To Be a Retirement Savings Pro, Act as if ‘Someday’ was Today

To Be a Retirement Savings Pro, Act as if ‘Someday’ was Today

By Tim Maurer While on vacation recently in the Abaco Islands, on the outer rim of the Bahamas, I found myself on an important mission: taking the golf cart to the local market to restock our dwindling supply of the necessary ingredients for piña coladas. I was stopped in my tracks en route by a welcome sign announcing a new resident’s beachside home. It read: “Someday Came.” The obvious implication is that these folks decided to act on their “Yeah, I’m gonna do that someday” daydreams. But it raises many questions, right? Who are these people? What’s their story, financial and otherwise? Did they hammer this sign into the sand after scrimping and saving, finally realizing their retirement dream following a lifetime of toil? Or are they the professionally mobile couple with young kids you see on HGTV’s “Caribbean Life,” who decided they’d just had enough of the rat race? I’m glad I don’t have the answers, because the big question for the rest of us is worthy of consideration: How do we define our “someday”? How do you define yours? There’s an answer that the financial services industry (and the U.S. government) has prescribed for you. That’s the one where you work your butt off, make as much money as you can, save as much as you can and then glide into a distant, worry-free utopia called “retirement.” Well, the baby boomers were the first generation to try this, and statistics suggest the “traditional retirement” experiment has been an abominable failure. Why? Hyperbolic discounting. It’s a term used primarily in the field of behavioral finance, and it’s defined as “the tendency for...
The Many Benefits of Alternative Lending

The Many Benefits of Alternative Lending

By Larry Swedroe The current—and almost decade-long—period of extremely low interest rates led many investors, especially those relying on a cash flow approach to investing, to seek alternatives to safe fixed-income investments. Unfortunately—many such strategies, such as investing in dividend-paying stocks and high-yielding bonds—expose investors to dramatically higher levels of risk, especially left tail risk. Compounding the problem is that this greater risk tends to show up at exactly the wrong time—when equities are doing poorly. Fortunately, over the past several years, we have witnessed a fundamental shift in the fixed-income landscape, one that provides an attractive alternative to investors who can accept the risks associated with illiquidity. Fintech/Social Media Transforming Landscape Banks have long been central to the creation of credit, which is driven by their ability to take in low-cost deposits and loan out money at higher rates. While nonbank loan channels have always existed parallel to traditional banking, these channels historically were small niches in the overall economy. However, a new breed of lender has emerged to become a significant presence in the market. Initially, they were known as “peer-to-peer lenders” or “marketplace lenders.” Growth in this space hit an inflection point after the 2008-2009 financial crisis. It was propelled by a severe contraction in bank lending, acceleration in the availability of financial services online and an increasing mistrust of, and dislike for, traditional banks. ‘Alternative’ Lenders Today these platforms are broadly recognized as “alternative lenders.” These technology-based lending businesses are disrupting the lending markets and have taken significant market share from traditional banks. Because alternative lenders are not burdened with the substantial infrastructure costs of...
5 Tips to Help Teach Your Children About Money

5 Tips to Help Teach Your Children About Money

By Stuart Vic Smith As parents, we continually struggle to pass knowledge on to our children. Unfortunately, sometimes financial knowledge is left off the list or lost in translation. To prevent that happening, consider the following five tips to help teach your children about money:  It is never too early to start. Just like saving for retirement, the earlier you start educating your children about money, the better off they will be. You can start with some early lessons around earning and spending. For example, show kids that when they do a job they can be rewarded with their own money. Give them examples of how much the money they’ve earned will allow them to buy. This puts into perspective how much various items cost and the amount of work needed to afford something they want. Understand the Save, Share, Spend mentality. For every dollar earned, either through an allowance, babysitting or other jobs, familiarize kids with the concept that there should be three buckets for their money: the amount they want to save for the future, the amount they want to share with others and the amount that is left over to spend. This will reinforce the idea that it is important to save for something special and give back to others in need instead of simply spending whatever makes its way into their pocket. Be smart about debt. There is an opportunity cost associated with every decision. If you spend now, you will have less to spend later. If you spend more than you have, you will incur debt. If you take on debt, 1) your future earnings will be reduced by the amount needed...
Stress-Testing the Volatility Risk Premium

Stress-Testing the Volatility Risk Premium

By Larry Swedroe There are a multitude of alternative investments for investors to consider, largely because Wall Street is exceptionally good at creating products, and at creating demand for those products, even when there shouldn’t be. However, among the many alternatives from which to choose, there are really only a few you should contemplate. They … Are supported by the academic literature, meaning they have provided premiums that have been both persistent and pervasive, come with intuitive risk-based or behavioral-based explanations, and survive implementation costs. Can be implemented using products under SEC regulation. Tend to have low correlation with the returns of traditional portfolio assets. May not necessarily be cheap by index fund or ETF standards, but don’t come with the typical “2-and-20” hedge fund fees. Among the few that meet these criteria is the variance risk premium (VRP). The VRP refers to the fact that, over time, option-implied volatility has tended to exceed realized volatility of the same underlying asset. (Note that the popular VIX is a measure of implied volatility.) VRP has been well-documented, and is best known in U.S. stocks. For example, Stone Ridge Asset Management examined the VRP for the 10 largest stocks for the period 1996 through 2012. Breaking down the period into three subperiods, they found a persistent and stable premium. From 1996 through 1999, the VRP was 4.3%. From 2000 through 2009, it was 3.9%. And from 2010 through 2012, it was 4.1%. Researchers at Stone Ridge also found strikingly similar patterns in the implied volatility curves around the world. Global Trend In a November 2011 paper, “The Variance Risk Premium Around the World” (Federal Reserve...
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