Today begins a four-part series on the efficient market hypothesis. We’ll begin with a brief history and explanation of the EMH. Eugene Fama, recent recipient of the Nobel Prize in economics, is considered the father of the efficient-market hypothesis (EMH). The EMH asserts that financial markets are “informationally efficient.” As a consequence, we would expect…
Today concludes our two-part feature that aims to define risk. Not being able to do so is a problem for both advisors and investors. Alternative Definition of Risk Risk can also be defined as the probability of not achieving your financial objective – with the objective generally being not the accumulation of the greatest wealth, but instead,…
This is the first of a two part series that aims to define risk. Since we live in a world without crystal balls that allow us to clearly see the future, prudent investing is all about the management of risk and expected returns. A problem that both investors and investment advisors face is defining what exactly risk…
Part one of our series introduced the efficient market hypothesis. Part twoexplored evidence in the mutual fund and pension plan worlds that showed that while the EMH fails all the tests of efficiency, it passes the only test that really matters – are active investors likely to outperform appropriate benchmarks after the expenses of the effort? Today,…
Yesterday, we discussed the history and overview of the efficient market hypothesis. Today we’ll look at some of the evidence on the efforts of mutual funds and pension plans to generate alpha. Mutual Funds Each year, Standard & Poor’s publishes its Indices Versus Active Funds Scorecard, more commonly referred to as SPIVA, presenting the evidence on the…
Today begins a four-part series on the efficient market hypothesis. We’ll begin with a brief history and explanation of the EMH. Eugene Fama, recent recipient of the Nobel Prize in economics, is considered the father of the efficient-market hypothesis (EMH). The EMH asserts that financial markets are “informationally efficient.” As a consequence, we would expect…
The recent appearance of Michael Lewis, author of Flash Boys: A Wall Street Revolt, on 60 Minutes, created quite a stir about the impact of high-frequency traders (HFTs), claiming the game was, and has been, rigged, with the victims being all investors. High-frequency trading is a set of computerized trading strategies characterized by extremely short position-holding periods….
Summary Ideally, to eliminate style drift investors should rebalance daily. However, because the real world involves costs, investors should reduce, not eliminate, style drift to an acceptable level. Investors should rebalance wherever there is sufficient cash to make the effort worthwhile, thus eliminating any tax issues and either eliminating or minimizing trading costs. An investor’s…
From 2000 through 2010, the MSCI Emerging Markets returned 10.9 percent a year, outperforming the S&P 500 by 10.5 percent a year. In typical fashion, investors flocked to emerging market funds. Since then, returns have been poor, providing negative returns in both 2011 and 2013 (as well as in the first two months of this…
Summary Investors often don’t properly diversify because they think international investing is risky. U.S. equities are mistakenly assumed to be the “safest.” Even if the U.S. is the safest, that does not mean investors should have all their eggs in one basket. Financial economists recommend that investors add international assets to their portfolios, because they…
My last post addressed the concerns investors had about the dollar potentially losing its status as a reserve currency. Today, we’ll take a look at what actions you might consider taking if that was a risk about which you are concerned. First, you could increase your allocation to international equities. For example, in the case of…
Historically, in terms of yields, because of their federal tax exemption, AAA-rated municipal bonds have traded at a discount to Treasuries. Over the long term, AAA-rated intermediate-term municipal bond yields have typically traded between 75-85 percent of the yields on similar maturity Treasuries. For example, for most of the period from 2001 through 2007 five-year…
Recently, I received an email from Russell Investments announcing that they had terminated several money managers and hired new ones. The funds that had changes in management were the Russell Emerging Markets Fund, the Russell International Developed Markets Fund, the Russell Global Infrastructure Fund, and the Russell Tax-Managed Mid- and Small-Cap Fund. Russell is one…
Earlier this month, the People’s Bank of China announced that it would double the allowable trading range for the yuan against the dollar to 2 percent from a midpoint rate it sets every day. This move provides evidence that the government is moving toward a more market-driven economy. I’ve noted that there’s a direct correlation between announcements…
Summary Socially responsible investing encompasses many personal beliefs, not just one set of values. Some investors don’t wish to invest in the “sin stocks” of companies whose products go against their morals. By avoiding the “sin stocks,” some investors may be accepting more risk than they realize because they’re not fully diversified across industries. Socially…