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. 

Nouriel Roubini's ETF Is Doing Well

There was a quick mention of the Atlas America ETF (USAF) in Barron's. USAF is comanaged by Nouriel Roubini, we dug in when it first listed. For that post last year I constructed a backtest and concluded that it seeks an absolute return or maybe market neutral type of result. There's a lot of short term treasuries and gold, it has a little bit in an inverse long term treasury ETF, there's REIT exposure, a long put spread (bearish position or a hedge) on the S&P 500 and it is short put spreads (a bullish position) on gold. There's also defense industry/cyber security exposure too. 

Sure enough, it has been very steady.

Now subbing in for AGG in a 60/40 portfolio.

USAF is only one year old so the sample size is small but the result is a little better than plain vanilla AGG-like bond exposure. Getting a similar result as AGG without the interest rate risk posed by AGG is a good outcome. 

Maybe intermediate and longer term rates will never go up again, I don't know but if they do go up then we know that AGG would get hit. A fund that avoids intermediate and longer term rates, like USAF, would avoid that potential hit. 

The point is not to be in the business of trying to predict anything but if we can get an AGG like result (from when AGG is doing well) without taking on AGG's biggest risk, that seems like a good trade.

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.

Scottish Portfolio Management

Barry Ritholtz had a great post about Sturgeon's Law. As Barry explains it, Theodore Sturgeon was a science fiction writer who when asked why so much science fiction is bad he said "90% of everything is crap." Barry pivoted that quote to what he called Sturgeon's Corollary, "90% of all investment products are crap."

This works on a couple of levels for what we do here. The most important one for what you actually do in your portfolio or for clients if you're an advisor is to avoid most of the new stuff, most of the complex stuff and most of the expensive stuff. We talk about private equity and credit in this context but there are others. The odds are high that expensive, complex products will not be worth the extra fees. Some will be but most will not whether Barry's 90/10 idea is the right number or not, most should be avoided. 

That doesn't mean it's not worth sifting through what is likely to be crap for that 10% that won't be crap. I've never thought about this sort of pareto principle aspect to it but this is why we spend time revisiting things like derivative income funds (mostly crap), some of the levered products (mostly crap), managed futures (mixed bag) or catastrophe bonds (pretty good for the most part). 

By sifting through, occasionally I find something I believe will be additive to the portfolio

There is a different layer for advisors, maybe, for me anyway. I've said this before but I don't want to get asked questions by clients for which I have absolutely no answer. It could happen that I have no answer for something of course but I am very motivated to try.

That gets us to this chart. I saw a Tweet promoting the ETF version of RDMIX, the ETF trades in Canada, RDMIX trades in the US. RDMIX has changed its strategy at least twice and is currently 100% equity and 100% global macro. The fund did great in early 2022 and has struggled since. This year it corrected hard in April and is up a lot since, netting out to a 6.3% gain per Yahoo Finance.

RDMIX is in blue, HEQT is hedged equity, LCR is multi asset core and of course VBAIX is plain vanilla 60/40. Since the April low, RDMIX is up 18% which is in line with the other three funds. Far more often than not, when we look at these funds, I struggle to see what benefit the complexity (leverage) gives you.

I will always be willing to sift and revisit but also very selective to use.

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. 

Sleepability Versus Optimality

First up is a conversation started by Cullen Roche about defined outcome/buffer funds.

Part of our regular discussion here includes referring to funds or strategies as being valid even if not optimal. Using buffer funds as equity proxies is far from optimal but it can be valid. You've probably heard and read people talk about having a portfolio that you can live with or will let you sleep at night which is probably why buffer funds have become so popular. 

The math supports the AQR notion that you'd be better off owning less in equities and more cash to capture the buffer effect. I don't think I've seen AQR allege that any of the buffer funds have malfunctioned, just that they are inferior which they probably are. Smart people mock line item risk but from the end user's viewpoint it might be easier to stay invested when instead of a 30% decline like the Covid panic in 2020, their buffer fund only drops 15% (just making up an example) irrespective of the portfolio weighting. 

Cullen obviously makes the point about sleeping in his comment. For the last 15 years, the S&P 500 has compounded at 14.79% and 60/40 as measured by VBAIX has compounded at 9.92% with 10 drawdowns of at least 10% for the S&P 500. The corresponding drawdowns for VBAIX were usually less but not always. Maybe someone can get what they need compounding at only half that rate for being a little ahead of where they need to be with their account balance and feeling they cannot tolerate huge declines very well. 

Look back at the same 15 year period and the drawdowns and realize that in every single one, people panicked out believing whatever the event, it was somehow different. Of course none of the were different and market kept working higher even if in fits and starts occasionally. 

Tony Isola wrote about what he called the first decade retirement plan which focused on health adjusted life expectancy, the years where people are still able bodied before getting "old." The amount of time that we are living after being able bodied is increasing which is negative in terms going many years without being able to do what you want to do. 

I didn't see a source cited for the chart but if I'm reading that correctly it's saying beyond 64, we collectively deteriorate quickly. In many (I think most) cases this is very preventable. We learn as children to exercise and not eat too much sugar and of course the vast majority of people do not exercise and do eat too much sugar. 

There are of course financial implications for retirees either spending a lot on medication or not if healthy and fit and quality of life issues with how they feel and what they are able to do with their time versus spending time in endless doctors' waiting rooms waiting for appointments. 

We all know or have known people in their 70's capable great things physically, maybe running or ability to climb mountains or whatever. Some slice of the population will simply be lucky on this front but most, me included, just need to put in the work. Not even a lot of work. 

@Mangan150 on Twitter talks constantly about just needing an hour/wk of intense exercise and then being somewhat active during the week. I would encourage a little more than that but people just trying to be lean and fit do not need to be in the gym everyday and don't need to spend many hours every week. A moderate amount goes a long way.

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.

Turning 60/40 Upside Down

I wanted to do a quick experiment with a 60/40 portfolio. Can we get a similar result allocating 60% to some sort of fixed income sector and 40% to some sort of muted equity exposure. The first thing that came to mind was 60% into a convertible bond fund and 40% into a defined outcome "equity" ETF. For the period I studied, convert plus defined outcome was about 300 basis points short which surprised me, I thought it would be closer. I tried asking Copilot which fund or ETF is most correlated to the S&P 500 and it said CWB which is the first convertible fund I tried. I thought that was funny. 

Portfolio 2 is interesting. It's had the same growth rate as plain vanilla 60/40 but with only 2/3 the volatility. 

The first question might be whether Portfolio 2 just captures a low volatility effect. Short answer is no.

The point of this is just to underscore the importance of understanding not only what a fund owns but what the strategy, if there is one, is trying to achieve. We've used the example of long/short many times in this context. Some long/short funds are trying to offer equity beta, trying to outperform, some are absolute return/market neutral and a couple are essentially inverse funds. 

Short post tonight.

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 Internet Hates Michael Green

Michael Green was out with Part 2 of his much discussed and somewhat controversial look at the poverty line in the US. We looked at the post here and then discussed some of the reaction here. Here's Part 1 from Green. 

Most of Part 2 turned out to be point/counterpointing with some of the critics, most notably, Scott Winship whose article we also dissected. From there, Green pretty much said home ownership is a scam, 401ks are a scam and so is higher education. There's more nuance which we'll get to but my reaction was pretty much... 

With owning a house, he said price appreciation is actually just inflation. If you buy a house for $200,000 and it goes to $1 million, what then? If you sell it, you'd just be trading into another $1 million house. Home value appreciation is just an illusion that is encouraged to make people feel wealthier without any actual wealth he said. 

He touches on trading down but seems to dismiss the possibility. If someone needs to access the equity in their house for retirement, having the house gives them optionality to downsize, assuming it's paid for. It will take some work to find the right downsize situation but it is possible. 

Green refers to the 401k mirage, noting that only the wealthiest benefit, the wealthiest own the majority of the stocks (true) and that typical 401k participants own target date funds. I am certainly not a fan of target date funds but they can work.

That goes back ten years. It assumes starting with $1000 and putting in $1000 every month (so no raises along the way) and both funds have created a decent retirement balance, not enormously wealthy but pretty good for ten years. Testfol.io had clearly incorrect data but Copilot said that starting with $1000 in 2007 when the funds launched, adding $1000 every month the balance now would be;

Again, I don't think target date funds are optimal but they are valid. This doesn't seem like an illusion to me. 

Green correctly sounds a cautionary tone about private equity eventually making its way into 401k plans. He said what we've said, they need more suckers. 

The last thing I will mention is his taking down of the "great wealth transfer." I've been hearing about this since the late 80's with money going to boomers back then from their parents. Did it happen? Hard to quantify but Green says the money that millennials and Gen-Z expects to get will instead pay long term care bills. If you google it, you might find that the health department says 70% of older American will need long term care. 

Anecdotally, that seems absurdly high. I asked Copilot to dig deeper. The 70% includes family helping their parents and grandparents. Copilot says 35-40% will need to go into a nursing home with only 10-15% staying more than two years. Ok but copilot says there are now 1.3 million Americans in nursing homes but the population of people 70 or older is 37 million. Yes there will probably be growth in the number of people who need nursing home care but 35-40% is still way too high. 

I think counting on an inheritance makes for a terrible retirement plan for several reasons but the healthcare angle the Green takes is far more pessimistic than the reality. 

Green in both essays (a Part 3 is coming) paints a bleak picture. The internet is falling all over itself trying to debunk and bash what Green has written thus far. It's kind of odd actually. If you want to delve into the details of Green's numbers, go for it but it is hard to look at the big picture of the questions Green is asking and feel optimistic. 

I'm always going to bang the drum of taking matters into our own hands to minimize reliance on other people figuring it out for us. If "they" (the government) figure it out great but that is clearly not their top priority and in meantime we're living our lives now while "they" spend time not solving any problems.

Live below your means, take care of yourself physically and stay curious/engaged.

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

What Do You Mean FIRE Is Obsolete?

Sam Dogen, aka the Financial Samurai and an early proponent of the FIRE movement had an intriguing post saying that Early Retirement/FIRE is becoming obsolete. The TLDR is that having more opportunity to work from home (a Covid byproduct) has created more of a sense of independence from better time ownership and the lack of a commute makes work more enjoyable. 

FIRE is an fun topic to write about and explore but the focus here has always been on the financial independence aspect, the FI in the acronym. The commute comments really resonated with me, that was a big driver for me trying to get to the point of working from home which I did, starting in 2003. Anytime I tell someone I've been working at home for that long I always throw in "thank God for the internet" which always gets a nod and a chuckle. 

A little while back I commented that I thought I've been in coast FIRE mode for awhile which means not necessarily having to save more for retirement but still needing to let the money grow without living off of it yet. Sam crapped on that one pretty good but didn't elaborate, simply saying it's an illusion and a participation trophy. I wish he would have dug in a little deeper on that because below is a chart he shared that I take to support the concept coast fire.

It doesn't matter whether you agree with the expected amount needed column or not, you're in one of those demographics, you have some sort of framework of what you think you need and you have some amount already accumulated. I take coast fire to be about optionality. If you're 50 and you have 85% of what you think you need, it seems to me like you can coast with some optionality. That might mean gearing down into a lower paying job that you enjoy more or if you enjoy what you do, maybe you can allocate more of your income to whatever your idea of fun or discretionary spending might be.   

We all have our own opinions and beliefs about every aspect of retirement from whether to even do it, when to do it and how our finances should work which gets us to one article from Barron's and one from Yahoo, both about when to take Social Security. 

The comments, especially on the Yahoo article were worth reading. One common theme to comments on these posts is the belief that people can do better themselves by taking the money early and investing it in the stock market. Speaking to beliefs, ok, maybe you can do better yourself than the 8% annual step up in Social Security payouts but there's more than that, there's also the COLA adjustment. Here's the last ten years of COLA adjustments from Copilot.

Year	COLA (%)
2016	0.3
2017	2.0
2018	2.8
2019	1.6
2020	1.3
2021	5.9
2022	8.7
2023	3.2
2024	2.5
2025	2.8

If the average year in the stock market is 8-9% and average COLA is 3.11% or 2.65% for the median if you prefer, then the hurdle rate becomes quite a bit higher. Now add the complexity that there are very few years that the stock market hits the average return (usually more or less than the average) and this becomes even more complicated. If Social Security is like the fixed income portion of an investor's portfolio (Jack Bogle said that) then trying to capture the stock market effect with that money increases the exposure to volatility. 

It's not for me to say what someone else should ultimately do but it's important to make all of these decisions based on an accurate framing. This point is similar to whether to take Social Security early or not, irrespective of investing it in the stock market. Take the time to understand the differences between taking it early and waiting (meaning how the numbers and math works) and then once the math is dialed in, applying that math to your particulars. 

Uninformed people are going to make poor decisions. JP below is destined to make a bad decision if he doesn't take a little time to understand the problem

Social security payments aren't going away. Occasionally people will comment about taking it before the cuts potentially take effect. Making the decision based on thinking you won't endure a benefit cut is a bad decision. There will not be a cliff like that. Maybe people above a certain age won't be impacted (this is my belief) or maybe not but taking it early will not by itself spare you from a benefit reduction. 

If your age 62 payout is $2000 and there is a 25% haircut you'll get $1500, if your age 70 number is $4000 and there is a cut, you will get $3000. When you start won't change that. 

If you want to take it 62 but plan to keep working, they withhold $1 for every $2 earned above $23,400 and they do that until you it your full retirement age (FRA). You get it back when you reach your FRA but in the interim the payout would be small. Maybe that is still worth it, not for me to say but the point of digging into these things before you pull trigger is something everyone should do. 

I'm seeing more acknowledgment of what I think is an important determinant which is waiting until 70 so that the lower earning spouse has a higher survivor benefit. That's not to say it resonates with too many people, it doesn't seem like it does but that's ok, we each have our own beliefs. Part of the pushback on this point seems to be a notion of winning versus losing against Social Security. Like my breakeven for waiting until 70 versus taking it at 62 is 79 and three months. If I die at 77, then I will have "lost" even though I would have provided for my wife. I might be in the minority on this but if I get what I want out of it while I am alive, I don't understand caring about after I'm dead. 

Whatever your beliefs about any and all aspects of retirement and Social Security, invest the time needed to make the right decisions for what it is you actually want. The whole system is overly complicated and it easy to get important details wrong. 

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.

Want To Make Your Great Grandkids Rich?

Some quick hits today. We're hosting a late Thanksgiving today for my wife's family. We've been hosting for quite a while. The food is great, there's football on and we collectively do a very good job of leaving our very disparate political opinions at the door. 

A few times we've looked at the Leuthold Core ETF (LCR) which is a multi asset fund that I would say is trying to be a single ticker portfolio idea and I think it does pretty well in that regard. It's actively managed and they really do manage it actively. Since its inception almost six years ago;

A one ticker portfolio is intriguing for the simplicity and there are quite a few of them where the long term result would be valid but every so often they will get pasted in some sort of "never happened before" market event.

BLNDX and BTAL are client and personal holdings. Portfolio 3 with BLNDX certainly is differentiated but would have been very difficult to hold in 2023 and this year as BLNDX just sort of lingered. Splitting the 50% sleeve equally between LCR and BLNDX helped slightly with 2023 and 2025 but still would have required patience.

Ben Carlson shared a different take on sequence of return risk from a mentor of his that I thought was very interesting. Read the post but the short version is set aside four years worth of expected portfolio income needs in cash or the like so you don't have to sell stocks after a large decline but if there is no large decline, leave the cash alone and do sell portfolio holdings so long as prices are high-ish. 

The FT had a fun one about Austrian century bonds. There are three issues that mature from 2117-2121, they were issued when global rates were very low so the prices have absolutely cratered. The FT notes that one of them is trading at €0.0265, two and half cents on the euro which might be the lowest price ever for a bond that is not in default. The issues are small but it might be an interesting idea to create wealth for your great grandkids. 

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.

Incendiary Capital Management

Defiance ETFs has issued derivative income funds using at least four different strategies. One that I had not heard of was Lightning Spread. There's one fund with the strategy currently, the Defiance NASDAQ 100 LightningSpread Income ETF (QLDY). ETF Hearsay Tweeted that Defiance has filed for 18 more targeting some individual stocks, a couple of cryptos and a few themes. 

The big idea is going long with deep in the money calls and then selling 0dte put spreads for income with the intention of paying two times per week. QLDY started trading in mid-September and has paid out just over $3 in distributions versus its starting point price at about $50, so 6% in two months which extrapolates to 36% per year. Grain of salt on the 36% of course. 

The boilerplate on the fund page is very clear about erosion and the other obstacles these types of funds have. Somewhere in the Tuttle universe are funds that sell put spreads, notably on Bitcoin. Part of the pitch is that by selling put spreads, the upside isn't being capped like with covered calls. That might be true under the hood but QLDY is going have a hard time overcoming the very high distribution rate whether it is anywhere close to 36% or not. Here's the price only for just the two months it's been out.

We built this sort of thing many times before.

The blend "yields" about 5% and as the QLDY page notes, there will be a lot of return of capital so it very well could be tax efficient. The 70% in QQQ can be rebalanced into QLDY as its price erodes which it will do. QQQ has compounded at just over 10% per year which I believe can more than offset QLDY's erosion based on how I weighted QLDY in the portfolios. The only realistic way QLDY goes to zero would be some sort of malfunction in the realm of being a black swan, QQQ isn't going zero. Like we've said before, the likeliest outcome is they go down a lot and then reverse split like we've seen others do. The more volatile the underlying the quicker it's likely to need to reverse split (think Strategy, Tesla and Bitcoin). While QQQ won't go to zero, who knows about things like Strategy?

As I was working on this post I saw a Tweet from YieldMax about their funds reverse splitting as apparently there are quite a few coming up. The comments are incendiary. People are pissed. I'm pretty sure this is all about incorrect expectations. When I first wrote about them three years ago, I did not realize they were going to "yield" 50% or more. I referred to harnessing volatility to get some basis points but it then became clear from YieldMax itself when the distributions started printing that they had no shot of keeping up with their respective reference securities. The boilerplate was clear and their social media efforts talked about reinvesting the dividends (DRIP). They don't talk about that much anymore. 

The objective with the above income strategy isn't about keeping up with QQQ or whatever the underlying is because it's not going to do that. Someone needs income and thinks this can work. My context is some sort of finite window like retired but waiting to take Social Security or waiting to take IRA distributions If there is growth that outpaces the erosion of the slice allocated to the crazy high yielder and the overall return stays ahead of inflation, then I'd say it's working. Maybe not optimal, depending on how it plays out, that's unknowable going in, but working.

I had an additional thought on how to frame ever owning a crazy high yielder in the context laid out in the above paragraph. What might last longer, leaving the account in cash and just withdrawing until it's gone or some sort of higher "yielding" blend? If you avoid crazy CEO risk and avoid crypto volatility, plenty of the crazy high yielders avoid those risks, then something like Portfolios 2 and 3 can sustain for that finite window we talked about. It won't keep up, but that's not the objective. Repeating for emphasis, keeping up is not the objective. The objective is sustaining for some finite period of time. 

If you're 30 or 40 and still accumulating, I don't know why you'd ever buy a crazy high yielder. 

I haven't done anything remotely close to this for any clients but it's interesting theoretically. I would take these posts as being about exploration and theory that maybe becomes useful a couple of iterations down the road. If anything like this could ever make sense, I suspect it would have to do with selling puts not selling calls. 

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.

$140,000 Poverty? The Internet Has Thoughts

The other day we took a look at an essay by Michael Green that sought to redefine how we think about poverty in the US. Green worked through a process that arrives at $140,000 being a more accurate or updated number that accounts for the way life has evolved with respect to skyrocketing of certain costs far in excess of the increase in reported price inflation and the addition of new expenses that didn't exist when the framework for poverty (as the government tries to calculate it) was derived.  

A lot of different outlets took up the essay and several other posts went after Green's premise pretty hard. Scott Winship wrote about "debunking the worst poverty analysis I've ever seen" and the National Review included the phrase 'good grief' in trying to pick apart the Green commentary.

The Green essay is an interesting read because it challenges conventional thinking and I think it is useful to try to look at things differently versus some sort of consensus. If you read my first post on it, hopefully it was clear I wasn't trying to agree or disagree with Green so much as explore what if he's right and if so, how to try to start solving it from the bottom up. Like most of us, I have no top down ideas for issues of this scope.

Both rebuttal articles really went after the minutia of the food computation part of the poverty formula which seems to really miss the point. Winship especially went on and on. I'm just going to assume the guy is orders of magnitude smarter than me but the amount of time he spent on why the food portion is "wrong" seems like a first level-thinking festival. I took Green's comments about the food to be background context or maybe a starting point for his thesis, not his thesis.

Some numbers from Copilot that I would say get into the conclusions Green is drawing. In 2005 child daycare cost $39 per week per child, today it is $343 per week per child which is very close to the current $32,000 that Green came up with for a family of four. And as Green noted, there was a point further back than 2005 where child daycare wasn't an common expense for young families. Health insurance was $2585 out of pocket in 2005 versus $6850 out of pocket now. The $6850 seems light to me but it assumes most of the cost is being covered by the employer. Inflation was 2.5% per year, cumulatively 64% versus 150% for the premiums.

Has home insurance gone up dramatically where you live? We very recently used to pay less than $1000/yr. This year we are paying $3000 after getting quoted $5400 a year ago before shopping around. We're grandfathered in for some period of time but the company charging us $3000 is writing new policies here for $5000-$10,000 and I've seen other people here get quoted $15,000. The risk we're being penalized for is wildland fires. In other places it is hurricanes or tornadoes. 

The average cost of a new car in 2005 was $28,000 versus $49,000 now which is slightly ahead of the rate of price inflation in that time. Yes the safety features are vastly improved but cost has gone up at a rate greater than the reported inflation rate by the government. Citing new car data is a little different because there is an element of discretion over what type of vehicle to drive. We have one pretty new care and one very old one. While most people probably don't drive 20 year old cars (our Tundra is a 2006), what about driving ten year old cars? No payments (hopefully) on those. 

All of these items and others I am probably overlooking reasonably change the math on poverty even if $140,000 is not the correct number. In the past, I've laid out one definition of success as being able to pay the bills and save for the future with a little left over to have some fun. 

A two-earner family of four making $100,000-$120,000 isn't paying a lot of federal income tax but they have to pay the employee half of Social Security tax which would be $7500-$9000. Assume a $1500 mortgage implying they bought a few years ago (the current average is $2300) and that's $18,000, health insurance at $6800, only one child needs day care for $17,000. Home insurance for $2000 (no expensive perils in this example). Can we assume one car payment? That could be $800 ($45,000 loan for five years) or $9600 for the year which gets us to almost $45,000 in expenses. 

We've taken up 37-45% of this couple's gross income with out buying any food, meeting any of the kids' needs, paying any monthly bills or saving for retirement. Poverty might not be the best adjective for this scenario but it's very difficult to see these folks getting ahead. How many places would $100,000 not be considered middle class? There are a few according to Copilot but not many. The DC area, Massachusetts, New Hampshire and a few others but it is unlikely that someone bought a house in any of those areas just a few years ago and only has a $1500 mortgage payment.

The various expenses that Green cited and that I tried to capture in my example are certainly not going to go down in price but will the rate of increases slow down? If yes, then maybe people can start to catch up if not then the problem that Green is actually talking about will only get worse. 

Another point that was either ignored or given very little attention in the rebuttals that Green really harped on was potentially being worse off financially moving up into the lower end of the middle class as eligibility for government assistance for housing, food and health insurance is lost. It's sort of like a Freakonomics sort of unintended consequence. I am not a fan of government support while at the same time realizing that people need it and I don't know how to reconcile those two opinions. 

A quick pivot to an essay by aging expert Ken Stern titled I'm 62, Stop Telling Me I'm Old. The essay covers ground we've looked at including people being old at some random age or being young at that same random age. I think habits are a huge driver here but Stern didn't go too far down that road. He did mention the importance of retaining the ability to walk fast and maintain grip strength. Odds are you know people your age who can no longer walk fast and cannot give a firm handshake. Do whatever you need to in order to maintain both.

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.

Managed Futures Face Ripper?

Don't look now but managed futures have been doing ok for the last six or seven months. Not a face ripper, but pretty good. There's plenty of dispersion in the universe of funds but far from terrible like the last couple of years.

In terms of setting expectations, I would not count on managed futures to keep up with equities in a strong market but they don't have to go down when stocks go up.

Maybe on the heels of 2022 or maybe because of this year's decent performance, JP Morgan has filed for a 100% equities/100% managed futures product that is similar to the Return Stacked US Stocks & Managed Futures ETF (RSST). In response to the filing, Corey Hoffstein Tweeted out a list of several funds that combine equities and managed futures using varying degrees of leverage including the Catalyst/Aspect Enhanced Multi Asset Fund (CASIX). This fund leverages up to 100% 60/40 and 100% managed futures. I heard about this fund when it listed but haven't circled back until now. 

CASIX owns 40% in AGG, it gets its equity via futures and ETFs and then runs a managed futures program on top of that. There is a growing number of funds that blend managed futures with other things, some seem to work pretty well while others do not.

Testfol.io had some sort of distortion for CASIX that I think made the data erroneous. Portfoliovisualizer seems to be correct. I tried to get all of the portfolios to 60% equities, Portfolio 1 has more managed futures and I added absolute return where it would fit. Only Portfolio 3 avoids AGG-like fixed income exposure. 

CASIX seemed to get hit especially hard in April but since May it has traded right inline with the other three portfolios. The trouble acutely visible in April, actually started long before then.

These multi-asset funds really are a mixed bag. Some of them do pretty well to be sure but CASIX seems to have really struggled, it must have been the managed futures program that held it back. There really is dispersion in the managed futures space and it's not that the same funds necessarily always do well while a different batch always do poorly so maybe it's just bad luck with CASIX.

I can't quite see how CASIX would be used in moderation. If you put 50% in CASIX, that gives a 30% weighting to equities and 50% in managed futures which is a lot. If you put 100% into CASIX, that's obviously a 100% allocation to managed futures. If you play around with VBAIX (half of CASIX is essentially VBAIX) versus a bunch of different managed futures funds you'll see varying degrees of negative correlations which will offset some portion of the VBAIX-like exposure in CASIX weighing down overall returns. If you believe in managed futures as a diversifier, I do, then I don't see how the blending math in CASIX can work. If you wanted 20% managed futures, I'm not sure it makes sense to allocate 20% CASIX to get it. 

But if lower volatility is the goal, the are plenty of better ways to do that including Portfolios 2 and 3 which I pretty much just pulled out of the air. 

A funny follow up to yesterday's post. I mentioned that there has essentially been no differentiation between the iShares US Quality ETF (QUAL) and the S&P 500 Index which is of course market cap weighted. I got an email from an ETF provider promoting their quality ETF that noted....the lack of differentiation between QUAL and the S&P 500 Index.

And a quick closeout with a stock I've held for clients since 2004, having a monster year in 2025, up about 40% versus 14% for the S&P 500.

It's a relatively low vol name that is considered a defensive stock in blue. It drifted for a couple of years before ripping this year. You can observe on the chart generally much smaller drawdowns, only 7% in 2008 and it was up in 2022. Once you accept that no stock or fund can always be best, there's been no reason to sell the name the whole time I've owned it. Sometimes it's outperformed, sometimes it's lagged and that recent run of underperformance appears to be it's worst multiyear period on a relative basis for as far back as testfol.io goes. I expect the same, going forward. I think the stock price will be fine and I have unyielding faith it will continue to do well as a defensive hold. 

Impatience is an emotion that leads to bad decisions. No one can make the best decision every time but recognizing impatience seems a little easier to overcome than a fear based reaction. If that's correct, don't be too quick to throw in the towel.

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.

Factoring Expectations

Whenever we've talked about factor funds like momentum, buybacks or maybe something dividend related I usually say something along the lines of if you're going to pick a factor, it is very important that you stick with it for a long time. The odds of getting into a factor that has done well of late only to see it then struggle are high in a Murphy's Law sort of way. But if it is a valid factor, it will have its time in the sun. If there is any value to factor investing it is that it works longer term. Anything else and the result is likely just continually chasing the factor that was hot last year. This behavior will lead to underperforming. 

In selecting a factor other than market cap weighting, I think there needs to be some reasonable basis to believe it will differentiate. For example, based on how it has performed since inception, I don't know why anyone would choose the iShares Quality Factor ETF (QUAL). It looks identical to the S&P 500.

It's not the quality factor itself, it's the fund. There are other quality factor funds that don't track as closely as QUAL. 

I had the above thought about factors as I read this from Jeff Ptak about the difference between fund performance and the return that investors actually get from those funds. The difference or "gap" is not about the funds, it's about investor behavior like buying JEPI after its great 2022 only to sell it at the end of 2023 because it lagged by a mile. You could apply that example to managed futures funds. Jeff looked at several alt categories and the gap varied depending on the fund but other than precious metals funds, investors generally underperformed the funds they held due to poor timing buying and selling. 

The problem isn't the funds, it's investor behavior that causes the issue. For this article, Jeff looked at funds that...

...utilize approaches that aren’t tethered to the broad stock and bond markets. These types of funds boast high diversification potential and thus, in theory, could nicely complement one’s primary stock and bond allocations. But because they’re idiosyncratic, it’s also possible they could push investors’ buttons, nullifying whatever diversification benefits they might confer.

Dialing it in a little more precisely, I think this is about having the wrong expectation. "High diversification potential" means won't look like the stock market. Client/personal holding BTAL is a great example. It is reliably, negatively correlated to the stock market. There's no other reason to buy it other than for that attribute. If it's doing well, chances are everything else is doing poorly. You want BTAL to do poorly but watching it do poorly can lead to giving up right before you might need it again. Managed futures is another example. It can do well when stocks are going up but it goes long stretches of languishing when stocks are going up. Watching managed futures do poorly can lead to giving up right before you might need it again, repeated for emphasis. 

Investors might think they want this;

But it means living through this;

The blue line portfolio will get the job done but it will differentiate which means it will occasionally lag behind a more traditional 60/40 which is a breeding ground for impatience and giving up at exactly the wrong time. 

One nit to pick from Jeff's article is that with the correct expectations, I don't think buying at the wrong time is that big of an issue. Whether you buy something like BTAL when it's up a lot like in April of this year or now when it is down, going forward it is very likely to continue to be negatively correlated to equities. Regardless of when it is bought, if the next 20% for the S&P 500 is up, then BTAL should be expected to drop and if the next 20% for the S&P 500 is down, then I would expect BTAL to go up. 

A week or two ago we looked at the latest autocallable ETF and the performance thus far of the first one. Both are from Calamos with symbols CAIQ and CAIE respectively. A commenter noted that because of what the index underlying CAIE actually tracks, that the fund got much closer to having the distribution suspended. Down 40% and the payouts stop until it gets back above the down 40 mark. I replied that I was probably being sloppy in saying the S&P 500 when the actual index isn't quite the S&P 500, it is the Merqube US Large-Cap Vol Advantage Autocallable Index which is close but not exact. 

Today I took a look and maybe I don't get it yet but I don't think it got anywhere near the point where distributions would be suspended.

Here's the link to the Merqube site if you want to dig in closer. 

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.

90% Are Below The Poverty Line?

Michael Green from Simplify wrote a brutal article dissecting the financial plight of the "middle class" that pretty much blows up the dollar assumptions underlying the poverty line and the disincentive to move up financially from poor to middle class. Really, the lower end of middle class. Brutal may not be a strong enough word.

I will try to do the article justice but need to acknowledge that I've been lucky but also somewhat insulated. I live semi-rurally and I work from home. 

Green starts with an early definition of the poverty line from 1963 that pegged three times food costs based on food taking up about 1/3 of the family budget back then. Housing and healthcare costs have grown at rates far exceeding inflation and because both partners need to work, the element of expensive child daycare now needs to be added to the mix. There are also "hedonic adjustments" with the example given of landlines versus smartphones. Green figures that a landline adjusted for inflation should cost $58 month but life now pretty much requires a smartphone that he pegs at $200/mo. Yes we benefit from the utility of smartphones but the choice to have them has been taken away, he argues. This is true for things like 2FA or how parents interact with their kids' schools. 

Below the poverty line, people get help for housing, food, healthcare and daycare. As income goes up, people lose eligibility for these programs so while their salary may have gone up, their out of pocket for these things also goes up and as Green lays out, people may actually be worse off by a small income bump that is more than offset by even larger increases in those expenses. 

We recently looked at the health insurance subsidy from healthcare.gov for 2026. At $84,000/yr of income, the 2026 subsidy is over $2000/month. At $85,000 of income, no subsidy (per the calculator I found online). That example is exactly the thing that Green is talking about. "Every dollar you earn climbing from $40,000 to $100,000 triggers benefit losses that exceed your income gains. You are literally poorer for working harder."

He works through a long process to determine that the real poverty line for a family of four is $140,000. Copilot says $155,000 and up is top 10% or earners and that 12-15% of households make $140,000 or more. 

This was Part 1 of a series. The tease for Part 2 "the wealth you’re counting on—the retirement accounts, the home equity, the 'nest egg' that’s supposed to make this all worthwhile—is just as fake as the poverty line." Oh boy. 

We'll see what he means by that but whatever we're each counting on, that's all we've got and we've got to make that work. Green didn't seem to offer a solution in Part 1, I am not being critical, I don't have a societal solution either. But many of us can work from the bottom up to prevent/solve our own problem. 

Our retirement account becomes an income stream. Social Security, even if it gets reduced, is an income stream. These income streams can be somewhat quantified. Are your income streams going to be enough? Home equity becomes optionality for downsizing financially which may not be as easy as it used to be but there are places where it is possible. Tucson housing is relatively inexpensive for example. 

We've been talking forever about adding additional income streams if the big two (portfolio and Social Security) aren't enough. A big reason I place so much importance on creating income streams is because we have control over how much effort we put into cultivating income streams. I've talked about a long runway to monetizing a hobby. Here's an article from the WSJ of someone who did exactly that. Now 70, he retired ten years ago from a tech job and his hobby (my word, not his) was adventure racing. The article is about how he created a paying job for himself as an adventure racing official (like a course martial). He also threw in that it is motivation for him to stay fit.

Regardless of where Green goes in Part 2 (and beyond?), we are living our lives here, now. It is in our interests and up to us to try to get the outcomes we want. 

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.