Visualizing IRA Rules Using Flowcharts
The rules around IRAs are really complicated and Wes asked if we could share our flow charts on the subject so others could potentially benefit [...]
Swedroe Spotlight: Does Market Sentiment Help Explain Momentum?
David Smith, Na Wang, Ying Wang and Edward Zychowicz contribute to the literature on momentum with their paper, “Sentiment and the Effectiveness of Technical Analysis: Evidence from the Hedge Fund Industry,” which was published in the December 2016 issue of the Journal of Financial and Quantitative Analysis. Their work examines how investor sentiment affects the effectiveness of technical analysis strategies (which include the use of moving averages as well as momentum) used by hedge funds (which are considered sophisticated investors). The study was motivated by prior research that has focused on “investor sentiment,” which is the propensity of individuals to trade on noise and emotions rather than facts. Sentiment causes investors to have beliefs about future cash flows and investment risks that aren’t justified. Two researchers, Malcolm Baker and Jeffrey Wurgler, constructed an investor sentiment index based on six measures: trading volume as measured by NYSE turnover; the dividend premium (the difference between the average market-to-book ratio of dividend-payers and non-payers); the closed-end fund discount; the number and first-day returns of IPOs; and the equity share in new issues. Data is available at through Wurgler and New York University.
The (Un-)Importance of Returns
In my last job with a large investment bank I built two global research teams and worked with high-profile clients around the globe. Having left [...]
How Asset Managers Are Adapting to Exchange-Traded-Funds
The ETF industry has been around for over 20 years at this point, but over the past 5 years the ETF industry has captivated the [...]
Rebalance Your Portfolio? You are a Market Timer and Here’s What to Consider
In this piece I examine various way in which an investor can think about their active market timing decisions, often labeled with the innocuous term [...]
The Dirtiest Word In Finance: Market Timing
In 2015, Cliff Asness made the case that to earn attractive returns with proper risk-based diversification and low correlation to traditional markets, investors need to [...]
Book Review — The Undoing Project: A Friendship That Changed Our Minds
Psychology permeates nearly every area of human endeavor. In the world of investing, for instance, psychology can help us understand the systematically poor decision-making that [...]
Don’t Make a Bar Bet with Warren Buffett
This past weekend Warren Buffet made some headlines that has the financial world spinning: Berkshire Hathaway released its annual report...which is always a great read. The [...]
Swedroe Spotlight: Explaining the Low Risk Effect
Before proceeding, it’s important to note that beta and volatility are related, though not the same. Beta depends on volatility and correlation to the market, whereas volatility is related to idiosyncratic risk (see here for an explanation of how to calculate the different measures). The superior performance of low-volatility and low-beta stocks was first documented in the literature in the 1970s — by Fischer Black (in 1972) among others — even before the size and value premiums were “discovered.” And the low-volatility anomaly has been shown to exist in equity markets around the world. Interestingly, this finding is true not only for stocks, but for bonds as well. In other words, it has been pervasive.
Will ETFs Destroy Factor Investing? Nope.
One of the popular investing truisms is the following (inspired by Bill Sharpe): For somebody to beat the market (win) someone else has to lag [...]
Shooting Yourself in the Foot with Socially Responsible Investing
Socially responsible investing (SRI). Environmental, Social, and Governance investing (ESG). Impact investing...and so on... These socially responsible investing concepts can be roughly described as portfolio [...]
How to Reduce Taxes through Negotiation
Since this is my first post, I'll make a quick introduction before getting to the content: I love science and learning. In college, I majored in [...]
Go Skew Yourself with Managed Futures
Skewness is a statistical measure of how returns behave in the tails of a probability distribution. Wikipedia has a more robust definition of skewness with [...]
Interest Rates and Value Investing
There is still no value in bonds today. The typical knee-jerk reaction to bold bond statements (such as the one above) is as follows: This guy is [...]
The Rebalance Bonus for Value and Momentum Porfolios
A sophisticated DFA-focused advisor asked us to conduct some research on the following question: Are there additional portfolio diversification benefits to combining concentrated portfolios of value and [...]
What is the best “Risk-Off” Asset for Trend-Followers?
So you're a trend-follower. Great. But here is a question: What do you invest in when your rules suggest "risk off?" Many investors suggest low [...]
Was the Financial Crisis Really a Valuation Crisis?
Most people look back at the dot-com bubble and acknowledge valuations were elevated far above historical norms. Investors ignored historically useful fundamentals, such as earnings [...]
Risk Tolerance Assessment for Investment Success
My Introduction to Decision-Making...40 years ago When I attended the Harvard Business School my favorite class was Managerial Economics. It focused on decision making under [...]
The Folly of Stock Market Forecasting
The idea that one can predict stock market movements is somewhat insane. The major problem with stock market forecasting is the lack of evidence that it [...]
Questioning Everything You Knew about Asset Allocation
Is a 100% stock allocation crazy? As long as one addresses their needs for liquidity (as to avoid extracting capital from the markets at bad times) [...]