. In the 2000's EWY and EWT outperformed XLK by a lot with more volatility as foreign generally did better. Then in the teens, XLK did much better as foreign lagged badly. And the 2020's have been more of a mixed bag.

I am far from a don't use country funds guy but using them effectively is not a set and forget endeavor.

The other day, when we looked at CPZ I said that combining long/short equity with an income overlay might be an interesting combo. Well the Neos Long/Short Equity Income ETF (NLSI) does just that and guess what? It's not interesting. No yet anyway.

Testfol.io doesn't always account for income correctly. So far, NLSI has paid out a little over 200 basis points so even if the chart doesn't account for the distributions correctly (low probability), the result would still be pretty rough.

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. 

A Blogger Looks At 60

The title to this post is a play on words from the Jimmy Buffett song A Pirate Looks At 40. This is an ongoing series that started when I was 40 with the intention of sort of updating the post at milestone birthdays. The point is to track how my views on various things might evolve or change dramatically and to hold myself accountable for any lifestyle opinions/advice I might write about.

These are the the previous posts in the series.

• A Blogger Looks At 40
• A Blogger Looks At 50
• A Blogger Looks At 55
• A Blogger Looks At 56
• A Blogger Looks At 57
• A Blogger Looks At 58
• A Blogger Looks At 59
• A Blogger Looks At 59 1/2

The first thing about 60 is I'm glad I made it. That's a serious comment. I don't talk about it a lot I don't think but I had a very rare, very treatable form of cancer in high school. Here's an article from the Washington Post talking about childhood cancer survivors having poor outcomes later in life in terms of not living that long and having depression issues. 

The WaPo article taught me to be more grateful for how things turned out. I do have a couple of issues that are probably more from the treatment than the actual cancer. Being direct about it, I have a disability that I have never disclosed here. I am not disabled, I have always invested a tremendous amount of time and effort to be able to overcome my issues which allowed me to be a pretty good beach volleyball player in college and allow me to still qualify as a wildland firefighter at a relatively old age. I've talked countless times about pack testing, this year I was six seconds faster than last year. I think the firefighters know something is up but they don't know what. I am fitter than most of the group but not the fastest hiker. 

If you're a long time reader and ever wondered why I am such a health nut, that's a big part of it. The bigger point is that we all have obstacles and many of them can be overcome but it takes effort. 

Let's lighten up the mood. 

Many years ago, we started talking about doing favors for your future self. I feel like I've been the beneficiary of things I did for the 50 year old and now 60 year old me. Invoking Nassim Taleb, we learn from our grandmothers about not eating too much sugar and the importance of saving money. Is there anyone who doesn't know that it's important to exercise?

Sixty is long past the age where people can start to feel physical consequences for poor decisions related to how they take care of themselves. But if you get to 60 and can still get it done and don't need a bunch of prescriptions then you're probably benefitting from habits taken up decades earlier, or you're lucky which is ok too. Either way, life is much easier.

My involvement with Walker Fire makes it easy to benchmark where I am physically, meaning how well the weightlifting and jumping rope is paying off. My priorities for exercising are for myself first, then to be a good partner to my wife and to set an example at the firehouse. "The chief of a small fire department needs to be able to get it done" someone once said to me and that stuck. The other day I posted pictures from the annual wildland fire exercise I participate in. My capacity to dig fire line is still very good. It is a ton of fun and it is great exercise. Working on any kind of fire always creates the sensation of having accomplished something. 

This is also well past the age of starting to benefit from financial habits mostly related to saving and living below your means. At 50 or 60, if you hate your job or otherwise feel you have to do something different, a decent sized nest egg can allow for changing jobs even if it means making a lot less money. Some people call this coast fire. You just need an income to cover expenses, you've already saved enough, you just need to let it continue to grow. 

This is where we are financially. A few months ago I mentioned that we bought a house in Tucson with the plan of diverting what would otherwise go into my 401k into paying down the mortgage very quickly. So far we're on track with that but it's only a been a few months. 

Making the rounds on a couple of other things we discuss in these posts; I still don't plan on retiring. I still think waiting to take Social Security until I am 70 makes the most sense for us. There's no visibility for my being able to give up the fire chief position. No one is interested in taking that on or even taking a long path to considering it. Over the last year I've been able to delegate a couple of the regular meetings out to other people which helps. I think I will want to continue being a firefighter for a very long time but the novelty of being the chief has worn off. 

I've banged the drum many times about the importance of having multiple streams of income and have lived that more than I reasonably expected. It's obviously a safety net if anything goes wrong.

Turning 60 was not a difficult birthday but it feels like a more significant milestone. My theory has long been that if you're happy at home, enjoy what you do and feel good physically, that the birthdays will be easier.

Yes, that is Skeletor on my shirt. 

"You Can Only Hedge Against Known Risks"

The title of this post is a quote by JP Morgan strategist David Kelly from this morning on Bloomberg. I don't think he's right. Much of my process specifically targets hedging the unknown. We talk all the time about client/personal holding BTAL being pretty reliable (not infallible) at going up when stocks go down. Whatever the reason causing stocks to drop, the Covid Crash, 2022, the Tariff Panic, BTAL has been reliable in this context.

TAIL and VIXM have also tended to go up when stocks go down, regardless of the reason of why stocks are going down.

You can build this yourself to see but the three different blends drawdown less than straight equity exposure pretty much every time. 

I hovered on the 2022 low because 2022 was a pretty bad year for TAIL but that combo still was down less than the S&P 500.

Copilot weighed in, that "Kelly’s statement is directionally true in a classical risk‑management sense, but it’s not literally true once you introduce convexity, volatility‑linked hedges, and regime‑adaptive hedging tools like BTAL, TAIL, VIXM, VIXY, or managed futures. These instruments do hedge risks that are not explicitly “known” in advance — but they hedge them probabilistically, not specifically."

So essentially the difference is the text book versus real world. The emphasis in that passage is Copilot's, not mine. 

That brings to a post from AQR about the mistake they see people making when they realize that bonds don't work for diversification in the manner that they used to so they are pivoting to exposures that actually have a higher correlation to equities than bonds, they are essentially adding more more equity beta to their portfolios, AQR says.

As I read the paper I started to think about barbelling a full equity exposure into a narrower slice of the portfolio which could come from leverage, using products that target more volatility or even with higher beta exposures in unlevered exposures. 

Portfolio 4 is just SPY and the other three, the rest is cash. HFEQ targets twice the volatility, XLK is technology and simply has a higher beta and SSO is a levered 2x fund. The chart is so short because of HFEQ which was pretty close to the other three until it had a great month in February. I am guessing it pulled away from the others for being long a lot less tech. You can see the 70% XLK portfolio pull away to the downside as the private credit whatever we're calling it started to unfold. 

Here's a longer term look at XLK that dials in a 74% weighting, 26% in cash, as being very close to 100% SPY. 

The year by year results though show the two taking much different paths to the same result. So the flaw in this backtest is optimizing for XLK's lifetime instead of trying to dial in the year by year. I couldn't get the data Copilot needed to optimize minimal year by year dispersion. 

Here's a similar backtest with 50% SSO/50% cash going back to SSO's inception 19 years ago.

They're not that far off from each other. Is that close enough? Maybe, maybe not, it depends on the user. I don't think any other fund compared like this with the 2x version of itself plus cash would be anywhere near as close but as we've been saying for a very long time, SSO stays pretty close over longer periods most of the time.

I wasn't able to find an alt to sub in for the cash to get a better return than SSO plus cash but I think that is because there were far fewer funds from 20 years ago versus today. It was a little easier to find some outperformance with newer funds and much shorter backtests. 

There is something to this theory, it can work longer term. More realistically, 50% into a 2x levered fund is not the answer but maybe a smaller slice worked into a portfolio can be an answer. 

Lastly, the Calamos L/S Equity & Dynamic Income Trust (CPZ), a closed end fund, popped up on my radar. It yields about 12%, it's leveraged up about 27%, it has done a good job in terms of not returning capital to make it's distribution, only six monthly payments included any ROC since it started paying out in December 2019 according to CEFconnect. It gets its yield from the leverage and then investing in preferred stocks and fixed income, it is not a derivative income fund. The long/short book is neutral biased so more like a market neutral or absolute return strategy. 

CPZ first started trading at $20. On a price basis it is not keeping up with its distribution which should not be a huge surprise. The total return has compounded at 3.94%. The huge rally in 2021 appears to be from the fund zooming up to trade at a pretty large premium to its NAV. Copilot posited that the run up in 2021 was more about top down yield chasing than anything to do with the fund. 

While I am not interested in using CPZ, I am intrigued by the l/s and yield combo. There will be a better mousetrap in this space.

This whole post was an exercise in sifting. I've used that word before. I spend a lot of time looking for ways to improve the portfolio which includes looking at strategies or funds that won't be able to do that. 

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 Training

Today we had the annual Basin Ops Drill which is the annual, interagency training exercise with live fire. It's always a ton of fun.

Our new Type 6 engine  (brush truck)

A small fire that we made quick work of getting a line around it and then putting it out.

Me in the white helmet.

I dig the color of the BLM trucks but they aren't called BLM anymore.

The S&P Is Turning Into A Tech Fund

A few quick hits today.

We've looked once or twice at the Simplify Multi QIS Alternative ETF (QIS). The fact sheet boasts exposure to 25+ quantitative investment strategies. Here's the chart.

The yield is modest so the total return is slightly better but the fund is down a lot. The holdings are pretty opaque unless you know what FOXBP1TRS and SBABOATRS are. Some of the holdings are intuitive but more power to you if you can figure out how the strategies are actually positioned. The easy conclusion is that the fund is too complex. 

Last August I questioned how the fund was still open. This post had a little color about QIS being intended as a fixed income sort of proxy like 60% equities, 20% bonds and 20% QIS. Based on the fund's result, there's no point in backtesting it. When QIS first started trading, I backtested the concept with other funds which looked good, I said the concept seems valid but the fund somehow hasn't lived up to the concept.

This next chart compares YieldMax Tesla (TSLY) which is a covered call strategy and the GraniteShares Tesla Yield BOOST (TSYY) which is a put selling strategy.

The chart is price only. Anyone taking out the income, that's a lot of bleed. I've said several times that I think selling puts is a better way to go, note that TSYY is selling puts on a levered Tesla single stock ETF, but there is no way the price of a fund is going to keep up with this kind of "yield."

Tell your friends how these work so they don't spend 85% of their principal in 16 months.

Bloomberg says that SpaceX is targeting a $2 trillion valuation for its IPO which might be coming as soon as June. Anthropic is currently valued at $380 billion and OpenAI is at $820 billion and both intend to IPO at some point. At $2 trillion, SpaceX looks like it would be the sixth largest in the S&P 500, Open AI at $800 billion would be tenth or 11th with Anthropic further down the list obviously.

SpaceX would probably go into the industrial sector but still be pretty techish. I'd expect Anthropic and OpenAI to end up in the tech sector. All three stand to make the S&P 500 even more tech/communications centric than it already is from it's current 43% (down from 45%) up closer to 50%.

That will potentially be a lot of volatility, really a lot. Ways to address that include building the portfolio at the sector level, adding and small doses of negatively correlated holdings or using different factors that underweight tech. 

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.