You Don't Need To Concentrate Risk

A few different things today.

First up is retirement related. Sherwood News wrote that older workers, which it counts as 55 and older, have been self-selecting out of the workforce since Covid. If correct, it contradicts the retirement crisis that we all read about so frequently. Of course both can coexist. Some portion of the population might be able to retire at 50 or 55 while some other portion could be facing retirement without any meaningful savings.

Being smack in the middle, age-wise, of this entire conversation about being crowded out of the workforce and retirement readiness is fascinating on some level, I think I want to see how my age cohort figures it all out. That's a key phrase because it is up to us to figure it out. Figuring it out includes isolating whatever it is we might be vulnerable to and then how to mitigate that vulnerability one way or another. 

For example, what are the odds that you could be replaced by some sort of AI function? Do you have a job that would allow you to keep working alongside AI? If that answer to that second question is yes then you need to figure out how to do that. 

If you read the comments in the various retirement articles at Yahoo, in response to the idea of working longer, commenters will say that tradespeople can't necessarily do that. Masonry work tends to be lucrative but it is grinding. A 53 year old mason with a Plan A of retiring at 67 probably needs a backup plan. Does some version of that example apply to you? If so, have you started to work on some sort of Plan B?

Speaking of articles at Yahoo, this one claims that "half of retirees are terrified about the impact of tariffs on their retirement income" with context being an understated COLA. I certainly have no idea whether the upcoming COLA will adequately reflect whatever the reality with price inflation might be but if someone is worried about COLA, that's valid, that is their concern and they are entitled to it. I would lump this in more broadly with problems with Social Security.

Ok, the COLA question, even bigger than that would be a reduction in payouts starting in the middle of the 2030's (the exact timing has been a moving target). How vulnerable are you to problems with Social Security? What can you do to try to mitigate any vulnerability you have along these lines? 

This is of course a repeat message. It is up to us to figure out how to have the retirement we want without overly relying on someone else (the government) to figure it out for us. 

Barron's interviewed the CEO of mutual fund firm MFS. He defended the shield for mutual funds versus ETFs including this quote;

He acknowledged that a mutual fund isn’t the most tax-efficient investment vehicle. “It has its imperfections,” Maloney said. “But we think it served the investment community extraordinarily.”

Again, defending the shield somewhat but I will say that here in 2025, I am surprised by how many traditional mutual funds I sprinkle into client accounts. I've long said that I am wrapper agnostic, I'll use whatever vehicle I think best captures the effect but still, more mutual funds than I would have guessed 15 years ago. Not everything packages into an ETF very well.  

Lastly, another one from Barron's trying to gameplan markets for the rest of the year. There were a couple of interesting comments about treasuries. One analyst likes 7-10 years and another 3-7 years, yields in the fours are attractive they both say.

The ten year treasury yield is currently 4.22%. Is that enough compensation for ten years? What about 3.69% for five years? For me, no. I would take those yields for a year or two and if the FOMC cuts in September the very front end might get closer to that 3.69% where the five year is currently. 

A diversified fixed income portfolio sleeve (including any fixed income substitutes) probably should have some exposure to treasuries but that doesn't have mean intermediate or longer term treasuries. As we explore all the time, there are countless ways to get the fixed income effect without taking on the volatility of something like a ten year treasury. 

UFIV is an ETF that owns five year treasuries. The others are funds we've talked about here many times. Yahoo has the trailing yield for UFIV at 3.87%. Portfolios 2, 3 and 4 have trailing yields ranging from 11.5%-6.56%. ARBIX has a small yield but the strategy is more about a low vol absolute return than yield. So two of the alternatives have the same volatility as UFIV but compound at close to three times higher rate and the other two have much less volatility than UFIV and compound at vastly superior rates. 

USVN which tracks seven year ETFs, is more volatile than UFIV and compounded at 2.84% with a volatility of 6.23%. UTEN compounded negatively with volatility at 8.64%. Going forward, returns for intermediate and longer term treasuries could be fantastic but that is a bet on capital gains from bonds. Is that a bet you want to make? That is not my trade, relying on being correct about interest rates is a tough way to make a living. It's a pretty good bet that stocks will be higher five years from now. It is a very good bet that stocks will be higher ten years from now. Not so with bonds. 

If any treasury market exposure interests you, I would suggest individual issues not ETFs unless you really are trying to game capital gains, ETFs might be better for that but I am not sure. If you want some treasury exposure (shorter term for me) and want to blend in alts as we discussed above, make sure you understand the risks. Three of the random examples we used to today take different types of credit risk. That could be mitigated by either adding in a couple of other alts that don't take credit risk or by removing one or maybe two of the funds that take credit risk and replacing with funds that take a different kind of risk. 

Portfolio 5 below blends all four alts together with a 50% weighting to UTWO.

The fixed income effect can be created without a lot of duration and without concentrating risk into a narrow slice of the market.

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.