The week’s top conversations were started by APViewpoint member John Walton and thought leader Michael Edesess, and included comments by thought leaders Wade Pfau, Dirk Cotton and Joe Tomlinson. They generated thoughtful discussions on decumulation planning strategies and whether quantitative strategies are vulnerable to the overfitting of data.
John Walton’s Inverted Withdrawal Rates and the Sequence of Returns Bonus inspired four comments from thought leaders commending Walton’s analysis of retirement decumulation strategies. Leading experts in retirement-spending research agreed that “the concept of taking a bit more risk in good times and a bit less in bad times [is] compelling from a research perspective,” and recommended that Walton’s analysis be extended to incorporate changes in a client’s time horizon and risk tolerance. That is, they suggested that it would be insightful to include metrics that capture the fact that a client’s safe withdrawal rate “both increases with age (declining life expectancy) and decreases or increases along with capital market expectations.” Thought leaders also proposed that testing decumulation strategies using the endowment method and Bengen’s floor-and-ceiling approach would provide additional insights.
Michael Edesess’ How Many Monkeys Does it Take to Find a Successful Strategy? tallied 17 comments as it continued into its second week. Advisors passionately debated the value of index-based ETFs and, in particular, smart-beta strategies. While advocates of smart beta strategies conceded that some research suffers from backtest overfitting, they argued that it does not mean we should “condemn all strategies derived from historical market data (unless you are assuming opportunity does not exist in the first place).” They claimed that there are dozens of papers showing that smart-beta factors are persistent in out-of-sample tests, exist globally, have logical explanations and persist well after publication. In contrast, others claimed that the “ability of a factor to deliver alpha depends on whether it can be mapped to a set of criteria and if that is sufficiently proprietary to maintain an edge that can’t be arbitraged away,” and that ETFs using factor-based strategies fail to do this and tend to charge exorbitant fees. In response, some defended factor-based ETFs and pointed to the value and diversification benefits of the fund QSPRX.
APViewpoint will be hosting its next CE eligible webinar, No Portfolio is an Island, on Tuesday, June 7, at 4:15PM ET. In this presentation, David Blanchett will show advisors how to achieve a more holistic approach to financial planning and portfolio optimization. Blanchett will review strategies that advisors can use to integrate each client’s wealth elements, including investable assets, human capital, real estate and pensions, into their analysis. You can register for the webinar on the APViewpoint events page here.
