The Importance Of Doing Very Little

The war between Israel and Iran appears to be over. The US is saying it is over and so is Iran....apparently. Hopefully that is correct and as I type this, after hours futures trading certainly implies that the news reports are correct. 

The phrase don't just do something, stand there in an investment context is attributed to Jack Bogle. I talked about this a little bit yesterday and of course we have almost the exact same conversation anytime something bad for markets...or potentially bad anyway.

Military escalations certainly have the potential to be bad for markets but when the reactions have been negative, they have tended to snap back quickly which magnifies the mistake of selling this sort of headline. The duration of this one as a military events was pretty short and it didn't even move the needle for the equity market which when I posted on Sunday night was down about 30 basis points. Pretty much a shrug.

The above is a simulated result based on real data. Going back to 1962, 60% SPY/40% TLT compounded at 8.98% despite quite a few hideous drawdowns. I frequently say that plain vanilla 60/40 can get the job done provided there is an adequate savings rate. I don't believe this sort of 60/40 is optimal but it can be adequate. 

This argues in favor of the Bogle quote. The more trading done against whatever allocation an investor believes is right for them the more they are fighting against whatever their long term CAGR will be. It is an argument to do less. 

Looking at these type of charts and studying them offers great lessons about not panicking. 

Amazon has endured plenty of brutal declines. Brutal. Despite how bad the drawdown chart looks, the stock has compounded at 31% since it started trading. Going forward, I have no idea what Amazon stock will do but it is pretty clear that none of us are likely to use our Amazon accounts less than we do, anytime soon. I am not making an argument to buy it, I am making an argument to not panic sell it the next time it cuts in half. It has almost 30 years of going up more than the broad market on the way up and going down more on the way down. Client exposure is through XLY which I first bought in November, 2008. 

I mentioned this scene from A River Runs Through It recently. I also referenced it at fire training over the weekend. For anyone who is an investor, as opposed to some sort of trader, I would encourage less trading, trade less. Never trading is not realistic but less trading is. Trade less.

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.

Surviving Uncertainty, Not Predicting It

Walker Fire had quite the week. First was a medical call Saturday night 6/14, a wildland fire on Father's day, a multiple vehicle fire that also took out a couple of sheds and caused a small ground fire on Tuesday and then on the holiday we had a call for an ATV accident that turned into a low level technical rescue because the patient was a long way down a hill very close to a wash. 

On our Sunday morning hike today, we saw a very large horny toad for the first time in several years. We've only seen very small ones lately. 

Morningstar had an article titled How Does Your 60/40 Portfolio Allocation Compare With The Pros? and included the following consensus mix.

I wouldn't say I am particularly contrarian but I do think of myself as knowing when to be orthogonal to the consensus as we've looked at in countless other posts. 

I think it is important for a portfolio to differentiate and of course the consensus does not...by definition. 

Sorry but there is nothing robust about consensus-type bonds funds. Jon Davi from Astoria was quoted in this article at Bloomberg via Yahoo that portfolios are "meant to survive uncertainty, not predict it” which very concisely sums up what we talk about constantly. 

At fire training on Saturday, another firefighter asked me what I thought would happen with markets if the thing with Iran escalated (then of course it did escalate). I gave a very wishy washy answer because I don't know. MLK Day 1991 is an example of markets skyrocketing when the bombs dropped after a long buildup to that day that saw stocks go down. Another firefighter chipped in that 1991 was before he was born. 

My thing is to have exposure to a few things that will probably go up if stocks go down a lot. It makes the most sense to me as a way to avoid the full brunt of large declines. As I type this, Yahoo shows very little reaction to the Iran news, great from a markets perspective if that is correct but I don't care about predicting what the market will do as opposed to being ready in case there is some sort of serious decline that accompanies this event. 

If it is bad, then we know that the decline would end at some point and then the market would start going back up and eventually making a new high. The only variable would be how long that would take. 

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.

Lazy Advisors?

Some quick hits today.

A comment on an article at Yahoo about retirement mistakes said the following;

The thing to really do is 5 years before you are required to take the money you have in an IRA is Transfer all the money in your IRA into your Roth account.

Hopefully, everyone here realizes this would be a woefully tax-inefficient way to do a conversion for just about every circumstance. If someone has $500,000 in their rollover IRA and they convert it all at once and assuming no other income, the effective tax rate would be about 28% or $140,000. Converting $100,000/yr five times and assuming no other income would have an effective tax rate of about 8% or $8000/yr for a total of $40,000, $100,000 less in taxes. 

I doubt anyone's situation has that few moving parts but you get the idea and do you're own diligence on effective tax rates. There are a lot of ways to get these this wrong. Slow down, do some research and number crunching to make sure you get it right or maybe even just less wrong. 

Somehow I missed it but GraniteShares launched several new YieldBOOST ETFs. This is the suite of funds that sells put options on 2x levered ETFs.

As a reminder, I would think of these not as proxies for the underlying like Nvidia or the NASDAQ 100, they are products that sell the volatility of the underlying and there's a difference. It wouldn't make sense to buy NVYY if you're not favorably disposed to NVDA common stock but over time it won't look like the common on a price basis but might not be that far away on a total return basis. The chart is price only. NVVY has paid out about $1.80 so far which would add another 7% into the price based return.

I don't use these or any of the crazy high yielders but we've mapped out possible utility in the context of barbelling yield which is why I follow the space closely, maybe at some point it will make sense to do something with these. 

The late Paul Sherwen regularly used the phrase threw a cat amongst the pigeons as Phil Liggett's wingman commentating on the Tour de France. ETF.com may have done exactly that by asking Are Financial Advisors Lazy To Recommend Active ETFs? 

Actually the article is very thin and might not be worth using one of your free articles. Side note, the content quality at ETF.com has fallen off a cliff in the last few years, maybe more but at least they are now charging for access. 

I'll broaden my comment to include mutual funds as well as ETFs. With regard to ETFs, there are many types of funds that technically are actively managed that have nothing to do with old tyme stock picking. Earlier in the week I mentioned client holding Alpha Architect Box ETF (BOXX). It's a substitute for T-bills that the typical advisor would not be able to implement themselves. It's active but it doesn't pick stocks or bonds. 

How many times have I lauded merger arbitrage or client personal holding BTAL? Managed futures? Get out of here. The idea of trying to do merger arb or the others directly in a client's $800,000 IRA would be beyond stupid. I am obviously not a huge fan of the crazy high yielding, single stock ETFs but they are active and the AUM is collectively huge but again that they are actively managed is more of a technicality.

What about a stock fund that does do old tyme stock picking? I don't have any of those in my ownership universe but I do not think it is lazy. It may not be optimal with respect to a broad based fund like Fidelity Magellan. There's no way to have current information on the fund's sector allocation. Maybe a portfolio has an S&P 500 fund for beta exposure and Magellan for alpha. If S&P 500 has 40% combined in tech and communications and Magellan is 80% in those two (that's made up, I have no idea), then the portfolio could be taking on a lot more sector risk than an advisor or their client would like. This would be less of an issue with a stock picking, active ETF because of the transparency. 

Part of what advisors do is try to help people have enough when they need it. Part of having success on that front is minimizing behavioral mistakes that a client might be inclined to make. If an advisor can figure a way to do that by including stock picking mutual funds, it works and is good for the client, then why not? 

The comment about an index fund for beta and Magellan for alpha wasn't a random comment. Torsten Slok had a micro blog laying out the following allocation idea. 

There were no percentages given but the idea of fixed income replacements is something we've been talking about for many years. We've tried to find different types of strategies and niches that do what I think people hope that bonds will do. I don't believe that too many investors would want to load up on parts of the bond market that are capable of dropping 15-20% like AGG and longer dated treasury funds did in 2022. 

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

Social Security Might Be In Trouble

The title to this post is a little snarky as latest report from the trustees of Social Security and Medicare is out and it reiterates Social Security running out of money in the mid-2030's at which time, everything else being equal, will require a 23% reduction. The date and the percentage to be cut moves around a little bit every year but for now, 2034 and 23%. 

We've been having this same conversation since I don't know when. The way in which Social Security is operated, payouts would have to be cut as a matter of law. Other pools of money cannot pay SS benefits. My understanding is that at a very high level, preventing cuts to payouts would require that the relevant laws be changed. 

Here news accounts about this from the Washington Post, Bloomberg, NY Times and Yahoo. Between the four articles, there were theories that tariff induced price inflation would put further strain on the program because of larger cost of living adjustments. Another potential strain would be the deportation of illegal immigrants paying in but not taking out. Per a Google search a couple of months ago, it was something like low to mid single digit percentage of the population participate in this manner.

Before getting any further into this, there is no way that some sort of benefit cut should catch anyone off guard. I really don't know how many years we've been talking about this outcome and it is still eight or nine years away. I would also repeat from previous posts that thinking in terms of fair or unfair is irrelevant. Yes cuts of any sort would be unfair but other than members of the legislature, none of us are going to impact whether there are cuts, who will have their benefit cut or who will not. To focus on the unfairness is to worry about things beyond our control.

The focus here has always been trying to create streams of income out of some sort of activity or endeavor that you enjoy, know something about or a combo of the two. If you have to work beyond the typical retirement age or beyond the age you hoped to retire, what is the one job or the one type of work you do not want to do, that you would hate to do, that would be depressing or defeating? 

If it looks like a cut to Social Security is coming, someone who hasn't worked on mitigating that outcome they least want has a high chance of ending up in that lousy, for them, situation. 

The approach of cultivating long term interests into a possible income stream does a couple of things. First, the obvious benefit of a better chance for avoiding a bad outcome like expecting $4000/mo from SS and only getting $3000. It also makes for a more interesting life. My life is far more interesting for my fire department involvement and in the last few years with the Del E Webb Foundation. I've already monetized the fire department work a couple of times with incident management work and could do more if I needed to but I've dialed that back for now. Starting next year, I will get a small stipend as a board member for Del E Webb. Stipend is a good word, it's not a big income but would help if things ever get tough for us. 

I've been talking about the fire stuff for many years which speaks to the point of taking a long runway to cultivate post retirement income streams. If I ever have to rely on these, it will be work/activity that I enjoy not a job that I'd have to take out of desperation.

As far as what might actually happen to Social Security, I've said before that I don't believe anyone born before a certain year, I guessed 1975, will have their payouts cut. There's some logic there but it could be incorrect. Somewhere, I saw the idea that as the 78 million baby boomers age out, that could provide some relief. Gen-X has about 65 million, both numbers per Google. 

In the past, I have floated the idea that people should expect means testing or maybe phasing out the spousal benefit. In that scenario a non-working spouse would get the survivor benefit but not spousal benefit while the working spouse was alive. 

If they do anything, it will be unfair to someone, maybe everyone. Languishing in the unfairness solves nothing.

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.

Skewing To An Unrealistically Good Result

All sorts of fun stuff today but no post yesterday because we had this going on. 

Two fires in three days doesn't happen here very often. I was first on scene with another firefighter. We knew other resources were coming so the immediate objective was to try to prevent it from getting worse and start to knock it down. Despite what it looks like, I am not directly under the power line.

We'll kick off with comments that Ken Griffin gave to Bloomberg, he said that diversification is the most important thing for newer investors because "your likelihood of beating the pros as a novice investor is low." I would argue of course that "beating the pros" is the about the last thing any investor should worry about, new or otherwise. 

Here's the one thing, with regard to portfolio outcomes, that matters most. Do you have enough money when you need it, for as long as you need it? That's it. Dusting off an old one, quick, without looking, what did the S&P 500 do in 2017 and did you outperform or lag? That odds that anyone knows without looking are microscopic because it doesn't matter. If you're 50 and only have 1/3 of what you should have by now, you're not going to outperform your way up to where you should be. If you're 85 and very fit but out of money, whether you outperformed from 1990 to 2000 means nothing. 

This is part of the reason we spend so much time here trying to figure out how to make the ride smoother over the long term. A very volatile portfolio increases the likelihood of panicking or making some other behavioral mistake. 

On Tuesday, I sat in on a webinar from ReturnStacked about the newest ETF that leverages up to own stocks, gold and Bitcoin that has symbol RSSX which we've looked at a couple of times. I won't bore you with more about that fund but they made a high level characterization of their strategy that I thought was interesting. Most of their funds they said offer a very basic asset class with an alternative added on top. The benefit as they see it is when deciding to use alts, you have to figure where to take from, stocks or bonds, to add the exposure. So 60/40 might become 50/30/20. With their funds, it can be 60/40/20.

The AQR fund QSPIX is the sole alt in portfolios 2, 3 and 4. I chose QSPIX because it has been around for a while and doesn't have a return that is so good that it might not be repeatable. And despite the so-so CAGR, it appears to have been an effective diversifier over the years. 

Looking at portfolios 3 and 4, the leverage gets you nothing. It lagged by a basis point so ok, it's a push and Portfolio 4 was a hair more volatile. Maybe it is something about my method but it is difficult to put something together using retail accessible funds to get their concept to work. I go through this so often trying to find a compelling result and it is just hard to do. 

In a similar vein, Simplify posted a paper in support of some of their alt funds. They tilted to 50/30/20 but they made a useful point about needing to discern between alts that actually offer differentiation versus equities and fixed income. Private credit is often considered an alt but they question private credit's usefulness as an alt. Maybe some private credit fund you might access will outperform regular credit or maybe not, but there's not a lot of differentiation. 

The paper highlights their managed futures fund, the new currency fund with symbol FOXY, their commodity fund and the new high yielding fund that uses something called barrier put options, symbol XV. Taking the 20 in the 50/30/20 and dividing it up equally with similar, but older funds and building out a 50/30/20 with the following.

So there is some differentiation. This 50/30/20 lags a little is a little less volatile, it did noticeably better in 2022 but not the other drawdowns.

What I built though may not be fair to Simplify. Their currency fund FOXY might end up being much better than CEW. Some of the Simplify funds do fantastically well and FOXY could be one of those but obviously at this point there is no way to know. 

We'll close out with a couple of new funds. I've mentioned client holding Alpha Architect Box ETF (BOXX). It is long and short S&P 500 calls and puts in such a way that the return mimics the yield on T-bills without owning T-bills. The much newer Twin Oak Short Horizon Absolute Return ETF (TOAK) appears to seek the same outcome with a slightly different option strategy. TOAK appears to be long a couple of straddles but not short any options. 

I threw in client and personal holding MERIX for a little context. MERIX is essentially a horizontal like that tilts upward yet it looks far more volatile than BOXX or TOAK. I own BOXX for clients to have a little less direct Treasury exposure in case there is some sort of unforced error with something like the debt ceiling. To be clear, I am not worried about the US being unable to pay it's bills, more like congressional dysfunction leading to something stupid. If a strategy like BOXX or TOAK interests you, I would not own both, I believe they are too similar to own both. 

Finally, WisdomTree launched a new capital efficient (leveraged) fund that focuses on inflation, the WisdomTree Inflation Plus (WTIP). The breakdown is 10% cash for collateral, 85% in TIPS, 5-10% to Bitcoin and 95% in commodities of which, 15% is long gold and silver. The other 80% of the commodity sleeve can be long, short or flat energy, metals, grains and softs based on momentum. 

Trying to backtest the WTIP allocation might not be too helpful. If the results of Bitcoin are not repeatable, it going up 10x would be less of a gain than looking backwards, then any sort of backtest will skew to an unrealistically good result. 

Capital efficiency is of course a fascinating method (I think it is anyway). I don't employ it with traditional leverage. If I do anything with it, it is with leveraging down as we have described it before with a small allocation to BTAL as more of a long term hold and a couple of others that are a little more tactical. We're seeing more fund providers start to offer capital efficient funds. This is something that would be easy to misuse or otherwise get wrong. Relative to the providers out there, I  think WisdomTree has it pretty dialed in as far as funds meeting expectations.

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.

"Prosperity Paradox"

Well known minimalist Joshua Becker wrote about the crossover between minimalism and financial independence. The first level of this is easy to piece together, spending less on unnecessary crap is a path to financial independence. 

There are also psychological factors at play here too. As some point, people become overwhelmed by their stuff/junk for whatever reason and life becomes more difficult than it needs to be. Woven in there was what Becker referred to as the "prosperity paradox." The more money we have, the more we think we need which creates a tough, emotional treadmill. 

The one story about the prosperity paradox I've shared was a former co-worker when I was at Charles Schwab. I worked on a three person trading desk and one of the other two guys had been with the company going back into the 80's. The third guy and I each started in January 1993. By 1999, Schwab's common stock was getting close to $100 and my colleague had well over $1 million in company stock. 

Part of our compensation was stock and the way it was structured, the only we he could have accessed it would have been to quit/retire once vested. We urged him to do just that and he said, I need $5 million. You know the rest. The internet bubble popped and Schwab stock, which is a client holding, fell 84%. Schwab didn't retake that high until early 2017. I got laid off in Sept 2001 so I don't know how long he stayed at Schwab but if it was a long time, then he obviously accumulated a lot more stock at lower prices. 

An idea from many years ago that we revisit occasionally is figuring out what we really value and then saving or planning toward that correct outcome. Too many people have trouble figuring that out for themselves and they end up saving or planning for what turns out to be the wrong (for them) outcome. 

I've told the story 100 times about not wanting to be a partner at my old firm. Not realizing that many years later, one of the partners would turnout to trade illegally and that the other would let it happen, I disagreed with the complexity they seemed to embrace buying a building and starting a private equity fund among other things. I was reminded of another point in this post from Michael Batnick. I used to say this exact thing all the time. The job of running an advisory is much different than simply being an advisor. 

If someone wants to be an advisor because on some level they enjoy markets, helping people or some combo of both, time spent running the business isn't either of those things. 

Every aspect of life is easier when you know what you actually care about and what you actually want.

And a quick correction from yesterday, the picture of me spraying wet stuff on the hot stuff. I don't think that was me actually. White helmet (usually chief color) and tan pants is me but what little you can see of the glasses is wrong. He must have been part of the task force that showed up later. The other picture of me where I say I look like Vincent from Pulp Fiction, that was me.   

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.

Wildland Fire Today

Saturday was Walker Day which is our big, annual fundraising event and then Sunday morning we were dispatched out to a wildfire shortly after 4am and I didn't get home until about 3:45 the afternoon so no blog post but some pictures,

I started out as the Incident Commander (IC). I called it in at two acres, the final count was 2.9. There is a thing where volunteer departments are known to call in much bigger acreage than it really is so I felt good about that. 

From a few miles away.

We got lucky with a weather phenomenon known as the inversion layer and the fire laid down. 

The sun started to hit it, heating things up a little bit.

I can't believe our department has a truck like this. We sort of actually have two of them!

I turned over IC to the Forest Service after about an hour or hour and a half. That is some of their folks,

A little more technical, I established and Alpha division and a Zulu division. Our personnel took Alpha side and that is what they had to climb in the dark. Zulu started out with city resources but then we all engine crews were released.

From around 8am until 4:30 pm we provided water tender support (brown water truck is one of them)

That's me putting wet stuff on the hot stuff.

I look like Vincent in Pulp Fiction when he's picking up Mrs Wallace and he's looking around confused when she calls him on the intercom. It's a little hard to see but I am wearing a bladder bag which is a backpack sort of thing that holds 5 gallons of water and and the way it works, you can put out a lot of fire with them. 

We got lucky with a lot of things but our tactics weren't wrong, we had a tremendous number of resources respond and were able to take care of business. Our crews did a fantastic job.

Twitter Experts

One of funniest aspects of Twitter is in the immediate aftermath of some event like yesterday plane crash in India (not funny), there will then be a lot of opinions voiced to dissect the news/event. The funny part is the Tweets that say something to the effect, here come the Twitter experts on aviation safety or vaccinations or whatever. 

I have opinions on what has gone on in the middle east since October a year and half ago of course and I take in the news like many people. While we are all entitled to our opinions, I am certainly no expert of the geopolitics of the middle east or anywhere else. In terms of managing client portfolios, I believe the important thing is making portfolios robust in the face of whatever might come along to create an adverse market reaction. 

Something like Israel attacking Iran would seem to have the potential to cause a market decline but I have no idea. As opposed to trying to predict the effect some event will have on markets, I want portfolios to be generally ready for whatever negative surprise might come along regardless of my ability to analyze that event.

That brings us to the prompt for today's post from Bob Elliott who posted a short video saying "most investors are totally unprepared for war." He went on to talk about the shortcomings of the typical 60/40 portfolio in terms of lacking robustness in the face of war and I would add, in the face of just about any serious event that takes markets down. 

Specific to war, Bob says that stocks and bonds underperform. Owning just stocks and bonds, Bob says, is a huge bet on growth and low inflation. He suggests owning gold and commodities and keeping in the same vein I would add commodity stocks to Bob's comments. 

The way we've talked about first responder defensives and second responders hopefully is useful for readers, it is for me. No matter what causes the market to go down, an inverse fund is going to go up. Client/personal holding BTAL has been extremely reliable in this regard but is not infallible. 

Loading up on just one defensive is a bad idea in case something goes wrong but for me, after an inverse fund and BTAL it boils down to assessing reliability or maybe predictability is a better word. How reliable do you think gold and other commodities are in a defensive context? If you believe in any of this then I'd suggest going through a similar process of weighing out what the correct expectation is for any alt you own and any you'd consider.

Down a lot, up a lot, flat or bouncing all over the place, the result for client/personal holding Merger Fund this year is exactly what I would hope for in all market types. 

We spend a lot of time here trying to better understand what to expect from managed futures. It worked so fantastically well in 2022 and struggled badly in recent times. In 2022 in the face of fantastic outcomes and calls for 20 or more percent in managed futures I was very clear about what a bad idea I thought 20% was because you never know when it won't "work." Work is obviously not the correct word, it's doing exactly what it is supposed to do, it's just that the trendless nature of quite a few markets don't let themselves to favorable result. If you have 5% in managed futures as one of several alts, then the result this year can just be a shoulder shrug. With a 20% allocation, the impact is more serious. 

The ReturnStacked guys have another paper out in support of their version of portable alpha, leveraging up to add managed futures. 

Citing work from the Man Institute with the above chart, you can see the results of adding a larger allocation with leverage. Just looking at the chart you can see a lot of outperformance in the popping of the internet bubble. There was outperformance in the Financial Crisis, it's visible on chart but a little harder to see. We do have a fund we can look at for 2008 with what started out as the Rydex Managed Futures Fund that still trades with symbol RYMFX. That fund was up just over 6% in 2008. And again, if you look closely you can see outperformance in 2022. 

I can't seem to ever recreate the results with funds however. I couldn't recreate the above result. I pretty much go through the same exercise when I see different models that have large weightings to managed futures and I can't get there. It could be me, clearly. But it also could be that it can't be recreated using brokerage accessible funds and that is probably the only way most of us can access the strategy. 

A 5% weighting to a managed futures fund that goes up 20% in a year like 2022 adds 100 basis points of positive return to a portfolio's result. As opposed to using leverage to add the 5% (in my example), if that 5% avoids exposure to something that goes down 15 or 20% (AGG or SPY) then the portfolio is spared another 75-100 basis points of negative performance. When you need managed futures the most, you don't want full equity exposure like in a portable alpha strategy, you want less, managed futures tend to go up when stocks are going down even if that is not infallible. 

Barron's wrote about a survey showing that 94% of advisors believe they don't own enough alternatives while 57% said they don't know enough about them. The context was mostly private equity and private credit but not exclusively I don't believe. My use and our conversation started before the word alternatives started being used. For anyone willing to make the time to learn, prudent use of alts, not 20% in one type of alt, I think they can make adverse market events much easier to endure. 

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 Have To Figure It Out For Yourself

Tadas Viskanta wrote a post titled Everyone Is Running Their Own Race. Included in there was "the more decisions we make, the most chances we have to mess up" which I find to be a great way to articulate what we talk about here in terms of letting the stock market's natural tendency to move from the lower left to the upper right work in your favor. The fancy word for this inertia is ergodicity. 

In client portfolios, I have quite a few names that I've owned since I started in this part of the business more than 20 years ago and quite a few others that have been in there more than 10 years. I believe the best way to manage a portfolio is to maintain a nucleus of core positions and then make more regular changes around how I dial up or dial down the portfolio's equity beta using the various alts we regularly talk about. Occasionally of course, changes to the nucleus need to be made but when you look at a long term chart and say I wish I would have just held it, that's my race, to put it in Tadas' terms. 

Weaving in an article from Yahoo about Americans flunking a six question retirement quiz, "most respondents bombed big time" the article said. Beliefs about retirement are our own race, our own thing to figure out for ourselves. We all know people who retired at 50 versus a video my wife was telling me about, a furniture upholsterer who is 94 and still works in the same shop that he and his wife have owned for 47 years. We all know people very well prepared for retirement and people who would appear to be in a lot of trouble. We all know people who make a full time gig out of planning and managing retirement and others who give it zero thought whatsoever. It's our own race. 

The article touches on decisions about Social Security noting that most people don't know they should wait. Should wait is not the correct framing. What matters far more, is making an informed decision about waiting or taking it late. A friend turns 58 this month and in four years she can take the early payout. Her husband works. I think they each make enough that they would be best off each taking their own payout not one taking the spousal. 

Taking their example and making it more general because I don't know about their particulars beyond this point, if she really dislikes her job, maybe she should retire at 62 and start to take SS while her husband who might like his job continues to work. We all run our own race and there is nothing wrong with taking advantage of some flexibility if you can. Maybe my friend, or switch it around to her husband not liking his job, can retire at 62 and with the safety net of knowing he, or she, could take Social Security, can figure out how to monetize something else to maybe push back Social Security. 

Another friend is going through something very serious with a medical thing. I can see where this sort of event might cause someone to decide to retire, life is too short and so on which would be their race, perfectly valid. I was sick for a year as a kid and for me, my race was to keep every aspect of my life as normal as I could possibly make it and I don't believe that has changed, that would be my race and perfectly valid. 

There was a quick but thin mention of what's your (retirement) number? I would reiterate the point we've been making here forever which is that having a number of some sort along with some understanding of what that number can or cannot do is important but whatever your number was, it has no relevance to what you end up with. Who cares about a $2 million goal when you end up with $1.3 million. Spending 4% of $2 million when the account balance is $1.3 million is probably going to end badly. 

There are a few comments on the Yahoo article noting how poor the education system has been at teaching personal finance. I do not know the extent of how bad or good it has been over the last 40 year or so since I graduated high school. I remember one project in sixth grade where we all picked a stock but that's it. If the Joe Moglia quote I throw around about no one caring more about your retirement than you resonates, then it is incumbent upon us individually to learn what we need to in order to have a successful outcome. 

An important thing to learn is what to avoid which we'll close out on regarding the spat on Bloomberg between Michael Saylor and Jim Chanos, they were interviewed separately. Chanos called what Saylor is doing with issuing convertibles and now preferred to buy more Bitcoin financial gibberish. 

Saylor very calmly replied that what Chanos doesn't understand is that Strategy is "actually the largest issuer of bitcoin backed credit instruments in the world." Ok, um that's something Saylor made up along with the term Bitcoin yield. He went on to say they "borrowed money that we never need to pay back." There are a couple different ways we could go with that one. He was asked something about Bitcoin going down and he pretty much said it wasn't going to go down but spelled out some more financial gibberish about why that would be ok for them too. 

The risk here is enormous. If Bitcoin keeps going up and never trades below $100,000 ever again then there may never be a consequence for all the risk embedded Strategy's common, the converts and the preferreds not to mention the ETF ecosystem of MSTR funds but the risk is absolutely there and it is enormous (repeated for emphasis). 

I'm not sure what happens to Strategy if the road from here to $1 million (Tom Lee said $3 million) goes through $40,000 and it languishes at $40,000 for a couple of years and of course it could all turn out to be bullshit. People love volatility on the way up. For my money a little Bitcoin has plenty of volatility. Speculating on it with a relatively small dollar amount is my race, not the 3 or 4 x leverage of owning MSTR. If that is your race, by all means. 

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.

Too Clever By Half?

One of the biggest themes we focus on is simplicity versus complexity, knowing when to use the former (more often than not) and when to use the latter. Here's an interesting read about Yale trying to sell a bunch of complexity because it believes it has to as a response to threatened cuts in federal funding. 

There's a never ending supply of complex products and strategies for us to dissect and that really is a lot of fun but there is utility as well. A lot of simplicity hedged with a little bit of complexity as I talk about portfolio construction means taking the time to sift through the complexity and recognize when a fund might be too clever by half.

To that end, I wanted to try to better understand the potential utility of the Pimco StocksPLUS Absolute Return Fund which has a bunch of symbols but we'll use PTOPX. The fund uses leverage to access 100% in equities and 100% in absolute return similar to the newer ReturnStacked suite of ETFs.

As a core holding, I'm not sure there's really any meaningful differentiation versus 50% in the S&P 500 and 50% Vanguard Market Neutral (VMNIX). Putting 100% into PTOPX is there for context and not something that too many people should consider.

And maybe not much that is compelling about the fund as a complimentary holding either. The following from the Fidelity page seals it for me. 

It has been a while since it was additive to a portfolio performance-wise.

And because it is sort of related, Paul Tudor Jones was on Bloomberg this morning talking about constructing a "volatility adjusted" portfolio comprised of stocks, gold and Bitcoin. The new ReturnStacked US Stocks &Gold/Bitcoin ETF (RSSX) does a variation on this. 

Corey Hoffstein Tweeted a formula of 100% to stocks, 80% in gold and 20% Bitcoin inline with what RSSX does to create Tudor Jones' trade. Unlevered you could cut those in half. I asked Copilot how to do this and it said stocks 40-50%, gold 30-40% and 10-20% in Bitcoin which is essentially what Corey said. When I play around with it on Portfoliovisualizer, I get 50% equities, 44% gold and 6% Bitcoin.

I've been very skeptical about the ReturnStacked funds. Anytime I play around with them, I never get a compelling result with them. After just two weeks of trading, there is no conclusion to draw about RSSX. It is of course interesting but I personally am very wary of this type of complexity.

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

Don't Do This x 2

Early this morning Matt Miskin from Manulife was on Bloomberg and part of his commentary talked about his belief that quality stocks, as in the quality factor, are underappreciated and undervalued because, he said, they are underperforming this year.

GMO Quality ETF (QLTY) and iShares Quality ETF (QUAL) are the two I look at for blogging purposes as proxies for the quality factor but I think buybacks and shareholder yield are also quality-ish too. On the chart, obviously one is a little ahead of the S&P 500 and one is a little behind. Miskin could end up being exactly right that quality will outperform, I have no idea, and of course if you want to own this factor, go for it but the odds of gaming one factor correctly at the expense of another one are very stacked against you. 

The more likely outcome is chasing last year's best performing factor which will quickly drift into those studies you see that show fund holders lagging far behind the funds they own due to poorly timed trades. I've got nothing negative to say about the quality factor but chasing heat is a self-imposed impediment to successful outcomes, just don't do this.

I listened to another Spaces event on Twitter about YieldMax funds. I was not moved to view them as anything other than a curiosity or more correctly one step on a path to the crazy high yielders in the derivative income space maybe becoming more useable. Or not, I don't know and that is the point.

The Spaces was a good format for letting listeners asked questions. One listener said he was older and a big fan of the product. If I understood correctly, he made it seem like this anyway, he has all his money in a Roth IRA split between five different YieldMax ETFs. He mentioned having NVDY, TSLY, MSTY, one for Bitcoin and I missed the 5th one. Early in his comment, one of the moderators asked "you have a basket of them, you don't just have like two of them?" Again he had said his entire Roth is in them. It was at this point he said five and then named them. I think I could hear the moderator wince a little bit but maybe not. 

We don't actually know if his Roth is the guy's only account, it just seemed like it, but he was clear that his entire account is split between five YieldMax funds. Don't do this. You could stop reading here and that would be the message, do not do that. I have no idea what kind of top down market malfunction would take down this niche but if that unknown malfunction ever happened, this guy would be penniless. Or, if there was ever some sort of problem unique to YieldMax but not the rest of the derivative income space, this guy would be penniless. 

That is a similar line of thought to not owning too many funds from a provider like AQR. There is carryover of the same/similar trades and positions across multiple funds. The risk would be some trade goes really wrong and many funds are impacted. 

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 TSLA ETF Ecosystem Gets Rocked

Last month we looked at Research Affiliates' take on quadrant style investing with allocations to equities for economic growth, bonds for income and defensiveness, absolute return for alpha and trend following for tail risk. In that last post we equal weighted a possible portfolio to express their idea. They did risk weighting but risk weighting can be more difficult to pull off with mutual funds and ETFs. And where this is probably permanent portfolio inspired, we'll use equal weighting.

Below, there are three version's of Research Affiliates'. They all have 25% in the S&P 500, 25% in floating rate and 25% in managed futures. The last 25% are all different variations on long short for the alpha sleeve; short biased, long biased and market neutral. In the May post we used Vanguard Market Neutral in two portfolios, had the S&P 500 and managed futures with the differentiation being income and defensiveness portion with AGG and client/personal holding the Merger Fund.

I think this study will be more interesting.

For the period studied, price inflation ran at 2.82%.

The short biased portfolio is interesting. The low volatility with mid single digit max drawdown and a real return of 2.6% is pretty solid. No one's bragging about those results to their friends but they're also not freaking out. The long biased version has a fantastic result but it might be benefitting from some unrepeatable performance. We talked about that the other day. If performance looks too good to be true, spending time to explore its unrepeatability is a good idea. 

If we divide the long/short alpha sleeve equally between the three different funds we used above and kept the rest the same, that portfolio compounded at 6.51% with a volatility of 5.19%, a Sharpe Ratio of 0.91 and a max drawdown of 9.45%. So volatility is pretty low and a real return of about 370 bp, again that is pretty solid but not killing it. 

At some point this year, I started using the term crazy CEO risk where the word crazy modified CEO not risk. There aren't a ton of CEOs to whom this applies but Elon Musk is one of them.

The table leaves out the GraniteShares YieldBOOST TLSA ETF (TSYY) that we've looked at a few times. TSYY sell puts on TSLL which is the first ETF listed in the table. TSYY shows on Yahoo as dropping from $11.15 at Wednesday's close to closing at $10.59 last Thursday. Since its inception, TSYY is down 56% on a price basis as of Friday's close or about $14. The distributions add up to $7.96 leaving TSYY down about $6 on a total return basis or 24% versus a drop of 32% for the common. All this is per Yahoo. 

The YieldBOOST concepts intrigues me and while it is hard to see using them, my interest is more about staying close to how the derivative income space continues to evolve.

And finally;

40/60? Not 60/40? Yes 40/60. Unusual Whales is not good about providing links but I think this is what they are talking about if you want to read a little further. 

Vanguard appears to be making some sort of short term or intermediate term call about stocks versus bonds but it turns out that we can do some interesting things with 40/60.

Stocks are the thing that goes up the most, most of the time so simply inverting the S&P 500 and an aggregate bond fund shouldn't be that interesting. In that instance 40% in equities should lag 60% in equities which is what VBAIX has. Maybe Vanguard will nail this call they're making with bonds but everything else being equal more stocks will have a higher long term growth rate and should have more volatility. 

Things get very interesting though with portfolios 2 and 3 which have much higher and slightly higher growth rates respectively with considerably less volatility and smaller drawdowns. The driver of this result of course is that 2 and 3 avoid the volatility of bonds with duration that funds like AGG and VBAIX will take on.

Knowing what to avoid can be more important than knowing what to include. From March, 2000-March, 2003 the S&P 500 negatively compounded at 13.95%. The S&P 500 excluding tech compounded negatively at 2.42% (taking numbers generated by Copilot and plugging them into testfol.io). Getting that one right was not realistic but it makes the point and I would say getting the decision to avoid bonds with duration this decade was much easier to get right.

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.

Gen-Xers Are Losers?

The Economist had a harsh assessment of the state of Generation X that it posted in May. I'm surprised this didn't make my radar sooner than now. The issues/problems cited though seem like ones we've been talking about here for a good 20 years. Maybe, we had great insight early on into these issues as being unique to Gen-X and they are just now starting to matter? 

That would be nice but more realistically, our conversation was more about being able to effectively sift through some basic life building blocks to know which ones to apply to our lives. While living below your means is good advice, it is far from requiring any unusual insight or wisdom.

Gen-X is defined as born starting in 1965 through 1980 and the Economist calls us the forgotten generation. Funny little fact is that when Gen-X was first defined, those born in 1965 and 1966 weren't included. Boomers ended with 1964 and X-ers started in 1967. Those born in 65 and 66 (that's me) were literally forgotten which I always thought was funny. 

A recent 30-country poll by Ipsos finds that 31% of Gen Xers say they are “not very happy” or “not happy at all”, the most of any generation.

From there, they cite work at Dartmouth to figure out why. Unhappiness, anxiety and despair top out at 50, Dartmouth says. They refer to the U-bend theory where younger and older people are happier than middle aged people. 

Part of the U-bend theory is the generalization that 50 is about the age that chronic health maladies start to kick in. Lifestyle habits may have moved that up to an earlier age of late but this is something we have been talking about forever and seems very obvious, requiring no unusual insight or wisdom. We learn as children that we need to exercise and not eat too much sugar. 

If at 50, someone is lean, can bend down and pick up heavy things and not taking a bunch of prescriptions, everything else in their life being equal, their odds of not being "miserable" improve dramatically. They actually used the word miserable. Cut carb consumption and lift weights to prevent/solve this part of the problem. This applies to all ages.

Gen-X has had inferior income growth versus previous cohorts and Millennials appear to be on pace to have better income growth than the X-ers (per the article). Another aspect of the financial component to all of this is Gen-X' turn to be the sandwich generation, providing some level of financial support to both aging parents and boomerang children. Some of the stats cited about 18-34 year olds living with their parents were pretty sad. There's plenty to this that is beyond our control but can we have some control with our resilience to handle that sort of circumstance? To the extent we can have control, for someone not making a ton of money, it would come from living in less house than could otherwise be afforded, driving our cars for longer and other types of advice we might have gotten from our grandmothers.

Is there a stereotype that Gen-X are "reluctant to be corporate drones, placing more emphasis on work-life balance and autonomy?" I don't know if that is true generally it but the article says we were influenced by The Matrix and by Fight Club to have this ideology. Um...I don't know about that. But if it is true, it would explain our only fair income growth and the implication that our retirement account balances are lower on age and inflation adjusted bases.

Part of our bad luck is attributed to timing of events (internet bubble and Financial Crisis) which might be the case but if it is the case then I think Gen-X needs to be divided into older and younger. When I got married in 1993, as an older Gen-X I was 27 and my wife's little sister was 14, born in 1979, she is younger Gen-X. Older Gen-X had the opportunity to benefit from the booming stock market of the 90's and younger Gen-X did not. 

There are studies that show that graduating college into the teeth of a recession, or worse, can negatively impact careers for a very long time. The article seemed to be saying that we were hurt by the Financial Crisis in terms of being able to buy a house. I'm sure that is true to some extent and if you believe in homeownership for wealth accumulation (I do), then that would be a major issue. It is easy to have a house purchase go bad, financially, when thinking five years. Buying a house that you can afford and wanting to stay for a long time becomes less risky.

At this point, the Economist doubles down on our poor wealth accumulation. Some harshness coming, wealth accumulation mostly falls on us to figure out. Repeating for emphasis, we learn as children to live below our means. Barring life events that are some combination of tragic and expensive, however much we do or do not have is on us. I don't equate success with being rich but I do equate it with having some financial resiliency. 

At 50, I think it is reasonable to be able to cover minor emergencies (low four figures) and have something more than an emergency fund socked away for retirement, again barring life events that are some combination of tragic and expensive. At 50, having $200,000 in retirement savings is far from rich but it is not nothing, that would be a useful piece of money and it wouldn't have taken a crazy high income starting in 2000 to have that much now. According to Copilot, $240/mo at an annualized 6% would be $200,000 today. Claude.ai said the average income per household back than was $42,000 but that salary per worker was $35,000 so if both partners in a couple were working, the numbers all seem plausible. 

The article closes out with doomerism about being the first group to be hurt by "broken pension systems." We talk about this threat all the time. There is some birth year, maybe 1975, that will be the cutoff for being negatively impacted by any potential changes to Social Security. We can all have opinions about whether something bad will happen to Social Security but regardless of what we think, the risk to us is that it happens. Citing Joe Moglia, no one will care more about our retirements than us. It is up to us to solve this problem for ourselves, otherwise we might die poor and hungry waiting for them to fix it. 

But on the other side of the coin, a little humor to close out a heavy post. 

You're Goddamn right we'll know what to do.  

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.

Are All-Weather ETFs Working?

Barron's had a short check in on the SPDR Bridgewater All Weather ETF (ALLW) which now has three months under its belt. Here's a quick comparison to a several similar funds along with the S&P 500.

None of those funds are meant to be full stock market proxies. If anything, they are intended to improve on something like a 60/40 portfolio. Maybe they target something like the permanent portfolio, certainly ALLW and personal holding FIRS are in that neighborhood. I would also say that HFND, run by Bridgewater alum Bob Elliott, targets that sort of quadrant style outcome too. USAF is run by Nouriel Roubini but that fund seeks more of a market neutral result than the others do. 

The three months available to look at is too short of a period to draw any solid conclusions but where they should be less volatile than the stock market, they are meeting that objective so far. Foe now, this is just a check in and we'll continue monitor how all-weatherish ALLW and the others can 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.

Interval Mania

Today's post will be a little more fun than yesterday, starting off with interval funds. We've touched on them a few times and the short version is they are expensive, there are issues with how the funds (don't) mark to market and liquidity is very limited, often only 5% of the fund can be sold on just a quarterly basis. If someone really needed out, it could take a very long time. With that lead in, what's not to love?

I didn't realize but there have been more interval funds listed in the last five years than the previous 27 (hat tip to Meb Faber). Interval Fund Tracker is good resource for data. Ben Johnson from Morningstar posted this table on LinkedIn.

The primary investments available through interval funds these days are alts, mostly private credit and private equity. There are also interval funds that invest in infrastructure. 

Like many things, I am not likely to do much with private equity or private credit in an expensive, illiquid wrapper but I do think advisors should spend some time learning about the product. First off, clients might ask and I think an advisor should be able to comfortably be answer reasonable questions. I wouldn't expect an advisor to know much about Malaysian palm oil yields off the top or Egypt's trade balance with Switzerland but there's enough attention on interval funds and Bitcoin that having something to say is a reasonable expectation. 

Now, I would highly encourage finding an hour over the weekend to listen to this podcast where Meb Faber hosted Kim Flynn from XA Investments. After listening to the podcast, I am convinced that there is nothing about interval funds, closed end funds and tender funds (like closed end funds but without ticker symbols) that Flynn doesn't know. XA has an index of interval funds that is made up of 76 ( I think that was the number) interval funds that set a daily NAV. Two of the three largest funds in the index are from Cliffwater who we've looked at once or twice before. XA also manages two closed end funds and its own interval fund.

The other part of my interest here is that this wrapper will evolve. That was obvious about ETFs back in the 90's and it is obvious about interval funds now. That is not to say they must evolve to be more useful than they are now, I don't know but they might. One quick topic that came up in the podcast was that the wrapper might lend itself to investing in farmland. Trying to figure out a way to invest in farmland through a brokerage accessible product is something I spent a lot of blogging time on 20 years ago. 

There were quite a few stocks, a lot of palm oil plantations in Asia and a few other things, back then and as fun as it was to learn about some of those farm companies, putting client money in was not something that made a lot of sense. There are some stocks that are US traded that are in farming one way or another but the returns are low, the volatility is high and while the correlations to the S&P 500 tend to be low, they aren't reliably low. 

I've never stopped being interested in this idea, maybe the interval format will be the way to do it, I have no idea if or when but given my interest, it is worth keeping tabs on this. 

A quick pivot to a Barron's article where different advisors shared how they are "navigating Trump 2.0." One advisor talked about using managed futures and market neutral, "we took the allocation equally from equities and fixed income." That of course is the argument that the ReturnStacked guys make for using their funds. They say that their funds allow for adding managed futures without having to take away from stocks or bonds. 

The predecessor name to that strategy is of course portable alpha, using leverage to add a source that might/hopefully add alpha to a portfolio. I have been both fascinated by and skeptical of their funds but the concept is worth continuing to explore. As opposed to using leverage to blend different assets or strategies in one fund, I generally think using a fund that leverages up just one asset might yield better outcomes. The following is similar to an example we looked at once before using the Simplify Short Term Treasury Futures Strategy ETF (TUA). 

The way the leverage works, a 20% weighting to TUA should equal the result of 100% in US Treasury Two Year Note ETF (UTWO).

You can decide for yourself whether that's close enough to ever use TUA in this manner but it is certainly close enough for blogging purposes. 

Portfolio 1 with UTWO is unleveraged and Portfolio 2 with TUA is leveraged. The leverage lets us make additional room for the RISR/MBB pair we've been looking at lately.

The allocation similarities between Portfolios 1 and 2 certainly backtest very well and maybe I am not putting it together very well but I am not sure the extra 92 basis points of annualized growth is worth the added complexity of the leverage. Am I thinking about it incorrectly? Please leave a comment if you think I have it wrong.

UTWO is a few months older than TUA. UTWO's largest drawdown was just over 2%. As long as TUA continues to "work," if UTWO drops 2% then TUA should be expected to drop 10%. But weighted in the manner I've done in the backtest, the impact to the portfolio should be the same 50 basis points.

The largest drawdown for iShares 1-3 Year Treasury ETF (SHY), as close of an older proxy I can think of, had a 5% decline at its low in 2022 just before TUA started trading. If that large of a decline happened to UTWO at some point, then TUA would probably drop 25% but again the impact would be the same if TUA was weighted properly. I am unsure if with a decline that large for TUA, there would be a volatility drag effect where it might deviate from UTWO. That's the risk. Is that risk worth the extra 92 basis points?

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.