It's Not All Doom & Gloom

You've probably seen news accounts that Americans believe they will need $1.2 million in savings to maintain their lifestyle after they retire. Barron's reported on a survey from Schroders that details how few people expect to have that much when the time comes. 

A couple of nuggets; only 30% expect to have $1 million, half of those surveyed do not think they will have $500,000 and some other grim variations on the same theme. Before getting into this, I do believe people will figure it out and make it work because they have to. I'm saying with a glass half full sentiment, people will figure it out. 

Needing $1.2 million in today's dollars seems a little high to me as a number across society. That assumes a withdrawal amount of $48000-$60,000 or 4-5 %. Gemini estimates that people born between 1970 and 1980 will get $2400/mo or $28,800 per year in today's dollars for Social Security. That's per person so $4800/$57,600 per couple. Those numbers assume each partner is making $62,030 so the couple is grossing $124,060. 

If this is an Arizona couple, they would be netting $97,502/yr or $8125/mo after putting 4% into their 401ks. If the couple born in 1970 bought a house in 2005 at age 35, the median mortgage payment would have been $1255 in the Phoenix/Scottsdale/Mesa area. Assuming 30 years, the mortgage would be paid off in 2035 when they are 65 and thinking about retiring. 

If they spend all $8125 every month, then their expenses in today's dollars would drop to $6870/mo after the mortgage is paid off. They are getting $4800/mo in Social Security so everything being constant, their retirement account only needs to generate $2870/mo or $34,440/yr. That means their retirement accounts would need to be $688,800 to sustain a 5% withdrawal rate, just over half of the generic $1.2 million. 

If their current spend includes two car payments, maybe they can get down to one car payment or maybe no car payments. If their kids successfully launch, then that would bring down their expenses a little more. The $2400 times 2 is their age 67 amount. If one of them waits one year longer to retire and take SS, then that $2400 would actually be $2592/mo. If they both delay a year then $4800 would become $5184/mo. 

Going through this exercise, I realize there's little to no margin for error and they are vulnerable if SS gets cut but it's not a desperate situation either. If this couple has a $30,000 gap between their Social Security and their spending needs and only have $100,000 saved, yes that will be a difficult place to be with some painful decisions to make. The example we built, there's a $34,000 gap and while having $1.2 million would be great, the scenario can do well with much less. 

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.

Text Book, Meet Real World

Allison Schrager from Bloomberg is not a fan of people targeting a magic number for their retirement goal. She says it puts the focus on wealth when it should be on income. 

My take on this has always been that while some sort of number helps in the accumulation process, it provides some context. Once you actually retire, the thing that matters is what you actually wind up with. That is your reality whether you are ahead or behind whatever goal you had. 

Apparently, Schrager places a lot more importance on income being precisely predictable than we typically do here which leads her to long term bonds as an important solution. Schrager says "If you focus on a number, however, you’re likely to suffer from a mismatch. That’s because you’re maximizing the wrong thing — wealth instead of income." She means a mismatch of liabilities. 

In a word, no. That is might be correct in the textbook but I would say not in real life.

I think my sample size is large enough in terms of years and number of clients that people are not constantly analyzing how much they take. They start with some amount for a few years and then might say they need to increase the dollars they take. If someone is in the 4-5% withdrawal range then they are going to be just fine with their withdrawal rate. Their equity exposure, whether low/normal/high, will very likely provide enough growth to counteract Schrager's concern. 

Per Gemini, in rolling ten year periods since 1900, bonds have only outperformed stocks 7% of the time. The 7% were concentrated in the great depression and the lost decade of the 2000's. According to testfol.io, in the 1930's despite the volatility and enormous declines, stocks compounded negatively by only 12 basis points. The lost decade was a little worse with nowhere near the same volatility. 

This places an emphasis on owning some equities, yes, but more importantly dialing in the correct allocation to equities for your tolerances. In the 20 years ending 12/31/2014, domestic equities compounded at 9.87% per testfol.io. I chose that period because it takes in really good times and really challenging times. If in the first 20 years of your retirement, equities only compound at half that rate, that would still be better than spending a 4-5% coupon for the same period. $100,000 in equities would grow to $265,000 in 20 years or stand at $117,000 if they had been taking 4% out every year versus having $100,000 in bond principal after 20 years. While 100% in equities might not be the right answer, having nothing in equities is not the right answer either.

Our example assumed a weak growth rate. Since 1900, only 20-23% of ten year rolling periods have stocks compounded at 5% or less. 

Again, dial in the correct equity exposure. 

While we devote a tremendous amount of time on how to build the yield sleeve of a portfolio, long bonds can work all the same even though I would say long bonds are far from optimal. 

A portfolio can be constructed for someone who is stock market skittish with a decent allocation to equities which could be 30-40% with a larger portion in some sort of yield engine mix and some cash left over to mitigate sequence of return risk. 

Here's an example with equities dialed down. I just used market cap weighting for the equities, nothing special.

AOM is a 40/60 ETF which is closer to the allocation we built today. Plugging Portfolio 1 into Finominal, it lags behind whatever they have for 40/60 for a shorter period but their benchmark is far more volatile.

The equity portion, large or small, will double eventually. Maybe it will take a long time or maybe quickly. In the period studied on testfol.io, the S&P was up 257%. While I would not bet on another 257% over the next nine years, it will keep growing if it can be left alone.

This might address Schrager's concern, letting the yield engine do just that, pay out some yield. If someone barely has accumulated enough for their retirement then they are going to need to have a normal allocation to equities or make a big change somewhere else like maybe continuing to work. 

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.

Simple, Not Easy

As you read and research on the internet, I think it is very useful to read the comments. Always read the comments, sometimes there is more value in the comments than the content. Yahoo has an article about about people who accumulated money without engaging an advisor but as they turn the corner toward actually retiring, they are starting to turn toward advisors for help. 

The comments are mostly dismissive of needing an advisor. I've tried to be consistent in saying that someone needs to do the work for your retirement. Hire an advisor or don't hire one but if not, you need to do the work to be your own advisor, there are a lot of things that are easy to get wrong and those mistakes could be very expensive. 

This comment stood out as exhibiting a common behavior. 

If he retired on July 14, 2010, exactly 16 years ago, then he is probably confusing a bull market and being for being a smart investor. And even if that doesn't apply to him, it applies to plenty of people. In the last 16 years the S&P 500 has compounded at 14.95%, an 80/20 portfolio using IEF for bonds, compounded at 12.52% and a 60/40 using IEF compounded at 10.03%. Going back as a far as we can on testfol.io for those three, the long term growth rates have been 10.55%, 9.91% and 9.12% respectively.  I can recall several blog posts over the last few years that mentions how my few clients who are overspenders have been bailed out by a strong longer term bull market.

If in the last 16 years, the S&P 500 compounded at 4%, then I suspect he'd be whistling a different tune in terms of how easy investing is. Investing can be simple; build a portfolio that is properly allocated for your tolerances, has a reasonable basis for believing it can work and then don't panic. That's simple, it's only one sentence, but not necessarily easy. 

As a matter of personal philosophy, I try to be introspective, self-aware, with everything. Life is good at humbling people from time to time and this comment appears to lack self-awareness. Overestimating our abilities often ends badly. 

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.

Closed End Funds Are Complex

This is an important chart from Bespoke in today's premarket email. It captures something I've mentioned just a couple times over the years because it is a rare occurrence. When markets get up to 20% above their 200 day moving average it isn't sustainable. At that level the underlying is very over extended and some sort of reversion becomes extremely likely. 

This really is rare. The last time it happened to the S&P 500 was late 2021. I heeded that signal and added an inverse fund which helped in 2022. The chart shows a similar over extension for the South Korean market driven primarily by SK Hynix and Samsung. Currently, the S&P 500 is nowhere near this far above its 200 DMA. Bear markets or large declines can still occur with being this extended, this is just a simple and I believe reliable indicator for the rare occasion it happens. 

Next is an interesting story about the XAI Floating Rate & Alternative Income Trust (XFLT) which is subadvised by Octagon Credit Investors. The fund is doing poorly and Bloomberg reports that Octagon is in danger of being removed as the manager. There is a lot to the story but the very quick summary is that the "problem is not the asset mix, but XFLT’s structure, execution, and governance." Here's the allocation mix per CEFconnect. 

Another tab on the CEFconnect page says the leverage is only 40%.

XFLT is currently at a 20% discount to its NAV. The fund pays out 15% of its market price, historically, very little of that has been ROC. Distributions have been trending lower for a little while. There was some sort of distortion in the data in March so the back test stops at 3/1/2026. Since that date, XFLT has had a very volatile ride to a 2% gain on a price basis. The total return is negative of course but not catastrophically so. If an investor took out all the distributions, they'd only have 1/3 of their money left which would be a catastrophe if they didn't understand how going ex-dividend works and how closed end fund NAVs tend to erode with high yields. 

Closed end funds are more complex than they appear to be. Here are a couple of very old CEFs. Very little volatility price only but they both end up losing the vast majority of their NAVs if the dividends are not reinvested. 

If you want to dig in more to CEF complexity, you can look into Saba's and Matisse's respective strategies.  

If XFLT is a poorly run fund then it might fail as part of a bridge to some financial milestone but the fund is eight years old and there's still 33% of the original investment left after taking out a lot of yield. Eight years is a very long time in relation to bridging to something like Social Security or starting RMDs. 

Again, this outcome is only catastrophic for people who don't understand how these work. People often are seduced by big yields not realizing the tradeoffs. 

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.

Crazy Allocations

James McIntosh wrote How To Invest When The Global Crises Never Stop. Catchy title, I'm in. 

Here's the premise;

More war. More political conflict. More weather disasters. The future looks grim, and for investors there’s worse: The standard ways to protect against such shocks might not work.

Many of the comments just tore into him over this, especially the part about the weather, there's a little more about weather further on in the article. He notes that bonds haven't been working because of shocks that are either causing price inflation or threaten to cause price inflation. I've talked about bonds not working ad nauseum for years so I won't relitigate that one other than this quote which is almost identical to what we've been talking about, "plenty of investors agree that bond yields need to be a lot higher than they were to compensate both for the newfound volatility of inflation."

There is also an acknowledgement that gold hasn't been working as a defensive or hedge since the war started. This is exactly when gold should be working; whatever is going on with the Iran War plus the concerns about inflation, gold should be working. Maybe we can find an explanation for why gold isn't working but whether we can or not, it won't change the reality, it's not helping. It is a perfect microcosm for why you diversify your diversifiers. After only a few months, maybe a 25% weighting in gold wouldn't be too painful, the Permanent Portfolio Mutual Fund (PRPFX) is only down 3% in the last three month. If this extends for a while though, a huge weight to gold looks like an unforced error.

“If you just need to buy and hold something for the next decade I think you just have to accept that it’s going to be a bumpier ride than in the past.” 

That's an interesting point. The hold for the next decade is not anything new for my approach, I have quite a few client holdings that have been in there for more than 20 years but preparing for a bumpier ride is probably something more people should do. A lot of our study focuses on how to build and prepare for a bumpier ride in case the scenario the WSJ is framing actually happens. 

Hopefully the writing here is clear that when you diversify your diversifiers you increase the odds of having something or a few things that are working when something like gold is not. There's a quick mention of hedge funds in the context of being diversifiers in the article. It's a vague term but things like managed futures, various forms of arbitrage and systematic macro that we talk about here are hedge fund-like to be sure and are easily accessible through ETFs and mutual funds. That shouldn't be taken as short cut to learning what these funds actually do, but many of them do function as differentiators, as legitimate diversifiers. 

We play around with all sorts of crazy allocations here. The following "Crazy Mix" has no plain vanilla equity or bond exposure.

For all the worry expressed in the article, of course equities might do great. Someone not wanting or needing a "normal" allocation to equities might build out with more alternatives but for people who need something close to "normal" equity exposure, if they try instead to build a portfolio just with alts, I think their portfolio needs to work much harder to get close to plain-vanilla equities' return. A lot more needs to go right for the funds in the "Crazy Mix" portfolio to keep up with plain vanilla. 

This is a different way of articulating the point we regularly make about not getting too far away from equities if you need equity market growth for your numbers to work. 

Here's one comment from the article;

50% Stocks / 50% Bonds / I can’t think of anything else

A 50/50 mix is valid and can get the job done but you can't think of anything else? I am guessing this guessing this guy is his own advisor. Guy, take a little time to learn about some other things. If nothing else, it might embolden your beliefs but can't think of anything else? Yikes.

Another reader had thoughts about equities and TIPS with allocation percentages depending on the age of the investor and suggested a couple of ETFs. If TIPS appeal to you, go for it but I would strongly suggest individual issues not ETFs.

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.

Deep Portfolio Theory

We've looked at the Cambria Trinity ETF (TRTY) a couple of times lately. I am intrigued by the allocation at a high level which is 35% trend, 25% equities, 25% fixed income and 15% alternatives. We've looked at the asset mix many times, and I think it works. Cambria's research supports that it works of course, the fund wouldn't exist if they researched it and it floundered. 

A similar backtest to what we've done many times.

The results are consistent with what we usually see.

A consistent result is that the strategy works better than the actual fund most of the time. TRTY has had a couple of very strong years mixed in but as a long term hold, TRTY lags a long way behind Portfolio 1 but with much more volatility. 

So, what's missing? I asked both Copilot and Claude. At first, Copilot blamed TRTY's lag on the mechanics of managed futures trading. That answer made no sense since Portfolios 1 and 2 have the same weighting to managed futures. It took quite a bit of back and forth to convey the point. 

Claude seemed to blame it on heavy equity factor weightings with a lot to shareholder yield. The way the fund is put together, Claude says it is complexity without a clear edge and that the way the factors are assembled makes it overly vulnerable to certain market environments.

When I figured out how to tell Copilot it was looking at this incorrectly, I told it I believe TRTY is too complex relative to the concept. It replied that TRTY is over engineered with too much structural friction. Both Portfolios 1 and 2 are simpler it said. The "too complex" answer felt more genuine coming from Claude because it was unsolicited versus my telling Copilot what I thought. 

Related to managed futures, iM Global Partners filed for an ETF that would leverage up to hold 30% in US equities and 100% in managed futures. This is the firm that runs the DBMF ETF. I saw one comment on the Tweet that brought this to my attention, it described this as being risk parity. That's a good observation, there's something to it, maybe it's risk parity influenced or risk parity adjacent?

On testfol.io, we can simulate DBMF back to 2000.

I am very surprised the result is so good. 

This second look includes a more diversified mix of managed futures funds instead of 77% in one fund (yikes) and AQRIX which used to be AQR Risk Parity and still is risk parity influenced.

There have been some long stretches where managed futures really was a pain trade but it's hard to argue with the underlying premise of the filing. 

A final iteration in Portfolio 3 which takes the filing, reduces the managed futures/equity sleeve down proportionately to 60% of the portfolio and combines it with 40% in fixed income.

Portfolio 3 is pretty close to a 75/50 version of VBAIX. The way it weighs out, Portfolio 3 is risk parity adjacent or inspired which along with Trinity's allocation is another idea that I find very intriguing. 

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 The World Ready For Betting Market ETFs?

A couple of quick hits tonight. 

I stumbled across a generic asset allocation from a huge firm ($100 billion AUM) that no one's heard of. The mix isn't radically different from other large asset managers and they use private assets to round out the mix but as is often the case, we can rebuild their idea using brokerage accessible funds. 

The build out of their idea includes the usual suspects of funds we use for blogging purposes.

With a little more time to spend, I think this could be improved but it is still pretty interesting. 

We've talked a couple of times about an ETF idea whose strategy would be to place many bets, talking thousands, on various betting markets, not necessarily seeing each bet out to the end but more like moving in and out as pricing changes. I imagine this as some sort systematic implementation that if it went well, might have an absolute return sort of result that would be a little better than T-bills.

This filing isn't exactly that but it's a step in that direction. 

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.