A New Variation Of The Permanent Portfolio?

I stumbled into a recently listed fund in Canada whose name checks a lot of boxes for what we like to explore here, WaveFront All-Weather Alternative Fund (WAAV.TO). I don't think it could be bought through a US brokerage firm but there could be something to learn from the allocation. Or not, that's the reason to dig in a little. 

The asset mix is comprised of equities, REITs, gold, bonds and "diversified futures" which I take to mean managed futures. This is the most recent weightings I could find.

Using testfol.io, I tried to replicate it two different ways; global equities and domestic only.

Since I think bonds will be a poor hold for the foreseeable future, I went with T-bills and because I couldn't find a complete list of the holdings, I assumed equities and index futures to be the same and added them together but the notional exposure I have might be incorrect. I am not a fan of broad REIT ETFs. The case for PSA makes sense to me because we collectively own too much junk but I don't own that one anywhere and AMT makes sense for the increased need for towers, AMT is in my ownership universe. 

WAAV seems Permanent Portfolio inspired which is why I threw in AQRIX and PRPFX along with VBAIX as a proxy for a 60/40 portfolio makes sense as a benchmark. 

The results are a mixed bag. Both the ACWI and SPY versions outperformed AQRIX which is sort of a risk parity fund and PRPFX which is the Permanent Portfolio. Neither version differentiates in terms of volatility versus VBAIX but in 2022 the ACWI version was only down 4.84% and the SPY version was only down 4.75% versus 16.87% for VBAIX. The 2022 numbers are of course favorable but they did get hit hard in the 2020 Pandemic Crash. 

This isn't radically different from a lot of ideas we look at. The bigger takeaway is to reiterate that there are countless ways to build a portfolio to help smooth out the ride without taking on bond duration.

The other side of my argument comes from Cliff Asness via Bloomberg who bumped up expectations for 60/40 results by 0.30% annually as he looks for better performance from.....bonds. As Bloomberg pointed out though, Asness made essentially the same call about bonds ahead of 2024 and of course bonds continued to struggle.

I'm not picking on Asness. Bonds do not do what they used to. Why then take on the variable of unreliable volatility as I have been describing it for a long time. For anyone trying to just manage or offset equity volatility, there are countless other ways to do just that with far fewer issues than what bonds have been going through. 

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.

Hating Duration, Learning About Staking

First a new, to me, suite of single stock covered call ETF from a provider named Kurv. They have funds for Apple, Amazon, Microsoft. Tesla and couple of others as well as one for the Nasdaq 100. Their Amazon fund symbol AMZP shows a 27% yield, the Apple version shows 78% but I'm not sure that's right. On price basis they seem to land in between the common stock and the YieldMax equivalent. Here are two examples.

And

There's differentiation there but they don't really look like the common. Like YieldMax, I'd say these don't track their reference securities, they are products that sell the volatility of their reference securities. Similar to YieldMax, they appear to be synthetically long (long call/short put) and then sell a call against that combo. The assets are pretty low in these. The reason to mention these at all is if they turn out to have less erosion because of less yield maybe...maybe...then they could be some sort of incremental step to a useable product. The big idea is how to sell volatility safely. That is a difficult needle to thread but staying reasonably current is how to ultimately decide if they are usable in small amounts for a diversified portfolio. 

Corey Hoffstein Tweeted that he is hearing more advisors say they don't see much reason to own bonds right now but that most of those advisors don't have a game plan for when or how to get back into bonds. For purposes of this post, I will assume the context is bonds with duration which I've been bagging on for ages. They've become sources of unreliable volatility and are now ineffective diversifiers.

I can't see ever owning something like 30-40% in duration. One path to having a meaningful chunk of the portfolio could be much lower volatility. I've said many time that I think people want very little volatility out of their bonds and duration is on a run of heightened volatility these days. Maybe they've always been very volatile but it's more noticeable because the 40 year one way trade lower in rates is now over. Another path back could be yields that do a better job compensating for that volatility. It's hard to imagine getting back to 7% yields on ten year treasuries. Maybe it will happen, I don't know but bonds in the early 80's at 15% were absolutely hated. 

There would be some yield where people would hate bonds due to the huge price declines. A yield close to the long term average of equity growth would be compelling. I'm sure I will continue to write about bonds so if we ever get to the point I describe above, I'm sure we'll talk about it. Sort of chunking around on either side of 5% is not the level I'm talking about. I hate duration right now but it is important to keep tabs on it in case it ever makes sense again. 

The first two items in today's post are about ongoing tracking of market segments that we look at frequently. I'll close out with something brand new for me, so I am on square one trying to learn about crypto staking. Staking does not pertain to Bitcoin which is known as proof of work. Staking pertains to proof of stake cryptos like Ethereum and Solana. Again, I am just learning here but staking is vital to the function of the respective blockchains. 

When you stake your Ethereum you are giving up liquidity, you still own it, in exchange for interest. Although it's not interest like from a bank, you get more of that crypto, Ethereum in my example which appears to yield just under 7%. The role of staking isn't crystal clear to me yet but staking allows for validation of transactions on the respective blockchain. There's been an Ethereum Staking ETP trading in Europe for a while. Here's how it compares to the underlying Ethereum.

The two are close obviously but there is a little differentiation. Maybe that is the staking yield? The fund hasn't had any distributions, it appears to accrue more Ethereum. I'm not sure I have any real interest in buying a version of this that lists on the American exchanges, who knows though, but I am curious to see what this niche could become. It's not difficult to believe that as an income stream of some sort, it differentiates from other income streams. That doesn't mean it should be bought, I don't know. Will these funds somehow accrue "interest" the way client/personal holding BOXX does? I don't know, this is maybe day two on this for me. I knew that staking paid interest, that was it and even then that isn't quite on the mark.

Taking in new ideas is crucial for long term investment success. 

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.

Investing Time Before Investing Money

Crazy busy few  days but have had a couple of things kicking around in my head to blog about.

First one is that on ETFIQ this week Kristy Akullian from Blackrock referred to duration as an "unreliable source of diversification." I've been calling it a source of unreliable volatility for a long time now so that is interesting that maybe some big shots are starting vocalize this sort of idea. Note, I am assuming she has never read this blog, I do think though that a couple of people at Blackrock are drawing a very obvious conclusion.

A reader threw down a terrific question that I think tries to dig in on some nuance in the investment process. They wanted to know "where to put your trust" with regard to alternatives. There can be challenges with sorting out the strategy, the market and the managers which can make choosing difficult. Things can go wrong, they point out.

Well, I have an answer and it may not be very satisfying! In the earliest days of my blogging at the original URL, I would occasionally describe the blog as a look over my shoulder at how I navigate market cycles and learn more about portfolio construction and management. Sidebar, never stop learning. So in the context of looking over my shoulder, this started long before 2004 when I started blogging and before I was a portfolio manager. I've always done a ton of reading, learning about strategies way before there were retail accessible products. So I've been collecting information for decades.

The easiest example was learning about blending correlations from reading about Jack Meyer who ran the Harvard Management Company (the endowment) and who had strong opinions about timberland as a diversifier. There are some concepts then that hit right away based on many years of previous study. Client/personal holding BLNDX is a great example. By the time they reached out to me in late 2019, I had 12 years of experience (probably a little more) with managed futures. Despite my being a tiny RIA, in terms of AUM, they gave me a lot of time and I knew from talking to them, combined with what I had learned previously, that they were onto something. 

Client/personal holding BTAL is a long short fund. So called 130/30 funds are also long short. I looked into them a long time ago and it was easy to see that defensive attributes aren't really the story there, the ones I've looked at have equity beta so relying on getting the shorts right can be a tough way to make a living and has far more moving parts than BTAL which does have a defensive objective and meets it quite reliably.

Use the search bar in the right side bar of this site and look for "Simplify." I've been very skeptical of most of their funds and laid out why in quite a few blog posts. HEQT is one that I observed as working very well and then sure enough it got a 5 star rating. 

One filter that I think people can apply is complexity. We picked apart the Simplify Tail Risk ETF pretty early on for its VIX exposure. VIX moves very often have no rhyme or reason except when something bad happens and then a day or three after something bad happens. 

One way to think of what I've talked about with some of these that I actually use is that I take a very long runway before buying. I tracked catastrophe bonds for quite a while before getting in for clients. I had many interactions with the fund company for the cat bond fund I finally added for clients which I realize is a luxury do-it-yourselfers may not have but the recurring theme is investing time before investing money.

Test driving funds with my account for possible client inclusion has also been useful. I chronicled my run with QQQY which sells 0dte puts on the NASDAQ 100. Selling volatility is interesting but with the yields being touted when QQQY listed, my initial reaction was how the hell can it possibly keep up with that dividend but let's see what happens. Turns it out it couldn't keep up. Knowing what question to ask about a crazy high yielding derivative income fund isn't terribly sophisticated but knowing enough about various strategies by virtue of time spent is the real tool to focus on. 

The case of TLT and TLTW (the covered call version of TLT) is useful too.

Where I've talked about the crazy high yielders not being proxies for their underlying reference security, think YieldMax, something like TLTW probably is a proxy for TLT. This reiterates the point that you have to want the primary exposure, that needs to the be priority for, well anything, but today we're talking about alts. The ReturnStacked funds with bond exposure all have a bit of duration with AGG-like exposure or longer treasuries. You have to want that specific exposure for the funds to make any sense. TLT/TLTW is a good example because how far away I want to be from this part of the market. 

Some personal news. Walker Fire, the volunteer fire department where I live and where I've been the chief for 13 years, just got this truck from a department in southern Pennsylvania. 

Almost two years ago we got a grant for the red one below.

Although they look similar, the red one, a 2023 International, is a Type 3 engine for wildland fires. We are able to send it out before and after the worst of our fire season to fires outside our area which brings revenue to the department. The plan was for that revenue to start replacing the older vehicles in our fleet and the green truck is the first one. The green truck is a Type 1 which is for structure fires. There are different capabilities between the two and different equipment. 

The Type 1, the new green one, is a 2004 with very low miles and very low hours on the pump. It was their second due engine so it didn't get used much and they took great care of it. We are incredibly lucky to have found 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.

Wildland Fire In January

I spent the weekend working on a wildland fire here in Walker. We haven't really had any precipitation in quite a while leading to this weekend's two day incident.

It was small but it was legit.

One of the guys got a great picture of me today while we were mopping up. For any fire folks, it was 25 degrees which is why no yellow. 

Hopefully, regular blogging can resume on Monday.

Barron's Gets The Memo

Our conversation here might be getting some mainstream traction from Barron's with the article The 60/40 Portfolio Isn’t Doing Its Job. It May Be Time to Ditch Bonds. That would have been a more timely prognosis in 2018 or so but that's ok. While anyone having meaningful exposure to bond duration up to this point has suffered, what is likely to happen going forward? My assertion has been bonds will continue to be unreliably volatile and have been writing for years that I want to avoid that headache. 

Honest to God, if you're cut in half on TLT or close to half in TLH, even AGG is down 20% from its high, I don't know what the answer is. I don't think the price can recover but eventually you'd get back to even on yield but what if rates go up further from here, the hole gets deeper. The tradeoff for these folks is permanently impairing their capital versus from here going forward, getting the same yield for now (or close to it) with essentially no volatility switching short dated treasuries or just a little volatility in something like bank loans. The bank loan fund I use has a standard deviation of 4.81 according to Portfoliovisualizer versus 14.09 for TLT and I doubt my bank loan fund is unique from the others. 

The three catastrophe bond funds we talk about here occasionally have standard deviations in the twos with very high yields, higher than bank loans. For blogging purposes we build portfolios with pretty large allocations to cat bonds but in real life, something yielding 10 or more percent should not dominate the portfolio, that kind of yield above treasuries has risk even if the consequences don't manifest very often. If you're wondering, there's not much exposure to the fires in Los Angeles County. Wildfires, and tornadoes too, are referred to as secondary perils and while it's not correct to say cat bond funds have zero exposure to secondary perils, they typically do not have much. 

If you care about using bonds to manage volatility, arbitrage strategies seems to do that, they trade in a manner that I think people hope bonds will trade. The names below don't even matter, this is what most of them look like. I think that's a great result as a volatility buffer but don't expect any sort of meaningful yield.

We talk frequently about horizontal lines that tilt upward. That's what the above three do and there are other niches available through funds that look similar but are vulnerable to different things. Merger arb has wobbled a couple of times over the years when rates move up which sometimes is perceived to threaten deal financing. It's never become a serious problem in the more than 15 years I've been involved with merger arb beyond just what I said, a wobble. 

The article recommended the iShares 3-7 Year Treasury Bond ETF (IEI) as "a good core position." A comment I would point toward advisors first is if you want this part of the curve, just buy individual issues. It should be very easy to do on whatever platform you're using. IEI is down almost 15% and if rates go up, that fund could keep going down with no par value to return to. If you need to rent something for a couple of months, ok but as a real holding, if you buy a five year note and the timing stinks, it will go back to its par value pretty soon. If you're a do-it-yourselfer, buying individual treasuries is very straightforward. Sure, other fixed income sectors can be trickier for several different reasons but not treasuries. 

The other day I made a comment in passing about having a watchlist of maybe 50 different alts in various categories that I monitor/follow. There was a surprising amount of interest in that list. One reader posited that I've probably mentioned them all in various blog posts which is correct. I pulled the  number 50 out of the air, turns out it's exactly 50 which make me snort out loud when I counted. 

I'm not going just rattle off the names because quite a few, I'm certain I will never use but there are categories. The list includes quite a few managed futures funds. No fund in a category can always be best but tracking a few helps me better understand the manner in which I do access the space. There are several macro or macro-ish funds, quite a few actively managed ETFs that try to beat the S&P 500, various derivative income funds, commodity funds, tail risk, all the cat bond funds, one odd ball is the CNIC US ICE Carbon Neutral Power Futures ETF (AMPD). Hell if I know what AMPD really does but it isn't correlated to anything. There are also some oddball fixed income proxies that I think are worth tracking. 

Finally, big news for Walker Fire.

We have a new to us Type 1 Engine, a truck for structure fires, on its way to us from Pennsylvania. As I write this, it is in Tallulah, LA and should be here Monday or Tuesday. A couple of years ago we got a grant for a brand new Type 3 engine, wildland truck that looks very similar to the Type 1 but with different equipment and capabilities. The Type 3 was hopefully going to bring in revenue from out of area assignments so that we could start upgrading older parts of the fleet. That plan worked and we had to start with out Type 1 which because of its age is now heavily rusted. 

I am beyond excited. We're going to probably keep it this color but it does need some work. The tires are out of date for the standards we use out here and we need to swap out the SCBA seats in the cab. And even if we do stick with this color, we'll need to take of the graphics on the truck. 

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.

Which Regret Is Worse?

First up today, Eric Crittenden who is the manager of personal/client holding Standpoint Multi-Asset Fund (BLNDX/REMIX) sat for a podcast with The Monetary Matters Network. There were a couple of very useful nuggets that came out of the show. 

These points are really just different ways of articulating what we've been talking about since long before BLNDX started trading so there is an element of confirming my own beliefs.

First, "no one wants diversification until disaster strikes and then they’re all scrambling for it" but concretely knowing when you'll need diversification isn't really possibly. We've framed this as assessing when risks might be elevated versus other times which is a page from John Hussman's playbook. The criticism of the elevated risk approach is that it's likely to predict 7 of the next two bear markets meaning you end up being too defensive. There is a balance to be struck and there is no strategy where you will feel good 100% of the time. I believe in permanently holding a couple of diversifiers and then being willing to occasionally dial up or dial down that exposure. 

"Risk happens fast" as Mark Yusko has said and to the title of this post, the regret of no diversifiers when you need them exceeds the regret of the drag on returns. 

When asked what problem he's trying to solve, Eric said "every 8-10 years there’s some sort off risk event where clients and advisors have regret that they didn’t have something that mitigated the downside" which is a reiteration of the previous point. A tendency that I've seen repeat from cycle to cycle is that people often forget how they feel in the throws of a large decline. I am telling you that "why do we own that" very quickly becomes "I'm glad we own that." It is worth repeating that if everything in the portfolio goes up together then they are all likely to go down together too. 

The last one from Eric is that "a true diversifier is something that stands up when you need the most" which speaks to a couple of things. Adding something like small caps may add different attributes to a portfolio that can help the long term result but it in no way diversifies equity risk. The other point I think this quote evokes is having the correct expectations about what various holdings will do for the portfolio. The next time the S&P 500 falls 30%, small caps won't somehow go up. Similarly, if the S&P 500 rallies 20% this year, it is not likely than managed futures will also go up a lot. 

The Wall Street Journal had a short article titled Your Fancy, New ETF Might Be A Little Too Fancy. The article was reasonably skeptical about some funds and got some details wrong about other funds but as is often the case, the comments were more interesting. Always read the comments. 

The comments were divided into two camps, one camp saying that the leveraged and derivative income funds mentioned are complete fee grabbing scams and others defending them and tried to point out errors in the article and misguided understanding by some of the naysayers. 

My starting point is the construct portfolios overweighted to simplicity, hedged with a little complexity. There's no reason anyone else should use complex products if they don't believe in them. I obviously do but with limited exposure. There is probably debate about middle ground funds being simple or complex which is in the eye of the beholder. I think of client/personal holding as being simple for example, while the one AQR fund in my ownership universe is definitely complex. 

One misconception about derivative income funds shared by the author and some of the commenters was the criticism that they will not keep up with simple market cap weighting in an up market. That is true but that is not what they should be expected to do. Over the long term they may or may not have some value you deem as additive to portfolio, but keeping with the market is not what they add. That's not me encouraging anyone to use them, maybe they make sense to you, maybe not, but anyone who is curious enough to learn about them and then make a decision might want to understand what they are evaluating. 

Another aspect to complexity is that not all the funds will work as intended. The best example might be the now closed Simplify Tail Risk ETF which had an all-timer of a symbol, CYA. The fund was short lived and just blew up. As we talked about as it was imploding, I believe the strategy was too dependent on using option combos on VIX which proved to be very unreliable versus doing more with put options or maybe they just should have done less with the VIX complex. A little less dramatic complexity that doesn't seem to work in fund form has been risk parity. I don't believe there were any catastrophes, but comment if that is wrong, but Wealthfront closed it's fund and I believe AQR also had a fund that it rebranded to include risk parity but not have that as its sole exposure. 

Doing the work to try to sort these out is both fun and productive for me, but if not for you, don't do it, simple as that. I would reiterate though that I sort through far more of these than I ever use. I have an alts watchlist that I track with maybe 50 names on it in pursuit of using just a handful.

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.

Languishing In Duration & Trend

The catalyst for today's post came from Torsten Slok who noted "unusual behavior" in the ten year treasury after the first rate cute last year.

The green line is the yield going up compared to the average of what has happened in previous tightening cycles. As a reminder, if the yield is going up, then the price is going down. Meb Faber retweeted something from October 2023 where he said "if stocks were down 50%, everyone would be losing their mind. But long bonds are down over 50% and everyone is super chill."

TLH is down 42% from its high and TLT is down 48% from its high. Close to 50% but not quite. While we can't know what will happen, it is a good bet that the declines in these two funds is money that is lost forever and that the declines in individual issues bought at the same time is money that is lost for decades. Slok is pointing out the unusual reaction since the FOMC started cutting or put differently, bonds are now unreliable sources of volatility as we have been describing it here for a couple of years. 

The argument for taking on duration has been reinvestment risk. This thought prevailed for a while but I perceive that this has become less of a concern as all those Fed rate cuts that were supposed to happen, never materialized. Reinvestment risk is the risk that when the note or bond matures that rates have gone down in the interim and that you are then forced to reinvest at a lower rate. The tradeoff is longer duration and all that volatility that potentially goes with it. A one or two year note won't move around too much in price unless something crazy happens but even then, you're only a year or two from getting your money back as opposed to ten or 20 years from getting your money back.

Related, I got an email announcing the Simplified Downside Interest Rate Hedge Strategy ETF (RFIX). The Simply funds are complicated, as is RFIX, but the email explained it very plainly. The fund has a 43 year duration which is longer than any fund I am aware of. 

The primary idea for using RFIX is not 60% equities/40% RFIX, there's not enough Dramamine for that sort of ride. What Simplify suggests as the intended use is replacing a core bond allocation in a 60/40 portfolio with a 6% allocation to RFIX to capture the same effect. This is obviously a capital efficient application of the fund. That leaves 34% left over for portable alpha, extra interest on cash or a combo of the two. 

Obviously, you have to want to core bond exposure generally and then be comfortable with the line item risk expressed in the following chart. Sized correctly, a big drop in small allocation to RFIX would equal a smaller drop in dollars to a larger allocation to a regular core bond fund. 

Just leveraging up fixed income like RFIX or equities in funds like the various 2x SPY ETFs from Tradr seems like a much simpler way to build a portable alpha strategy than blending two different asset classes together along the lines of what ReturnStacked and Wisdomtree among a couple of others do. You'd need to have enough track record to have a basis to believe that Simplify can replicate the exposure they are targeting. RFIX just started trading in December so it's too soon to know but 2x S&P 500 funds have been around long enough for anyone interested in portable alpha to draw a conclusion. When RFIX has some track record under its belt, we'll have some fun with it on Portfoliovisualizer.

Speaking of Tradr ETFs, Matt Markiewicz, head of product development and capital markets from Tradr was interviewed by ETF.com. If you listen, I think there are things to learn but I was most interested by a comment Matt made starting at the 6:29 mark. When asked about new product development, he said they are more focused on "what tools might be useful in a portfolio setting...focusing on some of the broader exposures," broader indexes as opposed to betting on individual stocks using leverage. Who knows what will come of it but I like the idea of focusing on innovation to help portfolio construct continue to evolve. Tradr ETFs' weekly/monthly/quarterly 2x index funds are an evolutionary step. Maybe they will add into the portfolio some day or maybe not but it is important to stay in touch with how these sorts of things evolve. 

And a quick pivot to a Bloomberg article (via Yahoo) that tries to dissect the problems that managed futures has been having since its glorious run in 2022. We've looked at the struggles of managed futures since then, many times. 

Yes, it has been a challenging hold since the 2022 glory. But as I've been saying (occasionally) since maybe 2010, managed futures tend to have a negative correlation to equities. If equities go up most of the time, then maybe managed futures will go down most of the time. When equities go up a lot, it probably doesn't make sense to count on managed futures going up too. 

Managed futures can go up with equities but the point is not to count on that happening. As we've been saying lately, just about any backtest you could run with a large weighting to managed futures looks fantastic but actually enduring a run of languishing is a whole different matter. Just don't with an enormous allocation to managed futures. Diversify your diversifiers. Ideally, a basket of alts will be vulnerable to different things and some will be first responders, some will be second responders and maybe some will be uncorrelated with very little 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.

Retirement Algebra, Solving For U

The Wall Street Journal had an article about the fear common to retirees about outliving their money. We've looked at this quite a few times. It can be difficult to switch from saving money to spending it. Knowing myself, I expect spending what we've accumulated will be difficult. 

The title of the WSJ article addresses outliving your money but doesn't spend very much time on a big part of the reason why this a concern which is needing needing to pay for some sort of very expensive assisted living or home health care. One suggestion about this that was thrown in was if necessary, people can use their home equity to pay for this sort of care. Before yeah butting me about long term care insurance, I've seen content (sorry no link) about LTC insurance not keeping up anywhere close to the inflation rate of healthcare costs. I'm not an expert here, I don't sell insurance. 

Average stays in facilities tend to not be very long but there are plenty of exceptions to that average. 

Spending down at an expected rate and then at 90 not being able to cover this expense would certainly be stressful and getting to 90 with more money than you started with because you listened to someone who said you can only take 2.7% out while having sacrificed a long list of things you wanted to do would reasonably cause regret. 

This is a problem to solve or maybe better for this post, to map out. What are your potential income sources and what could go wrong with those income sources? Are you likely to inherit money? What if that doesn't happen? What are regular expenses and how can you see them either going up or going down? What about irregular expenses like vet bills, expensive car repairs or repairs/remodeling for your house? What do you like to do and how much does it cost? Tough one now, what is the likelihood of having to help family financially and what might the details of that be? An even tougher one, if you have medical issues, how expensive are they likely to be? I understand the difficulty of that one but <very harsh comment coming> if you're 50, overweight and taking a half dozen medications, you should plan on health stuff being very expensive. Health issues are a real look in the mirror issue in terms of being honest with yourself about whether bad habits are part of the problem and what you might be willing to do about that versus issues that have nothing to do with habits that really are just bad luck. 

Looking at Social Security is a good starting point. The SS Admin wants everyone to know how much they are due to receive. Looking up your benefits at different ages is easy an then figuring out whether the lower earning spouse is better off with their own benefit or the spousal benefit (50% of the higher earning spouse's benefit) is easy. 

I've said many times that I plan to wait until 70 and that I think my wife should take hers at the same time which would be 64 and 2 months. My 64 and 2 month number is $3049 which is where I get the $1524.50 number for her. $6300 in today's dollars goes a long way for us, that's quite a bit more than our fixed monthly expenses but might be about equal to regular monthly expenses plus once or twice a year type expenses like property tax, home owners insurance and so on. What's the risk to Social Security income? Everyone knows this, the risk is some sort of benefit reduction. Something like 20-25% is what is thrown around in the media. In the past I worked through a process that led me to conclude that people born before 1975 won't have to actually confront a benefit reduction but plan for it anyway, where does that leave you?

If you will pull an income from an investment portfolio, what could go wrong? Lousy longer term returns could be a problem as could some sort of mistake. More simply, results that are less than expected which would be a problem.

We have a short term vacation rental. Obviously bookings could dry up or at least go through a some sort of downturn resulting in less income. At some point, we may not be able to do the work needed to continue to rent it out. We could hire a management company which would reduce our income or switch to a long term rental which would also reduce our income. 

Do you plan to work one way or another, consulting, part time or monetized hobby? What could go wrong there? The demand for your service could be less than anticipated or some life circumstance could get in the way resulting in far less income or no income.

If you might inherit money, does your plan rely on that coming through? What happens if it doesn't or is much less than you thought? We stand to inherit a little but I've never factored that in. It's probably easy at 40 while parents are hopefully healthy at 70 or so, to say that you're not counting on inheriting money but at some point, maybe it should be factored in. If you're 63 with one living parent who is 95 with $2 million spending $10,000/mo on some sort of assisted living, odds are you're going to inherit money. If that money is in an IRA, that is going to change your math considerably due to having to withdraw all of that inherited IRA within 10 years. It's not like this is a bad problem but there can be expensive mistakes made in this sort of scenario

I want to believe that it is not realistic that if someone has a set of maybe five or six assumptions that go into their retirement plan, that not all of them would have a worst case outcome. Having one or two take a turn would be bumps in the road and we need to be able to roll with those punches. Everything going wrong would be really bad luck. We all know someone for whom bad luck just seems to find them. Harsh comment, if you're that person, plan accordingly. 

For the fear of needing a lot of money toward the end for advanced care, if someone has enough, maybe they could partition off some of their net worth for this purpose. For us, the equity in our rental home could fit this bill if we ever need it. The mortgage will be paid off when I am 66. You'll find arguments on either side of investing in real estate but it is a store of value if nothing else and it has gone up enough in value since we bought that it just being an inflation hedge going forward would be a decent outcome. For someone in a different circumstance, maybe a Roth IRA could be where long term care expenses are partitioned. 

This whole exercise was bottom up and based on very simple questions. Maybe you have very few moving parts or have many more moving parts but it is important to realize that no one's retirement plan will be done in by everything going exactly as planned. The threat is things going sideways and the consequences of that threat are magnified by being unprepared. 

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.

Theory So Crazy It Just Might Work

A couple of fun odds and ends today starting with a post by Josh Brown about dividends. The TLDR is buying stocks just for their dividends is a bad idea. He's not against dividends, he is saying that buying just for the dividend is a losing strategy. I would say, and I think he was on a similar page, that in a diversified portfolio that goes narrower than a very broad based index fund will probably have a couple of "good" dividend stocks in it. 

I'm many, many years out of touch with the vibe at Seeking Alpha but 15 years ago, so many of the contributors and readers were dividend-crazy. I think I referred to them as Dividend Zealots. 

The chart compares the S&P 500 (SPY) to four long standing dividend focused ETFs with dividends reinvested. Lagging the market cap weighted SPY doesn't have to be a bad thing but the max drawdown numbers are not compelling and neither is the volatility. Lagging with much less volatility is appealing but that's not what the dividend funds have done. Yes the dividend funds did better than SPY in 2022 but not 2020 and in the financial crisis, I believe DVY was the only one that was around and being heaviest in financials, it did very badly. 

One more point Josh makes that echoes what we've talked about before is that total return and being willing to sell occasionally makes better tax sense. Long terms gains get better tax treatment everything else being equal. This won't matter of course to IRA accounts and the effective tax rate on dividends can be very low depending on having a low earned income but with a low enough income, long term capital gains can be taxed at 0%. 

Josh also had an anecdote about shipping companies, the kind that transport oil and the like and have crazy high yields. One of the "stalwarts" in that space was Nordic American Tankers (NAT) which still trades and still has a crazy high yield, Yahoo shows it yielding 14%. Twenty years ago it had a similar yield in a three percent world. I was of course fascinated by the stock and the space but the refrain that kept me from ever buying it was that getting double digit yields in a low single digit rate environment takes on a lot of risk regardless of whether you understand that risk or you do not. I remember the CEO used to be on CNBC with Jim Cramer all the time being touted as a great CEO.

That chart reinvests the dividends. Without reinvesting, NAT compounded at a negative 7.10%. It's not that something with NAT's risk should be avoided at all costs or that something yielding 14% in a 4% world must be a bad holding but not understanding these dynamics will lead to regret. Something like NAT could make sense for barbelling yield and taking the dividends out. Maybe some of NAT's payout is characterized differently than dividends, I don't know but some other crazy high yielders do characterize some of their payouts differently (tax friendlier) and erode slower than NAT.

As I was writing the above section, the following barbell strategy occurred to me.

If you just saw the result, not the constituencies, they would be very compelling. Instead they are very extreme. I don't think picking Amazon for this exercise is too far out there, it's been publicly traded for almost 30 years. The timeframe of the backtest is very short. Going from memory, Amazon dropped 90% in the tech bubble, 75 or 80% in the Financial Crisis and in 2022 it dropped 49%. It's a good bet that the next time the stock market goes down a lot, Amazon will go down a lot more. If the common cut in half again, it would create a huge hole for a 2x Amazon fund to dig out of and that would blow up the model. 

Take this just as a though exercise to look at how volatility can work, both buying it and selling it. As we've said before, the crazy high yielding single stock covered call funds are not proxies for the underlying, they are products that sell the volatility of the underlying. AMZY is not a proxy for Amazon, it is a product that sells Amazon's volatility.

Small weightings to the 2x fund and crazy high yielding covered call fund blend together to do something interesting. I chose T-bills for Portfolio 1 because there is essentially no volatility or risk and for the other I chose catastrophe bonds which also have very low volatility with only limited windows for when there is potentially a serious risk event. Cat bonds yield about three times what T-bills yield so there is risk there even if you don't understand the risk and an 85% allocation is good in theory, it would be an accident waiting to happen in reality. 

Maybe instead of thinking of a 2x single stock fund being 2x, we should think of it as magnified exposure. AMZU seems to reliably magnify the exposure of the common but not necessarily at 2x of what the common is doing. 

This is all interesting work, and fun, even if I haven't figure out what to do with it just yet.

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

Avoiding Retirement Regrets

Yahoo wrote about the biggest regrets that people had about retiring. Sprinkled in there of course were some grim average and median retirement account balances. The first regret was not saving enough. If life circumstances are such that someone can't save like a low income or something involving special care for a child then I wouldn't dwell on that as a regret. Yes, someone in that spot certainly needs to figure something about but I'm not sure there's action there to regret as opposed to a lifetime of bad decisions about spending money and waking up at 60 years old with $50,000 put away. That second scenario would be regretful.

Someone at 60 being a little short of where they should be may lead to regret but that is workable by either saving a little more if possible, working a little longer if possible, figuring out how to spend less or some combo of the three. Maybe people should focus less on hitting their retirement number versus hitting a workable number. Harshness coming but if you think you need $1.1 million to retire at 66 and at 65 and a half you have $900,000, you gotta figure out how to make that work (save more, work longer, spend less, all three).

The second regret listed was taking Social Security early. I'm not big on telling other people when to take it. I plan to wait and have been clear that's for my wife in case I die young. I think my wife should take it as soon as I do, if I can hold out to 70, she would be 64 and 2 months. The better way to think about regrets related to taking Social Security is not being fully informed, not putting in the effort to learn how it works at the most basic level and the nuance of things like working and taking it before your FRA (if you don't know what FRA is, you've got some learning to do). 

Taking Social Security early is fine if it has been well thought out and planned. There is a way to back track if someone realized after the fact the took it too early but that could be expensive. It can also be suspended for a limited time too. 

Retiring with too much debt was on the list. Every other aspect of life is easier when there's no mortgage and no car payments. Not everyone will be able to retire without those payments but my statement is true. If someone has credit card balances at that point from buying stuff and taking trips then that's on them they did that to themselves and that seems like it would cause a lot of regret. Again, I would not beat up a circumstance of having to pay for something very expensive to help family and needing debt to do so. It's not for me to generically say, you shouldn't do that.

I do realize that a lot of people do have debt and that's just how it is but again, every other aspect of life is easier when you don't.

Then the article hit on something we talk about frequently, saying that six in 10 retirees retired sooner than they were planning, implying their hand was forced somehow, but that only 1 in 5 retired early because they were financially able to do so. This part shines a spotlight on how we cultivate our resiliency and optionality. 

Fitness and metabolic health are both low hanging fruit for this part of the discussion. Of course I am going to say to lift weights to build/maintain muscle mass, promote bone density and there are countless metabolic benefits to lifting weights too. A lot of chronic maladies can be prevented or reversed by cutting way back on carbs. Google reversing Type 2 diabetes. Then Google Type 3 diabetes. The body is incredibly forgiving but you have to do the thing. 

Keeping engaged and challenged along with learning new things is a way to stay sharp and maybe take on new skills that can be monetized if you're part of the 6 of 10 a couple of paragraphs up. 

The last regret is also one we talk about which is planning what your actual retirement lifestyle will be. I've said 100 times that waking up on day one of retirement and saying to yourself, "ok, now what am I going to do" is a very bad spot to be in. 

My wife sent me a Facebook reel posted by a doctor whose practice involved seeing older patients and she had several observations that weren't medical in nature but more like observations from engaging with patients all day every day. Have a garden, not so much to eat from although great if you do but have a garden because it requires planning and gives a reason to look to the future. She said lift weights which we've already covered. Don't retire early unless you're retiring to a second career or a hobby that challenges you mentally or volunteer somewhere for the same reason, to which I would add to very actively volunteer, the more you put in, the more you will get out. She closed with the observation that so many people nose dive when they retire to do nothing.

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.

Macro Is Sooooooo Back!

Barron's had a short article looking at global macro funds. We dig into the space here a little bit, several AQR funds seems to delve into macro and the article also included Campbell Systematic Macro (EBSIX) which we often use for blogging purposes as a proxy for managed futures. The article also mentioned three funds that were new to me.

• Fulcrum Diversified Absolute Return Fund (FARIX)
• OnTrack Core Fund (OTRFX)
• Quantified Alternative Investment Fund (QALTX)

It's always interesting to see whether an unfamiliar fund might blend in to improve the overall risk adjusted return. Or not. Here's how they've done compared to the iShares 3-7 Year Treasury ETF (IEI).

OTRFX had a phenomenal 2020, it also had a strong 2016 and settled in with the pack the rest of the time. Here's the year by year with 2022 highlighted.

The Calmar Ratios are good for all of them but the kurtosis numbers are not which is a strike against relying on them as low vol, total bond replacements. Next is looking at how they blend in. To keep it consistent for this post, I'll use IEI.

There is some differentiation in terms of return, standard deviation and Sharpe Ratios. I would discount the result for the OTRFX version because the huge gain in 2020 for that fund is enough to skew the whole backtest. The FARIX and QALTX versions have less differentiation. 

None if the three create much of an impression of reliably delivering some effect that would enhance what I'm already doing but it was worth looking.

There was one comment on the Barron's article that said "High expense ratio and significantly lower performance than broad index fund combination (60/40). Why would anyone invest in these funds?" Regardless of whether you believe in macro strategy funds or any other type of alternative strategy, if you are one to study different types of strategies, it would be more productive to think about them in the correct way. Maybe there's a macro mutual fund out there that is a replacement for a 60/40 fund but that's typically not the objective.

Generally, macro funds and alts more broadly are trying to offer an uncorrelated return stream, uncorrelated to stocks, bonds and stock/bond combos. We've categorized these as being negatively correlated like client/personal holding BTAL or managed futures or uncorrelated like arbitrage and some macro funds would fit that bill too. 

Above, I mentioned reliably delivering some portfolio effect which brings us to this recap of AQR funds from Bloomberg. I think the article is talking about AQR's portfolios outside of mutual funds in reporting on AQR Market Neutral Fund because no ticker symbol was included. That fund was up 25.3% in 2024. That's an enormous gain for a market neutral fund at least in terms of how I think of market neutral. AQR has a mutual fund with that name that has symbol QMNIX and that mutual fund was up 25.29% so maybe Bloomberg did mean the mutual fund or maybe the mutual fund is managed exactly the same. Either way, when I see something like that, my first inclination to think that if it can go up by that much, then it can go down by that much.

That's pretty much the case with QMNIX' history. Portfoliovisualizer has QMNIX dropping 19.52% in 2020 after dropping 11% in 2018 and the same 11% in 2019.

There's clearly been some overlap with QLEIX, maybe QMNIX is a less aggressive version of QLEIX but it doesn't set the expectation of being a horizontal line that tilts upward. QMNIX is a five star fund but the expectation shouldn't be a very low vol, consistent result. 

This brings us to a fantastic paper written by AQR Founder Cliff Asness titled 2035: An Allocator Looks Back Over The Last 10 Years. It's obviously a tongue in cheek look at some of the crazy things going on these days like Fartcoin having a $1.5 billion market cap, the shenanigans going on with "volatility laundering" which is Cliff's term for the way private equity is made to appear to have very little volatility and a couple of other more useful reminders about important investment concepts. If you click through to read, make sure to click on the footnotes along the way, some are funny and some have very important content.

He's a big believer in Risk Parity which weights asset classes based on their risk which usually results in leveraging up the bond position. In ETF and mutual fund form, this has been disastrous but Cliff still believes in it. Bonds "are only boring if you invest in them traditionally. They are not boring in, say, risk parity or levered 60/40 portfolios which both, in this last decade, resumed their long-term pattern of outperforming unlevered, conventional stock/bond combinations of corresponding volatility, admittedly mostly because bonds were not as subpar as equities." So embedded in there is an expectation that stocks will look more like they did in the 2000's. 

Maybe, the next ten years will be subpar for equities, I don't know, and we'll have to figure something out if that happens but taking on duration, never mind levering up to take on duration, is not something I am going to do. The headache avoided by just leaving out duration is something I am very confident in. 

There was a quick mention of international equities which have lagged for ages. Going heavy with foreign was a huge difference maker in the 2000's and will be important again but I have no idea when. I have less foreign exposure than I used to but never bailed on it entirely. 

He went on at length bagging on private equity. I don't think he's anti-private equity, just making fun of what I mentioned above. I don't think the "good" deals will be available to everyday investors and it is not clear to me why anyone needs expensive illiquidity. If you have to have this exposure, I think one of the operating companies that benefits from running private equity would be a better way to go. Not an ETF, an individual name. 

He jokes around about bailing on managed futures at exactly the wrong time. I am a huge believer in managed futures, huge. Backtest it any which way you can and the results always look great but it is a very difficult strategy to just sit in. Managed futures can lag for a long time, there are several market conditions that increase the odds of languishing. 

A way that I've put this previously about managed futures specifically and alts more generally is that equities are the thing that goes up the most, most of the time. It should not be surprising then that a strategy that historically has a negative correlation to equities does poorly when equities are up a lot. We have two years in a row now where equities were up a lot and managed futures languished which is exactly what should be expected. I said the same thing in various places I-don't-know-how-many-times during the 2010's. 

In 2022, there were countless calls to increase managed futures to 20 or more percent which I equated to similar calls about REITs and MLPs before the financial crisis. The more time goes on, the worse the 20%-to-managed-futures calls look. God willing I live to a ripe old age and go through another 5 or 6 hideous bear markets, I am confident that managed futures will work very well in 4 or 5 of them not all 5 or 6. Picture the stock market cutting in half and your 20% allocation to managed futures dropping by a third. How bad would that be? Diversify your diversifiers and don't have a portfolio of diversifiers hedged with a little bit in equities. 

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.

New Year's Day Retirement Spectacular!

Barron's has an article about how to protect your portfolio, er sort of. Basically, after a couple of quotes from William Bengen, father of the 4% rule, about his tactical portfolio currently being 37% allocated to equities, there are a couple of suggestions from William Bernstein about just having less equity exposure. 

Portfolio No. 1: 15% U.S. stocks, 10% international stocks, 75% one- to three-year U.S. Treasury bills.

Portfolio No. 2: 15% U.S. stocks, 10% international stocks, 75% split between Treasury bills, five-year Treasury notes, and intermediate corporate bonds.

Then there was this surprising quote from Bernstein;

Over the long run, Bernstein estimates that these 25/75 stock/bond portfolios will trail a traditional 60/40 stock/bond portfolio by at least one percentage point a year. That’s a lot.

What do you think about that 1%? Can that be right? Wouldn't 25/75 lag 60/40 by a lot more than 1%? Well, yes, yes it would. Using testfol.io, we can go back pretty far.

Generally, I always say that if you need growth beyond the rate of price inflation, that you should have some sort of normal allocation to equities. Not everyone needs growth though. It's not that 75% in T-bills must be the wrong allocation but it's not going to trail 60/40 by only 1% unless short term rates get up in the 7-10% range. Where we talk about the importance of expectations, a portfolio that lagged 60/40 by a little with much lower volatility would be desirable for many investors but the idea that 75% in T-bills could offer that is not reality with rates where they are, it's an incorrect expectation.

What about leveraging up the equity exposure with a 2x fund? Keeping the same 25% in risk assets but going with ProShares Ultra S&P 500 (SSO) equates to 50% in equities plus then 75% in T-bills or The Vanguard Total Bond Fund (VBTLX).

If we go back to 2002 with this second back test using ProFunds Ultra S&P 500 (ULPIX) which is the mutual fund predecessor of SSO it looks bad because of how big of a hole any 2x fund would have had to dig out from after 2008 so there's some good context about the risk of any leverage strategy. The second backtest also cuts out the lost decade of the 2000's. 

Actually, the lost decade up until the end of 2007 was pretty good for this concept using 25% into ULPIX instead of SSO. 

So the problem was the Financial Crisis, this idea unravels holding through the financial crisis. How realistic is it to see trouble like that coming? Usually we address that as recognizing when risks are elevated not wild-ass guessing that a bear market will start. This is a bit of process taken from John Hussman. 

No BS, I flat out got ahead of the Financial Crisis. Here are some samples from Seeking Alpha here, here and here. All three are from late 2007 and talk about me calling it a bear market and defensive action I was starting to take. The third article linked is from 11/23/2007 and I say "I am convinced that the market has started to turn down into a bear." There's not much of a content trail available from 2021 but I was holding BTAL and BLNDX for clients (still own them for clients and personally) and derisked a little more late in 2021 when it seemed plausible that congress might actually allow the US to technically default on its debt. I added an inverse fund to client accounts, held it for a while, and the combo of BTAL, BLNDX and the inverse fund helped avoid the full brunt of 2022's large decline. 

So as someone who has maybe dodged the full brunt of a couple of really big events, I don't know how realistic it is to see serious market trouble coming. I have a process and am comfortable sticking with it but I don't assume infallibility. For as much as we explore using leverage and the concept of portable alpha, this post turned into a great example of how what appears to be a valid strategy (I do think it's valid) can get done in by an adverse sequence of returns, depending on how it's built. At its 2009 trough, SSO was down more than 80%. 

The closest I am willing to get to leverage in this context is leveraging down like having slightly more in equities, hedged with a reliable first responder defensive or a multi-strategy fund like BLNDX where the assets and the strategy give a reliable result. 

To counter Bengen and Bernstein, if you need growth then have a normal allocation to equities (repeated for emphasis) and keep some number of months' worth of expected expenses in cash like maybe two years' worth. 

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.