Waking Up To Alternatives & A Bonus Topic

There are more and more articles getting on board with using liquid alternatives as fixed income substitutes and proxies. I've been banging this drum for more than ten years, since long before the term "liquid alternatives" came to be. 

If you remember talk of "record low interest rates" and "return-free risk" which is play on words for risk free rate of return then the eventual cracking of the bond market couldn't have been a shock. Here is a white paper from AQR about some alternative strategies that could work to offset equity market risk the way bonds used to and then this similar article by Larry Swedroe. There's a good bit of overlap between the two as well as what we have talking about here for years. 

I won't repeat the specifics of what I do in client accounts, you can look in the archives for that information, but I will make a few high level points. To invest in liquid alternatives, you need to put in the time to really understand the underlying strategy to better understand why it works so that you will then understand the times it doesn't work. No alternative strategy will "work" 100% of the time. Understand that if you are buying a fund with a strategy that has a negative correlation to the stock market, then that fund is likely to go down more often than not because the stock market goes up more often than not. 

An article that polled millennials about how much they think they'll need for retirement resurfaced after being published last summer. Half of the millennials they polled thought they would need $300,000 to retire. The millennial cohort ranges from 26-42 so simplistically, half of them are in their mid-20's-early 30's. I attribute the $300,000 number to some sort of selection bias for the poll as well as the possibility that the typical person that age cannot envision themselves at retirement age, something we've talked about before, not really understanding what $300,000 is and not having been exposed to retirement planning math.

Using today's dollars, if you wind up with $300,000 in retirement savings you will be much further ahead than most people and it certainly could kick off an income stream in conjunction with multiple other income streams but that would not, by itself, be a robust retirement fund. That might seem harsh but better to know than not know. 

Using the 4% rule, a $300,000 fund could kick out $1000/mo which combined with Social Security and maybe a well-cultivated secondary career could make for a comfortable retirement. But the $1000 plus just Social Security with nothing else would be less comfortable. 

If you're young, it's simple. Sock away as much as you can. This will enhance your optionality for when you're older and older will come much faster than you realize. As you get closer to retirement, take the time to learn math around portfolio sustainability cold. Learn it up, down and all around. Also, take the time to understand how your numbers could come up short, what the biggest threat to your retirement success is which could be money or psychology. Isolate those potential issues and then figure out how to get way out in front of them to minimize their potential impact.