The Craziest Article I've Ever Read?

But first, a friend sent an article written by Pim van Vliet titled No Asset Is Safe But Some Lose Less. The first part of the article lays bare the loss of purchasing power by just holding cash or T-bills over very long time horizons. A useful rule of thumb for framing this effect is that at a 3% rate of price inflation, expenses will be 50% higher in 15 years. 

Cash is both optionality and protection against short term volatility but the drawback is as van Vliet says, a loss of purchasing power. A 50 year old sitting on $1 million in cash and nothing else will have a lot less purchasing power when they get to 70. 

The other day I mentioned that part of the asset allocation process is figuring out what portion of a portfolio needs to capture whatever the equity market will give over the relevant time period. Figuring out how much cash is appropriate is part of that process too and some apparent overlap between van Vliet and me would be how much to allocate to lower vol assets that should exceed the rate of inflation but without the full equity effects of growth and volatility. 

The second half of the article then makes the case for lower volatility stocks, van Vliet uses the term widows and orphans. 

SPLV and USMV target different versions of low volatility. SPLV simply owns low volatility stocks and USMV tries to optimize a portfolio of stocks with various attributes to deliver a lower volatility result. The results of both are valid in terms of generally delivering on the objective as well as the growth rate. In the period studied, inflation compounded at 2.60% so SPLV and USMV check that box too. It's not a realistic expectation that they could keep up with or outperform simple market cap weighting but the tradeoff is a smoother ride. 

As we've looked at before, the low volatility effect can be captured using client and personal holding BTAL combined with simple market cap weighting. I weighted the portfolios to get very similar returns as SPLV and USMV but with much noticeably less volatility. Portfolio 5 tries to add portable alpha using a 2x equity fund and client/personal holding MERIX. Again with that one I tried to target a similar return and even with the huge weighting to a levered fund the volatility is less than both SPLV and USMV.

If we dial up the volatility of Portfolios 4 and 5 to get closer to SPLV and USMV, the respective CAGRs for 4 and 5 go up to 13.32% and 13.39%. The idea with market cap weighting plus BTAL is the opportunity for more upcapture. It is not the core holding (SPLV or USMV) that is the governor, it is the hedging device, BTAL. Clearly though, just owning SPLV or USMV would be simpler.

Now the crazy article. It was kind of an advice profile at the WSJ for a 44 year old woman who wants to retire at 61, take Social Security at 67 and (here's the crazy part) wants to be able to afford to move into a "continuing care facility" at 70. Is it just me that thinks this is crazy? It makes no sense to me. There are other things in there that I will touch on that also don't quite add up, it makes wonder if this isn't real. 

The link removes the paywall so tell me if I am wrong but what person in their 40's targets wanting continuing care at 70? 

Starting at 61, she is eligible for a $5300/mo pension (she works for LA county). At 67 her Social Security will be $1500 is today's dollars from a previous employer or a spousal benefit. Her main job is a librarian and she side hustles as a librarian somewhere else. She has a mortgage on her place and a larger second mortgage so that she could buy her ex-husband out of their home. There's about $400,000 in home equity and another $240,000 in other IRAs, part of which I am assuming is her rollover from a previous employer. Something that also doesn't track is a $900 payment on a $15000 car loan but maybe it started as an $80,000 car loan or something.

The planner being asked to assess her situation doesn't think she'll be able to afford to buy into continuing care at 70. I still cannot wrap my head around this goal. At 44, maybe she doesn't understand what 70 is. We've talked about the theory of not understanding what it means to be older than your age plus 50%. So at 20, you wouldn't understand 35 and at 44, you wouldn't understand 70. That could be part of the equation. 

My older siblings are 69, 71 and 73 and while I think they could all be exercising more, none of them are anywhere close to sniffing distance to needing some sort of continuing care. If you're 70 and reading this, you probably read that last sentence are thinking, no shit Sherlock. Of course bad things can happen to anyone at anytime but planning for age 70 when you're 44? This is presented as Plan A, not some sort of optionality-contingency. What is the logic here, if you know, please leave a comment. 

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