"The Fragile Decade"

Retirement Researcher wrote about what it calls The Fragile Decade with the primary focus being sequence of return risk of poor market returns in the first few years of retirement. You know this already but retiring on December 31, 2007 could have created a serious headwind for a sustainable retirement versus retiring two years later. 

The blog post suggested four ways to mitigate sequence of return risk in a scenario like retiring on 12/31/2007.

• Spend less than 4% to start
• Have the flexibility for variable withdrawals
• Have a more conservative asset allocation when starting out and increase equity exposure later
• Set cash aside to cover X number of months of expected expenses

We've talked before about having a little more cash set aside and kind of related to the asset allocation bullet point, the help that a small percentage in negatively correlated assets can give. A 5% weighting to reliably negatively correlated holdings could grow to 8-9% in the face of a hideous decline. The need to protect against a large decline lessens after a large decline and could be a source of funds in addition to some holdings that are intended to look like horizontal lines that tilt upward no matter what is happening in the world. 

The point is to avoid meaningful sales of assets that have gone down a lot. As the Can I Retire Yet blog said, "all that matters is having enough—enough for me and my needs alone; enough to get me over the finish line" which is a crucial perspective to have in the withdrawal phase. 

I hadn't put this together before but one of my longest tenured clients was 57 and retired when they hired me in 2005. My philosophy was the same back then but there were far fewer tools available. During the summer of 2008, holdings included a gold miner, GLD, an inverse fund, RYMFX and cash to ride it out. This sort of protection is now much easier to add as the fund space has become more sophisticated.

When the financial crisis really kicked in, it was of course an emotional event for the client but I believe it was a great litmus test for the philosophy of cash and low/negatively correlated assets. 

I want to put a different meaning on The Fragile Decade. Fragile decade is a good description for the ten years before you retire too. By your mid-fifties, you probably have some idea of if/when you want to retire, how you'd pay for retirement and have something in mind for taking Social Security. Even if someone that age doesn't have it all dialed in they probably have some sort of framework. 

The fragility in this scenario comes from some event derailing that framework. If at 56, you know at 64 you will have enough to retire and then take Social Security at 67 (so eleven years) there are quite a few different areas of potential derailment. We've talked about several different ones including job loss having to do with something at the company, some sort of health or injury that prevents working, some sort of enormous, unexpected, ongoing expense like care for an aging parent and there must be others. 

In this scenario with our current 56 year old, what if he loses his job at 57, can't find meaningful income replacement so instead of taking SS at 67, he's now looking at 63. The drop in benefit paid for my numbers from 67 down to 63 would be $1049 less per month. Even if it's not precisely linear from person to person, the percentage drop is probably close and that could be a meaningful amount. 

What if layered on top of the job loss, when he's 58 the stock market embarks on 30 month bear market like the popping of the internet bubble and then takes quite a few years to get back to its highwater mark and so too does it take quite a few years for the portfolio to get back to its highwater mark? 

The idea is not to plan for some specific adverse outcome but to work on overall resiliency in case something comes out of left field. This would be a spot to misuse the term antifragile. An adverse outcome doesn't have to leave us better off, just that we stay close to "all that matters is having enough—enough for me and my needs alone; enough to get me over the finish line."

A weird adverse outcome maybe, for an acquaintance who has been making a ton of money for the last few years, 37% federal tax bracket money. He and his wife, they're my age, had a very rough go of it financially for quite a few years starting in the financial crisis, it took awhile but it worked out with this job. I don't really know what they have in savings or the extent to which they do or do not live below their means other than driving older cars but he is going to lose his job in a buyout. 

He is slated to walk away with $4 million, he said $2.5 million after taxes. I don't know whether there is any flexibility in how the payout is taken to reduce the tax burden like $400,000/yr for ten years maybe. Making up numbers and simplifying things, if they have $1 million put away and add another $2.5 million, the 4% rule says they can take $140,000/yr. Where he might be making $800,000-$900,000/yr, if they are living a $350,000 lifestyle, $140,000 doesn't sound so great. There's a lot I don't know which is fine, the thing to take away is something that seems like a great outcome may not be.

My thoughts have long focused on taking the long path to cultivating income streams. I write about this all the time because it seems like the easiest path. There needs to be a willingness in the cultivation process to do things for free and one piece of advice I got a while back is be willing in certain circumstances to do things that other people don't want to do. Another way to describe what I mean is paying your dues. 

The fire department is an example for me. For whatever reason, from the moment I walked in the door I was very motivated to be part of the solution, part of making it better. This was before I understood about it leading to being a lucrative side-gig if I ever needed it. 

Retirement is a word problem like a train leave Baltimore at 5:30.... and it is up to us to figure out how to solve 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.

Navigating The Liquid Alternative "Terrordome"

Jeff Ptak had an interesting writeup at Morningstar about the number of failed liquid alternative funds as measured by how many of them close. 

He says that of the 1,345 alternative mutual funds that existed on Jan 1, 2015, only 341 still trade today. So 75% failed. 

The point is worth digging into but the article seems to go back and forth between liquid alts and alts that are not liquid which is a whole different thing. 

Part of the story with the closure of so many liquid alternative funds stems from some strategy doing very well causing a surge in demand leading to a bunch of new funds. Then maybe the strategy in question struggles, investor interest wanes, leading to some of the marginal funds, marginal in terms of size, to close. My hunch is what I just described is the exact arc for managed futures. There have been a lot of new funds come out and the space has struggled for years in the past. We may be in the early innings of a multiyear struggle.

The conversation here for years has focused on having the wrong expectations for what specific alts will do and having the wrong portfolio sizing. I tell this story all the time but 20 years ago we talked on the blog about what terrible advice putting 20% into REITs and MLPs was and then sure enough they did not help in the Financial Crisis. The reason was simple to understand ahead of time, in times of turmoil the correlations to equities of those two niches tends to go up. Own REITs and MLPs if you want, just don't count on them to go up in a crisis. Both dropped a lot in the early April panic.

Lately there had been chatter about 20% into managed futures. Again, terrible advice. I don't think there are too many people saying this anymore compared to a couple of years ago though. Managed futures are a fantastic tool but a fantastic tool used incorrectly is going to become a problem. We'll see of course but to the premise of Jeff's article, I would expect to see attrition in the managed futures space.

If you've been reading this blog for a while you probably know I am a big believer in merger arbitrage as an alternative exposure. Client/personal holding the Merger Fund has been around since the early 90's and has over $2 billion in AUM. The other old fund in the space that I am aware has symbol ARBFX, it has been around since 2000 and has $730 million. 

To a point Jeff made, there is no hot sales pitch for merger arb. It's boring! That ought have them lining up. There are other merger arb funds but not a lot of them. I don't think the attributes of merger arb lend themselves to a rush of demand so the risk of closure of a specific fund might come down to whether there are enough demand dollars to keep ten of them (not sure the number and Copilot had the wrong answer) in business? The answer might be no but if it is no, I am not worried about the 30+ year old fund with $2 billion being the one to close. 

We look at the Absolute Convertible Arbitrage Fund (ARBIX) for blogging purposes but I don't use it for clients. I think this is the only pure convertible arb fund (if you know any others please leave a comment). ADAIX from AQR includes it but that one also has merger arb and event driven. ARBIX has over $1 billion but the fund isn't that old. If it really is a category of one and it has that much AUM, it's not likely to close.

Is risk parity an alternative strategy? There are just four or five funds. Wealthfront had a large one and it closed, presumably due to poor performance. The RPAR ETF has just over $500 million but has done poorly since inception. Invesco has ABRZX which has similarly poor results. Somehow this fund has $900 million in it and has been around for 16 years. AQRIX is an AQR fund that used to have 'risk parity' in the name, it changed its name but is still risk parityish. It has done better than the others but lagged VBAIX but with similar drawdowns to VBAIX along the way. 

Three years ago, Fidelity launched Risk Parity with FAPYX. It still only has $11 million in it. A Fidelity fund with $11 million? They can afford to keep it open but if Fidelity can't raise assets in a strategy, there are no more dollars out there looking for risk parity. 

I don't think this strategy solves anyone's problem and is vulnerable to closure. Even if you disagree with that, there are other alternative niches that where that description applies.

We've looked a couple of times at the Simplify Multi-QIS Alternative ETF (QIS). Read what QIS is. It's interesting. And very complex. The ETF has $58 million and it "seeks to provide positive absolute returns and income by investing in a diversified portfolio of quantitative strategies chosen to offer an uncorrelated positive source of returns."

No. I don't see how this could stay open. It hasn't done what it said it would do, it's tiny and not only doesn't it solve anyone's problem, I'm not even sure what problem it's attempting to solve. 

The point of today's post is to try to frame out what simple clues to look for that a fund might not last beyond low assets. If it doesn't meet the expectation it sets or offer any sort of useful attribute to a portfolio, then odds of closure increase. Jeff talked about faddish funds (my word not his) which is another area that eventually could see attrition. Does anyone buying the 2x Data Dog ETF, seriously, expect to grow old with that one in their portfolio? A lot of levered funds are likely to die off at some point. What about the 10th to market S&P 500 covered call ETF? 20 years ago, there were a ton of covered call closed end funds, most of them are gone. A repeat with some of the ETFs seems like a good bet.

One thing we do here is to try to sift through a lot of product trying to find the few that reliably do what they say with a strategy that reasonably meets a need. 

I'll close out with a quick word about the Cliffwater Corporate Lending Interval Fund (CCLFX). The prompt is an interview that Morningstar did with Phil Huber from Cliffwater. 

I don't know what to make of Cliffwater's results. Taken at face value, the results are phenomenal. Is the story about how they (don't) mark to market? I don't know. I can't see myself being interested in buying something that is illiquid but the other two portfolios in that backtest, get more than 90% of the return with very little volatility and no gating of funds. Where there are two ways to get close to what Cliffwater has done, there must be other ways too. 

Tip of the hat to Eric Balchunas for the word "Terrordome." 

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 Healthcare System Is Broken, Broken, Broken

An older member of my wife's family has been going through something medically serious for about a month. On July 14th, something wasn't right, they went to the hospital, a "good" hospital, for their problem, then had an emergency in the hospital that may or may not have been related to the original issue. They've been released and readmitted twice and is now getting released again. 

Ever since the in-hospital emergency, there have been problems with getting dosages and drug interactions dialed in such that my wife's relative has essentially been unstable the whole time. There is a lack of coordination between the medical team and random doctors who've popped in along the way, it's been a shitshow. 

Another component to this saga has been what appears to be tunnel vision on the part of the medical staff (I am including doctors), there seems to be a collective inability to see the big picture. There have been a couple of instances where I've spoken up and then heard after the fact "you were right" about whatever the thing was.

I've been an EMT for 14 years which is plenty long enough to tell you, I know almost nothing about actual medical things. EMTs can do some important interventions in an emergency but a great way to think of the EMT skillset is that everyone gets oxygen and treat what you see. Treat what you see often differs from paramedic and above. One thing that a good EMT (I am mediocre at best if for no other reason than we only run two or three calls a month) should be able to do though is be able to see and reassess the big picture. Not tunnel visioning is something that comes with time, the amount of time it takes might vary, but with my wife's relative, the team has trouble reassessing the big picture. 

My wife has said a couple of times since this started, that this motivates her to keep up with the weightlifting and other things we do so that we can avoid the situation her relative is in. I've said countless times here and elsewhere that anything can happen to anyone at any time but taking up the right habits gives us the best shot at avoiding medical situations no one would want to be in. 

You don't need me to tell you the healthcare system is in bad shape. For whatever reason, we have regressed from where we were. 

Woven in to some extent is the health insurance system which has been broken for a while. Costs were going up dramatically before Obamacare and while the ideal of making health insurance available for everyone is laudable, I think the actual details and implementation of Obamacare has made it much worse. 

For the last couple of years. I've been talking about how cheap healthcare.gov plans have been because of much larger subsidies. Barron's wrote about those subsidies being due to expire at the end of the year unless congress takes action. They estimate that premiums, before subsidies, will go up by 15% for 2026 and that if the current subsidies do expire then then 51% of people aged 50-64 would lose their subsidies altogether which in my case would result in more than a doubling of my out of pocket expense for premiums. To clarify, I am not using healthcare.gov for 2025 but I know the numbers from researching last fall. 

That so many people have been eligible for subsidies and would be seriously hurt if they go away should tell you the health insurance market simply does not work. With no subsidies, insurance for both of us on healthcare.gov would be north of $2000/mo. It is insane to me that health insurance is now close to the current median monthly mortgage payment.

Shit's broken, yo.

All of this contributes to why I consistently bang the drum about doing all we can to prevent/solve our own health problems. Get on Twitter and follow @mangan150. He finds study after study showing how important body composition and metabolic health are to having successful health outcomes. Lifting weights, reducing consumption of carbs and processed foods and skipping breakfast will prevent or solve a lot of problems while the government supposedly tries (and fails) to figure it out for us. No one will care more about your health outcomes than you. 

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 Risks To The Index Right Now Are Obvious

Mike Santoli posted a thread on Bluesky that included the following about the staples sector.

I think the longer term trend on the chart is more about the growth of tech and other growthy sectors as opposed to something bad going on with staples. The reasons to own staples include the tendency to have lower volatility, smaller drawdowns during market turmoil and a higher dividend yield than the broad market. The negatives include having a lower growth rate and depending on the circumstances, they have interest rate risk. 

A portfolio that goes narrower than broad indexes should probably have some exposure to the sector. 

Santoli's comment about being too defensive in staples is interesting. Let's see what that looks like though over a very long time horizon. 

Portfolio 5 obviously plays around with barbelling volatility and the growth rate with a nod to capital efficiency. The 2X tech ETF is ROM but as we've been describing it lately, instead of thinking of ROM as being 2x, it might be more useful to think of it as technology plus the volatility of the tech sector.

The result of Portfolio 5's backtest is of course compelling versus a more plain vanilla version of 60/40. Actually putting 55% into one sector fund is terrible portfolio construction but the bigger point of managing volatility inside of a properly diversified portfolio is valid. 

That brings us to Jason Zweig's latest in which he says indexing has become an "extreme sport." His big picture point of keeping things simple and the difficulty of picking stocks, narrow themes or otherwise chasing heat successfully is hard to argue with.

Lost in the article though is that large cap market weighted index funds have plenty of drawbacks. The rides down can be brutal and compounded by the common belief that this one is different even though it's never different. 

It's easy to extoll the virtue of market cap weighting when the market is close to an all time high but under the hood of the market right now is an enormous weighting to tech + communications with a heavy emphasis on the AI theme. The actual internet turned out to exceed the hype of the stocks in the space 25 years ago but the vast majority of the stocks capitalizing on that hype quickly disappeared. Actual AI could also exceed the hype but will there be the same destruction of stocks as was the case 25 years ago?

I have no idea but regardless of whether there is a similar fallout or not, loading up on the S&P now takes on the full brunt of the risk that very few of today's AI leaders will still be the leaders five years from now. 

If you weren't in markets 25 years ago or don't remember, sitting on the mountain top of early 2000, that these four stocks would compound negatively for the next ten years was unfathomable. Maybe even more unfathomable was that AOL wouldn't exist. Right here right now, it is again unfathomable that companies like Nvidia, Microsoft, Broadcom and Meta could compound negatively for the next ten years but if it happens, then hold on no matter what to nothing but the index will be in a lot of trouble. 

That scenario could be good for younger accumulators but anyone close to or already living off their portfolio would have a real problem. Maybe you disagree with my idea of a lot of simplicity hedged with a little complexity but the risks to the index right now are obvious even if there is never any consequence of the risk.

That's why we spend so much time looking at ways to capture a decent chunk of the upside while trying to diffuse whatever the prevailing risk might be. 

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

Are Interval Funds The Ultimate?

The YieldMax Ultra Option Income Strategy ETF (ULTY) was trending on Twitter for some reason so I looked to see why. While I didn't see why it was trending, there was one Tweet that said at $6, paying $0.10 per week, you'd make 100% in just 60 weeks.

ULTY owns individual stocks and sells options against the individual stocks. So it is not a fund of funds, it owns volatile stocks and sells calls with nominally fat premiums.

How good should anyone feel about ULTY maintaining that $6 price level? One a total return basis it has ripped higher since the April low, it's up 47%. That huge total return gain has allowed the price only return to move almost perfectly sideways. As you can see, since inception ULTY is down 68% on a price only basis.

The fund is working, it's doing what it should. Something that yields 86%, as the ULTY website showed early on Saturday, is not going to be able to keep up with that dividend for very long. They will go down a lot on a price basis and then reverse split. None of this is problematic when this dynamic is properly understood. 

Some sort of personal scenario where someone needs "yield" but wants a meaningful growth component from plain vanilla equities, some sort of small allocation to a crazy high yielder can fit the bill. If never rebalanced, then something like a 5% weighting will eventually go to almost zero. After 17 months (since ULTY's inception), the price only return of 95% S&P 500, 5% ULTY has been 19% cumulative/13% compounded which more that offsets the 70% erosion of ULTY.

I put yield in quotes because often, some portion of the YieldMax distributions are characterized as return of capital. The negative of that is they're just giving you back you're own money, the positive is that it can be more tax efficient than if it was characterized as a dividend. 

I've not done this, am unlikely to do it but I do think there is some merit. There is no realistic scenario though that, in this case, ULTY is going to maintain its current price for 60 weeks.

Barron's is reporting that Vanguard is going to partner with Wellington and Blackstone on an interval fund. Interval funds can go in several different directions with loans and real estate being common. Per the prospectus, the Vanguard fund would invest in "public equities investments in the range of 40% to 60% of the Fund’s net assets, (ii) public fixed income investments in the range of 15% to 30% of the Fund’s net assets, and (iii) private markets investments in the range of 25% to 40% of the Fund’s net assets."

We've talked a little about the Cliffwater funds which seem too good to be true. Some of the others mentioned in Barron's seem to be a mixed bag.

I asked Copilot for some other interval funds. It kicked out quite a few symbols, there were some mistakes in the list and not all the symbols are recognized by Portfoliovisualizer but here are some of them.

The knocks on interval funds include being expensive which the Vanguard fund is expected to be less so and the gated redemptions. I can't defend those two but this space feels like one that an advisor should be able to talk about and have a little understanding. Just as 20 years ago, ETFs were clearly going to continue to develop, so too will interval funds. 

Arguably though, you can get most of the Cliffwater effect from catastrophe bond funds which do not use the interval wrapper.

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.

Just Keep The Junk To A Minimum

The Washington Post wrote about ultra processed foods. The US appears to have less regulation around what ingredients can be used and increasingly over the the last 40 plus years we've seen ingredient lists on packaged food get longer as more and more seed oils get added to our food. 

As an example here is Skippy Peanut Butter's ingredients;

And Trader Joe's Peanut Butter's ingredients.

We eat Trader Joe's PB. Seed oils like the ones in Skippy are obesogenic and heavy in omega 6. Simplistically, Omega 6 is unhealthy and Omega 3 is healthy. Food has a ratio of Omega 6 to Omega 3. The higher the 6 to 3 ratio, the less healthy the food. Some food will have more Omega 3 than 6 but a ratio of like 2 or 3 to 1, Omega 6 to Omega 3 is considered healthier. Food processed with seed oils is usually much much higher than 2 or 3 to 1. This is the argument for keeping it simple and eating more foods with no ingredients that come from the edges of the super market not on the isles. 

The short version; just keep the junk to a minimum.

The President signed an executive order that creates a path to including crypto and private assets in 401k plans. This will sound like a contradiction but I agree with allowing this stuff into 401k plans, I just don't think too many people should buy for their 401k plans. 

I lean toward the idea that we should be free to make our own decisions, good, bad or otherwise. I've owned Bitcoin for a while. I have said of Bitcoin that the position started very small and that I will hold on until it either grows into a life-changing piece of money or craps out. At current levels, I would describe the position as a useful piece of money not life-changing. 

At my first post-college job at Lehman Brothers in 1989, one of the things I learned was to never take shares of an IPO that are offered to you. The generalization was that only IPOs you can't get shares of are the ones that are going to go up a lot.

I apply the exact same thought to private assets that will be available to retail investors via 401k plans or anything else. If you look you will find plenty of opinion pieces that the current push to make private assets available is about ginning up demand for product. 

The short version; just keep the junk to a minimum. 

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 Difficult Decision

This post is fire related. 

On July 13th I wrote about the loss of the lodge at the North Rim of the Grand Canyon, it got burned over in the Dragon Bravo Fire. My wife and I have been up there probably a dozen times and we were due to be there this week too for short visit. 

As a matter of circumstance with personnel, Walker Fire was not available to send an engine up to that fire until today. That the fire is still going on all these weeks after it started is really something. 

Engine 83, pictured above headed up there today. 83 is a Type 3 Engine and for these types of assignments it can go out with either four or five firefighters. We only had four going and I anguished a bit over going in the fifth spot. 

In that July 13th post I used the word magical to describe the North Rim area. There was a calm and peacefulness to it that is hard to adequately describe but I think everyone feels it. Do you remember David Darst? He worked at Morgan Stanley and was on CNBC all time. The picture is from 2009, it was my only encounter with him and before we went on, we had a five minute conversation about the North Rim. He loved it too. 

This is the Supai Tunnel, it is about two miles down the North Kaibab Trail. My wife said she saw where the fire burned down to this point. It's about two miles down from the trailhead and parking lot. 

If the fire did burn as far down as the tunnel, then just about all the trees in this picture from Cathedral Point are gone.

The next picture is from Imperial Point. This area is a short distance from the lodge and North Kaibab trailhead and it too was burned over. The view wasn't impacted but the picture is taken from a forested area that is now gone.

Although the main area, the lodge and guest cabins are lost there was a real pull for me to want to go be part of the solution someway, somehow and while it may bug me that I didn't go, there are more reasons for me to have not gone. 

Day job related, this assignment would have been out on a truck doing structure protection (per the resource order that requested us) and the cell signal up there is almost non-existent. That contrasts with my two assignments as a liaison officer which is 90% in an office and if there is no cell signal the bring that in via a cell on wheels (COW) or lately with Starlink. When these assignments come in, personnel need to be prepared to stay for two weeks. Two weeks with internet every day would be doable, two weeks without internet would not. 

Walker Fire related, we have had what seems like a pretty weak rainy season, right now things are very dry and the Forest Service has the current fire danger as extreme. As the chief and living less than a mile from the station house where I can quickly get a truck out the door, taking off for two weeks while the fire danger is extreme seems like a bad idea.

In almost 23 years on the department, we've had three what I would say were legitimate infernos including this one in June which was the diciest of the three. We had water flowing on it within ten minutes of finding out this was happening. The smoke was much blacker a few minutes before I took this picture. 

Can a decision be both right and regretful at the same time? This one is. 

A Year Later, It Still Works

Last August we took a quick look at the Bridges Tactical ETF (BDGS). It's equity centric and has a process for risk on and risk off that allows it to vary its equity exposure and pairing that with cash proxies. Last summer it was 71% in cash proxies and today it appears to be 43% in cash proxies. Like last summer, the equity sleeve appears to have more volatility than the S&P 500. Most of the equity names are stocks that have 2x versions trading. Last summer I said it's sort of a capital efficiency effect or maybe a barbell effect. 

Since that first blog post, the fund has done pretty much exactly what it said it would do. Decent upcapture, so it lags plain vanilla market cap weighting, with less volatility. 

The comparison to HEQT still seems to be reasonable. Portfolios 3 and 4 also create the same effect. Portfolio 5 captures the current positioning but not fair to BDGS because the ETF can adjust the mix. Still though, Portfolio 5 is surprisingly close to BDGS' performance. 

A year later the strategy seems to be valid. No strategy or fund can always be best and any strategy will at times struggle, that goes with the territory but it's hard to argue with a fund that does what it says it's going to do.

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

Buffer Mania

Reuters posted an article that could be summed up as man there's a lot of defined outcome and derivative income funds and they're getting more complex. These are fun to look at and although I don't really do much with them, I get a lot of questions from people outside the sphere of my day job (firefighters and friends). 

The theory of barbelling yield out of a narrow slice of the portfolio seems to hold some water, my only client use is intermittent and more of a volatility tool, I do not have any of the crazy high yielders in my ownership universe. I don't use any of the buffer funds, but I would caution that if you want to use them, do not expect them to be proxies for the equity market. I haven't looked at a ton of buffer funds but I do think some can continue to function as a low vol, low return type of exposure. 

This is a fun one. BALT is a large defined outcome fund that we've looked at before. IYW is broad based tech and a long time client holding. ROM is a 2X tech ETF from ProShares. Technology should go up more than the broad market on the way up and down more on the way down which is why I chose it for this exercise but oddly, the idea sort of works with consumer staples (XLP and UGE) too. Interestingly, the blend of BALT and 20% exposure tech is very underweight versus the S&P 500 and almost exactly in line with the tech exposure of VBAIX, so as big of a sector bet as you might think.

I would have thought that this sort of BALT/tech mix would have done worse than 60/40 in something like the popping of the internet bubble. Using XLK and client/personal holding MERFX as substitutes, the drawdown at the 2003 bottom was the same as plain vanilla 60/40. IYW started trading just after the 2000 peak and BALT just started in 2021.

IRL, putting 80% into one low volatility strategy seems insane to me. Below, Portfolio 2 has 8 different low vol strategies with 20% in IYW.

Testfol.io has VBAIX's CAGR since inception at 7.16% which is noticeably better than the 6.46% available in our back test but I don't think the skew creates too distorted of a picture. 

This variation of barbelling can work but despite the back test I think it would be quite risky.  

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 Craziest Article I've Ever Read?

But first, a friend sent an article written by Pim van Vliet titled No Asset Is Safe But Some Lose Less. The first part of the article lays bare the loss of purchasing power by just holding cash or T-bills over very long time horizons. A useful rule of thumb for framing this effect is that at a 3% rate of price inflation, expenses will be 50% higher in 15 years. 

Cash is both optionality and protection against short term volatility but the drawback is as van Vliet says, a loss of purchasing power. A 50 year old sitting on $1 million in cash and nothing else will have a lot less purchasing power when they get to 70. 

The other day I mentioned that part of the asset allocation process is figuring out what portion of a portfolio needs to capture whatever the equity market will give over the relevant time period. Figuring out how much cash is appropriate is part of that process too and some apparent overlap between van Vliet and me would be how much to allocate to lower vol assets that should exceed the rate of inflation but without the full equity effects of growth and volatility. 

The second half of the article then makes the case for lower volatility stocks, van Vliet uses the term widows and orphans. 

SPLV and USMV target different versions of low volatility. SPLV simply owns low volatility stocks and USMV tries to optimize a portfolio of stocks with various attributes to deliver a lower volatility result. The results of both are valid in terms of generally delivering on the objective as well as the growth rate. In the period studied, inflation compounded at 2.60% so SPLV and USMV check that box too. It's not a realistic expectation that they could keep up with or outperform simple market cap weighting but the tradeoff is a smoother ride. 

As we've looked at before, the low volatility effect can be captured using client and personal holding BTAL combined with simple market cap weighting. I weighted the portfolios to get very similar returns as SPLV and USMV but with much noticeably less volatility. Portfolio 5 tries to add portable alpha using a 2x equity fund and client/personal holding MERIX. Again with that one I tried to target a similar return and even with the huge weighting to a levered fund the volatility is less than both SPLV and USMV.

If we dial up the volatility of Portfolios 4 and 5 to get closer to SPLV and USMV, the respective CAGRs for 4 and 5 go up to 13.32% and 13.39%. The idea with market cap weighting plus BTAL is the opportunity for more upcapture. It is not the core holding (SPLV or USMV) that is the governor, it is the hedging device, BTAL. Clearly though, just owning SPLV or USMV would be simpler.

Now the crazy article. It was kind of an advice profile at the WSJ for a 44 year old woman who wants to retire at 61, take Social Security at 67 and (here's the crazy part) wants to be able to afford to move into a "continuing care facility" at 70. Is it just me that thinks this is crazy? It makes no sense to me. There are other things in there that I will touch on that also don't quite add up, it makes wonder if this isn't real. 

The link removes the paywall so tell me if I am wrong but what person in their 40's targets wanting continuing care at 70? 

Starting at 61, she is eligible for a $5300/mo pension (she works for LA county). At 67 her Social Security will be $1500 is today's dollars from a previous employer or a spousal benefit. Her main job is a librarian and she side hustles as a librarian somewhere else. She has a mortgage on her place and a larger second mortgage so that she could buy her ex-husband out of their home. There's about $400,000 in home equity and another $240,000 in other IRAs, part of which I am assuming is her rollover from a previous employer. Something that also doesn't track is a $900 payment on a $15000 car loan but maybe it started as an $80,000 car loan or something.

The planner being asked to assess her situation doesn't think she'll be able to afford to buy into continuing care at 70. I still cannot wrap my head around this goal. At 44, maybe she doesn't understand what 70 is. We've talked about the theory of not understanding what it means to be older than your age plus 50%. So at 20, you wouldn't understand 35 and at 44, you wouldn't understand 70. That could be part of the equation. 

My older siblings are 69, 71 and 73 and while I think they could all be exercising more, none of them are anywhere close to sniffing distance to needing some sort of continuing care. If you're 70 and reading this, you probably read that last sentence are thinking, no shit Sherlock. Of course bad things can happen to anyone at anytime but planning for age 70 when you're 44? This is presented as Plan A, not some sort of optionality-contingency. What is the logic here, if you know, please leave a comment. 

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 Disillusionment Of Winning

David Epstein wrote about an interesting idea (new to me) called the arrival fallacy. The prompt was the recent press conference where Scottie Scheffler talked about the short lived joy, for him, that goes with winning a golf tournament. Winning is joyful for Scheffler but then "it's like, okay, now what are we going to eat for dinner?" 

This is relatable. I've talked before about my first job out of college at Lehman Brothers starting in the summer of 1989. I got into a program where you had six months to open 50 accounts that would go to one a broker that was your mentor. Open the 50 and then you become a broker. 

I can't begin to tell you how bad I was at cold calling and pitching people but I was able to get to 50 in four months which might have been a record, not sure about that but it was fast. Amusingly, someone came along shortly thereafter and did in a month. This guy could open accounts so easily that I swear he could get anyone to send him their last $10,000 to buy Texaco or Paramount (two of the stocks getting pitched in the office back then). It got to the point where they coached him to not open so many accounts because that's what he was doing, getting people to send their last, or only, $10,000 in to buy stock which didn't jibe with the business model. I moved on shortly thereafter but I am sure he went on to be wildly successful. 

When I completed this program, I got the offer for my own desk (jargon) on a Friday. I was ecstatic all weekend, legitimately ecstatic, I had arrived. I worked very hard and achieved a goal that I was told most people fail at. Then Monday morning came, I had to start over completely and I knew almost immediately that this was not what I wanted to do. I had arrived but really I hadn't done anything. 

This encounter with arrival fallacy was pivotal in my development as an adult. I've talked before about not really being a goal oriented person and that Monday morning feeling was a contributor. 

My approach has been more like putting in the work and following the progression toward wherever the work leads. With my day job, I started studying voraciously in the 80's, then all through the 90's when I was at Schwab not knowing where I would end up. The progression was going from a trader to portfolio manager. A huge kickstart came from writing, first getting published in Barron's in early 2004 and then starting to blog a few months later. Things worked out but there's never been any goals, I just stuck with it and went where it took me. 

Similarly I've never been believer in retirement numbers (goals) like "oh, I need $1.2 million to retire" because whatever you end up with is your retirement number, not some calculation out of Smart Money Magazine (remember that one?) you did in 1998. 

Sort of related, the NY Times had a commentary about writing letters, actually writing them, to your future self and the sort of introspection that goes with this subject or when you see what advice would you give to the 20 year old you? 

The actual commentary was not interesting but I think there is value in doing favors for the future you, doing whatever you can to make things easier for yourself when you're older, giving yourself as many options as you can. There can be a progression to this without having to overly focus on goals that could result in arrival fallacy.

While starting to save money in your 20's would be great, I don't know how many twenty-somethings make enough to do so. Hopefully though as you get into your 30's you can start to build something up in a 401k or the like. This is where financial optionality starts. At 30, it may not be possible to understand what it is to be 50 years old but 50 is coming and having sort sort of financial optionality akin to some level of financial independence is an unknown favor that 30 year old you is doing for the older you. It is an unknown favor because at 30 you probably have no idea or very little idea about what you will want at 50. 

Of course staying in good physical condition is part of this conversation. If 50 is going to come, would you rather be lean, strong and able bodied or the alternative? We all know people our age who look like action figures and people who are very sick, unable to do very much. While it is never too late to start, a lifetime of exercise is a huge physical favor and a huge financial favor. I don't think this needs to be goal oriented. I've been lifting weights very consistently my entire life. The metabolic benefits are endless and I want to be able to bend down and pick up heavy things for the rest of my life. If being able to deadlift X pounds or benchpress Y pounds motivates you, great, but being healthy doesn't have to involve goals. Great, you can deadlift some big number but as Scheffler might say, ok, now what are we going to eat for dinner?

A Fun Post For A Crappy Day

Friday was one of the craziest days in quite a while so let's keep it lighter with a few quick hits.

Barron's wrote about the so called Trump accounts which would be like IRA accounts for children up to age 18. These accounts could be funded up to $5000 stopping at age 18 and then left in the account to grow. It looks as though family and friends' contributions would not be tax deductible going in. There is also talk of a short window where the government would contribute $1000 to these accounts. I have not seen anything about how the $1000 would paid for. 

Let's game this out for someone who turned 18 in 1975, so today they would be 68 years old. Where coming up with an extra $5000 today might be difficult for a lot of people, lets assume $2000 instead. It looks like $2000 today would have been worth $181 in 1957 when this person was born. So assuming the same $181 contributed 18 times but not invested (due to the limitation of testfol.io), at 18 this person would have had $3258 in 1975 to put into an index fund. The first retail index fund hit in 1976 but please humor me.

The $3258 put into an index fund and just left alone would now be $896,000 after compounding at just under 12% all per testfol.io. This person almost wouldn't have needed to save for their retirement. There are plenty of behavioral mistakes that could get in the way of this sort of outcome and assuming the compounding number of 11.89% is correct, that seems too high to count on for the next 50 years. This sort of starting out type of account could still grow into a very meaningful piece of money.

More Barron's, they had a piece on healthcare costs which wasn't very interesting but there was a terrific comment to share. 

In my mid 80s, I'm working to enhance dividend and capital gains income by selling covered calls and cash secured puts on stocks and ETFs. This puts about 50% of our liquid assets to work. It generates nice returns on risk every week, month and year with, for me, minimum risks.

I've been doing this since shortly before we retired. It's a job and it's what I can do.

Everyone who is healthy, exercises, gets a lot of sleep and is able to do something to generate income during "retirement" should keep working as long as their brains and bodies will let them.

Only people with a lot of income yielding savings and investments (including great federal and state government pensions), can quit working, play, travel and pretend that what's going on in the world won't affect them or put them on Medicaid.

The first observation is that he has been making the effort to solve his own problem. I wouldn't focus on his strategy, maybe it's for you or maybe it's not, but his being part of the solution, realizing someone needs to do work on his portfolio, it sounds like he enjoys the challenge and maybe based on the rest of his comment, he's got the other aspects of his life dialed into. Taken as written, it's a great example of successful aging. 

Tidal ETFs (white label ETF provider) had a blog post about the manner in which derivative income ETFs and defined outcome (buffer) ETFs are making their way into an increasing number of portfolios. They note that investors are "no longer content with riding out volatility unhedged" and "raises questions about how asset managers and advisors are framing risk." You can get more color if you click through but it touches on some ideas we've been working with here forever and triggered an idea for a crazy portfolio idea.

Portfolios 1 and 2 obviously barbell the volatility and growth potential into narrower slices of the portfolio and when paired with BALT which is one of the larger buffer ETFs that we've looked at before. I would absolutely not count on BALT to capture the equity market over longer periods but it is pretty good at having low volatility and positive compounding. 

Instead of thinking of this as mostly a low vol alternative and levered equity, like we've talked about before, the 2x and 3x funds might be better thought of as equity with volatility overlays. At times, the volatility overlay will either help the portfolio or hurt it. It would have to overcome the volatility drag to be additive and logically, sometimes it will do that and at other times it would not. 

Tidal talked about different ways to use volatility and that's what the above idea tries to do. No matter how flawed the levered ETFs are, they worked out in this example to a reasonable outcome.

I saw this Tweet today;

 

MERIX is a client and personal holding. 

If you want blistering volatility, the APED ETF might be for you!

Just a quick word about today. I saw some pundits talking about what steps to take in case the last couple of days turns into something more protracted. We spend a lot of time here on ways to make portfolios more robust so that you don't have to react when crazy news hits that may or may not actually hurt markets. 

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 Building Block Of Retirement Planning

Erik Conley had a well written post about whether people might have too large of an emergency fund. He had a couple of very funny one-liners in there too. 

The big idea is the opportunity cost of being too conservatively allocated to cash. If you play around with different, decently long time periods you'll see that domestic equities compound somewhere between 8-11% where cash compounds compounds at maybe 3-4%, even less than that over the last ten years or so. 

If someone has $5 million in the bank and only needs to pull $100,000 out per year then 3-4% will more than get it done but that won't be too many people. Part of the asset allocation process is to figure out what portion of the total pie needs to capture the effect of whatever the stock market can deliver over the relevant time horizon. 

One way you might know you have too large of an emergency fund, Erik says, is that you haven't actually had an emergency. That's funny. Being serious, define your terms of what constitutes an emergency. I shared our story from late 2023 going a few months into 2024 where we had a problem with out septic system. All in it ended up costing close to $4000. Does that constitute an emergency? It obviously was not planned for. If the only way to pay for it would have been on a credit card then that might constitute an emergency. 

Earlier in 2023 we had several out of the ordinary car issues, a few things came up that added up to about $2500. We have all had these sorts of things happen. We've never had to shell out $50,000 or $100,000 for something unexpected. All I can think of being that expensive is something medical not covered by insurance or a family member in some sort of serious trouble. Something that big would be an emergency regardless of whether we have the money or not. 

How much money should people have in some sort of liquid vehicle for the less dramatic "emergencies" like the ones I mentioned above or to pay the bills in the face of a job loss? There's no single answer there for everyone. 

Erik doesn't think people need a year's worth of expenses set aside unless their job situation is very unstable. As we've looked at quite a few times lately, maybe everyone 55 and older's job is very unstable as a large portion older workers get their hand forced at work. At 40, maybe one year's worth of expenses might be excessive but at some age, people need to be ready to "retire" if they get crowded out from their career and can't replace their income. Here, retire could mean be ready to be extremely underemployed. Maybe the career job paid $150,000-$200,000 but what if that ends at 57 years old and the replacement job pays $60,000.

I talk a lot about cultivating and creating income streams and while I have done that personally, none of those would add up to replace what I make from my day job. Living well under our means would make that forced transition easier even if not truly easy. 

There are certain basic building blocks to life and personal finance/retirement planning. While I don't know whether people over 50 have always been vulnerable at work or if this is a new phenomenon but I think a building block of retirement planning needs to be building a contingency in case you can't retire on your own terms. 

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.

Don't Try This At Home

FIRE Funds Tweeted a lot of detail about its Income Target ETF (FIRI) which is a companion to its Wealth Builder ETF (FIRS) which I own a few shares. FIRS is the accumulation phase fund and FIRI is the decumulation phase fund. The context here is for Financial Independence/ Retire Early. 

This from the Tweet caught my eye, "...seeks to provide a 4% target annual income level using a 'barbell strategy' to balance high-yielding income assets with low-volatility cash-like instruments." We talk about barbelling yield and growth regularly here. FIRI portfolio is mostly standard fixed income strategies but slight twists on the larger fixed income ETFs like AGG or MBS with a few crazy high yielders to barbell the yield.

Let's take all that as a prompt to build a portfolio that combines capital efficiency, a short biased long short and a bunch of higher yielders with just a little bit in a crazy high yielder. I built two versions of a very similar portfolio as follows. They are the same except that Portfolio 1 has 10% in YieldMax GDX (GDXY) and 10% in Bank Loans (BKLN) and Portfolio 2 has just 5% in GDXY and 15% in BKLN.

MVPL toggles between owning 1x S&P 500 and 2x S&P 500 so this is where capital efficiency comes in. Client/personal holding BTAL is the short biased hedge, BRW is growthy and yields about 12%, SJNK and BKLN (BKLN is in my ownership universe), high yield and bank loans, both yield in the high sevens, SHRIX owns catastrophe bonds and yields 14% and GDXY is the one crazy high yielder which Yahoo shows as "yielding" 49%. Using GDXY avoids the tech sector and single stock risk. Gold miners have more potential for defensive attributes than the typical tech stock.

I backtested with a large dollar amount like it was something someone would try to live off of for some period, willing to accept some depletion.

The made up portfolios for this post are pretty crazy but the volatility and beta numbers are not insane. The portfolios outperform but very little of the outperformance is from the leverage of MVPL. Apples to apples comparing of MVPL/BTAL and VOO for the same period had the MVPL/BTAL combo ahead by only 71 basis points with a little more volatility but a smaller drawdown.

The fixed income is where the outperformance came from.

The Sharpe Ratios of Portfolios 1 and 2 tell you that the bump up in volatility is well worth it for the extra total return. SJNK, BRW, SHRIX and BKLN were all around in 2022 and had declines ranging from -2.51% to -5.50% compared to -13.03% for AGG.

BRW didn't have a problem on a total return (price only it was down 16%) with rates going up in 2022 but it is an actively managed fund of funds so if it made a good decision in 2022, it could get that decision wrong if rates take another meaningful leg higher. The other three fixed income do have risks associated with them to be sure but interest rate risk isn't one of them. GDXY should be expected to be a depleting asset for the most part but if GDX goes on a prolonged run higher then GDXY might be able to tread water sideways.

This chart captures that point. GDXY went down last year but this year is trading sideways as GDX has gone up a lot.

Where the advantage of MVPL/BTAL is only very slight versus plain vanilla S&P 500, the results would look very similar using SPY or VOO and avoiding the complexity of the leverage/hedge combo. 

The idea with today's exercise was to make kind of a crazy blend to produce a lot of yield that could be offset by the growth component that might all add up to a return after distributions that was a little ahead of inflation. Yes, the period available to backtest is ridiculously short but in the short time we have, the two versions price only were up 5.57% and 6.65% respectively versus 2.32% as shown by testfol.io.

That was a fun exercise, what would you add or change to improve the result?

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.