Harsh But True

Some odds and ends today.

Chances are you know not to get a reverse mortgage other than as an act of desperation but you know someone who is not clued into this. I learned about someone in Walker who is underwater on their reverse mortgage because of how long they took it out and now they want to sell to leave Walker as a function of age. 

Technically, you can't be underwater on a reverse mortgage but as you take payment after payment each month your balance builds up and when you sell, that balance needs to be repaid plus the interest. If the balance and interest exceed the value of the sale proceeds you get nothing. The lender gets made whole by the FHA.

I don't know these peoples' financial situation but getting money out of their house won't be a part of it. 

Allan Roth wrote favorably about TIPS ladders. I'm not a fan but he is. I should say I am not a fan of going heavy. We looked at a use case of a small allocation for an expense that might track somewhat close to CPI versus expenses that won't. Property tax yes, various types of insurance no. 

If the intent is insulating a piece of money against inflation without taking on full stock market volatility, ok, they should be better than bonds but I think there are better ways to do it without the volatility of long dated TIPS. 

Finominal did an assessment on this model portfolio from JP Morgan.

It aligns as 75% equities and 25% bonds. Finominal thinks the best comparison is 75% iShares Russell 3000 (IWV) and 25% IUSB. 

I loaded this into testfol.io but replaced JBND with BND which is a Vanguard fund that does the same thing and allows us to look at four years.

Um,

This is a recurring theme with a lot of model portfolios. No differentiation. I had a blog post a few months ago titled something to the effect, why use two funds when you can use 11 which are the numbers in today's examples. 

I think JP Morgan is just showing how their funds can be used which is fair but I don't know why any advisor would implement this. 

Barron's wrote about what to do now that "interests rates are surging." Whatever happens next, it's a bad bet to think you can out nimble the interest rate market versus laying out a plan for yourself ahead of time and generally sticking with it. 

We have framed this as recognition that rates weren't compensating the volatility and risk of longer dated bonds. We spent a lot of time trying to build a portfolio sleeve that would do what people want bonds to do and added the consideration for what point yields will adequately compensate for volatility and risk of longer dated bonds. 

Several of the recommended funds in the article are low duration. Is now the time the rotate from long duration to short duration? Where were they five years ago? Making that trade now is a guess that might be correct or maybe not but reacting after the surge is not assessing the risks it's a guess. Harsh but I think correct.

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