Can You Actually Live Outside The Box?

Barron's had a long article about how difficult it has become to diversify a portfolio because of the dominance of mega cap AI and semiconductor companies in indexes like the S&P 500. The article goes on to make suggestions about factors and equal weighting for equities. You could "fix your fixed income" with CDs, treasury bills and money market funds.

Included toward the end of the article was the suggestion to think outside the box by adding a little gold or commodity exposure. 

Not a whole lot of unique ideas there. We build some extreme ideas here to try to help think about how things that really are outside the box could fit in to actually solve a problem a little better than just buying a CD.

I like the idea of barbelling. We've applied this in different ways. The idea I am trying to convey in that picture is a little bit in yield, a little bit in growth and a bunch in exposures/strategies that should compound a little better than T-bills, offer some defensive attributes or maybe both.

The first four names are the yield, the next two are the growth and the rest are the absolute and alts. most of the names are one we use regularly for blogging purposes except maybe Cambria Shareholder Yield (SYLD) as part of the growth allocation. We're not totally selling out for a 15% yield in that sleeve, there's some diversity of risks in that group. For equities, SYLD and IMTM are underweight AI and semiconductors. I chose SYLD because of the manner in which its results differentiate from market cap weighting. SYLD has had years of misery and glory on the way to not great long term results so we're not cherry picking something great. 

There's not much variation from year to year for the 20/60/20 portfolio we're working with today which is good.

But the bar chart sets an expectation that it will lag VBAIX in most individual years. There's plenty of different types of exposures, the mix is legitimately diversified but that doesn't mean actually implementing this sort of concept would be easy to endure. 

Even Claude liked the idea and Claude hates everything. Copilot is a bit of pushover so I went with Claude. The clearest suggested improvement was;

Thinking outside the box requires being willing to actually live outside the box. Experience tells me that is more difficult for people than it sounds. 

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.

Harsh But True

Some odds and ends today.

Chances are you know not to get a reverse mortgage other than as an act of desperation but you know someone who is not clued into this. I learned about someone in Walker who is underwater on their reverse mortgage because of how long they took it out and now they want to sell to leave Walker as a function of age. 

Technically, you can't be underwater on a reverse mortgage but as you take payment after payment each month your balance builds up and when you sell, that balance needs to be repaid plus the interest. If the balance and interest exceed the value of the sale proceeds you get nothing. The lender gets made whole by the FHA.

I don't know these peoples' financial situation but getting money out of their house won't be a part of it. 

Allan Roth wrote favorably about TIPS ladders. I'm not a fan but he is. I should say I am not a fan of going heavy. We looked at a use case of a small allocation for an expense that might track somewhat close to CPI versus expenses that won't. Property tax yes, various types of insurance no. 

If the intent is insulating a piece of money against inflation without taking on full stock market volatility, ok, they should be better than bonds but I think there are better ways to do it without the volatility of long dated TIPS. 

Finominal did an assessment on this model portfolio from JP Morgan.

It aligns as 75% equities and 25% bonds. Finominal thinks the best comparison is 75% iShares Russell 3000 (IWV) and 25% IUSB. 

I loaded this into testfol.io but replaced JBND with BND which is a Vanguard fund that does the same thing and allows us to look at four years.

Um,

This is a recurring theme with a lot of model portfolios. No differentiation. I had a blog post a few months ago titled something to the effect, why use two funds when you can use 11 which are the numbers in today's examples. 

I think JP Morgan is just showing how their funds can be used which is fair but I don't know why any advisor would implement this. 

Barron's wrote about what to do now that "interests rates are surging." Whatever happens next, it's a bad bet to think you can out nimble the interest rate market versus laying out a plan for yourself ahead of time and generally sticking with it. 

We have framed this as recognition that rates weren't compensating the volatility and risk of longer dated bonds. We spent a lot of time trying to build a portfolio sleeve that would do what people want bonds to do and added the consideration for what point yields will adequately compensate for volatility and risk of longer dated bonds. 

Several of the recommended funds in the article are low duration. Is now the time the rotate from long duration to short duration? Where were they five years ago? Making that trade now is a guess that might be correct or maybe not but reacting after the surge is not assessing the risks it's a guess. Harsh but I think correct.

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.

Interesting ETF Filing

The newly filed for Brinsmere Balanced Fund (proposed symbol TBFB) is going to do a variation of the portfolios we theorize with here. The very short version is 20% in equities, 20% in bonds and then sort of a go anywhere with the rest which "may include gold, commodities, and managed-futures" but it will seek to have similar returns to a traditional 60/40 portfolio. 

Brinsmere has a proprietary process for selecting what gets included in the fund and although I did not see anything in the prospectus about trying to reduce volatility (corroborated with Grok) it is plausible that lower volatility would be part of the outcome, and even if that is incorrect, we can play around with their idea in pursuit of that outcome.  

Using the following to get a decently long backtest;

The volatility looks great while the growth rate lags behind a little. The way it backtests looks like it achieved 75/50.

The period studied includes a stretch where both managed futures and gold floundered for several years and of course 20% in all world equities creates a drag versus 60% in domestic-only equities. Shortening the backtest up to six years was far more favorable, the growth rate of the mimicked portfolio was slightly ahead of VBAIX and the volatility was about the same 6% or so. 

If we consider a much shorter period, we'd have many more ways to fill the 60% bucket for a more robust mix including cat bonds that we use frequently here and that are in client accounts. I used XYLD which is an old covered call fund as sort of a proxy for a buffer fund. XYLD has no shot of keeping up with plain vanilla equities on a price basis. On a price basis, XYLD has compounded negatively ever so slightly in the period studied versus a CAGR of 13.92% for the S&P 500. QSPIX is not my favorite for any strategy but it is useful here for having a long track record. Like several other AQR funds, it seems prone to occasional long periods of lagging, 2018 through 2020 was dismal.

ETFs can't own mutual funds but something MKTN that we looked at the other day could slot in for QSPIX, ILS is an ETF that owns cat bonds and there are several merger arb ETFs.

Good luck to the Brinsmere guys, I hope the fund lists and is as interesting as our mimicking of their idea. 

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.

Woefully Flawed Backtesting

 Hopefully this will be obvious.

Any sort of long term study involving Bitcoin is built on a growth rate that can't be repeated. Over the last ten years, Yahoo Finance has Bitcoin is up 32,000%. That unrepeatable gain is built into the impact cited of 1% added to the portfolio.

It has been awhile since we included Bitcoin in one of our studies but I typically didn't go back further than 2021, where I have the yellow line because of the unrepeatable nature of the some of the earlier returns. 

Backtesting is useful but not infallible. I try to point out flaws that I see in some of the backtests we do but this one with Bitcoin is especially easy to observe. 

A quick follow up to yesterday when we looked at the MKTN ETF which hasn't been around that long. It turns out there is a mutual fund version with the Federated Hermes MDT Market Neutral Fund (QQMNX). Hat tip to reader Max for finding this fund. For some reason, Testfol.io only goes back about five years with that fund but it is quite a bit older. Portfoliovisualizer lets you go further back.

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.

Getting TIPSy?

Laurence Kotlikoff says TIPS are a screaming buy. He has long been a fan of TIPS, maybe always but either way, for a very long time. The real yield on TIPS has hit 3%, he notes 3.4% as of last week in his substack post. 

His post is in part an advertisement for his software which includes how to build a TIPS ladder. He draws some very dour conclusions about the risks of stocks that do not ring true for me on the way to thinking 20% in stocks and 80% in TIPS would be reasonable. You can read the post and decide for yourself. 

We recently looked at the Northern Trust 2055 Distributing TIPS Ladder ETF (TIPD). The example I used for utility was property tax. I speculated that with crazy high inflation rates for homeowner's insurance or health insurance including Medigap plans, it might not be ideal. Here's what the price of TIPD has done over the last year though. 

On a total return basis it is down a shade over 6%. The way it's structured, if someone put in $50,000 on day one and assuming no malfunction in the fund or panic sales, then the holder should get all of their money back plus interest along the way but the price can drop in between now and 2055. It holds plenty of very long dated TIPS and while the short dated ones won't really move too much the longer dated ones will if rates go up. Yes there will be at least a partial par value reset but that won't completely offset the decline if there is a huge move up in rates from here.

That's not a prediction, that is an attempt to build an expectation of what holding TIPD or individual TIPS might feel like. Great if you can avoid panic sales but what if something painfully expensive comes up and TIPD is down another 10% and there's no other place to pull from? Generically, a TIPS ladder can absolutely work but it is not a walk in the park by any stretch. 

Although I disagree with Kotlikoff's conclusions, he is asking good questions. What if the risk/reward for equities is out of whack for a while and we have some sort of lost decade or the like? We spend a lot of time trying to build in some robustness in case that happens. 

That brings us to a new (to me) fund, the Federated Hermes MDT Market Neutral ETF (MKTN). It's a long/short fund that's only been around for about a year. The long short strategy involves individual stocks. Its growth rate has been lower than QLEIX from AQR but its volatility has been lower too.

This comparison is interesting. It's very short but interesting, they take different paths to the same outcome. Blending them together should have a very low volatility. 

If Kotlikoff is directionally correct about stocks (the magnitude he talked about is way too extreme) then long short becomes more important. MKTN and HFND do different things, long/short versus global macro. Putting 50% each into two funds seems very unnecessary to me but lately we've looked at several different pairings that offer the opportunity for a decent real return with low volatility and no duration risk.

The Check For A Pulse portfolio has three different "pairings" plus cat bonds and APHPX that although not a pairing, fit the bill for very low volatility and no duration risk.

The pairings are color coded. We could also throw an arbitrage fund in there to lower the weightings of everything else or maybe do something with shorter dated TIPS. Other than MKTN, these are all funds/exposures we have been working with here for quite a while and they continue to behave as expected. 

The volatility numbers can probably stand up and while I do believe this could give a fine CPI plus x% result, the outperformance versus VBAIX is probably an anomaly unless stocks do poorly. RISR will probably drop if interest rates go down. The Check For A Pulse has very little equity beta and very little duration.

It's not riskless of course but as I already said, the concept gives the opportunity for a real return independent of typical benchmarks.

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.

This One's Even Worse

The other day we took a quick look at a blend of 30% equities, 60% managed futures and 10% in cash. The long term result was good albeit disconnected from standard benchmarks but holding it would have led to long periods of misery and anguish. 

Well this one might be worse. 

The framework is the same as the other day. The investor objective is a much steadier or smoother ride than something like a 60/40, 70/30 or maybe even 50/50. This would likely result in lagging behind in years when the stock market is up a lot and bonds don't implode.

Where we've talked about CPI plus 5 as being a common target for endowments and a good way to think about how a portfolio actually works to meet someone's needs. Maybe today's idea could be thought of as CPI plus 3.5 or CPI plus 4 but with no duration risk that would go with putting it all in TIPS. Side note, TIPS aren't quite at a 3.5% real return currently. 

Portfolio 1 is a synthetic backtest, I spent a little time trying to recreate the effect to get a longer look. The return is similar but the volatility is a touch higher. An objective of CPI plus 4 overlaps with the 75/50 concept that we've looked at periodically over the years where a portfolio captures 75% of the upside with only 50% of the downside. 

The synthetic backtest is long enough and been through enough different types of market events to make me think it has some merit. The idea we're playing with is 50% buffer funds/50% managed futures. The longest backtest we can build is using BJUL which I believe is the oldest buffer fund.

Those earlier years in the green box would have been rough for anyone expecting this idea to keep up with VBAIX. There were two years where the portfolio was up but fell short of CPI plus some decent number and obviously it was down a little in 2018 but it has been reasonably steady in line with the volatility and beta numbers. The standard deviation for BJUL/AQMIX was 3.94 versus 11.91 for VBAIX. 

Maybe the way to think of this is in the realm of aggressive absolute return. In the same period as we tested BJUL/AQMIX, Vanguard  Market Neutral (VMNIX) compounded at 6.85% with a volatility of 6.86%.

Since 2018 there has been a proliferation of buffer and defined outcome funds that have hit the market and there are now many more managed futures funds so anyone interested in something close to this would not need to limited themselves to 50% in two different funds, that seems crazy to me and very unnecessary. Additionally, buffer and defined outcomes do a lot of different things and building in different levels of protection would seem to make sense and we've looked countless times at different ways managed futures funds are run including replicators or not, different risk weightings and differing volatility targets. The result might be a pretty smooth ride but I don't think this would be set and forget by a long shot. 

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.

A Different Type Of Retirement Problem

Barron's had an article about retirees who haven't really spent down their nest eggs even well into retirement. There are a few variables here that contribute to this scenario and while the title of the article implied it was about people being afraid to do so, that wasn't really it.

The simplest variable is that the stock market has ripped for the 15 years so, just ripped which of course you can't count on in planning. There was a stat in there from Vanguard that 4 out of every ten retirees don't draw on their accounts until RMDs require it. Quick note, RMDs don't have to be spend, the money can be added to a taxable account and invested for any circumstance where that is appropriate. 

The article made a point that we have touched on which is that there can be a peace of mind from having a lot in the bank or brokerage account. That sentiment resonates with me. If something really goes sideways, knowing you can handle it has some value. The dollar amount needed for this sort of peace of mind will be a different number for each of us. 

This idea has evolved for me to being a number I don't want to go below in our accumulated accounts. That thought process made buying the Tucson house much more comfortable and it turned out to be a fantastic decision.

One point that was lightly hit on in the article with a couple that has $30 million, but moreso in the comments is that the lifestyle many people want to live isn't all that expensive in relation to what they have accumulated, again market results are a contributing factor here. This is how I've described my lifestyle. The life we enjoy living doesn't cost that much. When something expensive needs fixing, we do it. We've taken big trips here and there but we are not the Facebook friends who go to Europe every six months. Our ability to travel is more about scheduling with our volunteer endeavors so we're not spending a lot on that. I would add that the amount of amazing national parks, national monuments and the like that are within driving distance is endless so that is inexpensive too. We've been to a lot of them and will never get to all of them. 

This entire conversation is one of privilege and quite the contrast to all the the numbers and reports about how undersaved Americans are for retirement. We talk frequently about habits and lifestyle choices that improve the odds of being over-saved, not spending enough but I wouldn't discount luck either. It's ok to have been lucky.  

One final point is that a couple of comments focused on being healthy. I have been called a health nut by a few colleagues on the fire department but I can see where working hard to have a financially successful retirement only to be unable to reap the benefits for being unhealthy causing more regret than getting to a very old age with a bunch of money that's never going to be spent. 

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.

Avoidance, Not Predictions

ReturnStacked put up a new paper a couple of weeks ago about leveraging up to add alternatives. An important building block to their work and products is not removing equities or fixed income to make room for the alternatives. As I was making my way through, I had the following thought about what a huge allocation to managed futures would look like with very little in equities and no bonds.

On testfol.io, the KMLM managed futures ETF can be backtested to 1987 via however they simulate certain tickers. You can see where managed futures helped and where it was a drag but that's not the most interesting way to look at it. 

The worst year for the two portfolios that are 60% managed futures with no bonds was 2002 when Portfolio 1 was down 12.31% as you can see and Portfolio 2 was down 11.68%. Yes, plain vanilla 60/40 was down less that year but if you agree with me about bonds, then we cannot rely on bonds the way we used to to offset large equity declines. 

Looking at the year by year bar chart, out of 39 full and partial years, I count 12 years where Portfolios 1 and 2 were far, far behind 60/40. Lagging in some random year by 5 or 6% ok, but as one example of what I mean, in 2017 both 1 and 2 were down less than 1% while 60/40 was up 14%. Portfolios 1 and 2 lagged badly three years in a row recently; 2023, 2024 and 2025. 

The point is that anyone looking for a portfolio that resembles what 60/40 used to do when bonds were a one way trade have a decent chance of doing so without the unreliability of bond duration or the variable of adding leverage. Over the very long term, the portfolios with 60% in managed futures tracked closely to 60/40 without duration risk.

Adding a ton of managed futures is one way and while it can probably work, as we've looked at countless times, there will be long periods of anguish here and there. 

Another approach we've looked at many times has been barbelling the 40 with a lot in very boring, steady fixed income with a small slice into riskier income niches. The idea being that if something terrible happens in the risky slice it won't wreck the portfolio. 

Portfolios 1 and 2 are 90% FLOT which is very plain vanilla. Portfolio 1 puts the risky sleeve in TLT which would have been a poor choice and Portfolio 2 puts the risk sleeve in catastrophe bonds which would have turned out to be a good choice. The 10% in TLT would have lagged the 10% in cat bonds but TLT did not blow anything up. 

The returns for Portfolios 1 and 2 are not killing it by any means but that is not the object for what goes into the 40 or whatever percentage you use to offset equities, make that reliably offset equities. Also you can see FLOT yielding nothing for a long time and then turning up in 2022 as it finally started to pay out. 

This is simply an example of how to size risk into a portfolio. Having 10% in cat bonds probably isn't inviting doom but is a little heavier than I'd want to go. As we have looked at countless times, there are enough higher yielding segments that take different kinds of risk to get some yield, reduce volatility and diffuse risk without extending duration which many pundits are saying it is now finally time to do. Unfortunately a lot of them said the same thing at 4% and at 3%. 

I have no idea what interest rates will do. If you've been reading this blog for a while you know I'm not trying to predict something, this is about avoiding something. 

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.

Did An Autocallable ETF Just Malfunction?

We have called out the ProShares S&P 500 Autocallable Income ETF (ACSP) as being more volatile than many of the other funds in the space, I believe it is because ACSP targets a relatively high 18-19% distribution rate. This is a relatively new niche but we are working with the idea that the higher the yield, the more volatile the fund is likely to be. 

The fund went ex-dividend today for a whopper of a distribution. It should be like a catchup dividend reflecting September and most of August back to the fund's inception. 

From Yahoo;

From the ACSP website;

To keep the math simple, if ACSP pays 18% annualized then it would be 1.5% per month so I would have expected the first distribution somewhere close to 2.25%, not 11%. I couldn't find a news release on this so I asked Gemini if maybe one of the notes got called and they had to pay the redemption out and Gemini guessed that that is what probably happened but the math doesn't check out, it's too big for that unless a bunch of the notes got called early. Grok said that is not what happened that the structure the holdings could not possibly result in notes being called early. 

Grok gave a rationale for it being a catchup distribution but when I pointed out why the distribution is too big for that it backed off and said "we'll know soon" what happened. 

I don't think it malfunctioned. I don't know what happened and I'll eat some crow if this was a malfunction but I have to think that the explanation will fit into parameters laid out in the prospectus. But that doesn't let the fund off the hook and creating a very rough ride for anyone holding the fund.

JELM and IACL are much lower yielding than ACSP and much less volatile. 

The lower yielding ones are not going to end up being horizontal lines that tilt upward, they will be more volatile than that but I am quite certain they won't look like ACSP. That fund looks like a very difficult ride. 

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 You Obsessed?

Via Abnormal Returns, Elizabeth George says to stop obsessing about your safe withdrawal rate. The starting point is the 4% rule derived by Bill Bengen in 1994 based on a 50/50 allocation of stocks and bonds going back to the 1920's. 

Bengen has since dialed up the number to 4.7% but if you read or watch any interviews with him, he is constantly refining the number. Morningstar comes out with a revised number of its own every year which I have been pretty consistent in making fun of. Changing it every year in the manner they do doesn't help anyone. 

The precise, original implementation is to start at a 4.15% withdrawal rate and then adjust it upward by the rate of inflation. If someone's safe withdrawal dollar amount is $37,000 and then CPI was 3.4%, the following year the new number would be $38,258. I've also made fun of that part of it as being unrealistic. Many years ago, I started saying, "whatever you got, 4%, more precisely, 1% every quarter." 

That certainly is simpler but that was very early into my time as an RIA. I still believe in the simplicity although chances are 5% is ok too but even though the math checks out, it's not what too many people do at least based on my sample size of clients. It's more like, "I need $3500/mo" and that will be it for a while then after a few years, "I need to up it to $4000/mo." 

I've said before, like every advisor, I have a couple of clients who take what should be way too much to be sustainable but the stock market has bailed them out. Every so often, of course a client will need money for something bigger and I either just send it or if it is a problematic amount in terms of the longevity of their money I will say something like, "ok we're obviously going to do what you tell us but this threatens how long the money will last." One time a client responded, "I know but it's for son and I have to do it." 

One thing that several clients do as sort of coincidence is they take monthly withdrawals from their IRAs that are well under 1/12th of their RMD and then in December take a large enough withdrawal to get up to their RMD amount. They are living month to month on what they need and then that lump sum at the end of the year could be for traveling or some other discretionary spending.

George's point in her blog post is similar to my anecdotes about not perpetually tweaking it to the penny. "Financial professionals and FIRE personalities who lead the SWR debates and build complex models to analyze them to the third decimal place are usually so enamored with achievement that they never stop earning anyway" which I thought was pretty funny.

If I am reading correctly, it seems like George pays no heed to it and if that is the case I disagree with that pretty strenuously. What I think makes the concept work is thoroughly understanding what Bengen originally derived. Understanding what it's built on, understanding what type of environment challenges his concept and then moving forward with some reasonable even if not rigid implementation that suits your needs. I would expect any advisor to have this dialed in, it's not rocket science. There's also not much of a barrier to understanding for anyone managing their own accounts but take the time to learn it thoroughly. 

If nothing else, "whatever you got, 4%, more precisely, 1% every quarter" will work for anyone who can be a little flexible, able to take less in years where the markets are down. Even then, there is a work around to the need to be flexible in that way, just set aside 18-24 months of expected withdrawals in cash or some sort of cash proxy to greatly reduce the odds of ever having to sell after a large decline to meet income needs. 

I think George is right about not needing to obsess or overly stress about this. More time spent understanding how it works on the front end should reduce stress but also enhance understanding the reality that anyone taking 8-9% has a real chance of running into trouble or realizing that based on Bengen's process, a 6% withdrawal rate was successful 75% of the time (per Gemini). One of my high spenders does not care about running into trouble, this person is 20 years in taking more than 8-9% in most years but just is not worried. I don't know how but I bet they sleep well at night which is a pretty important component to this topic, having a plan that allows you to sleep.

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.

A Drone From Sector 7-G

Lately my timeline on Threads has had a lot of posts from people who are 59 or 60 and completely lost in terms of figuring out what life is all about, what comes next, what to do about retirement or if they even can retire. Yes, they could all be bots or otherwise fake accounts but what if the sentiment is real? 

I'm sure I am seeing these because Threads must know from my Facebook profile that I am about that age although my birthyear is not on my profile. If you're anywhere close to that age, do you feel lost in this manner or maybe more constructively, do you know anyone close to that age who is similarly lost?

We've addressed this here and there over the years. To me this is all about having sense of purpose or maybe more correctly finding a sense of purpose. 

I appreciate that anyone who thinks they are a drone from Sector 7-G may find it difficult to develop a sense of purpose at work but it is up to us to figure this out for ourselves. My tagline for this sort of thing has been to paraphrase Joe Moglia by saying that no one will care more about your outcome than you.

A drone from Sector 7-G can find purpose in pursuing the next thing. I figured out in my nid-20's that I wanted to manage money from home, it took a couple of stops along the way and almost ten years to get there but there was purpose getting to that point. Time spent planning and learning for their next thing is very purposeful and provides hope for someone who is really unhappy at work.

Part of this has to be figuring out how to be happy at home. That's going to be different for everyone I imagine and maybe it takes work but it is a crucial building block to this conversation.  

I am always going to talk about the importance of health and fitness which if nothing else, can simply be one less thing to worry about for the older Gen-X or younger Boomer trying to figure it out. Feeling crappy all the time or being unable to do enjoyable things or perform tasks that have to be done will make it much harder to live a full life. Any day that you exercise is always a little better.

Living below your means should result in not having too much financial stress. Pulling that off makes every other aspect of life easier. 

It is important to have a positive attitude in life and be grateful but everyone says that. The only thing I can add there, but I think it matters a lot, is that it has to be genuine and that probably takes some self-training to make happen if those aren't already personality traits. Or maybe a lot of self-training.  

Any article you read along these lines will talk about the importance of having social connections. I think this is widely accepted as accurate but that is difficult for a lot of people. It certainly is for me. I am terrible at making and enjoying idle chit chat. When there's something to talk about, some purpose, there's no hang up.

If it weren't for the fire department, this is probably what I would look like. 

Actively volunteering can check a lot of these boxes. It is very purposeful and likely to involve a lot of social engagement. Volunteering as a firefighter creates an obvious need for some level of fitness as do many volunteer endeavors. My older brother volunteers at a food bank which involves a lot of lifting and moving of food. My wife does a lot with dogs and other tasks at the animal rescue that require being fit. 

I am sorry for anyone struggling for answers, all the more so if the posts I see on Threads capture the actual sentiment of people but as is the case with everything, the more we put in to solving it, whatever it is, the more we will get out. 

I'll close with a quote I used to cite very frequently from our friend Bill here in Walker, "you can figure it out now or you can figure it out later but you'll be much happier if you figure it out now."

At What Point Are Yields Crazy?

First, I'll answer the question in the title. A 20% yield is crazy in terms of not having a realistic shot of being sustainable. Maybe the crazy threshold should be a little lower but twenty for sure. 

We've spent some time on developing a bridging strategy to make a smaller piece of money, smaller in relation to a rollover IRA, last for some number of years until the next financial milestone like starting Social Security or taking RMDs. Sticking with the ten year example we've worked before, we'd be willing to spend 1/10th of the original balance each year, depleting to zero after ten years. With that in mind can we take that big distribution and have something left over at the ten year mark or make that pot of money last longer. 

I've said this research is probably aimed at our (my wife and me) financial situation at some point down the road. We've looked at some crazy combinations that I probably wouldn't want to pursue but I think by adding one of those distributing ladder ETF, we can dial the crazy way down.

Here's the latest version, TIPB matures in 2035 which does not fit in with my timeline for any of this but will do for long term research/following.

The highest yielder is CAIE at 14% so we're nowhere near crazy if we're sticking with 20%. There's not much equity beta but there is some. The backtest can only go back a year so there's not a lot of useful information but here it is.

The yield is 8.25% which is pretty high considering how much is in TIPB and JAAA. TIPB though has a sneaky high yield and the first tranche of TIPS in the fund will mature next month which will kick the "yield" up considerably when it returns principal as it is designed to do. 

If we implemented this with $450,000 and took out $11,250 per calendar quarter in a ten year period that was identical to 01/01/2000-12/31/2009, Copilot says there would be $330,000 left over. The next stress test was a ten year period where the yield on the ten year US treasury went from 1.5% to 7% over a ten year period. In that scenario, everything else being the same, Copilot says $106,000 would be left over. Rates can't start at 1.5% because were at five and change but the point is something terrible happening in the bond market.

I would imagine the product landscape continues to improve, maybe in six-eight years when I might need to consider this, it can be a little more robust.

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

Retirement Planning Stream Of Consciousness

Yesterday, I mentioned the webinar for distributing ladder ETFs from Northern Trust. At one point the conversation talked about go-go retirement (early years), slow-go (middle years) and no-go (the period in which someone is old).

This creates what is referred to as the retirement smile, spending a lot early on for travel maybe or other activities. Then at some point retirees slow down but are still relatively healthy and able bodied, hopefully. The final tranche in this metaphor is possibly needing some sort of outside care. 

Does that resonate with you? I turned 60 this year and I'm starting to look ahead with more specificity than when I was younger. My focus was simply accumulate what I can so that I have optionality. 

If that does resonate, does it look like you will have the go-go years that you want both financially and physically? That could be a difficult conversation for people to have with themselves. Doing things is expensive and it would unfortunate to spend many years looking forward to taking a bunch of trips or whatever go-go means but being physically unable to do so. 

For the last few months, I've been thinking in terms of blocks of time loosely connected to financial milestones. I made a joke to my wife that I am spending my first decade of retirement, my 60's, by working. We've talked about this, there is visibility at some point for income from my practice to start to decrease. I expect it to be a significant contributor relative to our financial needs for quite a while even if it doesn't remain lucrative for that much longer. 

I am no longer with Del E Webb Foundation, I resigned earlier this summer so that income stream is gone. There haven't been too many instances in my life where I didn't fit in with a group but that was the case here. I never understood their decision process for running the org, not talking about how grants are awarded, but how they operated. That's not a knock on them, I did not fit in with them. I said I would get around to explaining what happened and this seemed like a good spot. Where people tend to want to do less as they get older, I'm glad to have it off my plate. I did not expect to have that reaction. 

For now, there's no visibility on ever preferring to take Social Security before 70. If I hold out beyond 69, I will think of that as having stayed on plan with that. Taking it as 70 has been my intention since I first thought about it. 

We've looked at all sorts of ideas for bridging to the next financial milestone with a smaller piece of money. I really like this idea but that might be because our situation appears to be heading in that direction if we sell our vacation rental in maybe ten years or so. We might live in it to avoid the capital gains, if you live in what was an investment property for two out of five years, that relieves the capital gains burden, not the depreciation recapture but ask your tax advisor. 

When I first started blogging in 2004, one of the things I wanted to do was chronicle how my thoughts on my own retirement would evolve. I think this is a useful exercise for people. The more we put into our retirement planning including thinking and evolving strategy, the more we will get out of it. 

Solving Actual Problems

We're in Tucson this week and on Wednesday afternoon I went to go pickup some garden tools that my wife found on Facebook marketplace, $20 for more that we needed, not too shabby.

The seller lives in a 55 and older mobile home park closer to the middle of town from where we live. The place was immaculate, it looked to be about half occupied, not sure if that is because it's still warm here or some other reason. Naturally I got curious about the actual dollars and cents.

As is common, residents own the house but lease the lot.

That price is toward the lower end, the upper end was $160,000-$180,000 and there were a handful closer to just $40,000. Gemini said the rent for lot ranged from $658-$717 which must be a dated number versus the $825 in the picture. All in utilities range from about $150 in the less hot months to about $350 in summer months. Insurance runs about $1000/yr and taxes (for the house, not the lot) are about $200/yr. So all in, after buying the house, it might be about $13500/yr or $1125/mo. 

Regardless of who may or may not be interested in this situation, it is relatively affordable. For anyone unable to accumulate a meaningful retirement but who bought a house could downsize into something like this and have a useable piece of money left over after selling and buying into the property I visited. As a primary residence it is not a lavish circumstance but it is workable outcome.

It is also an inexpensive way to snowbird. Someone in South Dakota might want to take a chunk out of their winters without actually moving away. There are plenty of ways to snowbird of course, in a recent blog post we cited someone who got an Airbnb for an entire month which is probably less expensive than buying one of the mobile homes we're talking about which is cheaper than buying a regular house in a neighborhood.

My wife and I probably have our retirement sorted out which I am grateful for but plenty of people will have to figure it out and make some difficult choices. Mobile home communities like the one I visited can solve problems. 

Speaking of solving problems, I sat in on a webinar for the Northern Trust distributing ladder ETFs. We've looked at them before. There are two versions, one that pays tax free income by owning muni bonds and the other protects against inflation with TIPS. The way these work, if you buy one that matures in 2036, so ten years from now, it pays out 1/10th of the NAV every year plus a little interest. In the final year, the fund pays out it's final 1/10th of the original investment and then closes. 

We've looked these in the context of a bridging strategy. Someone who is today 65 might use one of these as a way to hold off taking money from their IRA until RMDs start in 2036 when they are 75.

We've looked at putting together a bunch of very high yield products with different types of risks to do something similar but hopefully end up with some money leftover. Going all in on the 2036 TIPS Distributing Ladder (TIPF) means you have nothing leftover in ten years. Owning ten or 12 very high yielding with disparate risks has a reasonable chance of not completely depleting but that is aggressive. A strategy of half in TIPF and half in a very yieldy portfolio would be safer. 

None of that is new though from our previous conversations about these funds. The one new thing I pulled from the webinar was pretty much a throwaway line that wasn't followed up on. Yes, bridging seems to be the primary use for these but Chris Huemmer from Northern Trust made a comment about using the 2056 TIPS version for something like property tax. The symbol for that fund is TIPH and it matures in 2056. Each year it will pay out 1/30 of the original investment amount plus a little interest.  

Our property tax in Walker is around $2000/yr. In theory, $60.000 invested in TIPH would cover our property taxes until I am 90. Property tax is one the higher dollar items people have to deal with but it does not inflate the way health insurance premiums do or over the last few years the way home insurance premiums inflate. We probably need equity exposure to keep up with healthcare costs and now homeowners insurance but this angle on property tax is interesting and new to me even if I am the last to know. 

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.

Closed End Crazy

Dan Ives is throwing his hat into the closed end fund (CEF) ring with the upcoming Ives Ultra AI Opportunity Fund (IVAI). That article mentioned a couple of other recent closed end funds in the AI and private tech realm. It hasn't gone well.

PWRL just owns private companies and it appears as though the market price is trying to price the underlying illiquid portfolio that does price everyday.

Someone bought up in the $300's, yikes. These types of funds are real hot dot stuff that tries to appeal to people's greed. You can reach whatever goal you might have without it. 

Another day, another autocallable ETF. The VegaShares US Equity Autocallable Income ETF (VAIE) targets about a 16% yield so my guess it it will be a little more volatile than CAIE, see what VegaShares did there with the symbol, which is closer to a 14% yield. 

The autocallable space in the ETF market is just getting started and I think that unlike the closed end funds above, the lower yielding, less volatile funds will help contribute to solving people's need for income without nauseating volatility. Matt Kaufman from Calamos was on ETF IQ this week with a helpful explanation of how they work. The conversation around these from fund providers is evolving in response, I believe, to questions not addressed when they first started trading a year and half ago. 

This is a good contrast in yields/volatility that we probably looked at once before. ACSP targets twice the yield and the price is all over the place, no distributions yet per Yahoo Finance so that is all price. JELM is the lowest yielding autocallable ETF that I am aware of. To each his own but if I ever allocate to one of these for clients it will not ACSP. If anything, it will be a small slice to a lower volatility version. 

Next, a follow up on the WisdomTree Efficient Long/Short Equity Fund (WTLS). They hosted a webinar to explain the fund and recap its results. So far it has been lights out. It leverages up 90% beta with the S&P 500 and 90% alpha with a long/short overlay that seeks a volatility level around 7%.

Portfolios 2 and 3 leverage up the long/short symbol with SPY in the same manner that WTLS leverages up and you can see WTLS has favorable results. Portfolio 1 is QLFIX which has a similar leveraged strategy. The fifth portfolio isolates just the long/short strategy by shorting SPY out of it and although the timeframe is short, the result has been very steady but a little higher vol than 7.

When I first looked at WTLS, I just made a couple of casual comments that it was doing what it should for the most part, noting it was way too early to draw any conclusions and I also warned about using leverage to stack betas. WisdomTree talks about WTLS as being beta and alpha but arguably, a long biased long/short strategy could be thought of as a beta exposure. 

That frames the risk, it might turn out actually be two betas if something nasty happens with the stock market. That was not the case in the quick drawdown when we attacked Iran. It wasn't a problem for QLFIX either which is a fund we haven't looked at before today. 

A use case for WTLS in the context we've talked about lately could be in a portfolio that barbells a high volatility equity fund to be a small slice of the overall portfolio as the growth engine in a portfolio that is overall intended to be very low volatility or have a high distribution rate or both. In that circumstance there still needs to be a little growth. A 10% weight to WTLS is 18% of equity exposure and if that is the vast majority of the equity exposure then yes the portfolio is using leverage but in this context I think it is closer to leveraging down than leveraging up. 

Last one. We've talked a lot over the last few months about combining value, quality and momentum for domestic equity exposure. It turns out that iShares has three funds that do different versions of that factor combo for foreign equity exposure with INTF, IDYN and CORO. INTF is a relatively simple index fund that includes these factors and IDYN is similar to DYNF trying to rotate factors to try to outperform the index. CORO has been the best performer. It owns mostly country funds with a few individual stocks thrown in. The largest holdings currently, and this has been the case for a bit, are Japan EWJ, Canada EWC and Switzerland EWL. It also currently owns Taiwan Semi and SK Hynix.

The fund reports its holdings in an interesting way. It includes a look thru to the sectors.

This was always part of the template I used for writing about country funds for theStreet.com many years ago and while I do less with country funds these days, looking through to the sectors is very important. If you want to own Taiwan, cool, go for it but EWT is 73% technology. Owning a lot of QQQ with EWT on top of that is going to be very painful if there is ever any consequence for the excesses currently in the tech sector. Another example, iShares Singapore (EWS) has always been heavy in financials and sure enough, during the financial crisis it fell 60%.

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's A Meltdown"

That was the subject of the daily afternoon email from Bloomberg referring to what is happening in the treasury market as yields continue to work higher, sending prices lower.

I pulled up the following, halfway through the trading day thinking more like the pain continues for holders of long bonds more than thinking it was a meltdown.

Bespoke Tweeted out that since inception, TLT is down slightly on a price basis and that on a total return basis it is down going back to 2012. There's been a flood of pundits weighing in across the webs about why longer bonds are now attractive but the same or similar arguments were made at lower yields on the way up to the now current 5.11% on the ten year treasury. 

I'm sure the textbook logic expressed in those opinions is correct but yields still keep going up. It is correct that losses from 4% going up to 5% are different than losses from 1% up to 2% were because as the price does its thing, investors are collecting 4% versus collecting 1% or less five years ago. That does nothing for the volatility or the risk that rates go higher from here. It is difficult to see the price inflation problem subsiding soon and that certainly is relevant. 

The way we have been framing this has been as a matter of adequate compensation. Forget all the textbook logic, what return do you find to be adequate compensation for the volatility of owning intermediate and longer dated debt? For me, low fives doesn't do it. Maybe at 6% if it ever happens, not sure but at 7% probably a little. 

I've been repeating the above sentiment about 6 and 7%....if it ever happens for quite a while. I have no idea if it will ever happen but I do know that 5+% is not adequate compensation. 

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.

Incinerator Ridge Road

My wife and I went on a quick hike at the top of Mount Lemmon near Tucson. A few miles from the trailhead we drove by this road.

I think TSLY's NAV is down Incinerator Ridge Road. I did a poor job explaining to my wife why this was so funny. It fits right in with our recent looks at various forms of NAV incineration versus products/strategies that might be aggressive without necessarily incinerating NAV.

Here is a quick look at several new funds that have popped up on my radar. First, there is a new putwrite fund from Innovator, Innovator Equity Premium Income Daily Putwrite Fund (SPUT). It yields less than WTPI from WisdomTree with less volatility.

VistaShares has a diverse mix of ETFs with some thematic and derivative income funds and now they are getting into the buffer part of the market with what I believe is a differentiated concept. VOOB references the S&P 500 and QQQB references the NASDAQ 100. The big idea is that the first 8% down should completely insulated from market declines and then the funds are only exposed half of any decline beyond the first 8%. The upside does not have a hard cap, paraphrasing the literature, but the upside will be limited depending on the particulars of the option combo put on to effect the downside protection. 

First Trust has thrown its hat in the autocallable ring with ACYQ that seeks a 21% and ACYN that seeks a 9-10% yield. ACYN listed in March and ACYQ started trading in June. With the higher yield, ACYQ should be more volatile, the Q in the symbol tells you it references NASDAQ stocks, and it has been thus far.

This afternoon I went down a research rabbit hole on the Strive Series A Perpetual Preferred Stock (SATA). Strive (ASST) common stock is a bitcoin treasury stock that when I talk about some funds/stocks being like fire crackers, ASST is like holding on to molten lava or a McDonalds apple pie in the 1970's. ASST is much more volatile than Strategy (MSTR). Oddly, because of the corporate structure and how the preferred stocks are underwritten, it appears that SATA is less risky than the Strategy preferred issues and it has been outperforming the Strategy preferreds. 

The chart has just two of what I believe are three different preferred issues from Strategy, YBTC is a covered call fund that references Bitcoin and "yields" about 25%. 

In terms of attempting to understand and quantify the risks, the key word being attempt, the Strategy ecosystem runs into trouble at a couple of points. It's average cost is close to $75,000. It's cash buffer starts to deplete at Bitcoin $61,000. SATA is far more protected. ASST would be wiped out at Bitcoin $39,500 but SATA can function until Bitcoin drops to $30,000 and stays there for a year and half. At that point, everything else being equal, the company would run out of cash and be unable to make payments. 

In addition to being a Bitcoin treasury firm, Strive is also an asset manager providing research and there is a suite of mostly basic ETFs that has $2.9 billion in AUM so there is a business there. Here's its dividend fund against SCHD. Nothing wrong there. 

The ETF business is real and it generates cash flow but only covers about 1/8 of the expense of servicing SATA. Servicing SATA is apparently not problematic as Bitcoin moves up or hovers at a not low price for a while. Only a while though, as it buys more Bitcoin, eventually it would need Bitcoin to keep going up but the current level is not trouble for now. 

SATA will offer new shares whenever the the price gets to the $100 par value and then the proceeds will go toward buying more Bitcoin. In so doing, the $30,000 number I cited above can actually go up (not a good thing). At some point, maybe instead of being able to pay for 18 months at $30,000, maybe the can pay for 18 months at $35,000 or $40,000 or fewer months at the $30,000 level. 

For all this complexity, SATA yields 13% and is not incinerating NAV like YBTC has done. SATA pays its distributions daily....five cents +/- every day and the distributions are ROC so no taxes until the cost basis goes to zero or the shares are sold. Both of these help shareholders.

I just found out about SATA today off a Tweet about a new ETF coming from Strive that will sell puts on Bitcoin treasury preferred stocks and will have symbol DCAP. Someone will figure out how to harvest Bitcoin volatility without incinerating NAV. Maybe SATA does that, maybe it doesn't I just found it today. 

Whatever the risk of SATA is (I have some idea I think), it differentiates from the risks of the lower yielding autocallable ETFs which both differentiate from catastrophe bonds. Something that yields 10-13% in a 4.5% world is risky, there's no changing that which is a crucial point of understanding but putting something like 2% each into four or five of these that do truly differentiate the risk from each other creates a serious yield engine inside a portfolio and as we're seeing, quite a few of them have the tax advantage of ROC. No taxes for seven, eight or nine years is worth exploring. 

If this whole realm is more complexity than you'd ever want to take on, cool, leave it alone but it is fun to dig in and learn.

All of these things we looked at today are evidence of how funds are evolving to create more tailored outcomes up to a point. It is easier to build a portfolio that has one very yieldy sleeve, a modest CPI plus maybe 3% sleeve that causes little to no stress and then some plain, unconstrained equity beta. 

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.