You might think that the most important work a financial advisor can do is related to allocating a client’s investment portfolio, or perhaps helping secure a timely insurance policy or drafting the optimal estate plan. In fact, the most important work is done when clients are in the midst of navigating life’s major transitions. I…
Exchange-traded funds—commonly referred to as ETFs—are all the rage. While there are several excellent reasons to use an ETF over the seemingly archaic traditional mutual fund, they are not a universally preferable solution. First, to be fair, let’s review a few reasons why ETFs can be a better solution than mutual funds. ETFs generally have…
Earlier this week, we discussed some of the academic literature surrounding historical versus current valuations as a metric for forecasting future returns. We learned that because there’s so much variation over time in the equity risk premium, there isn’t any methodology that will produce highly accurate forecasts of stock returns. Stocks are risky investments, no…
At a recent meeting with a nonprofit organization, my firm was asked to explain why we don’t consider historical stock returns the best estimator of future returns. They wanted to understand why we instead rely on our own forecasts. Their request came in part because another firm had suggested in a previous pitch that forecasts…
I have long felt the greatest threat to the retirement dreams of most investors can be found in the combination of misinformation promulgated by the securities industry and much of the financial media. Together, they deliver a stream of marketing hype carefully crafted to enrich themselves at your expense. They seem to go into overdrive…
Q: What are callable bonds? And what are the risk and return of callable bonds? A: Callable bonds are fixed income securities that give the issuer the right, but not the obligation, to call in, or prepay, the bond prior to maturity. Issuers can be expected to exercise this right if they are able to…
Q: Should you stay invested in the short term while waiting for interest rates to rise? A: First, other than very short-term interest rates that are heavily influenced by the Federal Reserve, it’s difficult to predict changes in interest rates. Second, to determine whether a short-term fixed income approach will be superior to an intermediate-term…
The stock premium, the annual average return of stocks minus the annual average return of one-month Treasury bills, has historically been high. This fact has, understandably, attracted investors to the stock market. For the period 1927-2013, the stock premium averaged 8.18 percent. There has also been a size premium (the return of small stocks minus…
A new multi-part British documentary, How to Win the Loser’s Game, takes a hard look at active management. Although done with typical understatement, the results are not pretty. The complete documentary will not be available until Nov. 5. But you can view the first three parts, produced by Sensible Investing, here. It should be required…
You don’t need to pick stocks or eschew all risk to be a good investor. Convenient truths vs. evidence-based investing It’s easy for investors to absorb myths on best investing practices from the media and financial pundits. That’s why it’s important to know the difference between well-researched advice and entertainment masquerading as financial news. Be…
Today we’ll take a look at how the size and value premiums performed in 12 recessions, identified as such by the National Bureau of Economic Research, occurring in the post-World War II era. During that period, the average length of a recession was 11 months. Size Premium While the size premium from 1926 through 2013…
As if PIMCO needed any more bad press, The Wall Street Journal reported this week that the Securities and Exchange Commission is investigating whether the bond giant “artificially boosted the returns of a popular fund aimed at small investors.” While we should all be attentive to the results of this probe—because I’d bet my lunch…
An interesting article in Bloomberg noted that the recovery in this year’s Treasury market has been stronger than the rally predicted by every economist they queried in a recent survey. In mid-August, Bloomberg contacted 66 economists for their Sept. 30 forecasts on the 10-year yield for Treasury bonds. The 10-year yield closed on Aug. 28…
There is a wide body of evidence demonstrating the existence of momentum not only in stocks, but across asset classes. There’s also evidence that moving-average indicators provide higher risk-adjusted stock returns in recessions. On the other hand, while major data vendors, such as MarketWatch and Bloomberg, report daily on technical market indicators (for example, advance…
