Overview: With expected inflation rates very low, there will be significant attention on the possibility of deflation causing the stock market to fall. This blog examines the relationship between the rate of inflation and stock and bond returns. Generally, the research shows that stock returns are no lower in deflationary environments than in normal inflationary…
There are many well-known anomalies in finance. The most notable of these anomalies include the momentum effect, the low-volatility effect (in which high-volatility stocks produce lower returns on average than low-volatility stocks) and the poor performance of IPOs, penny stocks, stocks in bankruptcy and small growth stocks with low profits. But perhaps the biggest anomaly…
Behavioral finance is a fascinating field that combines psychology with investing. And one of the insights provided from the research is that some individuals want more from their investments than just returns. Some people make investments for the same reason they buy Rolex watches and oversized Gucci bags, labels proudly displayed. Just like with their…
Author Russ Roberts takes an interesting tack in his new book, “How Adam Smith Can Change Your Life.” While Smith’s most famous tome, “The Wealth of Nations,” has been most popular in economic and investor circles, his other volume, “The Theory of Moral Sentiments,” contains some of the venerable writer’s most valuable insights. One of…
What was the biggest surprise to hit the markets in 2014? I think most investors would tell you it was either that interest rates fell or that the price of a barrel of oil fell by half. My own view is that there was a far bigger one. For the 12 months ended August 2014,…
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…
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…
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…
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…
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…
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…
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…
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…
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…
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,…