Incinerator Ridge Road

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Options Market Does Not Give Money Away

There was a line in this week's Striking Price column in Barron's that really stood out.

"A conservative options-selling program can add 6% to 8% to your annual returns."

Maybe columnist Steve Sears is having a conversation I cannot hear, a reference to one of my favorite quotes from the show Deadwood, Hearst says "I am having a conversation you cannot hear" to Bullock. My initial response is simply that the options market does not give money away.

The column in question was a post mortem on a Walmart options trade that did not work. A few months ago, the column suggested buying a call and selling a put on Walmart. The stock went down, the call expired worthless and the puts were assigned. 

Someone who trades options frequently will have some number of trades that work out well and some that will not. There is no getting away from some losing trades so the idea becomes having more winning trades than losing trades or somehow have the dollars netted on the winning trades exceed the dollars lost on the losing trades. 

I am sure a few market participants can do what is asserted in the quote, adding 600-800 basis points to returns but taken as a blanket statement, no I would not bet my money on that.

Perhaps a more accessible outcome could be thought of as redistributing the composition of your return.

One of those lines is a common stock and the other line is the corresponding YieldMax. The stock is not as volatile as MicroStrategy or Tesla so the total returns of the two are identical. One is just price appreciation (there is a little bit of a dividend) and the other is all "yield" as the price only return is down considerably. 

A little less dramatically but not as tight as above, ISPY which is a tax efficient derivative income fund versus SPY.

ISPY's return has not kept up with SPY and it probably won't when markets are going up. In a couple of the drawdowns, ISPY has gone down less which can happen some of the time but won't happen all of the time. ISPY's return has been about 9.5% distributions with the rest in price appreciation. The returns are split into a couple of different sources versus really just one of any consequence from SPY. 

The options market does not give money away. The way ISPY redistributes the return will appeal to plenty of investors, derivative income funds have $175 billion in assets, clearly, people want this sort of appreciation/"yield" combo even if they don't articulate it that way but they are not getting free money. 

Pretend for a second that ISPY can compound at the same 7% on a price only basis, kicking out 9-10% in ROC (that's the tax efficiency), that is a plenty useful outcome for some people in the benchmark free context we talked about yesterday, some wants yield without eroding NAV. The tradeoffs of funds like ISPY or SPYI or GPIX might not be for you, you might think they are terrible but there is a reasonable use case in terms of results and investor tolerances without being NAV incinerators like the mystery stock in the first chart.

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.

Tracking Error Palooza

Some fun stuff today with a look at GMO's Benchmark Free Allocation Fund/Strategy and Meketa's thoughts on risk parity. 

GMO's paper talks about a "total portfolio mindset;"

Because Benchmark-Free focuses on generating real returns instead of beating a particular benchmark, it naturally has a different view of risk than most traditional portfolios.

The paper chronicles the various changes under the hood of the fund/strategy and the result of the fund seems to walk the walk it has looked much different quite frequently, painfully different to be blunt about it.

It did well early on thanks to getting the internet bubble right. Since inception the fund has compounded at 7.67% versus 8.30% for VBAIX with significantly lower volatility. 

That is a very rough 13 years in the middle of the fund's existence. The paper makes many references to real returns. Adjusting for inflation, the 4.18% comes down to 1.62% in the period charted. There's a balance between building a portfolio targeted to the outcome you need irrespective of what the broad market is doing but still giving yourself a reasonable shot at a decent growth rate. 

A similar sentiment from Meketa regarding risk parity;

...since these strategies are not widely implemented, institutional investors that adopt this allocation methodology need to be comfortable being “different” from peers, that is, having high tracking error relative to broad peer portfolios.

A big pillar to what the ReturnStacked guys offer with their funds is ability to add alternatives without introducing tracking error into the portfolio. It is ok to have tracking error. Certainly for you, managing your own portfolio, who cares? Again, are you giving yourself a reasonable shot at a decent growth rate if that is what you need? 

We have a lot of fun here with all sorts of crazy allocation ideas but if you need something beyond a T-bill rate or CPI plus 2%, then you probably need some sort of close to normal allocation to equities. Even just 35-40% can serve as a reasonable growth engine inside a portfolio for people who do not want the ups and downs of having 60-70% in equities. 

Yes some sophisticated combo of different asset classes with very light exposure to equities could get it done but anyone pursuing that kind strategy will probably have to work a lot harder for their return versus just having a close to normal allocation to equities. 

Finominal has a portfolio optimizer tool that we've used before. It can optimize for several things including risk parity. Depending on what inputs are used, the result might be interesting or not very helpful. If you include a T-bill or short term bond fund, the output will be to have a huge weighting to the T-bill or short term bond fund. A 15/85 portfolio won't be the answer for too many people. 

The following study starts with 35% in SCHD, 30% in IMTM, 15% in KMLMsim and the rest in SHRIX for Portfolio 1. Portfolio 2 allocates those four at 19%, 16%, 19% and 44% respectively (rounded off) inline with Finominal's risk parity optimization.

Portfolio 1 at 65% in equities is pretty typical while the managed futures and cat bonds could cause tracking error which is fine with me, I probably want that, you probably know whether that is ok for whatever money you are managing (just your own or for clients). Portfolio 2 is a tracking error palooza. The 35% in equities is at the lower end of what we talked about above as being a reasonable growth engine inside of lower volatility portfolio. It obviously has not kept up with VBAIX but nine years is a reasonably long time and it's not that far behind but with much less volatility and much shallower drawdowns.

If someone was interested in something close to this version of risk parity but wanted more traditional bond exposure, instead of building that into the Finominal portfolio optimizer, it would make more sense to figure out how much they want in more traditional bonds like 20% or 25%, whatever, then plug the rest of what they want for the portfolio into an optimizer (Finominal or someone else), get those weightings, reduce accordingly to account for the allocation to more traditional bonds. 

Long time readers probably know, there is no scenario where I am putting 44% into a cat bond fund. More realistically, I would split that 44% sleeve between five or six disparate strategies to avoid loading up on the same risks. Those five or six different strategies could themselves be risk weighted and then slotted into the more diversified version of Portfolio 2. Nineteen percent in managed futures is probably more than I'd ever want too but at a minimum, I would split that large of a percentage across two or three funds, not just one. 

I think the underlying premise of Portfolio 2 is valid, gives a reasonable chance of a decent growth rate while still differentiating effectively versus VBAIX's volatility. 

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.

HSA Optionality

Barron's had a short writeup on health savings accounts (HSA). If you are familiar with HSAs there probably wasn't anything new but it did prompt me to think about a use for HSA money that I hadn't thought about before for how my wife and I could or would use our HSA. Hopefully this is useful for anyone else in a similar circumstance of having an HSA and starting to look around a couple of corners at how Medicare works. 

The cost of Medicare Part B is deducted from your monthly SS check. Part D for prescriptions is usually paid directly by the individual. Both expenses are considered qualified for HSA withdrawals, meaning you can reimburse yourself out of your HSA account. This year, Part B is $202.90 (more for people paying an IRMAA surcharge).

This creates some optionality for people who have HSA accounts. In addition to Parts A, B and D, it is common to get some sort of Medigap coverage which has costs and coverage above and beyond A, B and D. According to Copilot, Plan G which is one of the more robust Medigaps averages around $250/mo in Arizona (that is a general number). The $250, or whatever dollar figure you find, Medigap cost is not a qualified expense in HSA terms. 

Part B is qualified, Medigap is not. A little bit of mental accounting here but money taken out of an HSA as reimbursement for Part B goes into your checking account to be spent on whatever you like. The Part B reimbursement is what lets you withdraw tax free from the HSA. From there, that $202 can be spent on anything repeated for emphasis including Medigap coverage. Like I said, mental accounting but nice little hack. 

Someone who is paying IRMAA can pull more out of their HSA if they want for their reimbursement. If they are paying $281 in 2026 dollars for Part B then they have access to $281 which more than covers the $250 Plan G figure we are using as an example. 

I expect to still have a decent earned income for the first few years of Medicare eligibility (self-employed there's no employer plan for me to stay on) so I doubt I would pull from my HSA for a while in this context, maybe at 70 or a little later?

Maybe I am the last person to have thought of this but either way, it adds a little optionality to the Medicare process. The more optionality we can find, the better.

Another new thing for me is that Plan N might make more sense and be cheaper for people who are not managing chronic maladies and going to the doctor frequently for their chronic maladies. Copilot and Claude conflicted a little on how much cheaper Plan N is versus Plan G. Copilot thought $1000/yr cheaper for a couple versus $1200 from Claude.

For now, it is useful for me to be aware that Plan N is an option if our good luck with health continues. Is saving $1000-$1200 worth it? That is up to the end user and we'll see where we are when the time comes.

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.

Risk Parity That Works?

The Beacon Tactical Alternatives Risk ETF (BTA) just started trading a few weeks ago and it is a variation on risk parity. Instead of  more typical asset classes like stocks, gold/commodities and bonds, the sleeves for BTA are gold, broad commodities, managed futures, digital assets but I don't see any in the fund currently and US dollar exposure which means the USDU ETF and a lot of different short term fixed income.

Part of the pitch for this fund is that it can be a "third independent return system to the classic stock/bonds mix." The fund is actively managed so the above holdings can change but the list above is easy to backtest. To create a longer backtest, I combined all the managed futures funds into KMLMsim on testfol.io and I used DBC which is the older cousin of PDBC.

Looked at as a standalone, the results are uninspiring compounding at 3.82% for almost 13 years. While those results really are meh, the replication does something interesting when paired with equities.

Risk parity has generally been difficult to implement in a mutual fund or ETF, look at how poorly RPAR has done. AQRIX is an AQR fund that used to run a risk parity strategy, it changed a while back but I think of it as still being risk parity adjacent. 

Also in the BTA literature is a mention of 50/30/20 replacing 60/40 where the 20 is alts and I think they are suggesting the 20% go to BTA. But with all that USDU and the short term debt, the fund has about 50% in fixed income or fixed income substitutes so allocating 50% to the BTA replication like we did in Portfolio 4 gets kind of close to 50/30/20. 

Portfolio 4 did better in just about every drawdown in the backtest, both fast and slow, except the tariff panic of 2025. In 14 full and partial years, Portfolio 4 outperformed VBAIX seven times so that's kind of a push but in a couple of the years that it lagged, it lagged VBAIX by a lot. In periods where managed futures and commodities both do poorly, obviously BTA as currently constituted should also be expected to struggle. 

The fund going forward could be different and like I said, it doesn't appear to me that there are any digital assets in there but if BTA uses risk weighting then the allocation to digital should be small enough that a catastrophe in something like Bitcoin wouldn't wreck the fund, it seems like potentially an asymmetric kicker if/when they actually add it. 

For now though, this seems interesting to me. It is only a month old (backtest is long enough to set some expectations) but it makes a good first impression. 

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.

There Was An ETF For That

More tidbits today that I hope will be interesting. 

First, I sat in on another autocallable webinar from ProShares and something clicked. I've talked about feeling like I don't completely understand the risks with these. Kind of a repeat comment but I have a better understanding than I did. Autocallables generate yield from equity risk not risk taken in bond markets. 

That an autocallable yields 18% or 9% tells you that the 18% yielder will be more volatile and probably be riskier than the 9% yielder but the risk relates to equities going down a lot not yields going up a lot. There could be a second or third order effect from interest rates' influence on pricing volatility but the story is equity risk and volatility. The way most of them are structured, down a little isn't really a problem for the funds. At varying points of down a lot for equities, some or all of the distributions can be disrupted if the "barrier" level is breached. Down 35% becomes problematic for ProShares ACSP for example. 

If you use a covered call or put selling fund, you think about equity market risk, funds like JEPI or WTPI create yield from equity volatility and risk. In that way, autocallables do the same thing. Zoom in and you will see there are structural differences and I would say more complexity but as one webinar said, derivative income and autocallables are cousins. 

Some of these funds are very volatile and some not. As a generalization repeated from above, I would expect that the higher the yield, the more volatile but I am still working on these, trying to learn. Certainly ProShares ACSP which targets 18-19% is more volatile than CAIE yielding 14% which are both more volatile than JELM from Janus which targets a 9% yield. 

ACSP is brand new which is why the chart is so short. I said this the other day, a 9% yield is fantastic and for me, it's not worth burning my fingers trying to hold onto ACSP. To be clear, I don't own JELM anywhere, I'd like to see the market go through some adversity before considering JELM or any other less volatile autocallable fund. I will reiterate though that some pay ROC like ACSP and CAIE and some don't--pretty sure JELM will be ordinary income but please leave a comment if you know otherwise.

If we're talking about harnessing volatility (which we are), this chart is interesting. 

ANV is the GraniteShares Nvidia Autocallable ETF, so it is a single stock autocallable. NVDY is the YieldMax NVDA ETF, and then the common stock in yellow. NVDY "yields" 38% versus close to 14% of ordinary income for ANV. Fourteen percent is a fantastic yield. ANV hasn't deteriorated because the stock has gone up a good amount. ANV doesn't capture the common's volatility the way NVDY does.

Things have gone very well for ANV but I am still not sure that single stock autocallables are a good idea, just pointing out that these are not automatically NAV incinerators. The chart is also quite clear that buying ANV is not buying the common stock, there should be no expectation of any sort of significant upcapture, six months of trading tells you there might be zero upcapture. The fund owns a lot of different autocallables on NVDA but in some sort of hideous decline for the common, eventually ANV would start to go down with the common. 

Yesterday we took a look at a paper from AQR about protecting a portfolio against inflation. There was a reference in there to long/short quality equities. AQR has mentioned that a few times and at some point I said there wasn't really a way to access that effect in an ETF or mutual fund and there still isn't as far as I know but there used to be. It closed a few years ago but QMJ was the Direxion Quality Minus Junk ETF. I guess the fund was ahead of its time. 

Corey Hoffstein posted a fun article on Twitter that compared and contrasted adding buffer funds to a portfolio versus managed futures and concluding there is room for both. I took it as a prompt to play around with a few different things related to combining buffers, managed futures as well as PPFIX which is a client holding that sells puts that are very far out of the money such that the fund is a horizontal line that tilts upward. The reason to include PPFIX is that Corey talked about buffers being equities with an option overlay on top. That's probably correct but I don't really think of them that way.

I use BJUL in these backtests because I believe it is the oldest buffer fund so we get the longest backtest. None of these ideas helped much during the various fast declines along the way but did help quite a bit in 2022. 

Buffers and managed futures as presented is an interesting combo that I will try to dig more into in future posts. 

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.

Whatever Keeps You Invested

Quick hits today.

AQR has a paper with some ideas about how to protect against inflation.

They involve leveraging up by 15% as you can see. I replicated the three ideas with URTH for global equities, IEF for bonds, STIP for US TIPS, ARCIX for commodities and DBMFsim for trend following. Portfolio 5 mimics AQR's Portfolio 2 but eliminates the leverage by reducing IEF from 19.2% to 4.2%.

They all outperformed 60/40 but an interesting observation is how little differentiation there has been from year to year with a couple of exceptions including 2022 when inflation first flared up. It's remarkable actually. 

Man Institute wrote about buffer funds. The TLDR is that they do help (work the way they are supposed to) on the way down and still help part of the way up as the market recovers but then gradually fall behind plain vanilla equities. 

The article's conclusion supports their 100% Equities/100% Managed Futures ETF that has symbol MATE.

The results are adjusted for inflation so the CAGR numbers are CPI plus whatever the result. The first three funds are obviously not market cap weighted, they all have a defensive element to their respective strategies and the volatility and beta numbers bear that out versus SPY and the MATE replication in Portfolio 5. Looking back, SPY was CPI plus 10% which is great. Will it be that strong going forward? Who knows but if SPY does half as well over the next eight years, cool, but BJUL, JHEQX and USMV very likely will not do that well. Once that is fully understood and accepted, they are not likely to capture the full gains of the stock market, if the lower volatility profile they offer make it easier to stay invested then go for 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.

Regret Waiting To Happen

In response to yesterday's post about Matt Tuttle's take on the Permanent Portfolio, a reader Tweeted that his preferred version is to allocate 1/3 each to ReturnStacked Global Stocks and US Bonds (RSSB), gold and KMLM which is a managed futures ETF. RSSB is 100/100 so the mix has four quadrants, each at 33 1/3%.

A few days ago we looked at a similar portfolio to what the reader suggested that used PSLDX which is a much older 100/100, domestic equities and long bonds. Then I removed the bonds, just equities and the results were better so that was my first thought today, peel out the bonds and what does that do?

To be clear, Portfolios 1 and 2 are equally weighted between those three funds.

I took PRPFX out to declutter the drawdown chart. In the bigger events, both 1 and 2 went down less but you can see a long stretch of meandering as both gold and managed futures struggled through much the 2010's. There were also a few very difficult individual years in there too. In 2013, Portfolio 1 was down 4.59%, Portfolio 2 was down 0.99% while VBAIX was up just over 18%.

If we shorten up the original backtest to go back to KMLM's actual inception, the results for Portfolio 2 look a little better versus Portfolio 1.

The improvement is likely attributable to managed futures and gold doing much better in this decade versus the previous decade. If we just look at the 2010's, the idea would have been almost impossible to stick with.

After gold peaked in 2011 it trended lower for awhile and became more of an afterthought. Managed futures was not something that too many people even knew about. In fund form back then, managed futures never was, let alone becoming an afterthought. I stumbled into managed futures by accident in 2007 and bought RYMFX, then came AQMIX in what I believe was 2010 and the a few others in 2013/2014. I stuck with RYMFX for quite a while but that was much easier at 3% or so versus 1/3 or 1/4 of a portfolio.

Owning this portfolio would be very difficult the next time gold and managed futures both struggle. It happened in the 2010's so it can happen again. There's a lot to be said for quadrant-like sleeves but going so big is regret waiting to happen.

We haven't isolated it out this way before, looking at just the 2010's. Having some gold and having some managed futures is a good idea for portfolio robustness but at some point it is too much because the risks/vulnerabilities overlap some. The risks/vulnerabilities are not identical, but there is a lot of overlap. 

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 New Quadrant Portfolio

Matt Tuttle from Tuttle Capital/T-Rex was profiled talking about a Permanent Portfolio-inspired update to the 60/40 portfolio that Tuttle says is 60-70 years old implying it needs to update to navigate modern realities of a different world and vastly broader fund/strategy choices.

The four, equally weighted quadrants from Matt are stocks, "beyond bonds" which includes pre-merger SPACs and property & casualty insurers, debasement trades like gold and Bitcoin and finally tail risk which Matt defined at managed futures and short term government bonds like T-bills. 

For stocks, I just used SPY, Copilot said merger arb is the best proxy for pre-merger SPACs, Chubb (CB) for P&C, for debasement I put 20% in gold and 5% in silver and for tail risk I put 12.5% in managed futures and 12.5% in T-bills. I did not use Bitcoin for debasement to leave out any potentially unrepeatable result.

The return of the Tuttle Quadrants is close to the Permanent Portfolio (PRPFX) with less volatility and the backtest obviously looks quite a bit better than 60/40.

Matt has written a couple of times about P&C companies in this context, his theory seems like it more relates to the operating business and risk transfer than how the stocks actually behave because using the Invesco KBW Property & Casualty Insurance ETF (KBWP) as a proxy, the space looks nothing like fixed income but you may draw a different conclusion. I also do not know whether pre-merger SPACs actually look like merger arbitrage, Copilot offered that, so grain of salt that idea.

The first lookback allows for a long period of study by using the Merger Fund. This next one swaps out the Merger Fund and adds a SPAC ETF that has symbol SPCK and gives us almost six years. The second look back is reasonably consistent with the first one. 

Anyone so interested can replicate the concept pretty easily but I wouldn't make any forward looking assumptions about returns. As if often the case, I think the volatility numbers can stand up and if bonds with duration continue to do poorly then this mix has a pretty good shot of continuing to outperform. To the extent P&C companies are or are not bonds proxies, both Chubb and KBWP are negatively correlated to IEF and TLT. 

It might not be visible on the chart though but there is a lot of differentiation of returns between the Tuttle Quadrant and the others. In the first back test, Tuttle quadrant was best performer in eight out of 27 full and partial years and 6 times it was the worst with four of those six coming since 2019. The updated version using SPCK fared a little better on that score though.

One takeaway is that like me, I don't think Matt is a fan of bonds with duration which leads us to this.

I would venture to say that the 30 day SEC yield is closer to the yield that investors will get. The portion highlighted by Ben is if all the bonds are held to maturity. I've never owned AGG but I don't think that is what AGG does but please leave a comment if I am wrong about that. 

If you have fixed income, what are you trying to do? Some want to offset equity volatility, some want yield and some want a combo of both. Whatever someone is hoping to get out of AGG or BND for that matter, there are ways to get it with less volatility and more yield. 

BOXX replicates T-bills but pays no interest so it is tax efficient. The price accretes at the rate of whatever T-bills are yielding. ACBAX is the investor class shares of the Pioneer Cat Bond Fund. It's the class A shares but self-directed investors should be able to buy it without the load at Fidelity or Schwab but ask them first. 

The 75/25 combo is structured for total return with a little yield. If the T-bill ETF BIL is swapped in for BOXX then the total return CAGR was 6.36%, the yield was 5.64% versus 3.87% for AGG and the volatility dropped a tick to 1.76%. 

There is no need to take on AGG's volatility and interest rate risk to get 5.XX%.

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.

Always Read The Comments

The Wall Street Journal profiled several people/couples who relocated states seeking to optimize their retirements financially and maybe enhance their quality of life too. These were not profiles of people in financial need. The stories were people who read the Wall Street Journal so they aren't representative of society at large. That's a gift link so you can click through if you're interested.

There are obviously tax differences in many areas. On of the couples profiled moved from Peoria, Illinois to Oro Valley, AZ which is just north of Tucson. Property taxes in Oro Valley are about 1/4 what they are in Peoria. The article says that state income tax in Arizona is half that of Illinois, 2.5% versus 5%. A commenter said that Illinois doesn't tax Roth conversions and the they should have done conversions before they left Illinois.  

It's not for me to say what sort of role lower taxes should have in deciding to change states, I just so happened to land in a low tax state that I enjoy at a young age. It is important to fully assess the tax differences though and be informed before pulling the trigger. Maybe it is low on the priority list so it might just be information gathering and that's ok but take the time to learn. The article made it sound like Florida is not a low tax state despite there being no income tax. I don't know but Gemini says it is a higher tax state for lower earners for generally being regressive. I know that Oregon has generally high taxes despite no sales tax. So there can be tradeoffs, one tax is low or zero while another is relatively high.   

The comments were more interesting than the article but the article itself is worth reading. There were of course comments about red states versus blue states. Having that be a determining factor for any life decision is lost on me. I think Arizona is considered a purple state or at least it has been recently. Prescott is in a very red county and Tucson is a very blue city. If someone can't leave political influences like this out of their lifestyle choices ok, I might be out over my skis on that one but leave politics out of investing, the domestic equity market goes up under both parties. 

There were a lot of comments about poor healthcare versus good healthcare in various places. Prescott has lousy healthcare but it's pretty good in Tucson with Phoenix being better. Being healthy is a very high priority for me and we are two hours from Phoenix so is that close proximity to good healthcare? That depends on who you ask but I think people need to sort this out for their personal priorities but also a have realistic assessment of their health. 

Many comments made staying close to family as the top priority which certainly makes sense. A sentiment I think it related to staying near family, a reader mentioned renting a place in the Caribbean every year for the month of February and someone said something similar about getting a VRBO for a few weeks every winter. Presumably these people live where it is cold so they are able to take a chunk out of the winter for not much money related to buying a house and can be near family the vast majority of the time. I think that is a great idea and for me it relates to moving to another country. I have no desire to leave the US but I love the idea of "living" in another country for a few months. There's a handful of places where I'd want to do that if our life circumstance allowed. For now, fire chief and animal rescue president doesn't really allow for that.

It was amusing to read comments from people who I don't think realize what is going on in Arizona. In expressing negative comments about the summers in Phoenix and other lower desert areas, I don't think people realize that a meaningful portion of the state is at very high elevation, with pine trees, usually cool summer temperatures and meaningful snow accumulation. 

There are several states that have this sort of weather divergence of cooler, high elevations and hotter, lower elevations to create a seasonal arbitrage. Nevada has this effect between Reno and other points north down to the Las Vegas area, California obviously but cost of living is there is rough, and there are a few others that may not be as extreme as Flagstaff versus Yuma. The point of this paragraph is about potentially staying close to family depending on where you live but it probably doesn't help much for Minnesota or Wisconsin. 

Mark Baker on Twitter has a theory that resonates with me that it is important for successful aging to have variation in our lives with weather and changing seasons being a simple example. A little more complex is stress variation that comes with exercising. Too much homogeneity, too much comfort leads to being less adaptable. There's research out there that supports the theory and as I said I believe in it. 

Since we are swimming in these waters a little bit, it is not our intention to pack up from Prescott and stay in Tucson for four months, but check back on that when we're in our 90's. There were several reasons that drove buying the Tucson house, we love the city, it's like Phoenix in the 80's, maybe the 70's. If there was ever a wildfire catastrophe in Walker, we would have a place to go. Less dramatically, Walker has been evacuated twice for fires in the last nine years. I stay of course but the first evacuation my wife took the dogs to her parents house in Phoenix for the week and that sucked for her. The second time she took the took the dogs to United Animal Friends ranch property and stayed in a shed which also sucked. Some hotels allow dogs yes, but five? 

Maybe we will want or need to leave Walker at some point and if that ever happens, it will be much easier to do, we will have a place that will already be paid for. And if that never happens then we'll just have a second place to getaway to, it's a form of optionality. For now we go for about a week every month, including the winters, although I didn't really go down much during our fire season, just three nights in May. 

With articles like the one we're talking about, I usually say read the comments, always read the comments. The idea there is that I believe we can learn from the experiences and observations of people we don't know. There are smart comments we can learn from and some remarkably stupid comments too that can help us figure out what not to do. This is why I share some of our details, maybe readers can pull something or positive from what we're doing and if anyone pulls anything negative, that's ok too. 

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.

Make Sure You Have The Correct Numbers In Your Planning

Investopedia via Yahoo Finance took a look at how much money people need to have saved for a comfortable retirement with your home paid off versus not, being single or married and depending on what state you are in. 

A mortgage-free couple needs between $700,000 and $1.18 million, $870,000 as median number, depending on the state with Arkansas and North Dakota at the low end and New York and New Jersey at the high end. Actually the only still has a mortgage retirement number they included was the $1.46 million estimate from Northwest Mutual that everyone wrote about a couple of months ago when it came out. 

Most of the article was as useless as that last paragraph but there were a couple interesting tidbits. One was that in 1980, only 13% of homeowners 65 and older had a mortgage versus 36% as of 2024. And I thought this graphic was useful.

We've articulated what the table displays many times as has probably every site that explores retirement math. The single/couple columns, ok but whatever your marital situation what are your complete expenses? What are monthly expenses, what are your annual/semi annual expenses like property tax and certain types of insurance? Do you track so granularly to factor in oil changes (not a bad idea but we don't) or maybe haircuts (my $20/mo at Great Clips seems a little unnecessary)? Do you pad in an amount for larger, unexpected items like a veterinary bill or something like tires? Whatever your process, just make sure it's thorough. 

We just looked at Social Security. The SSA wants us to know our numbers. Then decide if you think it is prudent to assume a reduction in your payout and to be thorough, reduce it by what you expect to pay for Medicare Part B.

That process is what is captured in the table. If there is a gap, can you cover it somehow from some sort of planned earned income, rental income or from an investment portfolio? 

At some point in our 50's it probably becomes reasonable to start to frame out what a gap might look like unless someone is hell bent to retire at 50 then they need visibility at a very young age and need to do some math (AI can do this for you) on what their Social Security will look like if they don't get 35 years of earned income in before they stop working. 

The annual Social Security report everyone gets notes that the dollar amount assumes a full career duration, if someone stops at 50 then that won't qualify for full benefits. The 35 highest earnings years will include quite a few zeros or if someone actually has earned income starting at 15, a few very low earning years. I wouldn't try to discourage anyone from retiring early if that is what they want but as per the above table, a reduced SS payout due to a shorter working career means needing more saved. Planning, based on the wrong numbers could be catastrophic. 

As a matter of personal philosophy, I don't want to rely on just two things, SS and my IRA account. The first two ideas I think most people would come up with for additional income streams is some sort of post retirement gig like monetizing a volunteer endeavor or turning a hobby into an income stream and the other one is rental income. All the better if you can come up with others that work for you. 

I actually think of a bridging strategy as being a separate income stream. We've written about this quite a bit lately. This could just be a taxable account that built up over the years or maybe there is some sort of event that funds an account for bridging like maybe the sale of an investment property or some sort of options vesting from an employer. 

The way we have framed this out in recent posts, this is a different strategy than the 60/40 or 70/30 that might be in the typical IRA account. If leaving this sort of windfall (house sale or options vesting or just years of accumulation) in cash would last for eight years, could a higher yielding bridging strategy stretch that for ten years until maybe when RMDs start? That's the equation. Leaving an IRA alone for ten years can reasonably see the IRA invested 60/40 come close to doubling.

It's a little sloppy but I tried to color code rolling ten year periods for most of this century. The ten years numbers show solid growth. The worst time to invest in this century would have been at the start of 2000 and even then, the cumulative growth for ten years would have been 34%.

I understand that this much work won't appeal to everyone but like many aspects of life, the more we put into retirement planning, the more we will get out 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.

Create Your Own Solution

The Washington Post says that "Republicans say it is time to raise taxes" to try to fix Social Security. By raise taxes, the primary implication is increasing or eliminating the cap, the level of income where people stopping having to pay FICA each year. The article goes on to mention considerations for means testing and various other sorts of ideas like raising ages for eligibility and anything else you've seen mentioned. 

Quite a few years ago, I blogged a few times that I thought people born before a certain year, I guessed 1975, would not have to confront benefit cuts in the context of what is now an expected 22% cut in 2032. That assessment appears to be incorrect. If Congress never tackles/solves the issue then I think we'd all be facing that 22% cut (the exact percentage and year has been a little bit of a moving target). 

What role will/does Social Security play in your financial picture? There's some mental accounting in the different ways people think about that answer. For some clients and plenty of commenters at places like WSJ and Barron's, it is more of an afterthought.

If things go as planned for my wife and me for when we take it (70 and she would be 64) and if it is reduced by 22%, in today's dollars it would be $5213/mo which exceeds our fixed expenses. The mental accounting for us is that the $5213 would be the first dollars we spend. If we still have rental income at that point then that income would contribute to our month to month living. Our accumulated savings would be for fixing things, buying the occasional big thing (my Tundra is 20 years old and will need to be replaced at some point), traveling and any other one-off unbudgetable expenses that come up.

I also brought up the idea of means testing a long time ago which as I mentioned is in the article. Who knows what that would look like, my comments on that were if means testing happens, it would come down to much lower levels of income and wealth than we might think or at least we should prepare for that. 

Our unreduced amount at 70/64 would be $6604 in today's dollars. We are not loaded but we are plenty comfortable. As a very aggressive means testing scenario that came down to our level of income/wealth, what would happen if $6604 was instead $3302? Yeah, that's aggressive but what if it shakes out that way? It's easy to quantify and then assess. Actually managing something like that might be more difficult of course but the dollar and cents assessment, just open a spreadsheet. $3304 would still be a meaningful contributor to our month to month expenses but we would need to rely on our savings more, not a catastrophe.

If the country is as unprepared for retirement as the media portrays, then solutions need to be found, people need to find their own solutions. The Wall Street Journal wrote that Boomers Are Moving Into Retirement Communities Alongside Their Parents. Some of the profiles in the article are people moving into the same community but some others are actually living with a parent as roommates, splitting expenses. From the standpoint of a financially challenged retirement, splitting expense with a family manner is a solution even if it's not Plan A for too many people. Five or ten years of spending less (half?) seems financially productive. 

Another solution that we haven't talked about in a while is tiny houses.

You can see the one above costs $72,000 and the one below is $36,000. 

They are more like much nicer manufactured homes than what most people think of for manufactured housing. You can go find modular_houses on Instragram to see the more, they are very nice and also a huge upgrade to what most tiny houses looked like ten years ago. The typical scenario for these is usually leasing a spot in a community or putting one of these on your own parcel. If you know otherwise, please leave a comment and I don't know about permitting one of these onto parcels, that's probably different across jurisdictions. 

Again, this may not be Plan A for too many people but in the context of serious financial challenges for retirement, a clean, new house that is paid for where everything inside works because it is new is a pretty good outcome.

All of this is about preparing in case whatever you have in mind for your retirement, your Plan A, does not work out as expected. Expecting fair outcomes (from the government) is bound to end up in disappointment. We are all here now, living our lives while the problem continues to go unfixed. Maybe they will fix it, logic says that one way or another they will but what if they don't or what if you are ground zero for everything that is unfair about what they come up? 

Ditto our busted healthcare system.

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.

(Traditional) Bonds Still Stink Part XXXVII

Meb's point about individual bonds is one we've made many times. Yes, you get your money back at maturity but think about someone who bought a 15 year Citibank bond in 2020 yielding 2% or so. They have nine more years taking in a yield that is way below prevailing market rates. That 2% has been way below market rates for four and half years already. They are carrying the position way below their price so if they sell they locking in a big loss. 

One of the comments nesting under there somewhere, someone said they were 60% alts and 40% cash with no other details. There are enough different kinds of alts now that someone could diversify idiosyncratic risk and avoid loading up on the same provider but backtesting probably wouldn't help, a lot of the funds are too new. Your AI of choice could probably help you poke holes in various ideas to avoid certain types of mistakes like unintentionally loading up on credit risk. 

If put together correctly, a 60/40 alts/cash mix could probably deliver a solid real return but I would not expect that to return anything close to equities and the differentiation versus more traditional 60/40 like with VBAIX will be difficult to endure every so often. A lost decade for equities would be a different story provided there isn't too much unintended equity beta in there, again AI can help with that.

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 Awesomer?

Jared Dillian has a new book out called The Awesome Portfolio. Here's a podcast with Matt Zeigler to learn more. 

In our parlance, the Awesome Portfolio is quadrant inspired with five equally weighted sleeves. Dillian said he was not aware of the Permanent Portfolio when he came up with the idea but described his portfolio as a slight modification resulting in a huge improvement. It's similar to the cockroach portfolio from Jason Buck but it's cheaper.

• Equities
• Bonds
• Real Estate
• Gold 
• Cash

For most part, it's Vanguard ETF; VTI, BND, VNQ, GLD.

The underlying premise is focus on managing volatility. No stress and sleeping well are priorities. A Gemini search says that Jared backtested it to 1971 and in that time the portfolio has returned about 9% annualized versus 10% for the S&P 500 with half the volatility and smaller drawdowns. 

Using testfol.io, there's no way to recreate the results going back to 1971 because there isn't a proxy for real estate (REITs) that goes back that far. But when you see 1971 what do you think of in terms of capital markets and the like? The US went off the gold standard that year and over the course of the next decade +/-, gold went from $35 to about $800. 

I asked Gemini if that created an unrepeatable, favorable skew? Gemini noted that there was a long slow decline in gold after that massive rally but that the impact of the gain in the 70's had more influence than the subsequent long decline. Gemini found something from Bogleheads that figured the Awesome Portfolio's CAGR was closer to 6.5% if you strip out the massive run in gold from the 1970's. 

Using ETFs, we can backtest back to late 2004 and in that run, it compounded at 7.37% versus 10.97% for SPY and since the idea seems quadrant inspired, the Permanent Portfolio Mutual Fund (PRPFX) compounded at 8.14%. The Awesome Portfolio was less volatile than SPY or PRPFX but not half as volatile.

I don't think REITs are a very reliable diversifier. Managed futures do a much better job, when we take out VNQ and add managed futures instead, we get about the same result as the Awesome Portfolio with much less volatility, much smaller drawdowns, half the beta and no huge, unrepeatable skew from gold.

Using managed futures instead of VNQ resulted consistently smaller drawdowns than in the Awesome Portfolio.

The only way I know to go back that far on testfol.io with managed futures is simulated DBMF. For anyone actually interested in putting 20% into managed futures, I'd suggest splitting that up across several funds. It's not as simple as just five funds total but we've seen enough performance dispersion across managed futures funds that such a huge allocation to one fund could create the sort of stress Dillian is trying to avoid. 

With the updated version that splits the managed futures between simulated DBMF, AQMIX and ABYIX and removes BND in favor of FLOT to take out duration, it still looks competitive with the shorter time period. Dillian said that "the one vulnerability of the Awesome Portfolio is rapid rising rates." He noted that bonds, stocks and gold would probably get "killed." He said real estate would be ok but VNQ was down 26% in 2022. I've been saying for 20 years that REITs are not good protection against declines.  

The much smaller drawdowns also hold up in this second study.

I used FLOT as I said but there are now many more choices to split the FLOT slice and add a few more basis points of yield to the portfolio. 

Can this continue into the future? There's no way to know but if this is quadrant inspired then the expectation is that properly diversified, managed futures has been better than VNQ for mitigating downside volatility. There should always be at least one thing working in the Permanent Portfolio, that's the big idea, and I would suspect at least two things could always be working in the More Awesomer Portfolio. A caveat is that I don't think there's anyway this concept keeps up with equities other than if we have another lost decade that skews the results for a while.

A quick follow up, it looks like the FirstTrust BuyWrite Income ETF (FTHI) also pays out about 93-94% ROC as we've been looking over the last few days. Also that fund is quite a bit older than most of the other ETFs in the space, it goes back to 2014 and has $2.5 billion in it. In it's early years it distributed about 5% but for the last few years more like 10% as interest rates as moved moved up. Side note, if you are going to dabble in derivative income funds I would strongly encourage learning the role that interest rates play in options pricing. 

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.