It's Crazy, But It Just Might Work

Simplify ETFs has a paper/marketing piece up about using five of its funds to create a portfolio that pays out a 10% distribution rate. 

Most of them are derivative income one way or another. FOXY pays out about 8% that appears to come from currency carry. None of the funds are simple. I think where the firm's name comes from is that they provide simple access to very complex strategies. Where we are currently in a 3.5%-4% world, a portfolio that generates a 10% distribution is risky. I am not against that risk but anyone diving in without understanding the risk they are taking is likely looking at a bad outcome. 

I would be more in the zone of willing to take the risk for a lot of "yield" from a narrow slice of the portfolio than allocating 40%, in a 60/40 construct, to the above portfolio. Less yield my way but less risk of being hurt if something blows up. Who knows if any of these could ever blow up but this is an easy vulnerability to avoid or more precisely, size prudently in case there is some sort of unanalyzable calamity. 

Ten percent is not in the realm of crazy high yielding numbers from the various single stock covered call ETFs or the YieldBOOST funds that sell put spreads so the NAV erosion may not be so fast. The Simplify 10% yield portfolio only goes back to April 15 due to the inception of SBAR per Testfol.io and net of distributions it is up 3.95% after paying out almost 800 basis points.  The timing was fantastic. 

Looking at just the last six months, taking out the huge April bounce, the 10% portfolio is down 18 basis points on a price only basis. If you're hell bent on yield, I don't think that sort of erosion is really a problem. Any sort of very high yielding portfolio comes down to assessing which is likely to deplete more quickly, just leaving it in cash and taking money out or building some sort of very high yielding mix and taking out the "yield" with the realization that it can't sustain for a very long period. 

Since the inception of YieldMax NVDA ETF (NVDY), it is down on a price basis by just over 1/3 while the common is up 343%. Yahoo has NVDY's trailing "yield" at 88%. A trailing "yield" of 22% should not be expected to sustain let alone 88%. Obviously, most of the stocks in the YieldMax universe are not up as much as NVDA so the erosion of those covered call funds is likely larger. At some point, NVDY will reverse split as a couple of the other YieldMax funds have done. Once all of that is understood, then someone is making an informed decision if they decide to buy and that informed decision either works out or it doesn't. We've looked at something like 5% into one of these things, 95% into a regular portfolio and rebalancing to maintain the 95/5 blend. The growth of the 95 would more than offset the erosion of the 5.

The above rebalances quarterly. Not calamitous but possibly unnecessary which would be a fair criticism.

At the far other end of the spectrum, there are a couple of ETF providers trying to make a go with various types of bond ladder ETFs. Very basically, a ladder owns a sequence of maturities, there is of course interest coming in and as an issue comes due every year it could either be rolled out to the back end of the ladder or in some sort of depletion strategy, the proceeds from the maturing issue could be taken out as cash. 

We've looked at a couple of these type of ETFs including the LifeX 2035 Income Bucket ETF (LDDR). It owns a ladder, it pays out regular dividends and returns capital. From the calculator on the LDDR site. 

It's designed to deplete in 2035. Some sort of personal scenario where someone is trying to delay Social Security or biding their time until they start taking RMDs or some other circumstance like (big ouch) waiting for an inheritance, this sort of concept might make sense. LDDR has only been trading for a year. I've written about LDDR twice. I didn't crap on the fund either time other than to say most investors could build this for themselves.

Blending all of this together, instead of NVDY, I will use NFLY which I've used before for blogging purposes, it tracks Netflix which has struggled lately due in part to its attempt to buy Warner Brothers. 

Working with a $200,000 lump sum with a willingness to let it deplete before taking RMDs in ten years, we can see that $150,000 into LDDR should pay $17,808 per year. Since NFLY's inception on 8/8/2023, a $50,000 95% VOO/5% NFLY combo has paid a total of $6500 which annualizes to $2708 for a total of $20,516 in annual distributions. The $50,000 that went into VOO/NFLY is now worth $73,463 in just two and a half years since NFLY's inception. 

Simply extrapolating out to model this isn't that rigorous but if the equity sleeve compounded at 6% net of distributions for the next ten years, $50,000 today would be worth $89,000 in ten years. There's a pretty good chance this ten year depletion strategy doesn't actually deplete. A CAGR of 6% is far below the CAGR of the S&P 500 over the previous ten years. Then, ten years from now maybe the IRA or whatever has gone up a lot in value and a more normal 4-5% withdrawal rate could be adopted and sustained. 

Putting all $200,000 into LDDR would kick out $23,745, so more income, but the principal would be depleted versus a scenario of getting through the ten year period with close to half of the original principal balance. 

These sorts of idea are always fun. The point isn't necessarily to run out and do this, it's more about each of having our own circumstances and sequence of events that might require some ingenuity. The investment world evolving with more investment products that can accommodate more individual situations. Someone in the world has a ten year plan where they are waiting for something to happen (Social Security, RMD, inheritance) and maybe this is a solution for that person. This one isn't very expensive and 95% of it is pretty simple. 

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 End Of The S&P 500?

Michael Green and Hari P. Krishnan Tweeted about a paper they are working on that explores, oh boy here we go, whether index investing can grow so big as to trigger something called the Feller Condition that could cause the indexes to go to zero. 

This is dense stuff and I certainly don't have it dialed in but the simplest way that I can break this down is that if passive funds grow to too large versus the market capitalization of the stocks in the index, the resulting loss of price discovery associated with markets would create an instability that would take the index down to zero. The number is 83%. If index funds account for 83% of the market cap, all of this could happen and currently we're a little over 50% (if I am reading correctly) with an estimate of hitting 83% in 5-7 years. 

Again this is very theoretical so not all the dots will connect right away, not for me anyway. 

Jack Bogle used to get asked about whether index funds could grow too large. Obviously he was a huge believer, supporter, founding father of indexing but even he acknowledged there's something to this idea. From Google AI, "he warned that if everyone indexed, markets could become chaotic, though he believed this was unlikely to happen." Green and Krishnan are quantifying this chaos starting at 83%.

This doesn't mean companies fail although some would have to I think, they would still sell products and services, this is about horrible consequences to stock prices if there is no price discovery possible. 

My first question is whether the use of passive funds in active strategies is a mitigating factor. No reply from Green on Twitter but Copilot seemed to think that was relevant. It estimated that between 30-70% of index fund AUM was used for active strategies. Yes that is a very wide range but intuitively that it could be more than half doesn't seem correct. 

If you read the thread, you will see a lot of assumptions that I would simplistically equate to building a model that assumes linear returns. Testfol.io says the S&P 500 (simulated) has compounded at 9.61% over the last 140 years but in only two of those 140 was the S&P 500 up actually nine point something percent. 

The path to recovery or at least partial recovery, or slow recovery might be thought of as how markets snapped back from the flash crash in 2011 or the other one in 2016. Capital/bids came in the market eventually stabilized. Those were more about mechanical glitches though not a fundamental tenet of capitalism being removed from the equation so maybe it would take more than a couple of hours. 

In trying to figure out what to do and what would work in a prolonged crisis, trying to buy a couple hundred thousand shares of a few different stocks at a penny or two might end up paying off but be prepared to lose that money too. Commodity markets and managed futures could likely carry on, certain managed futures programs might short stocks all the way to zero depending on how it plays out. I would also look at relative value (BTAL would probably go up a lot), arbitrage and volatility harvesting. Currency is also relative value. Foreign equity markets don't have index saturation to the extent the US does but I could see where they go down a lot, not as much as US indexes, but be slower to recover because of a smaller correction mechanism. 

This might also morph into a credit event so I'd be careful with esoteric strategies like bank loans and as much as I love cat bonds, that market could unravel if insurance companies investment portfolios go to zero. 

What about real estate? Would this cause a deflationary spiral leading home prices to crater or would capital seek real estate as an alternative? I don't know.

Don't shoot the messenger. And I am sure my understanding up to this point is very incomplete. If you're a student of markets then this theory might fascinate you, it does me. It is just a theory that I think is worth understanding as far out there as it may be. 

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.

Vanguard Talks Tough

The Wall Street Journal wrote that despite what a crazy year in markets 2025 has been, moreso the first half I guess, investors who did nothing came out just fine. I'm getting better at remembering to use gift links. Overtrading or otherwise taking action in a very reactionary manner tends to impede long term progress. "Don't just do something, sit there" is a quote that I believe came from Jack Bogle. Barry Ritholtz writes about this idea every so often too.

Of course, along the way changes and tweaks should be made but if for whatever reason an investor totally misses something obvious, odds are pretty good they will get bailed out by time. Anyone able to make the occasional important change will make navigating the full market cycle a little easier but if they don't, proper asset allocation, no panic episodes and time will bail them out (repeated for emphasis). 

All of that is a warmup for Vanguard recommending that investors flip from 60% equites/40% fixed income to 40/60 because they expect subpar equity returns for a while. This lines up with a 30/70 idea from them that we looked at in August. The 30/70 commentary seemed a little more abstract or think-tankish whereas this 40/60 we're talking about now is more of an actionable item from them. 

This timing of this is pretty good in at least one respect. While they could end up being correct about what equities will do for the next few years, that is totally unknowable and little more than a guess. It may be a well researched and well thought out guess but still a guess as maybe equities rip higher for another year or three before Vanguard ends up being correct. But where the timing is good is that domestic stocks are at all time highs. This is not a reactionary call by them after a 20% decline. "Things are good, lighten up" is not a panicked decision. Maybe they're right, maybe they're wrong but they are not panicked. 

The comments were not that interesting but a couple of people mentioned setting cash aside in case there is a serious decline, this is of course mitigating sequence of return risk. If you believe in setting aside cash to protect against an adverse sequence of returns, how much do you set aside? One commenter said five years worth which might be a bit much based on the duration of most bear markets which used to be 18-30 months but have been shorter lately. I think a couple of of years is prudent but to each his own. Depending though on how much you set aside in this context, you might be closer to 40/60 than you realize. 

The following quote from Vanguard gives some color on what the objective here is.

“The bottom line is we don't get better returns from the 40/60 — we get the same return as the 60/40, but with much less risk.”

We obviously explore this all the time. A portfolio that captures 75% of the upside with only 50% of the downside will outperform over the long term. Actually pulling that off is very difficult but a portfolio designed to pursue that outcome has the potential for long term outperformance. Can 40/60 deliver something close to 75/50? If so, that becomes very compelling. The difficult part is captures 75% of the upside which will be very trying. It draws on "don't just do something, sit there." It requires building the portfolio you need and then letting the market's ergodic effect work for you...for the most part, save for the occasional tweak. 

We spend a lot of time here building theoretical portfolios that I wouldn't suggest in real life but they can lead to influencing what we actually do. For example, there's no scenario where I think 30-40% in catastrophe bonds is a good idea but playing around with the concept helped me get to the point of figuring how to actually use them in portfolios and I've been pleased with the results. 

If we just flip the weightings using the S&P 500 and 7-10 year treasuries, 40/60 has historically compounded a little better than capturing 75% of the upside. To the far left of the draw down chart, it captured more like 2/3rd of the downside, then 40/60 had a run of going down less than half of 60/40 during the 40 year one way trade for bonds and then you can see lately bonds haven't been as successful of a place to hide as rates went up and then treasuries became less predictable. 

Here are a few variations on an idea to move toward what Vanguard is trying to accomplish with 40/60 that everyone would hate actually owning. 

BLNDX is a client and personal holding. It blends global equities, not just domestic, and managed futures. I just used a generic buffer fund, the rest are self-explanatory and in portfolio 6, I broke out global equities and managed futures with separate funds. The results skew somewhat unfavorably because BLNDX has just sort of muddled this year and in 2023. 

Buffer funds certainly have their potential drawbacks but keeping the conversation simple on those, anyone using them has to understand where the protection stops. A fund with a 15 or 20% buffer is going to be in a world of hurt if the market it tracks goes down 50%. There also can be some sensitivity to smaller declines inside the window of time (usually quarterly or annually) that gets made up when the product resets its buffer. 

Part of Vanguard's thesis is that bonds with duration are again a good source of return. I am not willing to make that bet. With a flattish yield curve that has been steepening I don't think 4-5% is adequate compensation for 7-10 years from our backtest or further out in real life. Regardless of 60/40, 40/60 or any other split, the portion that might go into bonds can instead be diversified into many different things that offer the positive attributes of bonds without the idiosyncratic risk of some huge allocation into bonds. 

The four portfolios we built for this post or anything you might come up with should be expected to lag, maybe by a lot, when equities rip higher. Vanguard is guessing that equities are not going to rip for the next several years. If they're right then some variation on 40/60 like we looked at today might look pretty good and if they're wrong then some variation on 40/60 like we looked at today will be very difficult to hold. 

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.

Diversification Ain't Easy

Anyone believing in a globally diversified portfolio probably has some emerging market exposure and in 2025, emerging market equities have done well. The iShares Emerging Market ETF (EEM) is far ahead of the S&P 500. But emerging markets have had a long run of lagging domestic.

There's no defending that table other than acknowledging that was a difficult run and for all we know, 2025 could just be a blip and emerging goes back to lagging again. Or, maybe 2025 is year one of a multi-year run of fantastic outperformance. There's no way to know which is why it makes sense to maintain some exposure more often than not. 

Barron's wrote favorably about quality stocks and included mention of a couple of ETFs that screen for the quality factor one way or another. One way or another is a key point because as Barron's notes, there isn't a universal definition. Often, quality relates to earnings and balance sheet strength but it is fuzzy.

You know how some comments or quotes just stick with you? At some point many years ago, someone replied to a Tweet from Wes Gray (pretty sure that's right) and said for broad based exposure, just mix quality and momentum and be done with it. I have been fascinated by that like it could be some sort of magic bullet even though it probably isn't.

For a little context we've looked at Invesco Momentum (SPMO) as probably being the best performing momentum ETF. We've looked at iShares Quality Factor ETF (QUAL) pretty much never differentiating from the S&P 500, the GMO Quality ETF (QLTY) has done quite well but it's track record is short so it's tough to know yet if it's been lucky or good. Many of the other big ETF providers have a quality ETF, a momentum ETF or both and when we look, they rarely show any sort of interesting result with SPMO being an apparent exception. 

It turns out there is a quality and momentum blend ETF, Virtus Terranova Quality/Momentum ETF (JOET) which is obviously connected to the guy who is/was on CNBC. JOET has been around for a few years so we can see if there is anything interesting with its result, does the fund prove the Twitter comment correct?

FQAL is Fidelity Quality and FDMO is Fidelity Momentum. I did not use SPMO because until proven otherwise, I think it is an exception not the rule for momentum funds. There's not much that is compelling about JOET. Combining FQAL and FDMO is nothing special but I doubt it would hurt anyone either, I'm sure it would be fine but the drawdown chart tells us not expect any real protection in a large decline. I'm going to continue to remember the quality/momentum comment and continue to seek out anything that might prove it to be a magic bullet. 

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's It Gonna Take To Retire Successfully?

The Wall Street Journal had a long read titled America's Seniors Are Over Medicated. The following snippet is a pretty good TLDR.

In 2022, 7.6 million seniors were simultaneously prescribed eight or more medications for at least 90 days. Of those, 3.9 million took 10 or more drugs at once. Mixing medications that affect the central nervous system can magnify their side effects, leading to falls. 

Yikes! An anecdote from a brother-in-law's family member who takes a GLP-1 for Type 2 Diabetes. They lost a lot of weight of course but then they started to have kind of serious problems because their dosing was for someone much heavier and it took some time to figure that out. 

In terms of side effects and interactions between multiple prescriptions, the conversation we have here is incomplete. We talk frequently about the potential expense involved with taking 8-10 prescriptions but interactions and side effects pose more of a danger to our actual wellbeing. I've been on a few medical calls with the fire department where drug interaction was an element. Part of the assessment process is to ask about what they take, are they taking as prescribed and any new meds they are taking. 

The story of Barbara Schmidt in the article (gift link) wasn't catastrophic but it was not good. She fell multiple times and had some cognitive issues caused by the interaction of the medication. A very common drug is Gabapentin and came up in the WSJ article and it is very problematic. A couple of days after the above article, WSJ came out with another one just about Gabapentin. Again, yikes!

I blog because it is a lot of fun and all the better if anyone gets anything out our conversation but this is serious stuff and no one is going to solve it for us. Something of a conspiracy theory but there's a lot of truth, is that drug companies aren't trying to cure chronic conditions. It is in their interests for people to manage their chronic conditions forever and then add in different drugs to help with side effects. The sad thing is that it is acceptable to many people to do just that, start taking meds and then add more. "It's a normal part of aging" they might tell themselves.

It doesn't have to be. 

I'm no saint here, clients own a couple of drug stocks based on that exact premise, people are more likely to take a pill than change their habits. In 2022, Copilot says there were 58 million people age 65 or older. The 7.6 million and 3.9 million quoted above are very high percentages of 58 million. Copilot went on to say that 1/3 of those people took 5 or more prescriptions. 

A story I've told before, my first run in with the idea of not needing prescriptions came on a medical call 14 or 15 years ago, the patient hurt himself working outside, he was 64 and very proud of the fact that he wasn't taking any prescriptions. Study after study says what to do to have this same outcome as the 64 year old patient, eat less sugar, cut down processed foods and lift weights. Other forms of vigorous exercise are of course beneficial but building muscle mass is vital for avoiding frailty. A ground level fall for someone who is frail (brittle bones) can be life changing in a bad way. Strong bones and strength from building muscle mass can turn a ground level fall into merely being embarrassing. 

A related pivot, Barron's looked at whether AI will hurt Social Security, will the loss of some jobs to AI result in less money going in, potentially hastening the time frame of when benefits would have to be reduced? With no changes or action in Congress, benefits are slated to be reduced by 23% starting in 2034 but both of those numbers are moving targets. 

There's no reasonable probability of this being resolved in a manner that is "fair" to everyone. Maybe the income cap is lifted. Currently, only the first $186,000 of income pays into Social Security. If they raised the cap to $500,000, people between $186,000 and $500,000 who are self-employed will be paying a lot more in taxes. 

If they means test to a benefit cut, anyone getting a cut will certainly not be happy. What about raising the eligibility age? What if taking it at 62 got taken off the table entirely and they moved that up to 65? How about just taxing the rich (however that might be defined)? Maybe ideas will be "unfair" to a smaller segment or everyone but it will be problematic. If I am wrong and they figure it out, all the better but as I've been saying, there is absolutely no reason to get caught off guard by this.

Things come up that could adversely impact an income stream that would come from an investment portfolio. So now, something might come up that adversely impacts the income stream we are expecting from Social Security. I'm not optimistic that anything I could personally do or say will have an impact on whatever happens to Social Security but I am optimistic about being able to prevent/solve any problem that might be coming my way in case our benefit gets cut by more than the 23% being kicked around now. 

Anyone who can stay lean and strong has a good chance of avoiding prescriptions and the costs and side effects associated with prescriptions. Anyone who can figure out how to monetize something or maybe a couple of things has a good chance of enduring a harsh cut to Social Security. Anyone who can do both has a good chance of have a long and able bodied retirement or put differently, a successful retirement. 

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.

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.