Saturday, June 2, 2018

Waring and Siegel write a new article, on the true nature of investment risk, showing how it flows through to spending risk

In their latest joint effort, Waring and Siegel write on the nature of investment risk, titled "What Investment Risk Means to You: Strategic Asset Allocation, the Budget Constraint, and the Volatility of Spending During Retirement," in The Journal of Retirement, Volume 6, Number 2, Fall 2018. The authors' experience suggests that few investment professionals articulate risk well to their investors. This research uniquely and graphically reveals the nature of strategic asset allocation (SAA) investment risk not only for single-period investors, but also for multi-period investors such as those whose savings are held for retirement consumption purposes. Informed by Monte Carlo simulations, they evaluate and picture the nature of that multi-period consumption risk with both efficient spending rules and inefficient spending rules. Risk in a multi-period context means that expected spending may increase with greater SAA risk, but realized spending, a function of realized investment returns, may instead be worse.

Thursday, March 24, 2016

Waring and Siegel Win Prestigious Graham and Dodd Award for Spending Rule Article

One of CFA Institute's Highest Honors

To read the award-winning article, click here, or locate it in the Publications section of this website.

From the CFA Institute's press release (for full text, click here):

CFA Institute Names Top Financial Analysts Journal Articles with Annual Graham and Dodd Awards

Best article of 2015 contributes to addressing the retirement crisis by proposing a dynamic spending rule that prevents retirees from running out of money by making their income during retirement fluctuate with asset values

New York, 8 March 2016

CFA Institute, the global association of investment management professionals, announces the results of the 2015 Graham and Dodd Awards, a program honoring the top articles published in the Financial Analysts Journal each year. “The Only Spending Rule Article You Will Ever Need” by M. Barton Waring and Laurence B. Siegel received the top award. The article appeared in the January/February 2015 issue, a special issue on retirement security that marked the 70th anniversary of the Journal. The article’s contribution is to use the annuity technique to determine the maximum income that retirees can withdraw each year without facing the risk of running out of money. The authors call their proposed spending rule an annually recalculated virtual annuity (ARVA). They explain and illustrate the mechanics of the ARVA, which allows retirees to recalculate each year how much they can spend based on their life expectancy and the current value of their retirement portfolio.

Barbara S. Petitt, CFA, managing editor of the Financial Analysts Journal, commented: “I am pleased that the Journal’s Advisory Council and Editorial Board chose to honor an article that plays a role in addressing the retirement crisis. Retirement security is one of the themes of the CFA Institute Future of Finance initiative, and the Financial Analysts Journal is well positioned not only to advance the knowledge and understanding of the challenges of achieving retirement security but also to offer practical solutions to these challenges. This article, which is written in language accessible to investors, should thus be valuable to them and their advisers.”

See Barton's earlier post describing the article in more detail.

Thursday, September 3, 2015

There Was Nothing I Could Do--All the Correlations Had Suddenly Gone to One!

Waring and Siegel post a new working paper, dealing with the frequently-heard claim after a losing streak that the underlying correlation structure had experienced a surprise change. They use an interesting approach to challenge traders and portfolio managers, as well as asset allocation strategists, to think beyond such simple claims. They show that rather than changes in the underlying correlation structure, short period realized correlations are widely distributed and highly random. The paper is supported by a user-friendly Excel(tm) spreadsheet, where the user can run simulations to explore the distribution of sub-period realized correlations given underlying "true" correlations between two assets. The working paper is here: Read working paper The supporting spreadsheet is here: OPEN SPREADSHEET

Friday, August 29, 2014

Waring and Siegel Resolve Spending Rule Debates

Puzzled for some time about the oversimplified spending rules usually proposed by financial advisors and others helping individual investors (such as the widely-used but dangerous "4% rule"), Duane Whitney and I briefly pointed out in our 2009 Journal of Portfolio Management article that modern portfolio theory provides a better answer (Summer, p. 123). That answer is that what one needs is an annuity for one's remaining life. The insight was that even if you don't want a commercial annuity, you can create a complete substitute on your own. One simply calculates each year the first payment on an annuity for one's maximum possible life, and spends that amount in that year.

Next year, you recalculate that first payment again, and spend that amount. In this way you self-correct for portfolio returns and interest rate fluctuations, and you avoid the possibility of running out of money. This was a side discussion in that article, which was primarily focused on the larger problem of investment strategy for investors with spending plans.

Larry Siegel and I thought that the idea warranted much more thorough discussion, as the industry starts to give more sophisticated attention to the issues facing individual investors. So in this current paper, published in the January-February 2015 issue of the Financial Analysts Journal, we dive in

Wednesday, April 10, 2013

Shanghai Securities News: Conference on the future of investment management in China

Barton's presentation to the Chinese investment management industry is available here: Shanghai Securities News conference presentation

Tuesday, April 2, 2013

Keeping Alpha and Beta Separate: An Active Manager's Utility Maximization Guidepost

I've created a document summarizing the critical lessons taught by Grinold and Kahn in the inexplicably little-known appendix to chapter 4 of their otherwise famous text, Active Management (McGraw Hill, 2nd Edition 2000). This is critical material. Anyone interested in active management, including market timing, should find it interesting--if for no other reason than that it takes the terse and difficult language of the original and puts it in far more approachable form. This document gives an easy-to-follow mathematical understanding of the differences between alpha and beta--and even active beta.Waring's summary of Grinold's and Kahn's Appendix to Chapter 4, book "Active Management"

Thursday, March 28, 2013

Waring's Reading List for Active Managers

Some time back I put up a post on the important differences between alpha and beta, especially as they relate to the difficult tasks faced by investment managers in their efforts to add value for their clients. I've often been asked to suggest readings on the topic, readings which might be helpful to those trying seriously to better organize their alpha-generating efforts.

I've published here on this site a first draft of just such a list. It is not a finished product, as there are many valuable pieces, especially those that have been written by others, that I have forgotten in the rush of setting