Morningstar's What Not To Own

Morningstar reran an article by Amy Arnott titled 7 Things I Don't Own In My Portfolio. 

1 Actively managed funds-but she kind of does own a couple of active products, so not much to say other than I don't think active/passive matters. Just about everyone (literally everyone?) that owns passive funds is doing so in an active strategy. Active/passive stopped mattering a while ago. 

2 REITs-there's nothing wrong with REITs once you realize that in times of crisis or serious decline, the correlation between REITs and the broad equity market increases. Arguments to the contrary don't pan out very often. 

3 Sector funds-86% of them, Amy says, don't outperform the broad market. It was never defined if industry, thematic or other niche funds were included. Also, many sector funds are never going to outperform. Staples aren't going to outperform. Utilities aren't going to outperform. This part of the discussion included a mention of poor investor behavior contributing to poor results. Poor behavior will hurt the results of owning whatever broad based fund she owns. I've owned the same tech sector fund for clients since 2004. I've owned the same consumer discretionary fund for clients since late 2008. I've owned the same medical device industry fund for clients since 2013, maybe 2014. For better or worse, I am not chasing heat, I am trying to capture the results of the sectors.

Blaming the tendency of people to chase heat on the funds they are chasing is thin analysis. Investor behavior is a whole other discussion. Yes, investors make poorly timed decisions but it is not the fault of the funds. The obvious oversight in Arnott's argument is a huge benefit in using sector funds to avoid or underweight excesses. If there is ever a consequence for the excess in the AI space, you may not want to be 40% in mega cap tech. Building a portfolio at the sector level allows for underweighting the sector most at risk. If you were reading me 18 years ago, you might recall I did exactly that with the financial sector. This isn't about predicting anything, it's about observing obvious excesses. 

4 Alternatives-at this point, reading this blog and how much we explore how to use them effectively with the correct expectations, you either believe in them or you don't. Not using alts is absolutely valid but her comments aren't even a little compelling and I think belie a lack of full understanding. 

5 I-bonds-she's mostly correct on this I think. I have no pushback and they are difficult to access in terms of building an adequate allocation. 

6 High yield bonds-there are plenty of ways to get yield and avoid below-investment-grade bonds. She's right about they're potentially taking on equity beta too. High yield generally takes on very little interest rate risk and with the BulletShares suite from Invesco, there is essentially no interest rate sensitivity with the short maturities and very little price fluctuation. I've been rolling these two years at a time for quite a while.

7 Gold-she doesn't own gold because her primary objective is long term growth. From the time she joined Morningstar, she's missed the boat on that one. 

Starting that backtest from when the GLD ETF actually started trading in 2004, GLD only has slight outperformance, 11.16% CAGR versus 10.84% for SPY.

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.

Retirement Fortitude

Tony Isola included the word fortitude in a blog post about retirement resilience that used Keith Richards as a model for survivability. I did a quick search and I have never used that word in any context let alone retirement but it's a great word. Retiring is not easy, there is an element of fortitude required.

We've looked at two areas that require fortitude before. One is switching from accumulation to decumulation and the other is finding purpose or meaning. But there is also the aspect of disillusionment and even a depressive state that can occur and yes, there probably is overlap with finding purpose. 

The assistant fire chief at Walker Fire has been with us for eleven years now. Part of the reason he came on board was that after he retired from 30 years with a nearby career department, he thought going cold turkey out of the fire service would not be good for him. It was good self-awareness on his part. A friend of a friend (not fire related) just retired a couple of years ago and is having a lot of trouble finding his groove. I barely know him so I have no idea the source of his difficulty but it's pretty clear and hopefully he figures it out. 

As alluded to above, finances are a component of stress in all phases of life and for people who accumulate enough money to create an income stream in retirement, dialing in how much take is difficult and something we all spend time analyzing inside and out. 

Here's a unique take from Jordan Grumet who says to "stop chickening out." He correctly points out that the 4% rule, which may now be 4.7%, is built on assuming the worst outcomes; 

• Bear markets
• Inflation spikes
• Adverse sequence of return

Ok, what's missing from his list? Expensive, unbudgetable events that are very difficult to plan for like a new roof, a serious electrical problem, anything in the sewer realm is easily in the mid-four figures and we're not even talking about dramatic health stuff that would be more expensive. No one says this, not even William Bengen who derived the 4% rule but the 4% rule's margin for safety or the reason the odds of underspending are high is that if something very expensive comes up, there's money to cover it without completely blowing a retirement plan. 

If Grumet means don't be fearful, I am on board with that but life circumstances change frequently enough that there is a need for some sort of ongoing refinement or maybe revisiting of numbers.

The above list from Retirement Manifesto is helpful. These are all important, there's probably overlap between a few of them and I would add 'get a dog' to the list. 

Figuring out the social aspects of that list can be difficult for anyone who tends to be even a little introverted. Volunteering solves that dilemma. I personally am not great or comfortable talking about nothing in a social setting. With volunteering there is usually a need to communicate and interact in conducting the normal affairs of the organization. On the last Friday of the month, a group of our firefighters who live up here full time get together to do preventative maintenance checks on the fleet of apparatus. As with everything we do (I think) there's a good mix of getting stuff done and fun interaction. But it's purposeful thanks to the task that needs doing. 

I am always going to work fitness and health into these discussions. Number 3 on my list of reasons for being a health nut is to set an example at the fire department. It has some impact but I can do better on this front. Over the course of 23 years with the department, I've seen a lot of people come through so I've collected a good sample size to see Guru's tweet playout in both directions over and over. 

Fifty years old is not elite in terms of being able to do the pack test that I always talk about but I've have seen many lose the ability to successfully complete it varying ages that I think it is still reasonably achievable. Age 65 is impressive, I don't know if it is elite, it might be. Next month I'll do my age 60 fire season pack test. I do not take it for granted but I am pretty sure I can still do it, last year I did it relatively quickly compared to the previous couple of years. 

We all have our reasons to stay fit even if there's just one, staying fit for ourselves. I've beaten the benefits to death here related to quality of time and saving money. In addition to staying fit for me and to set an example at the fire house, I want to be a good partner for my wife. 

Merry Christmas

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.

Investing In Litigation Finance?

I got an email soliciting a litigation financing fund. It's some sort of private fund that seems like an interval fund. The fees are high, there are liquidity restrictions and all the other reasons why I am not a fan of the wrapper but the underlying asset might be interesting in case it ever makes its way to some sort of wrapper that has daily liquidity.

I dug in with Copilot to start trying to learn. Litigation financing is a $20 billion market and growing. There are estimates for it to get close to $30 billion by the end of the decade. In terms of return expectations, for lower risk deals expect 8-12% returns, for average risk 12%-20% and for higher risk, 20%-30%. I'm not yet sure what makes some financing relatively more or less risky. Those numbers seem in line with the sales literature.

The correlation numbers are interesting. It also has zero correlation to managed futures and gold and a 0-0.10 correlation to merger arbitrage. Copilot was unable to find any hard data on failure rates for this type of financing but it pieced together that 65-80% of deals are successful.  

Like we discussed the other day with prediction markets, outcomes in the space have nothing to do with the economy or geopolitical events, the outcomes depend on "legal merit."  

The time horizons can be several years which Copilot says would make them difficult to package into an open ended fund (mutual fund or ETF), Copilot suggested a CEF or interval fund instead. The suggestion makes sense but the segment can evolve to where maybe it could fit into a mutual fund. Mutual funds can close to new buyers whereas ETFs can't. 

At first glance, and that is where I am trying to learn, I don't think this would be subject to volatility laundering, a specific deal doesn't fail until it fails. There's no market pricing in the odds of failure for specific financing deals. If the fund above has those types of returns then I take that to mean the interest on each deal is much higher and the return nets out the failures from the successes. 

I have no idea if litigation finance will evolve into something that will be packaged to have daily liquidity but it might. Catastrophe bonds can be had with daily liquidity. Autocallables can be had with daily liquidity. So maybe litigation finance can be too. The bigger idea is to continue seeking out assets/strategies that behave in the manner that I think people want their fixed income to behave but without the volatility of plain vanilla bonds if yields go up.

The blue line is the benchmark iShares Aggregate Bond ETF (AGG) and the other four lines are fixed income substitutes that we talk about regularly here. Putting 40% into AGG or a intermediate or longer treasury fund is a very big bet that doesn't make for great diversification. The four non-AGG strategies, aside from being much less volatile take different kinds of risks that aren't related to each other. Buying those four instead, greatly dilutes the risk versus 40% into AGG or something similar.

If someone is trying to figure out what to do with the 40, in a 60/40 context, it makes far more sense to me to spread the 40 across a half dozen that look like the above, not put it all into AGG or treasury funds. Maybe, litigation finance ends up as an accessible tool for what we're talking about and so it is worth learning about now. 

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 The Model Portfolio Sausage Is Made

Josh Brown had a very long post declaring "the war is over the human advisors won" and the robo advisors lost. Josh lumped robo in with direct indexing and ESG in terms of being failed ideas or maybe even fads. He also mentioned that there was fear in the advisor community that the robos were going to take jobs away from advisors and it actually turns out there is now a shortage of advisors. I don't know where he got that there is a shortage but I've seen that mentioned elsewhere. 

This is not something I wrote too much about, I certainly was never worried but I doubt I thought it would wither on the vine either. That I don't remember is an indication of how little I care. It seems logical that there is some demand for a simple portfolio that gets rebalanced for you at a cheap price. There is a generalization that this was a better solution for younger investors which could be the case, sure. 

It's not clear to me that robo portfolios are much different than the proliferation of ETF model portfolios, they are all over the place. A big difference is that the models are typically chosen by advisors, a form of outsourcing portfolio management where as the robos are an alternative to using an advisors. 

I asked Grok to find the most common model on the Wealthfront, one of the big robo names, platform and it came up with the following;

US Stocks (VTI): 45%

Developed International Stocks (VEA): 18%

Emerging Markets Stocks (VWO): 16%

Corporate Bonds (LQD): 12%

TIPS (SCHP): 6%

Dividend Growth Stocks (VIG): 3%

Comparing it to VBAIX and the Vanguard 2045 Target Date Fund (VTIVX).

VTIVX is a useful comparison based on its current equity weighting and mix between domestic and foreign. There's nothing wrong with the Wealthfront model but I don't know what investors are getting for their fee (the Wealthfront fees are low). I am less hung up on the performance and more interested in the lack of differentiation. An investor who is comfortable with hands off and very simple could go through the process of getting the Wealthfront model or just buying one target date fund. I don't see the advantage of the model. If there's no advantage, why do it?

We've seen this sort of thing frequently. A lot of models look very similar to the broad market on the way up and on the way down. The model is valid, it will get the job done with an adequate savings rate and no catastrophic behavioral mistakes, same the VBAIX and same as the target date fund. I would say they are not optimal, but they are definitely valid. 

An acquaintance who is also an advisor told me he wants to transition his practice to use index funds because of the potential simplicity. He's not really a portfolio manager so he went to ChatGPT and got this list but with no weightings.

• STOCKS
• SPLG     SPDR Portfolio S&P 500 ETF
• VTI         Vanguard Total Stock Market ETF
• SPMO   Invesco S&P 500 Momentum ETF
• SCHB    Schwab U.S. Broad Market ETF
• SPTM    SPDR Port S&P 1500 Comps Stk Mkt EFT
• BBUS    JPMorgan BetaBuilders U.S. Equity ETF
• VOO      Vanguard S&P 500 ETF
• GSUS    Goldman Sachs MarketBeta U.S. Equity ETF
• SCHM   Schwab US Mid Cap
• ACWX   iShares MSCI ACWI ex US ETF

• BONDS
• BND      Vanguard Total Bond Market ETF
• BIL         SPDR Blmbg 1-3 Mth T-Bill EFT
• SPSB     SPDR Portfolio Short Term Corp Bd ETF
• AGG      IShares Core U.S. Aggregate Bond ETF
• BNDX    Vanguard Total International Bond ETF

This is not to bash on ChatGPT, I don't know what exactly was asked and all of the AI interfaces are going to improve so this is just useful example of how to look at models in general. Seven of the ten equity ETFs track essentially the same thing. SPMO differentiates as does SCHM and of course ACWX is foreign. BND and AGG on the bond side track the same thing. 

For someone who really wants a portfolio of nothing but index funds, I'd say the Bogleheads are closer to having the answer than what ChatGPT spat out for my friend. It is my understanding that the Bogleheads gravitate to a three fund portfolio; domestic equity, foreign equity and a bond fund. That would be valid but at times very painful. I personally thing the answer for a very simple indexed portfolio is maybe four or five funds but I would not buy an aggregate bond fund. 

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.

Always Read The Comments

A few days ago we looked at a Yahoo article about Gen-Xers that said those folks (my folks) believe they need $1.2 million to retire but only expect to have $771,000. Of course the median balances in their 401ks are a small fraction of the $771,000 figure and the older part of the cohort is kind of getting short on time. 

Yahoo updated the article and while I didn't read it again I did go back to read new comments and I found a couple that provide testimony things we've been talking about forever.

A woman now 60 said she was not able to start saving until she was 40 and now has $500,000 accumulated. While there can come a point where it really is too late, that age is later than most people might think. We've laid out numbers where someone can start at 50 and while they may not accumulate all they need starting at that age, it is not a stretch to build up enough to create a useful income stream. 

If $500,000 isn't enough for the lady who started at 40 and is now 60, odds are pretty good that whatever she has in equities will double by the time she is 70. According to Copilot, over the last 100 years, in 80% of rolling ten year periods, the Dow Jones doubled if dividends are reinvested. The S&P 500 doesn't go back 100 years. Maybe she doesn't want to work 10 more years but it's an option and, making a bunch of assumptions, maybe she'd get lucky and the S&P 500 would double in less than 10 years and she'd be retiring with a good bit more than her current $500,000.

Quick detour to a conversation I had with one of the guys on the fire department yesterday. He's a two or three years older but semi-retired quite a while ago. He works one week a month for the company he and his partners sold. He said that his advisor teases him about how conservative he is. On a scale of 1-10, he's at 99. I did not ask him for any details but he made a comment about his wife's spending. I told him the S&P 500 is going to double whether he's invested or not so he might as well own some stock. I told him the path to 13,668 is unknowable, but it's going to happen at some point. 

Another commenter mentioned BMI. Health is our greatest source of wealth he said. I'll add that every aspect of getting older is easier when you're fit and have good body composition. You're less likely to be shelling out for prescriptions, spending time in doctors' offices and less likely to have aches and pains common to getting older. Being fit and having good body composition also allows for more optionality which might pertain to the next comment.

A 57 year old said he recently lost his job and is trying to find work. He lamented some bad financial decisions he made a long the way. He said he needs to find work by the summer but also implied that he might be able to retire now if he can't find a job. In making biggish financial decisions, I would encourage taking the viewpoint of what the older you might think, could the future you be worse off because you bought a $150,000 car?

This guy knows what's up.

Another commenter said that the AI bubble is going to pop right when Gen-X need their portfolios the most. Anyone agreeing with the commenter should set some cash aside now in case the commenter turns out to be correct.

Finally, there were many comments taking a pessimistic view on getting older related to being frail and other aspects of physical and cognitive deterioration common to old age. The tone was it's expensive and it's inevitable. Yes it could be expensive (less so if family is involved) but it is not inevitable. There is probably a selection bias to where I live but staying physically active and mentally active greatly reduces the odds of become frail and suffering other forms of deterioration or at least pushing that sort of outcome back by quite a few years. 

Our fire department has always had guys in their late 60's and early 70's able to do the arduous pack test (annual physical requirement to hike 3 miles in 45 minutes or less, wearing a 45 pound pack). Someone who stays fit enough to successfully pack test at 70 is many years from being frail if ever. There is a moderate version (2 miles, 30 minutes with 25 pounds) and I would say anyone able to do that at 70 is many years away from being frail, if ever. 

For most people, this sort of outcome will come down to habits related to diet and exercise, far less of a determinant is genetics (google it). An anecdote about genetics from my family. My father was always thin and always walked. he made it to 88 before 55 years of smoking cigars caught up to him. He had a brother who was one year younger and was overweight his entire life and didn't make it to 80. As far as cognitive deterioration, google "Type 3 diabetes" and decide for yourself.

Deadlifts, squats and farmers carry will take care of the strength part, hiking at a fast past will take care of maintaining gait speed and cutting sugar/processed foods will take care of body composition. But you should do more than just those three weight exercises.

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.

Prediction Markets Are Like Macro Hedge Funds

Ohhhhh, you're going to hate this one. This week's Barron's cover story tries to sort out what the presence of prediction markets like Kalshi or Polymarket will do to stock market investing. Some brokerage firms like Robinhood have started to integrate prediction markets onto their platforms.

Robinhood customers can bet on sports outcomes and hold stocks and bonds. For an example of how the prediction market bets work below, looking at a sporting event like tonight's James Madison/Oregon CFP game.

Based on the screenshot, betting on Oregon means risking $0.92 to make $0.08 and if you bet on JMU, you could win $0.92 from your $0.08 bet. You can also bet on various statistics, pretty much anything. This feels like gambling, at least engaging on this level, trying to predict a few outcomes here and there. 

Look under the hood at just about any macro strategy mutual fund and you will see hundreds of positions. Same with other alternative strategies, hundreds of holdings with no way to really understand how the fund is actually positioned. 

One of the reasons to consider catastrophe bonds is they have no fundamental correlation to anything. The strength of the economy, the outcome of elections nor geopolitical events will have any impact on how strong or weak the hurricane season will be. Cat bonds exist outside of all of that. 

I could see where a mutual fund or ETF centered on prediction markets would use some sort of algo or AI to continually make thousands of prediction market bets. It would be like a macro strategy for how much was going on in the fund and kind of like cat bonds, that the number of bets right or wrong would have nothing to do with the economy, the outcome of elections or geopolitical events. 

Such a fund would get a lot of predictions (bets) right and it would get a lot wrong. The win rate would be relevant but so too would be the importance of blending "sure thing" bets like Oregon in the above example and long shots like James Madison. The skill would not be in the predictions directly but in the system making and managing the bets. For example, lets say this fund buys James Madison at $0.08 and then JMU jumps out to a 14 point lead midway through the second quarter, the fund could sell the JMU bet for some sort of profit because at that point, JMU's odds of winning would improve. If the JMU side of the bet went from $0.08 to $0.30 mid-game, that would be huge win if sold. 

The outcome for such a fund would not be a binary win lose. A good outcome of constantly having thousands of bets as described might look like some sort of absolute or arbitrage like return. To reiterate, if a fund like this ever came into existence, it would bear no resemblance to any of us making a few bets here and there. 

The IDX Dynamic Fixed Income ETF (DYFI) popped up via a different Barron's article. When I see an unfamiliar fund, I always try to understand what it is trying to do. If you click through to the fund page, it clearly benchmarks to the AGG but it seems clear it is trying to have a smoother ride versus AGG. "Your bond allocation shouldn't be a source of unexpected risk."

DYFI is a fund of funds.

The small weightings to inverse funds are interesting, there's some thought going into this. 

The fund is not static. It looked much different last January.

The fund is clearly making active decisions but for now, it doesn't appear to be adding value. These numbers from Yahoo which probably only go through 11/30 aren't so hot either.

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.

Complexity & A Fun Filing

One important theme here is to make simplicity a priority. I've described portfolios as a lot of simplicity hedged with a little complexity. We've spent a little time trying to dissect autocallable ETFs which are a new and soon to be proliferating niche. 

Calamos was first to market with these packaged into ETFs. From the first post on these, I acknowledged they are very complex (yielding 14% in a 4% world should tell you that) but the further I dig in, the more complex they appear to be. Here's a video where Dave Nadig interviewed Matt Kaufman from Calamos about autocallable and the video makes it seem like they are more complex than I imagined. 

If you're going to wade in, make sure you not only invest a good amount of time learning about the product but that you continue to try to learn more. Based on the conversation in the video, there's a lot going on with these. 

Hedgeye filed for an ETF, the Hedgeye Brightside Family Office ETF. The name catches your attention, at least my attention. The allocation is interesting but a little vague too at this point. Its 50% in offense which is equities and the other 50% is vaguely (for now) split between defense and debasement. There's also a 5% slice to T-bills so really it's 45% split between d & d. 

Defense will consist of holdings that "tend to perform well when risk assets decline" which could include VIX products, perhaps trend and gold is also mentioned which covers both defense and debasement. Also in the debasement category are other commodities, just long exposure and they imply roll yield strategies as well (long backwardation, short contango). Not mentioned in the prospectus is Bitcoin, part of the bull case for Bitcoin is debasement. 

A short one tonight that I will finish on a very serious note. Someone close to me (not in the fire department) killed themselves yesterday. I certainly don't know what added up in their life to lead to this outcome but based on what I do know, this is totally out of left field. I found out earlier today and I'm not even sad yet, just stunned. 

Where this is totally out of left field, maybe this is a call to check in with people in our lives. We may not know when people are going through something if we don't ask. Maybe we get blown off but that's ok, that's an output beyond our control. Reaching out is something we can control.

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 We Take Social Security Early And Invest It?

I saw a short video where a former financial advisor turned finfluencer said he was going to take his Social Security at 62 to invest it and went on to explain why. He was youngish looking, so I doubt he's 62 yet. I don't have a link, I wasn't planning on writing about it but then as I thought more about the video, there's a big piece missing, so maybe the group here can help.

He said that we would come out ahead by taking the money at 62 and investing it versus waiting until 70. He said his breakeven between taking it at 62 versus waiting until 70 to take it was 79 meaning he'd start to come ahead with more money by waiting when he is 79 going the conventional route. That number makes intuitive sense. My breakeven is like 78.4. 

He said that by investing it though, the breakeven is never, that waiting for the age 70 amount never beats taking it at 62 and investing it. His age 62 and age 70 numbers are very close to mine so maybe he's my age? Rounding off a little, his age 62 amount is $2500 and his age 70 number is $4600. For the rest of this post we'll stick with 2025 dollars.

I asked Copilot to do the math on investing $2500 per month into an S&P 500 Index fund for eight years assuming 7% compounding, how much would he have accumulated? At 7%, there would be $324,000 at age 70, compounding at 5% there'd be $292,000 and at 9% there'd be $360,000. Yes, the index has been compounding at a higher rate for a while but planning on 12% is bad planning. 

Assuming $360,000 which might be very generous and assuming a 5% withdrawal rate which is a little aggressive but not unreasonable, there would be $18,000 in portfolio income per year at age 70 plus $30,000 of Social Security income assuming the money is now spent on living and lifestyle, so $48000 per year total. In this scenario, using his numbers, waiting until 70, the Social Security income would be $55,200. 

Where the finfluencer's idea might make sense on its face is if you think of the $360,000 accumulated by age 70 as a normal, sustainable portfolio. At a 4-5% withdrawal rate, it should of course last for a very long time. It would probably sustain taking out $22,000 per year versus a 5% growth rate. Copilot said it would last 90 years but I don't think that would actually work against a normal distribution of returns versus the linear 5% Copilot was working with. 

But here's the part I don't get. If he takes it at 62 and invests it, he can't really work and make any kind of meaningful income. If he makes $100,000/yr, which is a fine income but not killing it, then because of the so called earnings test, his SS income would get reduced to zero. He'd have nothing to invest in that case. If he's not working, where is he getting the money to live on? 

Is he spending down from his IRA or taxable account? If so, there would seem to be a Peter paying Paul element to his idea. He could have a very large Roth so he'd be getting tax free income that way. Does his spouse work? Sure, that could be the case but then he gave up his income to invest $2500/mo in an index fund? Would anyone actually be better off doing that? 

Taking income from an enormous Roth IRA could work. Copilot thinks only 0.1%-0.3% of all Roth IRAs have at least $2 million. He could be one of few people with a Roth that large but then his advice doesn't make sense for too many people at all. 

Please leave a comment if I am missing something. I must be missing something because this makes no sense. 

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.

Overweight Ground Zero May Lead To Portfolio Pain

The Wall Street Journal wrote about the recent struggles of CoreWeave's stock price. After a hot IPO, the stock price has fallen from a high of $187 to the current $68.46.

The company is part of the AI and data center ecosystem. The troubles are at least in part attributed to heavy rains in Texas causing serious delays on a build site in Denton, TX. There's more to the story including its business relationship with Nvidia that appears to be circular, causing people to think of it as being similar to the Cisco Systems (CSCO) situation from 25 years ago. 

I don't have any great insight on CRWV but this part of the market is ground zero if there turns out to be a consequence for the obvious excesses in this segment. It's not obvious that there will be a bubble popping, I'm not attempting to predict anything but we can observe there is an obvious excess and then make a decision about whether to be over/under/equal weight the risk embedded in an obvious excess. 

I've been intentionally underweight and prefer to use a sector ETF that still includes stocks that are now considered part of the communications sector like Google and Meta. The ETF will capture the upside of the segment and the downside but not face the worst of the fallout if something awful is coming. 

Jeffrey Rosenberg was on ETF IQ on Monday talking about the new iShares Systematic Alternatives Active ETF (IALT). He made a couple of interesting comments that I think might be useful for anyone interested in understanding alternatives and possibly using them. Rosenberg went out of his way to say IALT is a multi-strategy fund which allows the opportunity to avoid a strategy that might be in a period of underperforming. Opportunity is my word here because IALT needs to prove it can do that. The other interesting thing to me was that the holdings are not alternative, IALT builds alternative strategies with simple assets; equities, fixed income and currencies. I don't know, maybe that's a very geeky thing to find interesting. 

Last week we wrote about the proliferation of "moderate millionaires" as covered in the WSJ. This week we're back to Gen-X is doomed thanks to Yahoo. The comments are more interesting than the article, always read the comments. One of them was very funny. The reader paraphrased his accountant who said he's shocked by how many people are relying on inheriting money from their parents to fund their retirement and that he's even more shocked by how frequently that works out for people. 

The article cited some survey that Gen-X expects to have an average $771,000 in retirement versus the $1.2 million they think they will need. The way the word average was used rendered it meaningless and quite a few commenters noted how small the typical 401k balance is for Gen-X, one reader cited $110,000. 

Reading the comments is always fun and interesting but very little attention is given to the conversation we have here about what to do. If someone is old enough to be Gen-X then I think it is reasonable to have at least an elementary understanding of what you might need and where you are now in relation to what you might need when you retire so you can begin to figure out how to address any shortfall. Using AI can help with figuring out where you might be in 15 years or whenever. Tell it how much you have, how much you're saving and then have it run scenarios with different return assumptions. 

I'm always going to chip in with figuring out how to add an additional income stream or two by creating a job somewhere that would be enjoyable whether its full or part time which can include a monetized hobby or something you wish you would have done earlier or whatever. A 50 year old who might feel a little undersaved has a very long time to catch up on their savings and a very long time to figure out how to plug in some sort of income stream as mentioned above. 

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.

Simple But Not Well Diversified

Barron's had a short article on the proliferation of 2X single stock ETFs and the extent to which they represent an intersection of where market participation becomes gambling. At the far opposite end of the spectrum was a comment from a Barron's regular on another article who said that after 40 years, his dividend on Coca Cola (KO) exceeds his cost basis. 

This metric is called yield on cost and it certainly is a fun idea but not a real metric to evaluate a portfolio. KO has been a great long term hold, outperforming at times, lagging at times that has often yielded close to 3%. It got me to thinking about a permanent, individual stock portfolio. Instead of 25% each into an equity index, long bonds, gold and cash, what about 25% each into individual stocks that seem to combine staying power as well as some sort of easily identified demand story that bodes well, not necessarily for outperformance although that would be nice, but to benefit from survivorship bias.

In choosing those names, I am a big believer in having defense industry exposure, the demand is never ending. I chose LMT instead of the one I own for clients. JNJ is a long time client holding. Some might think of Pfizer in this context too, I've never been a fan of Pfizer I wrote an article for the Motley Fool in 2004 bagging on Pfizer and I don't view the name any differently. JNJ has evolved over the years by necessity so I am optimistic it can continue to do that when needed. 

Looking backwards, people have not been able to get enough soda (I realize there are a lot of other products) but to own it going forward is to believe they can figure out what to do if carbonated sugar water becomes less popular. This is a similar idea as very long term client holding Philip Morris. Smoking is less popular so they bought Swedish Match to get nicotine pouches. 

Microsoft also has shown it can evolve but it has gone painfully long periods of underperforming. Twenty five years ago, someone doing this exercise might have picked Intel. Intel owned the world at one point but this century is has compounded at 1.65% despite having a strong run from 2014 to mid-2021. If I had to guess, to repeat this exercise going forward, I might sub Google in for MSFT but I don't think MSFT is going to disappear in the next 75 years. 

Twenty or 25% in one stock is way more than I would ever consider, this is just a thought experiment trying to explore simplicity. Holding four ubiquitous stocks that avoid crazy CEO risk and benefit from some sort of underlying demand story that could continue many years into the future is simple but not very well diversified. 

And a quick pivot to a comment on a WSJ article about do-it-yourselfers trying to sort out whether there is an AI bubble. The commenter indicated that he is older and that he has 60% in a covered call ETF tied to the NASDAQ and 40% in "diversified high yield." That seems pretty nutty so the result was very surprising.

One of the two is the total return 60% Neos NASDAQ 100 High Income (QQQI)/40% HYG and the other one is VBAIX which is a generic proxy for a 60/40 portfolio. The price only compounding of the QQQI/HYG blend is 4.1% so it "yields" about 12%. The 4.1% is about 130 basis above the rate of inflation over the period of the backtest. 

The above is worth adding to the discussion. The same Portfolios 1 and 2, it is important to understand that high yield bonds take on some equity beta and a derivative income fund tracking QQQ is likely to fall more than a derivative income fund tracking the S&P 500 if there is some sort of AI meltdown. WTPI sells puts on the S&P 500. Portfolio 3 with WTPI and cat bonds is less volatile, goes down less and goes up less but the "yield" is still close to 12%. The real return though would be negative if all of the "yield" was taken out of the account, 1.79% price only return versus 2.82% inflation rate. 

A week or two ago I mentioned Christine Benz writing about a "good enough" portfolio. If 60% in a NASDAQ 100 derivative income fund with 40% in high yield is good enough for the original commenter then who are we to question what he should do? I wouldn't suggest anyone do this but hopefully it continues to be good enough for him.

If there is an AI bubble that pops then a portfolio holding 60% in QQQI or some other covered call ETF tied to the NASDAQ will get pummeled unless the original commenter has some sort of trigger point to sell which could spare him the pummeling or turn out to be a mistake if his trigger point turns out to be the low in an immediately forgotten about dip. If the NASDAQ cuts in half, the large distributions from QQQI could spare this guy a couple of hundred basis points but that wouldn't mean much in a down 50% world. This person has painted himself into something of a corner but his idea is interesting. 

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 Is Having A Strong Year

Neos has a suite of high yielding derivative income funds. They are not crazy high yielding, just high yielding. SPYI uses the S&P 500 as a reference security and it yields 11% and QQQI uses QQQ as its reference security and yields 13%. 

They just launched the Neos Long/Short Equity Equity Income Fund (NLSI). That sounds interesting although admittedly, they are all interesting or at least fun to look at. From the prospectus it looks like the stock picking will be bottoms up for both the long names and the short names. On top of that, it will sell put spreads on the S&P 500 for the income component. The longs will be leveraged up to 120% with 55% being short. 

I wanted to model out and this is what I came up with.

XYLG sells calls on half the portfolio and HDGE is a stock picking short fund not an inverse fund. The big step off for Portfolio 3 at the end of 2024 came a massive capital gain payout by XYLG.

If NLSI pays out something like 11%, similar to SPYI, that would be a big bogey to overcome in terms of compounding positively on a price only basis but QQQI has done it so far. FWIW, the distributions are expected to get favorable tax treatment for being index options. 

Let's check in on risk parity. The simple definition is leveraging up fixed income so the the risk contributions of equity and fixed income are the same. There's not a lot of funds in this niche and they do own more than just equities and fixed income. So they are multi-asset and I think intended to be single ticker portfolio solution like Vanguard Balanced Index (VBAIX). 

They are all doing well this year. AQRIX hasn't really had any struggles during the short period available to study. FAPYX' worst year was 2022 when it was down 9%. At first glance that might seem pretty good but that's only from August when the fund launched and much of the decline in markets had already occurred. 

RPAR is having a good year too but if you have any interest in this space, I think the conclusion is that trying to index risk parity as RPAR does is not a great idea. 

I am fascinated by risk parity but it's more intellectual curiosity than having an actual interest but it is a valid portfolio concept. I just think going heavy into duration is a tough way to make a living. 

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.

Could I Interest You In 59,000%?

First up is the Direxion Daily Technology 3X Bullish ETF (TECL) which is the best performing ETF of all time according to this week's ETF IQ. Testfol.io has it up 59,515% since its inception in 2008. The reference security is the index that underlies the Technology Sector SPDR (XLK). XLK is up 2239% in the same period. The difference of course captures the compounding effect that can work for fund holders or against them, in this case for them. 

I would imagine the dispersion between the two can be attributed to being long tech sector volatility is the right side of the trade far more often than not. For a little context, a working theory here is that levered long funds are more like a combo of the underlying plus the volatility of the underlying, not necessarily 2X or 3X the underlying. 

Since TECL's listing, XLK is up pretty close to 20X, looking forward to the next 17 years, how much will XLK go up? That's not knowable of course but assuming there's no sort of catastrophic outcome like the 1930's, it's a good bet that the S&P 500 will be up a good bet and that XLK will be up more. As we've talked about before, the tradeoff for usually being up more is that in down markets, XLK should be expected to go down more.

Look at TECL's drawdown history.

The hover is over a 59% drawdown at the end of 2018. The market fell for pretty much no reason and came right back but 59% for a quickly forgotten decline is really something. It fell 66% during the April panic this year and yet it is up 54% YTD! 

I'm not suggesting anyone should by TECL but it makes a dramatic version of a good point. Holding long term, especially indexes, will occasionally be difficult but a broad based index or an established sector or industry is not going to go to zero. Selling a broad index fund or established sector or industry just because it is down is a mistake. 

Because it's related, here's a Tweet from Mark Yusko.

The best companies occasionally go down a lot. Whatever the best performing stock will be for the next ten years will have plenty of drawdowns. Nvidia has been one of the best performing stocks of the last ten years if not the best. To paraphrase hall of fame picture Dennis Eckersley, Nvidia goes down 40% just to stay in shape on it's way to a 22,000% cumulative return in the last ten years including 35% drop this past April. 

I got an email noting that investors have been rotating out of JEPI, sells calls on S&P 500 stocks, and into JEPQ, sells covered calls on NASDAQ stocks. 

Since JEPQ listed, markets have mostly moved higher so it makes sense that JEPQ has had a more volatile ride to better returns. It's impressive that JEPQ price only has compounded positively despite its large payout. It's a "high" yielder but it's not a crazy high yielder. Staying slightly ahead of a 12% yield is not easy but JEPQ shows it's possible. Keeping up with "yields" like 30-40%, the low end of the crazy high yielders, is not really a repeatable thing. Yes, in a random year, it can happen but it's not reliably repeatable. 

Who knows if it can keep that up but for someone being ok inefficient (from a tax perspective) portfolio income, something like this is more sustainable than something that "yields" 80%. FWIW, in the same period the Global X NASDAQ 100 Covered Call ETF's (QYLD) price only compounding was negative 3.84% so you need to choose carefully. 

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.

Just Don't With 30 Year Debt

A few snippets today.

First is another stock looked at with a long term lens. 

The stock is the outperformer in blue versus the S&P 500 in green. The drawdowns for the stock are consistently larger than for the index including down 8% more in 2008. It's a good bet that people panicked out of the various drawdowns which was a mistake. It's been more volatile going up and going down and that will probably continue. The name is not important so please don't ask. If you have any stocks that behave like this and you believe in them, then selling out of impatience during one of the periods it lags is going to be a bad decision.

Meb Faber posted this;

Sound familiar? Recognizing there is an excess is easier than knowing when the music will stop. There's pretty much no way to know beyond guessing and getting lucky. Like we said just the other day, there's really no way to completely avoid the AI group of stocks without risking getting left far behind the market but the net exposure can be managed to soften a blow that might be coming.

And here's a quote from Howard Marks via Bloomberg;

“Is it prudent to accept 30 years of technological uncertainty to make a fixed-income investment that yields little more than riskless debt?” he questioned. “And will the investments funded with debt – in chips and data centers – maintain their level of productivity long enough for these 30-year obligations to be repaid?”

I've never thought of it that way before but it's fascinating. Think about it. The buildout that they are borrowing for today, he's referencing Alphabet and Meta, will be long obsolete by the time that debt matures. 

This is a whole other line of thought for why 30 year debt is better to avoid. 

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.

Moderate Millionaires?

The Wall Street Journal wrote about the proliferation of 401k millionaires as reported by Fidelity. UBS calls them "moderate millionaires" which is a nod to the reality that having a million bucks "ain't what it used to be." There were more than 900 comments. I didn't read all of them but quite a few with a lot of overlapping ideas. The following two comments captured the part of thread I found to be most interesting and productive.

A million dollars (before tax) isn't exactly extravagant by any means, I think most would need 2 million to retire nowadays.

And

I think $2.5M is probably the new bar for a "comfortable retirement", with lots of variability based on context (location one lives, expenses, etc.).

A million dollars will sustainably generate $40,000-$50,000/yr when invested in a portfolio that includes something close to a "normal" allocation to equities. Maybe that amount would go a long way to covering someone's needs or maybe not but it's not an enormous sum of money.

Do you have close to $1 million accumulated or will you? What part can $40,000-$50,000 in today's dollars play in your post-retirement financial picture? Are you likely to get up to $2 million or $2.5 million implying $80,000-$100,000 of portfolio income which sounds pretty good but I doubt anyone is driving a Ferrari, wearing a Patek Phillipe or flying private to Europe at that income level so maybe even $2.5 million "ain't what it used to be" either.

If you think you need $100,000/yr in today's dollars and aren't likely to have $2-$2.5 million, it's going to take some work and planning to figure out how to get to $100,000. Maybe someone earning a little more than most people and retiring in 2030 might expect $3000/mo and $1500 for a spousal benefit which works out to $54,000/yr which leaves $46,000 to go plus a little more to cover taxes. Having $1,150,000 would cover the $46,000 gap assuming 4% but this scenario would need another $6000 or so for federal income tax so really the need is $1.3 million but then there's no real margin for error like paying for some sort of very expensive home repair.

What if they actually reduce Social Security? That $54,000 might drop to $40,000. Note, if Social Security gets reduced, taking it before the reduction date won't spare anyone from having their payout cut. If there ends up being any sort of cliff involved it would be at some age many years from being eligible.

As we play out the scenario, being $150,000 short is not catastrophic. Someone could retire as planned and figure out how to get by on less. They could also work a little long and maybe a year or two's worth of contributions plus modest gains in the market could be the difference maker.

In the comments, I saw one or two references to "other sources of income" which I place a high priority on as being the answer. A post-retirement sidehustle/consulting/monetized hobby that pays $30,000 is like having an extra $750,000 ($30,000=4% of $750,000). In the example we're working with, $30,000 creates a margin for safety, it's not enough to dramatically enhance lifestyle.

If those numbers aren't comfortable enough then I think the answer would be adding a second additional income stream. A large enough income stream or two and you might be able to delay or greatly reduce how much you take from your portfolio early on which could mean being able to take a little more if you don't start to rely on your portfolio until 80 (RMDs don't have to be spent).

I've been writing about this idea forever and as I've gotten older I've gone down the road creating small income streams if/when we ever need them so these posts really are about sharing one way I'm preparing financially for when I'm older.

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 Don't Need Risk Management Until You Do

In April, 2022 a fraternity brother of mine who's just about exactly my age wanted my two cents about about his 401k which he had entirely invested in Vanguard 2030 Target Date Fund (VTHRX). He has since retired but is not yet accessing this piece of money. Three and half years ago, the 401k balance was a little over $400,000 which testfol.io says is now $553,000. That's a useful piece of money but I do not know if it is sufficient for his needs or if there are other accounts. I do know his house is long since paid for. 

My comments to him about VTHRX were pretty much exactly what I say now about target date funds. They can get the job done but they are not optimal. They torched people in the Financial Crisis when they were a pretty new product and they torched people in 2022. VTHRX had a 50% decline at it's Financial Crisis low when it presumably had more in equities. The 2020 Pandemic Crash decline was 24% and in 2022 it was down 21%.

Actually, holders were only truly torched if they panicked out because the fund of course went on to move higher. It has taken a suboptimal path to higher levels so it's valid but it has been a tough hold. This is good framing for all target date funds. An adequate savings rate with no bad decisions (panic selling) should get the job with a suboptimal but valid investment choice. 

Since its inception, VTHRX has compounded at 7.09% per testfol.io versus 8.22% for VBIAX. VTHRX has gotten that result with more volatility than VBIAX so again, not optimal but compounding at seven something percent can get it done. Putting it all into something that compounds at 4% will have a tough time getting it done unless the account in question won't play a primary role in a retirement plan. I'm not sure where the dividing line is but I do think 7% can be adequate. 

Like many people, my college buddy doesn't have a whole lot of interest in making a full time job out of his 401k and so some adequate choice has resulted in a decent sized account. Whether it is enough or not for him boils down to whether he saved enough (I don't know) but assuming 4%, $553,000 would pay $22,000/yr.

Now this from the WSJ that Vanguard is going to roll out a suite of target date funds that will embed an annuity into the package. Annuities are very complex and the article did not really dig in to the complexity of this new product but anyone signs up for this will, from age 55, start to have money segregated as part of the fixed income sleeve to be later moved into the annuity portion. The article said that 25% of the account will ultimately go to the annuity and based on today's numbers for a $1 million 401k, $250,000 would go into the annuity and pay $1670/mo which is about 8% annually. There will be a way to have a survivor benefit and a benefit for heirs but of course both will cost more money either with a higher fee or more likely a smaller payout.

Remember, we're dealing in the realm of suboptimal but adequate. 

To my buddy and his $553,000 401k, a quarter of that annuitized with the details that the WSJ gave means $138,000 paying 8%/yr or $11,000 plus $16,000 (4% of the remaining $415,000). This works out to $27,000/yr versus $22,000. That's not a life changing difference but it's not nothing either. 

All the drawbacks about annuities, I agree. I'm not an annuity salesman, I've never sold one and it's not going to happen in the future but all the drawbacks and fees notwithstanding, this would be the right answer for some people. You have no real interest in actively engaging or hiring someone to do that for you. It's your money you are entitled to do what ever you want. Buffer funds are suboptimal but people love them. If at some point, the CAGR is too low, that's going to be a problem for anyone going all in on a buffer fund. 

For what it's worth, Copilot says the oldest buffer fund is the Innovator S&P 500 Buffer ETF (BJUL) although it isn't that big with just under $300 million in assets. Per testfol.io, since inception, BJUL has compounded at 9.77% which is a little better than VBIAX and lags far behind the S&P 500 at 14.25%. I don't know the details of BJUL but for someone with no real interest in actively engaging or hiring someone to do it for them, it seems adequate. 

I don't think anyone reading this blog is going to want to use a target date fund, a target date fund with an annuity embedded or a buffer fund but if you are reading this blog, then there is a decent chance you are the one that family and friends go to for investing input. Someone not interested in really engaging but realizing they need to do something is looking for an easy path even if that is not the optimal path. If you're the go to, I would encourage educating on the drawbacks but realize they probably want target date funds and buffer funds all the same.  

I'll close out saying that calling buffer funds suboptimal might be overly charitable. Yes, they can compound positively, no question but the simple big drawback is there is more risk than potential reward with the "plain vanilla" fund in this niche. The upside is capped. On the way down, holders are spared the first x% like maybe 9% or 15% and then exposed to the remainder of the decline. If the S&P 500 ever cuts in half again, holders might end up down 41% in a down 50% world. There might be newer funds that address this issue which speaks to another point which is they are more complex than they first appear.

The thing with risk management is you don't need it until you need 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. 

There's No Escaping An AI Bubble

GMO had an interesting paper about what is "probably" an AI bubble with a comparison of how they managed through previous bubbles and what to do about the AI situation. 

Getting right to the title of this post, what I mean is that whatever your equity allocation is, that sleeve won't be able to avoid an AI bubble. Here's an extreme example to make the point.

NVDX and NVDS are different inverse Nvidia ETFs. If there is an AI bubble and it pops, there's no escape for NVDA common stock. But a portfolio that was half the common stock and half an inverse fund would realistically be spared the full brunt of whatever might befall NVDA. Depending on the compounding maybe the blend would even go up a little. No one should put 50% into a stock and then 50% into an inverse variation of that stock.

This is the effect that GMO is getting to in their paper. What can be added to a portfolio, in our words, to help avoid the full brunt of a large decline? GMO refers to 2022 as the Duration Bubble. They say that during the Duration Bubble they were able to sidestep the worst of the fallout with equity long/short, merger arbitrage and global macro.

This is pretty much the exact conversation we've been having here for many years. Client/personal holding BTAL is of course long/short with a short bias, clients have owned the Merger Fund since the financial crisis and maybe a weaker association but in some circles, managed futures gets labeled as systematic macro so it might be in the same neighborhood as global macro even if not exact. 

The paper seemed to be in support of the GMO Benchmark Free Allocation Fund (GBMBX) which as of its most recent reporting allocates 48.5% to equities, 23.6% to fixed income and 27.9% to alternatives which are listed as equity "dislocation" and "alternative allocation." So that's pretty vague but gives an idea of how they size into alternatives in 60/40 terms, they take a little from equities and a lot from fixed income to build out the alternative sleeve. 

GMO also talks about deemphasizing predictions in favor of what I'd describe as making observations which is an ongoing conversation here as well. They talk about the Internet bubble not in terms of crashing but some sort of mean reversion. We talked about the "Duration bubble" not in terms that rates must go up (which of course they did) but in terms of inadequate compensation for the risk taken. 

Both instances are about making an observation and then avoiding or underweighting the risk posed by that observation. With the way the S&P 500 has evolved to be so heavy in a handful of stocks, many of which are part of the AI theme, there's probably no realistic expectation of avoiding any AI bubble fallout that might come along. If you have 10% in domestic equities, that 10% would get hit hard. If you have 90% in domestic equities, that 90% would get hit hard. What could spare the bottom line of your portfolio is what you do with whatever percentage is not in domestic equities. 

Since there's no way to know if or when there will be any consequence for the current AI market excess, it would be a bad idea to put 40% into an inverse S&P 500 fund against 60% in the S&P 500. If there's never a decline, that 40% will eventually evaporate. What if stocks go down and interest rates go up due to concerns about inflation? That was part of the story in 2022 and currently reported price inflation is simmering persistently above the 2% target. Many would argue that reported price inflation greatly understates what's really going on so some sort of stocks down, yields up scenario would not be a black swan from here. 

I concede that most people won't go to the extreme avoidance of duration as I do but underweighting it seems like a pretty good idea based on current observations. 

One way we've positioned certain alternatives is to say they do what people think/hope fixed income will do which is have very little volatility and trend gently higher.

The outcome of the Merger Fund is what I believe people want their bonds to do and in line with what people should expect from this fund. Other alts seek different outcomes of course. BTAL is essentially an inverse fund, managed futures seeks to be closer to all weather but doesn't always live up to that. Managed futures was great in 2022, a tough hold in 2023 and 2024 and doing pretty well (not great) this year. 

With each successive adverse market event there have been more tools available to help avoid the full brunt and that trend will likely continue. The importance here, said more directly, is that bonds with duration are no longer in the 40 year one way trade they were in, that's over. If bonds can now trade in both directions that makes them less reliable as diversifiers as we saw in 2022 and repeating for emphasis, some sort of run where stocks go down and interest rates go up is far from an impossibility. 

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.