A Doozy Of A Day

This is a doozy of a quote from Torsten Slok via Bloomberg.

Here's how treasuries did on Wednesday. 

You can see most of the selling further out the curve happened as Kevin Warsh gave his press conference which was also a doozy. The respective drops in the seven year and five year is obviously less problematic.

Is the market doing the FOMC's job? Warsh sort of said that in the presser

The next batch are semiconductors, then broad tech, the S&P 500 and SPXT is the S&P 500 excluding the tech sector. From their respective highs in June, SOXX is down 27%, XLK is down almost 15%, SPY is down 3.8% and SPXT is down less than one percent from its high which was this month, not in June.

If this event turns out to be serious or memorable (or both), I think today gave a good look of what it will look like. Excess in the AI and AI adjacent space and unreliable volatility in the bond market will be front and center. We've been talking some about the excess in parts of the tech sector and talking constantly about the unreliable volatility of bonds a lot. 

We've had similar conversations in previous big events, I'm not sure what you do if you were overweight tech a month ago with no negative convexity on board. Maybe today is the bottom? At some point, industries like semiconductors, themes like the CHAT ETF or stocks like Oracle will find a bottom, time will bail those holders out eventually, there's just no way to know what they will have to endure or for how long. I mentioned ORCL because the decline has been stunning, I would be shocked if it went out of business at the end of this but to be clear, I am not a buyer at any price. 

I think anyone who was underweight tech coming into June, no tech is not realistic, and has been avoiding fixed income duration will fair better through this, if it turns out to be serious, but I would not count on skating through with no decline. My hope would be to avoid the worst of it. My experience has been that avoiding the worst of these events is repeatable. 

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. 

Should We Optimize For Sharpe Ratio?

Franklin Templeton is an ETF provider that gets very little attention. They do some interesting things and they also have model portfolios to support their funds. 

It's a 10/90 but it's not intended to be a standalone portfolio. As I take it, it could be used as a fixed income replacement along the lines of ProShares Hedge Fund Replication (HDG) or NY Life Hedge Multi-Strategy Tracker (QAI) as suggested by Claude. 

First is how Franklin model compares to HDG and QAI.

IUSB is similar to AGG but a little broader and has done slightly better that I will plan on using for blogging purposes going forward instead of AGG. The model took a less volatile path to a similar result as both HDG and QAI. A quick note, I switched out ARB from the model in favor of MNA to be able to go back a little further. If you look at the performance numbers, they fair worse than what I got because I am only able to grab what is in the model now, not track the changes it made along the way. 

Building the model out to a 40% weighting with 60% to equities, certainly helps the growth rate versus putting the 40% in IUSB but doesn't help much with volatility. Other than the 2020 Pandemic Crash though, the model has consistently done better in drawdowns. 

Here's a four minute excerpt from a podcast featuring Cliff Asness. The key line from Cliff was "you need to be able to short sell to create an uncorrelated return." QLEIX below is long biased, MERIX is market neutral and BTAL is short biased.

MERIX is client/personal holding the Merger Fund and ok, that might be the correlation but take a look for yourself, I would say it looks nothing like the stock market. It's by no means negatively correlated but regardless of the stats, having held the fund since the Financial Crisis, for my money it does not behave like the stock market even a little bit. 

Cliff also talked risk parity weighting of assets without using the term risk parity. He talked about leveraging up to even out the risk taken between assets with low/un/negative correlations. 

The holdings are SPY for equities, IUSB for bonds, AQMIX for managed futures and GLD.

It is very amusing that the way to optimize risk adjusted return (Sharpe Ratio) is to have no AGG-like bond exposure. Interestingly, if we replace IUSB with MERIX, the Optimized Sharpe Ratio recommendation was 25% each to SPY and AQMIX, 30% to MERIX and the rest in gold. 

Other than the Pandemic Crash, Optimized with MERIX has been a very smooth 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. 

Additive To Your Long Term Result

Here's a quote from Jonathan Hoenig;

The best portfolios are designed to protect capital first while pursuing steady, absolute returns over time—not reacting to every market swing.

From Stephen Harvey of Sagard Wealth;

And Matthew Tuttle. 

You've been hearing for years about ETFs democratizing access to various strategies, including from me. I think the ETF industry has forced the mutual fund industry to also up its game. If you've been reading this site for a while then you already have at least a start at knowing how to do what all three quotes are talking about. 

The underlying premise connecting all three quotes is how to avoid making behavioral and allocational mistakes. One way to do this is to avoid obvious signs of excess. I've got some track record for this with banks in the build up to the Financial Crisis, bonds yielding nothing as Tuttle says and now with AI and AI-adjacent themes. 

There were enough non-bank financials 20 years ago (more now) that being slightly underweight the sector while avoiding banks almost entirely (held on to BNS which clients still have) wouldn't have been too disruptive if there'd never been a crisis. There were/are countless alternatives to bonds and bond funds with duration that would do what I think people want bond and bond funds to do, we've looked at this countless times. Completely avoiding tech today is impractical, it's too big a piece of the market to be zero weight. 

I think being underweight or avoiding excesses is easier than picking what will do best. Occasionally sidestepping an implosion, so not even every implosion, will be very additive to your long term result. 

The link quoting Harvey is from Chief Investment Officer and while I am unfamiliar with Harvey and his firm the context is institutional portfolios. The strategies and exposures he is talking about can be found with an abundance of choice from mutual funds now and to a lesser extent, ETFs. Quick note, pound for pound, ETFs are the better way to go but not everything goes best into the ETF wrapper.

Harsh closeout coming, too many people in the industry are still talking about and using very plain vanilla fixed income products that simply haven't been doing what investors would hope for and expect (repeating for emphasis). 

I've put up similar versions of this chart many times before, what do you want your equity offset, let's not called it fixed income, to look like. I think to avoiding duration will continue to be very additive to your long term result.

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. 

Don't Focus On What You Can't Do

The starting point for today's post comes from a couple of different articles at the Wall Street Journal. The first one is about the retirement situation in Thailand. If you think the US is in rough shape, Thailand appears to be far worse. The equivalent of Social Security pays $18-$35 per month. 

That sounds low but there was no context around those numbers. Grok says a "frugal/basic" lifestyle ranges from $700-$1000/mo. Thailand has essentially no pension-like system at that low dollar amount and the WSJ contends that most people have no savings either. The default assumption seems to be that old people will move in with and be cared for by their children. The few people profiled as caregivers in this context are in their 50's/60's and they are portrayed as themselves being physically worn out. 

I don't know how you make a $35 payment (if accurate) work in the context of a $700 lifestyle but this example sheds a little light that maybe things don't have to be as universally dire in the US even if things are plenty challenging here. I'm not in denial about the US' retirement challenges, more like ok, this is the situation, what can we do about it.

A couple grossing $50,000/yr (current median is $65,000) where just one spouse works is taking home $3550/mo. If the one earner retires in 2030 at age 67 still making $50,000, his Social Security would be $1602 in today's dollars and the spousal benefit would be $801 for a total of $2403 so they are short of their working take home pay by $1147/mo. A positive for this situation would be they own a house and their mortgage will be paid at age 67 or sooner. There is the potential for their Medicare premiums to be less than regular health insurance but there some moving parts to that part of the equation. If the mortgage is not paid off, then yes something will have to give, probably some sort of part time work to make up the gap. 

The other WSJ article looked at Supersizing Your Retirement Account including contribute the max $70,000 to your 401k (for self employed) and a couple of others that seem financially out of reach for most people. The comments went pretty hard after the $70,000 idea. 

As opposed to taking the advice about putting $70,000 away as the only idea, I took the context of the article to be focused on people about 50 with little saved but making pretty good incomes, not killing it. If that is their situation, what can they do about it?

I think a plausible scenario at 50 is a house that had a 15 year mortgage now being free an clear, kids up and out successfully and diverting what has been the mortgage payment into retirement savings. If this worked out to be $25,000/yr, after 20 years of compounding at 7% (not a heroic assumption) they'd have just over $1 million when they are 70. Yes, maybe they don't want to work that long but at 50 with very little saved, something might have to give, will probably have to give. 

The backtest considers three different broad, multi-asset funds; GMO Benchmark Free (GBMFX), Permanent Portfolio (PRPFX) and Vanguard Balanced Index (VBIAX). Starting 20 years ago with $2000, putting $2070 per month in and you can see the totals as of today.

If this couple had accumulated $100,000 by the time they were 50 and started on this $2070/mo plan, putting it all into GBMFX would now be worth $1,313.000, PRPFX would be at $1,753,000 and VBIAX would have grown to $1,850,000. A quick note, when I played around with different timeframes, GBMFX compounded much closer to the other two.

The big takeaway is simple. Assess your situation and then figure out what you can do. You can't save $70,000 in one year? Ok, what can you do? 

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. 

El Hombre Es Muy Macro

Barron's wrote about Social Security again. There wasn't much that was new except quantifying how much money people would forgo if payouts actually get cut in 2032. As an example, my age 70 benefit added to my wife's age 64 benefit (our intention is to take it when I turn 70, she'd be 64) adds up to $6684 in today's dollars. A 23% reduction would be $1537/mo times 12 months times 25 years would be a lifetime hit of $461,196 in constant dollars. 

The article took a stab at how to make that up by investing an extra lump sum amount now into Vanguard Balanced Index Fund. Using their math and thought process, I would need to invest $192,000 to have made up the $461,000 in 15 years. I realize there's a few more moving parts than that but it does give some context. 

While Barron's mentioned VBAIX, Bloomberg says that Gen-Z investors are "ditching" bonds in favor of more cash and cash proxies. They are getting almost the same yield without the volatility or the interest rate risk. Amusingly, Bloomberg is citing work done by Vanguard for the ditching bonds comment. 

I stumbled into a new fund to look at for anyone wanting to ditch their bonds. The Dynamic Alpha Macro Fund (DYMIX) allocates 50% to domestic equity ETFs and 50% to macro strategies. It seems similar to BLNDX or QNZIX which both split between equities and managed futures. 

The results for DYMIX have been strong. It has compounded at 21% since its inception in 2023 but with a high degree of volatility.

The decline since February seems noteworthy but is probably easily dissected. The fund's literature refers to the fund has having very low turnover with the macro sleeve only having three holdings; gold, copper and five year treasury notes. It seems apparent that the majority of the macro sleeve is in gold and that the fund hasn't sold any of its position. Since gold rolled over, the decline in copper has been modest as has the decline for five year treasuries. 

Morningstar says the turn over is 3% which means very little trading, very little. I don't really understand how a fund that never trades can be a macro fund as opposed to more of a multi-asset fund. The result can still be good, it is good irrespective of the current drawdown the fund is in.

The counterpoint to whether it might be better thought of as a multi-asset fund is there is very little under the hood of DYMIX that can go wrong. The literature mentions simplicity, the look through is easy and the only risk is the decisions made not some sort of complexity working against the NAV. The decisions have mostly been correct based on the result but for the last few months gold has hurt.

The backtest is interesting.

In terms of volatility, DYMIX is a bit of a hot potato but Portfolio 2 could be thought of as an example of how to incorporate a hot potato in with other holdings with different attributes to blend into a pretty smooth ride. I would not count on the growth rate to continue to be that strong but I think the volatility attributes could be pretty durable. 

In terms of DYMIX, I think of macro strategies making a lot of small bets not one huge bet (gold in this case). I'm not going to be interested in pursuing the fund for clients but I think it could be useful for blogging purposes for studying ways to concentrate volatility into smaller slices of the portfolio like we did today. 

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.

Avoiding Costly Mistakes

The annual number is out from Fidelity about how much money someone who is 65 today can expect to spend on healthcare expenses for the rest of their lives. The 2026 number is $185,500 per person so $371,000 per couple which is up 7.5% from last year's number. 

One little detail in there that I suspected but wasn't sure is that "a little under half (45%) of Fidelity’s total comes from Part B and Part D premiums" but that excludes a supplemental plan like Part G. That makes the numbers a little less scary. A married couple might be looking instead at $204,050. Grok says the median Part G premium in Arizona is $170-$220 per person for 2026. Figure $4800 for the year times a 30 year retirement adds up to $144,000 so then we're left worrying about $58,050 from the Fidelity number?

That doesn't sound so bad but I don't believe it. We mention this number every year when the update comes out but deconstructing this way makes it seem useless. All I can say, repeat actually, is that it is up to us to prevent/solve our health issues. Eat less sugar/carbs and lift weights. 

The median number of prescriptions for a 65 year old is 4.3. I've told stories about going on medical calls with the fire department and the couple of instances where older people were very proud of not taking any prescriptions (the calls were for accidents/injuries, not medical events). Taking up some good habits can reduce the number of meds people take or push the need to start taking meds to an older age. If we're partially debunking the Fidelity number, ok but we can save quite a bit of money if we can avoid the polypharmacy treadmill altogether or at the very least, delay when we start. 

Bloomberg columnist Kathryn Anne Edwards said she can fix Social Security in six words. "Scrap the cap, invest the rest." Edwards says getting rid of the cap, the income level at which people stop paying payroll tax currently at $185,000, would solve half the problem and she is optimistic that investing a portion of the money into the stock market would work out well, maybe leading to a cut in payroll taxes at some point. 

If they eliminate the cap, will you be affected by that? Would you be paying more? If they do nothing and payouts actually get cut in 2032, would you be adversely affected by that? Everyone would be impacted but would you be hurt is what I am asking. Something will have to give for them to fix it. What's worse for you? Paying more on the way in or getting less on the way out? Whichever one is worse for you is the one to plan for. 

My all in as self-employed is 12.4% (with Medicare it's 15.3%). It's not like I make $400,000-$500,000 but at that level someone might be paying an extra $26,660 to $39,060. Although there is a write-off to offset that (talk to your accountant) paying a lot more in payroll tax for many years might work out worse than getting your benefit cut. 

The Washington Post wrote about long term care and assisted living expenses cutting into the "great wealth transfer" that is supposed to occur over the next ten or 20 years. There were of course anecdotes that are truly sad about people living in some sort of facility for many years, more years than is typical, draining a family's finances. 

This sent me on a little bit of a hunt to try to learn more. Take my comments as these might be good questions to ask an elder law attorney not as being definitive or declarative. 

When people run out of assets, Medicaid then kicks in to pay the cost. "Assets" does not include IRA accounts once someone has begun taking RMDs. "Assets" does not include the primary residence with some conditions including that one spouse is still living in the house (there are a couple of others). 

Second homes apparently do count as assets and would need to be sold. 

In quite a few previous posts I've said there are a lot of things that people can get wrong about retirement and estate planning if they don't hire someone to help. It's learnable but mistakes in this realm can be very expensive and the point of primary residences is one of them. The primary residence may need to be shielded from the state/government reclaiming some portion of what they paid for your loved one's advanced care and they can come after it once the second spouse dies (there's a little more nuance). Depending on the state you live in, the property can be deeded in such a way or titled in a certain type of trust to shield from dollars being reclaimed. 

I looked this up on two different AI's and there were some conflicting answers but I am very confident that in many states this can be done but again, I think it requires an elder law attorney. One of the anecdotes in the article was of a 96 year old woman who has been in a facility for 15 years for dementia. Being brutal, I believe that is an extreme outlier for duration but thinking in terms of reclaiming versus a home's value, there'd be nothing left for the heirs. 

To be clear, this is outside the sphere of what I do. Hopefully this promotes awareness and can help you ask some good questions to avoid an expensive mistake. 

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

Is It Safe To Extend Duration? (Hint: No)

Last week I got an email from an old school mutual fund company for a webinar they were having this morning that was going to look at fixed income with the title Beyond Duration: Diversify Your Fixed Income Alpha. 

With that title, I'm in, they're leading with the right things, let see where it goes. It was a pitch for a fund of theirs which is ok, that's common, maybe I can learn something or maybe it might be one to start the process to study for eventual inclusion in client accounts. BLNDX came from an email solicitation so I'm not dismissive of every email that comes in.

A few minutes in and the manager has been talking different things they've done to differentiate versus "core bond" or as we say here, AGG-like exposure. Ok, lets see what all this talk looks like. 

Over the entire 15 years, the fund clearly outperformed AGG but for all the talk about strategy and tactics, there's no differentiation and it rode the market all the way down in 2022. Yahoo shows the fund with a 4.00% trailing 12 month yield compared to 3.97% for AGG. The fund gets three stars, it is outperforming but if you agree that AGG is not answer then I don't see how this other fund could possibly be the answer either. 

You've probably seen where interest rates have taken a little bit of leg higher over the last couple of months or so. The ten year treasury now yields 4.65% and the 30 year is up to 5.15%.

The chart is price only. UTHY tracks the 30 year, UTEN the ten year and BOXX uses options to replicate the return of T-bills. Yes, I am banging the same drum. The potential yield from these longer dated proxies does not adequately compensate holders for the risk or the volatility. There has been no shortage of pundits since late 2022 saying that "now is finally the time to add duration" and that has been bad advice. 

USVN tracks the seven year treasury note which is pretty close to AGG. If an investor would put 40% into a bond fund with the word core in the name or a 5, 7 or ten year treasury ETF, maybe they would consider splitting that up into several different exposures with better yields and little to no interest rate risk. Doing so would actually be much less risky.

The returns are adjusted for inflation and while that return is attractive, the bigger focus is a much lower volatility, although not visible on this screen there is a much lower standard deviation, the drawdowns have been much shallower except for the Tariff Panic when the drawdown was slightly shallower not much shallower.

In relation to a couple of other posts lately, it's a funny coincidence that Portfolio 3 above has a return of CPI plus 5 even if just by 9 basis points. I would absolutely not rely on a mix of alternative income sectors and strategic alts intended to be income market substitutes to deliver CPI plus 5. Yeah it might happen, but I think counting on it would end badly. If the objective appeals to you, I think you're going to need a decent amount of equity beta and Portfolio 3 has none. 

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.