Not Nest Egg, Paycheck For Life

Andrew DeBeer who manages the iMGP DBi Managed Futures Strategy ETF (DBMF) as well as having involvement with the Simplify DBi CTA Managed Futures Index ETF (SDMF) sat for Barry Ritholtz' podcast. There wasn't a lot that was new but one item that I would pass along from it was Andrew's suggestion of allocating about 3% to managed futures. Barry led into that by saying it's not something you backup the truck on. 

Yesterday we looked at long biased long/short funds. WTLS is 90/90, 90% S&P 500 and then 90% long biased long/short. HFEQ seeks twice the volatility of regular long biased long/short. Yesterday, both funds were down more than the broad market and today they were both up more than the broad market even if not by that much in the case of WTLS.

At this point, I am not saying they are good funds or not, just that based on a first impression, both days the funds were behaving the way I think they should behave. Plenty of funds don't pass this test and maybe with a longer sample size these wouldn't either but when I talk about a fund doing what they say it will do, this is how to see, very simple but it is very important point. A fund is offering something, does it actually do it?

Don't think of your 401k and then when it becomes your Rollover IRA as a nest egg, think of it as "paycheck for life." That is part of the pitch from Blackrock to provide access to private assets for retirement plans. While I am a no on private assets due to lack of liquidity, high fees and volatility laundering, the idea of annuitizing a portion of assets intrigues me. Not annuities. Annuitizing with brokerage account accessible products that have daily liquidity. 

We've played around with this idea in various ways a few times. The way I framed it, a window of like five years where someone wants to retire but not take Social Security right away. Maybe this person has a piece of money in a taxable account, separate from their 401k/IRA that they are willing to deplete over something like four or five years to let their retirement account and Social Security benefit grow.

I sat in on a webinar from NorthernTrust today. They have a suite of funds that sort of do this, annuitize an income stream from funds that deplete in 2030 TIPA/MUNA, 2035 TIPB/MUNB, 2045 TIPC/MUNC and 2055 TIPD/MUND respectively. The symbol starting with T buys TIPS and the symbols starting with M buys muni bonds. 

We looked at these briefly when they first listed. Given the intended use, I'm not sure why the suite goes beyond 2035. If you can retire right now at 47, are you going to buy TIPC or MUNC so you can delay SS until age 66? It doesn't make sense to me. 

The webinar included a use case of someone 62 today wanting to retire now and use the 2030 product to hold out taking SS until 67. Here's what TIPA owns.

Every October, a tranche matures and get distributed. During the year, the fund pays a "dividend" periodically. I thought they said monthly but that must have been incorrect. Here's what Yahoo shows for distributions.

I spent a lot of time looking to see if there were more distributions and couldn't find any evidence of more and neither could Grok. The fund's webpage doesn't have any info about the distribution history. 

The idea is to collect income and principal back to live off of for a finite period expecting to deplete the piece of money just as you start to collect Social Security. The example from the webinar assumed that the guy had $200,000 to commit to the income bridge strategy. I like that name better than depletion strategy I came up with. 

The price of the fund is around $100/share for now. The dividends seem lumpy as hell. Next fall, the use case investor would get about $40,000 shortly after the first tranche matures. Let's say the yield from actual dividends is 3% (very little confidence it would be that high) spread sporadically over the year, that would be $6000 and then in the fall you get $40,000. It would take a lot of planning to make that work. You'd essentially need your first year's worth of expenses set aside and not include in the $200,000 purchase of TIPA. 

This idea will evolve into more useable funds. There are a couple of others out there, LifeX has a couple of funds that do something similar. If fund companies are creating these, there must be some sort of demand but like a lot of strategies, the first couple of attempts might not be the final solution. 

For now, I think with a little research work, people can build this themselves. Sticking with the $200,000 example, I bet we could find 10-15 disparate strategies with varying degrees of kind of high to crazy high yields that take disparate risks. Then set a schedule of taking paychecks that are a mix of accrued distributions and principal. With a five to seven year time horizon would this strategy last longer than just spending it out of a money market yielding 3.5%?

You'd really want to spread the risk around but we've looked at this before, yes this strategy can last a little longer than just straight cash out of a money market. Putting 6 or 7% in a crazy higher yielder or two is less crazy when the expectation is that the account will deplete. 

I spent two minutes coming up with 12 holdings. Maybe someone actually applying themselves would come up with something better. (hint, take my list, put into whatever AI you use and ask it to make improvements)

The "yield" annualized out to 12.29% so call it $24,000, take another $16,000 out by selling down positions and one year in, $183,000 with four years left until Social Security. If someone wanted wait ten years, then they'd only take out $20,000 which was less that the "yield" for year one. 

For the period studied, just owning VBAIX and selling it would have been better. It's an interesting theory that I think could work but may not always be optimal. 

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.

Do You Need More Long/Short?

On the heels of yesterday's post about robustness, a lot of the things that have tended to be sources of portfolio resilience didn't do that today. Gold was down. Managed futures ETFs were down. Defense contractors were down. Yieldy staples were down. 

Client holdings BTAL and CBOE were up along with a couple of other things but on a relative basis it was a rough day.

A reader on Twitter questioned whether any of what we talk about matters.

That is fair. The picture is a bit much but it's funny. These are tendencies we talk about with varying degrees of reliability but no assurances of infallibility. Meb Faber has a Tweet out there somewhere to the effect of setting your strategy and then just letting it work. The tendencies are reliable enough for me that I am very comfortable letting them work. 

Moving on, I saw an ad for the relatively new WisdomTree Efficient Long/Short Equity Fund (WTLS). It's a 90/90 leveraged fund with 90% in the S&P 500 and 90% in a long biased long/short strategy. In related fund news, the Unlimited Equity Long/Short ETF (HFEQ), similar to Unlimited Managed Futures ETF, targets twice the volatility of regular long short. That doesn't necessarily mean twice the return but that could frequently be the result. 

It's a very short look back because of WTLS' inception date. QLEIX is a long biased fund from AQR that does not seek to double the volatility. The numbers tell the story in terms of volatility. FWIW, on Tuesday WTLS was down 2.4%, HFEQ was down 3.5% and QLEIX was down 0.48%. That makes sense given what each fund is targeting.

For QLEIX's lifetime, it has trailed SPY by 133 basis points annualized with a much lower volatility. The table shows differentiation, sometimes meaningful differentiation, but as a long biased long/short, it could be a substitute for core equity exposure. 

Putting 60% into one fund like this is a non-starter for me but for blogging purposes we can play around with long biased long/short. Portfolio 1 is pretty oddball. USAF is the Nouriel Roubini ETF that we have looked at a few times. It's been fixed income-ish for most of its history looking a lot like AGG but has gotten a pop in the face of the recent chaos. 

The respective 20% allocations to QLEIX and HFEQ should be close to 60% in equities. The exposures to AQMIX and client/personal holding MERIX can happen because of the capital efficiency from HFEQ. The same could be said of WTLS.

This is an interesting idea. There are all kinds of different long/short strategies. The three funds all fall into the same category as opposed to short biased like client/personal holding BTAL or market neutral like arbitrage funds. 

Similar to managed futures, anything beyond a small slice to long biased long/short should probably have multiple managers.

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.

Making Portfolios Robust

In last night's quick post after the Sunday night sessions opened, I thought that this event would be a good litmus test for all sorts of concepts and strategies similar to 2022 or the Tariff Panic. Nope. Or maybe, not yet? They're telling us the actual military event will go on for at least a little while. It would be great if from a markets standpoint it was over already. That's not a prediction, I don't know but I tried to prepare clients in an email that this could take a while to sort out but no downside if it markets move on quickly. 

This is just a microcosm from the open of regular trading on Monday that illustrates the risk of treasury ETFs. They all finished the day lower than when I grabbed this look. At any moment, treasuries could turn right around and go up (in price). But as we've been saying for many many years, treasuries are not the cure-all that so many believe them to be. Not even believe, that so many rely on.

It would be fair to think my position of having no duration is further than you want to go. But then, it would also be fair to say that duration is just another alternative strategy that might work very well in a specific event, whether it is a quick event or a longer term event. In that light, sizing it as an alt, at 5 or maybe 10% would make far more sense than 40% like in a plain vanilla 60/40 portfolio.

We focus on portfolio robustness here and as nano as today's opening was, any argument that bonds make portfolios robust is lost on me at this point. They worked for a long time but now it really is a coin flip. Bonds went down in price because of perceptions that oil prices will remain elevated which of course puts upward pressure on price inflation. There's no way to know whether that will happen but is certainly is plausible. 

We talk about it regularly, robustness comes from having several diversifiers because you never know which ones might not "work" in a given event. Managed futures was really a mixed bag. Managed futures with client/personal holding BLNDX had a good day while the replication ETF I also use was down. Gold was obviously higher, BTAL was up when stocks opened lower. Any of those, or the others we talk about could have done anything today, just like duration could have gone the other way, the uncertainty of war could have easily prevailed over the price inflation concerns so, repeated for emphasis, duration has just become another alt to be sized with a small weighting if any weighting (I chose no weighting).

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.

Sunday Night Reaction

Here's an initial reaction in markets to the military escalation.

The table is listing the S&P 500, gold, WTI crude and the Australian stock index. That's clearly a reaction as opposed to ignoring it but stocks don't seem panicked at this point. Obviously there is no way to know whether it needs to get worse before it gets better.

Chances are defense contractors will do well from this. I did some digging and there is a good chance that managed futures is long crude oil, it is long gold and silver but again we'll see. 

Similar to 2022 and the Tariff Panic last April, this event has a good chance to be a good litmus test (learning opportunity) for a lot of strategies and philosophies. 

If you are a student of markets in addition to being a participant, this is yet another fascinating event. If it gets bad, ok, we've had bad before. We know bad ends and eventually the market goes back up. Maybe that happens quickly or maybe it takes longer than we'd like but that is just how it works so there is no need to panic, only the need to endure (if it is bad) and learn for the next one. 

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.

Building In A Margin Of Safety

Barron's posted a first hand account from a semi-retired writer, not Neal Templin, about why he chose to wait until 70 to take his Social Security at the start of the year. As is often the case, the comments are worth reading and like they usually do, they lean to taking it early for various reasons. 

Hopefully I've never said everyone should in terms of when to take it but for quite a few years I've tried to really hit on making sure you understand how things work and warning that there are a lot of mistakes to be made. I recently found out that one buddy didn't know his wife could get a spousal benefit instead of her own which has been very costly for them. Big mistake. 

I'm about 25 months from being eligible to take it early. At this point, things would need to take an unimaginable turn for me to want to take it that soon. Unexpected things happen in life of course but I have no desire to stop working so taking it before 67 where the benefit would be reduced, doesn't make a lot of sense to me. My preference has been to wait until 70 to max out the survivor benefit for my wife in case I die early. If somehow I ended up taking it a few months early for some reason, I wouldn't consider that a real change in my plan versus taking at 65 or 66. 

Comments often turn to taking it at 62 and investing it. We looked at that recently with the conclusion that it wouldn't work for too many people. If you take it and keep working, most of it will be withheld because of the earnings test. If you take it at 62 but are pulling money out of other accounts to live off of, then it's sort of like rearranging the deck chairs. If you make a lot in passive income it could work, that is not subject to the earnings test. 

See the scenario below;

Someone who just turned 62, making $100,000 and wanting to retire now and take Social Security right away. A single person goes from making $8333/mo to $1764. Or if his wife makes the same $100,000 and will keep working, they go from $16,666/mo to $10,097.

This scenario could easily have enough in retirement accounts to fill the gap but if they're sort of close to the line with not much margin for error, locking in $1764 (plus COLAs) could be difficult. Sticking with the single earner getting $1764 and the spousal benefit of $882, they've gone from $8333/mo to $2646/mo. Say they are living on 70% of their $8333, that's $5833 so they need their portfolio to kick off $3187/mo. Working backwards, assuming a 4% withdrawal rate, they need $956,000.

Copilot figures that of people 50 and older, making $100,000 or more, only 10-15% have at least $1 million saved. It's not that success is impossible or implausible but this scenario of seems kind of realistic, it's not desperate but something might have to give. Maybe not retiring. Maybe cutting back on spending somehow. Maybe getting some sort of side-hustle type of part time income but remember that too much income might cut into the Social Security benefit. 

If this person delays Social Security until 2028, their benefit would be $2084/mo and in 2030 it would be $2503/mo. If the nest egg, can compound at a not so heroic 6%, it could go from $956,000 now to $1,074,000, in 2028 or $1,206,000 in 2030. 

In 2028 they'd have $2084 in Social Security income plus the spousal benefit of $1042, $3126 plus 4% from the $1,074,000 portfolio for a total of $6706/mo versus their need of $5833. So the margin for error has gone from nothing at 62 to about $900 at 64. In 2030 at 66, their SS totals $3754 and 4% from their portfolio would be $4020/mo adds up to $7774/mo, leaving them about $1900 ahead. 

Arguably, the sweet spot for this scenario is closer to 64 than 62. Remember, one premise at work here is that the percentage of people making $100,000 that have $1 million in retirement assets is low. 

Obviously, some sort of income stream like from real estate or a monetized hobby could create a margin of safety that I think is important to have if at all possible. The question isn't 62 or 70, the question is personal, perceived need for a margin of safety.

I'll put out a second note after the Sunday night session starts if we see anything noteworthy. S&P futures down 10 basis points probably isn't worth anyone's time but we'll see what things look like. 

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.

Move To Albania?

Today's post will ignore the elephant in the room, the Iran attack, for now. Maybe we'll know a little more tomorrow when markets start their Sunday night sessions. 

I've had a bunch of tabs open this week with some downbeat topics but that I think are important to explore. First from the WSJ, More Americans Under 55 Are Dying Of Severe Heart Attacks. The idea that we are collectively less healthy than we were in decades past is something we've been digging into for a long, long time. We are getting heavier and heavier and our diets are getting worse and worse. The statistics are grim. They've been grim for a while. 

Being an EMT allows me to see some things first hand which has helped me better understand the predicament we finds ourselves in. A point we emphasize here is that they (the government) is never going to figure it out. We can either grow old, never trying to figure it out for ourselves or we can grow old and try to figure it out. We're going to grow old regardless and they are not going to figure it out so it is up to us. Health is wealth, make it a priority.

Cut way back on junk food. Take the time to learn what junk food really means, how many supposed healthy foods are in fact not and then cut way back. The more meals comprised of just meat, eggs, fish and cheese you can eat, the healthier you'll get. Vegans, I  don't know what to tell you. Plenty of fruits are sugar bombs, so watch out there. Many veggies are good of course but some are not. 

On Saturday morning, I was able to get a fire department buddy who doesn't really exercise to come do a mini-workout with me at the firehouse. I was thrilled he said yes. I do a full weight workout on Monday and Thursday (usually) and skip rope most other days. On Saturdays before either fire training, the monthly fire board meeting or like today a free Saturday, I do a mini-workout which is usually a set of jump rope and then three or four weight exercises. All in, this little routine is probably less than 15 minutes. After jumping rope, we did bent over barbell rows (dead lift substitute), landmine squats, pushups and farmers carry. I tried to get him to use weight he would think was too light and just do like 6 or 7 reps so he might feel it a little tomorrow but not be so blown up that he can't move. 

An important point is that I told him that this can be just 15 minutes and is far better than doing nothing. Hopefully you exercise vigorously and maybe you can encourage someone to start with small bites like we did this morning. On Wednesday, I have in my calendar to text him to encourage him to do a quick set of air squats and then some pushups. 

Next is that Americans Are Leaving The US In Record Numbers. It seemed like a lot of people said they were going to do this ten years ago but maybe not that many did? I'm not sure. Now though, if the numbers in the article are correct, maybe fewer people are talking about it but more people are doing it. Again, not sure. 

The article focused on Europe as an expat destination with no mention of Australia or New Zealand which surprised me, no Canada or southeast Asia either. One country that came up was Albania. One person who moved there was quoted as saying you can get buy on $1000/mo in Albania. I've never heard of Albania brought up in this context before, have you? 

Long story short, my father moved to Spain in 1980 when he was 54 and lived there until he died in 2015. Living in another country can work. Details related to finances and benefits (Social Security) can all be sorted out. Figuring out how to stay and whether you want to work there (he worked for quite a while) can also be sorted out. I don't need convincing that many places are cheaper to live than here. 

You also hear about the medical care being free or close to it. Yeah but.... My father had a few issues come up that were varying degrees of serious and they treated him just fine with a good result. He broke his hip at 71 for example and that went very well. He lived another 17 years and did a lot of walking, really a lot, right up until the end. Right after he turned 88, 55 years of cigar smoking caught up to him with throat cancer that spread all over and I saw first hand the medical care for something that serious was dreadful. Semi-serious and below, it's probably fine N=1 but for very serious, they didn't know what to do and I swear his doctor was about 24 years old, she looked like a kid and I never saw an older doc.

Our first trip to New Zealand in 2005 was unique. A Walker friend owned a property there with two houses. He rented out the main house to a slightly older couple and there was a guest house that our friend let us stay in. We spent a lot of time with the older couple and their kids who were about our age. Based on two visits, New Zealand seems like it would be a great place to live. Yes they import just about everything but they are net exporters of food, they have plenty. Pound for pound, it's a little cheaper there, maybe not in Auckland, but not as cheap as Albania purports to be. All good but as our hosts from the first trip told us, the healthcare system there isn't good. 

Speaking of New Zealand they are open for business for anyone who can buy their way in. For a time, they restricted foreigners' ability to buy a home but started to lose population so they loosened the restrictions a little. For now, a lot money and you can buy in as opposed to rent. 

Anyone who thinks they need to leave the US for whatever reason, you will have more optionality if you can get your health in order. Notice, I am not saying our healthcare system is better, it may not be, I don't know. A family member had some very serious health issues last summer. For a couple of months, it became a full time endeavor for a couple of family members to advocate for making sure mistakes were avoided, questions were asked and also pushing back on a couple of things that made no sense. 

Back to the second paragraph of this post, do everything you can to stay healthy. 

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.

Oh No, Financials!

The current event that appears to be unfolding in the financial sector coming out of the private asset space is not the Financial Crisis. Let's get that out of the way. I don't know what the final fallout will be but this will be an investment thing, if anything, not a systemic thing.

We've put up other tables capturing different periods but with the same message. These companies are pretty useful proxies for whatever is going on with private assets and right now, there are some real concerns with private assets but where private equity and private credit don't mark to market everyday, the above companies are like a Wittgenstein's Ruler look at what might really be going on in private asset funds. 

From Joe Weisenthal;

The other day, I talked about how complex the banks are and the complexity is again problematic even if not systemic. Before the financial crisis, I owned one domestic bank and several foreign banks. I had lucky timing selling all but the Canadian bank which I still own for clients today and Barclays which back then owned iShares. I've generally avoided banks ever since save for the one Canadian bank and a discount brokerage now that has some banking activity.

This might be useful.

Blackrock (BLK) is a client holding that of course now owns iShares and does have some exposure to the private asset theme. I would expect it to continue to feel more of the private asset unwind if that is what happens. Clients own a different credit card company than Visa (V). There's no fundamental connection to credit card companies (they don't take credit risk, they collect tolls). RY is a different Canadian bank, down less because I believe the Canadians are generally simpler businesses. KBWB is the ETF that tracks the bank index that Joe mentioned. JPM should be less levered based on Dimon's recent comments but we'll see how that pans out. ICE is the NYSE and a few other business. Panic should be good for trading volumes and exchanges should benefit from that with no fundamental connection to the credit event. Goldman Sachs (GS) is obviously smack in the middle of this thing

I am not zero weight credit risk but relative to the index I am underweight it considerably. If this gets uglier than it already has been, that bit of exposure I do have will feel it. Similar to tech, I've been somewhat underweight, not grossly underweight, but of course if there is a tech route, that exposure will feel it.

The point is completely avoiding something may not be plausible but avoiding the full brunt is plausible. Being underweight obvious risk focal points helps with portfolio robustness as does a little exposure to things that have negative correlations to equity or might actually benefit from the chaos (antifragile). 

And this is why you keep foreign exposure.

It can smooth out the ride over the intermediate and longer term. If you had some edge for when foreign would start to outperform a year or so, great, but that is a tough thing to get right. 

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.

What Going Heavy Managed Futures Looks Like

Simplify included this in promoting one of its funds.

That is a great way to phrase it, not relying on past correlations. The relationship between stocks and bonds is no longer as reliable as it used to be. This makes bonds less effective at helping manage equity market volatility. Yes, I am absolutely a broken record on this point and will continue to bang that drum. 

Next item, a good blog post from Ben Carlson, Can You Live Off Your Dividends? It was really about covered call ETFs with a look not so crazy high yielders and another chart with crazy high yielders. The starting point was answering a question for a 42 year old, single guy with a lot of money saved who wants to quit his job. If he put all the money into SPYI, he said the 11% would bring in what he needs.

That's Ben's chart. We do something similar here in terms of looking at total return and price only. If a fund like SPYI (there are others of course) can pay out 10, 11, 12% and still get a price only return of 3%, I think that's pretty good. That's not keeping up with the stock market of course, that should not be the expectation. Plenty of ifs there but still. 

The way we've looked at this idea is as a short term strategy like stopping work but wanting to wait a few years to take Social Security. 

Here's a simplified version of ideas we've looked at before.

Total Return versus price only.

The "yield" is about 11%. Inflation ran at 2.41% annualized during this period. So the real return, after taking out the distributions is above inflation but it's not great. It could limp along though for several years until the person wants to take Social Security. It's not a very robust portfolio if something bad happens in markets. Ben's reader is only 42. I would not want to try to ride that idea out for the next 45 years. There's very little likelihood it survives anywhere near that long. 

The scenario of like a five year window where you might allow a small portion of investible assets to deplete while waiting until Social Security kicks in is something we started playing around with quite a while ago, there are now ETFs from several providers that are intended to deplete for just this scenario so I'm not the only one. 

Speaking of Simplify, they launched a managed futures fund in partnership with DBi who already has their own ETF, DBMF which has done pretty well but absolutely killed it in 2022. DBMF is a replicator and the new fund which has symbol SDMF is also a replicator. Today was the first day so it is too soon know what the difference is between the two. 

I got an idea from looking at the fund and how some people believe in huge allocations to managed futures. Anyone wanting to more than dabble in managed futures should probably have several funds. We've gone over the performance dispersion between strategies including just the other day. 

The period studied captures an awful run for managed futures so I am very surprised that Portfolio 1 was anywhere close to plain vanilla 60/40.

Here's what the same three portfolios look like just looking at the last six years.

Portfolio 1 didn't really crash during the Covid Crash of 2020 and it was up 71 basis points in 2022.

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.