Sunday Morning Coffee

Barron’s had a brief article about absolute return funds. The article leaned a little skeptical but it brings up a good point. Generally speaking absolute return funds have not participated in the massive rally that started in March. Many are even down a little.

When the market was puking down there was some sentiment about going very heavy into the space which was never a good idea, IMO, for the simple reason that too much of anything is usually a bad idea. During the worst of the declines some of the funds did heroically and now not so much.

This brings up a crucial concept but if you really have a diversified portfolio then not every holding should be going in the same direction. If every holding went up 50% together with the market then how did they do when the market went down 50%?

Small exposures to things like this give a chance to own a few things that either go up a little if the market goes down a lot and even if they go down a little as the market cuts in half they are reducing the volatility. That is great for a down market but not for an up market. That doesn’t make an absolute fund a sell because they still offer the same thing as the did seven months ago, they will likely offset a portion of a swift decline.

Last Sunday I spoofed the Best Places to Retire theme by writing about a few towns, very small towns, in states with no income tax bordering states with no sales tax. Reader Stephen Drone amusingly referred to it as a tax arbitrage.

On Friday Yahoo Finance re-ran an article from MarketWatch called 15 Top Rural Areas To Retire and somehow none of the five towns isolated last week made the cut.

The article listed 15 “recreation” counties, three of which were in Colorado. And as mentioned above somehow Rancester, WY didn’t make the cut. The article itself was incredibly short on details. It listed estimates of people, by region, of where people are expected to move in this context and vagueness as to and what portion of the population might choose to relocate to rural areas.

The cost of living is unambiguously cheaper and anyone disciplined enough to really live below their means can have a very easy time of it most of the time. There are some serious drawbacks to living away from a big city the biggest probably being healthcare. If anyone in Prescott needs something done they go to Phoenix which is not quite two hours away. Ranchester is about two hours away from Billings, MT. I have no idea whether Billings has adequate medical care or not but that is something that any retiree moving there for the tax arbitrage would need to sort out ahead of time.

This also applies to people who want to go live in Uruguay or New Zealand or wherever.

Now from the how to budget for the unbudgetable file last Monday we had a lightning strike right out side our cabin (it sounded like artillery not thunder) that fried one TV, the washing machine and a wireless headset for the TV.

The new washer comes Wednesday ($800), if the TV needs to be replaced (the coax port works the rest of the back is fried somehow) that will be $400 and the headphones don’t have to be replaced but they are $100. I spoke to the insurance company Friday about filing a claim (that is when we found out the washer was broken) but I will remain leery of the insurance company until there is a check in my hand.

Many times in posts about retirement stuff I mention that there are always unexpected things that come up and use examples of new tires and vet bills. If the insurance company jacks us then that is $1200 of unexpected expense. Trust me when I say I realize how fortunate we are to be able to just go take care of it but that could be a big obstacle for a retired couple otherwise happily living on $4000 a month.

I mention the unexpected a lot because I think it is the biggest gap in peoples thought process.

10 Comments

  1. Hey Roger–We had a direct lightening strike that took off the top of our fireplace chimney and fried lots of stuff in the house. A neighbor took a hit to a satellite television dish. In both cases, insurance paid.

    Be sure to check absolutely everything that’s electrical, including door bells, garage door openers, bathroom exhaust fans, etc. There doesn’t seem to be any rhyme nor reason to what goes belly up, but our insurance company told us to take our time because they would only process one claim. Good luck.

    Reply
  2. thanks for the tip, as i think of it the only thing we have not checked is the propane floor heater which uses a thermostat to come on. not sure how to check that when it is 80 degrees but we’ll figure something.

    Reply
  3. Good morning.

    My steadfast rule is to save as much money using every angle possible on every transaction, knowing that you’ll be screwed on some transactions and suffer financial loss when unexpected events hit home. This seems to even the financial resource playing field. And, it’s fun.

    T

    Reply
  4. Not having read the article, I’ll rely on your brief take and comment on it. I’m continually amazed at the nonsense that gets published in the MSM.

    Expecting an absolute return portfolio to fully participate in a market such as we’ve had over the last 6 months is like expecting a Miata to keep pace with a Ferrari on the racetrack; its just not the nature of the beast.

    Fwiw, sure, I wish I was up 50+% from the March lows, but being up 20%, ytd, after losing 9% last year using an absolute return strategy takes away a lot of the “hurt” 😉

    Old Trader

    Reply
  5. I put more and more stuff on UPS (the big TV, for instance). I’ve also started replacing power strips every couple of years.

    It’s a “black swan” (hahah) type of event. The same savings account that has months of expenses saved in it and helped me feel better last October helps me feel better about house situations like this.

    Reply
  6. For fun, after reading the articles on using sectors in your portfolio this week, I ran some numbers.

    I made up a simple combo of 10% of each Ishares sector ETF so that I could compare it to the S&P 500 here, on the 3rd line .

    In down years, the sector combination goes down about the same. In up years, it tends to go up a little more.

    The Ishares global sector performance numbers don’t really go back far enough to compare this to something like, say, the EAFE index, but it’s something I think I’ll keep an eye on.

    Reply
  7. sd, good stuff as usual. I probably missed something basic, but are you rebalancing these sectors to stay at 10%? Or is there something more to this?

    Reply
  8. Chances are you may need a new Insurance Co if you put a claim in. That’s the way it works. Good luck and let us know how you make out.

    bwjr

    Reply
  9. Billb – I’m tracking a straight percentage (10% of the performance of each sector each year), so yeah you’d need to rebalance to come close to that. Unfortunately it’s not a portfolio you could replicate exactly.

    Reply
  10. RW, I like to thank you about your AIG comment you made on saturdays blog. I am being more cautious since I think this run is most likely hitting the top. I am projecting 1166 and an indicator is not making new highs while S&P is hitting new highs. However, the fact that last week all kinds of junk came alive reminds me last year in august when things came alive and in september we started to tumble.
    Your comment about having two types of account is a great idea.

    Roger,
    having a budget helps out a lot. When I came to Italy as a single person I was saving more than half the monthly check and having a great social life. Having a family with kids is not as simple, but feel that a family is really worth all. Living in a place where a person feels secure is worth the additional expenses. This comes out to feeling secure about health, justice system, crime, social issues, bugs, social life.
    Best,
    Jeff from Milan, Italy

    Reply

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Sunday Morning Coffee

Barron’s had a brief article about absolute return funds. The article leaned a little skeptical but it brings up a good point. Generally speaking absolute return funds have not participated in the massive rally that started in March. Many are even down a little.

When the market was puking down there was some sentiment about going very heavy into the space which was never a good idea, IMO, for the simple reason that too much of anything is usually a bad idea. During the worst of the declines some of the funds did heroically and now not so much.

This brings up a crucial concept but if you really have a diversified portfolio then not every holding should be going in the same direction. If every holding went up 50% together with the market then how did they do when the market went down 50%?

Small exposures to things like this give a chance to own a few things that either go up a little if the market goes down a lot and even if they go down a little as the market cuts in half they are reducing the volatility. That is great for a down market but not for an up market. That doesn’t make an absolute fund a sell because they still offer the same thing as the did seven months ago, they will likely offset a portion of a swift decline.

Last Sunday I spoofed the Best Places to Retire theme by writing about a few towns, very small towns, in states with no income tax bordering states with no sales tax. Reader Stephen Drone amusingly referred to it as a tax arbitrage.

On Friday Yahoo Finance re-ran an article from MarketWatch called 15 Top Rural Areas To Retire and somehow none of the five towns isolated last week made the cut.

The article listed 15 “recreation” counties, three of which were in Colorado. And as mentioned above somehow Rancester, WY didn’t make the cut. The article itself was incredibly short on details. It listed estimates of people, by region, of where people are expected to move in this context and vagueness as to and what portion of the population might choose to relocate to rural areas.

The cost of living is unambiguously cheaper and anyone disciplined enough to really live below their means can have a very easy time of it most of the time. There are some serious drawbacks to living away from a big city the biggest probably being healthcare. If anyone in Prescott needs something done they go to Phoenix which is not quite two hours away. Ranchester is about two hours away from Billings, MT. I have no idea whether Billings has adequate medical care or not but that is something that any retiree moving there for the tax arbitrage would need to sort out ahead of time.

This also applies to people who want to go live in Uruguay or New Zealand or wherever.

Now from the how to budget for the unbudgetable file last Monday we had a lightning strike right out side our cabin (it sounded like artillery not thunder) that fried one TV, the washing machine and a wireless headset for the TV.

The new washer comes Wednesday ($800), if the TV needs to be replaced (the coax port works the rest of the back is fried somehow) that will be $400 and the headphones don’t have to be replaced but they are $100. I spoke to the insurance company Friday about filing a claim (that is when we found out the washer was broken) but I will remain leery of the insurance company until there is a check in my hand.

Many times in posts about retirement stuff I mention that there are always unexpected things that come up and use examples of new tires and vet bills. If the insurance company jacks us then that is $1200 of unexpected expense. Trust me when I say I realize how fortunate we are to be able to just go take care of it but that could be a big obstacle for a retired couple otherwise happily living on $4000 a month.

I mention the unexpected a lot because I think it is the biggest gap in peoples thought process.

Submit a Comment

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WP-SpamFree by Pole Position Marketing