Making Portfolios Robust

In last night's quick post after the Sunday night sessions opened, I thought that this event would be a good litmus test for all sorts of concepts and strategies similar to 2022 or the Tariff Panic. Nope. Or maybe, not yet? They're telling us the actual military event will go on for at least a little while. It would be great if from a markets standpoint it was over already. That's not a prediction, I don't know but I tried to prepare clients in an email that this could take a while to sort out but no downside if it markets move on quickly. 

This is just a microcosm from the open of regular trading on Monday that illustrates the risk of treasury ETFs. They all finished the day lower than when I grabbed this look. At any moment, treasuries could turn right around and go up (in price). But as we've been saying for many many years, treasuries are not the cure-all that so many believe them to be. Not even believe, that so many rely on.

It would be fair to think my position of having no duration is further than you want to go. But then, it would also be fair to say that duration is just another alternative strategy that might work very well in a specific event, whether it is a quick event or a longer term event. In that light, sizing it as an alt, at 5 or maybe 10% would make far more sense than 40% like in a plain vanilla 60/40 portfolio.

We focus on portfolio robustness here and as nano as today's opening was, any argument that bonds make portfolios robust is lost on me at this point. They worked for a long time but now it really is a coin flip. Bonds went down in price because of perceptions that oil prices will remain elevated which of course puts upward pressure on price inflation. There's no way to know whether that will happen but is certainly is plausible. 

We talk about it regularly, robustness comes from having several diversifiers because you never know which ones might not "work" in a given event. Managed futures was really a mixed bag. Managed futures with client/personal holding BLNDX had a good day while the replication ETF I also use was down. Gold was obviously higher, BTAL was up when stocks opened lower. Any of those, or the others we talk about could have done anything today, just like duration could have gone the other way, the uncertainty of war could have easily prevailed over the price inflation concerns so, repeated for emphasis, duration has just become another alt to be sized with a small weighting if any weighting (I chose no weighting).

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.

Sunday Night Reaction

Here's an initial reaction in markets to the military escalation.

The table is listing the S&P 500, gold, WTI crude and the Australian stock index. That's clearly a reaction as opposed to ignoring it but stocks don't seem panicked at this point. Obviously there is no way to know whether it needs to get worse before it gets better.

Chances are defense contractors will do well from this. I did some digging and there is a good chance that managed futures is long crude oil, it is long gold and silver but again we'll see. 

Similar to 2022 and the Tariff Panic last April, this event has a good chance to be a good litmus test (learning opportunity) for a lot of strategies and philosophies. 

If you are a student of markets in addition to being a participant, this is yet another fascinating event. If it gets bad, ok, we've had bad before. We know bad ends and eventually the market goes back up. Maybe that happens quickly or maybe it takes longer than we'd like but that is just how it works so there is no need to panic, only the need to endure (if it is bad) and learn for the next one. 

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.

Building In A Margin Of Safety

Barron's posted a first hand account from a semi-retired writer, not Neal Templin, about why he chose to wait until 70 to take his Social Security at the start of the year. As is often the case, the comments are worth reading and like they usually do, they lean to taking it early for various reasons. 

Hopefully I've never said everyone should in terms of when to take it but for quite a few years I've tried to really hit on making sure you understand how things work and warning that there are a lot of mistakes to be made. I recently found out that one buddy didn't know his wife could get a spousal benefit instead of her own which has been very costly for them. Big mistake. 

I'm about 25 months from being eligible to take it early. At this point, things would need to take an unimaginable turn for me to want to take it that soon. Unexpected things happen in life of course but I have no desire to stop working so taking it before 67 where the benefit would be reduced, doesn't make a lot of sense to me. My preference has been to wait until 70 to max out the survivor benefit for my wife in case I die early. If somehow I ended up taking it a few months early for some reason, I wouldn't consider that a real change in my plan versus taking at 65 or 66. 

Comments often turn to taking it at 62 and investing it. We looked at that recently with the conclusion that it wouldn't work for too many people. If you take it and keep working, most of it will be withheld because of the earnings test. If you take it at 62 but are pulling money out of other accounts to live off of, then it's sort of like rearranging the deck chairs. If you make a lot in passive income it could work, that is not subject to the earnings test. 

See the scenario below;

Someone who just turned 62, making $100,000 and wanting to retire now and take Social Security right away. A single person goes from making $8333/mo to $1764. Or if his wife makes the same $100,000 and will keep working, they go from $16,666/mo to $10,097.

This scenario could easily have enough in retirement accounts to fill the gap but if they're sort of close to the line with not much margin for error, locking in $1764 (plus COLAs) could be difficult. Sticking with the single earner getting $1764 and the spousal benefit of $882, they've gone from $8333/mo to $2646/mo. Say they are living on 70% of their $8333, that's $5833 so they need their portfolio to kick off $3187/mo. Working backwards, assuming a 4% withdrawal rate, they need $956,000.

Copilot figures that of people 50 and older, making $100,000 or more, only 10-15% have at least $1 million saved. It's not that success is impossible or implausible but this scenario of seems kind of realistic, it's not desperate but something might have to give. Maybe not retiring. Maybe cutting back on spending somehow. Maybe getting some sort of side-hustle type of part time income but remember that too much income might cut into the Social Security benefit. 

If this person delays Social Security until 2028, their benefit would be $2084/mo and in 2030 it would be $2503/mo. If the nest egg, can compound at a not so heroic 6%, it could go from $956,000 now to $1,074,000, in 2028 or $1,206,000 in 2030. 

In 2028 they'd have $2084 in Social Security income plus the spousal benefit of $1042, $3126 plus 4% from the $1,074,000 portfolio for a total of $6706/mo versus their need of $5833. So the margin for error has gone from nothing at 62 to about $900 at 64. In 2030 at 66, their SS totals $3754 and 4% from their portfolio would be $4020/mo adds up to $7774/mo, leaving them about $1900 ahead. 

Arguably, the sweet spot for this scenario is closer to 64 than 62. Remember, one premise at work here is that the percentage of people making $100,000 that have $1 million in retirement assets is low. 

Obviously, some sort of income stream like from real estate or a monetized hobby could create a margin of safety that I think is important to have if at all possible. The question isn't 62 or 70, the question is personal, perceived need for a margin of safety.

I'll put out a second note after the Sunday night session starts if we see anything noteworthy. S&P futures down 10 basis points probably isn't worth anyone's time but we'll see what things look like. 

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.

Move To Albania?

Today's post will ignore the elephant in the room, the Iran attack, for now. Maybe we'll know a little more tomorrow when markets start their Sunday night sessions. 

I've had a bunch of tabs open this week with some downbeat topics but that I think are important to explore. First from the WSJ, More Americans Under 55 Are Dying Of Severe Heart Attacks. The idea that we are collectively less healthy than we were in decades past is something we've been digging into for a long, long time. We are getting heavier and heavier and our diets are getting worse and worse. The statistics are grim. They've been grim for a while. 

Being an EMT allows me to see some things first hand which has helped me better understand the predicament we finds ourselves in. A point we emphasize here is that they (the government) is never going to figure it out. We can either grow old, never trying to figure it out for ourselves or we can grow old and try to figure it out. We're going to grow old regardless and they are not going to figure it out so it is up to us. Health is wealth, make it a priority.

Cut way back on junk food. Take the time to learn what junk food really means, how many supposed healthy foods are in fact not and then cut way back. The more meals comprised of just meat, eggs, fish and cheese you can eat, the healthier you'll get. Vegans, I  don't know what to tell you. Plenty of fruits are sugar bombs, so watch out there. Many veggies are good of course but some are not. 

On Saturday morning, I was able to get a fire department buddy who doesn't really exercise to come do a mini-workout with me at the firehouse. I was thrilled he said yes. I do a full weight workout on Monday and Thursday (usually) and skip rope most other days. On Saturdays before either fire training, the monthly fire board meeting or like today a free Saturday, I do a mini-workout which is usually a set of jump rope and then three or four weight exercises. All in, this little routine is probably less than 15 minutes. After jumping rope, we did bent over barbell rows (dead lift substitute), landmine squats, pushups and farmers carry. I tried to get him to use weight he would think was too light and just do like 6 or 7 reps so he might feel it a little tomorrow but not be so blown up that he can't move. 

An important point is that I told him that this can be just 15 minutes and is far better than doing nothing. Hopefully you exercise vigorously and maybe you can encourage someone to start with small bites like we did this morning. On Wednesday, I have in my calendar to text him to encourage him to do a quick set of air squats and then some pushups. 

Next is that Americans Are Leaving The US In Record Numbers. It seemed like a lot of people said they were going to do this ten years ago but maybe not that many did? I'm not sure. Now though, if the numbers in the article are correct, maybe fewer people are talking about it but more people are doing it. Again, not sure. 

The article focused on Europe as an expat destination with no mention of Australia or New Zealand which surprised me, no Canada or southeast Asia either. One country that came up was Albania. One person who moved there was quoted as saying you can get buy on $1000/mo in Albania. I've never heard of Albania brought up in this context before, have you? 

Long story short, my father moved to Spain in 1980 when he was 54 and lived there until he died in 2015. Living in another country can work. Details related to finances and benefits (Social Security) can all be sorted out. Figuring out how to stay and whether you want to work there (he worked for quite a while) can also be sorted out. I don't need convincing that many places are cheaper to live than here. 

You also hear about the medical care being free or close to it. Yeah but.... My father had a few issues come up that were varying degrees of serious and they treated him just fine with a good result. He broke his hip at 71 for example and that went very well. He lived another 17 years and did a lot of walking, really a lot, right up until the end. Right after he turned 88, 55 years of cigar smoking caught up to him with throat cancer that spread all over and I saw first hand the medical care for something that serious was dreadful. Semi-serious and below, it's probably fine N=1 but for very serious, they didn't know what to do and I swear his doctor was about 24 years old, she looked like a kid and I never saw an older doc.

Our first trip to New Zealand in 2005 was unique. A Walker friend owned a property there with two houses. He rented out the main house to a slightly older couple and there was a guest house that our friend let us stay in. We spent a lot of time with the older couple and their kids who were about our age. Based on two visits, New Zealand seems like it would be a great place to live. Yes they import just about everything but they are net exporters of food, they have plenty. Pound for pound, it's a little cheaper there, maybe not in Auckland, but not as cheap as Albania purports to be. All good but as our hosts from the first trip told us, the healthcare system there isn't good. 

Speaking of New Zealand they are open for business for anyone who can buy their way in. For a time, they restricted foreigners' ability to buy a home but started to lose population so they loosened the restrictions a little. For now, a lot money and you can buy in as opposed to rent. 

Anyone who thinks they need to leave the US for whatever reason, you will have more optionality if you can get your health in order. Notice, I am not saying our healthcare system is better, it may not be, I don't know. A family member had some very serious health issues last summer. For a couple of months, it became a full time endeavor for a couple of family members to advocate for making sure mistakes were avoided, questions were asked and also pushing back on a couple of things that made no sense. 

Back to the second paragraph of this post, do everything you can to stay healthy. 

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.

Oh No, Financials!

The current event that appears to be unfolding in the financial sector coming out of the private asset space is not the Financial Crisis. Let's get that out of the way. I don't know what the final fallout will be but this will be an investment thing, if anything, not a systemic thing.

We've put up other tables capturing different periods but with the same message. These companies are pretty useful proxies for whatever is going on with private assets and right now, there are some real concerns with private assets but where private equity and private credit don't mark to market everyday, the above companies are like a Wittgenstein's Ruler look at what might really be going on in private asset funds. 

From Joe Weisenthal;

The other day, I talked about how complex the banks are and the complexity is again problematic even if not systemic. Before the financial crisis, I owned one domestic bank and several foreign banks. I had lucky timing selling all but the Canadian bank which I still own for clients today and Barclays which back then owned iShares. I've generally avoided banks ever since save for the one Canadian bank and a discount brokerage now that has some banking activity.

This might be useful.

Blackrock (BLK) is a client holding that of course now owns iShares and does have some exposure to the private asset theme. I would expect it to continue to feel more of the private asset unwind if that is what happens. Clients own a different credit card company than Visa (V). There's no fundamental connection to credit card companies (they don't take credit risk, they collect tolls). RY is a different Canadian bank, down less because I believe the Canadians are generally simpler businesses. KBWB is the ETF that tracks the bank index that Joe mentioned. JPM should be less levered based on Dimon's recent comments but we'll see how that pans out. ICE is the NYSE and a few other business. Panic should be good for trading volumes and exchanges should benefit from that with no fundamental connection to the credit event. Goldman Sachs (GS) is obviously smack in the middle of this thing

I am not zero weight credit risk but relative to the index I am underweight it considerably. If this gets uglier than it already has been, that bit of exposure I do have will feel it. Similar to tech, I've been somewhat underweight, not grossly underweight, but of course if there is a tech route, that exposure will feel it.

The point is completely avoiding something may not be plausible but avoiding the full brunt is plausible. Being underweight obvious risk focal points helps with portfolio robustness as does a little exposure to things that have negative correlations to equity or might actually benefit from the chaos (antifragile). 

And this is why you keep foreign exposure.

It can smooth out the ride over the intermediate and longer term. If you had some edge for when foreign would start to outperform a year or so, great, but that is a tough thing 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.

What Going Heavy Managed Futures Looks Like

Simplify included this in promoting one of its funds.

That is a great way to phrase it, not relying on past correlations. The relationship between stocks and bonds is no longer as reliable as it used to be. This makes bonds less effective at helping manage equity market volatility. Yes, I am absolutely a broken record on this point and will continue to bang that drum. 

Next item, a good blog post from Ben Carlson, Can You Live Off Your Dividends? It was really about covered call ETFs with a look not so crazy high yielders and another chart with crazy high yielders. The starting point was answering a question for a 42 year old, single guy with a lot of money saved who wants to quit his job. If he put all the money into SPYI, he said the 11% would bring in what he needs.

That's Ben's chart. We do something similar here in terms of looking at total return and price only. If a fund like SPYI (there are others of course) can pay out 10, 11, 12% and still get a price only return of 3%, I think that's pretty good. That's not keeping up with the stock market of course, that should not be the expectation. Plenty of ifs there but still. 

The way we've looked at this idea is as a short term strategy like stopping work but wanting to wait a few years to take Social Security. 

Here's a simplified version of ideas we've looked at before.

Total Return versus price only.

The "yield" is about 11%. Inflation ran at 2.41% annualized during this period. So the real return, after taking out the distributions is above inflation but it's not great. It could limp along though for several years until the person wants to take Social Security. It's not a very robust portfolio if something bad happens in markets. Ben's reader is only 42. I would not want to try to ride that idea out for the next 45 years. There's very little likelihood it survives anywhere near that long. 

The scenario of like a five year window where you might allow a small portion of investible assets to deplete while waiting until Social Security kicks in is something we started playing around with quite a while ago, there are now ETFs from several providers that are intended to deplete for just this scenario so I'm not the only one. 

Speaking of Simplify, they launched a managed futures fund in partnership with DBi who already has their own ETF, DBMF which has done pretty well but absolutely killed it in 2022. DBMF is a replicator and the new fund which has symbol SDMF is also a replicator. Today was the first day so it is too soon know what the difference is between the two. 

I got an idea from looking at the fund and how some people believe in huge allocations to managed futures. Anyone wanting to more than dabble in managed futures should probably have several funds. We've gone over the performance dispersion between strategies including just the other day. 

The period studied captures an awful run for managed futures so I am very surprised that Portfolio 1 was anywhere close to plain vanilla 60/40.

Here's what the same three portfolios look like just looking at the last six years.

Portfolio 1 didn't really crash during the Covid Crash of 2020 and it was up 71 basis points 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.

It Keeps Getting Worse

The whole Blue Owl saga and whatever it means for private credit continues to draw more attention. Here's the latest from the WSJ, it is a festival of very long running themes we regularly explore. 

Chris Paladino, 58 years old, said he initially decided to invest around a quarter of his portfolio in private credit, hoping for yields of 9%. When he saw the headlines last week, he briefly wondered if he had made a mistake. 

This sort of yield chasing is something that repeats over and over. A 9% yield in a 4% world is risky. It's not that the risk should not be taken but 25% of your money exposed to just one risk is very aggressive. The Journal said that this guy second guessed what he had done but then doubled down with another $200,000. This guy also bought shares in Ares (ARES) common stock.

Obviously he could turn out to be correct so this really is about understanding what risks you want to take and understand the fallout if you are wrong. Paladino is in very deep. Unlike plain vanilla equities, if this goes down a lot, it doesn't have to eventually come back.

If he was enticed by 9% yields, he probably could have constructed a tranche of his portfolio of several different exposures, each with their own unique risk factors that could have gotten him the same 9%. Same yield much less risk to the bottom line value of the portfolio. 

With growth slowing from traditional pension-fund and endowment clients, private-markets giants such as Blue Owl, Apollo Global Management and Blackstone have aggressively courted individual investors from everyday millionaires on up. The firms are now pushing to get their offerings into 401(k)s. Some in the investing world said the funds aren’t well-suited for the masses, in part because they tend to come with higher fees and are harder to sell.

I read this as "we need more suckers." That was mean. I meant bag holders. 

One advisor is cited as recommending 5% to private credit. Risk-wise, that's reasonable. It either works out or it doesn't but the client is not seriously damaged if it goes badly. 

Quick pivot to a suite of four new ETFs from Innovator that they are calling Managed 10 Buffer. Basically the first 10%-14% of downside is protected but unlike other buffer products, these allow for capturing 80-90% of the upside. 

In the webinar, they talked about the possibility of these funds protecting as much as 20% down depending on how the volatility impacts the options combo embedded into the strategy. Thinking through it, if the market drops 25% and if the Managed 10 Buffer actually protects as much as the first 20%, then it's only a 5% decline for the Managed 10 Buffer.

I don't doubt these will work as intended but what they're really doing is protecting against down a little. I would be more interested in protecting against down a lot, down a little goes with the territory. There are a lot of ifs in getting the 20% protection but I am sure the 10-14% will work. Maybe the concept doesn't work not protecting the first 15% down but then protecting from -15% onward, I'm not sure but I am more concerned with down a lot than with down a little. 

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.

At Least Try To Understand What You're Criticizing

On the heels of yesterday's post about the financial sector, Jaime Dimon said that he sees some people, meaning banks, doing dumb things like they were in 2005, 2006 and 2007. Nassim Taleb has been talking about the extent to which risk is underpriced and Torsten Slok says that tail risk has increased.

This brings us to a couple of different articles about how investment products are evolving, bad per this Wall Street Journal and bad per the comments on an article at Barron's. The take from here has always been that for anyone inclined to move beyond the plainest of vanilla funds, there needs to be a lot of sifting through to find a few things that capture something very effective. 

If you can accept that observation then yes, there will be a lot of crap. The WSJ article notes that a 2x Doge fund is down 70% since its inception and that a 0dte covered call fund on MSTR is down a similar amount, both in very short periods. We covered that 0dte fund, it's from Tuttle. An exec at Morningstar is quoted as saying "many of the funds being launched just don’t pass the quality test." Yes, if you're buying an inverse Coreweave ETF, quality may not be your first priority which is fine as long as that reality is understood. Inverse XRP? I mean, hopefully anyone swimming in those waters understands what their strategy actually is. 

The comments on the WSJ article were interesting because most them didn't understand how the funds work or how to evaluate them. Same with the comments on the Barron's article which made a weak case for buying alternatives now. It was a poorly researched piece. It recommended a mutual fund that appears to be closed, not closed to new money but shut down. As a note, when you see that a fund minimum is some very high dollar amount, that's not the minimum. That's a way of communicating the shares are institutional shares or that the fund is only available through an advisor. 

Evaluating ETF slop and non-slop as well as alternatives is kind of a big thing here. Anyone curious enough to want to learn needs to make sure they are viewing funds with the right lens as well as understand the mechanics. 

A fund that "yields" 50% on a stock that goes up by 20% is going to go down a lot on a price basis. That's how going ex-dividend works. You need to look at total return to have a better sense of the result. The total return might stink too but at least you'd be looking at the right thing. Some sort of market neutral or arbitrage fund is not intended to keep up with the S&P 500. Thinking that type of fund is not a good fund because it was up 8% when the index was up 20% is not actually understanding the fund. 

To the intro of this post, if you're going to use any complexity in your portfolio make sure you understand what it is supposed to do (negative correlation, low volatility and so on) and what it is vulnerable to. A bunch of alts that all take the same risk will lead to tears if/when that particular risk has consequences. 

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.

Risks That Don't Need To Be Taken

The situation with Blue Owl seems to be getting worse at an accelerating rate. We mentioned it quickly last week when they halted redemptions with a "retail based private credit fund" but the stock continues to go down. Here's more from Yahoo and Bloomberg.

Private credit and equity have been showing signs of excess for a while. It's not clear to me how serious the excesses are but there has obviously been a big push to make private assets available in more retail accessible funds and retirement plans. I've been consistent for years in being skeptical of these type of investments, I don't believe they will give the great deals to people's 401k plans. If you want to benefit from private assets, I've argued for buying the companies selling the picks and shovels, the fund providers, the ones making the fees on the funds not the funds themselves which are paying the fees.

The history of this group is that when times are good, they are great and when things take a bad turn, like now, the stocks get pounded but they do capture what is going on in the world of private assets. They are now on a run of getting pounded. In the last month Blackstone (BX) is down 24%, Apollo (APO) is down 16% and Ares (ARES) is down 26%. I've never owned one of these. I've never thought about buying one, just making the point for blogging purposes that I believe the management companies make more sense for anyone wanting to access the space.

The reason I don't want the exposure is the complexity of these companies and the leverage. Many of the large banks are similarly complex, maybe more so, and also heavily leveraged. This is subjective but financials (meaning the banks) is probably the most complex of the sectors. It might be difficult to understand the manufacturing process and equipment in the tech sector but I believe the businesses are less complex. 

Given how complex many financials are, it should not be a black swan if this event starting with Blue Owl evolves into something very serious. To be clear, I have no idea but this is space that is prone to blow ups. There's no reason to own something with such a clear path to blowing up or at least no reason to have a meaningful position. I don't think there is asymmetric potential with private credit like there is with Bitcoin. 

Mark Baker, aka Guru Anaerobic on Twitter talks about figuring out what to avoid, via negativa, and this is very important concept in portfolio construction. Avoid can sometimes be too much as opposed to underweight. There are excesses in the AI space too of course but there I'm just underweight. This isn't a riskless endeavor, the conversation is managing risk not completely avoiding it. 

In a similar vein, we're probably all watching the news from Mexico and the apparent impact on Puerto Vallarta which as many have reported is where a lot of American, expat retirees live. Moving to another country for retirement (just a few years or permanently) is something we've been looking at for a while in various places. It is a fun exercise to think about living in another country even if you're not serious about ever doing it (that describes me). 

Quite a while ago I wrote a few posts about Ecuador in this context. I made contact through Linkedin with someone (Edd Slaton might have been his name) who had moved to Cuenca, Ecuador with his wife and had some sort business helping people relocate to Ecuador. Then there started to be political unrest pretty close to the covid outbreak but I think the unrest was more political and focused more in Quito than anywhere else. I reached out to Edd back then to see if Cuenca was impacted but and his wife were vacationing in France and he wasn't sure. 

In the last few months I saw something that gave me the impression he and his wife left Ecuador and were somewhere in Europe. My suggestion has been to not sell your house in the US. Rent it out, have the income stream and a way to come back if you want to or think you need to. I have no idea what the real story is in Mexico but it would not be unreasonable for an expat in Puerta Vallarta to think they need to get out of there when the dust settles. The nature of housing in a lot of places is that if you sell and don't rebuy, you'll get priced out. 

You can always sell later but you might not be able to buy back in later. 

Going heavy into private assets one way or another and moving to another country with no fallback are both examples of things that are easy to recognize as risks that don't need to be taken. 

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.

Navigating Managed Futures Dispersion

Just a couple of quick hits today.

AlphaSimplex has a paper that looks at some serious dispersion in managed futures. 

The first chart shows dispersion between differing signal lengths. We've talked a little about fast signals versus slower signals, I believe more programs lean toward slower signals but either way, fast or slow, they all take turns leading and lagging.

The next chart compares full implementation (wide) versus replication (narrow). To the left it looks like full implementation did better and lately, replication has led. 

The paper thinks the recent outperformance of replication strategies is just random chance. 

There are other factors addressed in the paper that might account for dispersion but I think the bigger point is to consider owning more than one fund. Not necessarily a larger allocation but adding in a second or third fund. AI can help tease out differences in how many markets a fund invests in as well as differences in risk weighting and signal length. 

Barron's looked at convertible bond funds and had this table.

This is an interesting space. The textbook on these is that when stocks go up, converts trade like equities and that when stocks go down, further away from their conversion price, they trade more like bonds. Maybe individual issues, I don't actually know, but the funds usually trade like stocks on the way down too as implied by the 2022 result. 

What's the deal with the Franklin fund listed there? I asked Copilot if it targets a lower equity beta than FCVSX. Copilot said yes. It said the Franklin fund is a more "classic, balanced convertible" strategy where the Fidelity Fund "runs a more equity-forward, higher delta book."

A little longer term, I'm not sure Copilot is correct. When I pressed, it gave what I would say is vague reasoning for why it was correct related to realized betas versus target betas. This is a good example of being curious, getting some AI help and pushing back when it seems off. 

Peter Mallouk Tweeted this out;

While I wouldn't count on a 10% growth rate, it makes an important point. Being a little older and far behind doesn't mean you can't still accumulate a meaningful piece of money. I don't think too many 60 year olds are going to be able to put away $163,000 every year but $31,000 at 50 where both partners make a decent living doesn't seem crazy to me especially if they pay off a mortgage in this window. Even $20,000 a year from age 50 to age 66 at 9% per year would be $666,000 which is enough to create a meaningful income stream even if it is not sufficient to meet all needs. 

Yes, Mallouk used 15 years but if someone is starting from scratch at age 50, maybe they would consider working a little longer. 

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.

It All Comes Back To Optionality

The daily New York Times email led off with a bit about self improvement related to people "doing favors for their future selves." We have been using that exact phrase here for ages. There are big picture applications that we talk about in terms physical and financial benefits but also very immediate but mundane things like backing into a parking spot so it is easier to get out and doing the dishes tonight instead of letting everything sit in the sink overnight. 

Doing stuff now versus having it sitting there waiting for you, more the dishes and pots than the parking spot example, resonates with me. I really dislike having a bunch of work that I need to get done just accumulating, waiting for me for when I probably won't feel like doing it. Note that I don't know if the link will work, it's what came up when I clicked view in browser. 

The writeup was pretty superficial looking first at the emotional tradeoff of making sacrifices now for an uncertain future and then wonder when the payoff comes for doing favors for your future self. 

I figured this out early. Where I think it came from is my grandmother was a great baker. My favorite thing she made was mint chocolate cake with mint frosting. The frosting was the best part and my older siblings always told me to save the frosting for last, save the best for last. I started hearing that at a very young age and so it stuck. Save the best for last made it easier for me to think about favors for my future self along with a few other examples that I won't bore you with. 

It's also akin to playing the long game which has worked out well. From the fire department, I coveted one of these trucks from when the Forest Service first started buying them.

Financially, this was nowhere close to possible, not even a remote possibility for us. It took about 15 years but it finally happened in 2023 and I'm still young enough physically that I'll be operating it for years to come. Then we got another one.

One form of payoff, from this point I will call it optionality, is getting what you want and still being able to use it or do it or benefit from it. This is probably physical optionality.

Another form of self created optionality is either wanting to do something different (work related) or having your hand forced at work without being left desperate and scrambling, forced to do work you don't want to do which is probably financial optionality.

Physical optionality is created by regular vigorous exercise and financial optionality is created by making good decisions related to saving and spending. When I turned 50, I said being that age which implies having some experience, with a little money in the bank while still being able to get it done physically is a great spot to be in and that I imagined the 60's would be the same. I'll be 60 in April and that appears to be panning out which is not surprising. I already pack tested for the 2026 fire season which is the annual physical requirement of hiking three miles with a 45 pound pack in 45 minutes or less. Sixty is old for this but not elite, like many things, success on this front comes from understanding the task and marrying that with your capabilities. 

As far as the time tradeoff, the physical optionality doesn't seem like much of a tradeoff. Go find @mangan150 on Twitter. He preaches only lifting twice a week for about 30 minutes each session and then walking regularly. He also includes HIIT in his lifting sessions too. And for the little time actually needed when done with the right intensity, you're healthier and feel better now, not just in the future. I lift twice a week for closer to 50 minutes and I jump rope almost every day (less than ten minutes). Our dogs don't like to go on real hikes too often but we take them on a mile and half loop around our house that climbs a total 400 feet or 600 feet depending on how we go, we do that pretty regularly. It all takes very little time

Financially I would say living in less house than you can afford and not replacing cars every three years, I've been driving my Tundra since 2007. There is emotional benefit to going through with a little bit of a financial cushion which is a benefit now and in the future. The house angle may not stand up anymore. I perceive buying a house has become more difficult. Beyond the headlines, which I don't know what to make of, I know that were I live there are no more starter house in terms of cost. In terms of size, yes, but not dollars. Tucson has plenty of houses in the $300,000-$400,000 range which is much more accessible for younger people who make a pretty good living even if they're not killing it. 

All of these concepts serve to make life easier. If life is easier, it stands to reason that life would have less negative types of stress like worrying about money which makes life easier (yes that is circular).

Speaking of fire department stuff, we replaced our old brush truck with a new one. 

I may have told this story already but short version, we had to replace the truck. One of our guys had the idea of lifting the pump, water tank and all the rest off the back of the old brush truck and putting it on the new Dodge. This idea probably saved us $150,000. That's the truck, being picked up from getting the graphics applied this week. 

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.

Post 1000 & Risk Management

This is post number 1000 for this URL. My first blog address disappeared (short version) when all of that content, about 4900 posts, was moved over to a site hosted by AdvisorShares when I had my side gig there a while back. I wrote at The Maven for a bit but that sort of sputtered and however many hundred articles I wrote for thestreet.com are all still up.

First up, Corey Hoffstein posted this picture with the caption "as predictable as the daybreak." I think he was referring to a good fund having a long struggle and then doing well again. 

BLNDX is of course a client and personal holding. Yep, it struggled for a while. Any valid strategy will have periods where it languishes. Speaking of AdvisorShares, when I worked there, the CEO was fond of saying that when a manager struggles for an extended period, you should double down. I don't know about doubling down but certainly throwing in the towel runs the risk of being a bad decision. Probably.

The caveat might be a stock picking fund that is always trying to beat the market. The Fairholme Fund (FAIRX) might be a good example here. 

The manager, Bruce Berkowitz, a smartest guy in the room type but this has been a very difficult hold. If you play around with the time periods though yourself, you'll see there have been different runs where it has been closer or even ahead of the index but I'm not sure how you settle in and buy this one. BLNDX is systematic though. The equity sleeve uses index funds and the managed futures sleeve, like I said is systematic and if you've ever seen fund manager Eric Crittenden interviewed, he never second guesses it. 

Here's an interesting idea. 50% BLNDX and 50% gold.

Ok, that's interesting. If you simulate it though by replacing BLNDX which only goes back six years, with a mix of ACWI and AQMIX, you get a much longer backtest that is very unimpressive. Managed futures and gold had rough run for much of the 2010's. Managed futures is great. Gold is great. But don't get carried away.

And in a related article, Bloomberg said At Long Last Being Underweight Tech Is A Winning Strategy. I don't think this is the right thought process here for what has been kind of a sneaky rolling over for big tech. Not so sneaky? I don't know actually but either way, as we've said countless times, history has not been kind to sectors that grow to be larger than 30% of the index. Where most of the revamped communications sector came out of tech, you could argue that instead of tech being 34%, it's closer to 40%.

The risk from a huge sector weighting either resonates with you or it doesn't and this pullback is either the start of something or it isn't, I don't know but I do know that I don't want to chase this sort of thing. I've been underweight tech for a while. Said differently, excesses, like 35-40% in one sector, are prone to real pain. 

I think the most important part of risk management is recognizing it before the consequences hit. That much in tech is an obvious risk factor. Maybe it will never matter, I don't know but it is obvious and one that matters to me. There is no reason you need to be overexposed to the risks that matter to you. 

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.

Halting Redemptions...Permanently?

A couple of weeks ago I got an email promoting the Denali Structured Return Strategy Fund (DNLIX). It's more fixed income-ish, not an equity strategy.

It's a newer fund. We took a look at a few months ago. MERIX is a client and personal holding and I used CBYYX as a proxy for catastrophe bonds because testfol.io didn't have the right data for SHRIX or client/personal holding EMPIX. The general interest here for me is finding more strategies that have the above type of volatility and return profiles but with risk factors that differentiate from other funds I use. 

Related pivot, on Wednesday I sat in on a webinar put on by Nuveen about farmland investing. Similar to timberland, farmland is a fantastic diversifier. Equities/REITs in either category don't capture the effect very well. My belief in farmland (and timberland too) is great enough that I will listen to any presentation that comes my way. Nuveen has a non-traded farmland REIT which is probably surprising, at least to me anyway, and sure enough it does well.

Now this from the FT (everyone else covered it too), Blue Owl has "permanently" halted redemptions from some of its credit funds. Basically, Blue Owl is going to sell down holdings as it can and then return the money in drips and drabs. The implication is it will take a long time.

DNLIX is an interval fund. I already said the farmland fund is non-trade so no daily liquidity there either. 

I have been very consistent in saying I'm not going to go down this road for clients, and that is still the case but as we talk about frequently, all of these things will evolve and maybe farmland or timberland will make it into some sort of wrapper with daily liquidity that captures the effect. Or not, but there is no reason not to follow along for the things that interest you as much as timberland and farmland interest me. 

In the meantime, taking on the complexity, fees and illiquidity of the current wrapper makes no sense to me. Chances are you can find proxies that get 90% of the effect without the complexity, fees and illiquidity. 

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.

Selling Volatility Can Be Painful

It's been a rough go for the Tuttle Capital MSTR 0DTE Covered Call ETF (MSTK) since in listed last fall. It hasn't been much better for the older YieldMax version (MSTY).

If you add the distributions back in on testfol.io, MSTK is down 59% while MSTY is down 46%. The total return declines aren't that bad compared to Strategy's common stock which Yahoo shows down 52%.

Learning how to harness volatility as well as how not to do it has become pretty important to how I view things which is why we spend so much time looking at it here. Frequently, I talk about sifting through a lot to find something useful. That's what looking at funds like this is, sifting through things that would pretty clearly be very difficult to hold but there is information in watching how the crazy high yielders behave. 

Kind of related. Interesting idea, not being sarcastic, but getting hit in not quite a month of trading.

They filed for a whole suite of these but so far just this one and a gold/Bitcoin fund that has symbol ISBG which is down 25% in the same number of days. 

I sat in on a Webinar from WisdomTree about capital efficiency. They included this slide which we looked at a very similar slide a few weeks ago.

If you're interest in looking at that again, there it is but I had a another thought. Meb Faber Tweeted something about 60% S&P 500/40% gold looking an awful lot like plain vanilla 60/40. I couldn't recreate that but this is interesting.

Testfol.io can simulate certain things before when the respective fund actually started including DBMF which is a managed futures ETF. Backtesting managed futures this far back is pretty helpful. 

Managed futures looks more like intermediate treasuries (there is no simulation for AGG) than gold does until we get to late 2021. You can kind of see in the drawdown chart where managed futures worked relatively well when the internet bubble popped and the financial crisis which were both slow moving events, it got hit in the covid crash because that was a fast event and of course 2022 when it did fantastically well.

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 Pursuit Of Robustness

Bob Elliott from Unlimited Funds got interviewed by Brad Roth from Thor Financial which was posted at ETF.com. Bob has a fascinating background, he worked at Bridgewater for a long time and then started Unlimited a few years ago. Unlimited is up to four funds now and all of them offer some version of hedge fund replication. HFND is the original, HFMF is 2x managed futures, HFGM is 2x global macro and HFEQ is 2x long/short. What 2x means in this case is twice the volatility which might equate to twice the return but not necessarily. Part of the idea with these is that many liquid alts aren't volatile enough. 

With his background, Bob should be a great must listen but this interview was the best one I've heard for extracting useful tidbits. 

First, lets test drive 2x managed futures. In the interview, they talked about an allocation of 50/30/20 to replace 60/40 where the 20 goes into alts. 

For quite a while, the managed futures didn't really help much as the teens was a bad decade for managed futures. That struggle didn't really hold back relative returns though. Then in 2022, the managed futures did help both Portfolios 1 and 2. The early lag for Portfolio 1 is from having only 50% in the S&P 500 versus the other two having 60%. If you like the idea of 50/30/20, saying the obvious, you have less in stocks than in a 60/40 portfolio and stocks are the thing that go up the most, most of the time. 

They talked about HFND, Bob's first fund, being something of a fixed income proxy (my words).

Some clients own BALT as a fixed income substitute. The chart is interesting. Going back to QAI's inception, that fund has not done well but that might be a function of rates that were at 0%-1% for a long time. Now that rates are higher, that fund is doing better. I am surprised to see QAI ahead of HFND.

The motivation to use these liquid alts is to make portfolios more robust, the pursuit of robustness. Robustness does not mean perfection which I think is a great point.

The most interesting idea they talked about was that once you find robustness, you're not going to improve much from there. Basically don't mess with it because you'll get either diminishing returns or end up with something that's not as good. 

Interesting, what do you think about that idea? I disagree in terms of there are countless defensive tools available today that were not available when the Financial Crisis started in 2007 for example. Then fast forward to the crisis (small c for this one) for bonds with duration starting in late 2021. If the multi-decade, one way trade in bonds had ended in 2010 instead of 2021, there would have been far fewer fixed income substitutes to use instead of TLT and AGG. 

From my time at Fisher in 2002, they used the term capital markets technology which is what we're talking about. Buffer funds (no matter what anyone thinks of them) are an innovation, a new form of portfolio technology. When I bought RYMFX in 2007, it was literally the only managed futures fund. How often to I mention client/personal holding BTAL? BTAL didn't start until 2012. A few days ago we quoted Shana Sissel from Banrion saying that BTAL and managed futures are the most important diversifiers. 

All of this innovation has meant needing to sell less for defense than I did in 2007/2008. In terms of process evolving, I would rather offset downside with diversifiers than just straight up sell. It's much easier to get it wrong by reducing exposure selling down equities versus adding more negatively correlated funds. 

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.

Philosophy From Marshall Mathers

Let's start with this graphic from Gallup;

The trend probably isn't surprising, we are more divided and dysfunctional than we've ever been or certainly more divided and dysfunctional than we've been in a very long time. There are problems for which there is no visibility for solutions. I'm not sure solutions are even being worked on. This sentiment is a big driver for my harping the need to solve our own problems. 

Look, if you had one shot or one opportunity to seize everything you ever wanted in one moment, would you capture it or just let it slip? 

You probably recognize that from Lose Yourself by Eminem. This is our shot, our opportunity, we have to fix our own problems to get the most from our time here. To me, this means minimizing wasted time, worrying over things beyond our control, being unhealthy, sitting in rush hour traffic, really this is about living life on my own terms. So ok, if you agree with the polling in the graphic from the top down, that doesn't mean your life needs to follow that trajectory. Not following that trajectory may mean making a conscious decision, that "nope, that is not how I am going to spend my time." 

One way to waste time, is worrying to the point of panic over an investment portfolio which of course is a problem we focus on here. The stock market is going to go up long term whether you worry or not so might as well stop worrying. This is something that can be dialed in to avoid ever panicking. A validly constructed portfolio, combined with an adequate savings rate and avoiding panic will get the job done. That has nothing to do with beating the market. This puts an emphasis on constructing a portfolio that will allow you to not panic during events where others are panicking. 

Here's a fantastic passage from Steve Sears in Barron's;

While taking no action is always an option for true long-term investors, many others feel they must be in perpetual motion. This reflects how brokerage firms make clients feel with their marketing. Other people are under dire financial pressure and feel they must invest to offset expenses.

Whatever your motivation, let this column remind you of the importance of having a plan to handle volatility. You don't want to panic out of, or greed into, positions. You want to have a plan, and you want to be disciplined. If you do that, volatility becomes an important tool that helps, rather than harms, your interests.

Something else important will happen, too. You will develop a deeper understanding of how markets function, of normal and abnormal investor behavior, and you will arm yourself with a decision-making framework that is so critical to living a successful life—in and out of the markets.

The way we handle volatility is to build in things that pretty reliably smooth out normal equity volatility. I keep some things in place perpetually because "risk happens fast" and I also don't want clients to be overly leveraged to my reading every event correctly. Keeping BTAL and a couple of others means the portfolio is already at least somewhat prepared in case risk happens fast. If I can do a little more to spare some downside, great but I would count on nailing every single adverse event correctly.

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.