55 And No Savings Is Not Doomed

The latest retirement disaster article from Yahoo focuses on 55 year olds who have a "median savings of less than $50,000." Yahoo says it's "bleak" because this cohort is "only about a decade from retiring."

Anyone else skeptical about that $50,000 figure? It is pretty clear that all age cohorts are woefully undersaved but, yeesh, I don't know about that. A harsh reality is that $50,000 is not a retirement fund but it is a pretty robust emergency fund. 

We've gone over the math before that starting as late as 55 can catch a lot of the way up if they can afford to save a very high percentage of their income. At that age it is not crazy to think a house could paid off or very close to being paid off so what had been mortgage payments can go toward retirement savings. At that age it is not crazy to think that kids could be grown and out on their own. It might be reasonable to think that if someone hasn't saved a lot of money by 55 that they didn't have a high income so the hurdle to clear with their savings is lower. 

A 55 year old couple able to meet all their needs on a $70,000 income, even if that means having very little left over for savings will get $2997 in Social Security ($1998 primary benefit and $999 spousal benefit) at age 67 which is a meaningful percentage of their net income. Smart Asset calculates $70,000 gross income working out to $57,187 after tax. 

If they can put their previous mortgage payment, lets go with $1500/mo, into a 60/40 fund, they would end up with $415,000 including the $50,000 they started with based on June, 2014-June 2024 results for the Vanguard Balanced Index Fund (VBAIX) or they'd have $500,000 if they put 80% into stocks. Obviously you can discount those numbers if you expect lower returns going forward.

A 4% withdrawal rate of $400,000 (so I am giving the balance little haircut) is $16,000 and dialing up the risk slightly, a 5% withdrawal would be $20,000. Social Security plus the $16,000 would add up to $51,964 and they were netting $57,187 so there is a gap of $5223 per year. But there really isn't because they are no longer saving the $1500/mo ($18000/yr) mortgage equivalent. 

There is not much margin for error in this scenario but being 55 and extremely undersaved doesn't have to be a catastrophe either. If this couple could figure out how to create a third income stream, they have 12 years to do this, they could create a pretty good margin for error. 

Flipping the switch from paying a mortgage to saving into a retirement account seems plausible to me. I realize that not every undersaved 55 year old can do this but some can. 

Like I've been saying for 20 years now of blogging, people figure this out for themselves because they have to. Chances are that you, reading an investing blog are probably not extremely undersaved but you know people who are. You can certainly share the example in this post to help them think about this differently and start to hustle and scramble a little more than maybe they have previously. 

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.

Retiring Early? Barron's Has Tips

Barron's had a roundup of advisor advice for people who want to retire early. I was impressed or maybe surprised that the advisors kept value judgments out of their comments and kept to just giving suggestions. Several talked about tax issues, it is important to keep tabs on how taxes might change going forward and then when they actually do change. 

Yes on the taxes but without earned income and living on long term capital gains from an investment portfolio, there might be no income tax. If "passive" income from real estate or something else is part of the equation, then it can be trickier but even if taxes do go up, lower incomes are unlikely to be meaningfully impacted. 

The cost of health insurance was a big concern for one of the advisors. The way things are now, the subsidies for healthcare.gov are far more generous than they used to be. That could change in the future of course but a couple making $80,000-90,000 is going to pay very little for insurance. That might not sound like much income but the context here is being retired at a young age. That much income, without Social Security or active income seems pretty good to me. 

One advisor said don't own target date funds. This really is about having the right asset allocation. A balance needs to be struck between enough growth potential for a 50 or 60 year retirement and enough cash to get through the next 30 month bear market, Bear markets tend to run 18-30 months and while 2022 was shorter than that, a longer one will happen eventually. 

Paying off the mortgage is a tricky question because it may not make economic sense, but it can make emotional sense. If someone has a 2.75% mortgage and collecting 5.3% in a money market or T-bill then maybe they shouldn't pay the mortgage off. It would make sense to know the after tax yield in that scenario. I lean toward the emotional security of not having a mortgage but people need to do what they think is best for themselves.

A point that I've made before that was echoed in the article was the ability to be flexible with spending. Where a portfolio invested in capital markets is part of the equation, there will be years where markets do poorly and years where just the portfolio does poorly like maybe down a little when markets are up. Having fewer fixed expenses can help with being more flexible which is an argument for paying off the mortgage.

A few more considerations from me starting with mapping out large, foreseeable expenses like when a car needs to be replaced. It is also important to understand what sorts of things could go wrong and end up being moderately expensive. I mentioned a while ago that we had an expensive plumbing issue at our house. I though the project was complete, it isn't. A while back, we replaced our roof. We have to maintain the road from our house down to the county-maintained pavement. This is getting more expensive. Parcels downhill of us are being developed and the trucks driving down there are rough on the road. If the new houses ever get finished (a whole bunch of problems our three new neighbors have been having over the course of four years) then we'll have more traffic and I can just bet the idea of concreting the road will come up. Concrete over a dirt road is a bad idea up here, it doesn't make it better for managing ice and snow and a concrete road is more inviting for looky-loos in the summer. 

What about having to help family financially? That can be a tough one to think about before it happens but that is one to try hard to not be caught off guard by. 

Depending on how early someone retires, they might end up with very little in Social Security when the time comes. It doesn't take too many working years to qualify but it takes a long time to get a decent payout. It is based on the highest 35 years of earnings. Any years where of zero earning income count as a zero year in the calculation. Retiring at 40 with maybe 15 years of higher earnings and a few more of very low earnings will result in a very low SS payout. 

Yes there are questions about the future viability of SS. There could be cuts, yes, but it is not going away without some sort of similar replacement. If someone's full boat is $4000/mo, it could end up being less but for now it is not expected to be cut by more than 25%. All I am saying is to take this into account, there will be no meaningful SS payout for someone who retires at 40 and never has earned income again. 

There was a reader comment that raised a very salient point. Always read the comments. The reader, Ben, said he is 62, has $500,000 total in his IRA and Roth but his income needs are met from a combo of small pensions, a disability payment from the military and then a larger pension when he hits 67. I don't think he'll be getting SS but if I am reading correctly, the income streams will combine to be enough for regular expenses. He has plans to build a house that will cost about $250,000 and solicited opinions about whether to take a mortgage or withdraw from the IRA accounts. There was no mention of about whether there is a current home that can be sold, his framing was a mortgage or IRA withdrawal. 

He con cover most of the $250,000 out of his Roth IRA but not all. This raises an important point we've talked about before. Paying for a large, one-off expense out of a traditional IRA is very expense because of taxes. I've told this story before, a client wanted to buy a $40,000 pickup truck but only had a traditional IRA. Accounting for the taxes, the $40,000 truck cost about $50,000. When someone is taking out a regular distribution as an income stream to pay for monthly expenses, yes there are taxes but that seems more like a paycheck and we are used to paying taxes on paychecks. That might be mental accounting on my part but paying an extra 22% or 24%, maybe more maybe less depending is not ideal. If that's the only choice of accounts so be it, we need to do what we need to do, but this is an important point to understand for any retirement age. 

There was no mention of Roth conversions in the article. A 40 or 45 year old who retires with a large rollover IRA and no earned income has a lot of years to slowly convert with little to no tax paid if they limit the conversion to the amount of the standard deduction  or small enough where the effective tax rate is single digits. 

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 Luck An Asset Class?

Taylor Pearson and Jason Buck from Mutiny Funds and managers of The Cockroach Portfolio had a short podcast about sequences of returns that is worth listening to. Toward the end, Taylor had a fascinating comment that what they are trying to do is "reduce the impact of luck" and Jason reiterated the point to say "reduce the opportunity that bad luck can hurt us." 

I have conflicting thoughts about the point. In terms of how I live my life, I am all in on manifesting, being positive, expecting things to work out and so on. I'm sure I project that onto client portfolios. At the same time reducing the impact of bad luck is one reason to have holdings that help offset normal equity market volatility and otherwise hedge.

If someone can build a portfolio robust enough to have at least a couple of things that go up in a terrible year like 2022, I could see a sort of mental accounting where someone thought they were lucky in a periods that was broadly unlucky. I don't minimize the benefits of being lucky but when someone understands how correlations work and how to implement some of the portfolio into low and negatively correlated assets, they are creating their own good luck...maybe? It's an interesting thought exercise. 

Luck can trickle into portfolio results in a bunch of different ways. 2024 is really a very weird year so far for the equity market. The market cap weighted S&P 500 is up a lot but the equal weighted S&P 500 is only up about 4%, just 1/3 of MCW's gain. I saw a Tweet somewhere that said something like 2/3 of this years gain for the S&P 500 has come from just three stocks. You probably have seen many headlines about Apple, Microsoft and Nvidia each comprising about 6% each of the index. This sort of concentration is a negative risk factor. I have no idea when or if there will ever be a consequence for this risk but it is present. 

The weirdness in the market internals I'm sure has created quite a few anomalies out there including one for client and personal holding AGFiQ US Market Neutral Anti-Beta Fund (BTAL). The fund goes long low volatility names and short high volatility names with the intended effect of having a negative correlation to the broad market. 

Looking at the chart for this year, day to day and week to week it has been negatively correlated. I'd describe the chart as opposite paths to the same result. For a little context of how anomalous this is, in 2023 BTAL was down 15%. In other years where MCW has done very well, BTAL was down most of the time, there was one year it was flat in a strong year for equities. 

In the context of being lucky, the first six months of the year is just one of those things for the fund. It is benefitting from some pretty insane dispersion for how few stocks are doing very well. Michael Batnick Tweet out that only 17% of the S&P 500 constituents were outperforming the index. The narrowness of the rally appears to be helping BTAL, it appears to be a lucky stroke for the fund. While being overly vulnerable to needing a lot of luck for things to work out is not a great place to be in, the cliche about it being better to be lucky than good rings true. 

And to close out, Van Eck filed for a "spot" Solana ETF. Other than having heard of it, I don't know much about it. I tried to learn a little about it and all I found was a bunch of jargon that could probably be ascribed to many cryptos without much differentiation. I will continue to try to learn about it but the chart comparing it to Bitcoin is really something.

How volatile does something have to be to make Bitcoin look like a horizontal line?

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.

Watch Out For Being Under Diversified

I stumbled into an old podcast from Resolve Asset Management that looked at the lack of differentiation from most factors and how to seek out "orthogonality" to get better diversification. 

Looking at the above factors, they would argue that it is difficult to get true diversification from these factors and others. There's maybe some diversification benefit to dividends and equal weight but they are all shades of the same color. It has been a patience-trying two years for anyone who built their core equity position around a dividend ETF though.

Although the way we articulate these ideas has changed we've basically been having the same conversation about trying to learn how to better diversify the portfolio without giving up too much of the equity market's ergodicity, it's inertia from going up more often than not. 

Solving this puzzle has led us away from relying on longer term bonds and into small allocations to various types of diversifiers but it is productive and fun to continue to dive deep into other strategies that could help. 

So where we are looking for differentiated return streams, does the blend of equities and managed futures in one fund do that?

The chart is unfairly short so it is too soon to draw a conclusion for the ReturnStacked US Stocks and Managed Futures (RSST) but if it works, I don't know if it will, there should be differentiation the next time stocks have a prolonged decline. Trying to assess whether something will work comes down to first understanding the premise, then the process and probably a matter of patience after that.

I saw that Tweet today. I don't have any idea if GNMA will work. A strategy that goes in or out based on whatever metric or process is intellectually appealing but hard to pull off. The Pacer Trend Pilot ETF that I used ages ago worked a couple of times but there were market events where the signal it used wasn't right for  a particular market event and so it did very badly, this was in the 2020 Pandemic Crash. The ATAC US Rotation ETF (RORO) relies on a signal from gold compared to lumber. Gold outperforming means risk off, RO, and lumber outperforming means risk on, the other RO. It just about got cut in half between October 2021 and October 2022. How about that symbol for GammaRoad, wow!

A similar fund that could be intriguing is the Cambria Tactical Yield ETF (TYLD). When yield spreads are narrow, it will own T-bills and when spreads widen out it will diversify into fixed income sectors and REITs. It just listed at the start of the year and has only owned T-bills so far. The logic is certainly simple to understand and I have no doubt that there's plenty of research behind the fund launch but it's not the sort of thing that most people can backtest on their own and spreads are cable of doing the unexpected but I do follow this one, I want to see if it can "work." 

And because I think it's related, I wanted to put another simple, Permanent-inspired portfolio on the table to discuss with Portfolio 2. 

The portfolios are clearly defined and the result for Portfolio 2 is valid but of course there are tradeoffs. The ride is obviously very smooth over a decently long time frame. It also avoids interest rate risk and what I've been calling unreliable volatility from longer duration fixed income. 

In the 11 full and partial years we can see that Portfolio 2 lagged by a lot in 2016 and 2020. It was the best performer four times and it was also middling in four different years. You can also see a long run from 2016 to 2021 where it was pretty far behind 60/40. In that stretch, Portfolio 2 compounded at just half the rate  of 60/40. Much of the lag can be attributed to a dark winter for managed futures. Managed futures' best year in that window was a gain of 1.93%. 

With T-bill rates around 5%, I believe managed futures will do better than when interest rates were at zero. Managed futures has a good track record for being a diversifier, for being orthogonal. Not infallible mind you but good, the track record is pretty clear. To the notes above about the podcast, managed futures and several others we look at have differentiated return streams as opposed to being a different shade of the same color of large cap equities. Obviously the risk to a huge weighting into any alt, including managed futures, is the one or two instances it doesn't differentiate when investors need it to. 

In 2018 the S&P 500 was down a little over 4% and managed futures was down about 8%. Those aren't big numbers so a portfolio that was 80% equities and 20% managed futures that year would have been down 5.4%. Ok, no big deal, it happens. We can backtest RSST and in that year it might have been down 15% in a down 4% world. But what if the numbers were bigger? What if the capitally efficient blend was down 25% in a down 10% world? Yes, that is unlikely but not impossible. 

I'm pretty sure ReturnStacked is not positioning the fund for anyone to put 100% into it but it is a very common behavior for investors to get overly excited about a good idea and allocate too much to it. Then they don't find out they had too much until something bad happens. 

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.

How To Differentiate Funds That Have The Same Strategy

On Sunday afternoon I dug into the recently listed Neuberger Berman Option Strategy ETF (NBOS). It is yet another derivative income fund, this one sells put options, it is a putwrite fund. It turns out it is actually a mutual fund conversion from the Neuberger Berman US Equity Index Putwrite Strategy Fund, it had symbol NUPIX before changing to NBOS. 

Like similar funds, it owns a lot of treasuries and mostly sells index put options. The S&P 500 closed Friday at 5464. The three largest short put positions in NBOS are struck at 5425, 5355 and 5455 so they are somewhat close to the money. The fund appears to be most similar to the WisdomTree Putwrite Strategy ETF (PUTW). As of Sunday night, there was no info on what puts the fund was short but the fact sheet dated 3/31 listed 5150 and 5240 and as of 3/31 the S&P 500 was at 5254, also close to the money. 

The risk with selling volatility in this manner is that the S&P 500 drops a lot, far below the strike price of the option resulting in the short position being closed out at a large loss. A win for the strategy is that the options sold, expire worthless, allowing the seller which is the fund in this case, to keep the premium and then go on to sell more puts. The strategy works more often than not, at the index level, because the broad market goes up more often than not. The faster the decline, the worse the fallout when the strategy goes bad. 

During the 2020 Pandemic Crash, NUPIX fell 23% and PUTW fell 27% versus 34% for the S&P 500. In 2022, so a different type of down market, NUPIX fell 5.8% and PUTW fell 10.1%. The fast crash was worse than the slower decline of 2022 which makes sense.

The chart is from Portfolio Labs and it shows the two funds looking similar. NBOS is the same strategy and managers so if you take anything from the chart as to how NUPIX did, then it might carry forward to NBOS in terms of volatility, the fact that it goes up more often than not and a lower standard deviation at 9.93 per Yahoo Finance than the S&P 500 which is a little over 16.

Comparing NUPIX to the Vanguard S&P 500 ETF (VOO).

Do you think it looks like a differentiated return stream. Putwrite is an alternative strategy but how alternative? Portfolio Labs says NUPIX has a .90 correlation to VOO, I'd say it is a tool for dampening portfolio volatility but I don't think it can be the type of alt that protects in a drawdown. It hasn't been able to do that which makes sense, it is a bullish strategy. 

I've mentioned client and personal holding Princeton Premier Income Fund (PPFIX). It sells index puts but does so much differently than NUPIX/NBOS and PUTW.

PPFIX is not trying to capture equity beta. I would say the other two are trying to capture some equity beta. PPFIX was not crash proof, but it fell much less than NUPIX and it was up slightly in 2022. Where NUPIX/NBOS and PUTW might be pretty close to picking up nickels in front of steamroller, PPFIX is picking up pennies a mile and half ahead of the steamroller. For the most part, PPFIX sets the expectation of being a horizontal line that tilts upward. 

You can see where using PPFIX instead of PUTW as a diversifier gives a much higher return than 60/40 with almost the same standard deviation. And the 2022 result.

Obviously, I'm not putting anywhere near 34% into PPFIX or any single alt. This is simply an example of how different variations of what might be the same strategy can have very different impacts on the portfolio. In an up market, I would not expect PPFIX to keep up with the other two but I would expect it to do better during bear markets like we had in 2022. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Fun With Funds

Barron's had an article about the Vanguard Global Capital Cycles Fund (VGPMX). I'm not really interested in the fund so much as an allocation implementation that is a holdover from when this fund used to be called the Vanguard Precious Metals and Mining Fund. 75% of the fund is in global value stocks with the remaining 25% in mining stocks which is a huge overweight to that industry.

The fund goes back further than 2019 but the current manager started in 2018, so the period here gives us a clean slate to look at. ACWI is the iShares All Country World Index ETF and XME is client holding SPDR Metal and Mining ETF. The result surprises me, I'd have guessed that 25% in miners would be a real drag on returns. 

VGPMX' outperformance looks like it can be attributed to the fund going up in 2022. It doesn't look different versus ACWI in 2019, 2020, 2021 or so far in 2024. Blending 25% in with ACWI helped in 2022 but otherwise it's not much different than 100% in ACWI. I really am surprised this doesn't create an easily observed differentiated return stream. XME fell 50% in 2015 and then made it all back with a 106% gain in 2016. That sort of volatility with a low-ish correlation has a place in a diversified portfolio but I think 25% is well past the point of diminished returns. 

And speaking of derivative income funds, a Twitter ad prompted me to circle back to the Defiance S&P 500 Income Target ETF (SPYT). I mentioned it in March when it first started trading. The differentiation to this one is it sells 0dte call spreads as an overlay to holding the S&P 500 and it targets a 20% annual yield. A little more specifically it sells a close to the money call option and buys a call with a higher strike price. For Monday, June 24 it is short a 15 point spread having sold a 5470 and bought a 5485. 

With covered call funds, gains are capped up to the strike price of the call that was sold. With SPYT, if the index has a huge rally, the fund could participate in gains above 5485 on Monday. 

The credit from selling that combo every day accrues for a monthly distribution. So far it has paid three dividends, totaling $1 which works out to about 5% so it's on track to get close to 20%. 

As is common to these, there is an obvious lag to market cap weighted S&P 500. You can add 5% back in for SPYT, Personal holding ISPY paid out three dividends totaling $0.98 since SPYT's inception which adds 2.3% in for its total return. XDTE is similar to ISPY but it sells options the morning they expire where ISPY sells options in the late afternoon the day before they expire and for that one you can add back 5% to get its total return.

Small allocations to this space seems reasonable for bringing in a little more yield to a portfolio but they consistently set the expectation that they will not keep up with the broad market. Having the correct expectations is very important for these. If the NAVs can compound positively, not all of them do, and they pay higher yields, that's pretty good but again, not all of the NAVs compound positively and maybe with enough time to study, we might see that none of them compound positively. 

Finally as a funny coincidence, while I had the tab open writing this post, I found an article at WSJ about derivative income funds and buffer funds. I don't write about the buffer funds. The short version from me is just don't. Really just don't with the 100% downside protection funds. The market isn't going to go down 100%. If you actually think the market could go down 100% you should sell now and not rely on the buffer funds to work. 

Of course I read the comments. Always read the comments. A lot of commenters were skeptical of the promise of higher returns with lower risk that these funds offer. I read the article twice and I didn't see where the article said that and of course they do not have higher returns with less risk. If the article says that and I missed it, so be it but they most certainly should not be expected to have higher returns with less risk. In theory, a sequence of returns could play out that way but with the derivative income funds I think anyone using them should expect lower returns, lower volatility and higher income. Not all will deliver on those expectations. With the Defiance put selling funds, the erosion is huge unless you reinvest the dividend. If the full dividend is reinvested then so far, they do have a positive total return.

JEPY is a good example with its so far limited time frame. There are no negative surprises in that screenshot. Even here though, it is important to understand that the underlying index is up a ton, it is up an amount that should not be counted on to repeat frequently. Occasionally, yes it will be up that much but not frequently. The few small dips along the way did not damage JEPY in real time and I believe the daily nature of the trades would help the fund avoid getting decimated in a serious decline. Before anyone adds 1+1 and gets 11, I would expect JEPY to go down plenty, just not get decimated like down 80% in a down 30% world but it might go down 40% in a down 30% world or maybe, if holders are lucky, it would go down less. I can see how it would go down a little less but I would not bet heavy on that outcome. 

The comments on the article that are suspicious of investment products are right but that doesn't mean they're not worth learning about. The comments about keeping it simple with plain vanilla equity exposure are right but that doesn't mean a blend heavily tilted to plain vanilla with a small allocation to a derivative income fund must be bad. 

It's only partials from two different years but that income profile might make sense for someone.

One point that the article did not make in talking about the risk to retirees of having too much in equities and then the market dropping a lot. I would argue you are far better off having a combination of cash, a holding or two that you are confident will go up when stocks drop and a holding or two that will trade like a horizontal line that tilts upward no matter what is going on. And if you don't believe in those last two then just have cash set aside. How much to set aside is up to the individual but I would keep in mind that typical bear markets range from 18-30 months. 

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.

Weekend Updates

Jeff Ptak from Morningstar Tweeted out that the Stone Ridge LifeX funds we've been talking about lately have started a "conversion" to the ETF wrapper. It's a little confusing but it appears that when the cohort reaches age 80, the ETF will convert to either a longevity pool for males or females, depending, that is referred to in the filing as a closed end trust or holders can simply cash out. 

The big idea remember is that these funds annuitize the income stream similar to an annuity without being an actual annuity. As the age cohort ages beyond 80, the people who live the longest get the most benefit from what should be increasing payouts until age 100 when the survivors split what ever is left. 

I've been consistent in saying these funds are an evolutionary step toward more ways to annuitize income beyond the annuity structure. The conversion of LifeX from mutual funds to ETFs, assuming Jeff is correct, is probably an improvement. The holdings are simple enough for the ETF wrapper, not everything is, and so the soon to be named Longevity Income ETFs might get some tax benefits that are unavailable to the mutual fund wrapper. 

I will repeat from previous posts on these, I don't know if they are the answer but this is a space to keep tabs on. If they do what they're supposed to, these funds could end up being a difference maker for people who are somewhat undersaved.

Now an update on covered call funds. From now on, we should call them derivative income funds as the options strategies used go beyond just selling call options. The chart goes back to the inception for the ProShares S&P 500 High Income ETF (ISPY) which sells 0dte call options. I continue to test drive ISPY in one of my accounts to see if I would ever consider it for client accounts. 

The green line is the S&P 500, XYLD is the Global X Covered Call ETF which sells close to the money calls that expire monthly, JEPY is the Defiance S&P 500 Enhanced Income ETF which sells 0dte put options and OVL is the Overlay Shares Large Cap Equity ETF which owns the S&P 500 and sells put spreads on the index. 

The Yahoo chart captures price only. In looking at the chart I think there are four different types of return streams. OVL has some appeal compared to plain market cap weighted (MCW) S&P 500. I've looked at it many times and it seems to always be very close with just a little more yield, Yahoo shows it yielding 2.98%. During the 2020 Pandemic Crash, it fell the same amount as MCW. In 2022, at its low it was down quite a bit more than MCW. On a total return basis, it has had a better CAGR than MCW by 49 basis points but with more volatility. 

From the start of the chart, so not its inception, JEPY has paid $3.54 in dividends. Adding the dividends back in would give a total return of 7.8% which is pretty good but is a reminder of why reinvesting most or all of the dividend is important. To its credit, JEPY's volatility has been far below the MCW index but anyone spending the dividends is enduring some serious erosion. 

Looking at ISPY, we can add back about 4% in dividends to get a more accurate total return number. That is still noticeably behind MCW which might not be so bad but I think I see the spread between MCW and ISPY getting wider. However long it takes the S&P 500 to gain its next 100%, if ISPY was only up 60%, would that be tolerable? There would be many different answers to that and it would depend how ISPY was being used. It's probably not idea as a core equity holding for an investor who needs "normal" equity market growth for his plan to work. As a smaller, non core holding to enhance yield a little or dampen volatility or if an investor can figure out some other factor to pair it with to get a better result in either absolute returns or risk adjusted returns, that certainly could make sense. It could also be part of the solution for an investor who does not need "normal" equity market returns. 

XYLD doesn't really have any upcapture on a price basis. Yahoo shows it yielding 9.56% which is a little higher than what ISPY is on pace to annualize out at but lags far behind ISPY on a price basis. It also, unfortunately, goes down almost the same as MCW during tumultuous events like the Pandemic Crash in 2022. What I mean by that is it captures most of the downside of MCW with very little upside.

I think part of the process of ongoing portfolio management is to circle back to strategies, funds and correlation studies like we regularly do here. Aside from being fun, it is time well spent in search of the occasional idea that can be added to the portfolio. 

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 Assume Asymmetric Returns

Jason Buck from Mutiny Funds and creator of the Cockroach Portfolio gave a web presentation about Cockroach via RCM Alternatives. We've looked at the Cockroach Portfolio several times before. Its original was influence by the Permanent Portfolio created by Harry Browne which allocates 25% each to stocks, long bonds, gold and cash. The big idea is that no matter what is going on in the world, at least one of the four will be going up. 

The Cockroach divides into four quadrants plus one more. I realize that's a silly way to word it but I think it better captures how Mutiny presents it.

As we've said previously, trying to mimic it with exchange traded products doesn't really work due, I believe, to the limitations of the funds available to recreate the volatility quadrant. I am intrigued by the portfolio and even though mimicking it to get any sort of reasonable CAGR may not be realistic without the 4% Bitcoin allocation (a point we figured out in previous posts), that doesn't mean there isn't some bit of process or influence we can't take away. 

One thing I learned in the web show today is that the Cockroach leverages up, the four quadrants are actually 50% each and then 20% to crypto and gold which is split 4% to crypto and 16% to gold.

Now knowing the actual Cockroach leverages up, here's an updated replication using retail accessible funds.

It still isn't quite right of course for a couple of reasons. I used VMNIX as a proxy for carry because we compared that fund to currency carry and they were similar but at this point, I don't know what variation of carry that Cockroach uses. As we said yesterday, there's no fund that tracks the version of carry built around futures yield. If you run this without Bitcoin, the CAGR going back to mid 2017 which is as far as it goes because of TAIL's inception date was 4.03%. With Bitcoin, the CAGR jumps up to 10.96%. That's a powerful argument for barbelling in the context we talk about all time here. 

In terms of looking forward, I don't think it makes sense to model it to rely on Bitcoin performing anywhere close to what it's done in the previous X number of years. Even if Bitcoin goes to $1 million, it wouldn't come anywhere close to matching previous gains. 

Where this post is a step toward figuring out whether a portfolio resembling the Cockroach could come together to blend decent upcapture with an all-weather effect when the next crisis comes along or just in the face of the next "regular" bear market, I built the following. 

The weightings are adjusted to get to an unlevered version. With the capitally efficient funds now trading, you could get the leverage in there up to 120% pretty easily but we'll stick with a simpler approach for now. 

Instead of true volatility products, I used client and personal holding BTAL. The long term bleed of TAIL and to a lesser extent VIXM is a much larger drag than the huge weighting I have to BTAL for this post. 

VIXM obviously had serious crisis alpha during the pandemic crash but BTAL still did well.

In the web show, Jason mentioned that the income quadrant averages out to a 15 year duration. He said if you have a diversified portfolio then something you own should make you want to puke and for him, I guess it's his fixed income duration. Using a floating rate vehicle as a substitute, as we've been talking about for ages, removes another huge drag on returns as we try to figure this out. 

The version I built for this post was certainly all weather during the pandemic crash and 2022 which is interesting because they were two completely different types of events. If you take away the 2% allocated to Bitcoin and add it to gold, the CAGR drops to 6.74%. Going forward, Bitcoin is very unlikely to repeat its past performance (repeated for emphasis). 

Part of the drive underlying the Cockroach is the threat that equities lag for an extended period similar to the 1930's, 1970's and much of the 2000's. I think that concern, although valid that it could happen again, really hampers returns. They go up in more decades than not. I get not wanting a "normal" 60% in equities but investors who need growth for their financial plans to work, need more than a 1/4 of their assets in stocks. 

Tweaking it to 40% equities and no Bitcoin as follows.

It looks a lot like 60/40 in terms of growth, with only half the standard deviation and it retains the all-weather benefits from 2020 and 2022.

Including a percent or two to Bitcoin for it's asymmetry makes sense but I didn't want to skew the result to something that I don't think can be repeated. 

Regardless of what you think of the long term result, good or bad, a portfolio with this sort of low volatility is going to have quite a few years that you lag far behind more typical benchmarks. Finally, I would reiterate the importance of understanding when something is very unlikely to be repeatable like the blue line portfolio. Bitcoin was up 10X in the period studied. Of course that could happen again, but, repeated for emphasis, I don't think it should be modeled in looking forward. 

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.

Looking For Crisis Alpha In Too Many Places

On Tuesday, Corey Hoffstein from Newfound Research and ReturnStacked ETFs gave a web presentation to explain carry in support of the ReturnStacked US Stocks & Futures Yield ETF (RSSY). The fund leverages up to provide $1 of equity exposure and $1 of exposure to futures yield (carry) for each dollar invested in the fund. RSSY has brought in a mountain of assets so far.

The fund blends a core exposure, equities, with a differentiated return stream in carry. I may have missed it but I don't they actually explained the carry strategy they are implementing. Basically, it goes long futures that are in backwardation and short futures that are in contango. You can look those terms up if you're unfamiliar. ReturnStacked has shown in many papers and blog posts that carry is legitimately a differentiated return stream so while I will push back on a couple of things here, that's not one of them.

As Corey said in the presentation, it appears there is no retail-accessible product that offers carry exclusively. It is embedded in quite a few multi-strategy and global macro mutual funds including from AQR. I'm surprised with the huge increase in interest in alternative strategies, that there isn't a fund in this space. Maybe that's not the right question but it bugs me there is no fund for this. 

I mentioned this a couple of weeks ago, carry appears to be a cousin of managed futures. They both generically trade the same markets. Where carry goes long and short based on yield curve dynamics, backwardation versus contango, managed futures goes long and short based on a trend of some measure, most commonly a ten month trend. In that post, I said that I would guess managed futures would be a more reliable diversified than the way RSSY implements carry.

Managed futures "worked" as crisis alpha during the popping of the internet bubble (there were no mutual funds yet), the financial crisis (only one mutual fund), the 2020 pandemic crash and in 2022. You can click through here to the SG Trend website and see for yourself. 

Corey gave the impression that carry wasn't as reliable as managed futures during adverse market events. According to this paper from Resolve, carry "worked" as crisis alpha in the popping of the internet bubble, it was spotty during the financial crisis enduring a four month pronounced drawdown in 2008. it went down less in the 2020 Pandemic Crash (differentiated return stream, not crisis alpha) and it did well in 2022. 

As I develop my thoughts on this variation of carry, I think it falls in between managed futures and absolute return leaning more toward managed futures. 

The other day we looked at the Simplify Quantitative Investment Strategies ETF (QIS). After writing that post I found a short paper on the Simplify site positioning QIS as a fixed income substitute like 60% stocks, 20% traditional bonds and 20% QIS. Maybe, carry could be positioned as a fixed income substitute that is a little more volatile than most income sectors? Carry as a more volatile fixed income proxy and QIS as a absolute return type of fixed income proxy blended together? I don't know, and there isn't an easy way to backtest the thought and no devoted carry fund now to start studying. 

When RSSY has enough track record to study, we can play around with that for blogging purposes with 20% in RSSY, 20% in QIS, 40% in an S&P 500 fund (that plus 20% RSSY would give us 60% equities) and so we don't leverage up, the last 20% in cash. 

I'm intrigued because of the theories at play here but I still do not see ever using these funds though.

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.

He's Mad As Hell And Not Going To Take It!

Laurence Kotlikoff was interviewed by Think Advisor and boy howdy he has some strong opinions. The title of the article is Advisors Do Retirement Planning All Wrong so you have a sense of what's coming before you even start reading.

First up, he calls 401k plans "abject failures." If I am reading him correctly, he believes Congress and the various parts of the chain that comprise "Wall Street" are working together to make money at the expense of plan participants. He even includes FINRA and the SEC in this idea. 

He goes on to say that;

I don't really know what he means here. Encouraging people to buy mutual funds? Ok, there could be conflict of interest there. The part about investors not saving more, the rest of that paragraph is completely lost on me. The argument that employers are weaponizing the manner in which they match employee contributions, so they are paying 5% to employees to make a few basis points from mutual funds if as he says they are in cahoots? I can't see it. 

If there really are kickbacks, obviously that is bad. In my limited sample size, 401k problems with lousy fund choices or expensive fund choices come about from HR people who don't know what to do and end up buying an expensive plan from a third party administrator. I've seen that with small companies first hand not large companies via clients who rollover into an IRA when they retire. More likely than nefarious conspiracies is that very few people upstream from the employee actually care about employee outcomes. That is easy for me to believe and is consistent with what we say here all time, paraphrasing Joe Moglia, that no one will care more about your retirement than you. 

Kotlikoff believes advisors are "telling clients the wrong things about retirement planning to maximize their profits." He specifically goes after advisors because they tell clients to take Social Security early so that they can bill more on managed assets. Read the comments on any Yahoo or Barron's article about retirement and you will find tons of comments accusing advisors and the media for being part of a conspiracy to get people to wait until 70. My message has always been the same. The only generality from me on SS is taking the time to understand how it works and then do what you think is best for your circumstance. I plan to wait until 70 so my younger wife has a larger survivor benefit if I die early-ish. I would encourage her to take it when I am 70, she would be 64 and two months at that point.

There are of course conflicted an incompetent advisors which is why regulatory bodies exist. I have to believe that a professional in any field who is so woefully conflicted as Kotlikoff believes, he really is pounding the table on this, will quickly be found out, lose business and have trouble replacing lost customers. 

He is critical of the process that gets a client to thinking they need to replace 85% of earnings in retirement. Ok, I am with him there, I've been making that point at various blog sites for close to 20 years. Using the income replacement method, we've worked this down to 35-40% because you don't need to save for retirement after you retire, hopefully a mortgage is paid off, you're also not paying Social Security tax after you've stopped working. 

Of course income replacement isn't actually the best way to run the numbers. It doesn't account for people who live below their means. We write about taking an inventory of expected expenses, then building in a budget for unexpected one-off expenses (so a little guesswork there) and then an ideal discretionary bucket. This process could lead to a number that has no connection to how much money you made. 

Where I diverge with Kotlikoff on this point is the very widespread, premeditated attempt by advisors to steer clients into feeling undersaved in order to sell them more expensive investment products. If you work in the industry and believe I am wrong about this please comment but after a little over 20 years in this part of the industry, being an advisor is so much easier when you don't spend all day talking to clients who are terrified they don't have enough money or are worried about running out of money. Quite the opposite, an advisor who spends most of their time growing their practice would have more time to do that if existing clients felt more secure not less. 

There are many references to a "20% chance of being destitute without Social Security." That never gets defined nor is a source for that cited. 

The interview makes its way back to 401ks where he adds that one of the flaws is putting "people who are cashflow constrained into an account that lowers their current taxes, it's an incentive to spend more." I have no idea what that means either. 

He has ideas on how to replace everything with a different system. It is far more collective than I would ever want with far less autonomy but feel free to comment if you think his suggested changes would be an improvement. 

A more realistic problem with the 401k system is not the platform itself, yes it could be improved, but not enough effort is spent on educating participants and maybe people are not motivated enough out of their own self-interest learn on their own. 

Maybe I am naive as to how much of a cesspool the advisory business is, conflicts and incompetence do exist, I don't think it is anywhere near as bad as Kotlikoff says. 

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.

The Futility Of Factors?

Bloomberg wrote about factor strategies and the ETFs that track those factors. They included this table.

There's a lot here I don't understand. Growth is up a lot more than 1.5%. Whatever they mean by Revisions or Trade Activity, I am not aware of ETFs that track these. If you can figure out what I am missing please leave a comment. 

We've looked at factor investing before and as we revisit it today, really this could be Part 2 from yesterday's post about the challenges of being patient. 

The first chart compares one popular factor with a multi-factor fund and simple market cap weighted (MCW). Multi-factor has outperformed for the entire study but it's lagging the other two by a lot this year. Momentum is the laggard for the entire period but this year it is up almost double MCW and about 4x multi-factor. None of these, or any other factor you might be interested can always outperform but they are still valid strategies. 

One of the worst investor behaviors would be to chase the heat of momentum upon seeing it has had a terrific six month run to start this year. If you dig in to enough factor funds, I think you'd find many terrific runs that were then followed by underwhelming results. But they were just as valid when they were underperforming as when they were outperforming.

IVE is the iShares S&P 500 Value ETF and the chart captures a decent stretch where value had a run versus MCW. As you can probably guess, value has been left far behind MCW in recent years. For the last eight years, MCW has almost doubled up the return of IVE. It's not that value is not valid but man, it has been a long time since it did something relatively positive for a sustained period.

Even within strategies, there can be meaningful dispersion. Here are three different multi-factor funds.

For investors who prefer to stick to broad index exposure, I think multi-factor offers the potential for a somewhat differentiated return stream but I do not believe it is realistic to look at several multi-factor funds and choose which will will outperform going forward. I think studying the funds, differences in implementation could be isolated but that is not the same thing as being able to guess which one will outperform.

Here are a couple of different blends compared to 100% MCW.

The dispersion above is a lot less than I was expecting. I don't do a lot with factor funds or multi-factor. I think true diversification is easier to be found using alts with much lower correlations to MCW or in a couple of cases, negatively correlated to MCW. I don't doubt there is a way with factor funds but I haven't found it yet. 

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.

Patience As An Investing Skill

We've all seen Tweets or notes in articles or other places where someone says something like $1000 invested in Amazon in nineteen ninety whatever would be worth a gazillion dollars today. Reactions to that sort of comment might be some mix of hindsight bias, regret and maybe a couple of things. We've talked about this before. The prompt today is a passage from Phillip Fisher shared by Koyfin that addresses the power of holding stocks, or now ETFs too, for a very long time. 

I'd never seen this before but holding on in the manner Fisher describes is something I try to do. My longest tenured clients have had some holdings for a full 20 years now and quite a few more names for 15 years. Holding a stock for than long will be challenging. Take a look at the long term chart of any stock you think has been a great performer for a long period of time and you will see some painful drawdowns. In 2018, Nvidia was down 30% versus 4% for the S&P 500 and in 2022 it was cut in half versus 18% for the S&P 500. The Nvidia example ties right in with the Fisher quote. 

Let's look at a couple of stocks compared to the S&P. Coincidental to the Fisher quote, I bought client holding Motorola Solutions (MSI) in 2013. The catalyst was a deadline for emergency services having to drop wide band radio frequencies in favor of narrow band which meant new radios for anyone still using wide band. A quick side note, this was not the only time where my involvement with Walker Fire helped with my day job. The other stock is Johnson & Johnson (JNJ) which is simply a very blue chip type of name which is one of the 20 year holds I have. 

When we talk about expectations for a holding, I expect something like MSI to outperform over the long term but not so with JNJ. Some of the drawdowns for MSI were far worse than the index. JNJ is far more of a yield story having been a 3-ish percent yielder for a long time so where Yahoo charts don't capture total return, you could add about 30% more to the JNJ result, still far behind the S&P 500. JNJ mostly stayed with the market but then started to disconnect around the time FANG stocks became a fad and has continued lately as we call those stocks the Magnificent Seven. 

For maintaining a diversified portfolio, the attributes of both stocks are important.

We know one name was far ahead of the market and the other lagged. The compounded growth of both is a little better which is fine but what is noteworthy in this study is the worst year. Trying to smooth out the ride is a big priority for reasons we've talked about hundreds of times, and up 1% in 2022 makes a great case for why a stock with JNJ's attributes is important to hold if you use individual stocks. In 2018, the 50/50 blend was up 12% versus a 4% drop for the S&P 500. The ten year result is competitive with the index but in 11 full and partial years available for us to look at, the 50/50 lagged the index six times.

Think about that. Slight outperformance long term but lagged in individual years more often than not. At the beginning of the post I mentioned the challenge of holding on for 20 years. This 50/50 we're talking about is a slightly different type of example that makes the same point. Can you live with that? That is the challenge of being a patient investor. 

Weak stock performance is going to happen and not a reason all by itself to sell if you're an investor as opposed to a trader. The next time the stock market drops 30-40%, I'd expect certain holdings like MSI to fall more and I'd expect some holdings to go down less (or maybe even up in a couple of instances). Don't frame this as infallibility because anything can happen at anytime, think more in terms of reliability. In 2008, JNJ was down just under 8% and in 2022 it was up about 7%. While that seems reliable to me, it's not infallible for future market events. 

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.

The Most Important Part of Portfolio Management

Randy Forsyth got on the capital efficiency/risk barbelling bandwagon in this week's column. Obviously I got a big kick out of that. Michael Hartnett from BofA apparently said something to the effect of 70% in T-bills "clipping" more than 5% and 30% in YOLO like the artificial intelligence theme. 

One of the comments, always read the comments, mentioned that this is what Nassim Taleb talked about doing ages ago. I got the idea from Taleb probably 16 or 17 years ago and enjoy writing about it. Taleb talked about 90/10 instead of 70/30 but it is the same concept. 

I wanted to try to model Harnett's idea of 70% T-bills and 30% AI. I did a search of AI ETFs at Vettafi and cherry picked the Clockwise Core Equity and Innovation ETF (TIME). As well as Nvidia and SMC have done lately, the ETFs are more inline with the tech sector, TIME has done a little better but quite a few of the thematic funds have lagged broad tech which surprised me.

In addition to 70/30, I tested how much TIME would equal 100% S&P 500. It turned out that a 39% allocation since the start of 2023 did the trick. With so much allocated to T-bills, it makes sense that the standard deviations of the barbell portfolios is so much lower. The 2022 results, not captured above are also interesting.

We can only get the last 11 months of 2022 but it is still interesting. TIME did far worse than the S&P 500 in 2022 but owning 30% or 39% in TIME, the rest in T-bills was not catastrophic.

The numbers are real but I don't know how realistic it is to think we can pick the best performing fund in a theme. There's a couple of layers there. First is picking the theme. That seems plausible but there really are a lot of funds on the Vettafi list that have done poorly. Great, you got the theme right but the fund chosen didn't capture the effect which is a serious risk to this concept.

This could be built simply allocating to high conviction ideas from several different parts of the market. I could backtest that with my top performers and it would look great and I could backtest it with names that have not done as well and the result would be underwhelming but realistically, if you split 35% between 5 different stocks, the results would be mixed.

The better takeaway is more along the lines of how risk is managed, maybe allocating a little to asymmetry to maybe dial down the volatility elsewhere in the portfolio or using alternatives to manage volatility and risk. It doesn't get said often enough but really, the most important part of portfolio management is mitigating risk.

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.

Creating A Successful Outcome

A college buddy shared on Facebook that he is unexpectedly out of work and looking for a job. I know nothing of his financial situation so I am not talking about that. More generically, this is another anecdote of someone in their mid-50's who has had his hand forced. The reality is that it is not easy to find a job at that age, pretty much my age, that pays about the same. That might be unfair that we can't easily find jobs but I think people would accept that as mostly true.

This is going to happen to more of us. How vulnerable are you if this happens to you? If you don't think you have a lot of money saved, can you save more? Can you create an income stream somehow? How about more than one? We look at these things all the time so I won't rehash this again for this post but get started figuring this out now, before you need it, hopefully you never need it but the sooner you start the better off you'll be. 

Barron's wrote about expat living which is something we've looked at quite a few times. One aspect we haven't hit on but that Barron's looked at pretty closely is that it can take a while to create residency status in another country and even longer to gain citizenship. So it's another example of something retirement related where it is better to start early. 

There are plenty of places in Asia, eastern Europe and South America where people can live very comfortably for just a couple of thousand per month. Part of the equation is very inexpensive healthcare costs. I've questioned a few times whether the situation in Ecuador has gotten to a point that makes the country an inadvisable choice these days. Another college buddy is visiting there right now and he's posted a ton of pictures and video from Cuenca, although he is covering more ground than that, and if the political and gang related headlines are causing strife in day to day life, he doesn't appear to be finding any evidence of that. 

I will reiterate the idea though of keeping a hopefully paid off home in the US in case there is ever a need or desire to come back. The rent from a US property might cover all expenses in some countries allowing savings to keep growing and give more optionality on when to take Social Security. Even just a five year "adventure" to another country could have a hugely beneficial impact on retirement outcomes. 

Larry Swedroe had a long writeup about the LifeX mutual funds from Stone Ridge that we've looked at quite a few times. Basically, these funds turn into longevity pools at age 80, offering the potential for higher incomes than 4% from your own account. They are not annuities but they do annuitize the income stream. As opposed to be extremely expensive like regular annuities, these are merely not cheap although Allan Roth thinks the price is more than fair. 

As I have been saying, the concept of annuitizing without annuities is useful and Swedroe offers a couple of other points we have not explored here. Even if these are not the solution, they are at least a  step towards a solution.

A related idea that that tries but is not better than the LifeX funds is converting 401ks into annuities as we looked at a few weeks ago. Plan Advisor looked at whether target date funds could be converted into annuities. So, they are trying but I would run screaming from the room waving my arms frantically above my ahead if I was pitched a target date fund that converted into an annuity. 

There was an interesting point made though...interesting if it's correct which is that "participants already think some kind of guaranteed income is built into their plan." I'm not sure I believe that but if it is true, that would be a serious gut punch when they learn that is not the case. 

To the extent that "no one will care more about your retirement than you," actions like problem solving, learning about alternative forms of retirement living and keeping informed on investment product evolution is an important component to creating a successful outcome. 

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.