Money For Nothing And Your Shares For Free

Joachim Klement wrote a provocatively titled article, No, Stocks Are Not A Good Inflation Hedge. The link is to his substack which only provides a short summary to the original article at Reuters which is behind a paywall. 

Ok, is he right? The focal point is when inflation is 3% or higher, "history shows that real returns on U.S. stocks tend to drop quickly once inflation rates top 3%." First, the S&P 500 versus inflation for 55 years which I chose in order to take in the 1970's.

Long term, stocks are well ahead of inflation regardless of the inflation rate. 

Manually counting the year by year layout from testfol.io there were 28 years out of 55 when inflation was 3% or more. In those 28 years, the S&P 500 declined in 7 of them, 25% of the time which is very close to the percentage of years that the stock market is down overall. According to Copilot, in those 55 years, in the years where inflation was 3% or greater the S&P 500 compounded at 9.4% while inflation in those years ran at 6.1%. For just the 1970's, testfol.io shows the S&P 500 compounding at 8.38% versus 8.05 for inflation. Not great but not a negative real return.

Yes there were more instances in the 1970's but I'm not seeing Klement's conclusion. My favorite quote from the show Deadwood was when Hearst said to Bullock, "I am having a conversation you cannot hear." Maybe that's the case here as well with me playing the role of Bullock.  

PSUS is the latest investment vehicle from Bill Ackman. It is a closed end fund that just started trading on Wednesday. It was priced at $50 and to offset the normal decline associated with new closed end funds, the deal also included shares of the management company which has symbol PS for "free." This link might fill in the gaps.

Here's an exchange that Ackman apparently engaged in about the precipitous drop in PSUS' price. 

For a while it was common for new closed end funds to price at $25/share and very quickly fall by the amount of the sales charge which I seem to remember being about $1.50 but regardless of the exact amount, the sales charge built in to the $25 price is not part of the NAV of the fund and the market corrected that quickly. 

The ratio looks like for every 5 shares of PSUS that investors bought, they got one share of PS. So 100 shares on the IPO would have been $5000 and the would have received 20 shares of PS. On Friday, PS was up a ton to $37.99 and PSUS closed at $42.75. Twenty shares of PS plus 100 shares of PSUS adds up to $5034.80 at the close on Friday. I don't know why PS was up $9.99 on Friday but doing the same math 24 hours ago and the two would have added up to $4831.

If this process was correct then it's certainly not catastrophic (let's see what PS does on Monday) but no one got shares of the management company for free. 

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.

You Retire, You Die?

This from Herb Greenberg.

It's not uncommon in white collar professions for people to retire very late or never. The other side of the coin is the reality of people having their hand forced to retire early or at least get bumped out of their jobs sooner than they planned. I recently heard from a buddy I worked with at Schwab in the mid-90's. He's exactly my age and is out of work. I'm not sure if he was still at Schwab until his layoff or had been working elsewhere. If he was at Schwab for 25-30 years then he had the opportunity to accumulate a meaningful amount relative to retirement needs, hopefully a sufficient amount but he made it clear he'd like to be working somewhere. 

His story is just an example of why it is important for people that are maybe 45-60 or whatever age rage you think is relevant to be prepared in case your hand is forced. Everyone has their own Plan A that might involve retiring young or never at all but life happens and it would be better to have something of a Plan B on shelf if you ever need it. 

To the quote, I would replace "you retire, you die" with if you stagnate like leaving your primary career to just sit at home in a recliner watching television you'll probably die sooner. Stagnating, doing nothing is the danger that the doctor is talking about. Having purpose, a place to be with some regular frequency and problems to solve, regardless of whether there is an income involved can overcome "you retire, you die." 

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.

Can I Retire At 55?

Ben Carlson fielded a question from a 45 year old man who hates his job, has $1 million accumulated so far, earns $300,000, spends $12,000/mo and is asking about retiring at 55. He figures he needs $3.5 million at 55 to maintain his lifestyle. 

High level conclusions/observations from Ben;

• The reader is on track but maybe a little variability as to when he'll be able to retire
• There is a question from the reader about return assumptions which Ben notes can be tricky
• Ben makes the obvious but still necessary statement that retiring at 55 means the money needs to last longer
• The reader says he has $30,000 in savings, outside of his 401k and plans to put $50,000/yr into taxable accounts so ten years from now he'd have $530,000 plus whatever growth rate the reader can get
• Ben reminds the reader not to forget about inflation which could mean that in ten years, $12,000/mo might be $16.000/mo

I don't have a lot to disagree on but I think there is some nuance to add. Ben suggests that the reader either "roll the dice" which I take to mean that Ben is not certain things will go as the reader hopes, change careers and/or hire a financial advisor.

First thing I would add is to figure out what he will be spending in ten years. The $12,000 included the mortgage and cars. He doesn't say but the house could be paid off by then. If the house isn't that close to being paid off, paying in an extra $1000/mo would shorten the loan considerably. He could also just keep driving the same cars, the car loans (unless they're leased?) will be paid off by then. Maybe he can cut his nut in half?

If he actually puts away $50,000 into a taxable account every year for ten years, then that pot of money could be very useful as like a bridge to the next financial milestone. Note, we've talked about "depletion strategies" in this exact context but it appears that bridge has become a common term for this. The idea is using the taxable account to live on until it is depleted and by then, he'd probably be able to access 401k/IRA money without penalties (yes there are ways to access 401k/IRA money sooner w/o penalty). I think Ben is more skeptical of the utility of what this piece of money could do than I am.

One point that Ben did not mention is about Social Security. Anyone wanting to retire before 60 should take the time to understand what that will do to their Social Security payout. Social Security is based on the highest 35 earnings years. At 55, looking back to 20 is going to take in some very low earnings years in most cases. Most people will earn more from 50-60 or 55-65 than when they were 20-30. 

It's not that someone should necessarily change their plan of retiring early but they should go through the exercise of seeing what it would do to their payout. When you look at your statement is says something to the effect, this will be your benefit if you continue to earn whatever you just earned. I believe the SS website has a widget where you can tell it to refigure based on retiring earlier. If not, you can plug your earning record into the AI of your choice and get the answer. It would be useful to know if $4000 would drop to $3500 as a made up example to allow for accurate planning. Based on how the reader wrote into Ben, he comes across as very detail oriented and my guess is he would want to know his adjusted SS numbers. 

The last point I would make in response to the reader saying he hates his job two times in the email is that he should just quit now. The bigger point is that if he really stays in a job he hates for ten years, he is essentially going to wish away ten years of his life. It's not that he's a little older and of the mind set that ok, time to start winding this down, he hates his job. 

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.

Can Market Neutral Replace Fixed Income?

Barron's this week had its semiannual "Big Money Poll" that included the following chart.

Avoiding or being underweight duration seems to be catching on. Part of the message from the chart is trying to find different ways, other than bonds, to try to manage or offset equity volatility. To that end, Man group took a look at "equity market neutral as a more effective diversifier." By their work, market neutral does well during periods of higher inflation. They made a fundamental connection to higher costs for capital (higher interest rates). The argument wasn't that compelling but leave a comment if you think otherwise. Maybe market neutral does better is less about market neutral and more about bond prices dropping due to higher yields typically associated with higher price inflation. 

While I did not take Man to say 60% equities/40% market neutral, lets see what that looks like. Similar to managed futures, if you want to go heavy into market neutral, diversify your diversifiers, there can be idiosyncratic risks with these strategies.

Vanguard Market Neutral (VMNIX) was anything but in the period charted.

Here's part of the story from Copilot;

Here are four funds that have less violent histories. 

The Merger Fund is in my ownership universe. One fund that I excluded was AQR Market Neutral (QMNIX). It too looked very unneutral at the same time as VMNIX.

Taking all four and weighting them each at 10% to create a 60/40 looks like the following;

Portfolio 2 looks just like VBAIX until bonds with duration start to have problems in late 2021 then it pulls away, going down less in 2022 and has outperformed VBAIX by varying degrees every year since. 

Hold on though. The result for the Blackrock Global Equity Market Neutral Fund (BDMIX), seems to have much better result than the others. That sort of outlier, even if it's good, should prompt a closer look. Why has it done so much better? Is it taking risk for which there has been no consequence yet?

Copilot has thoughts.

It really spat out a lot of information, I think this screen grab summarizes most of it. Maybe for a 10% portfolio weight, it's worth the risk or maybe the weighting to that one can be reduced some but part of the process for considering an alternative strategy is to take some time to understand the why behind the performance not just look at the performance. Assuming Copilot has it right, getting to the bottom of a fund like this probably wasn't possible before AI. Copilot does similar things looking across various managed futures funds to quickly isolate risk weightings and signal speed. 

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.

Boo Dividends, Boo!

Sam Hartzmark from Boston College sat for Meb Faber's latest pod where they explored the flawed thinking people have regarding dividends. Listen to the pod but I think I can sum it up with a poll that Meb ran earlier in the week. Essentially, a lot of investors don't understand how the ex-dividend process works. If a $100 stock pays a $1 dividend, you still have the same $100 of total value. The day before the ex-date the total value was the price of the stock, $100. After the ex-date, you still have $100 total value comprised of $99's worth of stock and $1 worth of dividends. 

People also muddy their own waters, according to the conversation, using total return and price return incorrectly. If people spend all of their dividends, then the return leftover, available to make the account grow will be much less. That is important to understand for anyone taking their dividends out.

Many years ago I referred to the "dividend zealots" that dominated Seeking Alpha content and comments. That group was probably a magnified version of the attachment and mental accounting that goes with dividends. We looked recently and some whistling past the graveyard about how "good dividend stocks" can take bad turns or some of the tax inefficiencies when dividends aren't qualified. Sam and Meb also tackled the underwhelming nature of dividend centric funds, even dividend growth centric funds but listen and draw your own conclusion.  

On a similar track, here's this exchange about derivative income funds.

This from me about covered call funds.

The difference between the total return and the price only return supports the point made from the podcast. Anyone buying ISPY (in my ownership universe) or SPYI is not getting the S&P 500 if they take out all of the dividends. This isn't a problem for people who understand the mechanics. The pitch for covered call fund of upside with downside protection tends to be overstated. 

With the proper understanding of how they work, taking out all the of the distribution and still getting a few hundred basis points of price-only return is a pretty good outcome when sized appropriately (small) as one of many distinct income streams but it's not capturing the index, repeated for emphasis. 

Here's a YieldMax fund that we haven't looked at before but is similar to many crazy high yielders.

TSMY's total return lags meaningfully behind the common stock because it is not the common stock. TSMY has paid out about 55% based on this chart. As we have seen with other YieldMax products, it makes sense to expect that at some point, TSMY will do a reverse split. The bleed thus far is TSMY hasn't been that bad but that is because the common is up more than 60%. 

If the common had only been up 25%, would TSMY be down 30%? It's probably not that linear but you get the idea. It's less problematic when people understand this. Knowing how it works and buying it anyway that yields 55% might not be optimal but based on the many comments that YieldMax gets about this issue on Twitter, a lot of people don't understand, speaks to one of the ideas Meb and Sam discussed.

The crazy high yielders are better thought of as products that sell the volatility of their respective reference securities.

Following up on MHIP and MHIG that we mentioned yesterday. Copilot was able to find some holdings and asset allocation information.

So they are multi-asset and seem to be quadrant inspired. The funds are heavy to health-related companies but not exclusively invested in that sector. Maybe the idea with the overweight to healthcare is that since the healthcare system will cost a lot, the funds make the healthcare companies cover fundholders' medical costs. 

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.

Digging Into Healthcare Inflation

Yesterday we looked at an article in the WSJ about a lack of confidence that people have about being able to afford retirement. Today Barron's wrote about the same study as cited in the WSJ article and added a couple of other interesting things. 

This really jumped out;

In a separate survey, just 36% of those without a financial advisor reported knowing how much they needed to retire comfortably, versus 66% of those working with a financial advisor

The point from me is not that everyone should have an advisor, I realize that most people will not hire one which is fine but anyone choosing not to work with an advisor does need to spend some time on the basics. Chances are most people won't spend some time on the basics but they should (repeated for emphasis).

It has never been easier to put some sort of basic framework together thanks to the plain old internet and also AI. 

• How do I plan for retirement?
• How does Social Security work?
• What role does my savings play in retiring?
• Should I work part time after I retire?

None of those questions are particularly sophisticated. They're probably good starting points. This is very much in the no one will care more about your retirement than you discussion. 

The article had a mention of the recent $1.46 million estimate needed to retire comfortably survey. That would pay either $58,400 or $73,000 at either a 4% or 5% withdrawal rate. Will you have $1.46 million when you retire? Is $58,000-$73,000 an adequate amount when combined with your expected SS payout? Should you assume a 23% haircut to SS? How do the numbers look after that? 

Something new to me was the attempt to quantify healthcare inflation. Barron's cited Millman who comes up with an expected inflation rate for healthcare of 6.8% annually. Millman has a calculator that you can you use. It's not detailed but this is what it thinks based on our (my wife and I) particulars. 

The number is bigger than the Fidelity number that gets cited by just about everyone. This year, Medicare Part B for a couple making $100,000 would be $405/mo (covers both). If it inflated at 6.8% per year (if that is what Millman means) then it would cost $784/mo ten years from now. Part G in Arizona right now would be $400/mo (round number estimate from Copilot) and in ten years it would be $772. So part B and G in ten years would add up to $1556. I guess Millman's numbers include some sort of prescription estimate (I left out Part D, small outlay but I concede the flaw). 

To try to figure future needs for prescriptions, at 60, I take no prescriptions. Copilot says the odds that I will be able to get away with zero prescriptions at 70 are 30-40%. The odds that I only need 1-2 prescriptions at 70 are 40-50%. Interestingly, if I make it to 70 without needing prescriptions, the odds of not needing any at 80 are 25%-35%. This seems like a decent example of the Lindy effect. You can repeat this same exercise for your situation into the AI of your choice.

The polypharmacy number for 60 year olds stunned me. You can see where this is going. My odds for no prescriptions at 70 are so-so at best but if I only need one or two (my wife is just as much of health nut as me) at 70 then we can take a meaningful bite out of Millman's number. I know one person who at 74 a few years ago was taking no prescriptions (patient on a call for an ATV accident) and he might be the oldest person I've ever met to be on zero meds.

One idea I've had about how to approach, I will call it older ages, not necessarily retirement, is to break it up into segments. What will you need financially from whatever age you stop working until you start taking RMDs. What will you need physically for some immediate block of time like 60-72 maybe? What might you need from 72 to 85 and then maybe in the last segment of life. Sidebar joke, back at the original iteration of my blog, a reader commented about expecting to get shot by a jealous husband when he was 110. 

I'll try to think that idea through a little more and blog about it in the future. 

I'll close out that Millman just launched two ETFs that try to combat healthcare inflation. MHIP tries to "generate returns that over time exceed the U.S. healthcare cost inflation rate" and MHIG tries to "generate returns that are generally equivalent to the U.S. healthcare cost inflation rate." The funds just started trading a couple of days ago and unfortunately, the website for each fund doesn't really have any information yet. I think they are multi asset funds but I will update when there is more information available. 

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.

If You're Not Puking, Are You Really Diversified?

Allan Roth had a short writeup at Barron's about why low volatility stocks are not bond substitutes (agree) but he does like the idea of paying off debt when the relationship between the interest on the debt exceeds the yield earned by owning bonds. He also said this about AGG.

The iShares Core U.S. Aggregate Bond ETF has earned a respectable 4.69% annually over the three years ending December 31, 2025. That pales in comparison to the 22.25% annual return of the iShares Core S&P Total U.S. Stock Market ETF. I predict that when stocks tank, you will be glad you have some boring bonds.

Ok, so fair enough about AGG.

But if you'd be ok with AGG then you might also be ok with more total return, less volatility and smaller drawdowns than AGG. All of those are in my ownership universe. Instead of one big allocation to AGG, it appears to be safer to split between several alternatives like the ones above. 

The Wall Street Journal had an article about Americans losing confidence in having enough to retire. This anecdotal quote caught my attention, "Janet Kieffer, 73, estimates that her spending is about 20% above the level a year ago, because of rising prices for items like groceries, gas and her Medicare Advantage plan. The Georgetown, Texas, resident recently paid $400 for a new medication."

A couple of things here. One is she is spending more than she expected, like her hand is forced if we're talking about food and other essentials. Price inflation is not an outlying event, it's an easy thing to go wrong and force adjustments. The other item is paying $400 out of pocket for medication. Not talking in absolute terms but many chronic medical problems can be reversed or prevented by cutting sugar consumption and lifting weights. Yes, I am absolutely a broken record on this point but if someone is living a modest retirement on $4000/mo, maybe $2000 from Social Security and $2000 from portfolio income, it would be great to avoid spending 10% on one drug if at all possible. 

This Tweet caught my attention.

We have made this exact point countless times. Believe me when I tell you, a lot of people don't understand this. Even advisors who I am going to say should absolutely understand this point, do not. Jason Buck has talked about the few holdings in this context that make you want to puke. Hopefully, it's not that bad, maybe I would use the word frustrated, holdings that cause frustration.

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.

Managed Futures Palooza

The week is off to an very busy start on a personal front, all good stuff though. A very short one tonight with an idea that I was curious to look at. We've talked about the dispersion between different managed futures funds and whether or not to consider more than one fund for even small allocations.

The following looks at nine different managed futures funds, equally weighted then 10% to TECL which is the equivalent of 3X technology plus the same nine managed futures fund and of course VBAIX is plain vanilla 60/40.

The long term result, ten years is a decent timeframe, of Portfolio 2 is pretty good as are the stats and the year by year but it seems sensitive to fast declines due to two things, I believe. There were a few times were managed futures got whipsawed by bonds and of course if the S&P 500 gets a bug bite, TECL will get flesh eating disease (trying to make a joke). 

Not that anyone would allocate 90% across nine different managed futures funds in real life but that many funds blends away the various spasms that these funds have from time to time. 

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.

Fascinating Observation From William Bengen

A lot of ground to cover today. A week ago, the WSJ wrote about which generational cohort had more challenges; boomers or millennials. Apparently the comments included a lot of what about us from Gen-X readers so the WSJ followed up with How Gen-X Stacks Up Financially. I am older Gen-X, born in 1966.

If this topic interests you to the point that you've done some reading then I doubt you got too much that was new from the article. The financial crisis was hard on Gen-Xers in terms of home purchases, our average net worth dipped below the boomers because of that, now we appear to be ahead of the boomers but are quite a ways behind millennials when adjusting for age. Oh and you read that correctly, they used average not median to study net worth. 

Student loans are still an obstacle for Gen-X which isn't shocking to me in terms of younger Gen-X being in their mid-40's and although not quantified in the article, often when people in their 50s and 60s have student debt it is because they borrowed money to put their kids through school.  

The comments covered a wide range of we had it easy, we had it hard, stop whining and whatever with that last one being a stereotypical reaction that Gen-X has to everything.

Let's quickly circle back to the average net worth numbers. The median net worth for 50-65 year olds ranges from $325,000 to $350,000 according Copilot with about half of that being home equity. 

I'm not too interested in comparisons, you can look for yourself, it would be an easy query into AI but the numbers aren't great for 50-65 years (obviously a lot of overlap with Gen-X). Keep those numbers in mind as we look at a Bloomberg article that paints a grim picture for the economy. The TLDR is "after years of repeated economic shocks, the world has been left woefully unprepared to deal with the next one." The article primarily blames the war in Iran for the conclusions drawn.

As usual, I am not concerned about whether the article is correct or not but would be more concerned with trying to understand if the argument is plausible and if it is plausible, does it pose any kind of threat to anyone or anything that I care about? 

On the list of things I care about are client retirement outcomes and how think I about what my later years might look like financially which gets us to a fascinating interview with Bill Bengen who devised the 4% rule for retirement withdrawals. 

Bengen's original study goes back to 1925 and Barron's asked him what was the worst year to retire. It was not 1929 on the eve of the Great Depression it was actually 1968 because of the very high inflation rates of the 1970's. I don't recall ever reading anything from Bengen that went down this road.

The 4% rule says to start at a 4% withdrawal rate (a little higher actually) and then adjust the withdrawal rate up by the rate of inflation each year.

Year	Inflation Rate (%)
1970	5.84%
1971	4.29%
1972	3.27%
1973	6.18%
1974	11.05%
1975	9.14%
1976	5.74%
1977	6.50%
1978	7.63%
1979	11.25%

You can see then how adjusting upward in that fashion could have a relatively bad outcome. The outcome wasn't across the board catastrophic, but it ran out of money after 30 years. My take on the 4% rule has been to forget about adjusting the withdrawal percentage by the rate of inflation because the growth of the portfolio will handle that. It requires some flexibility for the years in which markets decline. My idea is much simpler. Each quarter, look at your balance and take no more than 1%.

This quarter, you have $950,000, cool, take $9500. Next quarter, $971,000? Take $9710. If the market does something hideous, that might require some belt tightening or this threat can be mitigated by raising expected cash needs ahead of time, maybe get 18-30 months ahead to avoid the likelihood of having to sell low and/or really cut back on something. 

So what happens if Gen-X cannot collectively retire on (reduced?) Social Security and their savings? What if there are long lasting economic impacts from the war that hurt the economy and capital markets? The point is not predict what will happen or rationalize why it will or won't happen but to plan in case things turn out to be that negative. It's your life and no one will care more about it than you.

This is why we talk all the time about building resiliency and creating optionality. Yesterday at fire training, one of the firefighters drew my conclusion about doing incident management team (IMT) work (I've talked about this many times as an outlet from my FD involvement) as a Plan B. "Yes!" The firefighter in question is 38 so I added or if you get to some age you think is old and realize you either want to do something different or feel you have to do something different, you can start to build that optionality now. She helped at the Basin Ops Drill (the live fire exercise I write about every year) in the planning section checking people in. That little bit is barely an introduction but where I've talked about this to the group before she now has a first hand sense of the opportunity which I feel good about. 

The IMT example is just one possible income stream from my stuff, everyone hopefully has one or two things from their life that could play out as an income stream if ever needed and if not, get started trying to solve that right now. The longer the runway the better the odds of success.

No one will care more about your retirement than you ~ Joe Moglia. 

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.

Sectorology

A couple of weeks ago, we discussed how the S&P 500 was turning into a tech fund. Barron's took up the conversation this weekend and included a list of ETFs that should help reduce tech exposure. 

If you're interested, you can look through and decide for yourself if any of them are worth owning.

The message from from my post was that if you build a portfolio at the sector level, it is easy to just reduce the exposure you have to tech/communications and you can also layer in small exposures to negatively correlated strategies to reduce the portfolio's beta. A little more nuanced would be to use SPXT which is the S&P 500 excluding technology. Using SPXT would allow for very precisely dialing the tech exposure. As you can see from the top holdings though, there is plenty of what I would call tech-like beta.

Back in March we looked at a broad based index strategy from Research Affiliates that combines quality, value and momentum. We built the idea by equal weighting SPHQ, SCHD and SPMO. Owning those three instead of market cap weighted S&P 500 would combine to a 33% weighting to tech plus communications versus 45% for the S&P 500. QVML is an ETF that combines those three factors but its weighting to tech plus communications is just over 44%. 

If a portfolio went 2/3 domestic with SPHQ, SCHD and SPMO and 1/3 foreign (20% ACWX 13% EMXC), then the total to tech plus communications would add come down slightly to 32%. ACWX is light on tech, EMXC is heavy in tech from Taiwan Semi, Samsung and SK Hynix. 

Yahoo had a weak retirement article that included a discussion about how to allocate to bonds and the idea that Social Security is essentially an annuity. 

One guy was all over the comments banging the dividend zealot drum. This comment captures where he is coming from.

If one invest in quality stock for dividend then the dividend income will always be there and the stock will go up in the long run. If your interested in dividend why would one care about stock going down? Quality company will always recover, dividend will at least be the same or more throughout the recession and recovery !

There is a stock market graveyard full of the exact type of companies he is talking about that were once quality stocks with "good" dividends. Washington Mutual, General Motors, JC Penny, Walgreens and countless others I am forgetting. 

Who knows what he actually means but the comment reads like he is oblivious to the possibility that down the road some quality stock with a "good" dividend that he cares about could disappear. The strategy he favors is of course valid but guy, great companies disappear. How about Bethlehem Steel and most of the rest of the steel industry?

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.

Bloomberg Bashes Buffers

Nir Kaissar wrote an article at Bloomberg titled Buffer ETFs Are Insurance You're Better Off Without. His general argument echoed the one made by AQR in 2025 which generally says you'd be better off just lowering your equity exposure. Eric Crittenden from StandPoint has made the point that they turn the risk/reward upside down, there is more potential risk than reward. Plain vanilla buffer funds cap the upside and then protect against the first X% down like maybe the first 9% down or the first 15% down. After that, investors are subject to whatever losses the underlying incurs in the period defined like maybe one year or one calendar quarter. If the stock market falls 30% in a year then a buffer fund that protects the first 9% down, would end up dropping 21%....essentially. 

Since then, there have been quite a few products that adjust or try to improve on that very general framework. I don't do a whole lot of work to study them because I believe the arguments are more right than they are wrong but I wouldn't dismiss buffer funds entirely. BALT is in my ownership universe for clients. 

First, I agree, don't count on them to ever deliver equity market returns. If there is some suite of them intended to capture the stock market's upside that I am missing, please leave a comment with some symbols. 

BUFR and BALT have both been around for a while. BUFR protects the first 10% down for one year. It owns a ladder of different buffer funds and the cap ranges from 13-17%. You can see from the chart that it has a bit of equity sensitivity. At its low in 2022, BUFR was down 13.52% versus 24% for SPY. It has compounded at 9.42% versus 12.26% for SPY with a vol level of 10.63% versus 17.30% for SPY. It's not better than SPY and it is not worse than SPY because it is not SPY it seeks a different outcome.

BALT protects the first 20% down and resets quarterly. The upside cap is also reset quarterly and is usually just above 2%. It uses the S&P 500 as a reference but it is not intended to function as an equity proxy. The symbol BALT is a play on bond-alternative. Copilot says that in the last 50 years there have only been three calendar quarters where the S&P 500 fell 20 or more percent; the 1987 crash, 2008 and the Covid Crash. In each instance the drop for the respective quarters was 20-23%.

You'd be better off reducing your equity exposure. 

I tried to create that effect here. Portfolio 2 tries to combine SPY and SHY to get the same growth rate as BUFR and Portfolio 4 combines the two to get the same result as BALT. The growth rates are close but Portfolio 2 is somewhat more volatile than BUFR and Portfolio 4 has twice the vol as BALT.

To get Portfolio 2 down to the same volatility has BUFR, the weighting to SPY would be 62% but the growth rate of Portfolio 2 would lag BUFR by 92 BPs annually. To get Portfolio 4 down to the same volatility as BALT, the weighting to SPY would be 16% but the growth rate of Portfolio 4 would lag BALT by 230 BPs annually. 

I don't use BUFR and don't plan on doing so, I personally wouldn't think of it as an equity proxy but maybe some folks might. BALT is definitely not an equity proxy. Both have risks and quirks that need to be understood and if necessary mitigated, but that is no different than any other non-equity thing you could possibly buy. 

What does some buffer fund you might be looking at reliably do? Is there a need or room in your portfolio for the result that this buffer fund you're looking at reliably gives? That would be the first question I would address. Then, how does it deliver this result? Is there a basis to believe it can continue to deliver that result that you have at least some interest in? Then, if you look under the hood and don't like the details, don't buy it. For me, BALT has a differentiated, fixed income-like return stream without taking interest rate risk and less volatility than many fixed income proxies. 

The return profile, combined with a volatility of 3.35% makes sense to me as a fixed income substitute. It is not equities, repeated for emphasis. Keep in mind that the weighting is small, 5-10% of the fixed income sleeve so pretty small. If something breaks, the impact on the portfolio would be minimal.

Kaissar also talked negatively about bond buffer ETFs. I didn't know there was such a thing. I'll just take a quick look at the Innovator 20+ Year Treasury Bond Buffer ETF (TBJL). The fund references TLT, protects the first 9% down and the upside cap for the year ending June 30 is 48%. Hedging bonds is cheaper than hedging equities. 

To even consider TBJL, you'd have to be ok with TLT-like exposure which I am not. TBJL seems to have done what it is supposed to. In a long, shallow downtrend for TLT, TBJL is down less. I threw TLTW which sells covered calls on TLT into the chart for a little more context. Anyone who understood TBJL and has been holding it is probably satisfied with the relative result. Part of Kaissar's argument against funds like TBJL is that there are no distributions. That's true, the fund owns an options combo, not 20+ year bonds. 

From the top down, long term bonds are just the wrong part of the market, full stop. So anything that references the wrong part of the market is a pass for me. Mark Baker says that when you're on the wrong train, every stop is the wrong stop. I think that applies to TLT, TBJL and TLTW. At some higher yield than we have today, I'd be interested in probably no further out than ten years. If there is ever a yield that adequately compensates for holding that long, I'd probably just rather have the simple yield.

One quick snippet. Calamos launched another autocallable ETF with symbol CAGE. The info page says the "weighted average coupon" is 29.16%. Meb Faber found this;

I don't know the story yet but on the surface, this is drifting into crazy high yielder territory.

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

The Emotional Cost Of Being Different

Let's check in on convertible bonds.

CANQ uses leverage to own a portfolio of fixed income securities with an overlay of equity options that is intended to create the effect of owning convertible bonds. You can see CANQ yields about 5.5%. CHI is a closed end fund that kicks off a lot of yield but the drawdowns in the price only version are brutal. CHI is less a proxy for converts than it is a yield machine. It fell 30% during the taper tantrum and last month it was down twice as much as the S&P 500. In the period studied, the State Street Convertible Bond ETF (CWB) is up 18% with less volatility than the S&P 500. Despite being "bonds," convertibles have a lot of equity beta. This was just a follow up on CANQ, it's done well. A fine return and the drawdowns haven't been catastrophic. 

The other day we had some fun looking at the cost of being different and some work from ReturnStacked. They came up with an allocation that they thought was optimal and actually useable after first discussing an allocation that is optimal but not really useable. 

I simulated Optimal Stack w/NTSX from the above linked post using SPY and AGG to go back just a little further. The red line portfolio is similar to optimal but not useable from the ReturnStacked paper in that no one would actually want to use it. It would be too difficult emotionally for many people.

It is a steady eddy but it lags almost constantly. It has been effective though at chopping off the left tail. Negative, outlying returns are referred to as being left tail on a bell curve, the portfolio we're talking about chops off the left tail because it looks different and the cost of being different is that it lags to the upside. Over the long term, I am quite certain it will provide an adequate long term result but I am also confident it would lag up markets most of the time. 

Simplify tweeted about its SBAR ETF and referred to it as an autocallable. XV which is another high yielding fund from Simplify is also an autocallable strategy. In case I am not the last to know, there you go. CAIE was generally considered the first autocallable ETF, I thought it was anyway, but SBAR and XV are a little older. Copilot said that the funds have always been autocallables but now the category/strategy is more recognizable so Simplify is referring to them as such.

A high yield with no NAV erosion is a good outcome but the market hasn't really been tested since SBAR and XV started trading. There is some sensitivity to declines as seen in March of this year. I threw BALT in there because there is some overlap of risk. I didn't throw in any crazy high yielders which has more risk overlap but as we know from many other posts, there has been plenty of NAV erosion with those products. I'd like to see how these weather a serious decline and then how quickly they can recover but a small allocation, like 5% of the fixed income sleeve, isn't reckless. 

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.

Bloomberg's Definitive Retirement Guide

Bloomberg posted a robust retirement guide based on how many years you have until you plan to retire, gift link. 

First, here is a table that came up several times, adjusted throughout the article based on age. 

Those numbers either resonate and/or seem realistic or they don't but whatever you end up with is your reality and what you need to work with. If someone at 65 making $125,000 has $700,000, $2 million or is right on this table at $1.14 million, their accumulated piece of money can kick off 4-5% pretty sustainably. If you're 65 and 4-5% of your accumulated piece of money is $40,000-$50,000, that is your math. For better or for worse, that is your sustainable number. Is your number enough? If not, what are you going to do? You need to figure something out.

Obviously, social security will be part of the equation. Will you have other income streams? Do you need other income streams? If so, have you figured out where those will come from? 

Maybe one partner will get $3000/mo from Social Security and the other will get $2000/mo. Then maybe a safe withdrawal rate from retirement accounts adds up to $45/yr ($3750/mo). Figuring out $8750/mo was easy enough. What are expected expenses This work is a little trickier because forgetting things as you sit down in front of a spreadsheet is probably going to happen. One that would be easy to forget for my wife and me is road maintenance. We have to maintain our road. To just have it graded is $600-$700 but could be a good bit more if we need to buy material (dirt/composite). I'm sure everyone has their version of getting the road graded. 

Ok so regular monthly expenses, other non-monthly regular expenses (car insurance as an example), what is your health situation and how expensive is that, are there other regular lifestyle expenses that are more discretionary in nature like paying for a hobby, how about more expensive fun like trips and what about emergencies? Did I leave anything out? Probably, but you get the idea. 

What's that all add up to? How does that compare to your SS plus reliable portfolio income, the $8750 we used above? Sticking with the $8750, framing, if all those expenses above add up to $8500, ok, that's good but there's not much room for error. That doesn't mean you should turn your life inside out but it is important to understand how slim of a difference that is. 

There was a snippet in the article about figuring out how to build some flexibility into your portfolio withdrawal strategy, I think that is a good idea. There was more time spent on addressing sequence of return risk. My answer is sell some holdings while times are good, maybe put enough aside to cover expenses equal to the number of months of the average bear market. That used to be 18-30 months but it has been awhile since we had one that long. 

Maintaining good health was in the 10 Years To Go section, invest in your health it said. Pushups are a good indicator of health. Here's a table from AI that I am going to bring up at fire training on Saturday.

How old are you? How many can you do? If you can do a good number based on the table, then chances are you'd do well with other physical indicators like grip strength or dead hang. 

Of course the Fidelity study about lifetime healthcare costs was brought up. Staying fit to the point of very few or no prescriptions will bring the Fidelity number down considerably. The guy in our fire department who is 70 and can still pass the arduous pack test takes no prescriptions. If he lives to 100, even if he needs to start any prescriptions soon, he's made it a decent chunk of the way through his retirement without spending money on prescriptions. 

It is not too late to get diet and exercise dialed in. The chronic maladies that many people take medication for can be reversed (google it). Fix your blood sugar, lose the gut and build some muscle mass. 

A 57 year old was cited talking about the high cost of health insurance being an obstacle to her retiring early. Yes, it might be very expensive, but maybe not. Low income levels are still very cheap through the government market place. We looked at this earlier, right around $84,000 of income for a couple is the Mendoza line for it being very cheap versus being expensive. Google Mendoza line if you're not a baseball fan.

In 2025 and this year, $709/mo covers both of us. Yes, it is crappy insurance, I think we'd have to pay $15,000 out of pocket if something awful happened, but we are very fortunate to not need anything but annual physicals. 

The article talked kind of a lot about 85% of Social Security being taxable above a certain income level. Realistically, if you're interested enough in investing to read a blog like this, you should plan on your Social Security being taxable. This will be unpopular but I wouldn't spend the time calculating the 15% you won't owe taxes on. Let your accountant's software just tell you how much to pay (estimated) every quarter. You're not not planning, you're letting your accountant figure it out for you. 

Not enough time, in my opinion, was devoted to figuring out what you will do with your time. We probably all know retirees who seem to be very busy all the time and others who sit in their Lazy Boy yelling at their television or maybe something else.

It's not for me to say what someone else should want to do, like yell at a cloud, but it is important to figure out ahead of time what your retirement looks like. 

A lot of this post is yet another reiteration of what we've been talking about for 20 years, literally. The overriding idea to all of this is that retirement is an equation that needs to be solved. The more time we all put into planning our idea of retirement, the more successful we will 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.

"The Cost Of Being Different"

Morningstar has an article up about the importance of diversification but warns about over diversifying. Here's the money quote from author Amy Arnott. "In my opinion, most investors need exposure to three core asset classes: US stocks, international stocks, and investment-grade bonds." She adds that some people might want TIPS exposure too. 

Over the long term, both portfolios (note I did not see suggested weightings beyond 60/40) compounded just fine at 7.17% and 7.59% respectively. Those numbers, combined with an adequate savings rate will get it done.

But neither version offers any real diversification. They track the market, they are the market, they don't differentiate from the market at all. Put differently, what is it the Morningstar thinks is being diversified away? If someone just went 100% SPY at the start of this back test, they'd have had larger drawdowns every time on the way to a higher growth rate; no differentiation, just bigger swings. 

The notion of overdiversification is worth raising though. I think we explore that here by try to keep things simple, relatively simple or in trying to allocate more heavily to simplicity versus complexity. A lot of the portfolio construction ideas we pull in to blog about flirt with overdiversification. The Cockroach Portfolio might be a tad busy, so too is some of the work the ReturnStacked guys do with their model portfolios and there are others. But we can learn from all of them. 

That brings us to a paper from ReturnStacked titled "What Is The Optimal Stack?" The focus seems to be trying to create a portfolio that has the same volatility as plain vanilla 60/40 but improve on every other metric. The real answer from them was a very levered up split with 24% to equities, 71% to bonds, 7% gold, 55% merger arb and 39% managed futures. They had a funny bit about how unworkable that is in real life. I spent some time trying to recreate it such that it had a volatility the same as 60/40 but I couldn't get there. 

Corey Hoffstein Tweeted out this image that was not in the paper. I think it was an output from their new optimizer tool.

I tried several different things with this blend.

Note that you have to be comfortable with AGG-like exposure to actually implement any of these. I am not but I am pretty sure the ReturnStacked guys are. 

All three are better in terms of CAGR and the volatility of Portfolios 1 and 3 are almost identical to VBAIX but I think the way in which they all went down much less in 2022 adds a favorable skew. In the other drawdowns, they don't look much different. 

If you really want to diversify, they say there will be an "expected cost of being different" which is a great line. Just about every backtest you can run that has a large weighting to managed futures looks fantastic but the "cost of being different" is that there can be long periods where it underperforms. Ditto gold. Do you like merger arb? I certainly do but a very strong year for merger arb might be up 7% which looks paltry compared to a strong year for equities. 

We could create more differentiation by including exposure to negatively correlated assets that are more immediately reactive to market declines as we've done in dozens of posts. Using those types of strategies pretty reliably creates a much smoother long term result but can be difficult in shorter periods, that is the "cost of being different," frustration in the short term. 

When you really invest the time to understand how something like managed futures actually works, it becomes much easier to hold on during that frustration. 

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 An Inheritance? Don't Mess It Up

A couple of retirement related items. First up is a thin article about the psychology that might go with inheriting money. There can be feelings of "guilt and grief." My tiny sample size with clients, there's never been guilt but grief happens, a loved one just died. 

I'm about to talk out of both sides of my mouth but while relying on getting an inheritance is a bad idea, you do need to know if it is likely and need to do some planning. If you're going to inherit some or all of one of your parents' IRA accounts, you need to plan for taking all the money out over ten years. I can't believe they made that a requirement but they did. 

You have the option of waiting until year ten to get the max tax deferred growth but if it is a lot of money, then you might be paying tax at 37% in ten years when you take it out. If you're still working ten years from now and inherit a $400,000 IRA today and want to wait to take it out in ten years, that $400,000 invested in VBAIX might double. $400,000 into VBAIX in 2016 is worth $992,000 now. That's an enormous tax bill. Maybe for someone, this scenario is their best outcome, or not, but there is no reason not to think this through well ahead of time. 

Taking out $40,000/yr in this scenario might end up in a similar net dollar amount but paying less taxes, sort of a wash? Putting $400,000 into VBAIX in this scenario ten years ago, letting it sit untouched until April 13, 2022, it would have grown to $701,000. Then there's four years to take out the money, maybe $175,000 per year...sort of. The money not yet taken out is still growing. Pretend they just took the last $175,000 out today, there would still be $109,000 from price appreciation of VBAIX to take out in addition to this year's $175,000 and now the account is depleted. 

Figure these people earn $150,000, then add the $175,000 they take from the inherited IRA. They are in the 24% bracket with an effective rate of 19.3%. In the last year, adding the final $109,000, they do get up into the 32% bracket on a few of their dollars earned but the calculator at taxact.com has the effective tax rate at 20.89%.

One way they might be able to cut their tax bill is contributing to their 401k. Having earned income makes you eligible to contribute and the limits of course can be quite high. If you've been living on $150,000 and get an extra $175,000 from an inherited IRA then there's a good chance you can fully fund your 401k...assuming you're eligible of course. 

Does this seem like a lot of detail? We didn't even get into inheriting money not in an IRA, like maybe from the sale of a house or maybe the parents just had their money in taxable accounts. 

I realize don't rely on it but plan for it is contradictory but I think it is prudent to understand the probabilities of your situation and do a little planning. Then if it actually happens, do some serious planning. Use AI if you want, it's probably a good idea, if nothing else, maybe AI helps you avoid a really bad strategy even if it doesn't get you to an optimal strategy. 

The other article was about whether or not to pay off your mortgage from Barron's. In terms of the math, paying off a mortgage with a low rate is not optimal. Again, that is just the math and ignores the emotional value of being mortgage free. The idea is that it is reasonable to think you'd get a better return investing the money than paying off a 3% or 4% mortgage. That idea is less compelling though with a mortgage at 6% or higher. 

VBAIX failed to return above 4% about 1/3 of the time, eight out of 25 years, since it started trading. We are all going to draw our own conclusion about what makes sense in this regard. The mortgage on our Airbnb rental is 3.5% and we are not paying it off early. It's a 15 year that will be paid off in 2032. The mortgage we just took out for the house in Tucson is 6.375% and we plan to pay that down very aggressively over the next four years +/- by not contributing to my 401k. If we get it paid off when I am 64 or 65 and I am still working (that is the plan), then we can resume 401k contributions. 

Being able to do this is a function of the optionality I think my wife and I created for ourselves when we were younger.

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.