This One's Even Worse

The other day we took a quick look at a blend of 30% equities, 60% managed futures and 10% in cash. The long term result was good albeit disconnected from standard benchmarks but holding it would have led to long periods of misery and anguish. 

Well this one might be worse. 

The framework is the same as the other day. The investor objective is a much steadier or smoother ride than something like a 60/40, 70/30 or maybe even 50/50. This would likely result in lagging behind in years when the stock market is up a lot and bonds don't implode.

Where we've talked about CPI plus 5 as being a common target for endowments and a good way to think about how a portfolio actually works to meet someone's needs. Maybe today's idea could be thought of as CPI plus 3.5 or CPI plus 4 but with no duration risk that would go with putting it all in TIPS. Side note, TIPS aren't quite at a 3.5% real return currently. 

Portfolio 1 is a synthetic backtest, I spent a little time trying to recreate the effect to get a longer look. The return is similar but the volatility is a touch higher. An objective of CPI plus 4 overlaps with the 75/50 concept that we've looked at periodically over the years where a portfolio captures 75% of the upside with only 50% of the downside. 

The synthetic backtest is long enough and been through enough different types of market events to make me think it has some merit. The idea we're playing with is 50% buffer funds/50% managed futures. The longest backtest we can build is using BJUL which I believe is the oldest buffer fund.

Those earlier years in the green box would have been rough for anyone expecting this idea to keep up with VBAIX. There were two years where the portfolio was up but fell short of CPI plus some decent number and obviously it was down a little in 2018 but it has been reasonably steady in line with the volatility and beta numbers. The standard deviation for BJUL/AQMIX was 3.94 versus 11.91 for VBAIX. 

Maybe the way to think of this is in the realm of aggressive absolute return. In the same period as we tested BJUL/AQMIX, Vanguard  Market Neutral (VMNIX) compounded at 6.85% with a volatility of 6.86%.

Since 2018 there has been a proliferation of buffer and defined outcome funds that have hit the market and there are now many more managed futures funds so anyone interested in something close to this would not need to limited themselves to 50% in two different funds, that seems crazy to me and very unnecessary. Additionally, buffer and defined outcomes do a lot of different things and building in different levels of protection would seem to make sense and we've looked countless times at different ways managed futures funds are run including replicators or not, different risk weightings and differing volatility targets. The result might be a pretty smooth ride but I don't think this would be set and forget by a long shot. 

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 Different Type Of Retirement Problem

Barron's had an article about retirees who haven't really spent down their nest eggs even well into retirement. There are a few variables here that contribute to this scenario and while the title of the article implied it was about people being afraid to do so, that wasn't really it.

The simplest variable is that the stock market has ripped for the 15 years so, just ripped which of course you can't count on in planning. There was a stat in there from Vanguard that 4 out of every ten retirees don't draw on their accounts until RMDs require it. Quick note, RMDs don't have to be spend, the money can be added to a taxable account and invested for any circumstance where that is appropriate. 

The article made a point that we have touched on which is that there can be a peace of mind from having a lot in the bank or brokerage account. That sentiment resonates with me. If something really goes sideways, knowing you can handle it has some value. The dollar amount needed for this sort of peace of mind will be a different number for each of us. 

This idea has evolved for me to being a number I don't want to go below in our accumulated accounts. That thought process made buying the Tucson house much more comfortable and it turned out to be a fantastic decision.

One point that was lightly hit on in the article with a couple that has $30 million, but moreso in the comments is that the lifestyle many people want to live isn't all that expensive in relation to what they have accumulated, again market results are a contributing factor here. This is how I've described my lifestyle. The life we enjoy living doesn't cost that much. When something expensive needs fixing, we do it. We've taken big trips here and there but we are not the Facebook friends who go to Europe every six months. Our ability to travel is more about scheduling with our volunteer endeavors so we're not spending a lot on that. I would add that the amount of amazing national parks, national monuments and the like that are within driving distance is endless so that is inexpensive too. We've been to a lot of them and will never get to all of them. 

This entire conversation is one of privilege and quite the contrast to all the the numbers and reports about how undersaved Americans are for retirement. We talk frequently about habits and lifestyle choices that improve the odds of being over-saved, not spending enough but I wouldn't discount luck either. It's ok to have been lucky.  

One final point is that a couple of comments focused on being healthy. I have been called a health nut by a few colleagues on the fire department but I can see where working hard to have a financially successful retirement only to be unable to reap the benefits for being unhealthy causing more regret than getting to a very old age with a bunch of money that's never going to be spent. 

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.

Avoidance, Not Predictions

ReturnStacked put up a new paper a couple of weeks ago about leveraging up to add alternatives. An important building block to their work and products is not removing equities or fixed income to make room for the alternatives. As I was making my way through, I had the following thought about what a huge allocation to managed futures would look like with very little in equities and no bonds.

On testfol.io, the KMLM managed futures ETF can be backtested to 1987 via however they simulate certain tickers. You can see where managed futures helped and where it was a drag but that's not the most interesting way to look at it. 

The worst year for the two portfolios that are 60% managed futures with no bonds was 2002 when Portfolio 1 was down 12.31% as you can see and Portfolio 2 was down 11.68%. Yes, plain vanilla 60/40 was down less that year but if you agree with me about bonds, then we cannot rely on bonds the way we used to to offset large equity declines. 

Looking at the year by year bar chart, out of 39 full and partial years, I count 12 years where Portfolios 1 and 2 were far, far behind 60/40. Lagging in some random year by 5 or 6% ok, but as one example of what I mean, in 2017 both 1 and 2 were down less than 1% while 60/40 was up 14%. Portfolios 1 and 2 lagged badly three years in a row recently; 2023, 2024 and 2025. 

The point is that anyone looking for a portfolio that resembles what 60/40 used to do when bonds were a one way trade have a decent chance of doing so without the unreliability of bond duration or the variable of adding leverage. Over the very long term, the portfolios with 60% in managed futures tracked closely to 60/40 without duration risk.

Adding a ton of managed futures is one way and while it can probably work, as we've looked at countless times, there will be long periods of anguish here and there. 

Another approach we've looked at many times has been barbelling the 40 with a lot in very boring, steady fixed income with a small slice into riskier income niches. The idea being that if something terrible happens in the risky slice it won't wreck the portfolio. 

Portfolios 1 and 2 are 90% FLOT which is very plain vanilla. Portfolio 1 puts the risky sleeve in TLT which would have been a poor choice and Portfolio 2 puts the risk sleeve in catastrophe bonds which would have turned out to be a good choice. The 10% in TLT would have lagged the 10% in cat bonds but TLT did not blow anything up. 

The returns for Portfolios 1 and 2 are not killing it by any means but that is not the object for what goes into the 40 or whatever percentage you use to offset equities, make that reliably offset equities. Also you can see FLOT yielding nothing for a long time and then turning up in 2022 as it finally started to pay out. 

This is simply an example of how to size risk into a portfolio. Having 10% in cat bonds probably isn't inviting doom but is a little heavier than I'd want to go. As we have looked at countless times, there are enough higher yielding segments that take different kinds of risk to get some yield, reduce volatility and diffuse risk without extending duration which many pundits are saying it is now finally time to do. Unfortunately a lot of them said the same thing at 4% and at 3%. 

I have no idea what interest rates will do. If you've been reading this blog for a while you know I'm not trying to predict something, this is about avoiding something. 

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.

Did An Autocallable ETF Just Malfunction?

We have called out the ProShares S&P 500 Autocallable Income ETF (ACSP) as being more volatile than many of the other funds in the space, I believe it is because ACSP targets a relatively high 18-19% distribution rate. This is a relatively new niche but we are working with the idea that the higher the yield, the more volatile the fund is likely to be. 

The fund went ex-dividend today for a whopper of a distribution. It should be like a catchup dividend reflecting September and most of August back to the fund's inception. 

From Yahoo;

From the ACSP website;

To keep the math simple, if ACSP pays 18% annualized then it would be 1.5% per month so I would have expected the first distribution somewhere close to 2.25%, not 11%. I couldn't find a news release on this so I asked Gemini if maybe one of the notes got called and they had to pay the redemption out and Gemini guessed that that is what probably happened but the math doesn't check out, it's too big for that unless a bunch of the notes got called early. Grok said that is not what happened that the structure the holdings could not possibly result in notes being called early. 

Grok gave a rationale for it being a catchup distribution but when I pointed out why the distribution is too big for that it backed off and said "we'll know soon" what happened. 

I don't think it malfunctioned. I don't know what happened and I'll eat some crow if this was a malfunction but I have to think that the explanation will fit into parameters laid out in the prospectus. But that doesn't let the fund off the hook and creating a very rough ride for anyone holding the fund.

JELM and IACL are much lower yielding than ACSP and much less volatile. 

The lower yielding ones are not going to end up being horizontal lines that tilt upward, they will be more volatile than that but I am quite certain they won't look like ACSP. That fund looks like a very difficult ride. 

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 You Obsessed?

Via Abnormal Returns, Elizabeth George says to stop obsessing about your safe withdrawal rate. The starting point is the 4% rule derived by Bill Bengen in 1994 based on a 50/50 allocation of stocks and bonds going back to the 1920's. 

Bengen has since dialed up the number to 4.7% but if you read or watch any interviews with him, he is constantly refining the number. Morningstar comes out with a revised number of its own every year which I have been pretty consistent in making fun of. Changing it every year in the manner they do doesn't help anyone. 

The precise, original implementation is to start at a 4.15% withdrawal rate and then adjust it upward by the rate of inflation. If someone's safe withdrawal dollar amount is $37,000 and then CPI was 3.4%, the following year the new number would be $38,258. I've also made fun of that part of it as being unrealistic. Many years ago, I started saying, "whatever you got, 4%, more precisely, 1% every quarter." 

That certainly is simpler but that was very early into my time as an RIA. I still believe in the simplicity although chances are 5% is ok too but even though the math checks out, it's not what too many people do at least based on my sample size of clients. It's more like, "I need $3500/mo" and that will be it for a while then after a few years, "I need to up it to $4000/mo." 

I've said before, like every advisor, I have a couple of clients who take what should be way too much to be sustainable but the stock market has bailed them out. Every so often, of course a client will need money for something bigger and I either just send it or if it is a problematic amount in terms of the longevity of their money I will say something like, "ok we're obviously going to do what you tell us but this threatens how long the money will last." One time a client responded, "I know but it's for son and I have to do it." 

One thing that several clients do as sort of coincidence is they take monthly withdrawals from their IRAs that are well under 1/12th of their RMD and then in December take a large enough withdrawal to get up to their RMD amount. They are living month to month on what they need and then that lump sum at the end of the year could be for traveling or some other discretionary spending.

George's point in her blog post is similar to my anecdotes about not perpetually tweaking it to the penny. "Financial professionals and FIRE personalities who lead the SWR debates and build complex models to analyze them to the third decimal place are usually so enamored with achievement that they never stop earning anyway" which I thought was pretty funny.

If I am reading correctly, it seems like George pays no heed to it and if that is the case I disagree with that pretty strenuously. What I think makes the concept work is thoroughly understanding what Bengen originally derived. Understanding what it's built on, understanding what type of environment challenges his concept and then moving forward with some reasonable even if not rigid implementation that suits your needs. I would expect any advisor to have this dialed in, it's not rocket science. There's also not much of a barrier to understanding for anyone managing their own accounts but take the time to learn it thoroughly. 

If nothing else, "whatever you got, 4%, more precisely, 1% every quarter" will work for anyone who can be a little flexible, able to take less in years where the markets are down. Even then, there is a work around to the need to be flexible in that way, just set aside 18-24 months of expected withdrawals in cash or some sort of cash proxy to greatly reduce the odds of ever having to sell after a large decline to meet income needs. 

I think George is right about not needing to obsess or overly stress about this. More time spent understanding how it works on the front end should reduce stress but also enhance understanding the reality that anyone taking 8-9% has a real chance of running into trouble or realizing that based on Bengen's process, a 6% withdrawal rate was successful 75% of the time (per Gemini). One of my high spenders does not care about running into trouble, this person is 20 years in taking more than 8-9% in most years but just is not worried. I don't know how but I bet they sleep well at night which is a pretty important component to this topic, having a plan that allows you to sleep.

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 Drone From Sector 7-G

Lately my timeline on Threads has had a lot of posts from people who are 59 or 60 and completely lost in terms of figuring out what life is all about, what comes next, what to do about retirement or if they even can retire. Yes, they could all be bots or otherwise fake accounts but what if the sentiment is real? 

I'm sure I am seeing these because Threads must know from my Facebook profile that I am about that age although my birthyear is not on my profile. If you're anywhere close to that age, do you feel lost in this manner or maybe more constructively, do you know anyone close to that age who is similarly lost?

We've addressed this here and there over the years. To me this is all about having sense of purpose or maybe more correctly finding a sense of purpose. 

I appreciate that anyone who thinks they are a drone from Sector 7-G may find it difficult to develop a sense of purpose at work but it is up to us to figure this out for ourselves. My tagline for this sort of thing has been to paraphrase Joe Moglia by saying that no one will care more about your outcome than you.

A drone from Sector 7-G can find purpose in pursuing the next thing. I figured out in my nid-20's that I wanted to manage money from home, it took a couple of stops along the way and almost ten years to get there but there was purpose getting to that point. Time spent planning and learning for their next thing is very purposeful and provides hope for someone who is really unhappy at work.

Part of this has to be figuring out how to be happy at home. That's going to be different for everyone I imagine and maybe it takes work but it is a crucial building block to this conversation.  

I am always going to talk about the importance of health and fitness which if nothing else, can simply be one less thing to worry about for the older Gen-X or younger Boomer trying to figure it out. Feeling crappy all the time or being unable to do enjoyable things or perform tasks that have to be done will make it much harder to live a full life. Any day that you exercise is always a little better.

Living below your means should result in not having too much financial stress. Pulling that off makes every other aspect of life easier. 

It is important to have a positive attitude in life and be grateful but everyone says that. The only thing I can add there, but I think it matters a lot, is that it has to be genuine and that probably takes some self-training to make happen if those aren't already personality traits. Or maybe a lot of self-training.  

Any article you read along these lines will talk about the importance of having social connections. I think this is widely accepted as accurate but that is difficult for a lot of people. It certainly is for me. I am terrible at making and enjoying idle chit chat. When there's something to talk about, some purpose, there's no hang up.

If it weren't for the fire department, this is probably what I would look like. 

Actively volunteering can check a lot of these boxes. It is very purposeful and likely to involve a lot of social engagement. Volunteering as a firefighter creates an obvious need for some level of fitness as do many volunteer endeavors. My older brother volunteers at a food bank which involves a lot of lifting and moving of food. My wife does a lot with dogs and other tasks at the animal rescue that require being fit. 

I am sorry for anyone struggling for answers, all the more so if the posts I see on Threads capture the actual sentiment of people but as is the case with everything, the more we put in to solving it, whatever it is, the more we will get out. 

I'll close with a quote I used to cite very frequently from our friend Bill here in Walker, "you can figure it out now or you can figure it out later but you'll be much happier if you figure it out now."

At What Point Are Yields Crazy?

First, I'll answer the question in the title. A 20% yield is crazy in terms of not having a realistic shot of being sustainable. Maybe the crazy threshold should be a little lower but twenty for sure. 

We've spent some time on developing a bridging strategy to make a smaller piece of money, smaller in relation to a rollover IRA, last for some number of years until the next financial milestone like starting Social Security or taking RMDs. Sticking with the ten year example we've worked before, we'd be willing to spend 1/10th of the original balance each year, depleting to zero after ten years. With that in mind can we take that big distribution and have something left over at the ten year mark or make that pot of money last longer. 

I've said this research is probably aimed at our (my wife and me) financial situation at some point down the road. We've looked at some crazy combinations that I probably wouldn't want to pursue but I think by adding one of those distributing ladder ETF, we can dial the crazy way down.

Here's the latest version, TIPB matures in 2035 which does not fit in with my timeline for any of this but will do for long term research/following.

The highest yielder is CAIE at 14% so we're nowhere near crazy if we're sticking with 20%. There's not much equity beta but there is some. The backtest can only go back a year so there's not a lot of useful information but here it is.

The yield is 8.25% which is pretty high considering how much is in TIPB and JAAA. TIPB though has a sneaky high yield and the first tranche of TIPS in the fund will mature next month which will kick the "yield" up considerably when it returns principal as it is designed to do. 

If we implemented this with $450,000 and took out $11,250 per calendar quarter in a ten year period that was identical to 01/01/2000-12/31/2009, Copilot says there would be $330,000 left over. The next stress test was a ten year period where the yield on the ten year US treasury went from 1.5% to 7% over a ten year period. In that scenario, everything else being the same, Copilot says $106,000 would be left over. Rates can't start at 1.5% because were at five and change but the point is something terrible happening in the bond market.

I would imagine the product landscape continues to improve, maybe in six-eight years when I might need to consider this, it can be a little more robust.

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.