Beware Of Morningstar Mischaracterizations

A couple of quick things tonight. 

First is a model ETF portfolio that I was able to get a look at. I won't get into specific funds and weightings but the basic idea was a lot of factor funds and very ordinary fixed income exposure including the Fidelity version of the AGG and some others that will look pretty similar to AGG.

There's not a lot of differentiation except in 2022 when the model was down about 300 basis points less than VBAIX and this year it is about 500 basis points ahead. 

Back to the factors, the model has 17 holdings, eight of which are different factor funds. To the extent a market cap weighted fund takes in all the factors, when you add too many different factors together they sort of wash out and drift toward looking a lot like market cap weighting which presumably they are trying to avoid. For anyone wanting to go down the factor road, I think it can be done more effectively with far fewer funds. Eight different ones seems like being too clever by half.

And second, a new fund alert; the Absolute Flexible Fund (FLXIX). It is convertible arbitrage-ish in that it won't always hedge every position. It says it should have about half the "beta" of high yield. It has been around for almost four years, has very little in assets and is nominally expensive. It isn't a yield play, paying out 2,88% but a portion of that is capital gains. 

The comparison is to AGG, high yield with HYG and then a couple of convertible bond funds. Just eyeballing it, I'm not sure how AGG is less volatile but FLXIX exceeds the volatility expectation versus HYG.

The fund only gets two stars from Morningstar because it is in the convertible bond category but it is not a long only fund like the majority of the category. Morningstar has miscategorized the fund. The typical convertible bond fund has a lot of equity beta and whether FLXIX is a good fund or a crappy fund, it has pretty much no 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.

Tell Your Friends

The NY Times had an article about retirees that have had to go back to work because their retirement math wasn't working out for them. A few of the people profiled simply did not have an adequate understanding of how the dollars and cents of retiring work. It might have been a lack of planning, not sure, but they simply did not understand. 

Most of the stories started before AI was commonly used. Now that AI is ubiquitous, anyone can use it to build a very basic framework. I'm not saying it will get everything right at this point and maybe there are some biases to sift through but in terms of an elementary starting  point where before there was less help available, AI can be helpful. 

Using Copilot, I told it I was going to make up a scenario, then ask some questions and I asked to keep the answers short. Here's the conversation with Copilot.

Roger: I am a 57 year old male. My wife is 55. We both want to retire when I am 65. My wife is in good health and I take a statin and blood pressure medication. We have a combined $300,000 in our 401ks and $26,000 in an emergency fund. I make $68,000 and my wife makes $51,000. We spend $6500/mo but that includes a mortgage that will be paid off when I am 67. First question is how much more do we need to save to be able to afford retirement?

Copilot: About $1.1M–$1.3M total by age 65 (including your current $300k).

Very rough rule‑of‑thumb math:

Spending drops to ~$5,000/mo once mortgage ends.
With Social Security, you’d want ~$1.1M–$1.3M to retire comfortably at 65.

You’re about $800k–$1M short, which means saving roughly $35k–$45k/yr combined (including employer matches + growth) gets you close.

Roger: What would you estimate our combined social security benefits to be if we both take it when I turn 65?

Copilot: Very rough estimate: ~$48k–$52k/yr combined if you both claim when you are 65.

Breakdown:

You at 65: ~$32k–$35k/yr
Wife at 63: ~$16k–$17k/yr

Total: about $4,000–$4,300/month.

Roger: If social security will be $4000/mo and we spend $5000 after the mortgage is paid off, why do we need $1 million dollars saved?

Copilot: Because the $1,000 gap isn’t the real gap — the real gap is inflation + longevity + market risk.

Super short version:

Your $5,000/mo at 65 becomes $7,000/mo at 75 and $9,000/mo at 85 with normal inflation.
Social Security doesn’t fully keep up with your rising spending.
You need savings to cover the growing gap for 25–30 years, not just the first year.

So the $1M isn’t to cover the first $1,000/mo — it’s to cover decades of rising costs and protect you if markets underperform or you live into your 90s.

Roger: Is the $35,000-$45,000 you think we need to save for both of us combined?

Copilot: Yes — that’s combined, not each.

Very short version:

You need to grow from $300k → ~$1.1M–$1.3M by age 65.
That requires roughly $35k–$45k/yr total household saving + growth.

 Roger: At most, we can only save $25,000/yr where will that leave us when I am 65?

Copilot: Very short answer: about $650k–$750k total by age 65.

Here’s the quick math:

You save $25k/yr for 8 years → $200k contributions
Assuming ~6% growth → your current $300k grows to ~$480k
Your new contributions grow to ~$170k
Total at 65 ≈ $650k (low return) to $750k (normal return)

So you’d end up about half of the ideal $1.1M–$1.3M target. 

Roger: What should we do if we are that far short of what we need?

Copilot: Here’s the short, blunt version:

If you retire at 65 with $650k–$750k, you’re not doomed — but you can’t run the same plan as someone with $1.2M. You’d need to adjust one or more of these levers:

1) Work longer (even part‑time).

Working to 67–68 shrinks the gap dramatically: more savings, fewer years to fund, higher Social Security.

2) Spend less.

If you can get spending to $4,000–$4,500/mo after the mortgage ends, the plan becomes workable.

3) Use home equity later.

Downsizing or a reverse mortgage in your 70s can fill the late‑life gap.

4) Delay Social Security.

Waiting to 67–70 boosts benefits 14–24%+, reducing how much savings you need.

5) Keep investing aggressively enough.

A too‑conservative portfolio makes the shortfall worse.

In practice, most households in your situation combine #1 + #2, and that’s usually enough to make the math work safely.

Roger: What other questions should I ask?

Copilot: Here are the short, high‑impact questions that make a retirement plan go from fuzzy to clear — perfect for your blog post’s point that AI can walk people through a framework.

1) What will our spending really be after the mortgage ends?

Most people never separate “today’s spending” from “retirement spending.”

2) How much of that spending will Social Security cover?

This tells you the size of the income gap.

3) How much will our savings grow by retirement?

People underestimate compounding and overestimate returns.

4) How long do we need the money to last?

Longevity is the silent risk.

5) What happens if returns are below average?

A simple “bad decade” scenario changes everything.

6) What levers can we pull — work longer, spend less, delay SS, downsize?

Retirement math is flexible once you see the levers.

7) What’s our safe withdrawal rate given our situation?

Not everyone gets 4%; some get 3.5%, some get 5%.

8) Are we invested appropriately for growth before and after retirement?

Too conservative = running out of money; too aggressive = volatility panic.

9) What’s our plan for healthcare before Medicare?

This is the #1 surprise cost.

10) What’s our plan for late‑life expenses (long‑term care, home repairs, etc.)?

This is where many retirements break.

Ok so that was the entire exchange. If you're reading a blog as obscure as this one, then you may know most or all of what Copilot said but you know people who don't. This can be solvable for people who realize they need to put some effort in to figuring this out but maybe they need some encouragement (from us) to get started. 

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 Time To Start Solving The Problem

Today's post is about Social Security and retirement planning with the catalyst being a bunch of content this weekend that hopefully I can weave into a useful commentary. By planning I mean both financially but also lifestyle-wise too. 

We'll start with an opinion piece in Barron's that argued for capping Social Security benefits at $100,000 per household or $50,000 for singles. Couples where both partners make the maximum salary (for purposes of payout calculations) will bring in $100,000+ from Social Security. Any sort of negative reaction you might have to a cap is fair but it is pretty clear that capping benefits is going to be part of the conversation. If nothing changes then every will get a 23% haircut starting in around 2033 or 2034. If they only take away from people perceived as being wealthy then that is probably more palatable to politicians in terms of votes. Tax/penalize the rich is often a popular argument. 

The opinion piece didn't say this but they would obviously need to index any sort of cap for inflation. Oddly, the essay didn't quantify how much the cap would help address the problem so I went to Copilot A $100,000 cap would save $100-$190 billion over ten years out of about $300-$350 billion problem, again per Copilot. The way the full answer was worded, my follow up was would it be fair to conclude that just implementing a $100,000 cap would mean that instead of cutting everyone else by 23%, that the cut to everyone else would be just 20%. That would be a slight improvement and Copilot said yes, that would be plausible. 

The comments seemed very hostile to capping the payout but more open to eliminating the cap on payroll taxes going in. So they were against getting less coming out but ok with paying more going in which surprises me. Eliminating the payroll tax cap would solve about half the problem. Stacking the capped benefits and eliminating the cap on payroll tax would plausibly mean that everyone else's benefit is only cut by 10%. Copilot called that defensible. 

One reader had an interesting idea about not taxing RMDs. I'll tweak that to increasing the exemption on IRA distributions like maybe the first $50,000 (indexed for inflation) is exempt from taxes. Some sort of actuarial analysis could come up with a workable number. 

If Congress tries to fix the problem then some people will be upset and believe they are being treated unfairly. If Congress does nothing then everyone will be upset and believe they are being treated unfairly. Any attempt to solve the problem is going to involve very difficult decisions. I don't know what I think is best, my comments above pick up on the idea from the essay and again, like it or not, some sort of cap is going to be part of the discussion. I continue to believe it makes sense to account for a reduced payout in your planning. 

The Washington Post had a very downbeat article about men leaving the workforce. 

Older men are being forced out for reasons we've talked about before and "young men who are disabled or in school" aren't entering the labor force. The implication for the young men is they can't seem to get started, many of them are living at home and feel no motivation to start their lives. These are statistics so maybe there is a grain of salt to be taken here but there were a handful of anecdotes that tried to give a broad perspective on the issue. 

I don't have great insight into why younger people are having trouble getting started but over the years I have noticed when friends closer to my age on Facebook have had their hands forced at work. Some chose to retire while others maybe aren't working but don't think of themselves as retired. On the positive side, I have noticed more friends retire because they wanted to and presumably were financially able to do so. 

If younger men are not entering the workforce then that would seem to be shorter term negative for Social Security as current workers pay for current retirees but it could be long term positive for the program because they will get smaller benefits when they hit retirement age. By positive, I mean for the viability of the program not for society overall. 

Whether the problem is as serious as the WaPo portrays it or not, we know it is happening to some extent and again, I continue to believe it makes sense to account for being forced out of your primary career sooner than you hope for. 

Barron's had an article with a three item check list for anyone retiring early, regardless of whether they want to or have to. The first item was healthcare costs. As we've looked at before, a couple earning $84,000 or less can still get insurance from healthcare.gov for essentially free which is a viable option for bridging to Medicare. It looks like if in this bridge period you take any qualified distributions from a Roth IRA, that does not count toward MAGI in determining eligibility for subsidies but taking from a traditional IRA account would count toward MAGI. Spending cash out of a taxable account would not add to MAGI either but long term capital gains would. Do some real research on that if it applies to your situation. 

To the extent people retire early for health reasons, it won't be so simple as lift weights/cut carbs and solve all your problems. However, I do believe that many health problems can be improved with the right type of physical therapy/training but it would take some effort to figure out how and then to stick with it. And of course a better diet will not make it worse. The other two items in this article were portfolio readiness and having a sense of purpose which are both points we talk about here all the time.

The final Barron's article was about choosing where to live in retirement including whether or not to downsize. Downsizing has two components, downsizing square footage but also downsizing financially. It seems like it has gotten a little harder to downsize financially in the last few years but that is just an anecdotal observation. For someone wanting to downsize, going from 3000 square feet to 1500 and being able to take out a couple hundred thousand in the transaction is a no brainer. 

If someone wants to downsize from 3000 to 1500 but needs to upsize financially, that becomes a more difficult decision. Someone who is somewhat behind where they need to be in terms of accumulated assets can't make that trade. They'd need to find somewhere else to downsize into. 

The New York Times looked at several retired couples who downsized into some version of van life with some people literally making a go of it in vans and others in Class A motor homes. The people profiled seem to have some financial challenges without being desperate. At least one of them seemed to be in very good financial shape but who knows. A negative point about the article is that it seemed like all of them had big enough social media followings (Insta or TikTok) that they made incomes from posting about van life. It's negative from the standpoint of not everyone will find that kind of audience. 

My wife and I have a bit about driving around the country solving mysteries but if some version of van life so appeals to you that you want to actually do it, rent something and go out for just a few months to make sure you actually like it before plunking down a bunch of money.

It certainly seems like being able to retire has gotten and continues to get more difficult. I saw firsthand when we first moved to Walker, it was not very affluent twenty whatever years ago, that people figured it out because they had to. Not everyone will figure it out but I have also learned in the last few years with my work at the Del E Webb Foundation that there are countless, non governmental resources to help with food, places to live and healthcare. And while those sorts of resources may not come into play for the typical blog reader, it is important to realize they exist. 

Hopefully everyone reading this has a comfortable retirement sorted out for themselves but being even a little bit clued in how to help someone else figure it out because they have to will be important because I am skeptical that the government will help.

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 This New Covered Call Fund The Answer?

A recurring theme here is the extent to which new products will evolve to improve the result that investors get. I think we're seeing that in real time from Global X and its covered call funds. First there was QYLD which sells monthly covered calls and while the distributions are high there has been no price-only growth since the fund's inception. Then came XYLG which sells monthly calls on half the portfolio and since its inception, it has yielded about 11% and had price only compounding at 2.43%.

A couple of months ago, Global X came out with EDGX which sells weekly covered calls targeting a 9% annual distribution which should allow for better upcapture which they believe their clients want. The chart encapsulates the "improvement" even if it is too soon to draw any conclusions about EDGX.

XYLD is the oldest fund in this product line from Global X and since its inception the S&P 500 has compounded at 14%. A 9% yield from EDGX with 5% of price appreciation left over would be a great outcome. Global X believes it can be more tactical with EDGX to get more upside than the more methodical methods for XYLD and XYLG. Once you accept that these are not going to capture the S&P 500 on the way up, you can start to assess whether there is any utility.

There is more yield than something like TLT but with less volatility than TLT. If you want to compare to high yield bonds instead of long dated treasuries, a fund like HYG is less volatile than the covered call funds. 

Getting 5% after a large yield is paid out would be compelling however building some sort of model or whatever that relies on 14% from the S&P 500 might not pan out going forward. That's a very high number and while we can hope that persists, putting some large weighting into EDGX expecting a 9% payout plus 5% in price only growth might turn out to be realistic. We've talked about small slices to completely different types of high yielding niches such that 15-20% of a portfolio split between three or four disparate strategies, disparate risks, can work. The Global X funds don't yield 50%, they might end up being lousy holds but they aren't going to go to zero. 

In a similar vein, I've been following BTYB which allocates 80% to five year treasuries and 20% to a synthetic Bitcoin covered call. The outcome sought is a yield that is twice the yield of the five year treasury. I tried to model it using YBTC which I believe is the first Bitcoin covered call ETF. When I do that, it only takes 10% in YBTC to get an 8% yield as follows.

This backtest goes back to January 2024 so we can see how the combo did as Bitcoin dropped a lot last fall.

Is a drop of just over 7% (price only) too much? It's still down that much for anyone taking the distributions out of their account. Is it too much? That is a question that anyone actually considering this fund needs to consider. However, my backtest only has 10% in Bitcoin, BTYB has 20%. Putting 10% into YBTC got us 2x the yield of UFIV but if we tweak it to 80% UFIV/20% YBTC, the blend fell by 15% on a price only basis and has not recovered yet.

The drop in Bitcoin was pretty big but far from an outlier. 

I am obviously intrigued by selling volatility but it is not something I do a lot of, it is tricky and you have to look hard to find a compelling risk return tradeoff. 

A small slice for someone looking to add yield but able to overlook line item risk can work but keep it small, repeated for emphasis. 

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.

Set & Forget? Morningstar Has Thoughts

Christine Benz wrote about How to Build a Portfolio You Don’t Have to Babysit. She cited research from Jeff Ptak that found that if mutual fund managers didn't make any trades, they just held on to their original portfolios they would have had better results than the funds actually had. Benz supported the conclusion saying she'll "take a policy of benign neglect any old day." 

I am sympathetic to the point and depending on what is chosen, it can be a valid approach for the end result even if there is a little pain along the way. Benz talks about target date funds for example. I am not a fan but they can absolutely get the job done. I have never met anyone who liked target date funds. My sample size is small but the few I've met, I've never heard anyone who owns one say something positive. They generally did poorly in 2008 and in 2022.

As we've talked about before, there are quite a few individual stocks and narrower ETFs in client accounts that have been there since I started back at the old firm in 2004. 

This Canadian bank, the name is unimportant, is one I have owned for 22 years. It's has always had a good dividend but has been very unremarkable the vast majority of the time. It's had a few years where it was up a lot including last year and a few years it has been down a lot on the way to compounding at a pretty good clip. The role it plays is exactly what I hoped it would do when I first bought it, yield and not a lot of drama (there's been some but not a lot). I've literally never had a client ask about it. 

The only reason that I think someone would have sold it would have been impatience. 

If you use any individual stocks have you held them for a very long time? The more often someone checks their portfolio the more difficult I suppose it is to just hold on because great stocks will go through some terrible periods. 

If you use broad based index funds, why would you ever need to sell beyond rebalancing and meeting cash needs? The reasons people sell have to do with short term thinking that they cannot see beyond like being afraid of the tariff decline. 

We spend a lot of time here experimenting with how to build set and almost forget portfolios, it certainly is intellectually appealing to have something that will give a decent return and be robust in the face of turmoil. Some sort of domestic equity exposure (broad based index or narrower holdings) some sort of foreign equity exposure (broad based index or narrower holdings), a couple of very boring holdings (not bonds with duration) that will offset equity market volatility and a small slice to negative convexity will probably get it done a little better than a target date fund but you still can't completely ignore it. 

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.

Understanding The Tape

Here's a bunch of items that point to how narrow the recent lift in equity prices has been.

They are all going down except tech and communications.

Since the start of 2023, healthcare as measured by XLV has compounded ay 3.7% versus XLK for tech which has compounded at 35%.

Semiconductors have never been this large in the S&P 500

This next one is difficult to conceptualize...at least for me it is.

I don't know if this specific 70% datapoint is correct but we've all seen items like this. 

You probably have heard the phrase don't fight the tape and I don't want to do that but I think there is value in understanding the tape which is what these snippets help us 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.

Getting Defensive Without Selling

GraniteShares launched several new funds in its YieldBoost suite. The basic idea is that the funds sell puts on levered single stock and index funds. The newest ones are industry funds and one that references long term bonds. 

The funds are pretty popular with AUM that is just shy of $500 million. So not wildly popular but pretty popular.

YSPY is the YieldBoost that references the S&P 500 and SPYI is a lower yielding covered call ETF that also references the S&P 500. The distribution amounts for YSPY are generally going down as the price has gone down. Early on, most of the distributions were in the $0.18  range and now they are in the $0.14 range. 

The price only return shows it has dropped by more than 1/3 since February, 2025. It's too linear to just assume that an investment on day one of the fund will be vaporized in another two years but it creates a little context that it is eroding quickly and anyone trying to build a strategy to bridge to the next financial milestone should probably keep that in mind. In real life, the fund will reverse split at some point and new money will come in unless GraniteShares ends up closing the fund. 

The question that I think is relevant is whether just spending money out of an account sitting in cash will deplete slower or faster than spending YSPI's distributions. Taking the difference between the total return and the price only return and starting with $10,000 someone in bridge/depletion mode would be a little head having spent the distributions versus sitting in cash. Obviously YSPI is vulnerable to declines in the market but since it's inception, the declines have all been very short and recovered quickly. 

I'm not making the case for using crazy high yielders but there is a siren's song to all of the derivative income funds. Simply labeling them as bad is less productive then understanding how they actually work before buying one. 

There is a new fund from ReturnStacked that combines foreign stocks and managed futures, levered up like the other funds in its lineup. The fund has symbol RSIT and allocates 75% to SPDW for foreign exposure and uses MSCI EAFE futures to complete equity sleeve and then adds managed futures on top of the equity exposure. 

If you look at yesterday's post about how well most managed futures funds have done since the low of the Tariff Panic then you can imagine that the ReturnStacked funds that use managed futures have also done very well. 

I'll close out with some real portfolio stuff. The S&P 500 has been ripping, making new highs. So is that it, is the war over? More precisely, have markets stopped caring about the war? Obviously I have no idea. I added a little bit of an inverse fund in early March and then sold it early last week. During that stretch I sent out an email or two to clients saying what I always say which is that without knowing how serious this (the Iran war in this instance) is, we do know it will end at some point and then the market will start to work higher, eventually making a new high. The only variable is how long that all takes. 

This time around it didn't take too long...assuming it's over as a market event. The purchase from early March was a tweak that would have grown to be a big helper if something hideous had happened in the market. 

I am not convinced it is over but will be happy to be proven wrong. Nothing about how this was done makes sense to me, I don't know how you believe the announcements coming from either side and if you can make an argument for an outcome that is better than returning to how things were before it started, please leave comment. The big thing now seems to be trying to negotiate free passage through the Straits which we had before. I am skeptical that we get an outcome we want regarding uranium enrichment but will be glad to be proven wrong there too. 

Faced with uncertainty it is now very easy to make portfolios very defensive without needing to sell anything which is a great offset to being wrong.

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.