Category Archives: Market Timing

Economic Inequality

Income inequality is increasingly acknowledged as a key economic issue for the world.  The topic is a major theme at Davos this year.  Economic inequality is also an increasingly common topic in U.S. politics.

A new study has found that economic mobility does not appear to have changed appreciably over the past thirty years, even as the wealth gap has grown enormously.   The authors analyzed the probability that a child born into the poorest 20% of households would move into the top 20% of households as an adult.  The numbers have not changed in three decades.

On the other hand, there is clearly a substantial accumulation of wealth at the top of the socioeconomic scale.  The richest 1% of Americans now own 25% of all of the wealth in the U.S.  The share of national income accruing to the richest 1% has doubled since 1980.  In contrast, median household income has shown no gains, adjusted for inflation, since the late 1980’s and has dropped substantially from its previous peak in the late 1990’s.

Why is this happening?

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Perpetually Out of Step

There is increasing evidence of big flows of money into equities and leaving bonds.  This is being seen at all levels in the market, including among institutional investors such as pension plans.  The Wall Street Journal just published an article discussing this shift called Are Mom and Pop Heading for Wall Street?   Mutual fund flows suggest that investors are finally returning to equities, after selling in droves over the past several years.  This article summarizes the issue:

From April 2009 through now, mutual-fund investors sold a quarter trillion dollars in stock funds, according to recent data from the Investment Company Institute.

Ironically, that selloff coincided with a period of stellar performance in stocks—when the Dow Jones Industrial Average jumped more than 60%. Continue reading

Top Ten Ways to Deal with Behavioral Biases

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

Pretty much since the day I wrote it, my Investors’ 10 Most Common Behavioral Biases has been the most popular post on this blog.  It still gets a surprising number of hits all these months later.  Due to the pioneering work of Daniel Kahneman and others, nearly everyone in the financial world acknowledges the reality of cognitive and behavioral biases and their impact on people, the markets and life in general. It’s a very popular subject. Continue reading

Game Theory, Behavioral Finance, and Investing: Part 1 of 5

Watching the market this year has been like observing an exercise in game theory and behavioral finance, and the two fields are closely related.  Game theory is the study of how a rational person makes decisions in uncertain situations.  As the name suggests, game theory was developed with the intent of developing optimal strategies in games in which chance or the decisions of an opponent play a role in your outcome.  Game theory focuses on how rational players can make the best decisions to maximize their satisfaction.  Behavioral finance adds the nuance that, in real life, people do not necessarily have all available information and, even if they do, they often make decisions that are inconsistent with those made by a perfectly-rational and fully-informed decision maker. Continue reading

Gaming the Numb3rs

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

Tom Stoppard’s Rosencrantz and Guildenstern are Dead  presents Shakespeare’s Hamlet from the bewildered point of view of two of the Bard’s bit players, the comically indistinguishable nobodies who become headliners in Stoppard’s play.  The play opens before our heroes have even joined the action in Shakespeare’s epic. They have been “sent for” and are marking time by flipping coins and getting heads each time (the opening clip from the movie version is shown above).  Guildenstern keeps tossing coins and Rosencrantz keeps pocketing them. Significantly, Guildenstern is less concerned with his losses than in puzzling out what the defiance of the odds says about chance and fate. “A weaker man might be moved to re-examine his faith, if in nothing else at least in the law of probability.” Continue reading

Gaming The System

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

When I was a kid I had a paper route.  One of my customers was a barber who made book on the side.  Shocking, I know.  The giveaway was the group of guys always hanging around but not getting their hair cut and the three telephones on the wall that rang a lot.  Even as a kid I could tell that something was up. Continue reading

Saving and Investing for Retirement: Part Three

Realities of Investing: Part Three of Our Special Five Part Series

In the various calculations that project retirement portfolio accumulations through time (such as the two discussed in the previous article), there are assumptions about how investors will allocate their savings and how those investments will perform.  In the case of the Fidelity study, no specific asset allocation is provided that would achieve the assumed risk-free 5.5% annual return.  In the Ibbotson study, the authors assume that investors hold a combination of a stock index fund and a bond index fund that progressively allocates less to stocks and more to bonds as investors get older.  The Ibbotson study also assumes that the stock index (the S&P 500) will have an average annual return of 10.96% per year and that the bond index will have an average return of 4.6% per year.  The Ibbotson study ignores expenses associated with investing. Continue reading

The Challenge of Long-Term Income: Part 1

Portfolio Income: The Trouble With Treasury Bonds

The current economic environment is making it very hard for investors to generate reasonable levels of income through traditional means such as bond ladders.  While it is always dangerous to suggest that ‘it’s different this time,’ I believe that we are facing some unprecedented conditions that require new approaches.  Income-seeking investors with low risk tolerance—those who have traditionally favored government bonds—are in the most difficult situation.

The problem of low savings and investment rates in the U.S. is huge.  I have written about this in the past, along with many others.  Every study on retirement savings notes that Americans need to save more.  Having the ability to support yourself from a portfolio of savings is not, however, just about the amount that you save.  There is also the issue of how much income you can derive from each dollar in your portfolio.  Today, with historically low yields on government bonds, retirees and others seeking to live on the income from low-risk investments are faced with an enormous challenge that compounds the savings rate problem.  To be able to live on the income provided by very low-risk investments, the necessary savings rates increase dramatically relative to savings rates when investors are willing to bear some risk. Continue reading

The Power of Effective Diversification: Part II

Last week, I posted an article discussing how diversification is one of the most misunderstood concepts in investing. In today’s post I continue with the second half of this two-part series titled, “The Power of Effective Diversification.”

In Part I of this article, I discussed the difference between naive diversification (holding lots of stuff in a portfolio) and real diversification (combining assets in a portfolio to create risk offsets).  I also showed how a well-diversified portfolio can maintain the ability to participate in market rallies while still mitigating risk.  In Part II, we will explore what an effectively diversified portfolio looks like today. Continue reading

Tax Loss Harvesting: Share Your Pain with Uncle Sam

Summer is winding down. And believe it or not, 2012 is more than half way over, which means it’s a good time for investors to start thinking about the year-end tax implications of their portfolios.

We invited Steve Thorpe, Founder of Pragmatic Portfolios, LLC to share some insights on Tax Loss Harvesting. Enjoy.

Tax Loss Harvesting: Why Should You Care?

Would you invest a few 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 Continue reading