A Six Month Wait?

Cards on the table, I haven't been to the doctor for a physical in a few years. I never liked my old doctor and my interactions with him had been deteriorating for a few visits. His response to "I am not going to take a statin, I am betting my life that the cholesterol hypothesis is wrong" made the agenda that many/most doctors have crystal clear. I don't assume anything nefarious, just fear of being sued if they go off script. 

That is what I thought about in real time during the last cholesterol conversation, it was like Spinal Tap.

Regarding cholesterol, there are mountains of research showing that nominally high cholesterol is not the problem. Instead it is sugary/carby diets that cause the cholesterol to gunk up which results in clogging us up. I first clued into this in 2004 when I read something that concluded statins don't prevent a first heart attack. I'm not trying to convince anyone of anything here, I have invested tons of time, advocating for myself, and this is the conclusion I draw for myself. To be clear though, it is factual that research on this has been done if you are curious enough to seek it out.

I turned 60 a few months ago and I need to start up getting physicals. Prescott has shockingly few doctors, I knew this would be close to impossible in Prescott but, we're down in Tucson quite a bit, it shouldn't take too long. Wrong. The first appointment I could get was March 11th. 

The system is broken. Six months is absurd. No wonder people get sick and die. So I did something kind of crazy on Wednesday of this week. I signed up for Amazon One Medical, had a Zoom consultation with a doctor on Friday and am going for bloodwork on Monday afternoon. I will then have a follow up with the doctor in a couple of weeks. So the doc I met is listed through Amazon, which is like Teledoc I suppose. The Amazon One Medical program seems like a sort of concierge service that costs $99/yr and I can add my wife for $66. The $99 (or $165) allows for quicker or maybe better to say more convenient access to some very simple things. 

Part of my willingness to go this route is that I don't have a lot of faith in the healthcare system's ability to treat chronic maladies as opposed to acute problems. So the doctor doesn't need to be great. The system seeks to manage chronic conditions with medications that require taking other medications to manage the side effects of the first medication even though for some conditions, the answer could be to just eat less sugar. Two fire trainings ago, I asked one of the firefighters to look up and read out the side effects of Jardiance and of course they sounded awful. I then said to the group "or...or...or you could just eat less sugar." Then at the next training I asked another firefighter to look up and read out the side effects of Zepbound which were similarly awful. Or...or...or you could just eat less sugar.

I don't know if my doctor is any good but reading tests results and using AI (I just assume doctors use AI, younger doctors anyway) is manageable even for a so-so doc. God-willing there's nothing wrong, I can dance the cholesterol tango with this guy and be done. 

The prompt for this post is an article from the NY Times about exercise helping cancer patients better endure treatment and reducing the incidence of recurrences of illness. If that gets people to exercise, that's great but vigorous exercise can play a crucial role in preventing cancers and other illnesses. Of course I bang the drum constantly about lifting weights. Go follow PD Mangan on X to learn about the various metabolic processes triggered by weightlifting that greatly reduce the odds of getting sick.

I am big on the idea that it is up to us to prevent/solve our own problems. That sentiment is about inputs, not outputs. You can exercise, eat well and generally do the right things and still get sick but odds for avoiding illness improve dramatically by having a flat stomach and building and then maintaining muscle mass/strength. This doesn't mean being jacked like an action figure, just lean with some muscle/strength. 

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.

Can You Actually Live Outside The Box?

Barron's had a long article about how difficult it has become to diversify a portfolio because of the dominance of mega cap AI and semiconductor companies in indexes like the S&P 500. The article goes on to make suggestions about factors and equal weighting for equities. You could "fix your fixed income" with CDs, treasury bills and money market funds.

Included toward the end of the article was the suggestion to think outside the box by adding a little gold or commodity exposure. 

Not a whole lot of unique ideas there. We build some extreme ideas here to try to help think about how things that really are outside the box could fit in to actually solve a problem a little better than just buying a CD.

I like the idea of barbelling. We've applied this in different ways. The idea I am trying to convey in that picture is a little bit in yield, a little bit in growth and a bunch in exposures/strategies that should compound a little better than T-bills, offer some defensive attributes or maybe both.

The first four names are the yield, the next two are the growth and the rest are the absolute and alts. most of the names are one we use regularly for blogging purposes except maybe Cambria Shareholder Yield (SYLD) as part of the growth allocation. We're not totally selling out for a 15% yield in that sleeve, there's some diversity of risks in that group. For equities, SYLD and IMTM are underweight AI and semiconductors. I chose SYLD because of the manner in which its results differentiate from market cap weighting. SYLD has had years of misery and glory on the way to not great long term results so we're not cherry picking something great. 

There's not much variation from year to year for the 20/60/20 portfolio we're working with today which is good.

But the bar chart sets an expectation that it will lag VBAIX in most individual years. There's plenty of different types of exposures, the mix is legitimately diversified but that doesn't mean actually implementing this sort of concept would be easy to endure. 

Even Claude liked the idea and Claude hates everything. Copilot is a bit of pushover so I went with Claude. The clearest suggested improvement was;

Thinking outside the box requires being willing to actually live outside the box. Experience tells me that is more difficult for people than it sounds. 

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.

Harsh But True

Some odds and ends today.

Chances are you know not to get a reverse mortgage other than as an act of desperation but you know someone who is not clued into this. I learned about someone in Walker who is underwater on their reverse mortgage because of how long they took it out and now they want to sell to leave Walker as a function of age. 

Technically, you can't be underwater on a reverse mortgage but as you take payment after payment each month your balance builds up and when you sell, that balance needs to be repaid plus the interest. If the balance and interest exceed the value of the sale proceeds you get nothing. The lender gets made whole by the FHA.

I don't know these peoples' financial situation but getting money out of their house won't be a part of it. 

Allan Roth wrote favorably about TIPS ladders. I'm not a fan but he is. I should say I am not a fan of going heavy. We looked at a use case of a small allocation for an expense that might track somewhat close to CPI versus expenses that won't. Property tax yes, various types of insurance no. 

If the intent is insulating a piece of money against inflation without taking on full stock market volatility, ok, they should be better than bonds but I think there are better ways to do it without the volatility of long dated TIPS. 

Finominal did an assessment on this model portfolio from JP Morgan.

It aligns as 75% equities and 25% bonds. Finominal thinks the best comparison is 75% iShares Russell 3000 (IWV) and 25% IUSB. 

I loaded this into testfol.io but replaced JBND with BND which is a Vanguard fund that does the same thing and allows us to look at four years.

Um,

This is a recurring theme with a lot of model portfolios. No differentiation. I had a blog post a few months ago titled something to the effect, why use two funds when you can use 11 which are the numbers in today's examples. 

I think JP Morgan is just showing how their funds can be used which is fair but I don't know why any advisor would implement this. 

Barron's wrote about what to do now that "interests rates are surging." Whatever happens next, it's a bad bet to think you can out nimble the interest rate market versus laying out a plan for yourself ahead of time and generally sticking with it. 

We have framed this as recognition that rates weren't compensating the volatility and risk of longer dated bonds. We spent a lot of time trying to build a portfolio sleeve that would do what people want bonds to do and added the consideration for what point yields will adequately compensate for volatility and risk of longer dated bonds. 

Several of the recommended funds in the article are low duration. Is now the time the rotate from long duration to short duration? Where were they five years ago? Making that trade now is a guess that might be correct or maybe not but reacting after the surge is not assessing the risks it's a guess. Harsh but I think correct.

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.

Interesting ETF Filing

The newly filed for Brinsmere Balanced Fund (proposed symbol TBFB) is going to do a variation of the portfolios we theorize with here. The very short version is 20% in equities, 20% in bonds and then sort of a go anywhere with the rest which "may include gold, commodities, and managed-futures" but it will seek to have similar returns to a traditional 60/40 portfolio. 

Brinsmere has a proprietary process for selecting what gets included in the fund and although I did not see anything in the prospectus about trying to reduce volatility (corroborated with Grok) it is plausible that lower volatility would be part of the outcome, and even if that is incorrect, we can play around with their idea in pursuit of that outcome.  

Using the following to get a decently long backtest;

The volatility looks great while the growth rate lags behind a little. The way it backtests looks like it achieved 75/50.

The period studied includes a stretch where both managed futures and gold floundered for several years and of course 20% in all world equities creates a drag versus 60% in domestic-only equities. Shortening the backtest up to six years was far more favorable, the growth rate of the mimicked portfolio was slightly ahead of VBAIX and the volatility was about the same 6% or so. 

If we consider a much shorter period, we'd have many more ways to fill the 60% bucket for a more robust mix including cat bonds that we use frequently here and that are in client accounts. I used XYLD which is an old covered call fund as sort of a proxy for a buffer fund. XYLD has no shot of keeping up with plain vanilla equities on a price basis. On a price basis, XYLD has compounded negatively ever so slightly in the period studied versus a CAGR of 13.92% for the S&P 500. QSPIX is not my favorite for any strategy but it is useful here for having a long track record. Like several other AQR funds, it seems prone to occasional long periods of lagging, 2018 through 2020 was dismal.

ETFs can't own mutual funds but something MKTN that we looked at the other day could slot in for QSPIX, ILS is an ETF that owns cat bonds and there are several merger arb ETFs.

Good luck to the Brinsmere guys, I hope the fund lists and is as interesting as our mimicking of their idea. 

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.

Woefully Flawed Backtesting

 Hopefully this will be obvious.

Any sort of long term study involving Bitcoin is built on a growth rate that can't be repeated. Over the last ten years, Yahoo Finance has Bitcoin is up 32,000%. That unrepeatable gain is built into the impact cited of 1% added to the portfolio.

It has been awhile since we included Bitcoin in one of our studies but I typically didn't go back further than 2021, where I have the yellow line because of the unrepeatable nature of the some of the earlier returns. 

Backtesting is useful but not infallible. I try to point out flaws that I see in some of the backtests we do but this one with Bitcoin is especially easy to observe. 

A quick follow up to yesterday when we looked at the MKTN ETF which hasn't been around that long. It turns out there is a mutual fund version with the Federated Hermes MDT Market Neutral Fund (QQMNX). Hat tip to reader Max for finding this fund. For some reason, Testfol.io only goes back about five years with that fund but it is quite a bit older. Portfoliovisualizer lets you go further back.

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 TIPSy?

Laurence Kotlikoff says TIPS are a screaming buy. He has long been a fan of TIPS, maybe always but either way, for a very long time. The real yield on TIPS has hit 3%, he notes 3.4% as of last week in his substack post. 

His post is in part an advertisement for his software which includes how to build a TIPS ladder. He draws some very dour conclusions about the risks of stocks that do not ring true for me on the way to thinking 20% in stocks and 80% in TIPS would be reasonable. You can read the post and decide for yourself. 

We recently looked at the Northern Trust 2055 Distributing TIPS Ladder ETF (TIPD). The example I used for utility was property tax. I speculated that with crazy high inflation rates for homeowner's insurance or health insurance including Medigap plans, it might not be ideal. Here's what the price of TIPD has done over the last year though. 

On a total return basis it is down a shade over 6%. The way it's structured, if someone put in $50,000 on day one and assuming no malfunction in the fund or panic sales, then the holder should get all of their money back plus interest along the way but the price can drop in between now and 2055. It holds plenty of very long dated TIPS and while the short dated ones won't really move too much the longer dated ones will if rates go up. Yes there will be at least a partial par value reset but that won't completely offset the decline if there is a huge move up in rates from here.

That's not a prediction, that is an attempt to build an expectation of what holding TIPD or individual TIPS might feel like. Great if you can avoid panic sales but what if something painfully expensive comes up and TIPD is down another 10% and there's no other place to pull from? Generically, a TIPS ladder can absolutely work but it is not a walk in the park by any stretch. 

Although I disagree with Kotlikoff's conclusions, he is asking good questions. What if the risk/reward for equities is out of whack for a while and we have some sort of lost decade or the like? We spend a lot of time trying to build in some robustness in case that happens. 

That brings us to a new (to me) fund, the Federated Hermes MDT Market Neutral ETF (MKTN). It's a long/short fund that's only been around for about a year. The long short strategy involves individual stocks. Its growth rate has been lower than QLEIX from AQR but its volatility has been lower too.

This comparison is interesting. It's very short but interesting, they take different paths to the same outcome. Blending them together should have a very low volatility. 

If Kotlikoff is directionally correct about stocks (the magnitude he talked about is way too extreme) then long short becomes more important. MKTN and HFND do different things, long/short versus global macro. Putting 50% each into two funds seems very unnecessary to me but lately we've looked at several different pairings that offer the opportunity for a decent real return with low volatility and no duration risk.

The Check For A Pulse portfolio has three different "pairings" plus cat bonds and APHPX that although not a pairing, fit the bill for very low volatility and no duration risk.

The pairings are color coded. We could also throw an arbitrage fund in there to lower the weightings of everything else or maybe do something with shorter dated TIPS. Other than MKTN, these are all funds/exposures we have been working with here for quite a while and they continue to behave as expected. 

The volatility numbers can probably stand up and while I do believe this could give a fine CPI plus x% result, the outperformance versus VBAIX is probably an anomaly unless stocks do poorly. RISR will probably drop if interest rates go down. The Check For A Pulse has very little equity beta and very little duration.

It's not riskless of course but as I already said, the concept gives the opportunity for a real return independent of typical benchmarks.

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.

This One's Even Worse

The other day we took a quick look at a blend of 30% equities, 60% managed futures and 10% in cash. The long term result was good albeit disconnected from standard benchmarks but holding it would have led to long periods of misery and anguish. 

Well this one might be worse. 

The framework is the same as the other day. The investor objective is a much steadier or smoother ride than something like a 60/40, 70/30 or maybe even 50/50. This would likely result in lagging behind in years when the stock market is up a lot and bonds don't implode.

Where we've talked about CPI plus 5 as being a common target for endowments and a good way to think about how a portfolio actually works to meet someone's needs. Maybe today's idea could be thought of as CPI plus 3.5 or CPI plus 4 but with no duration risk that would go with putting it all in TIPS. Side note, TIPS aren't quite at a 3.5% real return currently. 

Portfolio 1 is a synthetic backtest, I spent a little time trying to recreate the effect to get a longer look. The return is similar but the volatility is a touch higher. An objective of CPI plus 4 overlaps with the 75/50 concept that we've looked at periodically over the years where a portfolio captures 75% of the upside with only 50% of the downside. 

The synthetic backtest is long enough and been through enough different types of market events to make me think it has some merit. The idea we're playing with is 50% buffer funds/50% managed futures. The longest backtest we can build is using BJUL which I believe is the oldest buffer fund.

Those earlier years in the green box would have been rough for anyone expecting this idea to keep up with VBAIX. There were two years where the portfolio was up but fell short of CPI plus some decent number and obviously it was down a little in 2018 but it has been reasonably steady in line with the volatility and beta numbers. The standard deviation for BJUL/AQMIX was 3.94 versus 11.91 for VBAIX. 

Maybe the way to think of this is in the realm of aggressive absolute return. In the same period as we tested BJUL/AQMIX, Vanguard  Market Neutral (VMNIX) compounded at 6.85% with a volatility of 6.86%.

Since 2018 there has been a proliferation of buffer and defined outcome funds that have hit the market and there are now many more managed futures funds so anyone interested in something close to this would not need to limited themselves to 50% in two different funds, that seems crazy to me and very unnecessary. Additionally, buffer and defined outcomes do a lot of different things and building in different levels of protection would seem to make sense and we've looked countless times at different ways managed futures funds are run including replicators or not, different risk weightings and differing volatility targets. The result might be a pretty smooth ride but I don't think this would be set and forget by a long shot. 

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.