Monthly Archives: October 2010

The Challenge of Diversified Investing in a Correlated World

Below is a Fidelity Investments heat map showing the investing terrain of the past year, particularly how correlated a variety of investment classes were to the S&P 500 Index over the 12 months ended August 2010. As has been much discussed, many investment classes have moved in close tandem to this US Stock index. It is a small world after all.

But for those defending the importance of a continued commitment to bonds despite the low yields (Jack Bogle, Bill Bernstein, and Fidelity itself, among them) this map provides much support. Investment grade bonds and 30 day T-bills are the truest counterweight to all equities in every region of the world. Precious metals in general, gold in particular, the Yen, agriculture and livestock provided balance too.

The graphic comes from Intelligent Speculator, who notes surprise at the BRIC and Emerging Market’s similarly close correlation to the US market, and also predicts a more valuable role for real estate moving forward.

(Please click on image to enlarge.) Comments, insights, questions welcome below.

Jack Bogle’s Growth Outlook for Stocks and Bonds

Vanguard founder and investing icon John Bogle doesn’t believe we’re in a bond bubble, but he does think bonds will produce only modest returns for quite some time. Still he says investors generally belong in the conventional stock and bond markets — not reaching into more exotic categories for yield.

In this interview (video below) with Morningstar at the recently concluded Bogleheads reunion outside Philadelphia, he runs through a common sense approach to estimating what kind of yields investors can expect over the next five to ten years from those conventional categories. Continue reading

Your Fund Manager is No Albert Pujols, and Other Lessons from Larry Swedroe’s Investing Tales

Albert Pujols hits a home run against the Padres, May 19, 2008, photo: SD Dirk via Flickr

Corporate 401(k) plan sponsors pick bad funds for their plans, according to a 2006 study. Then the participants in the plans compound the problem, again picking funds headed for a fall.

Why? Because though the Securities and Exchange Commission mandates that funds put in any piece of marketing the disclaimer that past performance is not indicative of future results, it seems no one believes them.

In chapter 15 of his new book, Wise Investing Made Simpler, CBS MoneyWatch columnist Larry Swedroe acknowledges a logic to our apparent fiscal recklessness. Continue reading

Investors Dump Stocks, Markets Rise?

It’s been a choppy year for US stocks, with many getting hit today over earnings disappointments and worries about China. Even so,  the S&P 500 is up over 6% year-to-date. The Dow Jones Industrial Average is up almost 7%.

Who is buying these stocks? Not big corporate pension plans, according to a story in the Wall Street Journal.  Not mutual fund investors, according to fresh data from TrimTabs. Continue reading

Arends Case for Moderate Market Timing

Wall Street Journal columnist Brett Arends recently penned another piece on the dangers of blind “buy and hold” investing.

Citing a study by Spanish academic Javier Estrada, Arends makes an argument similar to a recent post on The Big Picture that took great interest in the upside of avoiding the market’s worst days.

The study by Estrada, a finance professor at the IESE Business School at the University of Navarra, seems exhaustive, covering, Arends writes, “nearly a century’s worth of day-to-day moves on Wall Street and 14 other stock markets around the world, from England to Japan to Australia.”

Over an investing period of about 40 years, he calculated, missing the 10 best days would have cost you about half your capital gains. But successfully avoiding the 10 worst days would have had an even bigger positive impact on your portfolio. Someone who avoided the 10 biggest slumps would have ended up with two and a half times the capital gains of someone who simply stayed in all the time.

Arends doesn’t come out in favor of trying to hop in and out of the markets day-to-day but he does argue that these gyrations give added value to dividend-bearing stocks which offer a steady, predictable portion of their total return. Continue reading

Diversification In Pictures

If a picture is worth a thousand words, when it comes to the payoff of diversification, a chart or two may prove even more valuable.

The principles over at MyPlanIQ, a firm specializing in sorting through corporate 401k plans and offering suitable portfolios from the funds on offer, have put several together. They show what portfolio theory teaches: that adding more asset classes to a portfolio improves its performance over time. Continue reading

How Risky Are Your Bonds?

I recently wrote an article for Financial Planning magazine in which I looked at ways of judging income investments. One of the major take-aways from the analysis–and a conclusion that surprised many readers–is that long-term government bonds now look as risky as junk bonds.

This is not a typo. Continue reading

The Flash Crash that Caused the Flash Crash?

Michael Gayed of Pension Partners has a thought-provoking piece up on Seeking Alpha. The topic: a pattern he found that shows a smaller “flash crash” in one proxy for high yield junk debt preceded the larger equity free fall May 6. Continue reading

Tax Loss Harvesting: Making Lemonade from Lemons

This is a guest post by Steve Thorpe

Would you invest a few short hours to reduce this year’s taxes by $1,000 or more?  For investors with taxable investment accounts, this is often possible by taking advantage of tax loss harvesting (TLH). This perfectly legal strategy makes lemonade from lemons, allowing Uncle Sam to share part of the pain of the losses inevitably experienced by investors at some points during their investing career

Between now and the end of the year is a good time to review your portfolio to see if any of your holdings are in the red. If so, you might be able to use those losses to help lower your 2010 tax bill.

In this article I’ll review:

  1. How to harvest a tax loss and under what circumstances you might want to.
  2. Why you need to keep track of what your investments cost in the first place.
  3. How to properly rebalance your portfolio after a sale, without triggering undesirable tax consequences.
  4. The way investments look from a tax perspective: short-term losses can be more valuable than long-term losses. But hold onto gains at least a year and a day.

Continue reading

Larry Swedroe on Passive Investing and Skill

One recent Sunday afternoon Larry Swedroe set off  a passionate debate on the Bogleheads board when he posted some thoughts about investing skill. Or more particularly its irrelevance.

Swedroe, an avowed proponent of passive investing, wanted to clarify his position. It’s not that investing skill can’t exist, he argued, it’s that if it does, the markets will, over time, erase that advantage. And, just as importantly, that  it’s impossible to predict where that skill will show itself.  We’re betting against the odds if we try to pick the winning investors (or fund managers). Continue reading