What The Hell Is Going On In Ecuador?

Every now and then we talk about expat living as part of a retirement plan, usually the context is an underfunded retirement plan. There are many countries where the cost of living ranges from somewhat less expensive than the US to dramatically cheaper. One popular country in expat living circles is Ecuador. We've talked about here as well. It seems like Cuenca is one of the more popular destinations in Ecuador.

This week there has been some sort of escalation of unrest when a prominent gang leader went missing in prison. Gunmen took over a TV station and there have been several attacks elsewhere in the country. I certainly do not understand all the moving parts here but this is at least the second recent flair up, with protests in Quito that also escalated. When we talk about expat living, I always say to not sell your house, to rent it out and live off the rental cash flow, allowing Social Security and the portfolio to grow. Keeping the house also allows for being able to come back if you need to for any reason. When you sell, you very likely give up the option of coming back or certainly make it more difficult for being priced out of the market.

If someone living in Ecuador felt that current events made coming back to the US a prudent thing to do, it'd be nice if they had the financial option to do so. 

Morningstar had an article about how well 60/40 did in 2023. It did do well but that wasn't the most interesting thing from the article. Look at this table of how some diversifiers did in 2023.

As someone who is a big believer in using diversifiers, the table reiterates the point of why you want equities hedged with smaller exposures to diversifiers and not the other way around. Equities are the thing that goes up the most, most of the time. Not diversifiers. Diversifiers can potentially smooth out the ride, I believe that to be the case. Systematic trend is managed futures. We've been saying for years, as the strategy was lagging throughout the 2010's, it was doing what it should, maintaining its negative correlation to equities. Market neutral is not intended to keep up with equities. Options trading, mostly covered calls, is one we've talked about a lot lately, expecting it to keep up in years like 2023, 2021 or 2019 is simply the wrong expectation.

I've have been both very intrigued and very skeptical of return stacking. A reader left a comment on an older post where I said the return stacking funds don't do very well, he rebutted that the Pimco StockPLUS Long Duration (PSLDX) has done well. The fund is 100% equities and 100% long bonds which is similar to the recently launched Return Stacked Global Stock and (domestic) Bond ETF (RSSB). First is a comparison of 50% PSLDX/50% cash versus 50% Vanguard S&P 500 and 50% iShares 20+ Year Treasury Bond ETF (TLT). In theory these should be very close to identical.

They are pretty close. The PSLDX/BIL mix gets a boost from the yield derived from BIL. There are some pretty big differences if you look at the year by year but clearly is smooths out to a result that I would characterize as expected. 

I tried to play around with PSLDX to construct portfolios that might outperform the PSLDX/BIL 50/50 mix (Portfolio 1 below) with lower standard deviation and carving out a fair amount to avoid the consequence of an adverse sequence of returns. PPFIX and BTAL are in my ownership universe.

And the results 

To use PSLDX in any capacity, you have to want long duration bonds in your account, I do not. Portfolio 2 was spared a couple of hundred basis points which is better than nothing and Portfolio 3 did very well in 2022.  

In addition to wanting long bonds, Portfolio 3 as constructed is making a huge bet on QGMIX. A fund that complex could easily have a bad run. The 35% in QGMIX could be replaced with a grouping of alts that have similar return characteristics and get very close to what Portfolio 3 has done. 

I constructed Portfolio 2 to have a little more equity beta than Portfolio 3 and XYLD does that. It's not a great proxy for capturing stock exposure but does have some equity beta, in 2023 XYLD had a total return of 11% versus flat for QGMIX and in 2022, XYLD was down 12% while QGMIX was up 29% (I'm not sure that could ever be repeated again). 

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.