Too Good To Be True?

Over the years there have been a handful of reader comments that really stuck with me. One reader joked about the best way to die as being shot by a jealous husband at 110 years old, I told my dad that one and he really had a good laugh. Recently I referenced the reader who put 1/4 of his portfolio into Pozen 20 years ago and then there was a bad FDA ruling. 

Another one came at some point in the Financial Crisis when a reader said to just put it all in Hussman and forget about it. 

I'm not sure which Hussman fund he was talking about so I included both. Hussman is usually bearish and does a great job framing out the prevailing bear case but I think he leans very hard into protecting against the bearish conclusions he draws in a manner that seems to ignore the reality of markets going up the majority of the time. Although stale info, as of last fall HSTRX had 68% in cash versus an average of 6% for the conservative allocation strategy. The period studied is the decade after the reader left the comment, HSTRX has done a little better since, compounding at 7.09%. HSGFX is still compounding negatively. 

There's a reasonable argument for Hussman being a bear market manager but "putting it all into" one strategy that is this defensive is not the answer. 

All of that is a preamble to the iShares Systematic Alternatives Active ETF (IALT) which is a multi strategy fund that includes equity, credit and macro. Based on the description is seems AQR-like.

I wouldn't expect it to have a similar growth rate to equities over a longer period of time but the first six months of trading catches my attention. Just put it all into IALT and forget about it? I doubt it's a magic bullet for equity like growth on the upside but absolute return behavior in drawdowns but who knows?

There's no easy way to assess the holdings as presented on the website so with an assist from Copilot;

That still might not be easy to dissect but it helps at least a little. If it is difficult to understand the holdings then it will also be difficult to break down what is driving results so back to Copilot. IALT has benefitted from carry, look at RSSY for confirmation of how well carry has done lately. Before this latest run doing well, RSSY went down 30%, this happened before IALT started trading so carry can be difficult to hold.

There is an equity market neutral component to IALT's portfolio which is similar to BDMIX, you can look at that fund to get a longer term perspective. In the last few years BDMIX has been on an absolute tear but before that, it had mid-single digit returns more inline with what you might expect from market neutral.

Copilot also gave credit to macro trend and relative value so there is some overlap with managed futures which has also been doing well.

All of these doing well at the same time is not an expectation that anyone should have. It might happen 1/4 of the time Copilot said. If you think about these different sleeves being quadrant-ish like the Permanent Portfolio (completely different types of quadrants), how often do all four work at the same time? The entire premise of the Permanent Portfolio is that no matter what, at least one will be working which implies there will always be at least one that isn't working. "IALT is not designed to produce high, smooth returns. It is designed to produce diversified, low‑beta, multi‑premia returns."

Copilot did say it makes sense as a diversifier for being slightly positive in an equity crash, a little better than that if inflation spikes taking commodities higher, it will probably go down in a credit crisis and it would probably do poorly if yields spike.

Take those expectations though with a grain of salt. IALT is an active fund and might be able to manage around some of that. Or not. There's no way to know. 

IALT would be a complementary alt to managed futures, merger arb, certain long/short equity and macro. It would be duplicative with alternative risk premia (AQR has at least one of those) and carry. I pushed back on managed futures and global macro not being duplicative but it came down to nuance. If you're curious you can go into the AI of your choice to get an explanation or maybe you'd get a completely different answer.

Turning this into a discussion of ways to use AI, this exchange mostly replaces talking to a sales guy. On the plus side for AI, I got un-salesy answers, the AI is able to look under the hood in away I could not and answer questions that I doubt a sales guy could. AI also has knowledge/understanding of other strategies. On the negative side, Copilot could be wrong about multiple things. If I was actually interested in IALT with its complexity, I would probably repeat this exercise with Claude to compare and contrast and then still talk to a sales guy. A call with a sales guy would probably be more productive after having checked in with AI.

I'll track this one. We might now know what the good times look like for IALT, it would be nice to see what the bad times look like or if it can somehow defy the occasional painful mean reversion that hits some of the strategies it uses. 

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 Inflation Doesn't Get You, Forced Retirement Will

Price inflation, not poor returns, is the biggest threat to 4% rule for a sustainable withdrawal rate in retirement. We mentioned that a couple weeks ago when we looked at a podcast that William Bengen sat for with Morningstar. The point came up again in a Barron's article about five tips for retirees to protect themselves from price inflation. 

Here's what Barron's suggested;

• Delay Social Security as long as possible
• Own stocks
• TIPS not bonds
• Make sure cash is actually earning interest
• Own precious metals

The point about Social Security seemed a little odd because no matter when you take it, you get the annual cost of living increase. At this point, hopefully everyone has thought about the tradeoff of getting less money every month by taking it sooner and more money every month taking later but no matter what, you get the COLA.

Equity exposure is of course where a lot of growth will come from. Sizing the exposure correctly isn't always easy but for most people, something in the neighborhood of "normal" like 40-60% will be a good number even if not an optimal number. TIPS versus bonds, if you agree with the premise, own individual TIPS not TIPS funds.

The fourth one is sneaky. At Schwab and Fidelity, there are accounts where the default for uninvested cash pays essentially nothing. You need to proactively buy a money market that has a competitive yield. Schwab says they don't hide this fact but I am not sure they promote it either. The practice seems insidious to me but nonetheless, you need to be on top of this point. 

Precious metals, especially gold, should protect against inflation but gold can be a tough hold with any sort of large weighting. Gold can go a long time doing relatively little versus equities. My preference is think of gold as a diversifier, weighted accordingly as opposed to a core holding on par with equities in the manner that the Permanent Portfolio allocates to gold. 

A building block of understanding that gets some attention but not enough is the extent to which overall expenses can go down when you're older, retired or not. First is not having to save for retirement after you retire. If there is no earned income, then you're not paying 7.5% of income (W2 workers) to Social security. Can you synch up the final mortgage payment to coincide with retiring? Toyotas can pretty reliably last for 20 years so no car payments for a long time. Health insurance versus Medicare is trickier because of the amount that employers contribute to the cost. The thresholds for IRMAA are very high and just about anyone subject to IRMAA is spending a smaller percentage of their income on their coverage.

For most people, their incomes go down when they retire, so then do their taxes. If someone is paying more in taxes after they retire then they are either making more money (seems like a positive outcome) or they lose their spouse which is of course a negative outcome. 

Per a Google search, the median percentage of take home pay that people pay for their mortgage is 30-43%. That's kind of a wide range but it's a big number either way. For cars it's 15-20%. Using Gemini and Grok to try to assess health insurance versus Medicare, it might go up a little for W2 workers but go down for self employed people. Actual expenses could be a very different story. On the Google page with the search results was an ad for an article by Investopedia that said retirees spend $1 for every $6 they earn. That's more than paying Medicare, that would also include out of pocket for doctor visits and prescriptions.

People don't believe this so ok but the types of chronic maladies that people take prescriptions for can be reversed by cutting carb consumption and lifting weights. I can't say it is universally true but is often the case and there is no downside to eating less sugar and getting in better physical condition from exercising. It's a legitimate dollars and cents aspect that ties in with this conversation. 

What about discretionary spending? What does your typical month look like? Despite the word discretionary, how much of your discretionary spending could you actually cut back on if you had to? We don't eat out a ton, so hard for me to say but is it easy for couples to eat out less? Are there things you buy on some regular interval that may not be truly essential but still somewhat necessary that would be difficult to cut back on? My wife gave me a good example, ladies who get Botox. She does not, no judgment from me but how well would "honey, you need to cut back on the Botox" go in households where Botox treatments are a regular thing? What about a house cleaner? 

So maybe with some looking ahead, these sorts of expense reductions without sacrificing discretionary spending that isn't so discretionary can be put in place to help start retirement with a much lower base which would minimize the impact of inflation. If a $7000 monthly nut can be cut in half because there is no mortgage payment or car payments, then the impact of inflation on a $3500 monthly nut would be much easier to absorb. 

All of the above was about coinciding with a planned retirement date. What about those who end up having to retire sooner than they expect? Here's another Barron's article where the latest data says more than 40% of Americans retire sooner than they planned. That seems like a huge number but whether it is accurate or not we know it to be the case for many people. 

Someone who is 55 today, thinking they want to retire in 8-10 years should probably do what they can to move up the timetable on all the things we're talking about today. Health insurance stands to be a big threat but with incomes below $84,000 for a couple, plans on the government plan are very (fully?) subsidized. 

The solutions to planning and threats to whatever plans we make are up to us to figure out for ourselves. I find it easier to work on creating income streams to add to potential portfolio income I might take and Social Security when the time comes. I have general preferences of continuing to work, delaying SS until 70 or close to it and having a couple of small income streams for an extra margin of safety. I find it interesting that my preferences aren't really changing. I think these ideas go back to before I was 40, I'm 60 now. There's nothing truly enlightening there, just interesting.

I try to be consistent in not saying everyone should about when to take SS or the rest of it, I'm more trying to convey my thought process that gets me to a conclusion that is right for me. Certainly, everyone should understand tradeoffs but once you do, take the appropriate path for your circumstance and beliefs.

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. 

Rebalancing vs Derisking

We'll start with this from Michael Kitces.

I've never been much of a strict rebalancer so much as a derisker. We use the word ergodic (ergodicity) here to talk about the natural tendency or inertia of equities to go up. That applies to sectors and good lucky stock picks. If the starting weight for a stock in a portfolio is 5% and it grows to 6.5% that means it is outperforming the portfolio but I don't think it is ideal to shave that down in the name of rebalancing. 

Meb Faber has asked rhetorically on Twitter a couple of times whether or not it is a good idea to buy gold when it is at all time highs. He said it is not a good time, it is a great time and of course has data to back that up. I am not concerned with taking that input literally so much as to take it as a reminder that setbacks along the way notwithstanding, broad equities tend to go up, same with sectors and same with many stocks (not all stocks). This is a variation on the Lindy Effect.

My preference is to think about reducing risk. I start most individual stocks at 2-3% of the equity portion of the portfolio. Over the course of more than 20 years of managing client portfolios, there have been several instances where individual stocks went on absolute heaters and did so for an extended period. I don't have a hard and fast rule about what percentage weight I take some off the table instead it is more of a combination of things to consider. It doesn't get better than this is a good time to take a little off the table. Also it is pretty easy to look at a chart and see where something has gone parabolic. The context here is not that something negative has happened to the company, just whether or not it has grown too large in relation to the portfolio.

At what percentage weighting would an implosion be problematic? If Sandisk now made up 5% of your portfolio and it cut in half, would that be problematic for you? What if it was currently at 10%? We're not trying to pick a top or predict something bad happening, this is simply a matter of risk management. If giving up 500% points quickly because of some sort of calamity for the stock would be too much, that tells you to sell some. I wouldn't sell all of it unless there was something negative about the company prompting action, I would sell enough to get down to an acceptable risk level if something terrible happened.

This gets us to looking through to your exposure to various sectors and themes in ETFs and making decisions about what sort of weighting to have. For example, the S&P 500 has just under 8% in Nvidia and about 18% overall in semiconductors. For someone who is a real indexer, they are probably content to have that much exposure. But from there, how many portfolios own both the S&P 500 and QQQ?Nvidia is just over 8% of QQQ and semiconductors are closer to 30% of that index. 

Copilot says there are at least 40-60 narrower ETFs that own Nvidia at more than a 5% weighting. One of the advisors I started subadvising for last year were quadrupling up on Nvidia exposure with the S&P 500, QQQ, SOXX and the actual stock. This would have been great for returns and terrible for risk management and the advisor didn't realize the duplication he had.

If you want to build that way by all means, make an informed decision and go for it but the point is more often than not, people do not realize the extent to which they are loading up on the same risk. That won't be a problem until it is a problem. 

Do you have emerging market equity exposure? Have you looked at what is going on with the holdings? Chances are the fund you use is heavy in Taiwan Semiconductor, Samsung and SK Hynix. So that is another avenue to the same sort of risk/theme. If you've looked through to your holdings and know what your exposure adds up to and you're comfortable with that weighting then you're all set. 

The top five in EEM add up to about 30% of the fund, tech more broadly is just shy of 37%. It is important to understand these exposures not to avoid being overweight the sector or the AI theme but to avoid being unintentionally overweight.

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 Great Result That Would Be Very Difficult To Live With

We've got a lot to pack in today starting with a two hour podcast with Jason Buck who created the Cockroach Portfolio and Jim O'Shaughnessy. I hopped around a bit and took in maybe 45 minutes. There was a lot of deep stuff, Jason is a complex guy. There are just two points that I wanted to explore here.

The first one is the difficulty in holding diversified portfolios. Jason cited the cliche we say here that if everything is going up together, you aren't diversified because they will all go down together. In other interviews Jason has said that being diversified means there's always at least one holding that will make you want to puke. 

We'll dig in a little on the Cockroach Portfolio in a moment but he talked about trying to talk people out of investing in his fund because of the behavioral challenges that go with sitting in one holding, even if it has a small weighting, that is down most of the time (your diversifier). 

Jason has talked frequently about Nassim Taleb and Universa (a hedge fund that specializes in tail risk strategies) but I didn't realize the influence that Universa had on Jason. He said the Cockroach came about from reading Taleb and then trying to reverse engineer the concepts that Taleb wrote about. 

Here's how the Cockroach is allocated;

Below is the most recent version of the Cockroach that we tried to reverse engineer;

And here is how it has done through yesterday;

I threw in the Permanent Portfolio Fund (PRPFX) because quadrant style investing is also a source of influence on the Cockroach and I included the Trinity ETF (TRTY) because I think there is some conceptual overlap. We can't really backtest further than with BTCFX for Bitcoin because if we use GBTC we would get some results that I don't believe could be repeated but for the almost five years, the Cockroach has done very well. It kept up with PRPFX and outperformed VBAIX with a lot less volatility than both of them. 

While that is good of course there are a few holdings that do dreadfully bad occasionally. There might be a better mousetrap than TAIL but that one is a tough hold. Managed futures funds are frequently difficult to hold. Bitcoin is currently in a 40% drawdown. I think people give gold the benefit of the doubt but 12% is a lot when it's on a downswing. All of that and our version of the Cockroach works.

Here's a more extreme example of holding something that goes down a lot from time to time from an article that tries to deconstruct Mulvaney, the CTA shop that made news for making a fortune on cocoa a couple of years ago. 

80% of their trades lose money? The long term result is fantastic but the drawdowns can be brutal. The strategy is that trades are small and allowed to grow unconstrained until they get stopped out, constantly increasing stop levels for a trade that works. Risk is managed with stop orders not position sizing or risk weighting per the link above. A reader turned me on to the article when I asked if anyone knew about any funds more volatile than MFTNX that we looked at yesterday. 

Pivoting to leverage that I think I can weave into today's discussion, Jeremy Schwartz from Wisdomtree sat for a much shorter podcast with Ben Carlson. Wisdomtree has quite a few capital efficient (leveraged) ETFs and they appear to do exactly what they say they will do. Part of the argument in favor of these funds is that the leverage is not being used to magnify one position, instead the leverage is used to add diversification without having to take away from the stocks and bonds allocations.

The idea makes sense but that doesn't necessarily remove the risk that the disparate assets in the fund both go down. If sized appropriately, that isn't necessarily catastrophic but while VBAIX was down 16.87% in 2022, NTSX, which leverages up such that a 67% weight to it equals a 100% weight to VBAIX, was down 25%. The math checks out in terms of the fund working correctly but sized incorrectly, 25% is a big decline. Additionally, with the stocks/bonds combination funds, you have to want the bond exposure they offer. NTSX has AGG-like bond exposure, RSSB has a treasury ladder of sorts that takes on plenty of duration. 

Stocks and bonds can go down together. In terms of being willing to look different, these funds are about not looking different. The ReturnStacked guys talk about their funds helping to avoid tracking error. The bond market is a great place to want tracking error, to want to look different. The benefit of looking different with respect to bonds for individuals is less volatility and the benefit of looking different with respect to bonds for portfolio managers is better risk adjusted performance.

Here's a little more about effective use of leverage from RCM.

We've looked at leverage a little differently. More real world, we've looked at how a small exposure to negative convexity can allow for a little more exposure to equities. Not a lot more, a little more. If equities start to decline, the fund with negative convexity will grow to hedge more of the portfolio. A little more theoretically, we've done some things will small exposure to SSO which is 2X S&P 500 and much smaller exposure to TECL which is 3X technology. Putting 5% into TECL only to see it blow up would be a bad outcome of course but no catastrophic.

Investors are leery of leverage which is a good starting point but as the pro-leverage crowd will tell you, serious problems comes from misusing leverage. I would tread very carefully with any of this and I would avoid a fund that leverages equities and duration. I don't know if there are more bond market declines coming but I do think there is more bond market volatility coming.

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 Portfolio To Make You Throw Up

I was intrigued by the comment from Eric Crittenden that we shared yesterday about using very volatile managed futures. With that in mind, a truly awful portfolio that no one could endure despite the decent long term result. 

MFTNX is managed by Dunn Capital and is one of the most volatile managed futures funds. Please leave a comment if you know of one more volatile. Look at how much time it has spent down 30%!

Portfolio 1 compounded 132 basis points better than VBAIX despite MFTNX' low growth rate. Including client/personal holding Merger Fund in Portfolio 2 made it more palatable by lowering the volatility noticeably but not dramatically without sacrificing too much growth. The drawdown numbers are only slightly better but deconstructing that a little, there was pretty much no help with fast declines but a huge help in 2022 when Portfolio 1 eeked out a small gain and Portfolio 2 was down less than half of VBAIX' decline.

I'm a big believer in small exposure to one or maybe two negatively correlated holdings but this is a good example to show that purely by the numbers, a large holding in one of these can improve risk adjusted results. 

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 Sitdown With Standpoint

Eric Critten sat for Matt Zeigler's podcast with Jason Buck joining in. Eric manages client/personal holding Standpoint Multi-Asset Fund (BLNDX) which combines global equities and managed futures. There were some good tidbits in there to share. 

The origin of the fund came from conversations with advisors expressing similar ideas of what they were looking for in an alt; capture some upside soften the downside and do that with lower volatility. Those ideas also tied in what what Eric would want to do with his own money. 

Researching and backtesting led him to conclude that a mix of global equities and managed futures was the best way to achieve this. If you look at how the fund has done it is hard to argue with the conclusion but there was an interesting part of the conversation early in the pod about how difficult spring of 2025 was emotionally before just about everything bottomed a few days after the Tariff Panic. 

He didn't waiver, didn't deviate from the system or do anything but stick to the process but his comments made it seem he was worried. I know Eric personally and so this surprised me. They said that this period was the worst drawdown for managed futures in a very long time but I seem to recall late 2022/early 2023 being worse but maybe not. 

BLNDX is 50% managed futures (there's a little more to it than just saying 50% though) because that is optimal per Eric's research but the three of them agreed that no one is going to have that much of their portfolio in managed futures. Eric made an interesting comment in passing that if you're only going to have 10% in managed futures, you should use the most volatile exposures you can find. 

Let's check that out using AQR Managed Futures High Volatility Strategy (QMHIX), KraneShares Mount Lucas Managed Futures Index Strategy (KMLM) and Arrow Managed Futures Strategy Fund (MFTNX).

Although Portfolio 1 and SPY look very similar, Portfolio 1 was down much less than SPY at the 2022 low and although not shown, it was down less than VBAIX' low too. 

Another important topic in the discussion was that to be willing to own managed futures means being willing to look different which is not easy to do they said. You really have to want to look different and endure the times when that is difficult. 

I've long been willing to have the portfolio look different and I try to explain how the various diversifiers tend to behave to clients so they are not surprised. Part of the conversation on the pod was directed at Matt who is a practitioner and he gave an analogy of dogs and their owners who look alike. I think he was saying that investors who would be interested in alts will find their way to advisors who use alts but that wasn't crystal clear.

A final topic to point out was the idea that advisors should have a higher percentage of their money in managed futures than their clients. The idea is one we explored a long, long time ago that Meb Faber is known for but I may have beat him to the punch on the original iteration of the blog. I said that I have very little in equities so that I never get to a point where I am so worried about my portfolio that I neglect clients or that I am so busy trading my own account that I neglect clients. Meb's point is that as advisors our livelihoods, our actual business and our client outcomes all serve to lever us up considerably and so having a full equity allocation would just compound that leverage. 

A few weeks ago we looked at a portfolio that consisted of just nine or ten managed futures funds thinking that mixing that many would blend out some of the negative dispersion which it did. Let's update that though to include the funds we looked at already in this post. 

The portfolio with just the managed futures funds is not too compelling but Portfolio 2 is a little more interesting. It has a similar CAGR as Portfolio 1 with half the volatility (a little less volatility than AGG too). In the period studied, inflation compounded at 3.61% so the real return was just a shade above 300 basis points which is pretty good for someone who is looking to avoid equity beta which is the context here. 

If we add 5% of Direxion 3X Tech (TECL) at the expense of managed futures, the CAGR goes up to 10.03% while the volatility only goes up to 7%. The drawdown numbers of the TECL version also look pretty good if you want to go in an see for yourself.

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.

Jim Cramer's Retirement Advice

Jim Cramer had some simple retirement saving advice that downplays doing a lot of trading. As opposed to chasing short term gains, in this article he suggests putting close to half in index fund, then close to half in four or five individual stocks and then a little bit in some combo of gold and/or bitcoin. For someone who is younger, at least one of the stocks should be "speculative."

I'm not a huge fan of 10% into just one stock but I might be in the minority on that. 

That article also included some thoughts about the age that Millennials and Gen-z's think is the right age to retire; 61 and 59 respectively. There's probably not much that is new with those ages but they are at odds with the lack of progress toward being able to retire that many Gen-Xers find themselves confronting. 

One thought from me that I think might be new is that when you retire at 60, you forgo some number of years at what is probably your highest earning years. If you've done a decent job of avoiding lifestyle creep then your 60's provides a great opportunity to meaningfully add to your retirement balances. That assumes you haven't had your hand forced at work to retire early. 

It's not for me to say don't retire early, I've been seeing people from high school and college do it over the last few years, but it is important to dig into any financial tradeoffs.

Today's post cut short. We had to go looking for this;

With these guys;

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.

Checking Out Of Beta

There's been a lot of content lately about equities being too expensive and the potential index manipulation coming to market cap weighted indexes as they try to shoehorn SpaceX, Anthropic and OpenAI in. There are of course many pundits besides me chirping up about the visibility for more pain in bonds if price inflation remains elevated or even continues to work higher. 

All that might be enough to make someone want to check out from the typical equity beta/bond beta construct entirely and do something completely different. I don't know about completely, but maybe very different will do. 

Part of the inspiration comes from updating the 75/50 portfolio. The basic idea is a portfolio that captures 75% of the upside with only 50% of the downside. It's not easy to pull off but if you play with the numbers, you'll see it works. Although it is not easy to pull off (repeated for emphasis) the way that ETFs and mutual funds are evolving, it is becoming a little more attainable. 

The versions include funds that we don't use too often for blog purposes but they allow for a little longer backtesting. The mix has no bond duration and other than the small slice to Direxion 3X Tech (TECL), the holdings mostly do their own thing when compared to equity beta. TECL of course is equity beta but it's more about adding positive convexity. TECL would account for a disproportionate amount of the growth but be a very small drag, due to its weighting, when equities go down a lot.

GPAIX and MBXIX are in the realm of multi-asset, multi-strategy funds. They aren't totally uncorrelated to equities or VBAIX but they do often deviate from them by quite a bit. Gold has the potential to hedge a few different things and we talk about SHRIX and client/personal holding Merger Fund all the time. 

The growth rates are an easy observation. The version with just gold doesn't quite capture 75% of the upside while the other two do better than 75%. All three offered a little less downside in the fast declines, in the 2020 Covid Crash they were down a lot less though and they were very effective in the much slower 2022 decline. 

If you want to keep up with equities, this is not the idea for you. In the same nine year period, the S&P 500 compounded at just over 15%. 

The fund universe has expanded dramatically since the backtest's start date so anyone actually interested in trying to build this sort of portfolio for themselves would have more funds to choose from and would be able to diversify a little better. Instead of just one managed futures fund, that portion could be split into two different funds. We've explored the dispersion in managed futures performance many times and having a couple of different funds would probably give a better result.

The 50% in GPAIX and MBXIX could probably be split between four or five funds not just two. Merger arb is great but 15% is more than I would want in real life and if I was willing to allocate 15% to catastrophe bonds, I would probably split that between two funds. 

Getting 60/40-like returns over intermediate and longer periods with a lot less volatility is an outcome that I think many people would be pleased with but it requires being uncomfortable in random short term periods when the sort of portfolio we built today lags by a lot, 2019 and 2023 would have been rough in this context. 

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.

Barron's Says To Lift Weights

Over the last few months it seems like Barron's has expanded its coverage of retirement related issues including a lot of content about health and fitness. This is an important part of the equation of course, one I spend a lot of time trying to learn more about and hope that more people take an active interest. 

There have been a couple of articles this weekend, one was about the costs of biohacking and some potential investment angles too. The other article was a simpler look at exercising.

The biohacking article is far beyond what I am interested in doing. There was mention of a company called Radence that has a $50,000 entrance fee and then $50,000 annual fee to use tech to find problems earlier than other means (how it was represented in the article but I can't vouch for that), do countless blood tests and so on. 

There was a mention of Bryan Johnson who might be the most well known biohacker. He is constantly taking blood samples, tracking just about everything in his body and he takes "upward of 100 supplements a day." There is a documentary on Netflix about Johnson called Don't Die: The Man Who Wants To Live Forever. It's difficult to watch

A little less dramatically there was talk of the role GLP1s now play in everyday life and the various wearables that people can use like Garmin or Apple. 

GLP1s seem to be miracle drugs. I am not even a little bit dismissive of that, they work. The side effects are brutal though, that is something not to be dismissed either. They seem to be constantly finding new things that GLP1s might help with beyond Type 2 Diabetes and obesity like Alzheimer's and most recently cancer. These are all things that a ketogenic diet address too. I've seen commentary that says GLP1s mimic keto diets but Gemini says no. Fair enough but if you can get the same or similar benefits with keto without the side effects of GLP1s, that's worth looking into. 

I don't use any wearables. I have nothing negative to say about them, I just don't feel the need to monitor my stuff in that manner. My wife has a Fitbit watch but doesn't go all in with her metrics, it's convenient for getting texts bluetoothed from her phone, but she does track her sleep closely. 

Over optimizing has a lot of negatives and I think what Johnson does is way beyond that line. Doing 1/4 of what he does is way beyond that line. I don't think wearables go down that road. The idea of spending thousands of dollars on a recurring basis seems like throwing money away. 

The article on exercise didn't have a lot of depth to it. As we get older, certain things naturally diminish and vigorous exercise can slow the diminishment which is probably obvious. It goes deeper than that though. The article didn't get into it and you can follow @mangan150 on Twitter for more details but weightlifting triggers countless metabolic processes that have the effect of slowing down the aging process both at the metabolic level but also in terms of appearance. 

The article mentions grip strength as being an important indicator but it did not include retaining the ability to walk fast. Both are important and easily worked on. 

If it's useful for anyone, this is my typical weightlifting routine, I do it twice a week, Monday and Thursday.

• Skip rope
• Deadlift
• Romanian deadlift
• Incline dumbbell benchpress
• Pushups
• Landmine squats
• Leg press
• Dumbbell rows
• Farmers carry
• Landmine rotations
• Chin ups 
• Narrow incline bench (triceps)
• Squat with a dumbbell on a wedge (kind of like goblet squat, not sure the proper name)

Just one set each, it usually takes 50 minutes. 

One most Saturdays I do a mini workout where I do a set of jump rope and then three or four of the above. Another mini workout includes cleaning the bar twice, then doing two front squats and two overhead presses all as one set. Most other days I do a longer jump rope session. 

For diet, I usually don't eat until around 11:30 so a form of intermittent fasting but more precisely it's time restricted feeding. My first meal is usually either eggs with cheese (no carbs), a package of smoked salmon (packaged as one serving from Trader Joes) which is also no carbs or some combination of meat at cheese. With the meat and cheese, I usually put it in a low carb tortilla which has two carbs. I usually have a Quest bar (4 carbs) which gets me to the middle of the afternoon in the single digits of grams of carbs consumed. Contrast that with one bowl of Wheaties which has about 30 carbs. From there I am not too worried about dinner but I do avoid rice and pasta.

The list of metabolic benefits from reducing carb consumption seems to be endless, again follow @mangan150 for more details. 

It is up to us to figure all of these things for ourselves. You might disagree with every conclusion I have made for myself but hopefully you actively engage for your own health outcomes.

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 Need More Bonds! No You Don't!

Robert Pozen wrote an essay for the Wall Street Journal arguing for 90% in equities/10% in a money market after having carved out some sequence of return mitigation in a separate account. The simple reason underlying his premise is how much better stocks do than bonds. 

Cliff Asness has been on the other side of this trade for at least 30 years. Asness' firm is of course a big believer in risk parity which the most basic version means leveraging up the bond exposure such that the risk from the bond allocation equals the risk of the equity portion. Cliff notes that the Sharpe Ratio for 60/40 is better than 90/10 which pans out in this backtest.

Pozen is obviously correct about stocks returning more than bonds which shouldn't be a surprise. For what it's worth, the AQR Multi Asset Fund (AQRIX) which is risk parity-ish shows a lower Sharpe Ratio than 60/40 or 90/10 per testfol.io since its inception in 2011. The data I show above goes back to 2003.

I tried to build a do it yourself risk parity strategy. I started combining Direxion 3X Tech (TECL) with TLT but the result wasn't compelling. I asked Copilot for an assist saying I wanted to approximate AQRIX and it gave me 36% in 3x S&P 500 (UPRO) and 64% in EDV which is Vanguard Extended Duration. 

The result looked almost exactly like 2x AQRIX so in Portfolio 5 I cut the numbers in half and added 50% in the Merger Fund which is a client and personal holding. 

The result for Portfolio 5 was actually helped by path of daily resets for UPRO which of course cannot be counted on to repeat in the future.

I can't imagine too many people would build and run Portfolio 5 in real life, I think it would be difficult to endure large drawdowns and of course there is no scenario where I am using an ETF like EDV. If interest rates ever go up to a point where the compensation for the volatility is adequate, I would buy individual issues, not ETFs.

But this was a good exploration leading to this quote from Ben Carlson;

"As long as you understand the trade-offs, there is no optimal portfolio. In fact, the sub-optimal portfolio you can hold onto is much better than the optimal portfolio you give up on."

Looking for the optimal portfolio even if it doesn't exist is certainly entertaining and the act of looking allows for occasionally refining what we actually do. I try to be consistent to bring up this point about some portfolios not being ones that investors would want or be able to hold on to.

I agree with Ben about the importance of people figuring out the portfolio that is optimal to them. That's a combination of giving a reasonable chance of reaching whatever the goal might be but that also ensures not succumbing to panic. We all have emotions, the important thing is not succumbing to those emotions. 

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.

Avoiding Personal Retirement Calamity

Let's start with some more retirement doom from a few places. Barron's has all sorts of numbers in a new article about how stretched and stressed retirees are. Because of increased inflation or concerns that inflation might persist, 58% of retirees have some sense of insecurity about inflation shortening how long their assets last. There were 19% struggling, 5% were "living the nightmare" but there were also good numbers with people who are comfortable and living the dream.

Alicia Munnell is sounding the alarm over the increase of out of pocket medical expenses and to a lesser extent, Medicare inflation going up at a higher rate than the COLA adjustment for Social Security. That doesn't mean people are going backwards though. A 10% bump in Medicare might be $25/mo while a 3% COLA for Social Security might be $120 as a simplistic example. 

I am obviously going to take the Munnell article as a chance to make a bigger priority out of diet changes and exercising vigorously. The simplest path is to eat less sugar (carbs) and do some sort of resistance training with weight. If someone can get ten years into retirement without needing polypharmacy and constant doctor visits, how much less money are they spending? As my contemporaries and I all get older I see this play out in terms of who is having more issues come up and who is having fewer issues comes up. This may not be easy to implement but it is very simple; cut carbs and lift weights. 

Bill Bengen, the founder of the 4% rule for sustainable retirement withdrawals, sat for a podcast with Morningstar. I would guess that most people view the 4% rule as a set and forget sort of thing but based on the podcast and some other interviews he's done, set and forget is pretty much the opposite of what he is doing. He is constantly researching and refining. Lately, the safe number in his estimation has been more like 5.8%. The biggest threats as he sees them is the combination of high price inflation and lower stock returns. 

He places a lot of emphasis on the potential for higher inflation to really jam up a lot of retirement plans. Where we have used the phrase "something's gotta give" if someone does hit the amount of money saved that they think they need, something extreme might have to give if inflation really gets out of hand. I don't think he was making a prediction though, it seemed more like he has concern that inflation might go up quite a bit. That's a subtle nuance and I might not be wording it very well.

My take on the 4% rule has always been to try to simplify it, whatever you got, take 4% or more realistically, take 1% per quarter. The growth in the portfolio will address keeping up with inflation. Obviously, when markets go down, there is visibility that a retiree would have to take less. Bengen thinks that most people cannot be flexible enough in their spending to weather a 25% drop in their portfolio leading to a 25% drop in their income. He might be right, there's certainly truth in that but I don't know how universal it is. 

One way to mitigate this is to set aside cash in an attempt to manage sequence of return risk. Something like two year's worth of regular expenses would last through most bear markets. 

There's been a lot of content lately about the rise in bond yields and whether there is more trouble ahead. I certainly don't know if rates will go up but I do think the volatility is here to stay and as we've been talking for several years, bonds with duration have become source of unreliably volatility. 

All the above makes up a cocktail of reasons why I place so much importance on adding robustness to portfolios using tools that take different approaches to offsetting equity volatility without taking on the volatility of bonds. 

Most of what we build overlaps with each other, some combo of equity beta, managed futures, bond substitutes that have almost no volatility and a little bit of negative convexity. Here's another version;

The only one not in my ownership universe is SHRIX. I use  a different cat bond fund for clients but SHRIX is more useful here for having a longer track record. 

With just over six years to backtest, the portfolio was close to VBAIX most of the time but much of the improved CAGR comes from only being down 3% in 2022. 

For people who are truly desperate something called a home equity investment contract might be an answer. Basically, you sell some of the future price appreciation of your home to get cash now. The way it compounds though you might actually get zero or close to zero when you sell your house. Like I said, for people who are truly desperate. This is not HELOC to consolidate debt or remodel the kitchen. About the only application I can think of is using this to pay for something that was very medically expensive. Someone has $300,000-$400,000 and needs to spend $150,000 for something not covered? That might be desperate enough. You can't get kicked out of your house but the smaller portion of future gains that you sell today might become all of your appreciation in the future leaving you with almost zero. Save your life but be able to stay in your house? Yeah, maybe.

The world is getting more complicated but I think my message is very similar to what it has always been in terms of health, having a simple withdrawal strategy (the way Bengen constantly tinkers is not simple) and a robust investment strategy. Building other income streams in order to be less reliant on the portfolio is a logical (to me) extension to try to reduce the odds of personal, retirement calamity. 

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.

Coincidental Coincidences

This will be fun and starts off with a coincidental Tweet about something we looked at the other day, sizing equities correctly. 

Cullen then replies;

From there, this guy Brad appears to actually get mad at Cullen for essentially saying "don't forget about inflation." Click through, do you think it's a bit or is Brad actually mad?

Obviously, a lot would have to go wrong to exhaust $10 million in most circumstances but it is important to understand price inflation and why more attainable relatively large numbers might not be the golden ticket that they first appear to be.

However much you end up with will simply be a source of income. If sustaining that source is important then taking 4-5% will be about it. Having $2 million accumulated at retirement age is nothing to scoff at, most people will not have that much in today's dollars. The income available to mostly ensure sustainability is $80,000-$100,000 which again, that's pretty good but not killing it. 

Combining that $80,000-$100,000 with $50,000 in Social Security is pretty comfortable I think and will get the job done for plenty of people but it is not so much that something very expensive, I am thinking health related, couldn't derail that "comfort" quickly. 

The combination of a down market coinciding with something medical that is very expensive and maybe a roof or plumbing catastrophe and that $2 million is going to get much smaller. The market will come back after some period, I would certainly spend the money on a medical problem and I can't imagine there's any getting around a roof or plumbing catastrophe, but the ability to generate the same income could easily be diminished. I wouldn't count on $1.3 million sustainably paying out $100,000 every year.

It's that sort of combination is why we spend so much time on trying to find additional streams of income beyond an investment portfolio and Social Security. Whether anyone thinks of that as working with a negative connotation is up to them but I would say it doesn't have to be negative. 

I started talking about this ages ago and then recently my involvement with the Del E, Webb Foundation just sort of fell out of the sky. It was a volunteer position for what turned out to be almost five years and now as a board member pays a stipend that is not big but big enough to cover a decent chunk of what I expect our fixed monthly expenses to be a few years from now. It would be enough to relieve some of the burden we would otherwise place on our portfolio if I ever decide to retire from my day job. It's the sort of "work" that others in the group have done into their 80's. 

When we talk about these things, I usually include something about being willing to have a long runway to creating an income stream so I think it is a funny coincidence that happened with my Foundation involvement. 

The willingness to play the long game with planning is vitally important to figuring out a successful path through retirement and I don't just mean financially. 

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.

Low‑Volatility Carry Engine

Bob Elliott posted on Bluesky that "rate rises have been the most common prick that pops bubbles throughout history." There is certainly visibility for the FOMC to start hiking after that last bit of inflation data and based on what Fed Fund Futures are now pricing in for 2027. Who knows what will actually happen but there is a path to hikes.

To the second half of Bob's quote, is there now a bubble? Maybe, but that is more difficult to determine versus observing there are excesses and a few warning signs. The sector weightings of the S&P 500 is something we've been talking about lately and the current tech weighting or tech + communications which I think might be a better way to look at it is certainly excessive. The capex numbers being thrown around and the debt being issued to fund that capex also seems excessive. 

Maybe these signs of excess won't matter, maybe there will be no consequence but portfolios and retirement outcomes are not threatened by what can go right which is why it is so important to look for signs of obvious excess and make decisions about whether to address the threat. 

It's not practical to avoid 47% (tech + communications) of the S&P 500 in a portfolio that needs some equity market growth. I do think being underweight is feasible, I've been in the 20's in terms of percent with most of the exposure coming from a sector ETF, an individual stock and EMXC has evolved into having a lot of semiconductor beta.

Completely avoiding bond duration is much easier because the positive attributes have been pretty easy to replace. Replacing the positive attributes of tech stocks would be more difficult.

SPXT is the S&P 500 excluding the tech sector. So it includes some tech adjacent names like Amazon, Google, Netflix, Meta and Tesla but still compounds quite a bit lower than the full S&P 500. Maybe you could overcome the 400 basis points but I think that path is more difficult than simply underweighting. 

Against this backdrop, Owen Lamont had some interesting things to say about global equity diversification. The short version is that globalization of trade has made global equity diversification less effective but now because the trend toward globalization is reversing it should make global equity diversification more important. 

I'm not sure I agree with the premise that the value of global diversification has been diluted by globalization. That implies that correlations have gone up and that returns have been less differentiated which hasn't been the case assuming he is going back further than the start of this year.

But, foreign equity exposure is still very important and if any of the chatter about the Thucydides Trap has made your radar, anyone not having any foreign exposure should probably do some work there. I don't take Thucydides literally, at least I hope that is not the outcome, but it seems like the current administration's policies are designed to make us less globally relevant. That would be a big negative, creating visibility for another decade like the 2000's where select foreign outperformed domestic. Broad foreign outperformed by a little but some select pockets outperformed by a lot.

The threatened drags from there being a consequence to the excess in tech, globalization happening without the US and let's throw in visibility for higher interest rates raises the question about how to make portfolios a little more robust or all-weatherish. 

Like we've been talking about, the way that products have developed, there isn't a need to completely turn a portfolio inside out against these risks because they might never matter. Adding a little managed futures for anyone who doesn't have that exposure is probably a good idea. The negative themes we've isolated today are probably slower moving as opposed to the Tariff Crash which is more conducive for managed futures to do well. Long time readers know I am a believer in adding negative convexity like with BTAL. That's certainly not for everyone but adding negative convexity is an effective way to make portfolios defensive without selling anything or selling very little. 

And a fun item to close out. Obviously we spend a lot of time on what to do with the 40% that typically goes into bonds in a 60/40 portfolio. I was doing a little work on the concept with Copilot and it came up with two different descriptions for my approach of no duration, instead using alts as bond substitutes and keeping duration very short in more traditional income sectors. Copilot called the strategy a low‑volatility carry engine and a risk‑controlled carry portfolio.

Carry means several different things but in this context it refers to the yield earned. 

SHRIX invests in catastrophe bonds and I'd say is an extreme example of low volatility carry and YieldMax Netflix (NFLY) is a pretty extreme example of high volatility carry. I threw T-bills in just for a little context. The SHRIX lines (I use a different cat bond fund IRL) are what I am trying to get out of the 40, or whatever percentage, that would usually go into bonds. 

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.

Explaining Your Strategy To A Child

Michael Sonnenfeldt from Tiger 21 wrote a guest essay for Barron's about whether or not to establish a family office. The main point about needing a family office probably isn't germane to what we do here but he had some pretty good one liners that are worth sharing. 

1) Intelligent discipline beats brilliance. Process is repeatable. Genius isn’t.

We talk all the time about process. I would add the idea of simplicity to this point. I think anyone's investment process should be simple relative to their own experience and capacity. I don't think Cliff Asness thinks what AQR does is simple but none of us are Cliff Asness. I first learned about the idea of simplicity in this context from Peter Lynch in the 1980's. Paraphrasing, you should be able to explain your process to a child. 

2) Position sizing is the sharpest risk tool. 

Yes. This point is an essential building block for understanding how to manage risk. I'll reference a reader comment from 2006 who put 25% of his portfolio into Pozen, betting on a migraine treatment. There was bad FDA news and the stock fell by 61%. He put 1/4 of his money into a lottery ticket. It's hard to be critical of making the bet but the sizing was catastrophically bad. 

3) If you can’t explain your edge, index proudly. 

I don't take this literally. Indexing is of course valid but so too are plenty of other simple strategies. Ideally, a portfolio only needs to be tweaked occasionally versus a lot of churn. This is why so much of the content on CNBC as well as a lot of stock market websites should be avoided. They try to get you to trade more which is the wrong thing for so many people. I would rephrase number 3 to build a portfolio you can live (sleep) with that doesn't require constant trading. 

If I have an edge, I don't love that word, I think it is avoiding or being seriously underweight areas where the risk of something terrible happening is high. Hopefully that is repeatable in the future but I have had this luck in the past.

And because I think there is a connection, the CEO of the Harvard Management Company, the endowment, announced he is retiring. The link includes a little bit about the performance which has run at close to 8%. The comments, it's a WSJ article, piled on about how far behind the S&P 500 the endowment has been. 

The endowment doesn't benchmark to the S&P 500. Apparently, the HMC targets an 8% return to account for inflation and the amount of the school's budget it covers. It's fair game to wonder whether that is the appropriate target or not but that's what it is. 

One point we've made here before is that there are things to learn from how endowments allocate but I don't think they should be emulated. One reason is that we do not have access to the private equity and venture managers that Harvard does. The other is that we are not managing for an infinite time horizon the way a college endowment should be doing. 

The idea of targeting 8% or some other number is difficult to pull off but I think the idea drifts into making sure you have the correct allocation to stocks, making sure you don't have more than you need. For example, a 55 year old who wants to retire at 68, has $1.8 million now, thinks his number is $2.5 million and is still adding to his savings. 

The median total return for rolling 13 year periods going back 100 years is 10.7% annualized, 274% total. This guy could have just 35% or $630,000 in equities and most likely come out ahead of what he thinks his number should be. Remember he is also still putting money in every year. I could see where 35% might be uncomfortably low but I don't think this situation needs 60% in equities either. 

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

Are You Ready If Rates Go Up?

Jonathan Hoenig Tweeted this out

Yields have been trending higher of course which historically has spelled trouble for stocks. Someone else on Bloomberg this morning (didn't catch who it was) said that 4.5% is not great, 5% would be trouble and pegged 4.80% as being where trouble starts. Maybe but I would take it as there potentially being some sort of adjustment period for stocks. There's no way to know how long any sort of adjustment period would last or how much stocks might drop if at all.

Any of this playing out means bond prices go down and we might be able to take today (Friday) as a microcosm for what this "adjustment period" might look like for plain vanilla 60/40.

AOR is an ETF proxy for plain vanilla 60/40.

Repeating for the 1000th time, just avoid duration. The four blanked out funds above are all huge ETFs, not obscure, that we write about all the time. They avoid duration risk and don't feel the pain of things like TLT when rates rise. 

Cullen Roche gave a quick post mortem on the collapse of the QVR Hedge Fund which focused on volatility. This specific point is relevant to today's conversation.

1) Tail risk hedging is really, really hard. There’s a reason the classic 60/40 stock/bond portfolio remains the most popular allocation in the world: the 40% in bonds is still the simplest, most reliable positively asymmetric long-term hedge most investors can implement. It’s not perfect, but it’s “good enough” for the vast majority of people who just want durable diversification without needing to be geniuses.

Cullen is far more comfortable with bonds with duration than I am. Something like 60/40 can be all the things Cullen says but my argument is that there is a better chance of being all those things by avoiding duration in the 40. And as noted above, there are many ways to replace the duration with less volatility, a little more yield and still diversifying the risks versus putting 40% in UTEN, TLT or the like. I would also add short term individual issues into the mix if you're comfortable. 

Unrelated, here's a doozy of an ETF filing.

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.