Too Good To Be True?

Over the years there have been a handful of reader comments that really stuck with me. One reader joked about the best way to die as being shot by a jealous husband at 110 years old, I told my dad that one and he really had a good laugh. Recently I referenced the reader who put 1/4 of his portfolio into Pozen 20 years ago and then there was a bad FDA ruling. 

Another one came at some point in the Financial Crisis when a reader said to just put it all in Hussman and forget about it. 

I'm not sure which Hussman fund he was talking about so I included both. Hussman is usually bearish and does a great job framing out the prevailing bear case but I think he leans very hard into protecting against the bearish conclusions he draws in a manner that seems to ignore the reality of markets going up the majority of the time. Although stale info, as of last fall HSTRX had 68% in cash versus an average of 6% for the conservative allocation strategy. The period studied is the decade after the reader left the comment, HSTRX has done a little better since, compounding at 7.09%. HSGFX is still compounding negatively. 

There's a reasonable argument for Hussman being a bear market manager but "putting it all into" one strategy that is this defensive is not the answer. 

All of that is a preamble to the iShares Systematic Alternatives Active ETF (IALT) which is a multi strategy fund that includes equity, credit and macro. Based on the description is seems AQR-like.

I wouldn't expect it to have a similar growth rate to equities over a longer period of time but the first six months of trading catches my attention. Just put it all into IALT and forget about it? I doubt it's a magic bullet for equity like growth on the upside but absolute return behavior in drawdowns but who knows?

There's no easy way to assess the holdings as presented on the website so with an assist from Copilot;

That still might not be easy to dissect but it helps at least a little. If it is difficult to understand the holdings then it will also be difficult to break down what is driving results so back to Copilot. IALT has benefitted from carry, look at RSSY for confirmation of how well carry has done lately. Before this latest run doing well, RSSY went down 30%, this happened before IALT started trading so carry can be difficult to hold.

There is an equity market neutral component to IALT's portfolio which is similar to BDMIX, you can look at that fund to get a longer term perspective. In the last few years BDMIX has been on an absolute tear but before that, it had mid-single digit returns more inline with what you might expect from market neutral.

Copilot also gave credit to macro trend and relative value so there is some overlap with managed futures which has also been doing well.

All of these doing well at the same time is not an expectation that anyone should have. It might happen 1/4 of the time Copilot said. If you think about these different sleeves being quadrant-ish like the Permanent Portfolio (completely different types of quadrants), how often do all four work at the same time? The entire premise of the Permanent Portfolio is that no matter what, at least one will be working which implies there will always be at least one that isn't working. "IALT is not designed to produce high, smooth returns. It is designed to produce diversified, low‑beta, multi‑premia returns."

Copilot did say it makes sense as a diversifier for being slightly positive in an equity crash, a little better than that if inflation spikes taking commodities higher, it will probably go down in a credit crisis and it would probably do poorly if yields spike.

Take those expectations though with a grain of salt. IALT is an active fund and might be able to manage around some of that. Or not. There's no way to know. 

IALT would be a complementary alt to managed futures, merger arb, certain long/short equity and macro. It would be duplicative with alternative risk premia (AQR has at least one of those) and carry. I pushed back on managed futures and global macro not being duplicative but it came down to nuance. If you're curious you can go into the AI of your choice to get an explanation or maybe you'd get a completely different answer.

Turning this into a discussion of ways to use AI, this exchange mostly replaces talking to a sales guy. On the plus side for AI, I got un-salesy answers, the AI is able to look under the hood in away I could not and answer questions that I doubt a sales guy could. AI also has knowledge/understanding of other strategies. On the negative side, Copilot could be wrong about multiple things. If I was actually interested in IALT with its complexity, I would probably repeat this exercise with Claude to compare and contrast and then still talk to a sales guy. A call with a sales guy would probably be more productive after having checked in with AI.

I'll track this one. We might now know what the good times look like for IALT, it would be nice to see what the bad times look like or if it can somehow defy the occasional painful mean reversion that hits some of the strategies it uses. 

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. 

If Inflation Doesn't Get You, Forced Retirement Will

Price inflation, not poor returns, is the biggest threat to 4% rule for a sustainable withdrawal rate in retirement. We mentioned that a couple weeks ago when we looked at a podcast that William Bengen sat for with Morningstar. The point came up again in a Barron's article about five tips for retirees to protect themselves from price inflation. 

Here's what Barron's suggested;

• Delay Social Security as long as possible
• Own stocks
• TIPS not bonds
• Make sure cash is actually earning interest
• Own precious metals

The point about Social Security seemed a little odd because no matter when you take it, you get the annual cost of living increase. At this point, hopefully everyone has thought about the tradeoff of getting less money every month by taking it sooner and more money every month taking later but no matter what, you get the COLA.

Equity exposure is of course where a lot of growth will come from. Sizing the exposure correctly isn't always easy but for most people, something in the neighborhood of "normal" like 40-60% will be a good number even if not an optimal number. TIPS versus bonds, if you agree with the premise, own individual TIPS not TIPS funds.

The fourth one is sneaky. At Schwab and Fidelity, there are accounts where the default for uninvested cash pays essentially nothing. You need to proactively buy a money market that has a competitive yield. Schwab says they don't hide this fact but I am not sure they promote it either. The practice seems insidious to me but nonetheless, you need to be on top of this point. 

Precious metals, especially gold, should protect against inflation but gold can be a tough hold with any sort of large weighting. Gold can go a long time doing relatively little versus equities. My preference is think of gold as a diversifier, weighted accordingly as opposed to a core holding on par with equities in the manner that the Permanent Portfolio allocates to gold. 

A building block of understanding that gets some attention but not enough is the extent to which overall expenses can go down when you're older, retired or not. First is not having to save for retirement after you retire. If there is no earned income, then you're not paying 7.5% of income (W2 workers) to Social security. Can you synch up the final mortgage payment to coincide with retiring? Toyotas can pretty reliably last for 20 years so no car payments for a long time. Health insurance versus Medicare is trickier because of the amount that employers contribute to the cost. The thresholds for IRMAA are very high and just about anyone subject to IRMAA is spending a smaller percentage of their income on their coverage.

For most people, their incomes go down when they retire, so then do their taxes. If someone is paying more in taxes after they retire then they are either making more money (seems like a positive outcome) or they lose their spouse which is of course a negative outcome. 

Per a Google search, the median percentage of take home pay that people pay for their mortgage is 30-43%. That's kind of a wide range but it's a big number either way. For cars it's 15-20%. Using Gemini and Grok to try to assess health insurance versus Medicare, it might go up a little for W2 workers but go down for self employed people. Actual expenses could be a very different story. On the Google page with the search results was an ad for an article by Investopedia that said retirees spend $1 for every $6 they earn. That's more than paying Medicare, that would also include out of pocket for doctor visits and prescriptions.

People don't believe this so ok but the types of chronic maladies that people take prescriptions for can be reversed by cutting carb consumption and lifting weights. I can't say it is universally true but is often the case and there is no downside to eating less sugar and getting in better physical condition from exercising. It's a legitimate dollars and cents aspect that ties in with this conversation. 

What about discretionary spending? What does your typical month look like? Despite the word discretionary, how much of your discretionary spending could you actually cut back on if you had to? We don't eat out a ton, so hard for me to say but is it easy for couples to eat out less? Are there things you buy on some regular interval that may not be truly essential but still somewhat necessary that would be difficult to cut back on? My wife gave me a good example, ladies who get Botox. She does not, no judgment from me but how well would "honey, you need to cut back on the Botox" go in households where Botox treatments are a regular thing? What about a house cleaner? 

So maybe with some looking ahead, these sorts of expense reductions without sacrificing discretionary spending that isn't so discretionary can be put in place to help start retirement with a much lower base which would minimize the impact of inflation. If a $7000 monthly nut can be cut in half because there is no mortgage payment or car payments, then the impact of inflation on a $3500 monthly nut would be much easier to absorb. 

All of the above was about coinciding with a planned retirement date. What about those who end up having to retire sooner than they expect? Here's another Barron's article where the latest data says more than 40% of Americans retire sooner than they planned. That seems like a huge number but whether it is accurate or not we know it to be the case for many people. 

Someone who is 55 today, thinking they want to retire in 8-10 years should probably do what they can to move up the timetable on all the things we're talking about today. Health insurance stands to be a big threat but with incomes below $84,000 for a couple, plans on the government plan are very (fully?) subsidized. 

The solutions to planning and threats to whatever plans we make are up to us to figure out for ourselves. I find it easier to work on creating income streams to add to potential portfolio income I might take and Social Security when the time comes. I have general preferences of continuing to work, delaying SS until 70 or close to it and having a couple of small income streams for an extra margin of safety. I find it interesting that my preferences aren't really changing. I think these ideas go back to before I was 40, I'm 60 now. There's nothing truly enlightening there, just interesting.

I try to be consistent in not saying everyone should about when to take SS or the rest of it, I'm more trying to convey my thought process that gets me to a conclusion that is right for me. Certainly, everyone should understand tradeoffs but once you do, take the appropriate path for your circumstance and beliefs.

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. 

Rebalancing vs Derisking

We'll start with this from Michael Kitces.

I've never been much of a strict rebalancer so much as a derisker. We use the word ergodic (ergodicity) here to talk about the natural tendency or inertia of equities to go up. That applies to sectors and good lucky stock picks. If the starting weight for a stock in a portfolio is 5% and it grows to 6.5% that means it is outperforming the portfolio but I don't think it is ideal to shave that down in the name of rebalancing. 

Meb Faber has asked rhetorically on Twitter a couple of times whether or not it is a good idea to buy gold when it is at all time highs. He said it is not a good time, it is a great time and of course has data to back that up. I am not concerned with taking that input literally so much as to take it as a reminder that setbacks along the way notwithstanding, broad equities tend to go up, same with sectors and same with many stocks (not all stocks). This is a variation on the Lindy Effect.

My preference is to think about reducing risk. I start most individual stocks at 2-3% of the equity portion of the portfolio. Over the course of more than 20 years of managing client portfolios, there have been several instances where individual stocks went on absolute heaters and did so for an extended period. I don't have a hard and fast rule about what percentage weight I take some off the table instead it is more of a combination of things to consider. It doesn't get better than this is a good time to take a little off the table. Also it is pretty easy to look at a chart and see where something has gone parabolic. The context here is not that something negative has happened to the company, just whether or not it has grown too large in relation to the portfolio.

At what percentage weighting would an implosion be problematic? If Sandisk now made up 5% of your portfolio and it cut in half, would that be problematic for you? What if it was currently at 10%? We're not trying to pick a top or predict something bad happening, this is simply a matter of risk management. If giving up 500% points quickly because of some sort of calamity for the stock would be too much, that tells you to sell some. I wouldn't sell all of it unless there was something negative about the company prompting action, I would sell enough to get down to an acceptable risk level if something terrible happened.

This gets us to looking through to your exposure to various sectors and themes in ETFs and making decisions about what sort of weighting to have. For example, the S&P 500 has just under 8% in Nvidia and about 18% overall in semiconductors. For someone who is a real indexer, they are probably content to have that much exposure. But from there, how many portfolios own both the S&P 500 and QQQ?Nvidia is just over 8% of QQQ and semiconductors are closer to 30% of that index. 

Copilot says there are at least 40-60 narrower ETFs that own Nvidia at more than a 5% weighting. One of the advisors I started subadvising for last year were quadrupling up on Nvidia exposure with the S&P 500, QQQ, SOXX and the actual stock. This would have been great for returns and terrible for risk management and the advisor didn't realize the duplication he had.

If you want to build that way by all means, make an informed decision and go for it but the point is more often than not, people do not realize the extent to which they are loading up on the same risk. That won't be a problem until it is a problem. 

Do you have emerging market equity exposure? Have you looked at what is going on with the holdings? Chances are the fund you use is heavy in Taiwan Semiconductor, Samsung and SK Hynix. So that is another avenue to the same sort of risk/theme. If you've looked through to your holdings and know what your exposure adds up to and you're comfortable with that weighting then you're all set. 

The top five in EEM add up to about 30% of the fund, tech more broadly is just shy of 37%. It is important to understand these exposures not to avoid being overweight the sector or the AI theme but to avoid being unintentionally overweight.

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 Great Result That Would Be Very Difficult To Live With

We've got a lot to pack in today starting with a two hour podcast with Jason Buck who created the Cockroach Portfolio and Jim O'Shaughnessy. I hopped around a bit and took in maybe 45 minutes. There was a lot of deep stuff, Jason is a complex guy. There are just two points that I wanted to explore here.

The first one is the difficulty in holding diversified portfolios. Jason cited the cliche we say here that if everything is going up together, you aren't diversified because they will all go down together. In other interviews Jason has said that being diversified means there's always at least one holding that will make you want to puke. 

We'll dig in a little on the Cockroach Portfolio in a moment but he talked about trying to talk people out of investing in his fund because of the behavioral challenges that go with sitting in one holding, even if it has a small weighting, that is down most of the time (your diversifier). 

Jason has talked frequently about Nassim Taleb and Universa (a hedge fund that specializes in tail risk strategies) but I didn't realize the influence that Universa had on Jason. He said the Cockroach came about from reading Taleb and then trying to reverse engineer the concepts that Taleb wrote about. 

Here's how the Cockroach is allocated;

Below is the most recent version of the Cockroach that we tried to reverse engineer;

And here is how it has done through yesterday;

I threw in the Permanent Portfolio Fund (PRPFX) because quadrant style investing is also a source of influence on the Cockroach and I included the Trinity ETF (TRTY) because I think there is some conceptual overlap. We can't really backtest further than with BTCFX for Bitcoin because if we use GBTC we would get some results that I don't believe could be repeated but for the almost five years, the Cockroach has done very well. It kept up with PRPFX and outperformed VBAIX with a lot less volatility than both of them. 

While that is good of course there are a few holdings that do dreadfully bad occasionally. There might be a better mousetrap than TAIL but that one is a tough hold. Managed futures funds are frequently difficult to hold. Bitcoin is currently in a 40% drawdown. I think people give gold the benefit of the doubt but 12% is a lot when it's on a downswing. All of that and our version of the Cockroach works.

Here's a more extreme example of holding something that goes down a lot from time to time from an article that tries to deconstruct Mulvaney, the CTA shop that made news for making a fortune on cocoa a couple of years ago. 

80% of their trades lose money? The long term result is fantastic but the drawdowns can be brutal. The strategy is that trades are small and allowed to grow unconstrained until they get stopped out, constantly increasing stop levels for a trade that works. Risk is managed with stop orders not position sizing or risk weighting per the link above. A reader turned me on to the article when I asked if anyone knew about any funds more volatile than MFTNX that we looked at yesterday. 

Pivoting to leverage that I think I can weave into today's discussion, Jeremy Schwartz from Wisdomtree sat for a much shorter podcast with Ben Carlson. Wisdomtree has quite a few capital efficient (leveraged) ETFs and they appear to do exactly what they say they will do. Part of the argument in favor of these funds is that the leverage is not being used to magnify one position, instead the leverage is used to add diversification without having to take away from the stocks and bonds allocations.

The idea makes sense but that doesn't necessarily remove the risk that the disparate assets in the fund both go down. If sized appropriately, that isn't necessarily catastrophic but while VBAIX was down 16.87% in 2022, NTSX, which leverages up such that a 67% weight to it equals a 100% weight to VBAIX, was down 25%. The math checks out in terms of the fund working correctly but sized incorrectly, 25% is a big decline. Additionally, with the stocks/bonds combination funds, you have to want the bond exposure they offer. NTSX has AGG-like bond exposure, RSSB has a treasury ladder of sorts that takes on plenty of duration. 

Stocks and bonds can go down together. In terms of being willing to look different, these funds are about not looking different. The ReturnStacked guys talk about their funds helping to avoid tracking error. The bond market is a great place to want tracking error, to want to look different. The benefit of looking different with respect to bonds for individuals is less volatility and the benefit of looking different with respect to bonds for portfolio managers is better risk adjusted performance.

Here's a little more about effective use of leverage from RCM.

We've looked at leverage a little differently. More real world, we've looked at how a small exposure to negative convexity can allow for a little more exposure to equities. Not a lot more, a little more. If equities start to decline, the fund with negative convexity will grow to hedge more of the portfolio. A little more theoretically, we've done some things will small exposure to SSO which is 2X S&P 500 and much smaller exposure to TECL which is 3X technology. Putting 5% into TECL only to see it blow up would be a bad outcome of course but no catastrophic.

Investors are leery of leverage which is a good starting point but as the pro-leverage crowd will tell you, serious problems comes from misusing leverage. I would tread very carefully with any of this and I would avoid a fund that leverages equities and duration. I don't know if there are more bond market declines coming but I do think there is more bond market volatility coming.

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 Portfolio To Make You Throw Up

I was intrigued by the comment from Eric Crittenden that we shared yesterday about using very volatile managed futures. With that in mind, a truly awful portfolio that no one could endure despite the decent long term result. 

MFTNX is managed by Dunn Capital and is one of the most volatile managed futures funds. Please leave a comment if you know of one more volatile. Look at how much time it has spent down 30%!

Portfolio 1 compounded 132 basis points better than VBAIX despite MFTNX' low growth rate. Including client/personal holding Merger Fund in Portfolio 2 made it more palatable by lowering the volatility noticeably but not dramatically without sacrificing too much growth. The drawdown numbers are only slightly better but deconstructing that a little, there was pretty much no help with fast declines but a huge help in 2022 when Portfolio 1 eeked out a small gain and Portfolio 2 was down less than half of VBAIX' decline.

I'm a big believer in small exposure to one or maybe two negatively correlated holdings but this is a good example to show that purely by the numbers, a large holding in one of these can improve risk adjusted results. 

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 Sitdown With Standpoint

Eric Critten sat for Matt Zeigler's podcast with Jason Buck joining in. Eric manages client/personal holding Standpoint Multi-Asset Fund (BLNDX) which combines global equities and managed futures. There were some good tidbits in there to share. 

The origin of the fund came from conversations with advisors expressing similar ideas of what they were looking for in an alt; capture some upside soften the downside and do that with lower volatility. Those ideas also tied in what what Eric would want to do with his own money. 

Researching and backtesting led him to conclude that a mix of global equities and managed futures was the best way to achieve this. If you look at how the fund has done it is hard to argue with the conclusion but there was an interesting part of the conversation early in the pod about how difficult spring of 2025 was emotionally before just about everything bottomed a few days after the Tariff Panic. 

He didn't waiver, didn't deviate from the system or do anything but stick to the process but his comments made it seem he was worried. I know Eric personally and so this surprised me. They said that this period was the worst drawdown for managed futures in a very long time but I seem to recall late 2022/early 2023 being worse but maybe not. 

BLNDX is 50% managed futures (there's a little more to it than just saying 50% though) because that is optimal per Eric's research but the three of them agreed that no one is going to have that much of their portfolio in managed futures. Eric made an interesting comment in passing that if you're only going to have 10% in managed futures, you should use the most volatile exposures you can find. 

Let's check that out using AQR Managed Futures High Volatility Strategy (QMHIX), KraneShares Mount Lucas Managed Futures Index Strategy (KMLM) and Arrow Managed Futures Strategy Fund (MFTNX).

Although Portfolio 1 and SPY look very similar, Portfolio 1 was down much less than SPY at the 2022 low and although not shown, it was down less than VBAIX' low too. 

Another important topic in the discussion was that to be willing to own managed futures means being willing to look different which is not easy to do they said. You really have to want to look different and endure the times when that is difficult. 

I've long been willing to have the portfolio look different and I try to explain how the various diversifiers tend to behave to clients so they are not surprised. Part of the conversation on the pod was directed at Matt who is a practitioner and he gave an analogy of dogs and their owners who look alike. I think he was saying that investors who would be interested in alts will find their way to advisors who use alts but that wasn't crystal clear.

A final topic to point out was the idea that advisors should have a higher percentage of their money in managed futures than their clients. The idea is one we explored a long, long time ago that Meb Faber is known for but I may have beat him to the punch on the original iteration of the blog. I said that I have very little in equities so that I never get to a point where I am so worried about my portfolio that I neglect clients or that I am so busy trading my own account that I neglect clients. Meb's point is that as advisors our livelihoods, our actual business and our client outcomes all serve to lever us up considerably and so having a full equity allocation would just compound that leverage. 

A few weeks ago we looked at a portfolio that consisted of just nine or ten managed futures funds thinking that mixing that many would blend out some of the negative dispersion which it did. Let's update that though to include the funds we looked at already in this post. 

The portfolio with just the managed futures funds is not too compelling but Portfolio 2 is a little more interesting. It has a similar CAGR as Portfolio 1 with half the volatility (a little less volatility than AGG too). In the period studied, inflation compounded at 3.61% so the real return was just a shade above 300 basis points which is pretty good for someone who is looking to avoid equity beta which is the context here. 

If we add 5% of Direxion 3X Tech (TECL) at the expense of managed futures, the CAGR goes up to 10.03% while the volatility only goes up to 7%. The drawdown numbers of the TECL version also look pretty good if you want to go in an see for yourself.

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.

Jim Cramer's Retirement Advice

Jim Cramer had some simple retirement saving advice that downplays doing a lot of trading. As opposed to chasing short term gains, in this article he suggests putting close to half in index fund, then close to half in four or five individual stocks and then a little bit in some combo of gold and/or bitcoin. For someone who is younger, at least one of the stocks should be "speculative."

I'm not a huge fan of 10% into just one stock but I might be in the minority on that. 

That article also included some thoughts about the age that Millennials and Gen-z's think is the right age to retire; 61 and 59 respectively. There's probably not much that is new with those ages but they are at odds with the lack of progress toward being able to retire that many Gen-Xers find themselves confronting. 

One thought from me that I think might be new is that when you retire at 60, you forgo some number of years at what is probably your highest earning years. If you've done a decent job of avoiding lifestyle creep then your 60's provides a great opportunity to meaningfully add to your retirement balances. That assumes you haven't had your hand forced at work to retire early. 

It's not for me to say don't retire early, I've been seeing people from high school and college do it over the last few years, but it is important to dig into any financial tradeoffs.

Today's post cut short. We had to go looking for this;

With these guys;

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.