We now turn our attention to another way in which structured portfolios can add value over index funds; namely, by creating “core funds.” Core portfolios combine multiple asset classes into one fund. The following provides a good example of why a core approach is superior to a component approach, and is the most efficient way…
An overwhelming body of evidence demonstrates that the majority of investors would be better off if they adopted indexed investment strategies. And while a total-stock-market index is fine for many investors, indexed investors who desire certain types of exposure face a number of problems. These problems can be addressed with what I call “structured portfolios.”…
Today concludes our discussion on international stocks and whether investors should consider them in their portfolios. Negative tracking error has resulted in my receiving an increasing amount of calls questioning the wisdom of investing in international stocks. To help you avoid making the mistake of recency, here are two questions to ask yourself: First: While…
Today begins a two-part series on investing in international stocks. Over the past four years, international investments have done poorly relative to domestic investments. For example, from 2010 through 2013, while the S&P 500 Index returned 15.9 percent per year, the MSCI EAFE Index returned just 8.6 percent per year, and the MSCI Emerging Markets…
As I’ve previously discussed, the Federal Reserve’s zero-interest-rate policy has “pushed” many investors—especially those who use a cash-flow approach as opposed to a total-return approach—to look to stocks and equity funds that have a high dividend yield; that is, that have a low price-to-dividend ratio. Adding to their attraction is that a high-dividend strategy has…
In a Dec. 23, 2011 article, New York Times columnist Ron Lieber wrote about my personal investment strategy, which can be described as a low-beta/high-tilt (to small and value stocks) portfolio. I want to circle back to it to illuminate important points about diversification. Lieber called it the “Larry Portfolio,” or the “LP,” as we…
Vanguard is clearly the leading provider of index fund products. Dimensional Fund Advisors is also the clear leader in its “space,” managing about $350 billion in assets in what we might call structured asset class portfolios. (Full disclosure: My firm Buckingham recommends Dimensional and Bridgeway funds in constructing client portfolios.) They are both leaders because…
The 2006 publication of Gary Gorton’s and K. Geert Rouwenhorst’s study “Facts and Fantasies about Commodity Futures” spurred an increase in the interest of using the asset class of commodities to enhance the performance of financial portfolios. In fact, commodity investments more than doubled from roughly $170 billion in July 2007 to $410 billion in…
It’s not as if investors didn’t already have enough to worry about in the uneven aftermath of the financial crisis. Now, money pundits are crowing that record profit margins might soon pose a problem in markets. Some of the worries coursing through the markets these days include: A dysfunctional Congress’s failure to address the long-term…
Compared with risk factors in investing—such as the market, value or size—momentum has offered investors the highest Sharpe ratio. However, momentum does have a dark side, as it has had some of the worst crashes. The large gains associated with the momentum factor come at the expense of a very high excess kurtosis (fat tail)…
During bear markets, the dividends thrown off by companies provide the cash flow required, while a total-return approach requires one to sell shares to provide the cash flow—a clear advantage of dividend-focused strategies that those who favor them are quick to point out. This blog addresses that issue specifically. We’ll begin our discussion by pointing…
The financial equivalent of the Miller Lite, “tastes great, less filling,” debate is between traditional finance (which uses risk theories to explain asset pricing), and the newer behavioral finance field (which uses human behavior to provide the explanations). Unfortunately, there’s no consensus about which side of the debate is correct. My own view is that…
The financial equivalent of the Miller Lite, “tastes great, less filling,” debate is between traditional finance (which uses risk theories to explain asset pricing), and the newer behavioral finance field (which uses human behavior to provide the explanations). Unfortunately, there’s no consensus about which side of the debate is correct. My own view is that…
During bear markets, the dividends thrown off by companies provide the cash flow required, while a total-return approach requires one to sell shares to provide the cash flow—a clear advantage of dividend-focused strategies that those who favor them are quick to point out. This blog addresses that issue specifically. We’ll begin our discussion by pointing…
While there are many studies demonstrating a link between the value premium and risk, the empirical evidence draws inconsistent conclusions on whether distress risk is a systematic risk factor that is priced in the cross section of stock returns. There are studies that conclude that default risk is positively priced in the stock market, and…