Monthly Archives: May 2012

The Facebook IPO: Why Gambling with Your Portfolio Rarely Pays Off

In the academic finance world, it’s fairly common to find comparisons of investors to gamblers and certain types of stocks have been referred to as ‘lottery tickets.’ I’ve found that this comparison is actually quite important. There is an odd paradox between the assumption that investors are rational when it comes to investing, yet still spend an awful lot of money playing the lottery.  When we speak of “lottery ticket” investments, we are talking about investments that have a small probability of a big “win” and a large probability of a modest “loss.” And this is precisely the situation with lotteries.

The reality is that people spend considerable sums of money on lottery tickets, a money gamble that has a negative expected value. This same appeal (big, low-probability win, modest high-probability loss) also seems to motivate some investors. Continue reading

What’s Driving the Price of Oil?

Gas prices are not keeping Americans at home this Memorial Day weekend. AAA projects that 34.8 million Americans will travel 50 miles or more this holiday weekend.

Here at the Portfolioist, we thought the start of Memorial Day weekend would be a good time to re-examine what drives the price of oil. This article was first published by Geoff Considine on May 4th.

From all of us at the Portfolioist, have a happy and safe Memorial Day.

There’s lot’s of talk right now about the price of oil and, particularly, gasoline, and it looks as though the price of a gallon of gas will be a significant political topic for the election this year.  President Obama recently proposed new rules for limiting the influence of speculators on the oil market.  Politifact, a media group that fact checks the truthfulness of political statements recently ran a piece on public statements about oil prices.  Their conclusion is that much of what is being claimed with regard to the causes of high oil and gas prices is, at best, based on half truths. Continue reading

What You Need to Know Before You Invest in an IPO

In light of all the discussion surrounding Facebook’s IPO, we thought we’d repost one of our most popular articles that explores the characteristic performance of IPOs.  This article was previously published in June of 2011, but the narrative feels very timely today.

It shouldn’t surprise you that investors have had a long history of enthusiasm for IPO stocks. But has this enthusiasm ever paid off over the long-term?

To answer this question, you first must do the research.

Do Your Due Diligence

There is a substantial body of research that examines how and why IPO stocks perform the way they do and there are two major themes that emerge Continue reading

Are We Hard-Wired To Make Bad Financial Choices?

Proper financial planning that provides for our financial needs in retirement is perhaps the prototypical example of willful blindness. We all know that most people have not saved enough to provide for a sustainable long-term income in retirement. The core issue here is that we (as a society and as individuals) are making consistently bad financial decisions that affect our futures, beginning with how we pay for Continue reading

Does “Low Risk” Outperform?

Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.

A new paper by Robert Haugen, president of research house Haugen Custom Financial Systems, and Nardin Baker, chief strategist, Global Alpha, Guggenheim Partners Asset Management, claims that low risk (really low volatility) stocks consistently delivered market-beating returns in all of the 21 developed countries they studied between 1990 and 2011 (video here). Their research showed the same was true of 12 emerging markets they looked at over a shorter period since 2001. In essence, their idea is that low volatility stocks are boring and underappreciated but outperform because Continue reading

The Most Common Mistake Investors Make

Each year, the research firm DALBAR publishes their Quantitative Analysis of Investor Behavior.  Every year, the results show that individual investors are their own worst enemies. 

And this year is no exception. 

The QAIB examines the real returns earned by investors in equity mutual funds, bond mutual funds, and asset allocation mutual funds.  Over the past twenty years, the average investor in an equity mutual fund has under-performed the S&P 500 Index by an annualized Continue reading

The Hidden Risk in Target Date Funds

Lately, Target Date Funds (TDFs) have been the subject of intense scrutiny and criticism, because investors have realized (in many cases, after the fact) that these types of funds can be very volatile. In the aftermath of the 2008 collapse of the financial markets, TDFs for investors near retirement (funds with a projected retirement data of 2010, a.k.a “2010 TDFs”) got considerable media attention because some of these funds suffered dramatic losses.

Clearly, investors nearing retirement didn’t understand the levels of risk they were taking by investing in 2010 TDFs.  It has also been widely noted that the percentage of assets invested in equities in 2010 TDFs varied dramatically among funds, which in turn meant Continue reading