Whether you are investing your own money or making decisions as an investment fiduciary, it is essential that you understand how to calculate the fair market value of future cash flows. Depending on the nature of the cash flow and the degree of accuracy you need, these calculations can become quite complex. However, you can go a long way towards protecting yourself and your clients with just a basic understanding of the interrelationship between spot, forward and zero interest rates. Read More
Blog
Why We Should Expect to Live Longer Than Our Life Expectancy
Life Expectancy
A person’s “life expectancy” is always expressed as of a reference age and equals the average number of years that a group of people with the same starting age will live, assuming that group members experience certain predetermined mortality rates over the course of their remaining lives.
The Social Security Administration’s 2007 Period Life Table is the most recent summary of life expectancy data for the Social Security area population (basically residents of the US and dependent territories plus US citizens and federal employees abroad).
Using death probabilities from the 2007 Period Life Table, Figure 1 below shows how to calculate the number of Remaining Lives each year and a person’s Life Expectancy at any age.
Defining The Goal of Retirement Security
Before we can start to address the many challenges in achieving retirement security, we need to define the goal. I define retirement security as:
“The accumulation of sufficient capital by a target retirement age to be able to buy a guaranteed, lifetime, inflation-protected retirement income payment that, in combination with Social Security and any employer-provided benefits, allows the person to maintain their desired standard of living.”
If your immediate reaction after reading this definition is “I have no intention of using all of my savings at retirement to buy a lifetime annuity so this is a fairly useless definition”, please read on. Read More
A Brief History of Downside Risk Measures
Title: A Brief History of Downside Risk Measures
Author: David Nawrocki
Publisher: Journal of Investing (Fall 1999, Vol. 8, No. 3: pp. 9-25)
Summary (Extracted From the Paper)
There has been a controversy in this journal [i.e. Journal of Investing] about using downside risk measures in portfolio analysis. The downside risk measures supposedly are a major improvement over traditional portfolio theory. That is where the battle lines clashed when Rom and Ferguson (1993, 1994b) and Kaplan and Siegel (1994a, 1994b) engaged in a “tempest in a teapot.” One of the best means to understand a concept is to study the history of its development. Understanding the issues facing researchers during the development of a concept results in better knowledge of the concept. The purpose of this paper is to provide an understanding of the measurement of downside risk through tracing its development from 1952 and the initial portfolio theory articles by Markowitz and Roy through to the Rom and Ferguson-Kaplan and Siegel controversy in 1994.
Read More
The OER Movement
This is the first in a series of 7 posts that will provide an overview of innovative resources and services that have become available during the past 10 years to help all individuals pursue a lifetime of continuous learning.
(Image Credit: 2012 Jonathas Mello)
UNESCO and The OER Movement
Efforts have been underway since at least the mid-1990’s to make the world’s knowledge more easily accessible to everybody. This has led to the emergence of a large and growing movement to provide what are called Open Educational Resources (”OER”).
According to Wikipedia this term was first adopted at UNESCO’s 2002 Forum on the Impact of Open Courseware for Higher Education in Developing Countries. A paper by David Wiley delivered at the OECD Expert Meeting on Open Educational Resources held in Sweden on 6-7 February 2006 provides a very brief overview of the history, current state and trends in OER. A 2007 OECD paper entitled Giving Knowledge For Free: The Emergence of Open Educational Resources provides a very detailed review of OER. OECD also maintains an OER Wiki while OER Commons is another interesting community of OER advocates.
Read More
Survival Guide For Endangered Fiduciaries
This post was first published in April 2010 on the FiduciaryX website. I am posting it again today on the new Bdellium blog just to have a complete record of my (few) previous posts in one location.
In my blog post Lessons From The Copula Function I raised the concern that some investment fiduciaries might be following the same path to self destruction as the credit derivatives industry, paved by the indiscriminate use of decision-making methods that are at best ineffective and at worst actually dangerous.
Read More
Lessons From The Copula Function
This post was first published in January 2010 on the FiduciaryX website. I am posting it again today on the new Bdellium blog just to have a complete record of my (few) previous posts in one location.
The cover story by Felix Salmon in Wired magazine’s February 2009 issue, Recipe for Disaster: The Formula That Killed Wall Street, provided an engrossing account of how the indiscriminate use of a single mathematical formula contributed to the meltdown in global credit markets.
Read More