Market Sell-off Analysis: Baseline Historical Facts
We often hear that the market is 5% off its highs or that it is down 5% from the high of the year. This alone does not tell us much. The questions I want to [...]
Volatility Targeting Improves Risk-Adjusted Returns
There’s a large body of research, including the 2017 study “Tail Risk Mitigation with Managed Volatility Strategies” by Anna Dreyer and Stefan Hubrich, that demonstrates that, while past returns do not predict future returns, past [...]
Buyer Beware: The Reality of Tax-Loss Harvesting Benefits
Executive Summary • Tax loss harvesting is widely promoted, but we think the benefits are generally misunderstood and often overstated.[ref]a recent paper highlighted by Wes on twitter comes to a similar conclusion. Here is a [...]
Investment Strategy in an Uncertain World
In 1921, University of Chicago Professor Frank Knight wrote the classic book “Risk, Uncertainty, and Profit.” An article from the Library of Economics and Liberty described Knight’s definitions of risk and uncertainty as follows: Risk [...]
Sector Business Cycle Analysis
There are different investment approaches to identify sector winners and losers, such as price momentum strategies, top down approach based on specific macroeconomic indicators or bottom-up approaches to identify sectors with improving fundamentals. One widely [...]
Using Flexible Spending to Achieve Financial Goals
Financial planning and specifically portfolio "safe" withdrawal rates are often viewed and analyzed from the perspective of rigid rules that can't be broken - i.e., you will take an inflation adjusted 4% of starting portfolio [...]
Rebalancing…Not so Fast
My last article used Warren Buffett’s pre-crisis sale of put options to highlight the risk of getting over our financial skis. In both temperament and negotiation, Warren can outlast most bear markets. Many of us [...]
The Smart Money Indicator: A New Risk Management Tool
We have all heard the mantra, “You can’t time the market!” But in reality, investors attempt to do just that every day as part of their tactical asset allocation strategies, which are less extreme variants [...]
Warren Buffett is Wrong About Options (Except)
Warren Buffett sold long-dated, deep out of the money puts in the years leading up to the financial crisis. In his 2008 Annual Letter to Shareholders, he explained: I believe each contract we own was [...]
Asset Diversification in a Flat World
Diversification is a fundamental principle of prudent investing due to its ability to mitigate/minimize risks. In fact, it has been called the only free lunch in investing because, done properly, it can reduce risk without [...]
Investment Factor Timing: Challenging, but Not Impossible
The Promises and Pitfalls of Factor Timing Jennifer Bender, Xiaole Sun, Ric Thomas and Volodymyr Zdorovtsov Journal of Portfolio Management A version of this paper can be found here Want to read our summaries of academic [...]
Summing up the Potential Benefits and Pitfalls of Diversification in 3 Slides
Not long ago I used to teach investment management courses to Master's students (MBAs and MS Finance types). A core aspect of my course was so-called modern portfolio theory. We did a lot of math [...]
When Diversification Fails
When Diversification Fails Sebastien Page and Robert Panariello Financial Analyst Journal, forthcoming A version of this paper can be found here Want to read our summaries of academic finance papers? Check out our Academic Research Insight category What [...]
A Q&A Discussion with Vanguard Researchers on the “Fair Value CAPE Ratio”
As everyone who's been invested for the last ten years knows, post-financial crisis stock returns have been incredible. The chart below highlights the total returns for the S&P 500 Index, the MSCI EAFE Index, the [...]
A Smarter CAPE Ratio to Better Forecast Expected Stock Returns
Improving U.S. Stock Return Forecasts: A “Fair-Value” CAPE Approach Joseph Davis, Roger Aliaga-Diaz, Harshdeep Ahluwalia, and Ravi Tolani Journal of Portfolio Management A version of this paper can be found here Want to read our summaries [...]
Market Volatility? Hang On and Enjoy the Ride
As you are no doubt experiencing, stock market volatility has spiked this year with the S&P 500 dropping or rising 2% or more on eight different days. Jolts of this size didn't happen at all in [...]
Are Trend-Following and Time-Series Momentum Research Results Robust?
When it comes to trend following and/or time-series momentum research, we got ya covered! A few places to dig in: Evidence for Long-Term Trend-Following by Alpha Architect World's Longest Trend-Following backtest by Alpha Architect Diversification Benefits of [...]
The World’s Longest Multi-Asset Momentum Investing Backtest!
As evidenced by the image below, interest in momentum research has taken off since the original 1993 Jegadeesh and Titman paper: Source: "Two Centuries of Multi-Asset Momentum (Equities, Bonds, Currencies, Commodities, Sectors and Stocks)" [...]
Quantifying the Value of Retirement Accounts
Many people talk about the tax benefits of retirement accounts. However, few attempt to quantify and estimate the actual benefits. To make matters worse, when the topic is addressed, many of the discussions rely on [...]
What the CFOs Think About the Equity Premium in 2018
Professors John Graham and Campbell Harvey consistently put out great research. One of their innovations in financial research is their annual CFO survey (we've covered this research here, here, and here, if interested). In their [...]