April: Bad Month For Stocks, Good Month For Alts

Corey Hoffstein from Newfound and ReturnStacked ETFs had a Twitter thread that recapped a webinar they put on about how to use their funds but it seemed to have an edge to it like it was defensively justifying the idea. 

Take that Tweet combined with the two older funds ReturnStacked Stocks & Trend (RSST) and Return Stacked Bonds & Trend (RSBT) which appear to be lagging as per the following. 

Six months in the case of RSST is a very short period but that is a big difference.

A year where RSBT is concerned is not a long time but it's not nothing and that is a big gap.

I agree with the idea of not tunnel visioning on performance alone but that depends on what we're talking about. I say all the time if gold is the best performer in your portfolio, then chances are things aren't going very well. That is even more the case with client/personal holding BTAL. We've modeled countless portfolios over the last year and half or so with BTAL and it has shown to consistently lower volatility and help with performance. 

BTAL, as an example, allows for a much greater allocation to equities leading to a much higher return than plain vanilla 60/40 with about the same volatility. And you can see how BTAL by itself just sort of limps along. 

RSBT and RSST are talked about in terms of capturing the beta of bonds and stocks respectively and then adding managed futures on top to add the opportunity for "excess return." The idea has merit and Corey's comment about making sure you're looking at the right things is valid but you need some basis to think that the strategy you're considering can work and I'm having trouble seeing that with the ReturnStacked ETFs at this point. There was a related fund that we've looked at a few times, the Newfound Risk Managed US Growth which is now closed, it had symbol NFDIX and as opposed to 100/100, it was 75/75. It too lagged badly. 

The concept of leverage as they employ it can work but it appears to me that with their funds, something has been off regardless of whether I can figure out what about it has been off. 

The WisdomTree US Efficient Core ETF (NTSX) is a capital efficient (synonymous with ReturnStacked) fund that leverages up in such a way that a 67% allocation to it just about equals 100% into a 60/40 strategy like the Vanguard Balanced Index Fund (VBAIX). 

Portfolio 3 takes a similar approach to how ReturnStacked suggests their funds are used by allocating 10% to managed futures on top of a "normal" stock/bonds mix. The lower volatility and higher performance of Portfolio 3 is merely incremental but we can take NTSX, plug in different types of alts intended to smooth out the ride and get back tests that also have incremental benefit.

Speaking of alts, April was obviously a rough month for equities. It looks like the S&P 500 was down 4.07% for the month. I wanted to take a look at how various types of alts that are intended to help smooth out the ride one way or another did as a microcosm. 

Just typical Yahoo Finance weirdness that not all them capture today's close. The names don't matter, they're all funds that we look at here regularly and/or are in my ownership universe. Client/personal holding BLNDX is not on the chart but it was down 2.3%. A month is obviously a very short period and while a couple of them were down (less than the market) I would say they collectively helped with avoiding the full brunt of the 4.07% decline. It wouldn't have been surprising if any of them disappointed for the month, it just turns out that wasn't the case on this go around. The potential for one or two to not work out is why you diversify your diversifiers. 

Interestingly, managed futures looks like it did well even though the cocoa trade blew up on Monday. I don't follow every single managed futures fund but of the 6 or 7 I do watch, only the Invesco Managed Futures Fund (RYMFX), which I believe to be the oldest in the group, was down for the month. 

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.

Effective Derisking?

ProShares emailed out a short paper in support of the ProShares S&P 500 High Income ETF (ISPY). ISPY is a covered call fund and it's point of differentiation is that instead of selling monthly calls it sells daily calls. The idea is that by selling dailies, fund holders can capture more of the S&P 500's upside versus selling monthlies. The idea makes intuitive sense and so far it seems mostly correct. 

Quick disclaimer that I am test driving ISPY in one of my accounts for possible use for clients. 

From the start of 2024 it was closer to the S&P 500 than XYLD which sells monthly calls but ISPY felt more of the market's downside move in early April than XYLD. I think ISPY had more downside because of the smaller premiums taken in from daily selling than monthly selling. To capture the ISPY dividends for a more accurate total return number, we'd need to add in about 2.5% to the 3.1%. How does 5.6% versus 7.0% (plus 35-40 basis points or so for the S&P 500's dividend) sit with you? Is that enough upcapture? For XYLD, we'd add back 3.2% for a total of 4.8% YTD return. Remembering that nothing can be infallible, ISPY is mostly doing what they said it would do so that is a positive but again, is the upcapture sufficient? That's what I'm trying to figure out and that will take time so this is sort of just a progress report. 

As a coincidence, Ben Carlson and Michael Batnick had Eric Metz from SpiderRock Advisors on one of their podcasts talking about options. SpiderRock is a pretty big firm specializing in providing outsourced option strategies to advisory firms.

Sidebar, I don't know where the name SpiderRock comes from but there is a Spider Rock formation in the middle of Canyon de Chelly.

Anywho, the podcast didn't have a lot of meat on the bone but there was one thought provoking point that I wanted to explore. Metz talked a little about using options to help derisk a portfolio as someone approaches or moves into retirement or the decumulation phase. 

The context was more about using options to manage the risk of large positions of company stock than using ETFs with some sort of options overlay in pursuit of less volatility. If you have a portfolio with 20-40 holdings without a disproportionate weighting in one stock (from your employer or anywhere else), I'm not sure using options to derisk each position makes sense. 

Funds that employ options strategies offer the promise of lower volatility, a form of derisking but as noted above they are not infallible, nothing is. As I mentioned, ISPY was down on lockstep with the S&P 500 for the first three weeks of April.

For all the different types of option strategies now accessible through funds, the attributes are different enough that they'll help smooth out the ride in different ways during different types of market events. I think solving the idea of how to derisk comes down to a couple of things, finding the more reliable derisking effect as well as maintaining the proper asset allocation for the investor in question. 

An investor who has enough money such that their plan will probably work needs something close to a normal exposure to equities. Someone who is very far ahead of the game can usually get away with having more allocated to lower volatility strategies whether that is options funds or something else. An investor who is very far behind might be better off with no equity exposure for fear that sequence of return risk would blow them up. There are countless examples, these were just some very basic ones. 

I believe the better way to derisk is by blending plain vanilla equity exposure with alts that combine to bring down portfolio volatility instead of owning funds that should have less volatility. As we've looked at many times, this approach does reduce volatility but with the opportunity for more upcapture. 

Ten years is a good sample size and to be clear, all of these lagged 100% exposure to the S&P 500 which in the same period had a CAGR of 12.73 but a standard deviation of 15.05%. You can see for yourself how that compares and decide for yourself what appeals to you. The examples I used for this point are over simplified versus real world portfolio construction. BTAL in Portfolio 1 is a client and personal holding. 

My hunch is that ISPY can have better upcapture than XYLD (four months is too short to conclude anything) but I would need to see it hug the market cap weighted index closer than it has so far to want to anchor around it. 

To the extent an options strategy fund could be thought of as a factor, I continue to believe there is a way to blend in a covered call fund with another factor or two to find something that is a proxy for market cap weighted exposure but that does a little better. I haven't found that yet but I think it is worth pursuing.

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.

You Need To Work Longer But Will Be Forced To Retire Earlier

Writing for Bloomberg, Allison Schrager suggests that in order to enjoy retirement, we should work a little longer. Ann Tergesen at the Wall Street Journal reports that while most people expect to retire at 65, 62 ends up being more like it. So what the hell are we supposed to do? 

Summing up Schrager. most people are not financially ready to retire at 65 or even 67, combined with longer lifespans she says, we'd be better off working into our 70's. Fortunately for her scenario, there are some demographic trends that indicate that a labor shortage is in the offing. 

The sorts of things that inhibit our ability to work longer are all things you've heard before including ageism which can include a lot of different things, some sort of medical or physical issue or some sort of burnout. 

There were over 800 comments on the WSJ article. I always say read the comments and while I did not read all of them, I looked at quite a few and of course there was just about every possible reaction. There were sad stories, people who started their own business and still wildly successful in their 70's, comments blaming both major political parties, people talking about conspiracies to manipulate us toward a couple of very different outcomes, on and on. 

People having their hand forced earlier than they were planning, this happens to plenty of people in their 50's, is a real thing that can coexist with the financial need for many to work longer. Sitting idly by and hoping nothing like this happens or being in denial about the possibility are probably very common behaviors but the idea of not being proactive is not something that I personally could live with. Like with anything, the more you put in, the more you get out including how you develop resilience and optionality. 

We have this conversation regularly. At 50 or so, you probably need to have a decent understanding of where you stand. Are you generally on track, way behind or far ahead? From there, I think you need to understand what things you're relying on like working until a certain age or maybe an inheritance or downsizing your house to get cash out or anything else. I would also start to Plan B some ideas if the thing(s) you're relying on doesn't pan out. 

As we pointed out above, all sort of things can get in the way of a plan that relies on working until some "older" age. Top down numbers on inheritances are all over the place but if you are planning on some sort of inheritance and assuming no Mr. Marbles gets the summer house plot twist like the pet food commercial, some sort of longer than normal assisted living situation could seriously reduce an inheritance. Downsizing a house has at the very least become more difficult to do as house prices and interest rates have skyrocketed. I'll add another one, focusing for years on moving to a specific country and then that plan unraveling like what has gone on in Ecuador lately. I read something today that talked about Ukraine having been an expat destination. I haven't even mentioned coming up short in retirement savings. Not something catastrophic like having nothing but like coming up 20-25% short which is more of a problem than a catastrophe.

There really are a lot of variables and things can take a negative and unexpected turn. It is up to us to mitigate that for ourselves. 

Resilience becomes easier, the earlier you start. There are huge payoffs in your 50's and 60's from having lived below your means. You probably have a little in the bank and at that age, it would be reasonable to be mortgage free at that point. Maybe, there are no car payments so all you have pay for are various insurances, taxes, utilities, food and unbudgetable one-off expenses. Hopefully there's a little left over for fun too. 

If you do end up out of work and you have no income, odds are very good that health insurance will be almost free. If somehow part of a severance package includes free or cheap insurance, that'd be nice but explore insurance through healthcare.gov. Also, if you get to the end of a calendar year with no earned income, that might be a path to a small, up to the amount of the standard deduction, tax-free Roth conversion. Ask your tax preparer about that. 

Optionality needs to be cultivated and there are quite a few ways to do that. Keep up with how your industry is developing by staying curious and keeping up skill-wise. Stay curious to learn about entirely different things that could grow into some sort of opportunity. I always talk about actively volunteering as a path to a job opportunity. Work on creating some sort of passive income stream. Passive is really a misnomer as these things usually require a lot of work. And of course start early to see if any of your hobbies can be monetized. 

In a scenario of having your hand forced at 55 or 60 or whatever but most of the way there with your retirement account balance but not all the way there, mortgage free and able to create some sort of income stream, that income stream can hopefully cover the various insurances, taxes, utilities, food and unbudgetable one-off expenses. If your retirement account balance is close then maybe you don't have to add to it in this Plan B type of situation but one more full stock market cycle and maybe the total balance can grow enough so that you hit the amount you think you need which is not a heroic assumption. 

I've said before, I've seen plenty of people where I live, without a lot of money, figure this out because they had to. I believe in that but would prefer to have as little stress as possible in case I ever need to figure it out because I have to. 

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 There A Secret To Beating The Market?

Blending together assets/strategies with different attributes, correlations and expected behaviors plays a huge role in how I construct portfolios. This is something I've been doing and writing about for ages. The blending, when done effectively, can help smooth out the ride for clients which is a high priority for me.

Forget that though. What if all someone cared about was beating the market, regardless of the volatility, regardless of the occasional, painful drawdown? How could someone go about that? Sidebar: this post is not going where you think it's going. If beating the market was the only thing that mattered to someone, chances are they would not go heavy into utilities and consumer staples. These sectors tend to have lower volatility than the broad market, higher yields and are kinda sorta counter cyclical in terms of (hopefully) having defensive attributes to help soften the blow as was the case in 2022. 

It would make sense to look for alpha opportunities in only certain sectors including technology and consumer discretionary. Yes, there are stocks in every sector that outperform the broad market but what this is about is adding beta. Tech and discretionary have higher betas and as sectors, have the tendency to go up more when the market is going up and down more in declines.

You can decide for yourself if there's enough there to be a tendency or not but in the time studied, the SPX compounded at 14.37% versus 16.60% for discretionary and 20.34% for tech. With all that in mind, I wondered what a portfolio that was 50/50 tech/discretionary would look like versus the S&P 500. That mix should outperform with a lot more volatility. 

It certainly did outperform. Is that a lot more volatility? It is noticeably more volatility but a little less than I expected. The 50/50 mix was down 32% in 2022 versus 18% for the S&P 500 which is a dramatic difference. In the period studied it outperformed in 13 out of the 16 years sampled. 

The idea of tech and discretionary outperforming has merit (disclaimer it's not infallible and not the point of the post). Back to the idea of the power of blending, I wanted to mix in an alternative strategy to see if I could equal the volatility of the S&P 500 but outperform it with these two same sectors.

The standard deviations are almost identical but Portfolio 3's CAGR is 201 basis points higher than the S&P 500. The max drawdown though was much larger. 

The point of today's post is to offer a simplistic example of how I think portfolio volatility can be managed. I have no secret for outperforming the stock market. Over a long period of time, an investor who is at least ordinary will have years that they lag and years that they lead. I think it is far more constructive to manage to a smoother ride which I think is more realistic than "beating" the market. 

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.

Risk Parity Funds Still Don't Work

It's been a while since we bagged on risk parity but Bloomberg gave us a good prompt to revisit the strategy. Apparently a few state pensions and similar pools of capital have been pulling money from risk parity funds managed by the likes of Bridgewater, Man and others. 

The simplistic definition is that risk parity equal weights asset classes by their volatility. Where bonds, generically are less volatile than equities, a risk parity fund would have more exposure to bonds to get the volatility contribution of both to be equal. This often involves using leverage to get the bond allocation large enough for its volatility contribution to equal that of equities. There can be other things in there too like commodities and there can also be management of the weightings to account for changes the volatility profiles of the various asset classes. The RPAR Risk Parity ETF (RPAR) is indexed, the Fidelity Risk Parity Fund (FAPSX) is actively managed as two examples. 

I always say the same thing about risk parity, it is intellectually appealing and I want it to work which I concede is silly, but it just doesn't, at least not in retail accessible funds and based on the Bloomberg article, maybe not in hedge funds either. Or maybe they are doing it wrong. 

At times in the Bloomberg article they seemed to use risk parity and All-Weather interchangeably, attributing both to Ray Dalio. The following compares All-Weather. a home made risk parity replication that copies the target allocation, which is leveraged, of the Risk Parity ETF (RPAR) and plain vanilla 60/40.

RPAR has only been around since 2019 but the replication allows us to go back to 2008. It isn't necessarily a bad thing that risk parity lagged but it did so with a higher standard deviation. 

The year by year for risk parity replication shows quite a few things. It was down a little less in 2008 and 2022. There were a couple great years, a couple good years and maybe a half a dozen years where it lagged by a lot. 

Both All-Weather and risk parity don't keep up with simpler broad market proxies and risk parity doesn't lower the volatility, All-Weather does have a a lower standard deviation though. It is possible that they are both too clever by half. We've looked at countless ways to build around a normal weighting to very simple core exposures, equities, with small slices to complex strategies to try to reduce overall volatility in what I think is a similar way to what All-Weather and risk parity have in mind. 

An update on something I mentioned in passing a few months ago, the CBOE S&P 500 Dispersion which has symbol DSPX. Google Finance recognizes the symbol and you can do some things like chart comparisons. Yahoo recognizes it but the charting doesn't work. You can also do some things on the CBOE site too.

When I wrote about it before I thought it captured some sort of put/call skew but that was incorrect. Basically it tracks when stocks are more likely to deviate away from the performance of the S&P 500 or less likely to deviate away from the performance S&P 500. By their work, the dispersion tends to increase going into earnings season and then come down some after earnings season. The process to derive the Dispersion Index is kind of similar as the process to derive VIX but the information is much different. 

The plan is to create a futures contract based on DSPX in Q1 2025 which could then be a path to some sort of exchange traded product. CBOE, a client holding, among others things has about 19% of ETF listings. 

On Google, it only goes back to last fall but I compared to a bunch of liquid alternative funds and it doesn't look like anything. I think it is uncorrelated to everything but we'll see how that proves out. If so then it becomes a way to harness volatility as an asset class and uncorrelated return stream which makes for good diversification when sized correctly. 

Per the above backtest, DSPX went up during market declines including a massive spike during the 2020 Pandemic Crash. It briefly went to zero in 2018 and then came right back. They would need to address what the index going to zero would mean for a fund. If there was some number of shares and the index went to zero but shares still existed then when the index came back, the shares would have value again. Maybe it would be that simple? I listened to a webinar about it and the way I understood it, it can touch zero but it cannot stay at zero. Based on that understanding, if it touched zero after a fund launch, it should probably be bought hand over fist but I'd still have some learning to do to be comfortable with that idea. 

DSPX is interesting on first and second glance and I am getting an early start learning about 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.

What The Hell Is This Fund Trying To Do?

We look at a lot of alternative funds here. Basically, I'm willing to dig into just about anything that does something that might be a little different or have its own take on a strategy that interests me. A high level answer I am looking for is what should the fund look like, what expectation should investors have and is the fund meeting those expectations. 

For example client/personal holding Merger Fund (MERIX) should have very little volatility and go up a small amount most of the time. Client/personal holding BTAL should have a negative correlation to equities most of the time and go up more often than not when stocks go down. You can decide for yourself whether either of them live up to those expectations but defining them is pretty simple. Some other alternatives do their own thing in such a way that they complement equity exposure to reduce volatility and drawdowns without lowering the long term growth of the portfolio. 

If you're going to buy any type of alternative strategy, I believe beyond understanding what the fund does it is important to understand the expectations and whether the fund is meeting them.

This brings us to the ABR 75/25 Volatility Fund (VOLSX). ABR has a couple of other funds too but we'll just focus on this one for today. I mentioned this fund once before. The objective is "long term capital appreciation" and there's this further description, "Seeks to generate favorable long-term risk-adjusted returns, in part, by profiting from price changes involving instruments that track volatility levels. Relies principally on models to determine allocations among (i) long exposure to CBOE Volatility Index (“VIX Index”) futures and VIX Index exchange-traded products (“ETPs”); (ii) short exposure to VIX Index futures and VIX Index ETPs; (iii) long exposure to S&P 500 Index futures and S&P 500 Index ETPs; (iv) long exposure to long-term U.S. Treasury securities, and (v) cash." In terms of trying to set an expectation, it says to "use for liquid alternative investment; long and short investment." 

It offers this pie chart to show its current asset allocation.

The fact sheet does not define what 75/25 means but the prospectus says it allocates 75% to long volatility and 25% to short volatility. I found a fact sheet from Q2 2021 that had about the same equity exposure but a much greater 13.5% to short volatility. Getting information from the website is not easy. It is not clear if something changed to account for the reduction in short volatility or if it is an active decision to reduce that exposure because VIX has been so low. Either way, it is not apparent to me how the fund had 25% allocated to short volatility in either instance. The prospectus seems to be saying that it includes equity proxies as part of the long volatility exposure. I am not saying it is doing anything wrong, if I am looking at this correctly, I'm sure prospectus gives them the wiggle room where it says "the adviser may implement adjustments to the 75/25 blend under various market conditions..."

Based on the pie chart, it looks more like a multi-asset fund than a volatility-centric alternative strategy. Below, we compare VOLSX to a home made version of their exact, most recent allocation and VBAIX a proxy for a 60/40 portfolio.

The time frame is so short because VOLSX only goes back to 2020. VOLSX outperformed in 2021 and 2023 but fell twice as much as the others in 2022. Clearly the portfolio weightings are a valid combo but the fund is capable of lagging by a lot. To be clear, just because it is valid doesn't mean it is optimal or even usable. 

What about the big picture premise of VOLSX' strategy which is a long/short combo of volatility weighted 75/25. That can be replicated several ways, I am doing it below with VIXM and SVXY and comparing it to 60/40. Maybe the Volatility Blend does something interesting?

The Volatility Blend seems to track the same uptrend, it is far more volatile than 60/40, it had three very bad years along the way but in 2022 it only fell 3%. While I'm not going to implement this as a portfolio, it reiterates an important concept, it blends together to very volatile, negative correlated assets to deliver a result that in terms of CAGR is not that far from VBAIX. Blending disparate strategies is a powerful return driver.

Let try one more idea with the 75/25 concept, not VOLSX. The following builds a return stacking sort of idea around the WisdomTree US Efficient Core ETF (NTSX) which is levered in such a way that a 67% allocation to the fund equals 100% allocated to VBAIX leaving 33% left over to either leverage up with alpha seeking or alternatives to manage volatility or even just cash to add a few basis points to the total return while managing sequence of return risk. 

Well this looks promising at first glance, higher returns and lower standard deviation. The longer term outperformance seems to have happened all at once during the 2020 Pandemic Crash. In 2022, Portfolio 1 actually lagged VBAIX by a few basis points. 

The actual VOLSX fund is a hard pass, I'm not sure what expectation the fund is trying to set so there is no way to know if it is meeting the expectation the managers have in mind. The 75/25 idea is interesting though and there might be a way to stumble into a better use of the idea than with VIX products. I will follow up on this post if I come up with something that turns out to be a better implementation.

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.

Join The Bond Market Resistance!

Jason Zweig wrote an article titled How Not to Invest in the Bond Market. The title of course piqued my interest. This blog has pretty much evolved into 100 ways to build a portfolio without bonds. I've been like a broken record for years on the need to avoid bonds that have any sort of duration or at least be extremely underweight duration versus the typical benchmarks. 

The article devoted a good amount of space to bond market math, focusing on the pain of owning the iShares 20+ Year Treasury ETF (TLT) and bond funds in general. Bond funds have no par value to return to which might make them worse than individual bonds. An individual 20 year treasury bond bought when yields were at their lowest will return 100 cents on the dollar when it matures in 2040. There is nothing that says TLT must get back to the $171 dollars it traded at in 2020. The dividend that TLT pays will help but the capital put in to TLT in 2020 might be permanently impaired.

I'm not sure how long Jason has felt this way or if maybe he is new to the resistance but there were a couple of points in the article I want touch on. 

This quote from Jason surprised me. "It’s impossible to say for sure why so many people barged into long-term bond funds last year." Ok, well just about every pundit on TV and news print was saying to add duration. All these various talking heads from brokerage firms and the like were given their regular media platform and were regularly doing this and I have to believe that the clients they advise, directly and indirectly, did end up buying long term bonds funds last year. One of the articles in this week's Barron's quoted someone as saying something like bonds are more attractive than they've been in 20 years. Maybe they are that attractive, maybe not but I'm not sure how anyone could be confused by the amount of buying in 2023. 

After making the case that even the Fed doesn't know what interest rates will do, he said "...financial advisers are kidding you if they say they are 'positioning' your portfolio for a specific interest-rate scenario. If the Fed itself can’t forecast rates, why would your financial advisers think they can?"

This is an important point. For however long I've been a broken record on this, I've avoided trying predict anything since probably 2010, I learned a lesson at some point back then about how silly it is to try to predict interest rates. Just for fun, I Googled "Nusbaum bond still stink" because I think I've written a lot posts with that title. I found an interview I did with Seeking Alpha in late 2010 that made its way to NASDAQ.com. Here's the relevant excerpt.

Not much has changed in terms of my approach to bonds, but the manner in which alts have evolved has led me to more use of alts also, lately, pricing for individual issues over treasuries hasn't been great. I think you can see in that snippet that the focus was more on what we know and can be easily observed. That is certainly the case now. Longer term debt yields less than shorter term debt, volatility of longer term debt was extremely high, it is less so now but still high in my opinion, there was a consensus calling for lower rates on the front end and as we've all seen many times and as Zweig points out, being right about this sort of thing is very hard to do. 

Observing there is elevated risk and volatility is not the same thing as trying to make a prediction. It's about making an active decision about what to avoid. The risk that I've been concerned about since, apparently, at least 2010 may have never had a consequence beyond a couple of blips along the way. It turned out it did matter starting in late 2021. 

It turns out there might have been something to these observations I've been relying on. Alfonse Peccatielo, @macroalf on Twitter, posted the following.

With higher inflation, like we've had for a while, bonds don't offer the same kind of diversification benefit. The way I have been describing this has been to say that bonds have become less effective diversifiers than what they use to be due to volatility that has become unreliable.

The volatility that I perceive as unreliable leaves me unwilling to commit to intermediate and longer term bonds while they have a four handle. I guess I'm at the point of trying to assess what sort of yield it would take to be willing to extend duration which is not much different than the interview excerpt from 2010.

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.

Should You Invest In Venture Capital Funds?

We've written about Ecuador quite a few times as an expat destination but over the last year or so the news seems to be getting worse. I have no idea what the reality on the ground is but it started with protests in Quito, then gang-related violence and the latest is an energy crisis that is leading to rationing. I'm pretty sure that in every post about spending part of retirement in a foreign country I say to keep your house in the US and rent it out in case you need to come back. I don't know whether expats should be leaving Ecuador or not but this sort of sequence of events is exactly what I have in mind about being able to come back. If you sell your house to move to another country, the odds of being permanently priced out from coming back are pretty high.

Barron's reported on a proposed change to the fiduciary standard related to when people leave companies and how or if they should roll their 401k over into an IRA. The intent is to help people from getting conflicted advice. It appears to be more focused on annuities than rollover IRAs.

The commissions on annuities are usually enormous. I am aware of one inexpensive annuity offered by Vanguard for anyone really wanting an actual annuity. I am not licensed to sell annuities and I've never sold one to anyone. Despite my bias against annuities as insurance products, I am open to keeping tabs on products that annuitize income streams. I've written about the Stone Ridge mutual fund suite that does this. I've mentioned a couple of times that investment products that annuitize income streams are very likely to improve to the point of making more sense than annuities as insurance products. The Stone Ridge funds are an improvement but I think this niche can get better still which could help people who are undersaved. 

It is not clear if this new rule would make it more difficult to rollover into an IRA. Yes there can be conflicted advisors, advisors who charge too much and there are advisors who do not know what they're doing. But as far as regulating this, no one has to hire an advisor, it's not leave it the company plan or hire an advisors, people can self manage. 

I've said many times, this is all learnable for most people. There is a lot to learn, maybe less about portfolio construction because despite how inferior I think 60/40 and target date funds are, they are valid. Calling them inferior doesn't mean they are invalid. There's probably more to learn about Social Security and how to be smart, tax-wise, withdrawing from retirement accounts. If you don't want to hire an advisor, don't, just realize there really are a lot of mistakes to potentially make, it is worth it to invest the time needed to avoid those potential mistakes. 

Leaving money in a 401k after you've retired is a terrible idea. There must be an exception to this rule but leaving it in a 401k is a woefully inferior choice. Ironically, one of my older brothers cannot wrap his head around this point. Free advice to everyone but my brother, roll it over! If this new rule would make that more difficult then they are hurting consumers not helping them.

Finally, there was a legitimately fascinating discussion on Bloomberg the other morning when Katie Greifeld interviewed Brett Winton from Ark Investment Management. The segment quickly turned a nerd fight over the better mousetrap for retail accessible venture investing. Earlier in the week, Bloomberg looked at the recently listed Destiny Tech100 (DXYZ) which is a closed end fund. Winton was on there to talk about the ARK Venture Fund (ARKVX) which isn't a normal mutual fund. It is what's called an interval fund which limits when and how much you can sell. 

DXYZ came out of the starting blocks and immediately jumped to a massive premium to its net asset value (NAV). In debating the merits of the interval structure versus the closed end fund wrapper, Winton kept repeating paying $30 for "$5 worth of stuff." In less than one month of trading, DXYZ has traded between $8.25 and $105.00. Winton was implying the NAV is only $5, the market price closed Friday at $28.39. Whatever the NAV, Winton is close even if not exactly right, investments in things like Space-X or Cerebra, which don't trade publicly are not marked to market anywhere near frequently enough to correspond to DXYZ's volatility. 

If the NAV is $5, DXYZ could drop 75% and still be trading a huge premium.

The interval format again limits liquidity, ARKVX is also expensive, it appears to charge 2.90%. DXYZ charges 2.5%. As for the fees, I don't know what a fair fee would be, maybe the 2.90% and 2.50% are very fair, but access to companies like the ones these funds own is going to be more expensive than the typical ETF or mutual fund. 

DXYZ is uninvestible. The NAV could double and the market price could cut in half (both could happen simultaneously) and the fund would still be trading at a huge premium just like the 75% drop example above. If somehow you have to own the space, I guess the interval wrapper is better. Assuming no fraud, getting a dollar's "worth of stuff" for a dollar is better. Again though, getting your money out will take a long time. 

I am not saying no one should own these, that's not up to me obviously, I just think there are other niches in the market where getting asymmetry or at least the opportunity outsized returns (the tradeoff is increased volatility so allocate accordingly) is cheaper, simpler and more accessible without the fees, gates and premium to NAV issue. 

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.

No Portfolio Can Win Every Time

First a quick note on Israel's missile strike on Iran. The initial reaction of markets over night was a swift, but not huge, decline in futures. My thought process was "uh-oh" at first and then I thought, "ok how much work will this be?" The potential work would be to write up a quick "don't panic" note to email to clients. I pretty much had it half written in my head in about ten minutes because the message from any scare or actual decline is always the same. I don't know what will happen but at some point the event will end and then the market will start working higher, we just don't know how long it will take. 

The other bit of work would be if the market actually crashed, what would I do? It would mean increasing net long exposure which is the easy decision. The harder one is how. Just buy a broad market index ETF? Maybe or would just selling BTAL make sense or maybe both, buying an ETF and selling BTAL. Interestingly, I lost no sleep over it which I mean literally. The market opening flat on Friday and then drifting lower later in the day looks more like the recent malaise to me than having to do with Israel/Iran but we'll see more next week I suppose. 

On to today's post. Morningstar had a very shortsighted article to recap its diversification landscape report. The basic summary is that they blended together a bunch of asset classes, of which only gold had negative correlation to US large cap, and that blend lagged in 2023. What is shortsighted about it is the time frame. You could repeat the exercise every year and compare against the thing that outperformed and of course diversification will lose. 

Allocating to things like value or mid caps won't offer much diversification benefit. Yes, style and size allocations could absolutely improve performance but with correlations of 0.94 to large, market cap weighted, value and mid cap, and plenty of others won't zig when the stock market zags. 

We talked about this the other day, it is easy to discount the value of  diversification when the stock market is going up. Owning 50 different stocks will diversify issuer risk but not market risk which is the context of what the Morningstar article was about (market risk). The simple rule of thumb is if they all going up together, like with a 0.94 correlation, then they should all be expected to go down together. 

The other day we looked at the Cambria Trinity ETF (TRTY) which targets 25% to equities, 25% to bonds (along the lines of the AGG I believe), 35% to trend and 15% alternatives. It is a variation on All-Weather and with that sort of approach there will be years where it looks much different than 60/40.

I circled the three years with the biggest differences. Also, 2023 it noteworthy. The Trinity Replication captures some of the effect of the market longer term, maybe enough, maybe not enough, you can look at the other post to get more numbers, but that is what real diversification looks like. 

We work on theoretical portfolios here all the time that blend in strategies that really are negatively correlated or at least very little correlation. 

The above are just a couple of examples inline with what we've explored before. They are not like TRTY but they are not like pain vanilla 60/40 either. Trend is managed futures and for alpha I used Blackstone (BX), the private equity companies tend to be far more volatile than the S&P 500 and tend to outperform in both directions. Both portfolios have higher standard deviations than the Trinity Replication but much higher returns.

Portfolio 2 was up in 2022, Portfolio 3 was down only down 7% that year versus a decline of almost 17% for 60/40. 

They have better upcapture than Trinity Replication but offered real diversification when it was most needed in 2022. Trinity Replication though, offered more protection during the 2020 Pandemic Crash, In the very fast crash at the end of 2018, both portfolios above lagged 60/40. 

One take away is that nothing can be best for all times. We say that repeatedly here. A strategy can be very effective most of the time even if it does not perform every time. Enduring a real crash defined as a fast decline that snaps mostly back very quickly is more about behavior IMO than portfolio construction. Enduring a bear market is about both, behavior and portfolio construction. 

Accounting for every possible adverse market scenario is not realistic. The way we frame it in these posts and the way I manage client accounts is to try to avoid the full brunt of large declines. The mindset for this for how to do this is to blend strategies together in such a way that there is a reasonable probability for getting the outcome I want, most of the upside, less of the downside, realizing that even if an approach like this could work most of the time, it might not work every time. 

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.

Don't Move The Goal Post On Your Financial Security

First, an update on my test drive of the Defiance NASDAQ 100 Enhanced Option Income ETF (QQQY). I bought 100 shares on its first or second day of trading last fall for $2017 and I sold it today for $2114 which includes reinvesting the dividends. The price, without reinvesting dividends has fallen by about 24% but as I've been saying all along with these, if the entire dividend is taken out and spent, they are likely to go to zero (not quite literally). At some low price they will reverse split. I made 4.8% in about seven months. Defiance did a good job setting the expectation when I asked that they thought it would look like a covered call fund and I believe QQQY met that expectation. 

QYLD is more of a plain vanilla covered call fund where QQQY sells 0dte put options. It has had considerably less volatility than the underlying QQQ but twice the vol of QYLD. I have no complaints about the fund or the concept. I will keep tabs still on it and the similar fund they have that sells 0dte puts on the S&P 500 with symbol JEPY but I think there are better ways to add volatility strategies into a portfolio. 

Speaking of volatility, I swapped the QQQY money to test drive Simplify Bitcoin Strategy Plus Income ETF (MAXI). I've written about the fund a few times and described it as long and short volatility. It buys bitcoin futures, long volatility, and it sells option combos on mostly equity indexes and equity index ETFs. It pairs Bitcoin with an income source that doesn't cap Bitcoin if it goes up the way a Bitcoin covered call strategy would do. 

It tracks Bitcoin close enough to be a proxy in my opinion. I've invested a decent amount of time in trying to understand Bitcoin and I've owned a little for a good while, I am surprised though that only a couple of clients have ever asked about it. My answer would be the same as what I say here which is I view it primarily for now as asymmetry, it could go to a bazillion or go to zero. I would not tell someone not to buy but I would try to make sure they understand zero is a possible outcome. I actually doubt it would go to zero but it is not clear to me that it must become what the touts say it will become. You want to take a flier with a small, small part of your account, ok. Right now, I would use one of the "plain vanilla" Bitcoin ETFs but maybe MAXI proves out to be a better mousetrap, if I am correct about the option strategy not getting in the way of any increases or maybe some sort of plain vanilla/MAXI blend would be appropriate for the client wanting to add Bitcoin in. 

An interesting read from Texas Monthly about the desert town of Terlingua being "discovered." I found this line to be very thought provoking. "Ivey and other locals maintain that the newcomers are bringing the outside world’s values with them, lured to the middle of nowhere by pure self-interest. Instead of adding value to the community, too many see an opportunity to scoop up ten, twenty, or a hundred acres to hold on to as an investment or develop into the area’s latest vacation-rental playground." If you are familiar with this part of Texas, the motto "don't Marfa our Terlingua" might resonate.

Lastly, Joshua Becker wrote about something called the Prosperity Paradox. This is the behavior of continually moving the goal post on how much money is needed for financial security or happiness or any other like term you would substitute in. Think you need $500,000, then you get there and so you think you need $1 million, then you get there and think you need some higher number. The energy expended on not being content seems draining to me but I can't where many people would view it differently, always striving for more. Maybe the article can help anyone who hasn't thought about it before.

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 Are You Willing To Give Up In Pursuit Of All-Weather

The idea of building an All-Weather portfolio of course has its appeal. The basic idea is to be much less volatile than the broad market or the typical 60/40 portfolio. However, All-Weather is less likely to be appealing when markets are going up, which they do most of the time. Several years into a rising bull market and investors forget the pain of large declines and drift away from the important All-Weather traits to include into a diversified portfolio.

As a bull market wears on, simple market cap weighting (MCW) will likely pull away from All-Weather, performance wise. Then, the market drops a lot perking up interest in All-Weather and the pendulum swings back to wanting a lot allocated to All-Weather, maybe everything into All-Weather.

Back in the financial crisis, a reader left a comment about just "putting it all in Hussman" and forget about it. The reader back then didn't specify which funds but since 2008, Hussman's two most prominent funds have compounded at -4.15% and 3.16% versus 7.52% for Vanguard Balanced Index Fund (VBAIX). The two Hussman funds are HSGFX and HSTRX and the data is per Portfoliovisualizer. 

It raises the question though of how much performance should an investor expect or be willing give up for the potential emotional comfort of an All-Weather portfolio. I say potential comfort because even though a strategy or fund is billed as being All-Weather doesn't mean it always will be. 

The Permanent Portfolio Mutual Fund (PRPFX) was an early, retail accessible fund in the All-Weather space going back to the early 90's. Over the long term it has trailed a plain vanilla 60/40 portfolio by 105 basis points annually, 7.19% CAGR versus 8.24% but with only a modestly better standard deviation. Despite the lag, I think 7% annualized is pretty good but there have been longer periods where PRPFX has lagged by much more than that which certainly can be difficult to endure. 

That period ending in May 2000 was relatively bad for PRPFX. I'd argue it all worked out in the end but imagine how you might handle being that far behind in early 2000. That would not have been easy of course there was no way to know how well gold was about to do to help PRPFX catch up over the next few years. 

The prompt for this post is that I wanted to check in on the Cambria Trinity ETF (TRTY) which I view as being a different form of All-Weather. Unlike the 25% each to stocks, long bonds, gold and cash in the Permanent Portfolio, TRTY allocated 35% to trend following, 25% each to equities and fixed income and the last 15% to alternative strategies. I don't know whether those weightings can vary but the numbers come off the home page for the fund.

TRTY only goes back to late 2018 so I build the following to try to replicate it with exposure I believe to be consistent with what TRTY owns.

In terms of being less volatile and faring better during market it turmoil, TRTY Replication has worked looking backwards.

In 2022 it was up slightly versus down 5% for PRPFX and down 16% for VBAIX. It only dropped 6% during the Pandemic Crash in 2020 versus 12% for VBAIX. The overall result does include a few years where it lagged by a lot, really a lot which is important to remember. Any sort of All-Weather is likely to have years where it completely misses some big gains. Is the longer term CAGR of 5.66% worth quite a bit less volatility and what looks like will be shallower declines? 

I'm not bagging on this even a little. I wouldn't say every All-Weather fund/strategy will work as advertised but there enough that do. Is the tradeoff worth it? For some people yes and others, no. There's no single right answer but I do think the odds of someone getting this wrong for themselves is pretty high especially when emotions are at play. I'd bet that Hussman anecdote from above came from a place of emotion given the timing of it. 

The decision to go full All-Weather needs to be a financial planning decision not a reactionary decision to a bear market. An investor is 60, 30-40% ahead of his "number," sure going full All-Weather could be the right decision. Reacting in the middle of 2022 after learning too much was allocated to risk assets? That person will be best off waiting for some portion of the recovery that will inevitably occur and then make their decision about asset allocation when there is less emotion at play.

I do want to take just a second to discern between going full All-Weather versus having holdings with all-weather attributes to help manage the volatility for a portfolio that has something of a normal allocation to equities. FTR, I consider 25% to be well below normal. I use several alt funds that I believe add all-weather in this fashion and I want to be very clear, that is much different than going all in on the 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.

Did I Miss A Rate Hike?

The title for this post is inspired by the following post on Threads. 

Fixed income, meaning intermediate and longer term duration, is having a rough 2024 after a meh 2023 and terrible 2022.

For most of those ETFs you can add 100-125 basis points back in for dividends. For TLTW which is TLT with a covered call overlay you can add back about 300 basis points.

The idea of avoiding or at least really minimizing exposure to intermediate and longer duration has been an evergreen topic for quite a while. My take has evolved from rates in that part of the market were way too low (extreme interest rate risk) to believing that this part of curve has become very volatile and that the volatility is unreliable making bonds ineffective for diversifying equity volatility. The front of the curve is ok and of course there are segments of the equity market that take interest rate risk but that kind of volatility from equities is fine, I don't want it from income sectors. 

We've written countless posts on this for many years. My framing of this has never been to try to predict what interest rates will do. I gave that up in something like 2010. With rates at all time lows, they were by definition more risky than they'd ever been regardless of whether there was ever going to be a consequence for that risk. Isolating the risk was easy. Knowing when it would matter was not. Similarly, recognizing that bonds are now more volatile and the 40 year bull market has ended is easy. Knowing what comes next is not. 

I don't know what comes next but just under 5% for 5-10 years does not make sense to me when we can get just over 5% for one year and in some other short term sectors, probably best accessed through funds, you can get more than 5%.

A few months ago when six rate cuts were expected, a lot of pundits said investors should go into the belly of the curve of even further, I disagreed based on the volatility first and foremost and the belief that not quite 5% just isn't enough compensation for 10 years or longer. Taking 5% for ten years when volatility dies down, eventually it could recede, might make sense but that is not where we are today. 

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.

A Blogger Looks At 58

The title to this post is a play on words from the Jimmy Buffett song A Pirate Looks At 40. This is an ongoing series that started when I was 40 with the intention of sort of updating the post at milestone birthdays. The point is to track how my views on various things might evolve or change dramatically and to hold myself accountable for any lifestyle opinions/advice I might write about. 

There's been enough going on in my life to warrant doing this every year now for the time being. Here are the previous posts from this series.

• A Blogger Looks At 40
• A Blogger Looks At 50
• A Blogger Looks At 55
• A Blogger Looks At 56
• A Blogger Looks At 57

I think there is an arc to these if you care to check out the older posts. Here's where I am having turned 58 earlier this month.

A frequent topic to our lifestyle posts is the importance of figuring out what things we actually care about. We all have different priorities to pursue or maintain, the point I am making is to not waste time pursuing what turns out to be the wrong set of priorities. Owning my time, setting my own schedule is a huge priority for me, far more so than chasing a big career. I paid my dues with jobs during my 20's into my mid-30's but as I've said before, an investment advisor doesn't move to Prescott, AZ expecting to build a $1 billion practice. 

On the personal finance front, not much had changed over the 12 months. I've mentioned in other posts that in my early to mid 50's I focused on beefing up our taxable savings in case we had some sort of problem. Over the last year, I swung back to a relatively large 401k contribution. At 58, I am only 18 months from penalty free withdrawals from my 401k. If something catastrophic happened with my job as was almost the case in early 2023 (partners of old firm got in trouble) could we last on taxable savings for at least a year and a half? The next question would be could we last until I turn 62, four years obviously, until I can take Social Security early? 

If I can make it to 62 without having to tap IRAs, how much longer could we last? I've been of the same mind on taking SS when I am 70 for the simple reason that my wife is six years younger than me. If I die young, or young-ish, she'd get a larger survivor benefit. If I can hold off taking it until 70, I would encourage my wife to take her benefit at the same time, 64 and two months for her. My payout would be maxed out, hers would not. 

I think it makes sense to figure out what you would do if your hand was forced with your primary income source. I write about that a lot and we've created other income streams in case something crazy does happen and things don't work out. We have a short term rental and this summer I will take one or two training assignments as a liaison officer on large fires, both of which I've talked about many times. Living below your means will prove invaluable if you ever are in a tough spot too. 

An expression I like very much is that you never know what the future you will want to do. For many years, I've said I did not want to retire from what I do for a living realizing that is the sort of thing that I could change my mind at some point. Twenty years later and I am still in the same place, not wanting or planning to retire. At the same time though, being able to retire (we'd have to dial back some discretionary spending) is very empowering. Not worrying about money which in our case is more about living below our means has made our life much easier. 

When I talk about doing favors for the "future you," I'm well past the point of starting reap the benefits of a couple of simple decisions we made when we were much younger related to living below our means and continuing to exercise. Your 40's, 50's and I'm guess 60's can be a great period if you've got some independence with a little money in the bank (not necessarily wealthy) and can still get it done physically. Hopefully that applies to all ages from here. 

Exercise and diet continue to be huge parts of my life. I stay in shape for several reasons. First is for me in order to be able to do what I want to do (health span) and do what I need to do. For my wife, I figure she would prefer I am able bodied forever which is probably a clunky way to say it. She works out with me now so maybe she feels the same way. Also, I am setting an example at the firehouse on a couple of different levels. I got a nice compliment from a FD colleague who said I very much lead from the front. Being able to get it done physically is important. I try to set an example for the firefighters close to my age that they can be fit and also for the young guys, showing that fifty whatever doesn't have to be old. When I first joined the department in 2003, there were "older" guys who set the same example for me that I am trying to set that example forward. It would be nice to give up being fire chief in a couple of years or so, I'm 12+ years in and 15 years seems like a good term. I hope to continue being a firefighter until I'm holy shit, how old is that dude? 

We have some intermediate term planning/spending needs and we've started in on them. We upgraded our 4runner. We had a 2003 and upgraded to 2023. That's kind of a big expense of course but it is now behind us. We have a bunch of smaller projects on the house that we are knocking out this year.  Eventually we'll have to replace the Tundra too. Our ATV, used for plowing snow, will also need to be upgraded. Plowing snow beats the hell out of ATVs but our road is not county maintained so it is something we have to do. 

I write often about unexpected, unbudgetable on off expenses. Over the last few years, we've been less lucky on this front. We had a septic issue that cost about $3000 before it was hopefully solved.

It is interesting to see what beliefs are staying generally the same even if evolving slightly like not wanting to retire, my ongoing involvement at Walker Fire and my devotion to staying fit. I am also aware of a couple of quirks that are also evolving. My interest in self-sufficiency has increased. I've talked about this, I am not any sort of doomsday person but the chances for inconvenience appear to have increased. We saw this on a societal level at the start of the pandemic. That was a corner I was able to look around as I wrote about back then, just by getting a couple of weeks ahead of our food needs and Costco paper goods. 

I've talked about the grid here being fragile and old which is why we added solar awhile back. We've had three, week-long power outages since we've lived here. The grid itself is old and while the power company has gotten better about fixing outages much quicker, some sort of problem again leading to a long outage seems plausible. They also announced a plan to cut power in the face of expected wind events during fire season. It's not like I'm wading into creeks and catching fish barehanded, I just want to minimize the hassle. 

From 57 to 58, I don't feel any great enlightenment. I'm  grateful to be healthy and happy and I'll add another one that I read something about in the Wall Street Journal a month or so ago which is not having anything to prove. I probably haven't had anything to prove for a while but I've never articulated it that way to myself before. 

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.