We Want More Vol And Less Leverage

The ReturnStacked guys sent an email about having updated their model portfolios. These are always interesting to look at and fun to play around with. One the models is called ReturnStacked 60/40. They do a lot of volatility targeting with their work and I believe this particular model targets a volatility around 12.

Testfol.io currently has ReturnStacked 60/40 at a vol of 11 versus just under 10 for plain vanilla 60/40. The model is leveraged. The entire point is to test their thesis about using leverage and to support their funds. 

Since all of their models are behind a sign in, it's probably not ok to get too specific with all the moving parts but the notional exposure of ReturnStacked 60/40 is 173% with 62.5% in equities, 50% in fixed income and 60% in alts, 3/4 of the alts exposure is managed futures. This is all pulled together with various multi-asset and levered funds. The model owns RSST so a portion of the domestic equity exposure (S&P 500) comes from this fund as well as a portion of the portfolio's managed futures allocation. In other words they look through to the funds' holding and add up the various exposures. Most of the fixed income exposure is very basic with AGG-like exposure and intermediate treasuries. 

Sort of related to our conversation the other day about portfolio efficiency I wanted to try to replicate ReturnStacked 60/40 not with leverage but by dialing up the volatility. 

The weight to SPMO is pretty close to the S&P 500 exposure when adjusted for volatility. EEM isn't quite as close of a proxy for the foreign exposure but not ridiculously off. MFTNX has twice the volatility as AQMIX and RISR has almost twice as much vol as AGG. ReturnStacked 60/40 does not have overt negative convexity like BTAL but I wanted to throw it in anyway. Systematic macro is missing from my version. HFGM from Unlimited targets 2x volatility for global macro but its track record would shorten our backtest considerably. 

Portfolio 2 above tries to target the same volatility as ReturnStacked 60/40 while Portfolio 3 tries to target about the return by reducing each holding by 50% and then adding 50% in T-bills. Portfolio 3 is an example of leveraging down. We get a similar growth rate with less exposure to risk assets. 

Below, we remove the ReturnStacked 60/40 to allow for a slightly longer backtest that takes in all of the 2022 event.

The drawdown chart hovers over the Tariff Panic of 2025 and you can see the levered down version has a small drop. In 2022 the Replication With Volatility No Leverage version was up 14.41%, the Same CAGR With Less Volatility version was up 7.91 while Plain Vanilla was down almost 17%. It is important to note though that while 2022 looks pretty good, both of our versions lagged Plain Vanilla in 2023 by about 1200 basis points. 

Today's post was a useful exercise in taking someone else's process to create something more useful for, in this case, my approach but in refining your own process, borrowing bits of process from others is a great technique. I draw different conclusions about using leverage than the ReturnStacked guys do but I believe these versions we built mimic what they built and while our versions certainly have drawbacks there is validity to the outputs. 

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.

Indispensable Tools For The Modern Allocator

WisdomTree has a short paper up titled Bonds Are Starting to Serve as an Effective Hedge Again. Ever since 2022 there have been many pundits and papers saying the same thing and that hasn't been the case. Sure, maybe now is the time that they are back to being an effective hedge, why not?

Included in the key takeaways is that real yields are above 2% (are they really though?). They note that if stock/bond correlations improve....if they improve would be a guess. The paper then goes on to support the WisdomTree Core Efficient Core Fund (NTSX) which leverages up such that a 67% allocation to the fund equals a 100% weighting to plain vanilla 60/40 like you'd get from VBAIX. It's return stacking before ReturnStacked. Any time I have looked at NTSX it has been very true to what it targets.

Part of WisdomTree's argument is that now that there is some yield, four point whatever percent is yield, bonds can be a little more of a cushion, the 4.4% yield helps versus a yield of 1% +/- back in late 2021. That is accurate, the 4% yield (carry) helps the portfolio in a way that 1% yields don't. 

But bond math is still bond math. And longer term duration can be quite volatile. If the ten yen year treasury goes from 4.4% to 6.4%, people owning the actual paper would be sitting on a large price decline getting a below market yield. Anyone owning ETFs like UTEN or IEF would be in a similar but slightly worse position, the price on ETFs might never come back. I doubt that anyone who bought IEF five years ago at $117 will ever get back to even on a price basis, the fund is at $94 now. 

Read the article but that is not how I would think about whether to wade into bonds with duration, NTSX has AGG-like exposure so I have to believe they mean bonds with at least some duration. We've said this before, the question that I think should be asked is whether the yield provides adequate compensation for the volatility and the risk if rates go up more. The right level is up to the individual. Seven percent if it ever happens would do it for me for at least some exposure, maybe even 6% but not 5%. There are yields in the fours and fives right now with very little volatility and there are enough disparate strategies that idiosyncratic risks can be diversified away.

Pivot to a paper from TIFF Investment Management titled Why Now Is The Time to Invest In Hedge Funds. They say that hedge funds are an "indispensable tool for the modern allocator." TIFF positions hedge funds as a bond replacement noting better returns than bonds with a little less volatility. 

From 2000 on, hedge funds weren't so hot, relatively, but then the 40 year bull market in bonds ended. There are countless hedge fund strategies so if we read TIFF's context correctly, they are looking for and talking about hedge fund strategies that differentiate from equities and help offset normal equity volatility as opposed to a shop that goes balls to wall equities like Renaissance Technologies. 

TIFF is an institutional firm so they have access to hedge funds that you or I would not have access to. There are all sorts of mutual funds and ETFs that are somewhere in the hedge fund realm in terms of strategy and results. There are countless managed futures funds of course, plenty of macro this or macro that, arbitrage and so on that we look at all the time. 

If the TIFF article, and others like it, are compelling to you, there are ways to capture the effect they are talking about.

The table (symbols intentionally omitted) lists the attributes of four different mutual funds. They seem pretty hedge fundish to me. The learning curve is steep though. Systematic macro is going to have more moving parts than some other strategies. And as we always say, it is important to diversify your diversifiers and I would not load up on multiple funds from the same provider, they might put very similar trades into many of their funds which has the opposite effect of diversifying your diversifiers.

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. 

Portfolio Efficiency

Peter Hecht from AQR sat for the Flirting With Models podcast. Hecht is the Co Head Of Portfolio Solutions at AQR and the conversation was about portable alpha/capital efficiency/return stacking. 

We've looked at this quite a few times. It's a fascinating concept, I track my interest back to my time at Fisher Investments in 2002 (repeat story coming). A couple of the smarter guys there geeked out over the fact that going short Nikkei futures with 2% of your portfolio and nothing else equaled the return of the S&P 500. It doesn't matter whether they were correct, I don't know, but the idea was mind blowing. 

Then something similar from before the GFC when Nassim Taleb talked about going all out for risk with 10% of the portfolio and then putting the other 90% in T-bills from around the world. The idea from Taleb was getting most of your return from a small slice of the portfolio while the vast majority of the assets are safe.

The word efficiency applies to both ideas. I think they both fit the bill of leveraging down as we've talked about it before. The history of portable alpha drew negative attention as fallout from the GFC when the common implementation was leveraging up equity exposure to buy more equities which ended very badly when the S&P cut in half. 

Today the conversation is about using leverage as a funding source for uncorrelated alternatives without selling stocks or bonds. Someone concerned about tracking error but wanting exposure to alternative strategies could leverage up to include something like managed futures. 10% into a levered fund like CTAP when combined with 50% SPY and 40% AGG would have 60% in equities (10% from CTAP and 50% from SPY), 10% in managed futures from CTAP and 40% in aggregate bonds from AGG. In this example, CTAP solves the "funding problem." Man Group has a similar fund and of course ReturnStacked's entire lineup is about solving funding problems. WisdomTree has also been a leader in the liquid, capitally efficient fund space. 

So there is bad leverage and good leverage. Bad means just adding equity beta on top of equity beta where good leverage is adding uncorrelated betas on top of equity beta as a means of adding uncorrelated alts or alts with low correlation. That is a takeaway from the podcast not me weighing in. 

One way to manage the leverage and keep it as good leverage is to just add up and net out the betas. Here's an example with SPY and client/personal holding BTAL.

So that's a good amount of leverage over a reasonably long period. You can see the betas are almost the identical with the 120/30 having a noticeably better growth rate. It's not a great example but it works...sort of. It is more volatile and there aren't any defensive attributes but the reliability of BTAL allowed for leveraging up. 

There was a lot of the podcast devoted to equity long/short. BTAL is an example of short biased long/short, there's also market neutral like merger arbitrage and long biased like QLEIX. If I understood correctly, using portable alpha (leverage) to add market neutral is the most common use of portable alpha that AQR sees but it's not necessarily the most effective use for portable alpha. Hecht thought that multi-strategy is the best way to go because it allows for easily diversifying your diversifiers. He added that if whatever multi-strat you're using isn't quite getting it done, increase the managed futures exposure. 

A quick sidebar, Hecht noted that over the long term, longer than any of the current mutual funds have been around, managed futures as pretty much equaled 60/40. Claude, is that right? The TLDR from Claude was the on a risk adjusted basis (not nominal returns) it's close but that the paths are wildly divergent. 

Peter and Corey talked about how to size a portable alpha strategy in client accounts and the answer boiled down to right up to the point that the advisor would panic. I've never heard an answer like that in any sort of investment related setting. It seems both very honest and flippant at the same time but I really got a kick out of it. 

The idea of "portfolio efficiency," pretty sure that is the term I used 20 years ago on the first iteration of my blog, plays a role in my portfolio process. It's about understanding where return is likely to come from among the holdings. In a normal bull market, more of the portfolio's growth will come from tech instead of staples or utilities for example. One aspect to how I use alts is that they dynamically protect more of the portfolio in a falling market which is a form of efficiency that helps pursue the goal of greatly reducing downside capture. 

I built out a capitally efficient model for this post that uses just a little leverage with an approach we haven't used before (I don't think). It is a variation on leveraging down. I am not a fan adding a lot of leverage.

WTLS is WisdomTree Efficient Long/Short US Equity Fund. It is 90% S&P 500 and 90% long biased equity long/short. QNZIX is 50% domestic equity and 50% managed futures. The others are one we regularly use for blogging purposes. The leverage of this mix is modest. The notional equity exposure is 53%. There's modest managed futures and the fixed income sleeve avoids duration. 

Portfolio 2 adds 5% BTAL and takes 5% away from BKLN. This adds a little negative convexity and slightly reduces credit risk if there is ever a credit event. 

The backtest is very short due to WTLS' inception. Most of the outperformance comes from going down a lot less when the Iran War started. SCHD has done much better than market cap weighting this year which has also helped. Copilot tried to backtest it (theoretical of course) and the version without BTAL would have been down 10% in 2022, maybe, and the version with BTAL would have been down 9.5%, maybe. I do believe the volatility numbers are little more useful than the CAGR numbers and the standard deviation is also quite a bit lower.

No portfolio can always be best and with a longer period to look at, that would be the case here but it does bring in attributes that I think are important for navigating a full stock market cycle.

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. 

Is AI Ready To Build Your Retirement Plan?

The Wall Street Journal looked at a few ways to tweak the 4% rule for retirement withdrawals. The article acknowledged that William Bengen has since dialed up the number to 4.7% but has said 5% is just fine. There was also a note about Morningstar adjusting the number every year based on some sort of assessment of current conditions. The last few years their estimate has been in the threes, proving too conservative as markets rocketed higher. 

WSJ's ideas included copying the RMD table (that's not how they described it), mapping out non-discretionary spending (medication and groceries for example) and discretionary spending (hobbies and travel). If someone is actually living on 4% and they can attribute 2.5% to non-discretionary then they'd be able to cut back on the discretionary spending when called for like in a serious drawdown. 

The comments are worth reading, there was a lot of sentiment that overlaps with what we've looked at before, notably that growth in the portfolio will account for inflation, also that the types of suggestions in the article overcomplicate the task. Our answer to overcomplication has always been to just take 1% out of your balance every quarter. Yes, it requires some flexibility but setting aside some number of months worth of expenses in cash can reduce the need for flexibility. 

A related idea we talk less about is the more likely scenario that people will have several different types of accounts; some combo of taxable accounts, traditional IRA, Roths and HSAs. In this scenario, it might make more sense to deplete an entire account and then move on to the next one. 

"The book" says to pull from those accounts in the order I put them in above but there are exceptions. The example I always use is buying a car. Assuming you don't want to go into debt for the car, If the car costs $40,000 but it is paid for from a traditional IRA, then accounting for the taxes, it will cost more like $50,000. Pay for the car from the Roth and it will cost $40,000. 

Lately, we've been talking about bridge strategies, depleting some piece of money over the course of a few years to get to some financial milestone like maybe starting Social Security or having to take RMDs. I've written more about this lately because I think it's how my wife and I will probably frame out our financial plan as we get older. 

I am hesitant to use the word retirement, I can't see choosing to give up my day job but as I get older, I should plan for my income from portfolio management to go down. Most clients are quite a bit older than me so there are some inevitabilities there. We have a pretty good income stream from our Airbnb rental but at some point we might want to dial that down to spend less time on it. Less time would mean less revenue. 

Over the next ten years, income from portfolio management plus the stipend from Del E. Webb plus the rental income should exceed our expenses. If everything goes as hoped for with Social Security then we'd both take it in nine years-10 months with the total covering our fixed expenses and then some. If it gets cut by 22% (low probability outcome but not something to ignore either) it wouldn't be a catastrophe but something we'd have to reckon with. 

Ten years from now, we might want to sell the rental cabin or sooner or maybe later but for now ten years makes sense to think about. The proceeds from the cabin could be a bridge to delaying RMDs (I mean spending the money, there's no avoiding taking them out of your IRA). We've talked about living in the rental for a couple of years to avoid paying the capital gains tax (I don't believe we'd get out of paying back the recapture). If something goes wrong, we could live there to meet the capital gains burden. 

If we did sell what is now the rental cabin, we'd still want to have Prescott house we live in and the Tucson house and split time between the two. Eventually we'd have to sell the Prescott house we now live in. If things go well then maybe that would be when I am 85-90? These proceeds could be a bridge until the end without ever relying on the IRA for covering expenses.

I asked Grok to age me 30 years, like when we might leave Prescott. That's not 90. It said it thinks I'm in my mid-40's to early 50's. I will take that, thankyouverymuch.

Why would I want to never rely on the IRA for expenses? Thinking about all this allowed me to identify a hot button for me which is if I ever need some sort of serious care, that I be able to receive that at home. My wife framed it a little differently, we have a casita at the Tucson house that some sort of care provider could live in which sounds good but would take work for find the right person for that. 

If you're still with me, I plugged this narrative, and strategy plus a few more details I'm not sharing here into Copilot to evaluate what I have in mind. There was a lot of back forth with Copilot. I found that letting it start very simply and then adding inputs to bring Copilot to a point where it understood our situation was the way to go. When I finally had all the inputs and details entered and felt like Copilot did understand, I asked it for a qualitative assessment of our plan. 

It gave feedback as a well as a simple list of the positives along with ideas of what the vulnerabilities might be. This was good, it was helpful. I then said to spreadsheet it out with base case and worst case scenarios, it also threw in a "conservative" case scenario and a summary.

The spreadsheet got a lot of things wrong. Really a lot. It assumed we sell the Prescott house that we live in when I turn 67, not much older. There were instances where it did assume account balances would compound and others where it didn't to that calculation. It omitted the Del E. Webb stipend for quite a few years, it ignored my base case for taking SS at 70 in all three assumptions. 

I did not spend the time trying to correct the spreadsheet errors. That the spreadsheet was so far off surprised me because the qualitative feedback was correct. 

Having a qualitative exchange was helpful for me, hopefully it comes across that I've put a lot of time into thinking about our aging strategy, I think that is a crucial part of the process. The more effort you put into your planning, the better your chance for a successful outcome. 

If you engage on various socials, threads especially, you might see spammy posts about using AI for financial planning. AI is making progress but not there yet. It would probably take a long time to correct all the spreadsheet errors. A year from now, I'm sure the outputs will be much better. It will happen, but not quite yet. I should note, I did not put any confidential information into AI. 

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 2% Withdrawal Rate?

About a month ago we looked at an article by William Bernstein and Edward McQuarrie that contrasted people who die with a lot of unspent money and people who Yolo through their retirement without needing or wanting a robust financial cushion in the bank. 

Jason Zweig touched on it in a column this week that included snippets from an interview he did with Bernstein and McQuarrie. There wasn't much that was new in the article but a couple of good tidbits.

“BMWs, fancy clothes and Birkin bags aren’t lifestyle choices, they’re IQ tests.”

From Bernstein, this is obviously about consumerism and spending habits. I don't know which form of overspending, buying too much crap or simply living beyond your means with fixed expenses, is more common but excessive spending is a huge obstacle to retirement success. I realize that is an obvious thing to say but someone you know might benefit from hearing the obvious. 

There was a statistic cited that the stock market over the very long term has a 6.2% real return (real return meaning after inflation). If you don't have a great margin of safety in your retirement numbers I would plug in whether that gets it done for you or not and then I would discount that by 150 or maybe 200 basis points to 4.7-4.2% real return.

That goes back 64 years and is an after inflation number. The 6.2% is stocks only and goes back a couple of hundred years. Targeting Inflation plus 5% is a common hurdle for foundations and endowment so it is a funny coincidence to see 5.08% for this study. 

There was one other idea that I would touch on that got torched in the comments. Having enough is probably more than you think they said. Ok, sounds reasonable. "If your investment portfolio is 50 times your annual spending, you can stop worrying about whether you’ll run out of money." The comments mostly took that literally, I did not. Despite the words investment portfolio being included, I took that as a starting point for planning.

I think of it this as an early step to understand someone's numbers. If someone says they need to take out $60,000 and they have $930,000 in the bank earning nothing, then they 15 and a half years' worth. The default cash option at Fidelity and Schwab each pay effectively zero for taxable account. Someone telling me $60,000/yr for 8 years, well cash might be ok (inflation might be an issue on the back end). Someone who is 54, retired and says it needs to last until they are 90, that might be tough but it is context. It's an early step to figuring out what your asset allocation should be. 

The person only needing the $930,000 to last for eight years might need a little in equities but not much. The person needing it for 35 or 40 years needs a lot more in equities. 

Most people are going to need some sort of normal allocation to equities in order for their retirement math to work. If 60% is the most common equity target, then maybe "normal" starts at around 40-45%. We obviously spend time trying to figure out how to build the portion not in equities. If the non-equity portion can be built into a modest compounding engine with less volatility than bonds with duration then having a little less than 60% in equities becomes mathematically more feasible. 

If even 40-45% in equities is too much, then creating other income streams becomes very important which is why is spend so much on that topic too. 

We all have to solve this for ourselves and once you realize there's an infinite number of ways to solve retirement, it can be motivation to spend more time figuring out your best path. 

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. 

Yield Engine

The catalyst for this post comes from a short writeup by James Picerno about real yields. The idea of manufacturing a high yield while still getting decent growth ahead of inflation is fun thing to toy around with. 

Today's attempt as follows;

There's a little bit of leverage with TECL on the way to a 50% equity allocation and 65% to yield although WTPI does have some equity beta too. By having so much in FLOT, the portfolio doesn't completely whore out for yield. If the entire 65% were in things that yielded low double digits, there would be more erosion in the results.

In looking at this, we don't necessarily care about what the benchmark is doing, we are trying to take yield out and have the remainder grow at a rate that exceeds price inflation.

The Yield Engine portfolio went down less in 2022 but that is mostly attributable to avoiding duration, SPMO and SCHD helped some too. It did not offer any protection or crisis alpha in the Tariff Panic of 2025 or the Iran War decline this year. I'm not sure I would count on the Yield Engine portfolio to reliably go down less in a slow decline but maybe?

The way to protect against the Yield Engine feeling every bit of the next bear market would be to have some number of months of expected expenses set aside in cash in case withdrawing from the portfolio  felt uncomfortable. 

SPMO, SPHQ, SCHD, BKLN and FLOT are all in my ownership universe.

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 YieldMax That Doesn't Yield 40%?

You've probably noticed that Microsoft is in a serious drawdown going back quite a few months. This is far from unprecedented in Microsoft's tenure. At some point it will bottom out and I'm sure it will recover and eventually rip higher at some point, obviously I don't know how long any of that will take. 

It seems like a good time to check in on how the YieldMax MSFT ETF is handling the drawdown. The crazy high yielders are fascinating but must be very difficult to own. The total return for MSFO has actually held up better than the common. The marketing pieces talk about covered call funds possibly going down less because of the distributions and that is working out for MSFO this time on a total return basis.

Anyone taking out the distributions is down 40%. The nature of the crazy high yielders is that they should not be expected to keep up with their distributions, they will continue erode at some rate of speed and then reverse split. 

Not all the YieldMax funds are crazy high yielders. The YieldMax U.S. Stocks Target Double Distribution ETF (DDDD) started trading earlier this year. It seeks to pay out twice the yield of SCHD which currently yields 3.3%. SCHD is in my ownership universe. It's too soon to evaluate its ability to generate twice the yield but at a six point something percent yield, it won't be a on a fast path to eroding into a reverse split. 

DDDD reminds me of the Pacer Metaurus US Large Cap Div Multiplier 400 ETF which tracks the S&P 500 and tries to quadruple the yield. So far, it looks like it has done a little better than that. 

There are probably more wrong ways to get more yield (a large allocation to crazy high yielders) than correct ways but it's worth continuing to look. 

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. 

No One's Going To Be Happy

Yahoo syndicated an article from Fortune about the retirement woe facing many baby boomers. The headline talked about boomers hoarding wealth but the article talked about how much trouble many boomers are in. Editors, amirite?

The comments were a hoot, people just going off on the writer because of the boomers hoarding wealth quip but again, that wasn't what the article was about. There probably wasn't anything too new in there but this caught my attention. 

Only about 40% of workers in their early sixties are on track to sustain their standard of living in retirement; the typical near‑retiree faces about a 24% income gap, roughly $9,000 a year.

Thinking about a number, $9000 in this case, and trying figure out how to cover it is a slight tweak to how we and many other blogs cover it. 

If $9000 is some sort of common shortfall, how can it be covered? I think that too many people don't actually break out their expected expenses for when they retire. We've been quipping for years that you don't need to save for retirement after you've retired. At some point a house will be free and clear of the mortgage. The first thing I thought of for trying to find $9000 is to wonder about car payments. A $40,000-$50,000 vehicle is far from a shitbox and also not extreme luxury. The typical payment for a car in that range is about $800/mo. Drive your car longer and there's your $9000.

I don't know how many people that example helps or how often it can be that simple but ultimately, it comes down to spreadsheet work, itemizing expenses. What do fixed monthly expenses add up to now (for context) and what are they likely to be after retirement. If $6000/mo at 55 years old includes a mortgage payment and a car payment and those will be paid off, then maybe $6000 drops to $3000 or $3500 at age 65?

Now, how much are regular expenses that only get paid once or twice a year like maybe car insurance or property tax? Are these likely to change? Our list is about $13,000/yr which includes very expensive homeowners insurance due to where we live, property tax and propane (only need that every 3 years or so). I realize some of these can be paid monthly. 

Unbudgetable one-off expenses is a line item we talk about frequently like new tires, a veterinarian bill or something else in the low four figures. My own belief is to earmark maybe $1000/mo but if you're sort of unlucky with this stuff (we had a very unlucky year a few years ago with a plumbing issue and car issues) then maybe earmark a little more. 

How much would you like to set aside for affordable fun? If expensive trips are unlikely, what is there that you're interested and that is accessible? From Arizona, there is no shortage of hiking, national monuments, national parks, the San Diego Padres all within one day's drive. 

Once all of that is dialed in, what do the known income sources add up to? How does that compare to expenses via the process we just went through above? If the income barely covers the expenses, that's not a bad outcome but there's very little margin for error. If the income is just a little short, then maybe just a little belt tightening can solve it. If the gap is big, like $9000, what can you do if the car payment example or something like it doesn't solve the issue?

Can you work some sort of part time gig or monetize a hobby? Downsizing where you live might be a little more difficult than it use to be but in Arizona, the median price for a three bedroom house in Phoenix is $475,000 (seems low) and in Scottsdale it's $875,000 versus $350,000 in Tucson. In terms of family considerations, it's only a two hour drive. 

This is obviously a problem that we all need to solve for ourselves. The more effort we put into solving it, the better off we'll be. 

And a quick pivot to a plan promoted by Senators Moreno (R-Ohio) and Warren (D-MA) to solve the Social Security problem by eliminating the income cap. At some income level, $184,000 in 2026, people no longer pay employment tax. Eliminating the cap has long been a regular talking point about how to address, either fully or partially, the shortfall that awaits Social Security. This seems like it would be especially painful for people making $200,000-$300,000 and living in very expensive cities. 

The comments on the article are very negative of course. It is worth remembering that whatever they come up with, it can't possibly be "fair" to everyone. A couple of weeks ago I invoked a cliche about a good negotiation being one where no one feels good about it. That might be where we are headed with Social Security. 

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 Isn't Always Tidy

Some very quick hits today.

That free money from SpaceX deep in the money calls that we looked at on Saturday is looking a little less free and the options are looking a little less deep after today's close.

Again, I certainly don't know what SPCX will do but the options market doesn't usually give money away. 

David Blanchett has a paper out titled The Foundations For A Truly Successful Retirement. It covers the usual suspects in terms of social connections, a few others including that having more money makes for a more enjoyable retirement, go figure. There was one interesting point that we've probably talked about but that Blanchett worded differently that I think is useful regarding annuities or some other way to get lifetime income. 

The paper says that both retirement accounts and lifetime income streams are both wealth (read the paper for context) but people are far more emotionally comfortable spending from some sort of lifetime income stream than they are from their retirement account. Yes this makes sense almost to the point of being obvious but it resonates. If some income stream is guaranteed, it's not that you are taking zero risk, it's more like you're not seeing the risk. That's not very tidy intellectually or mathematically but emotionally? Sure why not? I continue to believe there will be ways to annuitize income without annuities as we know them today, we'll see. 

Long time readers might recall how involved I used to be with Seeking Alpha. For a while, I had the most followers of their contributors. I was a very early outside contributor. It's possible that I was literally the first outside contributor. I feel like the site sort of evolved into being more of a 10 Stock Picks For Summer! type of publisher. A few years ago, I submitted something to see what the publishing process was like and the feed back was they wanted stock or fund picks. I broke off with them when they edited out a mention of a book I wrote from one of my posts. 

Every now and then, I circle back to see if I am missing anything in terms of content quality. I used to poke fun at the dividend zealots that dominated the content and while I don't know if anything dominates the content now, I took a look and found an article on a closed end fund that interests me. I'm not linking to the article but it belied a misunderstanding of many aspects of closed end fund investing and the fund itself. One of the two comments was more useful than the actual article. 

Carter Worth, you might recognize his name as a regular on CNBC many years ago (is he still on?), has a new derivative income fund with symbol WRTH. It sells straddles on stocks that have moved 10% in reactions to their earnings. The website shows that other that treasuries, it only has straddles currently on two stocks. It will target an 11-12% distribution which would include about 1/3 of the distribution coming from the T-bills it holds. 

It's not obvious to me if it will be able to always maintain the 10% earnings move strategy. What if there aren't any?

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. 

Should You Prepare For A Lost Decade?

We spend a lot of time here trying to study and learn about how to make portfolios more robust to various types of risks including market risk (bear markets) and event risk (usually resulting in fast declines). One market risk might be a so called lost decade. A report from Gorman, Keel and Randazzo went into depth on lost decades. 

I added the green rectangle because that doesn't look very lost to me, but the red rectangle would seem to fit the bill. If you were around for the lost decade of the 2000's you know first hand that even in a lost decade, there will be pockets of the market that will do at least ok, if not better than ok. 

In the 2000's, dialing up foreign exposure was pretty important for example. Someone who builds a portfolio that includes individual stocks would reasonably have at least a couple that would do just fine if we have another lost decade. There are now more ways to build a portfolio that includes all weather types of funds or tools that would allow investors to build their own all weather portfolio to succeed in a lost decade. 

Ares tried to make an argument for (private) infrastructure to play a role in a lost decade (my interpretation) because they say it tends to go down less, has fundamental tailwinds behind it and doesn't necessarily rely on a favorable economic cycle. It's not that infrastructure is reliably countercyclical but money can still be spent on infrastructure development and various forms of tolls can still be collected. 

Maybe private infrastructure can offer crisis alpha or maybe it's just volatility laundering but I wouldn't count on getting crisis alpha from infrastructure stocks or ETFs. I use PAVE for clients with part of the thesis being, we need to invest a lot into our infrastructure, I believe the money is going to be spent no matter what is going on, even if it happens in fits and starts. I've talked frequently about my belief that publicly traded financial financial markets are also part of the infrastructure theme as toll takers. I use CBOE in this context which also benefits from VIX trading volume despite getting kicked very hard over the last couple of weeks or so. In 2022, PAVE and CBOE were only down 7.18% and 2.17% respectively but I am saying I would not rely on that to repeat....great if it does. 

The Ares paper explores leveraging up with a sort of portable alpha strategy to add 20% in infrastructure to a 60/40 portfolio. Here's how I built their idea out.

Compared to plain vanilla 60/40 comprised of SPY and AGG.

It does outperform but with more volatility and the max drawdown was much higher. The infrastructure portfolio went down less in 2022 but down more in every other significant drawdown available to look at. 

According to Copilot, the main driver of the outperformance is the leverage, then avoiding duration with FLOT and MERFX (both client holdings), we always avoid duration in these exercises, with the infrastructure exposure being the least important driver. While I believe in infrastructure, I am skeptical that it can do the sort of long term heavy lifting implied in the Ares paper. 

Kind of funny, on the flip side of a lost decade for equities, Robert Pozen made the case for 90% equities instead of 60%. We can get a sense of what 90/10 would look like versus 60/40 from the last two previous lost decades cited above. I'll use the IEI ETF for the fixed income allocation, testfol.io can't go back as far as we need with AGG.

If there is a lost decade anytime soon, I wouldn't want to rely on bonds helping as much as they did in the last two lost decades. In the most recent lost decade, the SocGen Trend Index compounded at 13.43%. The index was not around in the 70's but Gemini theorized that managed futures trend would have done better than 13.43 from 1968-1974.

Having some managed futures seems like a good idea to help with a lost decade and I would consider more than one fund to build out this part of the portfolio and maybe a higher volatility managed futures fund should be considered. 

Gemini thinks that global macro, equity market neutral, merger arb, commodities and reinsurance would also work in a lost decade. 

Selling volatility doesn't seem like a great idea but Gemini said that covered calls might be a strategy that could work. 

There isn't a great sample size to study on that point but I certainly wouldn't go heavy if at all into crazy higher yielders. 

It makes sense to think about what you'd do if equities start to sputter. Getting the timing exactly right seems like a low probability outcome so I wouldn't make dramatic changes. Dialing down equities a little and dialing up diversifiers a little can work to improve results in a lost decade without being completely left behind in case it's just a lost month. 

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. 

Is The Options Market Giving Away Money?

A reader left an interesting comment on this week's Striking Price column in Barron's. The article was about SpaceX. The reader said he sold deep in the money calls against the stock, really deep at $110, he didn't say where the common was when he put the trade on. Despite being that deep in the money, there was a ton of time premium in the price of the option.

Usually when there are calls that are that far deep in the money, there isn't much time premium (time premium is where changes in volatility are reflected) because the odds of the stock cutting in half or whatever are very remote. 

With markets closed it is easy to take a look at where the stock and a couple of options are pricing without it being completely different 10 minutes from now. On Friday at 4pm, SPCX common closed at $185.00. The January 100 call was bid at $90.90 so the time premium was $5.90. With something like this you could compare $5.90 to how much interest you might get on the $9410 you'd need to put this on as a buywrite. That annualizes out to a "yield" of almost 11%.

The trade runs into problems if the common drops below $94.10 ($100 minus the time premium taken in). If SpaceX drops to $110 or $120, the buywrite would still intact and be profitable when the option expires, the call sold gives up everything that happens above the strike price. You might be sweating it, if the common was at $110 or $120 next month, you'd still have a long time to go. The reader called his strategy "conservative." He believes he is avoiding the volatility in the stock prices but is benefitting from the options volatility. 

Obviously, there is no way to know what will happen to SpaceX' price between now and the January expiration but to the title of this post, the options market doesn't give money away. I take the time premium in our example to mean that the market thinks the stock could go below $100 between now and January. 

If it works out, then the reader did a great job of exploiting SpaceX' volatility but either way it's a fascinating trade. 

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. 

Steep Hill To Climb

We had a very challenging wildfire yesterday. Walker Fire trucks are red and the Forest Service are green.

It was very close to the road which made it easy for us to find but it was down an insanely steep hill. I've never done any sort of fire activity on such a steep hill.

We got there just a couple of minutes before PNF 633, it was on federal land so they had command of the incident which was probably a good thing, no obvious obstacles to ordering up air support. 

Now, on to today's post. Alpha Architect has put out a lot of content and information lately promoting its High Inflation And Deflation ETF (HIDE) as a substitute for managed futures. There is some amount of trend following in the HIDE process and part of the pitch is HIDE can be a way to avoid the fallout when managed futures struggle or otherwise do poorly. The most recent incidence of this was the few months going into the Tariff Panic in early 2025. 

You can see from the drawdown chart that when DBMF and QMHIX get colds, HIDE barely gets the hiccups. 

The tradeoff is that in 2022, HIDE might have been down based on replicating it. A reasonable expectation for managed futures is that it will hopefully go up when markets have longer, slower declines. HIDE seems like it is setting a different expectation. 

Here's a fun idea.

The funds will take any dividends earned by the underlying equity portfolio and use them to buy Bitcoin. Or you could just buy Simplify US Equity PLUS Bitcoin Strategy ETF (SPBC). Or you could just buy a Bitcoin ETF. 

What will be the yield of the equity portfolio? A little over 1%? Maybe? I don't know why this would be someone's best choice to add Bitcoin. 

A couple of weeks ago, we looked at a portfolio from Finomial that they called Leveraged Equity + Diversifiers Portfolio. Today I got an email about their review of Leveraged Equity + Diversifiers Portfolio II. The differences between the two is slight.

Version 1 has pulled away the last couple of years, I think the difference can be attributed to the position in FEGIX which includes mining stocks. Gold miners tend to have bigger moves in both directions than just plain gold. 

The results are compelling. The Finomial portfolios have had quite a bit more growth with about the same volatility as putting 100% in the S&P 500 often with smaller drawdowns. The Finomial portfolios are 100% equities with alts on top. 

There's never been any sort of hideous path for SSO versus the S&P 500 but it's not impossible going forward, 50% in SSO could be difficult at times. That said there a couple of concepts here that I think are useful and overlap with what we talk about and do here. One is the willingness to include traditional mutual funds in the mix. ETFs are generally the better wrapper but not in every instance. I don't think it is logical that one wrapper must always be best and I don't think ETF-only models make the most of what is out there. In building or managing your own portfolio, if a mutual fund is the best way to capture some exposure, use the mutual fund. 

The other thing is that I'm learning from a project I am working on for the Del E. Webb Foundation is that these are "institutional caliber" portfolios. That doesn't guarantee results and that doesn't mean portfolios like this can't be poorly assembled but these sorts of things really are sophisticated concepts that are accessible for individual in their brokerage accounts.

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. 

Style Is Tricky

Sorry I haven't posted in a few days. It's been very busy (good busy) and I haven't seen a whole lot that would spur a blog post. Here's a quick something though. 

The weighting is microscopic but still, what's the deal? Dave Nadig weighed in. It's a long article so the TLDR is "SpaceX was added to the Schwab U.S. Large‑Cap Value ETF (SCHV) not because it looks cheap, but because the Dow Jones style methodology couldn’t classify it as growth—so it defaulted into value by process of elimination."

That comes on the heels of our conversation the other day about the VLUE ETF having 22% in Micron. If Dave is right, it's value because it's not growth, then to the point we made the other day, there's not much utility to the growth or value labels. 

That may not matter as much with an actively managed stock picking fund. To buy that sort of fund is to buy the manager. The SpaceX weighting is so small in SCHV that if the company went out of business tomorrow, it probably would not be detectable in the NAV but for anyone trying to build a style oriented portfolio, it is tricky, maybe trickier than it should be. 

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

Are Index Funds Too Big?

First a follow up to an idea from a couple of months ago about creating some sort of fund that would make constant bets on Kalshi or Polymarket. The idea was not so much hold bets through to the conclusion but to use an algorithm to scale in and out as prices change. The hope would be some sort of uncorrelated, absolute return outcome that maybe did a little better than T-bills.

The NY Times wrote about something not that close but sort of close. The article was about arbitraging between two markets when they price outcomes differently. If between the two markets the yes and the no outcome add up to less than a dollar, then a combo bet could be placed to capture the pricing discrepancy, very much hitting singles. The article profiled a mathematician who the Times reports has made over $1 million in the last three years. 

The arb isn't betting on outcomes it is exploiting inefficiencies and discrepancies. 

Torsten Slok is concerned about the enormous size of the three largest index ETFs; VOO, SPY and IVV.

Two different AIs corroborated that index funds (ETFs and mutual funds) comprise 20-30% of the US market. Jack Bogle thought it would be problematic if it ever got above 50%. 

I think it is important to understand that indexes have flaws and drawbacks and it is prudent to know when to deviate from tracking too close to the index. With 50% in tech plus communications, I believe this is one of those times. I have no idea if anything bad will happen but the concentration of risk in those two sectors seems obvious. 

And we'll close out with a fire department buddy who is my age but retired. Part of his post-retirement routine is that he picks up shifts at his church as an EMT during Sunday Services which is not uncommon for larger churches. I believe he has done similar work at the arena in Prescott Valley that has concerts and is the home field for our indoor football team. 

Another former fire department colleague used to get event gigs for EMS down in Phoenix, mostly concerts and festivals. The last time we had a serious fire here was the Crooks Fire in 2022. The community was evacuated and our station house hosted one of the divisions working on the fire as well as the structure protection group. 

As part of this contingent working from our firehouse, there were two EMTs and an ambulance. The EMTs sat in front of our station house on their phones or tablets just hanging out waiting for someone to need help. They were doing nothing wrong, their job was to be on standby and wait in case someone got hurt. There are also teaching/training opportunities for people with EMS credentials.

The point here is there can be plenty of ways to pull together a useful income in an area that might be as relevant to you if needed as EMS is to me. None of these EMS opportunities strike me as punching clock on a regular basis. Taking shifts with the ambulance company would feel like giving up some independence. 

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. 

Value Funds That Load Up On Tech

Barron's had an interesting writeup about value funds having done well this year including the iShares MSCI USA Value Factor ETF (VLUE). It is up a whopping 44% this year versus 7% for the iShares S&P 500 Value ETF (IVE). 

When you see that sort of dispersion, I think the first question to ask is what the hell is causing that sort of outperformance (or lag as the case may be)? In the case of VLUE, it owns Micron (MU) at a current 22% weighting. MU is up 243% YTD so at 22% of the fund, it has not been rebalanced yet. Barron's neglected to make the point about Micron but several reader comments made the same observation I am making. The number two stock is Cisco (CSCO) with just under 5% of the fund.

A big point being made was that the line between value and growth appears to be blurring as more and more tech is showing up in value funds. The tech sector comprises 42% of VLUE, for IVE it is only 22% which seems kind of high. Apple is the largest holding in IVE at almost 8%, tech adjacent Amazon is second at 4%. The DFA US Large Cap Value Fund (DFLVX) has only 14% in tech for context. 

iShares has several large cap growth ETFs. BGRO and ILGC both have 52% in technology. If both growth and value are heavy in tech and tech adjacent, the odds of doubling up on the same stocks are pretty high as well as having just a ton of tech. Apple and Amazon are both top four holdings in growth funds BGRO and ILGC along with value fund IVE but don't appear to be in VLUE.

I've never done anything with funds that target growth or value. I think managing sector weightings is very important and if the lines are blurring between growth and value then managing sector weightings becomes harder to do. If someone buys VLUE today thinking they're going to get X% of their tech from the fund, whenever MU gets rebalanced down it will change the tech exposure of the portfolio. VLUE is 42% tech with half of it being one stock. 

It's a lot simpler to use sector funds and some thematic funds for any portfolio that doesn't use individual stocks. Utilities are always going to be utilities and a defense contractor themed ETF is usually going to be a mix of industrials with a little bit of specialized tech thrown in unless the name indicates otherwise. 

Quick pivot to the behavioral challenge of spending down from a retirement account. When you build up some sort of account balance, retirement or otherwise, it creates a sense of security. Pulling from that account combined with seeing it shrink doesn't sound easy to me. Over the last many years, chances are someone taking a reasonable amount out has seen their account balance still grow because of how well markets have done. Taking 4-5% out is very unlikely to result in running out of money early but with a decade like 2000-2009, taking 4-5% out could have easily cause the balance to decline. 

Looking back in hindsight, yes just staying the course was the obvious thing but maybe not so easy to actually stick to at the low in 2008 or early 2009. 

This is something I've long recognized in myself. I think it will be emotionally challenging to pull money out whenever the time comes but my thinking on this has evolved a little, maybe someone will find this helpful or useful.

More than just generally spending down if the market sequence is not great causing discomfort, I think when the time comes, there will be some number in my account that would be difficult to go below. Right here, right now there is number that makes me feel comfortable and the dollars above that are gravy. I'd be ok spending the extra, spending the gravy. If I can continue to work to RMD age, 75 in my case, that's still quite aways from here so I have no idea what my comfort number would be by then between price inflation and hopefully account growth (price appreciation and any contributions I might make) or obviously what my gravy number will be but this is a useful tweak to my thought process. 

You can't take out $15,000/mo from a $1.8 million account and expect it to last but if you have that much money when you retire, it would be nice to take your $80.000-$90.000/yr without being constantly stressed out about it. 

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. 

Prioritizing Peace Of Mind

A few days ago we looked at an article about whether or not to end up as the richest person in graveyard. Basically, dying with too much leftover could lead to regret for people when they get to a very old age. The article from William Bernstein and Edward McQuarrie gave permission to have a lot of unspent money at the end because going through with that sort of safety net, even if unspent, has utility, it has value. They validated the idea of moving financial security further up the priority list. 

This week, the WSJ reported on Fidelity moving toward allowing target date funds to partially convert into immediate annuities. I am not a fan of annuities, I've never sold one and I am not licensed to sell annuities. Anything bad you can say about them, I am likely to agree.

That said, there are positives to annuitizing a portion of a retirement portfolio. I think this will come at some point without getting tied up with a complex insurance contract. One point that I made ages ago, more anecdotal actually, was that people I knew who had annuities love them. 

Someone living a $6000/mo lifestyle, getting $3500 from Social Security, maybe they can peel off a chunk of their IRA into an immediate annuity to generate a $1000/mo income stream while having most of their retirement money still in their brokerage account where they maintain control of the assets. The lifestyle in this example might be $6000 but if SS plus the $1000 annuity stream covers the fixed expenses, then that might reasonably create utility, value, for the end user in the form of peace of mind. 

So if you want an annuity, go buy an annuity if the trade offs would be worth the peace of mind. 

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.