Postcards: The Retirement Edition

Note: With Momentum under Pressure, We are Focusing on a Trade and a Trading Strategy. Markets are facing two days of question markets around Alphabet and the Bank of Japan.

To Whom It May Concern (You):

One of my favorite little books is by Christopher Hitchens, and it’s called “Mortality.” And in it - after his diagnosis is revealed, he resorts to explaining that he is launching a “little paper boat” out into the abyss… describing his work.

I felt that language tonight because I liked the imagery of what I’m about to say about the retirement industry.

I can’t say I care for it, and I’m happily relieved that I don’t find myself working for it in any capacity.

This won’t be a fun article to write, but it’s the continuation of my rant from last week on the subject… but a deeper dive into the extraction that embodies what it’s become.

My goal tonight is to stress what you SHOULD be doing if you are seeking advisers… and to give you a trading strategy around one single name and one simple man who has a great track record of buying his own stock.

Does that work?

Because as I’m about to explain, we have to try to find ways to generate our own alpha, all while doing so around the chokepoints of this world.

I find myself laughing at the strangeness of this financial publishing world. The SPY, which is a simple tool that tracks the S&P 500, is the benchmark on which everyone should be measured. And, just 20% of people beat that benchmark…

It’s incredible that this is a thing because the cost of a simple equity fund is about 10 basis points (or 0.1% a year). A traditional financial advisor may charge about 1% (100 basis points), although those figures may range from 0.5% to 1.3% if you’re looking on a bell curve.

To do what?

Well… that’s the debate.

And if you’re not looking at the people who are doing everything they should in your defense… that’s the extraction point.

Today, the typical worker who has a 401(k) will pay the first charge… The second one (the bigger fee) arrives when the money leaves an employer plan, rolls into an IRA or advisory account, and then ends up accruing a separate asset-management fee along the way.

As you know, I’ve been talking about this for a week.

Both charges exist in situations where the underlying engine might only cost a dime per $100… each year. But the person pointing at the engine and clicking a box… wants $1.00.

You shouldn’t be paid more just for using a machine… to select more about the machine. That’s the fundamental issue here.

Now, up front, I will defend RIAs.

I will defend them so long as the client gets honest professional work - and that might include access to a number of services like trusts, tax advising, behavioral strategy, helping a client deal with a crazy child who would blow all of their inheritance… and so on.

But… that’s the question running through this letter today… on top of what the market charges and what we should expect. Quantitative desks on Wall Street have now questioned the point of retirement stock picking… and they’re doing so with a level of candor that suggests change is on the horizon.

Their descriptions and analysis deserve a wider audience than what the traditional institutional lists went to on a June 2026 evening…

As I explained in my latest podcast, SocGen’s Andrew Lapthorne runs the bank’s global quantitative desk.

He wrote a note in 2016 called “The Death of Investment.”

Then, in June 2026, he wrote another note in the Global Equity Market Arithmetic series. This was called “Indexing is making stock picking pointless, but there is another way.”’

His 2016 note showed a standard vanilla retirement mix.

It was 50% global stocks via the MSCI, 40% bonds, 5% cash, and 5% corporate bonds. He set up a 20-year window with $100,000 as the balance. He then estimated the forward return based on the yields, valuations, and expectations at the time. Sure, the market enjoyed a decade of monetary expansion… but the model’s measurements are what mattered.

The expected after-cost excess returns came in at 0.99% a year. The note said that investors might generate about $21,800 in total excess return over those 20 years.

But if he ran that same model on conditions from a decade earlier, that excess number should have been about $60,000.

And 30 years earlier, the number was closer to $150,000. So, in a single generation, the reward from the model lost about 85% of anticipated returns. That’s a warning for what is happening in markets… and in the vehicles in which we invest.

Lapthorne concluded that investors would one day need to find more money… one way or the other. “Those with large nominal liabilities are going to have to find more money,” he wrote.

That meant everyone… all the pension funds and all the insurance companies… and all the households saving up for retirement.

Each one of them carries large nominal liabilities. So, to make sure that retirement was comfortable, everyone would need to find ways to generate more money through more work and hours, more savings, more risk taking, more leverage, accepting less, or some combination of the options listed.

Most households will choose a variety of these options.

So, what did this industry do? They accepted the broken math, and accelerated the automation of the industry.

About $4.8 trillion sat inside target date mutual funds and collective investment trusts at the end of 2025. That figure, according to Morningstar, tells us about the direction of investment over the coming years.

In the EBRI/ICI 401k database, about 71% of respondents said they held target dated funds at the end of2023. Those funds represented about 42% of plan assets, and about nine out of every ten plans offered them.

If we look at the destination of a paycheck in this year of our lord… we see that most plans now treat them all as the default around target dates. The contribution will depart a paycheck before the worker ever sees it. In plans matching contributions, workers tend to defer to that part of the paycheck to ensure a full match as it is part of their compensation.

Without any changes in the election, the plan sends money into a target date fund that’s tied to an employee’s expected retirement year (really a window.) That year might be the last allocation opinion that a person in their retirement planning offers. Everything after this runs on autopilot - a glide path if you will.

The preset schedule aligns with a mix of stocks that eventually move toward bonds as the target year approaches. Will 2055 deliver the necessary returns?

That’s something that no one actually knows right now…

Many low-cost target date funds hold broad index funds… Others will incorporate active strategies, custom portfolios, and maybe even collective trusts. They all share the same delegation process. It’s all automated and allocated according to whatever the prospectus and rules tell the fund to employ.

That’s it.

If the underlying holdings are index funds, they’ll distribute their shares of contributions across a body of stocks that align solely on market capitalization and the weight of the stock in the index. There’s no focus on valuations and whether the stock is a great company… way out toward the target date. THis is about index weight exposure.

The biggest companies receive the largest share of every new dollar because they are already the biggest company in the index. In a world where people suggest that some of the wealthiest people made all their money because they created “great companies,” remember this very simple fact.

Some of these CEOs and founders continue to enjoy incredible wealth because the underlying retirement machine continually allocates a fortune of capital each year that buys their stock regardless of valuation. These people are the chosen ones, and the mechanical buying enables their aristocratic permanence.

That’s not a left-or-right take.

It’s a mechanical realization of how “extreme wealth is created.”

It’s done… and extracted on the back of a mechanical machine that buys the same 20 stocks over and over. It’s pretty brilliant when you think about it…

And that’s the problem that so many people continue to miss when they are throwing hand grenades around because they want to be some part of a political team. They miss what’s happening… the machine does what it’s designed to do.

These funds are cheap.

The average asset-weighted expense ratio for an index equity fund was about 14 basis points for an ETF in 2025. That number comes from the Investment Company Institution, Flagship S&P 500 funds are even cheaper.

The target fund will publish its own expense ratio, which might reflect the costs of other funds inside it. That creates layers that must be checked inside a prospectus instead of just mechanically accepted.

But the professional advisory fee?

That’s a totally different animal. The most recent industry study on this that I could find came from Datos Insights and Envestnet. It said that the average advisory AUM fee came in at 96 basis points (0.96%). The median fee on a $1 million portfolio sits at about 1.02%.

So, that fee wraps a portfolio that is built on the back of expensive funds. The advice costs a factor of maybe 10x what the products underneath it costs.

Remember… a basis point is one-hundredth of a percentage point…

And 100 basis points represents 1.00%.

If the fee buys real, professional work, the trade is fair. If it’s just going twice a year to see a pie chart and then the advisor hits the golf course, then we have to have a conversation about what you’re actually buying.

What Lapthorne Said Next

The 2026 note in June talks about a market where the automated capitalization weighted buying now created a problem for the retirement industry.

The top 20 stocks in the MSCI All Country World Index now average about 60 times the size of the average of the other 2,500 stocks on that index. That’s an index that was supposed to represent the entire investable world of finance and industry.

By this time last year, the ten biggest companies in the S&P 500 weighed at 40%, says the latest chart from the S&P Dow Jones. That concentration hasn’t hit the U.S. markets since the 1960s. The figure moves with prices and should carry a date…

Active managers have struggled mightilly… and not just in the last year. Yea, about 79% of active large-cap funds trailed the S&P 500 last year. But I’ve been following this phenomenon since I started at Modern Trader in 2015. This has been going on for at least 25 years, and the longer windows look worse.

Over 20 years, 93% of active managers trail their benchmark. We can attribute this all we want to outperformance of large cap names, but we have to understand that concentration is just one force, alongside fees, trading costs and manager selection. Benchmarks whose gains come from the largest constituents leaves little room for anyone paid to deviate from it.

Dispersion levels between winning and losing stocks remain wide, which is theory is where real research should pay off. A manager could do everything that the profession teaches… They could find overlooked companies, find quality-value stock (even 40 of them), avoid frauds, and time the market…

But they could fall behind their benchmark because they missed out on one single big name. Maybe they avoided it completely… or maybe they were just underweight against the benchmark fund.

Lapthorne explains the Fundamental Law of Active Management.

This lesson takes us through a manager’s expected information ratio to forecasting still. That also includes the square root of the number of real, independent investment decisions.

Owning more stocks doesn’t create more independent bets. Under a period where concentration dominates, different portfolio decisions will collapse into one decision about the same handful of giant S&P 500 or MSCI stocks.

Again, you can be right about 50 stocks, but still trail the benchmark because one giant was underweighted against those 40% of the S&P 500 weight.

As a result, benchmark risk drives investment managers to hold stocks that they don’t even like. Then his closing argument: “And if more funds look like the index? Why not just buy the index, which is essentially what investors have been doing.”

Lapthorne, like many other commentators I’ve cited, doesn’t foresee a world where concentration risk will dissipate. In fact, my concentration is expected to go up…

Not down.

The weight of these market caps starts in the index funds and spreads further…

Active managers measure their performance against these benchmarks. They face the same concentration problem. The larger the constituents get, the bigger a bet it becomes to be underweight against these names.

The manager might think that the smaller companies provide greater value, all while concluding that straying too far from the benchmark may create career risk. A manager that underperforms along with a peer group keeps the job.

One who underperforms alone - even if their long-term thesis holds - often won’t get to see that thesis play out with time.

There’s a whole world of consultants and investment committees and risk systems and quarterly reviews that reinforce this same pressure. No law demands that someone own the same 20 stocks, but bench market design will keep raising the professional costs of avoiding them.

Mike Green has talked about this for years, tracking the mechanical flows of it. That mechanical, automatic buying reinforces whatever is biggest. There isn’t a mystery to this. Who cares what we think about them… the bigger the benchmark concentration grows the more difficult it is to avoid.

Incentives matter…

Workers who hold the S&P 500 fund don’t necessarily realize that the fund isn’t “equal weight.” About 40 cents of every dollar goes to the 10 largest names.

So, imagine that you have a $250,000 rollover account with a fund…

And you’re now asked to pay a 1% advising fee. That’s $2,500 to the advisor during the first year.

When that balance grows, the fee grows too… every year… like it’s a property tax. It doesn’t matter if the advisor did anything differently in that time.

So, over a 25-year horizon, fees alone can run well into the six figures on a balance that size, before counting the growth of the dollars that would have been generated if they hadn’t been pulled out of the account and were just… invested…

This compounding loss doesn’t show up as a line item.

It hides away as an extraction…

Now, I know that term can make people upset.

And it’s important to think about how we can actually beat this market.

Lapthorne has recommended the concept of “portable alpha.”

This means that a firm replicates the benchmark at a very cheap level… they can use futures, freeing up capital and risk budgets in the pocess. One top of theis they can operate long-short strategies that can run with hot momentum stocks,a dn short or ignore stocks that the investment manager either doesn’t know or like.

That means that all of the funds out there could build this. Think endowments and pensions or any pool that looks like a sovereign funds…

There’s no one without access these days to derivatives, leverage, and manager relationships.

But the average retirement person lacks access to these things…

We want to talk about a way to trade and use what already works in the market… But first, let’s audit our advisors…

Please don’t dump an index fund because of this note today. In fact, consider owning the index, because it’s outperforming… This is a very successful investment product, and it was built to kill the expensive, opaque products that came before it.

The issue is that in this industry, extraction moved downstream of the workplace plan, 100 basis points at a time.

This is why I tell you the none investment move… that is also an investment move is to hire a retirement planner who EARNS the fee.

Planners should build a trust structure before anyone needs it. They should offer tax advisory that explains withdrawal sequencing (or sequence of return risk) and help with Roth conversion windows while they’re available…

They should help assign beneficiary designations so the estate holds together in probate.

They should give investors Social Security claiming analysis…

And look at long-term care coverage options health events….

And answer the phone and talk investors out of selling everything at the bottom…

That call could be the single most valuable service on this list.

Most professionals I talk to charge flat retainers instead of a percentage of assets… They know their labor can be quantified and priced honestly.

Some of the best planners in the country handle the hardest work families ever face, the estates with complicated children, the businesses passing between generations, the trusts that hold a family together after the founder is gone.

That work is worth every basis point it costs.

Now is the time to audit fees against work…

Ask if you’re getting the estate architecture, tax strategy, insurance analysis, and behavioral coaching justify one hundred basis points.

If the answer doesn’t hold up, move the account.

This isn’t complicated…

Now… let’s set up a trade…