What Is A FIRE Portfolio?

Fund provider Tidal/ETF Masters, more of a white label than an actual provider, had a fun article titled Building A Financial Independence/Retire Early Portfolio With ETFs. The article spells out several alternative strategies to build out a portfolio once you achieve FIRE. 

First, if you've just retired early and plan to draw from an investment portfolio for the next 40 or 50 years, do not load up on a bunch of alternatives that aren't intended to provide something that looks like stock market growth. I'm assuming the situation is someone probably has enough to make it work as opposed to some sort of massive windfall where someone lives a $200,000 lifestyle but has $20 million in the bank. 

In a post over the weekend, we looked at an alt-heavy portfolio to provide high income for nine years. The backtests didn't deplete because market returns were relatively high. Neither did a 10% withdrawal rate deplete an account that just owned the S&P 500, it actually grew in the period we studied. If you expect that your FIRE portfolio will have last 40-50 years then focus on equities, have a decent amount of cash for expected expenses set aside and if you believe in using alts, have small exposures to smooth out the ride a little.

Tidal/ETF Masters talked about risk parity, managed futures, hedge fund replication, inflation protection and derivative income funds. They didn't name names or talk about weightings. Risk parity is really a tough one to invest in at the fund level. This history supporting it is good but that is because bonds had a 40 year bull market. If I am correct about bonds with duration now being a source of unreliable volatility then I'm not sure how a retail-accessible fund would be able to do the job. 

Quick pivot to catastrophe bonds thanks to a short report about the impact of Hurricane Milton. First here's how the three devoted funds in the space have done.

I threw iShares 7-10 Year Treasury ETF (IEF) in for a little context. The report was sent out by EMPIX which is a fund that I am test driving for possible client use. EMPIX and CBYYX have pretty much recovered back to their respective trend lines, maybe a little short of the mark. The drop in mid-September for SHRIX was actually a dividend reduction not a price drop. Hurricane Ian back in 2022 had a bigger impact on SHRIX which as best as I can tell was the only fund in the space back then. SHRIX fell 10% from Ian. 

The threat of the hurricane as it was approaching land caused some markdowns in bond prices. It's not ok to share a lot of detail from the report but one stat to mention is that the benchmark Swiss Re Global Cat Bond Total Return Index only fell 1.34% at its worst. I am less familiar with SHRIX and CBYYX but EMPIX' literature goes out of its way to talk about really trying to tamp down volatility and risk relative to other cat bond portfolios. If you look at longer term stats of the funds on Portfoliovisualizer, that doesn't really appear to be the case but as for the eyeball test during Milton it does appear to have been less volatile thank the others.

All three though have very little volatility and all three have a slightly negative correlation to equities. I mentioned in an earlier post about cat bonds that the thresholds for triggering events, the dollar amount at which the bonds pay out which is bad for bond holders, tend to be very high. The report from EMPIX did not say there were no triggering events in Milton, or Helene for that matter, but the daily updates they sent out when the hurricanes were actually hitting made no mention of triggering events and the snapback in the fund prices imply there were no triggering events. 

Going through this today, I tried to track down the status of the Brookmont Cat Bond ETF which will have symbol ROAR if it lists. I found no news saying there was a problem so maybe it's as simple as not wanting to list the fund during hurricane season. 

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