Monthly Archives: July 2011

Government Default: The Market vs. The Media

One of the more interesting things that I have noted in recent weeks is the dramatic disparity between the way that the media and politicians discuss the probability and potential fallout of the U.S. not raising the debt ceiling and/or defaulting on its obligations, and the way that the markets are reacting to the debate. 

 Just this morning (July 28), CNBC had the striking headline “If US Defaults, Stocks Fall 30%, GDP 5%: Credit Suisse.”  That certainly sounds bad and it makes for a dramatic story.  The story goes on to say that Credit Suisse sees a default as a low probability event, but also outlines a series of other lesser bad outcomes that may occur, such as the possibility that no budget deal is reached but the U.S. does not default (in which case they predict between a 10%-15% decline in stock prices). 

Another great headline: Continue reading

The Hidden Costs of Index Funds

While it is widely understood that index funds represent a low-cost way for investors to achieve broad diversification, a recently published research study sheds light on a “hidden cost” associated with investing in index funds.

Antti Petajisto, a professor at NYU’s Stern School of Business, conducted the original research for “The Index Premium and its Hidden Cost for Index Funds,” as part of his Ph.D. thesis at Yale in 2003.

The study examines the ways that stock prices change between the time that it is announced that a company will be added or removed from a stock index (such as the S&P500) and when the company’s stock is actually added.  The research suggests that canny institutional investors can make a profit in this period that results in a drag on performance for index fund investors.

Continue reading

From the Portfolioist Book Shelf: Your Money Ratios by Charles Farrell

I’m always on the lookout for great books on financial planning and investing.  There are literally thousands of books on these two topics and that makes it hard for many people to figure out where to start.

I recently read Your Money Ratios: 8 Simple Tools for Financial Security by Charles Farrell and think that this is one of the best books on financial planning that I’ve ever read. If you don’t feel confident in how much you should be saving, can afford to spend on housing and other financial planning decisions, start by reading this book. Continue reading

Are Americans Saving Enough for Retirement?

Have retirement accounts balances rebounded from the financial crisis?

Reports from both Vanguard and Fidelity put the average balance for U.S. 401(k) plans at a record $75,000 (as of March 31, 2011). The first report, released from Fidelity in May, showed that the average 401(k) balance rose to $74,900—up 12% over the last year. This marked an all-time high since Fidelity began tracking account balances back in 1998. Fidelity is the largest single administrator of 401(k) plans, with 11 million accounts, so these numbers are of considerable interest to me.

Vanguard also announced that the average balance of its 401(k) accounts rose to about $75,000 in its annual How America Saves 2011 report.

At first glance, the numbers are compelling and encouraging. Both Vanguard and Fidelity report the largest increase in contributions since both firms started tracking this data (in 1999 and in 1998, respectively). However we need to take a closer look to see Continue reading

Why Low Beta Stocks Are Worth a Look

Just last month Geoff Considine wrote an article about why investors may want to explore low beta strategies in a  highly volatile market.

 Here at the Portfolioist, we thought we’d re-post the article in reponse to this week’s  wild ride on Wall Street.

The recent volatility in the stock market has many investors trying to figure out how to maintain some exposure to equities, while limiting their exposure to the big ups and downs of the major equity indexes.

One alternative is to manage a portfolio’s beta, a measure of how a portfolio tends to respond to movements in a broad index (most commonly the S&P 500 Index). Stocks with values of beta less than 100% (1.0) tend to react less to changes in the broader market. (For example, utility stocks typically have betas less than 1.0, because Continue reading

The Top 5 Things Every Investor Should Know

Worried about the wild swings in the stock market? Not sure what’s next for the economy?

You can successfully invest in these uncertain times—and you won’t have to chase the next new IPO or buy into the latest advice on CNBC.

Here are the top five things every investor should know. Continue reading

Hedge Funds: The Emperor’s New Clothes?

Brett Arends recently wrote a piece for MarketWatch in which he expressed the opinion that hedge funds are a sucker’s bet.  He bases his argument on a fascinating  study called Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn that was published in 2009.  The authors of the study, professors from Emory University and Harvard, came to the conclusion that hedge fund investors would have (on average) been better off buying an S&P500 Index fund. So, if hedge funds have performed as badly as this academic study suggests, why have assets invested in hedge funds skyrocketed over the past 20 years?  Continue reading