J.B. Heaton, Nick Polson and J.H. Witte recently authored a nice short paper—it’s all of four pages—entitled “Why Indexing Works.” In it, the authors developed a simple stock selection model to explain why active equity fund managers tend to underperform their benchmark index. While most of the academic literature focuses on the efficiency of the…
Many investors today are confronting what could be considered a “perfect storm” that is creating strong head winds against the pursuit of higher expected returns. So far, we have discussed the main factors currently working against investors, as well as some steps they might consider taking to help combat this problem. We will now examine…
Eleven years ago, I needed a new bike. At the time, I rode a lot. I was in a big group of relatively competitive riders, and we’d often put hundreds of miles on our bikes each week. I agonized over what bike to buy, but I kept coming back to one made by a company…
Over the past week, we’ve taken an in-depth look at why today’s investors are facing a “perfect storm” of factors that, when combined, can significantly hinder the pursuit of higher expected returns. In taking on this problem, we have so far discussed the elements working against investors, as well as some steps to help combat…
Ask someone how they invest, and you’ll probably get a pretty standard answer involving stocks, bonds and maybe some real estate or cash. But rarely will people mention something that is even more important: their investments in human capital. They don’t talk about it because human capital investments can look a lot like any other…
As we have discussed many times, much of the “conventional wisdom” on investing is simply wrong. For our purposes, we can define conventional wisdom as those ideas that become so commonly accepted that they go unquestioned. Today we’ll look at the idea that rising interest rates would doom returns to real estate investments, specifically the…
It’s been said that diversification is the only free lunch in investing because, done properly, an investor can reduce risk without reducing their expected return. Yet despite this wisdom, many individuals hold concentrated positions in a single stock when they could easily diversify away that idiosyncratic, single-company risk. Which, then, begs a critical question: given…
Do you remember the scene from It’s A Wonderful Life—only the best holiday movie ever—when George and Mary Bailey are cruising out of Bedford Falls on their well-earned honeymoon, only to notice a literal run on the banks (including the Bailey Savings and Loan, which George reluctantly operates)? Well, as Mark Twain is attributed as…
By Sylvia Nissenboim Both caregiving for an elderly loved one and preparing for the holidays can come with a lot of joy, but also some unintended stress. As such, it’s vital that caregivers don’t overload themselves as they balance the day-to-day demands of caring for an older family member with the additional commitments that pop…
Ever since the global financial crisis, the real interest rates of developed economies have remained in negative territory. Nominal interest rates hover near zero, and inflation rates, although quite low for historical standards, have remained positive (in most countries, at least on average). What’s more, negative nominal interest rates have even been observed in some…
I don’t want to rehash all the reasons for my view that investors should avoid actively managed funds, expensive, complex investment products and “alternative investments” like hedge funds and private equity. If you find these investments suitable, you have every right to buy them. Special issues with 401(k) plan participants Employees with 401(k) plans, however,…
There has been a lot of research recently that investigates the link between stock returns and higher moments of the return distribution, specifically the skewness of returns. This link, unfortunately, is frequently ignored by more standard measures of market risk and volatility. Skewness, if you’ll recall, measures the asymmetry of a distribution. In terms of…
Ask someone how they invest, and you’ll probably get a pretty standard answer involving stocks, bonds and maybe some real estate or cash. But rarely will people mention something that is even more important: their investments in human capital. They don’t talk about it because human capital investments can look a lot like any other…
With the recent spate of positive economic news, highlighted by the strong jobs numbers for both October and November, all signs point toward the Federal Reserve raising the federal funds target rate 25 basis points from 0–0.25 percent to 0.25–0.50 percent. Based on federal funds futures, the market is assigning a roughly 76 percent probability…
When we talk about the chances of something bad happening, people tend to fall into three general groups. The Numbers Don’t Matter No matter the odds, this group dismisses the statistics. People insist they can trust their gut. I suspect this group buys lottery tickets every week. The Odds Look Great This group focuses on…
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