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.

Beware Of Morningstar Mischaracterizations

A couple of quick things tonight. 

First is a model ETF portfolio that I was able to get a look at. I won't get into specific funds and weightings but the basic idea was a lot of factor funds and very ordinary fixed income exposure including the Fidelity version of the AGG and some others that will look pretty similar to AGG.

There's not a lot of differentiation except in 2022 when the model was down about 300 basis points less than VBAIX and this year it is about 500 basis points ahead. 

Back to the factors, the model has 17 holdings, eight of which are different factor funds. To the extent a market cap weighted fund takes in all the factors, when you add too many different factors together they sort of wash out and drift toward looking a lot like market cap weighting which presumably they are trying to avoid. For anyone wanting to go down the factor road, I think it can be done more effectively with far fewer funds. Eight different ones seems like being too clever by half.

And second, a new fund alert; the Absolute Flexible Fund (FLXIX). It is convertible arbitrage-ish in that it won't always hedge every position. It says it should have about half the "beta" of high yield. It has been around for almost four years, has very little in assets and is nominally expensive. It isn't a yield play, paying out 2,88% but a portion of that is capital gains. 

The comparison is to AGG, high yield with HYG and then a couple of convertible bond funds. Just eyeballing it, I'm not sure how AGG is less volatile but FLXIX exceeds the volatility expectation versus HYG.

The fund only gets two stars from Morningstar because it is in the convertible bond category but it is not a long only fund like the majority of the category. Morningstar has miscategorized the fund. The typical convertible bond fund has a lot of equity beta and whether FLXIX is a good fund or a crappy fund, it has pretty much no equity beta. 

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

Tell Your Friends

The NY Times had an article about retirees that have had to go back to work because their retirement math wasn't working out for them. A few of the people profiled simply did not have an adequate understanding of how the dollars and cents of retiring work. It might have been a lack of planning, not sure, but they simply did not understand. 

Most of the stories started before AI was commonly used. Now that AI is ubiquitous, anyone can use it to build a very basic framework. I'm not saying it will get everything right at this point and maybe there are some biases to sift through but in terms of an elementary starting  point where before there was less help available, AI can be helpful. 

Using Copilot, I told it I was going to make up a scenario, then ask some questions and I asked to keep the answers short. Here's the conversation with Copilot.

Roger: I am a 57 year old male. My wife is 55. We both want to retire when I am 65. My wife is in good health and I take a statin and blood pressure medication. We have a combined $300,000 in our 401ks and $26,000 in an emergency fund. I make $68,000 and my wife makes $51,000. We spend $6500/mo but that includes a mortgage that will be paid off when I am 67. First question is how much more do we need to save to be able to afford retirement?

Copilot: About $1.1M–$1.3M total by age 65 (including your current $300k).

Very rough rule‑of‑thumb math:

Spending drops to ~$5,000/mo once mortgage ends.
With Social Security, you’d want ~$1.1M–$1.3M to retire comfortably at 65.

You’re about $800k–$1M short, which means saving roughly $35k–$45k/yr combined (including employer matches + growth) gets you close.

Roger: What would you estimate our combined social security benefits to be if we both take it when I turn 65?

Copilot: Very rough estimate: ~$48k–$52k/yr combined if you both claim when you are 65.

Breakdown:

You at 65: ~$32k–$35k/yr
Wife at 63: ~$16k–$17k/yr

Total: about $4,000–$4,300/month.

Roger: If social security will be $4000/mo and we spend $5000 after the mortgage is paid off, why do we need $1 million dollars saved?

Copilot: Because the $1,000 gap isn’t the real gap — the real gap is inflation + longevity + market risk.

Super short version:

Your $5,000/mo at 65 becomes $7,000/mo at 75 and $9,000/mo at 85 with normal inflation.
Social Security doesn’t fully keep up with your rising spending.
You need savings to cover the growing gap for 25–30 years, not just the first year.

So the $1M isn’t to cover the first $1,000/mo — it’s to cover decades of rising costs and protect you if markets underperform or you live into your 90s.

Roger: Is the $35,000-$45,000 you think we need to save for both of us combined?

Copilot: Yes — that’s combined, not each.

Very short version:

You need to grow from $300k → ~$1.1M–$1.3M by age 65.
That requires roughly $35k–$45k/yr total household saving + growth.

 Roger: At most, we can only save $25,000/yr where will that leave us when I am 65?

Copilot: Very short answer: about $650k–$750k total by age 65.

Here’s the quick math:

You save $25k/yr for 8 years → $200k contributions
Assuming ~6% growth → your current $300k grows to ~$480k
Your new contributions grow to ~$170k
Total at 65 ≈ $650k (low return) to $750k (normal return)

So you’d end up about half of the ideal $1.1M–$1.3M target. 

Roger: What should we do if we are that far short of what we need?

Copilot: Here’s the short, blunt version:

If you retire at 65 with $650k–$750k, you’re not doomed — but you can’t run the same plan as someone with $1.2M. You’d need to adjust one or more of these levers:

1) Work longer (even part‑time).

Working to 67–68 shrinks the gap dramatically: more savings, fewer years to fund, higher Social Security.

2) Spend less.

If you can get spending to $4,000–$4,500/mo after the mortgage ends, the plan becomes workable.

3) Use home equity later.

Downsizing or a reverse mortgage in your 70s can fill the late‑life gap.

4) Delay Social Security.

Waiting to 67–70 boosts benefits 14–24%+, reducing how much savings you need.

5) Keep investing aggressively enough.

A too‑conservative portfolio makes the shortfall worse.

In practice, most households in your situation combine #1 + #2, and that’s usually enough to make the math work safely.

Roger: What other questions should I ask?

Copilot: Here are the short, high‑impact questions that make a retirement plan go from fuzzy to clear — perfect for your blog post’s point that AI can walk people through a framework.

1) What will our spending really be after the mortgage ends?

Most people never separate “today’s spending” from “retirement spending.”

2) How much of that spending will Social Security cover?

This tells you the size of the income gap.

3) How much will our savings grow by retirement?

People underestimate compounding and overestimate returns.

4) How long do we need the money to last?

Longevity is the silent risk.

5) What happens if returns are below average?

A simple “bad decade” scenario changes everything.

6) What levers can we pull — work longer, spend less, delay SS, downsize?

Retirement math is flexible once you see the levers.

7) What’s our safe withdrawal rate given our situation?

Not everyone gets 4%; some get 3.5%, some get 5%.

8) Are we invested appropriately for growth before and after retirement?

Too conservative = running out of money; too aggressive = volatility panic.

9) What’s our plan for healthcare before Medicare?

This is the #1 surprise cost.

10) What’s our plan for late‑life expenses (long‑term care, home repairs, etc.)?

This is where many retirements break.

Ok so that was the entire exchange. If you're reading a blog as obscure as this one, then you may know most or all of what Copilot said but you know people who don't. This can be solvable for people who realize they need to put some effort in to figuring this out but maybe they need some encouragement (from us) to get started. 

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

It's Time To Start Solving The Problem

Today's post is about Social Security and retirement planning with the catalyst being a bunch of content this weekend that hopefully I can weave into a useful commentary. By planning I mean both financially but also lifestyle-wise too. 

We'll start with an opinion piece in Barron's that argued for capping Social Security benefits at $100,000 per household or $50,000 for singles. Couples where both partners make the maximum salary (for purposes of payout calculations) will bring in $100,000+ from Social Security. Any sort of negative reaction you might have to a cap is fair but it is pretty clear that capping benefits is going to be part of the conversation. If nothing changes then every will get a 23% haircut starting in around 2033 or 2034. If they only take away from people perceived as being wealthy then that is probably more palatable to politicians in terms of votes. Tax/penalize the rich is often a popular argument. 

The opinion piece didn't say this but they would obviously need to index any sort of cap for inflation. Oddly, the essay didn't quantify how much the cap would help address the problem so I went to Copilot A $100,000 cap would save $100-$190 billion over ten years out of about $300-$350 billion problem, again per Copilot. The way the full answer was worded, my follow up was would it be fair to conclude that just implementing a $100,000 cap would mean that instead of cutting everyone else by 23%, that the cut to everyone else would be just 20%. That would be a slight improvement and Copilot said yes, that would be plausible. 

The comments seemed very hostile to capping the payout but more open to eliminating the cap on payroll taxes going in. So they were against getting less coming out but ok with paying more going in which surprises me. Eliminating the payroll tax cap would solve about half the problem. Stacking the capped benefits and eliminating the cap on payroll tax would plausibly mean that everyone else's benefit is only cut by 10%. Copilot called that defensible. 

One reader had an interesting idea about not taxing RMDs. I'll tweak that to increasing the exemption on IRA distributions like maybe the first $50,000 (indexed for inflation) is exempt from taxes. Some sort of actuarial analysis could come up with a workable number. 

If Congress tries to fix the problem then some people will be upset and believe they are being treated unfairly. If Congress does nothing then everyone will be upset and believe they are being treated unfairly. Any attempt to solve the problem is going to involve very difficult decisions. I don't know what I think is best, my comments above pick up on the idea from the essay and again, like it or not, some sort of cap is going to be part of the discussion. I continue to believe it makes sense to account for a reduced payout in your planning. 

The Washington Post had a very downbeat article about men leaving the workforce. 

Older men are being forced out for reasons we've talked about before and "young men who are disabled or in school" aren't entering the labor force. The implication for the young men is they can't seem to get started, many of them are living at home and feel no motivation to start their lives. These are statistics so maybe there is a grain of salt to be taken here but there were a handful of anecdotes that tried to give a broad perspective on the issue. 

I don't have great insight into why younger people are having trouble getting started but over the years I have noticed when friends closer to my age on Facebook have had their hands forced at work. Some chose to retire while others maybe aren't working but don't think of themselves as retired. On the positive side, I have noticed more friends retire because they wanted to and presumably were financially able to do so. 

If younger men are not entering the workforce then that would seem to be shorter term negative for Social Security as current workers pay for current retirees but it could be long term positive for the program because they will get smaller benefits when they hit retirement age. By positive, I mean for the viability of the program not for society overall. 

Whether the problem is as serious as the WaPo portrays it or not, we know it is happening to some extent and again, I continue to believe it makes sense to account for being forced out of your primary career sooner than you hope for. 

Barron's had an article with a three item check list for anyone retiring early, regardless of whether they want to or have to. The first item was healthcare costs. As we've looked at before, a couple earning $84,000 or less can still get insurance from healthcare.gov for essentially free which is a viable option for bridging to Medicare. It looks like if in this bridge period you take any qualified distributions from a Roth IRA, that does not count toward MAGI in determining eligibility for subsidies but taking from a traditional IRA account would count toward MAGI. Spending cash out of a taxable account would not add to MAGI either but long term capital gains would. Do some real research on that if it applies to your situation. 

To the extent people retire early for health reasons, it won't be so simple as lift weights/cut carbs and solve all your problems. However, I do believe that many health problems can be improved with the right type of physical therapy/training but it would take some effort to figure out how and then to stick with it. And of course a better diet will not make it worse. The other two items in this article were portfolio readiness and having a sense of purpose which are both points we talk about here all the time.

The final Barron's article was about choosing where to live in retirement including whether or not to downsize. Downsizing has two components, downsizing square footage but also downsizing financially. It seems like it has gotten a little harder to downsize financially in the last few years but that is just an anecdotal observation. For someone wanting to downsize, going from 3000 square feet to 1500 and being able to take out a couple hundred thousand in the transaction is a no brainer. 

If someone wants to downsize from 3000 to 1500 but needs to upsize financially, that becomes a more difficult decision. Someone who is somewhat behind where they need to be in terms of accumulated assets can't make that trade. They'd need to find somewhere else to downsize into. 

The New York Times looked at several retired couples who downsized into some version of van life with some people literally making a go of it in vans and others in Class A motor homes. The people profiled seem to have some financial challenges without being desperate. At least one of them seemed to be in very good financial shape but who knows. A negative point about the article is that it seemed like all of them had big enough social media followings (Insta or TikTok) that they made incomes from posting about van life. It's negative from the standpoint of not everyone will find that kind of audience. 

My wife and I have a bit about driving around the country solving mysteries but if some version of van life so appeals to you that you want to actually do it, rent something and go out for just a few months to make sure you actually like it before plunking down a bunch of money.

It certainly seems like being able to retire has gotten and continues to get more difficult. I saw firsthand when we first moved to Walker, it was not very affluent twenty whatever years ago, that people figured it out because they had to. Not everyone will figure it out but I have also learned in the last few years with my work at the Del E Webb Foundation that there are countless, non governmental resources to help with food, places to live and healthcare. And while those sorts of resources may not come into play for the typical blog reader, it is important to realize they exist. 

Hopefully everyone reading this has a comfortable retirement sorted out for themselves but being even a little bit clued in how to help someone else figure it out because they have to will be important because I am skeptical that the government will help.

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

Is This New Covered Call Fund The Answer?

A recurring theme here is the extent to which new products will evolve to improve the result that investors get. I think we're seeing that in real time from Global X and its covered call funds. First there was QYLD which sells monthly covered calls and while the distributions are high there has been no price-only growth since the fund's inception. Then came XYLG which sells monthly calls on half the portfolio and since its inception, it has yielded about 11% and had price only compounding at 2.43%.

A couple of months ago, Global X came out with EDGX which sells weekly covered calls targeting a 9% annual distribution which should allow for better upcapture which they believe their clients want. The chart encapsulates the "improvement" even if it is too soon to draw any conclusions about EDGX.

XYLD is the oldest fund in this product line from Global X and since its inception the S&P 500 has compounded at 14%. A 9% yield from EDGX with 5% of price appreciation left over would be a great outcome. Global X believes it can be more tactical with EDGX to get more upside than the more methodical methods for XYLD and XYLG. Once you accept that these are not going to capture the S&P 500 on the way up, you can start to assess whether there is any utility.

There is more yield than something like TLT but with less volatility than TLT. If you want to compare to high yield bonds instead of long dated treasuries, a fund like HYG is less volatile than the covered call funds. 

Getting 5% after a large yield is paid out would be compelling however building some sort of model or whatever that relies on 14% from the S&P 500 might not pan out going forward. That's a very high number and while we can hope that persists, putting some large weighting into EDGX expecting a 9% payout plus 5% in price only growth might turn out to be realistic. We've talked about small slices to completely different types of high yielding niches such that 15-20% of a portfolio split between three or four disparate strategies, disparate risks, can work. The Global X funds don't yield 50%, they might end up being lousy holds but they aren't going to go to zero. 

In a similar vein, I've been following BTYB which allocates 80% to five year treasuries and 20% to a synthetic Bitcoin covered call. The outcome sought is a yield that is twice the yield of the five year treasury. I tried to model it using YBTC which I believe is the first Bitcoin covered call ETF. When I do that, it only takes 10% in YBTC to get an 8% yield as follows.

This backtest goes back to January 2024 so we can see how the combo did as Bitcoin dropped a lot last fall.

Is a drop of just over 7% (price only) too much? It's still down that much for anyone taking the distributions out of their account. Is it too much? That is a question that anyone actually considering this fund needs to consider. However, my backtest only has 10% in Bitcoin, BTYB has 20%. Putting 10% into YBTC got us 2x the yield of UFIV but if we tweak it to 80% UFIV/20% YBTC, the blend fell by 15% on a price only basis and has not recovered yet.

The drop in Bitcoin was pretty big but far from an outlier. 

I am obviously intrigued by selling volatility but it is not something I do a lot of, it is tricky and you have to look hard to find a compelling risk return tradeoff. 

A small slice for someone looking to add yield but able to overlook line item risk can work but keep it small, repeated for emphasis. 

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.

Set & Forget? Morningstar Has Thoughts

Christine Benz wrote about How to Build a Portfolio You Don’t Have to Babysit. She cited research from Jeff Ptak that found that if mutual fund managers didn't make any trades, they just held on to their original portfolios they would have had better results than the funds actually had. Benz supported the conclusion saying she'll "take a policy of benign neglect any old day." 

I am sympathetic to the point and depending on what is chosen, it can be a valid approach for the end result even if there is a little pain along the way. Benz talks about target date funds for example. I am not a fan but they can absolutely get the job done. I have never met anyone who liked target date funds. My sample size is small but the few I've met, I've never heard anyone who owns one say something positive. They generally did poorly in 2008 and in 2022.

As we've talked about before, there are quite a few individual stocks and narrower ETFs in client accounts that have been there since I started back at the old firm in 2004. 

This Canadian bank, the name is unimportant, is one I have owned for 22 years. It's has always had a good dividend but has been very unremarkable the vast majority of the time. It's had a few years where it was up a lot including last year and a few years it has been down a lot on the way to compounding at a pretty good clip. The role it plays is exactly what I hoped it would do when I first bought it, yield and not a lot of drama (there's been some but not a lot). I've literally never had a client ask about it. 

The only reason that I think someone would have sold it would have been impatience. 

If you use any individual stocks have you held them for a very long time? The more often someone checks their portfolio the more difficult I suppose it is to just hold on because great stocks will go through some terrible periods. 

If you use broad based index funds, why would you ever need to sell beyond rebalancing and meeting cash needs? The reasons people sell have to do with short term thinking that they cannot see beyond like being afraid of the tariff decline. 

We spend a lot of time here experimenting with how to build set and almost forget portfolios, it certainly is intellectually appealing to have something that will give a decent return and be robust in the face of turmoil. Some sort of domestic equity exposure (broad based index or narrower holdings) some sort of foreign equity exposure (broad based index or narrower holdings), a couple of very boring holdings (not bonds with duration) that will offset equity market volatility and a small slice to negative convexity will probably get it done a little better than a target date fund but you still can't completely ignore it. 

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

Understanding The Tape

Here's a bunch of items that point to how narrow the recent lift in equity prices has been.

They are all going down except tech and communications.

Since the start of 2023, healthcare as measured by XLV has compounded ay 3.7% versus XLK for tech which has compounded at 35%.

Semiconductors have never been this large in the S&P 500

This next one is difficult to conceptualize...at least for me it is.

I don't know if this specific 70% datapoint is correct but we've all seen items like this. 

You probably have heard the phrase don't fight the tape and I don't want to do that but I think there is value in understanding the tape which is what these snippets help us do.

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 Defensive Without Selling

GraniteShares launched several new funds in its YieldBoost suite. The basic idea is that the funds sell puts on levered single stock and index funds. The newest ones are industry funds and one that references long term bonds. 

The funds are pretty popular with AUM that is just shy of $500 million. So not wildly popular but pretty popular.

YSPY is the YieldBoost that references the S&P 500 and SPYI is a lower yielding covered call ETF that also references the S&P 500. The distribution amounts for YSPY are generally going down as the price has gone down. Early on, most of the distributions were in the $0.18  range and now they are in the $0.14 range. 

The price only return shows it has dropped by more than 1/3 since February, 2025. It's too linear to just assume that an investment on day one of the fund will be vaporized in another two years but it creates a little context that it is eroding quickly and anyone trying to build a strategy to bridge to the next financial milestone should probably keep that in mind. In real life, the fund will reverse split at some point and new money will come in unless GraniteShares ends up closing the fund. 

The question that I think is relevant is whether just spending money out of an account sitting in cash will deplete slower or faster than spending YSPI's distributions. Taking the difference between the total return and the price only return and starting with $10,000 someone in bridge/depletion mode would be a little head having spent the distributions versus sitting in cash. Obviously YSPI is vulnerable to declines in the market but since it's inception, the declines have all been very short and recovered quickly. 

I'm not making the case for using crazy high yielders but there is a siren's song to all of the derivative income funds. Simply labeling them as bad is less productive then understanding how they actually work before buying one. 

There is a new fund from ReturnStacked that combines foreign stocks and managed futures, levered up like the other funds in its lineup. The fund has symbol RSIT and allocates 75% to SPDW for foreign exposure and uses MSCI EAFE futures to complete equity sleeve and then adds managed futures on top of the equity exposure. 

If you look at yesterday's post about how well most managed futures funds have done since the low of the Tariff Panic then you can imagine that the ReturnStacked funds that use managed futures have also done very well. 

I'll close out with some real portfolio stuff. The S&P 500 has been ripping, making new highs. So is that it, is the war over? More precisely, have markets stopped caring about the war? Obviously I have no idea. I added a little bit of an inverse fund in early March and then sold it early last week. During that stretch I sent out an email or two to clients saying what I always say which is that without knowing how serious this (the Iran war in this instance) is, we do know it will end at some point and then the market will start to work higher, eventually making a new high. The only variable is how long that all takes. 

This time around it didn't take too long...assuming it's over as a market event. The purchase from early March was a tweak that would have grown to be a big helper if something hideous had happened in the market. 

I am not convinced it is over but will be happy to be proven wrong. Nothing about how this was done makes sense to me, I don't know how you believe the announcements coming from either side and if you can make an argument for an outcome that is better than returning to how things were before it started, please leave comment. The big thing now seems to be trying to negotiate free passage through the Straits which we had before. I am skeptical that we get an outcome we want regarding uranium enrichment but will be glad to be proven wrong there too. 

Faced with uncertainty it is now very easy to make portfolios very defensive without needing to sell anything which is a great offset to being wrong.

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

What Happens When You Replace SPY With XLV?

First, an update on the the Millman Healthcare Inflation Guard ETF (MHIG) and the Millman Healthcare Inflation Plus ETF (MHIP). We tried to look at these a couple of times and the most recent time I got information from Copilot that was off by a little bit. 

Here is the "risk" allocation for MHIG

And here it is for MHIP

As I look at the holdings for each fund, they don't quite seem to correspond to the respective "risk" allocations. If they really mean risk allocation then there is probably a risk parity sort of dynamic to the funds, not that they seek equal risk weightings but that they target risk weightings from each segment. Both slides say long term treasuries but it looks like the furthest they go out is five years. I also didn't see any gold, instead they both have Van Eck Gold Miners (GDX), far less than 30%. GDX is much more volatile than GLD so using GDX appears to be a sort of leverage, they'd need to own a lot more GLD to equal the volatility of GDX. Note that volatility and risk are not the same thing but this does create some context for using a smaller weighting to GDX versus putting 30% in GLD. 

The vast majority of the equity is in healthcare stocks with both MHIG and MHIP having small weightings to the S&P 500. For this post, we'll treat the risk allocation as the asset allocation. To backtest we'll use XLV for healthcare equities, GLD for gold and SHY for short term treasuries. Using a five year proxy for "long term" treasuries seems off to me so we'll use TLH which is 10-20 years. 

The results are good. The drawdowns have generally been less than VBAIX or the Permanent Portfolio Fund (PRPFX). Part of the long term success stems from XLV going down much less than the S&P 500 in 2008. There's a low or minimum volatility effect that the backtest benefitted from. Low/min vol is just a factor so sometimes it helps performance and sometimes it doesn't. If we were to shorten the back test to just 15 years then it is almost a dead heat between the MHIP replication and VBAIX. 

The idea of healthcare companies as a proxy for broad based equity exposure is not something we've looked at before. 

The low volatility idea doesn't quite stick in this table but the standard deviation of XLV has been 12.13 versus 9.47 for USMV and 13.92 for SPY.

I didn't include it in the back test but comparing the MHIG replication to AGG, for the entire period MHIP compounded at 7.00% versus 3.03% for AGG and for the last 15 years MHIG compounded at 5.86% versus 2.2% for for AGG. That may not be the best comparison though.

Resolve Asset Management has a paper up about how to diversify within trend following that concludes three distinct management styles is the way to go. Not just three different funds but funds that come at trend differently; different risk weighting or different signal speeds and maybe replication versus full implementation. 

Copilot read the paper and it concluded that the best three funds to capture the intended effect was AQMIX, DBMF and KMLM. I was not wowed by the paper so I asked Copilot "Is the paper compelling or is the conclusion just so-so?" Copilot said it is moderately compelling but not a breakthrough. 

I am all in on having some exposure to managed futures but we've talked regularly about it being a difficult hold.

Over the last year, most funds have ripped higher but the chart makes the point about considering more than one fund. The worst performer in the last year, the pink line, has had plenty of instances where it was one of the best performers. Clients own one dedicated managed futures fund and get more exposure through BLNDX.

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.

More Questions Than Answers

Here's an update from mid-day Monday on the Pershing Square closed end fund and management company situation.

Using the math from Friday's blog post, the combo is worth $4850.40 for someone who put $5000 into the share offering. Gemini found that the sales charge was $1.25/share ($125 on the $5000 number we're working with). Both closed a little higher from when I took the screenshot and the math at the close was $4935.20.

Barron's had more on PSUS and closed end funds in general if you're interested. 

For all the coverage, what's the Seinfeld quote...I'm repulsed but I can't look away, I am not seeing anyone talk about the sales charge and the no free lunch aspect. Bill Ackman was on Bloomberg and he said something about the fund still being all cash and thinking it is odd that anyone paid $50 for a cash portfolio and then immediately sold it at a huge discount. Part of his explanation was that they favored retail investors, retail investors usually don't expect to get their full ask of shares but this time they did and they had to sell to get down to what they really want. 

I am skeptical about all of it.

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

Retirement Is Inflationary

The WSJ has a write up noting that not all core bond ETFs are the same. Here's a table that shows the differences.

Or, you could just go an entirely different route.

A few people have talked about the importance of knowing what to avoid which is a concept I believe in. The core funds are more volatile than many investors realize and if rates ever take another meaningful leg higher, then the core funds will get hit hard again. The charts for CGCP and AGG are total return. Anyone who has held CGCP since inception and taking out the dividends is down 11.9% on a price basis and there is no guarantee that they will ever be whole on a price basis. 

Are interest rates going to go up? I don't know but John Authers laid out a theory that is interesting because it is simple and it relies on something that is very hard to argue with. Essentially, the act of saving for retirement is deflationary while the act of retirement spending is inflationary. The country is obviously pivoting older to a much larger percentage of the population being of retirement age. 

If price inflation keeps moving up or stays elevated then that creates visibility for higher interest rates. Maybe it won't play out that way but in terms of assessing risk, the risk here is that this simple theory plays out. 

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.

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.