What People Want to Know and What is Knowable Are Two Different Things: The FiveThirtyEight Political Forecast Model and a Better Approach to Investing
With the 2018 midterm elections tomorrow, I noted a similar conceptual approach between a political forecast website I follow called FiveThirtyEight (www.fivethirtyeight.com) and the evidence-based approach to investing. If you are not familiar with FiveThirtyEight, it is a political and sports forecast website developed by statistician Nate Silver. What I think is instructive is his […]
The S&P 500 vs. The World: S&P 500 Returns Have Been the Best So Why Bother with Anything Else?
From January 2014 through August 2018, the S&P 500 Index, driven by the strength in large growth stocks, particularly large technology stocks, has bested the rest of the major global asset classes by a wide margin. The chart below shows how the S&P 500 has outpaced domestic small and value indices as well as international […]
Some Welcome Clarity on Trade Policy
In a recent New York Times article, Surprising Truths About Trade Deficits, Gregory Mankiw provides a welcome bit of clarity on trade policy. Mankiw is a professor of economics at Harvard University, chairman of the Council of Economic Advisers under President George W. Bush and, most importantly, the author of one of my economics textbooks […]
Stock Valuations are High: Five Things to Do (and Not Do) About It
Stock market valuations are at historical highs and we are more than nine years into the current bull market. It stands to reason that the bull market won’t continue indefinitely. So, not surprisingly, investors are voicing more frequent concerns about high stock market valuations and what that could mean for them going forward. Implicitly, investors […]
Buy Low and Sell High: Simple but Not Easy
Buy low, sell high…maybe the most obvious axiom in investing. It seems so obvious, yet in practice, most investors have difficulty buying the worst-performing assets or selling the best-performing assets. “Wait…you want to sell this thing that’s been going straight up so we can buy this other thing that’s been terrible?” Yet buy low, sell […]
Diversification: It’s about more than risk control
“Diversify your portfolio!” implored the well-meaning investment advisor. Over the years, you have likely heard this phrase many times and from many sources, including me. ‘Diversification’ has been drilled into the head of many an investor and for good reason: Diversification[1] is, in fact, a critical concept in investing. Interestingly though, the standard reasoning for […]
Why an Allocation to Bonds Always Makes Sense
A decline in stock prices during a bout of market volatility often elicits the comment that “this is a buying opportunity because markets always bounce back”. From a historical perspective, that’s generally been true but is it possible for a stock drop to be something closer to permanent? Is this a realistic possibility, and if […]
A Brief History of the Index Fund
On the 40th anniversary[1] of the launch of the First Index Investment Trust (now the Vanguard 500 Index Fund), it is interesting to note how the original premise of index funds has held up over time. The premise that a low-cost, unmanaged fund, simply composed of the index constituent stocks, could beat a conventional actively […]
Using the Fama/French Five Factor Model to Assess Actively Managed Fund Performance
A recent study conducted by Dimensional Fund Advisors assessed the performance of actively managed mutual funds by comparing fund performance to the performance predicted by the Fama/French five factor model. The five-factor model tests fund performance based on their exposure to the market, value, size, profitability and investment factors. The study of 3,870 active funds […]
Investor (Mis)behavior
A well-written recent New York Times article seeks to elucidate the causes of investor (mis)behavior through recent research into behavioral finance. In the article, the author, Gary Belsky, details five cognitive biases that are hard-wired into human brains. These biases form the basis for investor (mis)behavior that various studies have shown causes investors to systematically […]