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…
Today concludes a two-part series on myths about momentum. We’ll pick up right where we left off with the additional myths the paper “Fact, Fiction and Momentum Investing” discusses. Read the rest of the article on Seeking Alpha.
Today begins a two-part series on momentum and the myths that surround it. Momentum is the phenomenon that explains how securities, which have performed well relative to peers (winners), on average, continue to outperform, and securities, that have performed relatively poorly (losers), tend to continue to underperform. Jegadeesh and Titman are credited with the first…
My previous post addressed the issue, “Is the stock market overgrazed?” It raised questions about the forward-looking expectations for the beta, size and value premiums that have existed historically. Researcher Claude Erb showed that each of these premiums has been declining over time, leading to at least the suspicion that they have been “overgrazed.” *Erb noted…
Here’s an argument hedge fund marketers make to tout hedge funds’ superiority over mutual funds. They point out that unlike mutual fund managers, who are paid solely based on assets under management, hedge fund managers also receive incentive compensation. The typical hedge fund compensation scheme is 2/20, or 2 percent of assets under management plus…
An overwhelming body of evidence shows that actively managed mutual funds underperform their appropriate risk-adjusted benchmarks. In addition, little to no evidence points to persistence of performance beyond the randomly expected, which means past performance isn’t prologue. That’s the reason for one of the great puzzles in finance: Why do investors continue with such great…
Most investors are well aware of the SEC’s warning that past performance isn’t an indicator of future performance. That warning often leads to questions like: “If past performance isn’t predictive, why do you believe that the past outperformance of value stocks over growth stocks and small stocks over large stocks is predictive?” The answer lies…
Today begins a two-part series exploring premiums, starting with the size premium. With the dramatic outperformance of U.S. small-cap stocks over the past several years, we’ve had many stories in the financial media warning investors about their future performance. Since valuations are the best predictors of future returns that we have, we can examine the…
Articles such as the recent post on Seeking Alpha that referred to Cohen & Steers as the “King of REITs” stir my interest – though, perhaps, not in a typical way. The article noted that “Cohen & Steers has been around since 1986 and is the first investment company to specialize in investing in listed real estate…
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)…
The financial media are full of conjecture about which strategies might effectively hedge inflation risk or not. Here we explore which asset classes, if any, have been effective at protecting against inflation risk. First, it is helpful to address some common logical and analytical misconceptions about hedging inflation risk. Focus on Correlation, Not Volatility When…
Paul Lem, a medical doctor, scientist and entrepreneur wrote an extraordinary book, “Master Life Faster: How To Be Happy, Healthy, Wealthy, Smart and Social” in 2008. I met Dr. Lem during a recent speaking tour for my own book in Ottawa, Ontario, where he gave me a copy of his book. I confess to having a bias…