"Fair Value" Income Portfolio

Geoff Considine, another one of my favorite investment authors, wrote an article called Yield vs. Risk in the October 2010 article of Financial Planning. In it he provides a chart of the yield of various income vehicles as a function of risk:


Based on this chart, he later constructs a portfolio that he calculates will return 6.8% annually with volatility of 11.4%, less than half of that of the S&P 500:


He calls this the "fair value" income portfolio where its expected total return is what it's current yielding.

Note that Kinder Morgan and Enterprise Products are MLPs, and you can probably substitute any of the MLP ETNs or one ETF for it (although there has been some controversy over their effectiveness as investment products). You can probably also use utility and/or telecomm funds for Con Ed and AT&T.

This is probably a good starting point for a domestic income portfolio. I think to round things out, you've got to go international. Add in REITs, TIPs, and peer-to-peer as well.

The Mythical X-Curve

I remember reading this when I first stumbled across it maybe a decade ago. It's just as interesting and applicable now as it was then.

The Mythical X-Curve

This one speaks for itself. I'd love to actually experience a movie in one of John F. Allen's theaters. Too bad there aren't any in California.

Setting The Subwoofer Level

The best succinct article I've read about properly calibrating a sub is by Tom Holman in the September 2001 issue of Digital TV magazine (which I've not been able to find online), so I'm paraphrasing it here. Because of the initial works of Fletcher and Munson in the 1930's (nowadays we use the updated ISO standard), we know that our perception of loudness is not very flat, and it takes more bass energy to sound equally as loud as the midrange. To get that extra headroom to achieve "equal" loudness, the LFE channel is "turned down" by 10dB in the medium and "turned back up" by the end user's equipment. Work by Eric Benjamin of Dolby Labs confirms that this 10dB amount is a good choice. However, since the bandwidth of the LFE channel is less, it should NOT measure 10dB greater using noise. The best way to set the level is to observe 10dB in-band gain above that of one of the main channels in its operating frequency. In other words, with a 1/3-octave RTSA, if the center channel measures 70dB SPL, then the LFE should read 80dB SPL in its active bands. In a pinch, with your typical Radio Shack analog SPL meter on the C-weighted curve (which rolls off the bass), the LFE with band-limited pink noise should measure approximately 4dB greater than one wideband channel playing pink. The best way is still to use an RTSA though. Holman also mentions this in his book Surorund Sound: Up And Running on page 60. You can read it for yourself on Google Books.

A Multi-Asset Portfolio Is Best For Withdrawels In Retirement

You don't want to run out of money in retirement, so your investment portfolio should be constructed in a way to last your golden years. One of my favorite financial planning authors Dr. Craig L. Israelsen provides evidence that a multi-asset portfolio equally-weighted in large U.S. stock (S&P500), small U.S. stock (Russell2000), foreign stock (EAFE), real estate (NAREIT), commodities (GSCI), U.S. bonds (Barclays Aggregate), and cash (3-month T-bills) outlasts standard portfolios of 60/40 stocks/bonds, 40/60 stocks/bonds, and 100% bonds in a May 2010 article at Financial Planning entitled "Built To Last."



The rule of thumb for retirement nest egg withdrawels is typically 4% annually with an inflation increase per year of about 3% of the withdrawel amount (a COLA). For example, with a $1,000,000 nest egg, the first year amount would be $40k, the second year would be $41.2k, etc... Dr. Israelsen back-tested several 25-year rolling retirement periods using the above portfolios, and although all portfolios survived all periods using a 5% withdrawel rate, only one survived all periods using an 8% withdrawel rate: the robust multi-asset portfolio. Notably the most brutal 25-year periods all started in the early 1970's.

I'd be really interested in knowing how well things would've have fared earlier, since one can argue that historically we've seen the most rapid growth in assets in the last 30 years or so. 30-year rolling retirement periods might be a more accurate norm for retirement now, now that we're all living longer, in which case the 4% annual withdrawel rate is safer for not running out of money.

Passive Mutual Funds Beat Active

There's an interesting paper on why indexes are a better investment than mutual funds. It's called "The Difficulty of Selecting Superior Mutual Fund Performance" and was in the 2006 February issue of the Journal of Financial Planning. The bullet points:

1. Few active mutual funds can consistently beat their respective indexes, but there are some that do.
   
2. Predicting which active mutual funds will outperform, however, is difficult, if not impossible.
3. The cost of selecting the wrong manager was high, and probably not worth the risk.
4. Active mutual funds provide significantly lower after-tax returns.

The only issue I have with this study is that it studies only 20 years (because there aren't many active mutual funds around longer), and in that period, stocks have been mostly on a tear. I'd be interested in how active mutual funds fare against the indexes in a sideways or down market.