Logical and Personal Quandary

[NW-Bound]

I'm currently doing something similar to this for my stock allocation that I explained in the options thread... I buy very long LEAPS as a stock substitute.

And I'm in a dilemma as to how to count it towards my AA... using your example whether to use the notional amount (100 in your example) which is the amount of the investment that I will get appreciation from based on market performance... ot the 25c that I paid for the option (in reality it is more like $9 rather than 25c for a long term option).

SWAN uses a similar strategy... 90% of the fund is in ~10 year UST and 10% of the fund is invested in SPY 12 mo call options... at 6 month intervals so they have half 6 month call options and half 12 month call options.

I never heard of the funds PSLDX and SWAN until this thread. And I have learned something very interesting.

Both hold bonds, and use the bond income to buy stock options. But after that, the two are quite different.

PSLDX states that its goal is to beat the S&P. SWAN's objective is to have some gain in a bull market, while protecting itself in a black swan event. And both funds indeed show behavior and performance consistent with their objectives.

In the crash of 2008-2009, PSLDX lost just as much as the S&P. Since that time, the market has been generally in a bullish mode, and PSLDX indeed beats the S&P. And that's because it uses leverage to get the excess return. And it exhibits higher volatility, which is the price to pay.

On the other hand, SWAN uses option trading to reduce volatility, with the understanding that it may trail the S&P in a hot market.

SWAN's inception was fairly recent in Dec 2018. Hence we would not know how it would do in a bear market. However, the performance in its short life has been decent. It has about the same performance as the popular Wellington with the 60/40 AA. However, SWAN volatility is significantly less. I have to say it's impressive.

If an investor thinks the market will stay in a hot streak, he should buy PSLDX. If he wants to be more conservative, he will like SWAN.

I may get a bit of SWAN myself.

 

[Scratchy]

I'm not sure each of you is talking about the same thing.

I think Scratchy means the fund may have just been lucky with a strategy or picks that have done well over this period (there's always some fund out there that outperforms - whether that holds going forward is the big Q).

But I think Life_by_Fire is talking about the "luck" of picking that fund. The fund has been around 14 years, so I think the "hours and months" refers to Life_by_Fire's efforts, not the fund's. But it's not hard to find a fund that has done well in the past, that's an easy screen.

Do I have that right?


So Life_by_Fire, when did this fund get picked? Was it already in the inherited IRA?

-ERD50

Yes, that is a fair summary thank you. I hope I was not sounding harsh or derogatory, that's not my intention. But I would not count on returns in the future to continue to be higher than the market.

 

[Life_by_Fire]

The first purchase of PSLDX was in July 2020, I believe. It was not in the IRA before then. Before then, the holdings were a complicated mixture of ETFs and funds selected by the decedent's FA. Unsurprisingly, that portfolio performed poorly.

While I can appreciate skepticism, things appear to be heading into nonconstructive dismissiveness. While I have nothing to prove to anyone, I can assure you selecting this fund was not the result of an "easy screen" but a laborious exercise that resulted in the chosen AA which includes more than PSLDX.

The question of "will it continue to perform going forward" can only be answered with "nobody knows nothing." It is a question that I researched and considered in my decision. It is a question that should be asked of any investment but should be done with intension, not derision.

 

[Scratchy]

While I can appreciate skepticism, things appear to be heading into nonconstructive dismissiveness

Apologies for any offense, will sign off from this thread.

 

[pb4uski]

.... The question of "will it continue to perform going forward" can only be answered with "nobody knows nothing." It is a question that I researched and considered in my decision. It is a question that should be asked of any investment but should be done with intension, not derision.

Fair point, and if it were just a significant piece of an overall balanced portfolio then I don't think you would be getting much pushback at all... many of us have little tilts and bets in our portfolio (then again, others do not).

The difference is that as I understand it you will be essentially betting your retirement and financial life on PSLDX because it will be 50-65% of your total portfolio and that is what so many posters are uncomfortable with. If at some point PSLDX's unique strategy has a big fail then you are screwed.... if the 50-65% was in a index fund then there wouldn't be as much risk of a big fail (or if it did happen then you would have a lot of company).

 

[SecondCor521]

I am aware of those things. We are at our current desired AA. I don't wish to get rid of PSLDX but I won't hold it in a taxable account. So as we take RMDs, those PSLDX shares will be converted to VTSAX and VTIAX in a taxable account. This is in line with our planned glide path AA as we get closer to retirement.

I understand the risks of this fund but for now am willing to accept them. As we near and enter retirement, we will be less inclined to take on those risks. So the transition is a glide path. Does that make sense now?

Yes, if this is your plan and glide path, it makes sense to me.

I think I was thrown off by the phrase "if it helps". I misinterpreted it as "if it helps the rest of you feel better about my investment decision" instead of "if it helps the rest of you understand my investment plan". The former makes no sense to me; the latter makes perfect sense.

It seems you are fortunate that your current allocation to this fund, your financial plan's glide path, your retirement plans, and your inherited RMDs all line up. I've had the same thing happen to me in another area of my financial life and it's nice because it makes things easier for me, as I suspect it has for you.

Thanks for the reply, I appreciate it.

 

[Life_by_Fire]

Fair point, and if it were just a significant piece of an overall balanced portfolio then I don't think you would be getting much pushback at all... many of us have little tilts and bets in our portfolio (then again, others do not).

The difference is that as I understand it you will be essentially betting your retirement and financial life on PSLDX because it will be 50-65% of your total portfolio and that is what so many posters are uncomfortable with. If at some point PSLDX's unique strategy has a big fail then you are screwed.... if the 50-65% was in a index fund then there wouldn't be as much risk of a big fail (or if it did happen then you would have a lot of company).

A fair point and I appreciate it. My wife and I have chosen to take that risk at this stage and glide the AA to a less risky AA as retirement approaches. I really do encourage everyone to research risk parity approaches though as funds like this are, I believe, less risky than some think at first glance.

Here is a recent interesting article on PSLDX: https://seekingalpha.com/article/4437228-psldx-1-percent-monthly-payout-nearly-14-years

 

[plex]

Not exactly sure what $ amount you are aiming for ER, after saying you are decreasing it from 5M to 200k shares (?). It sounds like you know your living expenses. 5M does sound a bit high, but if your aim is still $115k in expenses (including all future child expenses), and you both want to retire in your 30's, generally you need some at or a bit below 3.5% withdrawal rate to last that long at something near 100%. So while that doesn't add up to 5M, it does add up to at least 3.3M.

So, if your job is driving you crazy, try to find another income stream to makeup for that remaining 1.8M. And/or find comfortable ways to lower your expenses.

As other's have said, the PIMCO is highly undiversified, and looks like it has a much higher risk profile than even a total or cap tilted index fund, the only way it could be any riskier is if it was leveraged on top of all that. It is extremely concerning it has only briefly weathered a down market so you can see just how much volatility is packed in there, the starting date is basically right near the beginning of the bull market. It basically feels like this fund was created as one of many test funds at just the right time, was one of the lucky few to survive, and is being kept until the next downturn at which it will very likely get clobbered and suddenly perform much worse than an average fund, at which point the fund will be delisted, or at least never have an article written about it again. This is an incredibly common tactic used by active management companies to show they are "winners". I won't mention much more than that since it has been talked about to death.

 

[Life_by_Fire]

Not exactly sure what $ amount you are aiming for ER, after saying you are decreasing it from 5M to 200k shares (?). It sounds like you know your living expenses. 5M does sound a bit high, but if your aim is still $115k in expenses (including all future child expenses), and you both want to retire in your 30's, generally you need some at or a bit below 3.5% withdrawal rate to last that long at something near 100%. So while that doesn't add up to 5M, it does add up to at least 3.3M.

So, if your job is driving you crazy, try to find another income stream to makeup for that remaining 1.8M. And/or find comfortable ways to lower your expenses.

As other's have said, the PIMCO is highly undiversified, and looks like it has a much higher risk profile than even a total or cap tilted index fund, the only way it could be any riskier is if it was leveraged on top of all that. It is extremely concerning it has only briefly weathered a down market so you can see just how much volatility is packed in there, the starting date is basically right near the beginning of the bull market. It basically feels like this fund was created as one of many test funds at just the right time, was one of the lucky few to survive, and is being kept until the next downturn at which it will very likely get clobbered and suddenly perform much worse than an average fund, at which point the fund will be delisted, or at least never have an article written about it again. This is an incredibly common tactic used by active management companies to show they are "winners". I won't mention much more than that since it has been talked about to death.

$5 million is the, "I know we are safe for whatever number." I am working on 2 other income streams currently that could be lucrative but take time to establish.

I have been meaning to ask how PSLDX is undiversified. It carries anywhere from 775 to well over 800, almost 900 bonds and the S&P500. It was also created right before the Great Depression and weathered it, which is difficult for a new fund, especially a leveraged one. Its a bit unfair to say it was created at the beginning of a bull market. That's like Northwestern Mutual failing to include 2008-09 in its return statistics, which they do. I would argue that as a leveraged fund it was created at the absolute worst time possible within the last 90 years.

 

[SecondCor521]

I have been meaning to ask how PSLDX is undiversified. It carries anywhere from 775 to well over 800, almost 900 bonds and the S&P500. It was also created right before the Great Depression and weathered it, which is difficult for a new fund, especially a leveraged one. Its a bit unfair to say it was created at the beginning of a bull market. That's like Northwestern Mutual failing to include 2008-09 in its return statistics, which they do. I would argue that as a leveraged fund it was created at the absolute worst time possible within the last 90 years.

Per the holdings report from:

https://www.pimco.com/en-us/investments/mutual-funds/stocksplus-long-duration-fund/inst

As of 3/31/2021 PSLDX owned:

Approximately 560 bonds, of which approximately 500 were corporate bonds in only three sectors (banking/finance, industrials, utilities).

None of the S&P500 index as far as I could see (the fund benchmarks itself against the S&P500 but appears to own bonds, derivatives, forward currency spreads, and other stuff).

And I'm sure you meant great recession (2008) not Great Depression (1929).

 

[NW-Bound]

^^^ They do not own the S&P per se, but own options that have the S&P as the underlying asset. The values of these options are tied to the S&P.

 

[plex]

Hopefully you will be able to get the new sources of income going.

I don't want to reiterate what others have said, but to explain why I don't consider the fund all that diversified, this PIMCO fund is basically saying they "emulate" the sp500, and it does hold futures of the sp500 (which are a type of bond) in a portion of it, but it then takes a series of extreme long/short positions to basically concentrate where the fund is positioned at different times basically through a type of leverage, just not a straightforward one. This is not what is traditionally considered as diversification, because the whole point of this fund is to move away from the main focus of diversification, based on the fund manager's investing style at the time, to the point of making it potentially sometimes act much more severely (with more volatility) than the SP500 ever would, similar to an undiversified stock.

 

[ERD50]

...
I have been meaning to ask how PSLDX is undiversified. It carries anywhere from 775 to well over 800, almost 900 bonds and the S&P500. ...

OK, maybe not undiversified regarding those holdings, but clearly they are trying to do something different with them, in order to beat the market. So it's not the same (if it were, we wouldn't be having this discussion!).

So maybe consider it undiversified from a management team perspective. You have a lot of eggs in one management team. What if the team changes, what if their strategy no longer works (relative to the market)? What if hundreds of funds copy their strategy, making it harder to implement?

With the broad passive index funds, there really is no management team, you get what the market dishes out. There is no management team risk, just market risk.

-ERD50

 

[SecondCor521]

^^^ They do not own the S&P per se, but own options that have the S&P as the underlying asset. The values of these options are tied to the S&P.

Can you point me to those rows in the holding spreadsheet? I did see one S&P related futures on row 699, but that appeared to be less than 15 basis points of the fund's assets.

 

[NW-Bound]

Can you point me to those rows in the holding spreadsheet? I did see one S&P related futures on row 699, but that appeared to be less than 15 basis points of the fund's assets.

I just went by the fund's broad view that it has 100% stock exposure, 160% bond, and -160% cash.

Just now, went into the detailed spreadsheet that you mentioned, and saw a lot of things laymen like myself would not know. Indeed, the tiny S&P future you mentioned did not amount to anything. I saw a lot of CDS (Credit Default Swap) that I did not understand.

I guess perhaps the fund computes its equity risks to be equivalent to holding 100% stock somehow. This high finance stuff is complicated. It's a far cry from the simplistic option contracts that I dabble in.

 

[Koolau]

OK, maybe not undiversified regarding those holdings, but clearly they are trying to do something different with them, in order to beat the market. So it's not the same (if it were, we wouldn't be having this discussion!).

So maybe consider it undiversified from a management team perspective. You have a lot of eggs in one management team. What if the team changes, what if their strategy no longer works (relative to the market)? What if hundreds of funds copy their strategy, making it harder to implement?

With the broad passive index funds, there really is no management team, you get what the market dishes out. There is no management team risk, just market risk.

-ERD50

I think this is the best argument against virtually any non-index fund. Beating the market has been shown time and again to be a matter of "luck" (for want of a better word.) It also adds significant fees which have been shown to be the most avoidable drag on your portfolio. I know nothing of this particular fund, but I'm guessing the fees and trading costs are substantial.

Having said that, I wouldn't try to talk anyone out of investing the way they see fit. For me, index investing is "easy." It beats most funds in the long run. It's also cheap. Just what a "couch potato" wants in a portfolio. Couch Potato is a reference to Scott Burns recommendation of an AA made up of 2 or 3 index funds only. See https://www.optimizedportfolio.com/...rtfolio&utm_content=Couch-Potato-Portfolio-EM and https://couchpotatoinvesting.com/ In any case, YMMV.

 

[OldShooter]

I guess if countless hours of research and comparing against other options over several months is considered "lucky," then yes.

Yes. This kind of thing is mostly luck. There is a half-century worth of solid data that says the best model of the market and of individual securities prices is as a random process. This is the foundation of Modern Portfolio Theory as proposed by Harry Markowitz in 1952. Here's a good way to spend a few minutes understanding this: https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx

One consequence of this is that past performance is not predictive. This is incredibly un-intuitive to people but it is the case. One good reference is S&P's "Manager Persistence" reports that are published semi-annually. "Persistence" refers to a fund manager's past performance being predictive. Each of these reports is basically the same -- little or no persistence.

Here is a chart I have posted before, showing the 5-year results of managers who were successful in the prior 5 years.

The bar on the left separates the thousands of managers into quintiles, where the green block is the top 20% of managers for the first five year period. To the right, then, is the bar representing those managers' performance in the subsequent 5 years.

​

For more on this, read Nassim Taleb's "Fooled by Randomness." One of his themes is traders who, having gotten lucky, conclude from that that they are geniuses. BTDT, learned my lesson years ago.

No one seems to be recognizing how this fund survived the Great Recession soon after it was created and then thrived. This isn't some new hot fund without any track record. It has 14 years of operation including the Great Recession.

Actually, it is much easier for a fund to look good when it is tiny, specifically because its tiny trades have no market effect. As soon as the trades get to be any size at all, the price runs away from the fund's trader while he is executing the trade. Some of this is normal market action and some is skilled front-runners, usually program traders' computers. But it is a significant cost where turnover is high like it is in PSLDX. Lack of market impact makes the fund look better than it will be. Also, it is common for expenses to be subsidized or waived for new funds, again making them look artificially good.

The other thing to consider is whether the fund may be an incubated fund. This is an especially sneaky way of misleading potential investors: https://www.investopedia.com/terms/i/incubatedfund.asp

 

[ERD50]

... The other thing to consider is whether the fund may be an incubated fund. This is an especially sneaky way of misleading potential investors: https://www.investopedia.com/terms/i/incubatedfund.asp

Very interesting, I was not aware (or forgot!) about this.

Is there a way to determine if a fund's historical record includes the "incubation period"? I would hope the various charts available on the web only show the time period that it was public (though, I suppose a 'trick' to that would be to simply not advertise the fund, essentially keeping it private, even though technically it is public).

-ERD50

 

[OldShooter]

... Is there a way to determine if a fund's historical record includes the "incubation period"? ...

Not if the hucksters can help it.

There is kind of an analogous scam where the hucksters trumpet "all of our funds beat the S&P over the last ten years", not mentioning that the ones that didn't have been killed off. See: https://www.investopedia.com/terms/s/survivorshipbias.asp

 

[NW-Bound]

The risk with these new funds is not the same as with the normal funds that load up on hot stocks. An example of the latter is the Ark fund family run by Cathie Wood.

The funds like PSLDX deal in derivatives that individual investors do not get access to, nor know how to evaluate. The latter is what concerns me the most. Looking at these CDS's reminds me of all the CDSs and CDOs that blew up in the subprime mortgage crisis.

I am not saying the same will happen here, but with derivatives that are not traded in the open market, how are their values determined? Even common stocks and options that are liquidly traded in the open market already have their values called "ethereal", let alone something illiquid that may be traded only between a few players.

 

[Running_Man]

I think this is the best argument against virtually any non-index fund. Beating the market has been shown time and again to be a matter of "luck" (for want of a better word.) It also adds significant fees which have been shown to be the most avoidable drag on your portfolio. I know nothing of this particular fund, but I'm guessing the fees and trading costs are substantial.

Having said that, I wouldn't try to talk anyone out of investing the way they see fit. For me, index investing is "easy." It beats most funds in the long run. It's also cheap. Just what a "couch potato" wants in a portfolio. Couch Potato is a reference to Scott Burns recommendation of an AA made up of 2 or 3 index funds only. See https://www.optimizedportfolio.com/...rtfolio&utm_content=Couch-Potato-Portfolio-EM and https://couchpotatoinvesting.com/ In any case, YMMV.

All index funds owns swaps, derivatives and contracts in lieu of actual stocks, read the brochure and details of any of them. This fund has overperformed because it owns long dated derivates which track the S&P500 index which trade at a discount to the actual stocks while not investing the full amount of money and then utilizes long bonds on top giving it a blended rate and a juiced up return.

I would imagine in a decline of major proportions this fund would decline more than the index, which it did from Feb-March 2020 down 37% vs 32% for the S&P500, however it also recovered much faster by two weeks and since Jan 2020 is up 6% more than the S&P500 38% vs 32%. It also absolutely destroys the S&P 500 in the last 10 years 830% vs 395% again mainly because of the investment in long bonds and long term derivatives in the S&P500.

In a long sideways move in the market, similar to 1966 to 1981, this particular investing style would also underperform the indexes, as time value would crush the derivatives. IN a rising interest rate enviroment with the stock market falling, this fund would fall the most.
But the performance is not luck it is design, when yields are falling, stocks go up and this fund capitalizes on that trend. The fact that we have been in this trend since 1981 led the fund managers to this solution.

 

[Koolau]

But the performance is not luck it is design, when yields are falling, stocks go up and this fund capitalizes on that trend. The fact that we have been in this trend since 1981 led the fund managers to this solution.

If I buy this argument, then I would still suggest there is "luck" involved. The "luck" is whether the market trend (in this case falling yields) reverses. That would be "bad" luck for this fund if I understand your premise.

But, when I spoke of "luck" it was more along the lines of what OldShooter pointed out. Out of all the funds, a few will win the coin toss 15 out of 20 times. But the odds of the next coin toss do not change. It's still a 50/50 toss.

True, rising markets will lift all (well, most) funds. So a 14 year old fund can look pretty good as long as the coin toss went well during one downturn (the great recession.) Now, admittedly, I'm telling you WAY more than I know, but I still maintain that the stock market goes up in general with some more or less random ups and downs along the way. Best way (IMHO) to play the game is to bet on the total market and pay very little to play the game.

No special insight on my part so I can't argue with this particular fund's strategy. Maybe it's NOT luck, but only time will tell. In the mean time, I'm paying (I forget - it's been so long since I looked) 10 basis points to manage my index funds. YMMV

 

[NW-Bound]

The holy grail of investment strategies is this:

1) If the market goes up, I match it, or go up even more.

2) If the market goes down, I lose less, or perhaps even gain.


Being an active investor, what I have found with my performance is this:

2-a) If the market goes down, I go down more.

 

[Paulz]

I'm not sure if I can articulate this right, but I'd suggest really taking a step back and thinking about why you want this and what you want it to look like verses reality.

COVID and working from home has changed a lot of attitudes, mine included. I dream and plan for retirement every day. I am a HUGE planner. I can honestly say looking back on my life that nothing I originally planned worked out like intended. You are basing your financial security for 50-60 years on your understanding and state of the world today.

When I see you and your wife is 32 but you "both wanted to retire early", to me thats a head tilt. Based on your occupation, you graduated from college at 26ish? So in 5 years, you hate your occupation, your current employer, or both? I say this only to point out there are many "fields" in your profession and not all require one to compromise their integrity. Grisham's book "Street Lawyer" shows us that. Is RE really the goal verses getting out of a bad work position vs an entirely new speciality in your field? Is your wife working? If not, RE would not change her circumstances at all since you have small children. What is the catalyst for her RE desire?

On the financial side, everyone has pointed out that it could work. My concern is your plans need to be accurate for 50-60 years in the future. To me, it just seems like a daunting task to project and provide financial coverage that far in the future with two very young children.

I guess the entire point of this is to point out that the FIRE bug can allow one to make sub-optimal choices. Just make sure you are RE to something and not from something.

 

[SecondCor521]

Is your wife working? If not, RE would not change her circumstances at all since you have small children.

This seems very odd to me. Having two parents at home sharing the burden of raising small children is 1000% different from just one parent at home. And my personal experience includes many different combinations of parents, kids, working, going to school, and being retired.