Retirement Planning Stream Of Consciousness

Yesterday, I mentioned the webinar for distributing ladder ETFs from Northern Trust. At one point the conversation talked about go-go retirement (early years), slow-go (middle years) and no-go (the period in which someone is old).

This creates what is referred to as the retirement smile, spending a lot early on for travel maybe or other activities. Then at some point retirees slow down but are still relatively healthy and able bodied, hopefully. The final tranche in this metaphor is possibly needing some sort of outside care. 

Does that resonate with you? I turned 60 this year and I'm starting to look ahead with more specificity than when I was younger. My focus was simply accumulate what I can so that I have optionality. 

If that does resonate, does it look like you will have the go-go years that you want both financially and physically? That could be a difficult conversation for people to have with themselves. Doing things is expensive and it would unfortunate to spend many years looking forward to taking a bunch of trips or whatever go-go means but being physically unable to do so. 

For the last few months, I've been thinking in terms of blocks of time loosely connected to financial milestones. I made a joke to my wife that I am spending my first decade of retirement, my 60's, by working. We've talked about this, there is visibility at some point for income from my practice to start to decrease. I expect it to be a significant contributor relative to our financial needs for quite a while even if it doesn't remain lucrative for that much longer. 

I am no longer with Del E Webb Foundation, I resigned earlier this summer so that income stream is gone. There haven't been too many instances in my life where I didn't fit in with a group but that was the case here. I never understood their decision process for running the org, not talking about how grants are awarded, but how they operated. That's not a knock on them, I did not fit in with them. I said I would get around to explaining what happened and this seemed like a good spot. Where people tend to want to do less as they get older, I'm glad to have it off my plate. I did not expect to have that reaction. 

For now, there's no visibility on ever preferring to take Social Security before 70. If I hold out beyond 69, I will think of that as having stayed on plan with that. Taking it as 70 has been my intention since I first thought about it. 

We've looked at all sorts of ideas for bridging to the next financial milestone with a smaller piece of money. I really like this idea but that might be because our situation appears to be heading in that direction if we sell our vacation rental in maybe ten years or so. We might live in it to avoid the capital gains, if you live in what was an investment property for two out of five years, that relieves the capital gains burden, not the depreciation recapture but ask your tax advisor. 

When I first started blogging in 2004, one of the things I wanted to do was chronicle how my thoughts on my own retirement would evolve. I think this is a useful exercise for people. The more we put into our retirement planning including thinking and evolving strategy, the more we will get out of it. 

Solving Actual Problems

We're in Tucson this week and on Wednesday afternoon I went to go pickup some garden tools that my wife found on Facebook marketplace, $20 for more that we needed, not too shabby.

The seller lives in a 55 and older mobile home park closer to the middle of town from where we live. The place was immaculate, it looked to be about half occupied, not sure if that is because it's still warm here or some other reason. Naturally I got curious about the actual dollars and cents.

As is common, residents own the house but lease the lot.

That price is toward the lower end, the upper end was $160,000-$180,000 and there were a handful closer to just $40,000. Gemini said the rent for lot ranged from $658-$717 which must be a dated number versus the $825 in the picture. All in utilities range from about $150 in the less hot months to about $350 in summer months. Insurance runs about $1000/yr and taxes (for the house, not the lot) are about $200/yr. So all in, after buying the house, it might be about $13500/yr or $1125/mo. 

Regardless of who may or may not be interested in this situation, it is relatively affordable. For anyone unable to accumulate a meaningful retirement but who bought a house could downsize into something like this and have a useable piece of money left over after selling and buying into the property I visited. As a primary residence it is not a lavish circumstance but it is workable outcome.

It is also an inexpensive way to snowbird. Someone in South Dakota might want to take a chunk out of their winters without actually moving away. There are plenty of ways to snowbird of course, in a recent blog post we cited someone who got an Airbnb for an entire month which is probably less expensive than buying one of the mobile homes we're talking about which is cheaper than buying a regular house in a neighborhood.

My wife and I probably have our retirement sorted out which I am grateful for but plenty of people will have to figure it out and make some difficult choices. Mobile home communities like the one I visited can solve problems. 

Speaking of solving problems, I sat in on a webinar for the Northern Trust distributing ladder ETFs. We've looked at them before. There are two versions, one that pays tax free income by owning muni bonds and the other protects against inflation with TIPS. The way these work, if you buy one that matures in 2036, so ten years from now, it pays out 1/10th of the NAV every year plus a little interest. In the final year, the fund pays out it's final 1/10th of the original investment and then closes. 

We've looked these in the context of a bridging strategy. Someone who is today 65 might use one of these as a way to hold off taking money from their IRA until RMDs start in 2036 when they are 75.

We've looked at putting together a bunch of very high yield products with different types of risks to do something similar but hopefully end up with some money leftover. Going all in on the 2036 TIPS Distributing Ladder (TIPF) means you have nothing leftover in ten years. Owning ten or 12 very high yielding with disparate risks has a reasonable chance of not completely depleting but that is aggressive. A strategy of half in TIPF and half in a very yieldy portfolio would be safer. 

None of that is new though from our previous conversations about these funds. The one new thing I pulled from the webinar was pretty much a throwaway line that wasn't followed up on. Yes, bridging seems to be the primary use for these but Chris Huemmer from Northern Trust made a comment about using the 2056 TIPS version for something like property tax. The symbol for that fund is TIPH and it matures in 2056. Each year it will pay out 1/30 of the original investment amount plus a little interest.  

Our property tax in Walker is around $2000/yr. In theory, $60.000 invested in TIPH would cover our property taxes until I am 90. Property tax is one the higher dollar items people have to deal with but it does not inflate the way health insurance premiums do or over the last few years the way home insurance premiums inflate. We probably need equity exposure to keep up with healthcare costs and now homeowners insurance but this angle on property tax is interesting and new to me even if I am the last to know. 

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 Crazy

Dan Ives is throwing his hat into the closed end fund (CEF) ring with the upcoming Ives Ultra AI Opportunity Fund (IVAI). That article mentioned a couple of other recent closed end funds in the AI and private tech realm. It hasn't gone well.

PWRL just owns private companies and it appears as though the market price is trying to price the underlying illiquid portfolio that does price everyday.

Someone bought up in the $300's, yikes. These types of funds are real hot dot stuff that tries to appeal to people's greed. You can reach whatever goal you might have without it. 

Another day, another autocallable ETF. The VegaShares US Equity Autocallable Income ETF (VAIE) targets about a 16% yield so my guess it it will be a little more volatile than CAIE, see what VegaShares did there with the symbol, which is closer to a 14% yield. 

The autocallable space in the ETF market is just getting started and I think that unlike the closed end funds above, the lower yielding, less volatile funds will help contribute to solving people's need for income without nauseating volatility. Matt Kaufman from Calamos was on ETF IQ this week with a helpful explanation of how they work. The conversation around these from fund providers is evolving in response, I believe, to questions not addressed when they first started trading a year and half ago. 

This is a good contrast in yields/volatility that we probably looked at once before. ACSP targets twice the yield and the price is all over the place, no distributions yet per Yahoo Finance so that is all price. JELM is the lowest yielding autocallable ETF that I am aware of. To each his own but if I ever allocate to one of these for clients it will not ACSP. If anything, it will be a small slice to a lower volatility version. 

Next, a follow up on the WisdomTree Efficient Long/Short Equity Fund (WTLS). They hosted a webinar to explain the fund and recap its results. So far it has been lights out. It leverages up 90% beta with the S&P 500 and 90% alpha with a long/short overlay that seeks a volatility level around 7%.

Portfolios 2 and 3 leverage up the long/short symbol with SPY in the same manner that WTLS leverages up and you can see WTLS has favorable results. Portfolio 1 is QLFIX which has a similar leveraged strategy. The fifth portfolio isolates just the long/short strategy by shorting SPY out of it and although the timeframe is short, the result has been very steady but a little higher vol than 7.

When I first looked at WTLS, I just made a couple of casual comments that it was doing what it should for the most part, noting it was way too early to draw any conclusions and I also warned about using leverage to stack betas. WisdomTree talks about WTLS as being beta and alpha but arguably, a long biased long/short strategy could be thought of as a beta exposure. 

That frames the risk, it might turn out actually be two betas if something nasty happens with the stock market. That was not the case in the quick drawdown when we attacked Iran. It wasn't a problem for QLFIX either which is a fund we haven't looked at before today. 

A use case for WTLS in the context we've talked about lately could be in a portfolio that barbells a high volatility equity fund to be a small slice of the overall portfolio as the growth engine in a portfolio that is overall intended to be very low volatility or have a high distribution rate or both. In that circumstance there still needs to be a little growth. A 10% weight to WTLS is 18% of equity exposure and if that is the vast majority of the equity exposure then yes the portfolio is using leverage but in this context I think it is closer to leveraging down than leveraging up. 

Last one. We've talked a lot over the last few months about combining value, quality and momentum for domestic equity exposure. It turns out that iShares has three funds that do different versions of that factor combo for foreign equity exposure with INTF, IDYN and CORO. INTF is a relatively simple index fund that includes these factors and IDYN is similar to DYNF trying to rotate factors to try to outperform the index. CORO has been the best performer. It owns mostly country funds with a few individual stocks thrown in. The largest holdings currently, and this has been the case for a bit, are Japan EWJ, Canada EWC and Switzerland EWL. It also currently owns Taiwan Semi and SK Hynix.

The fund reports its holdings in an interesting way. It includes a look thru to the sectors.

This was always part of the template I used for writing about country funds for theStreet.com many years ago and while I do less with country funds these days, looking through to the sectors is very important. If you want to own Taiwan, cool, go for it but EWT is 73% technology. Owning a lot of QQQ with EWT on top of that is going to be very painful if there is ever any consequence for the excesses currently in the tech sector. Another example, iShares Singapore (EWS) has always been heavy in financials and sure enough, during the financial crisis it fell 60%.

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

"It's A Meltdown"

That was the subject of the daily afternoon email from Bloomberg referring to what is happening in the treasury market as yields continue to work higher, sending prices lower.

I pulled up the following, halfway through the trading day thinking more like the pain continues for holders of long bonds more than thinking it was a meltdown.

Bespoke Tweeted out that since inception, TLT is down slightly on a price basis and that on a total return basis it is down going back to 2012. There's been a flood of pundits weighing in across the webs about why longer bonds are now attractive but the same or similar arguments were made at lower yields on the way up to the now current 5.11% on the ten year treasury. 

I'm sure the textbook logic expressed in those opinions is correct but yields still keep going up. It is correct that losses from 4% going up to 5% are different than losses from 1% up to 2% were because as the price does its thing, investors are collecting 4% versus collecting 1% or less five years ago. That does nothing for the volatility or the risk that rates go higher from here. It is difficult to see the price inflation problem subsiding soon and that certainly is relevant. 

The way we have been framing this has been as a matter of adequate compensation. Forget all the textbook logic, what return do you find to be adequate compensation for the volatility of owning intermediate and longer dated debt? For me, low fives doesn't do it. Maybe at 6% if it ever happens, not sure but at 7% probably a little. 

I've been repeating the above sentiment about 6 and 7%....if it ever happens for quite a while. I have no idea if it will ever happen but I do know that 5+% is not adequate compensation. 

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.

Incinerator Ridge Road

My wife and I went on a quick hike at the top of Mount Lemmon near Tucson. A few miles from the trailhead we drove by this road.

I think TSLY's NAV is down Incinerator Ridge Road. I did a poor job explaining to my wife why this was so funny. It fits right in with our recent looks at various forms of NAV incineration versus products/strategies that might be aggressive without necessarily incinerating NAV.

Here is a quick look at several new funds that have popped up on my radar. First, there is a new putwrite fund from Innovator, Innovator Equity Premium Income Daily Putwrite Fund (SPUT). It yields less than WTPI from WisdomTree with less volatility.

VistaShares has a diverse mix of ETFs with some thematic and derivative income funds and now they are getting into the buffer part of the market with what I believe is a differentiated concept. VOOB references the S&P 500 and QQQB references the NASDAQ 100. The big idea is that the first 8% down should completely insulated from market declines and then the funds are only exposed half of any decline beyond the first 8%. The upside does not have a hard cap, paraphrasing the literature, but the upside will be limited depending on the particulars of the option combo put on to effect the downside protection. 

First Trust has thrown its hat in the autocallable ring with ACYQ that seeks a 21% and ACYN that seeks a 9-10% yield. ACYN listed in March and ACYQ started trading in June. With the higher yield, ACYQ should be more volatile, the Q in the symbol tells you it references NASDAQ stocks, and it has been thus far.

This afternoon I went down a research rabbit hole on the Strive Series A Perpetual Preferred Stock (SATA). Strive (ASST) common stock is a bitcoin treasury stock that when I talk about some funds/stocks being like fire crackers, ASST is like holding on to molten lava or a McDonalds apple pie in the 1970's. ASST is much more volatile than Strategy (MSTR). Oddly, because of the corporate structure and how the preferred stocks are underwritten, it appears that SATA is less risky than the Strategy preferred issues and it has been outperforming the Strategy preferreds. 

The chart has just two of what I believe are three different preferred issues from Strategy, YBTC is a covered call fund that references Bitcoin and "yields" about 25%. 

In terms of attempting to understand and quantify the risks, the key word being attempt, the Strategy ecosystem runs into trouble at a couple of points. It's average cost is close to $75,000. It's cash buffer starts to deplete at Bitcoin $61,000. SATA is far more protected. ASST would be wiped out at Bitcoin $39,500 but SATA can function until Bitcoin drops to $30,000 and stays there for a year and half. At that point, everything else being equal, the company would run out of cash and be unable to make payments. 

In addition to being a Bitcoin treasury firm, Strive is also an asset manager providing research and there is a suite of mostly basic ETFs that has $2.9 billion in AUM so there is a business there. Here's its dividend fund against SCHD. Nothing wrong there. 

The ETF business is real and it generates cash flow but only covers about 1/8 of the expense of servicing SATA. Servicing SATA is apparently not problematic as Bitcoin moves up or hovers at a not low price for a while. Only a while though, as it buys more Bitcoin, eventually it would need Bitcoin to keep going up but the current level is not trouble for now. 

SATA will offer new shares whenever the the price gets to the $100 par value and then the proceeds will go toward buying more Bitcoin. In so doing, the $30,000 number I cited above can actually go up (not a good thing). At some point, maybe instead of being able to pay for 18 months at $30,000, maybe the can pay for 18 months at $35,000 or $40,000 or fewer months at the $30,000 level. 

For all this complexity, SATA yields 13% and is not incinerating NAV like YBTC has done. SATA pays its distributions daily....five cents +/- every day and the distributions are ROC so no taxes until the cost basis goes to zero or the shares are sold. Both of these help shareholders.

I just found out about SATA today off a Tweet about a new ETF coming from Strive that will sell puts on Bitcoin treasury preferred stocks and will have symbol DCAP. Someone will figure out how to harvest Bitcoin volatility without incinerating NAV. Maybe SATA does that, maybe it doesn't I just found it today. 

Whatever the risk of SATA is (I have some idea I think), it differentiates from the risks of the lower yielding autocallable ETFs which both differentiate from catastrophe bonds. Something that yields 10-13% in a 4.5% world is risky, there's no changing that which is a crucial point of understanding but putting something like 2% each into four or five of these that do truly differentiate the risk from each other creates a serious yield engine inside a portfolio and as we're seeing, quite a few of them have the tax advantage of ROC. No taxes for seven, eight or nine years is worth exploring. 

If this whole realm is more complexity than you'd ever want to take on, cool, leave it alone but it is fun to dig in and learn.

All of these things we looked at today are evidence of how funds are evolving to create more tailored outcomes up to a point. It is easier to build a portfolio that has one very yieldy sleeve, a modest CPI plus maybe 3% sleeve that causes little to no stress and then some plain, unconstrained equity beta. 

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.

The Options Market Does Not Give Money Away

There was a line in this week's Striking Price column in Barron's that really stood out.

"A conservative options-selling program can add 6% to 8% to your annual returns."

Maybe columnist Steve Sears is having a conversation I cannot hear, a reference to one of my favorite quotes from the show Deadwood, Hearst says "I am having a conversation you cannot hear" to Bullock. My initial response is simply that the options market does not give money away.

The column in question was a post mortem on a Walmart options trade that did not work. A few months ago, the column suggested buying a call and selling a put on Walmart. The stock went down, the call expired worthless and the puts were assigned. 

Someone who trades options frequently will have some number of trades that work out well and some that will not. There is no getting away from some losing trades so the idea becomes having more winning trades than losing trades or somehow have the dollars netted on the winning trades exceed the dollars lost on the losing trades. 

I am sure a few market participants can do what is asserted in the quote, adding 600-800 basis points to returns but taken as a blanket statement, no I would not bet my money on that.

Perhaps a more accessible outcome could be thought of as redistributing the composition of your return.

One of those lines is a common stock and the other line is the corresponding YieldMax. The stock is not as volatile as MicroStrategy or Tesla so the total returns of the two are identical. One is just price appreciation (there is a little bit of a dividend) and the other is all "yield" as the price only return is down considerably. 

A little less dramatically but not as tight as above, ISPY which is a tax efficient derivative income fund versus SPY.

ISPY's return has not kept up with SPY and it probably won't when markets are going up. In a couple of the drawdowns, ISPY has gone down less which can happen some of the time but won't happen all of the time. ISPY's return has been about 9.5% distributions with the rest in price appreciation. The returns are split into a couple of different sources versus really just one of any consequence from SPY. 

The options market does not give money away. The way ISPY redistributes the return will appeal to plenty of investors, derivative income funds have $175 billion in assets, clearly, people want this sort of appreciation/"yield" combo even if they don't articulate it that way but they are not getting free money. 

Pretend for a second that ISPY can compound at the same 7% on a price only basis, kicking out 9-10% in ROC (that's the tax efficiency), that is a plenty useful outcome for some people in the benchmark free context we talked about yesterday, some wants yield without eroding NAV. The tradeoffs of funds like ISPY or SPYI or GPIX might not be for you, you might think they are terrible but there is a reasonable use case in terms of results and investor tolerances without being NAV incinerators like the mystery stock in the first chart.

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.

Tracking Error Palooza

Some fun stuff today with a look at GMO's Benchmark Free Allocation Fund/Strategy and Meketa's thoughts on risk parity. 

GMO's paper talks about a "total portfolio mindset;"

Because Benchmark-Free focuses on generating real returns instead of beating a particular benchmark, it naturally has a different view of risk than most traditional portfolios.

The paper chronicles the various changes under the hood of the fund/strategy and the result of the fund seems to walk the walk it has looked much different quite frequently, painfully different to be blunt about it.

It did well early on thanks to getting the internet bubble right. Since inception the fund has compounded at 7.67% versus 8.30% for VBAIX with significantly lower volatility. 

That is a very rough 13 years in the middle of the fund's existence. The paper makes many references to real returns. Adjusting for inflation, the 4.18% comes down to 1.62% in the period charted. There's a balance between building a portfolio targeted to the outcome you need irrespective of what the broad market is doing but still giving yourself a reasonable shot at a decent growth rate. 

A similar sentiment from Meketa regarding risk parity;

...since these strategies are not widely implemented, institutional investors that adopt this allocation methodology need to be comfortable being “different” from peers, that is, having high tracking error relative to broad peer portfolios.

A big pillar to what the ReturnStacked guys offer with their funds is ability to add alternatives without introducing tracking error into the portfolio. It is ok to have tracking error. Certainly for you, managing your own portfolio, who cares? Again, are you giving yourself a reasonable shot at a decent growth rate if that is what you need? 

We have a lot of fun here with all sorts of crazy allocation ideas but if you need something beyond a T-bill rate or CPI plus 2%, then you probably need some sort of close to normal allocation to equities. Even just 35-40% can serve as a reasonable growth engine inside a portfolio for people who do not want the ups and downs of having 60-70% in equities. 

Yes some sophisticated combo of different asset classes with very light exposure to equities could get it done but anyone pursuing that kind strategy will probably have to work a lot harder for their return versus just having a close to normal allocation to equities. 

Finominal has a portfolio optimizer tool that we've used before. It can optimize for several things including risk parity. Depending on what inputs are used, the result might be interesting or not very helpful. If you include a T-bill or short term bond fund, the output will be to have a huge weighting to the T-bill or short term bond fund. A 15/85 portfolio won't be the answer for too many people. 

The following study starts with 35% in SCHD, 30% in IMTM, 15% in KMLMsim and the rest in SHRIX for Portfolio 1. Portfolio 2 allocates those four at 19%, 16%, 19% and 44% respectively (rounded off) inline with Finominal's risk parity optimization.

Portfolio 1 at 65% in equities is pretty typical while the managed futures and cat bonds could cause tracking error which is fine with me, I probably want that, you probably know whether that is ok for whatever money you are managing (just your own or for clients). Portfolio 2 is a tracking error palooza. The 35% in equities is at the lower end of what we talked about above as being a reasonable growth engine inside of lower volatility portfolio. It obviously has not kept up with VBAIX but nine years is a reasonably long time and it's not that far behind but with much less volatility and much shallower drawdowns.

If someone was interested in something close to this version of risk parity but wanted more traditional bond exposure, instead of building that into the Finominal portfolio optimizer, it would make more sense to figure out how much they want in more traditional bonds like 20% or 25%, whatever, then plug the rest of what they want for the portfolio into an optimizer (Finominal or someone else), get those weightings, reduce accordingly to account for the allocation to more traditional bonds. 

Long time readers probably know, there is no scenario where I am putting 44% into a cat bond fund. More realistically, I would split that 44% sleeve between five or six disparate strategies to avoid loading up on the same risks. Those five or six different strategies could themselves be risk weighted and then slotted into the more diversified version of Portfolio 2. Nineteen percent in managed futures is probably more than I'd ever want too but at a minimum, I would split that large of a percentage across two or three funds, not just one. 

I think the underlying premise of Portfolio 2 is valid, gives a reasonable chance of a decent growth rate while still differentiating effectively versus VBAIX's volatility. 

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.