Grasshoppers Versus Ants

Comments on “Grasshoppers and Ants in Retirement,” by Robert R. Johnson, Ph.D., Michael Finke and Tao Guo in the June 2018 AAII Journal:

I think we grasshoppers have more fun than ants do!

The article doesn’t address whether grasshoppers are living below their means. Since my wife and I live well below our means, we can afford to be grasshoppers, travel a lot and have nice things. Who knows how long we will live?

Do the math and figure out how long it will take to spend your accumulated wealth and accomplish goals like bequests and inheritances. If it’s about as long as your genetics predict your life expectancy will be, why not spend what you worked hard to accumulate?
—Eric Bressler from Minnesota

Many of us feel more secure, and thus happier, if we feel we have done our best to prepare for unanticipated needs—happier than we would be by spending more for travel and entertainment. It is not very hard to think of people who have suffered very large unanticipated losses or expenses. Many people in the ants group are likely to be content with their lifestyles.
—Kenneth Dodds from South Carolina

Asset Allocation Formula & Rebalancing

Comments on “A Quantitative Method for Asset Allocation,” by Joseph Harding, in the June 2018 AAII Journal:

How exactly did you determine the values in the formula from Robert Shiller’s spreadsheet? The article was very thought-provoking and appears to be based on a logical foundation.
—D. Wilson from Florida

Why is October 1 the best day to rebalance your portfolio compared to other days of the year?
—Ken Smith from Alberta

Joseph Harding responds:

I created my own spreadsheet that uses the data from Shiller’s spreadsheet. The formula uses a 20-year CAPE (as opposed to the 10-year CAPE in Shiller’s spreadsheet).

I simply went through a process of assuming different structures for the formula (e.g., linear, exponential, etc.) and then played around with different parameters such as slope, exponents, number of years for CAPE, etc. The formula in the article is the best I have come up with so far for the time period of 1950–2017.

Regarding the second question, I looked at rebalancing on the first trading day of every month, meaning 12 different scenarios. For the time period of 1950–2017, rebalancing on the first trading day of October would have resulted in the best returns using the quantitative model presented.

As far as why, I am not completely sure except to say that there are well-known seasonal influences in the stock market—i.e., some months have historically provided better returns than others.

Tax Losses & Tax Deferral

Comments on “Quantifying the Value of Retirement Accounts,” by Aaron Brask, Ph.D., in the June 2018 AAII Journal:

Two issues seem to greatly impact the article’s analysis. First, a fundamental difference between stock holdings inside and outside of a IRA/401(k) account may be the respective treatment of capital gains tax and income taxation. Upon liquidation in retirement, the withdrawal from any IRA/401(k) is taxed more than a similar liquidation of capital gains.

Another question is the benefit of claiming tax losses when selling securities, especially in earlier high-income years, that is never offered in IRA/401(k) plans. It really helped to sell off those losers after the dot-com bubble burst.
—Donald Schott from Colorado

I felt the article was very helpful in pointing out the benefits of tax deferral. It would seem in a taxable account that one pays the tax up front on your investment at the ordinary tax rate. Then if you want to spend the money, after it has gone up in value, you pay a second tax on the gain (the capital gains tax). Compare this to the tax-deferred account, where you just pay once at the ordinary tax rate when you take it out. That’s why you are better off with the liquidated portfolio invested in the tax-deferred account.
—James McEnerney from Illinois

Betting on Behavioral Finance

Comments on “Making Better and More Rational Decisions,” an interview with Annie Duke, in the June 2018 AAII Journal:

Excellent interview! I just ordered the book that Annie wrote, “Thinking in Bets.” I like behavioral finance. I hope to have a different perspective after reading the book. Although I am only risking a small percentage of my total portfolio, options trading is an extension of my “gambler tendencies.”

—Jim Eisenreich from Minnesota