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Are You at Risk of the Tail?

If you’re an investor worried about another major decline in the markets like the one experienced in 2008-2009, then you’re worried about something called “tail risk”. Just like the probability illustrated on a bell curve, the majority of gains and losses are usually within a certain range. But there is a chance that your portfolio could decline so much that it hits the far tail of the curve. PIMCO has an excellent illustration of tail risk.

Bell curve showing tail risk

You’re not alone in thinking that another major decline is on the way. A recent survey reported by Financial Times shows that many of the worlds biggest investors foresee another major market drop (Read more: Investors fear imminent tail-risk event).

As discussed in the article, some of the strategies that could limit your losses if such an event were to happen again include: managed volatility equity strategies, direct hedging and other alternative asset allocations (such as property or commodities), or going all to cash since inflation would likely be low. And for what it’s worth all of these strategies are included in The Active Asset Allocation Portfolio.

Then again, have you considered the possibility that we are entering a significant bull market and that we at the other end of the tail?


Five strategies to fix the biggest problem with your portfolio

The single greatest factor to affect your financial goals for retirement has nothing to do with investment options, asset allocations, bonds or stocks. Rather, it’s the amount you save for retirement year over year. And yet, many struggle to save for retirement despite the facts. Business Insider recently published an excellent article that detailed some of the reasons why individuals are not saving enough for retirement.

So now you know why you aren’t saving enough, here are a few top strategies you can use to improve how you save for retirement:

1) Aim to save about 10% of your gross pay for retirement. It’s a rule of thumb – if you’re starting to save later in life, that rate will have to be higher.

2) Double check that you are taking advantage of matching programs with your employer’s 401k.

3) Save in addition to your 401k contributions. Just because you’ve maxed out your matching contribution, doesn’t mean that you should stop there. Consider opening a Roth IRA to save more.

4) Track expenses. To reiterate one of the tips in the article, by reducing how much you spend on non-essential expenses you can end up with a nice contribution to your retirement accounts. You can track expenses yourself or use a site like

5) Set up systematic contributions. It’s very easy to link your checking account to your retirement account and have contributions made to your investment account automatically. You can even explore the option of a payroll deduction.

Regardless of the strategy you adopt, remember that it will require self control. It’s very easy to shift dollars you earmarked for retirement to pay for that unexpected expense. Develop a plan, stick to it and review it periodically.


The Great Reset: Europe

The Euro was the child of politicians, not economists. It was seen as huge, allowing trade with each other free of restrictions as an integrated Europe no longer subject to internal wars. The unintended consequence was a clash of different non-homogenous cultures strapped into one currency, into one monetary policy. The low-interest rates of Germany became available to all and the enormous stockpiles of capital flowed freely into the easy lifestyle of the Mediterranean countries.

“The Euro triggered a tsunami of wasteful fiscal spending in Greece and Portugal, the loss of export markets for family-owned Italian firms dependent on lira devaluations and an epic construction bubble in Spain whose denouement has devastated its banking system and cajas. Ireland has mirrored Spain.” Read here for more

Now the southern economies are strapped with a mountain of unpayable debt and unsustainable budgets. Production costs need to drop up to 30% to be competitive with the northern counterparts. Internal adjustment through wage cuts, pension reductions, and benefit cutbacks will not work. The populace is turning increasingly and inappropriately socialist while those responsible for the financial mismanagement seem to go unscathed. A coordinated exit from the euro and an immediate devaluation is inevitable. Those institutions that benefited so greatly from the old order need to face the inevitable losses.

“Exit is the cleanest way to “re-balance Europe” and end the deflationary bias in the system. This may mean “crystalising losses” but they already exist in any case.”

“Unilateral exit states would spring a “Saturday surprise”, suddenly reverting to the Drachma, Escudo, etc. Euro notes would be stamped with national insignia. Capital controls would be imposed, with a bank holiday.”

“Local jurisdiction debt would be switched to the new currency under Lex Monetae. More than 90pc of Greek, Portuguese and Spanish state debt is under national law.” Read here for more

The partial breakup of the Euro is not the end. It is the beginning. The history of capitalism is full of panics. Currency exits have happened before and devaluations are commonplace. Quick and immediate pain and a reset to growth is the answer. The current path of denial and grinding agony is not. Read here for more

Too Good Not to Share

Mohamed El-Erian, the head of PIMCO, recently delivered this lecture at the St. Louis Fed. Here are two passages from his conclusion:

“After diffusing a material threat of a global depression, central banks in the advanced economies did a good job in maintaining a certain status quo in the midst of too much debt, too little growth, too much inequality, and a historic global economic realignment. Critically, they succeeded in their overwhelming priority of avoiding an economic depression.”

“Where the global economy goes from here will depend less on the actions of central banks and more on whether others, including other government agencies and private sector participants that have the ability to act but lack sufficient willingness to do so, finally step up to the plate. Only with the supportive actions of others can central banks pivot – away from using the unsustainable to sustain the unsustainable, and toward a better equilibrium for them and for the global economy (i.e., sustainability).”

View the complete transcript

He believes it is possible that our country’s leaders can put us on a ‘sustainable fiscal trajectory’ of manageable debt and modest economic prosperity. It is refreshing to read some guarded optimism from an informed and honest scholar such as Dr. El-Erian.