While Wall Street investment firms have done a very poor job of delivering good risk-adjusted returns to investors, their well-tuned marketing machines have done a great job creating demand for products where none should really exist. Their latest creation is a type of investment offering referred to as “smart beta.” To ensure you understand why …Read More.
The sharp market decline in January has raised the anxiety level of investors everywhere and brought out the worst in the financial media. Many investors are asking the wrong questions, like these: 1. Is this the beginning of a market correction? 2. Should I sell my stocks and just “sit on the sidelines”? 3. Is …Read More.
The superior performance of low-volatility stocks—the low-volatility anomaly—has been documented to exist in equity markets around the globe. And since its discovery, a good amount of academic research has attempted to determine both its origins and whether or not it will continue to persist. Among that research is a December 2013 paper, “A Study of …Read More.
What feels safe is often risky, and what feels risky is often safe. This statement contradicts just about every evolutionary instinct we possess. We tend to seek out safety and avoid risk whenever possible. A classic example has to be the instinct that (still) tells us we are safer staying with the group. If members …Read More.
In a recent blog post for Pragmatic Capitalism, Ben Carlson did an excellent job of putting the recent surge of money into passively managed funds in context. The shift to passive funds is still modest The shift from active to passive strategies is understandable, given the historical poor performance of actively managed funds in beating …Read More.
On and off over the years, I have used a training app called Strava. It allows you to keep track of your performance on different biking, running and skiing trails. You can even break down overall times into sections or compare your performance over the entire trail. Last year, in an attempt to get back …Read More.
One of the most difficult aspects of investing involves sifting through the daily barrage of advice offered by “experts.” More often than not, this advice is calculated to enrich the securities industry at your expense. One way to determine whether investment advice has merit is to ask for the data on which an assertion is …Read More.
Nils Friewald, Christian Wagner and Josef Zechner—authors of the study “The Cross-Section of Credit Risk Premia and Equity Returns,” which appears in the December 2014 edition of the Journal of Finance—studied the relationship between a firm’s default risk and that firm’s equity premium. Their study covered the 10-year period from 2001 through 2010, and estimated …Read More.
One of the biggest problems facing the first formal asset pricing model developed by financial economists, the capital asset pricing model (CAPM), was that it predicts a positive relationship between risk and return. Empirical studies have found that the actual relationship is flat, or even negative. But the superior performance of low-volatility stocks was documented …Read More.
An intriguing new book, “The Incredible Shrinking Alpha,” presents an overwhelming weight of research which leads to the inescapable conclusion that the pursuit of “alpha,” or returns above an appropriate risk-adjusted benchmark, is a fool’s errand. The book was written by my colleague Larry Swedroe, director of research at The BAM Alliance, and Andrew Berkin, …Read More.
No wonder the average investor significantly underperforms market returns that are theirs for the taking. After all, the financial media and the securities industry inundate investors with a daily barrage of new products and misleading information. Here are some recent examples: A dumb idea from Fidelity As reported in The New York Times, Fidelity has …Read More.
Many of you have some fundamental beliefs about the process of investing. These beliefs understandably guide your investing behavior. Unfortunately, they are often dead wrong. This is not surprising, because the financial media and the securities industry have a vested interest in encouraging short-term thinking and other emotional behavior harmful to your returns. Here are …Read More.
Earlier this week, we discussed the first six of a total 12 lessons that the markets taught us in 2014 about prudent investment strategies. To recap: Lesson 1: Active management is a loser’s game Lesson 2: The economy and the stock market are very different things Lesson 3: Diversification is always working; sometimes you like …Read More.
Last week, a conversation with a friend reminded me how easily we can confuse actual risk with our own exposure to that risk. My friend travels a lot for work, and I asked him where he planned to go this year. His answer surprised me. “I don’t know,” he replied. “With everything going on in …Read More.
Q: What are the risks of alternative yield-seeking strategies? A: Replacing a portion of your high-quality bond or bond mutual fund holdings with strategies ranging from high-dividend stocks to oil-and-gas master limited partnerships because “rates are low” involves taking on substantially more risk. A more efficient way to increase your level of risk is to …Read More.