Building In A Margin Of Safety

Barron's posted a first hand account from a semi-retired writer, not Neal Templin, about why he chose to wait until 70 to take his Social Security at the start of the year. As is often the case, the comments are worth reading and like they usually do, they lean to taking it early for various reasons. 

Hopefully I've never said everyone should in terms of when to take it but for quite a few years I've tried to really hit on making sure you understand how things work and warning that there are a lot of mistakes to be made. I recently found out that one buddy didn't know his wife could get a spousal benefit instead of her own which has been very costly for them. Big mistake. 

I'm about 25 months from being eligible to take it early. At this point, things would need to take an unimaginable turn for me to want to take it that soon. Unexpected things happen in life of course but I have no desire to stop working so taking it before 67 where the benefit would be reduced, doesn't make a lot of sense to me. My preference has been to wait until 70 to max out the survivor benefit for my wife in case I die early. If somehow I ended up taking it a few months early for some reason, I wouldn't consider that a real change in my plan versus taking at 65 or 66. 

Comments often turn to taking it at 62 and investing it. We looked at that recently with the conclusion that it wouldn't work for too many people. If you take it and keep working, most of it will be withheld because of the earnings test. If you take it at 62 but are pulling money out of other accounts to live off of, then it's sort of like rearranging the deck chairs. If you make a lot in passive income it could work, that is not subject to the earnings test. 

See the scenario below;

Someone who just turned 62, making $100,000 and wanting to retire now and take Social Security right away. A single person goes from making $8333/mo to $1764. Or if his wife makes the same $100,000 and will keep working, they go from $16,666/mo to $10,097.

This scenario could easily have enough in retirement accounts to fill the gap but if they're sort of close to the line with not much margin for error, locking in $1764 (plus COLAs) could be difficult. Sticking with the single earner getting $1764 and the spousal benefit of $882, they've gone from $8333/mo to $2646/mo. Say they are living on 70% of their $8333, that's $5833 so they need their portfolio to kick off $3187/mo. Working backwards, assuming a 4% withdrawal rate, they need $956,000.

Copilot figures that of people 50 and older, making $100,000 or more, only 10-15% have at least $1 million saved. It's not that success is impossible or implausible but this scenario of seems kind of realistic, it's not desperate but something might have to give. Maybe not retiring. Maybe cutting back on spending somehow. Maybe getting some sort of side-hustle type of part time income but remember that too much income might cut into the Social Security benefit. 

If this person delays Social Security until 2028, their benefit would be $2084/mo and in 2030 it would be $2503/mo. If the nest egg, can compound at a not so heroic 6%, it could go from $956,000 now to $1,074,000, in 2028 or $1,206,000 in 2030. 

In 2028 they'd have $2084 in Social Security income plus the spousal benefit of $1042, $3126 plus 4% from the $1,074,000 portfolio for a total of $6706/mo versus their need of $5833. So the margin for error has gone from nothing at 62 to about $900 at 64. In 2030 at 66, their SS totals $3754 and 4% from their portfolio would be $4020/mo adds up to $7774/mo, leaving them about $1900 ahead. 

Arguably, the sweet spot for this scenario is closer to 64 than 62. Remember, one premise at work here is that the percentage of people making $100,000 that have $1 million in retirement assets is low. 

Obviously, some sort of income stream like from real estate or a monetized hobby could create a margin of safety that I think is important to have if at all possible. The question isn't 62 or 70, the question is personal, perceived need for a margin of safety.

I'll put out a second note after the Sunday night session starts if we see anything noteworthy. S&P futures down 10 basis points probably isn't worth anyone's time but we'll see what things look like. 

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.

Move To Albania?

Today's post will ignore the elephant in the room, the Iran attack, for now. Maybe we'll know a little more tomorrow when markets start their Sunday night sessions. 

I've had a bunch of tabs open this week with some downbeat topics but that I think are important to explore. First from the WSJ, More Americans Under 55 Are Dying Of Severe Heart Attacks. The idea that we are collectively less healthy than we were in decades past is something we've been digging into for a long, long time. We are getting heavier and heavier and our diets are getting worse and worse. The statistics are grim. They've been grim for a while. 

Being an EMT allows me to see some things first hand which has helped me better understand the predicament we finds ourselves in. A point we emphasize here is that they (the government) is never going to figure it out. We can either grow old, never trying to figure it out for ourselves or we can grow old and try to figure it out. We're going to grow old regardless and they are not going to figure it out so it is up to us. Health is wealth, make it a priority.

Cut way back on junk food. Take the time to learn what junk food really means, how many supposed healthy foods are in fact not and then cut way back. The more meals comprised of just meat, eggs, fish and cheese you can eat, the healthier you'll get. Vegans, I  don't know what to tell you. Plenty of fruits are sugar bombs, so watch out there. Many veggies are good of course but some are not. 

On Saturday morning, I was able to get a fire department buddy who doesn't really exercise to come do a mini-workout with me at the firehouse. I was thrilled he said yes. I do a full weight workout on Monday and Thursday (usually) and skip rope most other days. On Saturdays before either fire training, the monthly fire board meeting or like today a free Saturday, I do a mini-workout which is usually a set of jump rope and then three or four weight exercises. All in, this little routine is probably less than 15 minutes. After jumping rope, we did bent over barbell rows (dead lift substitute), landmine squats, pushups and farmers carry. I tried to get him to use weight he would think was too light and just do like 6 or 7 reps so he might feel it a little tomorrow but not be so blown up that he can't move. 

An important point is that I told him that this can be just 15 minutes and is far better than doing nothing. Hopefully you exercise vigorously and maybe you can encourage someone to start with small bites like we did this morning. On Wednesday, I have in my calendar to text him to encourage him to do a quick set of air squats and then some pushups. 

Next is that Americans Are Leaving The US In Record Numbers. It seemed like a lot of people said they were going to do this ten years ago but maybe not that many did? I'm not sure. Now though, if the numbers in the article are correct, maybe fewer people are talking about it but more people are doing it. Again, not sure. 

The article focused on Europe as an expat destination with no mention of Australia or New Zealand which surprised me, no Canada or southeast Asia either. One country that came up was Albania. One person who moved there was quoted as saying you can get buy on $1000/mo in Albania. I've never heard of Albania brought up in this context before, have you? 

Long story short, my father moved to Spain in 1980 when he was 54 and lived there until he died in 2015. Living in another country can work. Details related to finances and benefits (Social Security) can all be sorted out. Figuring out how to stay and whether you want to work there (he worked for quite a while) can also be sorted out. I don't need convincing that many places are cheaper to live than here. 

You also hear about the medical care being free or close to it. Yeah but.... My father had a few issues come up that were varying degrees of serious and they treated him just fine with a good result. He broke his hip at 71 for example and that went very well. He lived another 17 years and did a lot of walking, really a lot, right up until the end. Right after he turned 88, 55 years of cigar smoking caught up to him with throat cancer that spread all over and I saw first hand the medical care for something that serious was dreadful. Semi-serious and below, it's probably fine N=1 but for very serious, they didn't know what to do and I swear his doctor was about 24 years old, she looked like a kid and I never saw an older doc.

Our first trip to New Zealand in 2005 was unique. A Walker friend owned a property there with two houses. He rented out the main house to a slightly older couple and there was a guest house that our friend let us stay in. We spent a lot of time with the older couple and their kids who were about our age. Based on two visits, New Zealand seems like it would be a great place to live. Yes they import just about everything but they are net exporters of food, they have plenty. Pound for pound, it's a little cheaper there, maybe not in Auckland, but not as cheap as Albania purports to be. All good but as our hosts from the first trip told us, the healthcare system there isn't good. 

Speaking of New Zealand they are open for business for anyone who can buy their way in. For a time, they restricted foreigners' ability to buy a home but started to lose population so they loosened the restrictions a little. For now, a lot money and you can buy in as opposed to rent. 

Anyone who thinks they need to leave the US for whatever reason, you will have more optionality if you can get your health in order. Notice, I am not saying our healthcare system is better, it may not be, I don't know. A family member had some very serious health issues last summer. For a couple of months, it became a full time endeavor for a couple of family members to advocate for making sure mistakes were avoided, questions were asked and also pushing back on a couple of things that made no sense. 

Back to the second paragraph of this post, do everything you can to stay healthy. 

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.

Oh No, Financials!

The current event that appears to be unfolding in the financial sector coming out of the private asset space is not the Financial Crisis. Let's get that out of the way. I don't know what the final fallout will be but this will be an investment thing, if anything, not a systemic thing.

We've put up other tables capturing different periods but with the same message. These companies are pretty useful proxies for whatever is going on with private assets and right now, there are some real concerns with private assets but where private equity and private credit don't mark to market everyday, the above companies are like a Wittgenstein's Ruler look at what might really be going on in private asset funds. 

From Joe Weisenthal;

The other day, I talked about how complex the banks are and the complexity is again problematic even if not systemic. Before the financial crisis, I owned one domestic bank and several foreign banks. I had lucky timing selling all but the Canadian bank which I still own for clients today and Barclays which back then owned iShares. I've generally avoided banks ever since save for the one Canadian bank and a discount brokerage now that has some banking activity.

This might be useful.

Blackrock (BLK) is a client holding that of course now owns iShares and does have some exposure to the private asset theme. I would expect it to continue to feel more of the private asset unwind if that is what happens. Clients own a different credit card company than Visa (V). There's no fundamental connection to credit card companies (they don't take credit risk, they collect tolls). RY is a different Canadian bank, down less because I believe the Canadians are generally simpler businesses. KBWB is the ETF that tracks the bank index that Joe mentioned. JPM should be less levered based on Dimon's recent comments but we'll see how that pans out. ICE is the NYSE and a few other business. Panic should be good for trading volumes and exchanges should benefit from that with no fundamental connection to the credit event. Goldman Sachs (GS) is obviously smack in the middle of this thing

I am not zero weight credit risk but relative to the index I am underweight it considerably. If this gets uglier than it already has been, that bit of exposure I do have will feel it. Similar to tech, I've been somewhat underweight, not grossly underweight, but of course if there is a tech route, that exposure will feel it.

The point is completely avoiding something may not be plausible but avoiding the full brunt is plausible. Being underweight obvious risk focal points helps with portfolio robustness as does a little exposure to things that have negative correlations to equity or might actually benefit from the chaos (antifragile). 

And this is why you keep foreign exposure.

It can smooth out the ride over the intermediate and longer term. If you had some edge for when foreign would start to outperform a year or so, great, but that is a tough thing to get right. 

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.

What Going Heavy Managed Futures Looks Like

Simplify included this in promoting one of its funds.

That is a great way to phrase it, not relying on past correlations. The relationship between stocks and bonds is no longer as reliable as it used to be. This makes bonds less effective at helping manage equity market volatility. Yes, I am absolutely a broken record on this point and will continue to bang that drum. 

Next item, a good blog post from Ben Carlson, Can You Live Off Your Dividends? It was really about covered call ETFs with a look not so crazy high yielders and another chart with crazy high yielders. The starting point was answering a question for a 42 year old, single guy with a lot of money saved who wants to quit his job. If he put all the money into SPYI, he said the 11% would bring in what he needs.

That's Ben's chart. We do something similar here in terms of looking at total return and price only. If a fund like SPYI (there are others of course) can pay out 10, 11, 12% and still get a price only return of 3%, I think that's pretty good. That's not keeping up with the stock market of course, that should not be the expectation. Plenty of ifs there but still. 

The way we've looked at this idea is as a short term strategy like stopping work but wanting to wait a few years to take Social Security. 

Here's a simplified version of ideas we've looked at before.

Total Return versus price only.

The "yield" is about 11%. Inflation ran at 2.41% annualized during this period. So the real return, after taking out the distributions is above inflation but it's not great. It could limp along though for several years until the person wants to take Social Security. It's not a very robust portfolio if something bad happens in markets. Ben's reader is only 42. I would not want to try to ride that idea out for the next 45 years. There's very little likelihood it survives anywhere near that long. 

The scenario of like a five year window where you might allow a small portion of investible assets to deplete while waiting until Social Security kicks in is something we started playing around with quite a while ago, there are now ETFs from several providers that are intended to deplete for just this scenario so I'm not the only one. 

Speaking of Simplify, they launched a managed futures fund in partnership with DBi who already has their own ETF, DBMF which has done pretty well but absolutely killed it in 2022. DBMF is a replicator and the new fund which has symbol SDMF is also a replicator. Today was the first day so it is too soon know what the difference is between the two. 

I got an idea from looking at the fund and how some people believe in huge allocations to managed futures. Anyone wanting to more than dabble in managed futures should probably have several funds. We've gone over the performance dispersion between strategies including just the other day. 

The period studied captures an awful run for managed futures so I am very surprised that Portfolio 1 was anywhere close to plain vanilla 60/40.

Here's what the same three portfolios look like just looking at the last six years.

Portfolio 1 didn't really crash during the Covid Crash of 2020 and it was up 71 basis points 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.

It Keeps Getting Worse

The whole Blue Owl saga and whatever it means for private credit continues to draw more attention. Here's the latest from the WSJ, it is a festival of very long running themes we regularly explore. 

Chris Paladino, 58 years old, said he initially decided to invest around a quarter of his portfolio in private credit, hoping for yields of 9%. When he saw the headlines last week, he briefly wondered if he had made a mistake. 

This sort of yield chasing is something that repeats over and over. A 9% yield in a 4% world is risky. It's not that the risk should not be taken but 25% of your money exposed to just one risk is very aggressive. The Journal said that this guy second guessed what he had done but then doubled down with another $200,000. This guy also bought shares in Ares (ARES) common stock.

Obviously he could turn out to be correct so this really is about understanding what risks you want to take and understand the fallout if you are wrong. Paladino is in very deep. Unlike plain vanilla equities, if this goes down a lot, it doesn't have to eventually come back.

If he was enticed by 9% yields, he probably could have constructed a tranche of his portfolio of several different exposures, each with their own unique risk factors that could have gotten him the same 9%. Same yield much less risk to the bottom line value of the portfolio. 

With growth slowing from traditional pension-fund and endowment clients, private-markets giants such as Blue Owl, Apollo Global Management and Blackstone have aggressively courted individual investors from everyday millionaires on up. The firms are now pushing to get their offerings into 401(k)s. Some in the investing world said the funds aren’t well-suited for the masses, in part because they tend to come with higher fees and are harder to sell.

I read this as "we need more suckers." That was mean. I meant bag holders. 

One advisor is cited as recommending 5% to private credit. Risk-wise, that's reasonable. It either works out or it doesn't but the client is not seriously damaged if it goes badly. 

Quick pivot to a suite of four new ETFs from Innovator that they are calling Managed 10 Buffer. Basically the first 10%-14% of downside is protected but unlike other buffer products, these allow for capturing 80-90% of the upside. 

In the webinar, they talked about the possibility of these funds protecting as much as 20% down depending on how the volatility impacts the options combo embedded into the strategy. Thinking through it, if the market drops 25% and if the Managed 10 Buffer actually protects as much as the first 20%, then it's only a 5% decline for the Managed 10 Buffer.

I don't doubt these will work as intended but what they're really doing is protecting against down a little. I would be more interested in protecting against down a lot, down a little goes with the territory. There are a lot of ifs in getting the 20% protection but I am sure the 10-14% will work. Maybe the concept doesn't work not protecting the first 15% down but then protecting from -15% onward, I'm not sure but I am more concerned with down a lot than with down a little. 

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.

At Least Try To Understand What You're Criticizing

On the heels of yesterday's post about the financial sector, Jaime Dimon said that he sees some people, meaning banks, doing dumb things like they were in 2005, 2006 and 2007. Nassim Taleb has been talking about the extent to which risk is underpriced and Torsten Slok says that tail risk has increased.

This brings us to a couple of different articles about how investment products are evolving, bad per this Wall Street Journal and bad per the comments on an article at Barron's. The take from here has always been that for anyone inclined to move beyond the plainest of vanilla funds, there needs to be a lot of sifting through to find a few things that capture something very effective. 

If you can accept that observation then yes, there will be a lot of crap. The WSJ article notes that a 2x Doge fund is down 70% since its inception and that a 0dte covered call fund on MSTR is down a similar amount, both in very short periods. We covered that 0dte fund, it's from Tuttle. An exec at Morningstar is quoted as saying "many of the funds being launched just don’t pass the quality test." Yes, if you're buying an inverse Coreweave ETF, quality may not be your first priority which is fine as long as that reality is understood. Inverse XRP? I mean, hopefully anyone swimming in those waters understands what their strategy actually is. 

The comments on the WSJ article were interesting because most them didn't understand how the funds work or how to evaluate them. Same with the comments on the Barron's article which made a weak case for buying alternatives now. It was a poorly researched piece. It recommended a mutual fund that appears to be closed, not closed to new money but shut down. As a note, when you see that a fund minimum is some very high dollar amount, that's not the minimum. That's a way of communicating the shares are institutional shares or that the fund is only available through an advisor. 

Evaluating ETF slop and non-slop as well as alternatives is kind of a big thing here. Anyone curious enough to want to learn needs to make sure they are viewing funds with the right lens as well as understand the mechanics. 

A fund that "yields" 50% on a stock that goes up by 20% is going to go down a lot on a price basis. That's how going ex-dividend works. You need to look at total return to have a better sense of the result. The total return might stink too but at least you'd be looking at the right thing. Some sort of market neutral or arbitrage fund is not intended to keep up with the S&P 500. Thinking that type of fund is not a good fund because it was up 8% when the index was up 20% is not actually understanding the fund. 

To the intro of this post, if you're going to use any complexity in your portfolio make sure you understand what it is supposed to do (negative correlation, low volatility and so on) and what it is vulnerable to. A bunch of alts that all take the same risk will lead to tears if/when that particular risk has consequences. 

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.

Risks That Don't Need To Be Taken

The situation with Blue Owl seems to be getting worse at an accelerating rate. We mentioned it quickly last week when they halted redemptions with a "retail based private credit fund" but the stock continues to go down. Here's more from Yahoo and Bloomberg.

Private credit and equity have been showing signs of excess for a while. It's not clear to me how serious the excesses are but there has obviously been a big push to make private assets available in more retail accessible funds and retirement plans. I've been consistent for years in being skeptical of these type of investments, I don't believe they will give the great deals to people's 401k plans. If you want to benefit from private assets, I've argued for buying the companies selling the picks and shovels, the fund providers, the ones making the fees on the funds not the funds themselves which are paying the fees.

The history of this group is that when times are good, they are great and when things take a bad turn, like now, the stocks get pounded but they do capture what is going on in the world of private assets. They are now on a run of getting pounded. In the last month Blackstone (BX) is down 24%, Apollo (APO) is down 16% and Ares (ARES) is down 26%. I've never owned one of these. I've never thought about buying one, just making the point for blogging purposes that I believe the management companies make more sense for anyone wanting to access the space.

The reason I don't want the exposure is the complexity of these companies and the leverage. Many of the large banks are similarly complex, maybe more so, and also heavily leveraged. This is subjective but financials (meaning the banks) is probably the most complex of the sectors. It might be difficult to understand the manufacturing process and equipment in the tech sector but I believe the businesses are less complex. 

Given how complex many financials are, it should not be a black swan if this event starting with Blue Owl evolves into something very serious. To be clear, I have no idea but this is space that is prone to blow ups. There's no reason to own something with such a clear path to blowing up or at least no reason to have a meaningful position. I don't think there is asymmetric potential with private credit like there is with Bitcoin. 

Mark Baker, aka Guru Anaerobic on Twitter talks about figuring out what to avoid, via negativa, and this is very important concept in portfolio construction. Avoid can sometimes be too much as opposed to underweight. There are excesses in the AI space too of course but there I'm just underweight. This isn't a riskless endeavor, the conversation is managing risk not completely avoiding it. 

In a similar vein, we're probably all watching the news from Mexico and the apparent impact on Puerto Vallarta which as many have reported is where a lot of American, expat retirees live. Moving to another country for retirement (just a few years or permanently) is something we've been looking at for a while in various places. It is a fun exercise to think about living in another country even if you're not serious about ever doing it (that describes me). 

Quite a while ago I wrote a few posts about Ecuador in this context. I made contact through Linkedin with someone (Edd Slaton might have been his name) who had moved to Cuenca, Ecuador with his wife and had some sort business helping people relocate to Ecuador. Then there started to be political unrest pretty close to the covid outbreak but I think the unrest was more political and focused more in Quito than anywhere else. I reached out to Edd back then to see if Cuenca was impacted but and his wife were vacationing in France and he wasn't sure. 

In the last few months I saw something that gave me the impression he and his wife left Ecuador and were somewhere in Europe. My suggestion has been to not sell your house in the US. Rent it out, have the income stream and a way to come back if you want to or think you need to. I have no idea what the real story is in Mexico but it would not be unreasonable for an expat in Puerta Vallarta to think they need to get out of there when the dust settles. The nature of housing in a lot of places is that if you sell and don't rebuy, you'll get priced out. 

You can always sell later but you might not be able to buy back in later. 

Going heavy into private assets one way or another and moving to another country with no fallback are both examples of things that are easy to recognize as risks that don't need to be taken. 

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.