Displaying items by tag: volatility

Saturday, 18 May 2024 12:55

Is the 4% Rule Still Relevant?

The 4% rule has become conventional wisdom when it comes to managing finances during retirement. As millions of people enter retirement over the next decade, it may be time to revise this rule, given higher inflation and longer lifespans.

Social Security benefits are typically equivalent to 40% of a retiree’s income. According to TIAA, retirees should consider pairing the 4% rule with an annuity to generate higher levels of income during retirement. This means that a retiree would convert some portion of their savings into an annuity.

In the first year, this is likely to boost income by up to 32% compared to just using the 4% rule. It also leads to more predictable income and shields retirees from market risk. More predictability can also help with more effective financial planning, leading to a more enjoyable retirement. 

Treasury Inflation Protection Securities (TIPS) are another method to increase guaranteed income, especially with a ladder across different maturities. It also protects retirees against inflation. 

Overall, the 4% rule should be reconsidered, especially in this era. It leads to less spending flexibility and should be augmented with other sources of income. It also doesn’t account for retirees’ individual circumstances, such as tax rates, risk profiles, and cash flow needs. 

Finsum: TIAA believes that the 4% rule should be reconsidered, especially for those retiring now. Retirees may need more income and should consider annuities or TIPS.

Published in Alternatives
Sunday, 28 April 2024 11:40

Innovators Big Innovations in Buffer ETFs

Innovator Capital Management, a pioneer in defined outcome ETFs, announced the launch of a groundbreaking ETF designed to provide investors with exposure to the equity market while ensuring a complete buffer against losses. The Innovator Equity Defined Protection ETF aims to match the upside return of the SPDR S&P 500 ETF Trust, symbolized by SPY, with a cap of 16.62%, while safeguarding against losses from SPY over a two-year outcome period.


Graham Day, the Chief Investment Officer, emphasized the surge in investor interest towards safer options like bank deposits and Treasuries amidst market concerns, hence the necessity for a low-risk market reentry strategy. Innovator's objective with the new fund is to offer clients a means to remain invested in the market with robust risk management, extending their buffer ETF range, which previously spanned buffer levels from 9% to 30%.


Since introducing the world's first buffer ETFs in August 2018, Innovator has witnessed competitors such as First Trust and, more recently, BlackRock, entering the fray with their versions. While the new strategy may not immediately entice investors due to its slightly higher risk and cost, Innovator anticipates competition with traditional cash-like instruments, highlighting the potential tax advantages alongside increased upside potential and complete downside protection.

Finsum: A full 100% buffer could be a major innovation in the risk mitigation space for ETFs.

Published in Wealth Management

The number of alternative investment options continues to increase, and many now consider it an essential ingredient to optimize portfolios. However, there are significant challenges that come with evaluating these investments, given that there is more complexity and advisors have less experience with the asset class.

The benefits of alternatives are higher returns, especially in high-rate, high-inflation environments, and less correlation to equities and bonds. The two biggest drawbacks of alternatives are reduced liquidity and price discovery. There are additional potential tradeoffs, such as limited transparency, higher fees, and restrictions on redemptions. Further, some alternatives use leverage or derivatives, which can increase tail risk during certain periods.  

Therefore, it’s important to study how the investment performed during periods of market volatility, such as 2020 or 2008. With some illiquid investments, the asset may look like it’s outperforming until actual transactions start taking place at lower levels. Many skeptics contend that the diversification and volatility-mitigating effects of alternatives are overestimated due to the absence of mark-to-market pricing. 

Another consideration is that evaluating alternatives has a qualitative element. This includes studying the reputation and track record of the management team. Overall, advisors and investors should understand that many of the traditional tools and methods used to evaluate public investments are not suitable for alternatives. 

Finsum: Alternative investments continue to grow and are increasingly a core part of many investors’ portfolios. However, there are many unique challenges that come with evaluating these investments. 

Published in Alternatives

Stringer Asset Management shared some thoughts on fixed income, monetary policy, and the economy. The firm notes that while inflation has remained stubbornly above the Fed’s desired levels, it will move closer to the Fed’s target over time. One factor is that the M2 money supply is starting to decline, which is a leading indicator of inflation. Another is that fiscal stimulus effects are finally waning.

Thus, Stringer still sees rate cuts later this year, although it’s difficult to predict the timing and number of cuts, creating a challenging environment for bond investors. During this period of uncertainty, it favors active strategies to help reduce risk and capitalize on inefficiencies. Active managers are also better equipped to navigate a more dynamic environment full of risks, such as the upcoming election and a tenuous geopolitical situation.

Stringer recommends that investors diversify their holdings across the yield curve and credit risk factors. It favors a balance of riskier credit with Treasuries. This is because the firm expects the bond market to remain static until the Fed actually cuts. It’s also relatively optimistic for the economy given that household balance sheets are in good shape, corporate earnings remain strong, and the unemployment rate remains low. These conditions are conducive to a favorable environment for high-yield debt. 

Finsum: Stringer Asset Management believes that fixed income investors should pursue an active approach given various uncertainties around the economy, inflation, and monetary policy in addition to geopolitical risks.

Published in Bonds: Total Market
Thursday, 18 April 2024 14:32

Constructing a Volatility Resilient Portfolio

Amidst higher interest rates, achieving alpha and managing risk in corporate credit necessitates a nuanced approach. Josh Lohmeier of Franklin Templeton Fixed Income unveils a dynamic portfolio construction method adaptable to diverse investor profiles and market conditions. 


In the current interest rate landscape, sophisticated techniques are essential for capturing alpha with improved downside protection. Alongside meticulous bottom-up security selection, a systematic quantitative portfolio construction process can potentially yield consistent excess returns uncorrelated with peer benchmarks. 


By segmenting the opportunity set based on volatility and strategically positioning along the yield curve, investors can optimize risk allocation and enhance portfolio returns. This adaptable portfolio construction framework offers a repeatable process with consistently positive outcomes, emphasizing the importance of diversification across managers and fixed income portfolios.

Finsum: Quantitative approaches can deliver a more resilient portfolio in times of increased volatility.

Published in Wealth Management
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