One of the most interesting market stories in the last week is the big drop in the Japanese stock market. Japan is the third-largest economy in the world, ranked by GDP. The values of the Japanese stock market, as measured by the Nikkei 225 index, dropped by 7.3% on May 23rd, and then suffered another fairly dramatic one-day decline of 3.2% on May 27th.
Vanguard has just reduced the expense ratios of 24 of its ETFs. The reductions are fairly substantial. What I noticed, in particular, is that the reductions include sector-specific ETFs.
The Vanguard Energy ETF (VDE), the Vanguard Information Technology ETF (VGT), the Vanguard Telecom ETF (VOX), and the Vanguard Utility ETF (VPU) each now have 0.14% expense ratios vs. 0.19% previously. While the expense ratios of these funds were already low, the new expenses are 26% lower than before. Continue reading
Guest post by Contributing Editor, Matthew Amster-Burton, Mint.com.
Do we live in the golden age of investing?
Moronic question, right? Of course we don’t. The S&P 500 sits at about the same level it did five years ago. Bond interest rates have never been lower, and the Fed says it’s planning to keep them that way through mid-2015.
Turn on any financial channel and you’ll find as many gloomy predictions as you care to sit through: debt-fueled implosion in Europe, the next flash crash, the shrinking dollar, a stagnant labor market, Great Depression 2.0 (or is it 3.0 by now?). Continue reading
In Part 1 of this series, I set the stage for a discussion of behavioral finance and game theory as they pertain to how market participants behave. In Part 2, I expand upon some of ways that individuals and institutions behave in ways that can be explored from this perspective.
Giving People What They Want
One of the most striking features of the capital markets of the recent year or two has been the ‘Las Vegas’ feeling to much of the action in the markets. There has been tremendous excitement around IPOs of companies including Zynga (ZNGA), Groupon (GRPN), and most notably Facebook (FB). The hoopla around the Facebook IPO, in particular, is without precedent. Why do the financial media and corporate management work together to create this frenzy? The answer is simple: people buy it. If investors ignored the carnival atmosphere around these firms, we wouldn’t see this kind of media. If people say that they want to invest in solid well-run profitable firms, but clearly signal that what they are actually buying is shares in IPOs of companies with enormous dreams but untested business models, we know what Wall Street will provide. If investors seem to be seeking investments that behave like lottery tickets, it is perfectly rational for venture capitalists to fund such companies and to rapidly take them public. I view the marketing of Facebook’s IPO as perfectly executed to exploit behavioral biases. I am not a conspiracy theorist, but even the trading delay on the day of the IPO helped to bring the frenzy to own shares to a fever pitch. The Facebook IPO and others like it suggest that Wall Street is very effectively playing a game that many investors do not really understand. Continue reading
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
The market rally of the past twelve months may appear somewhat baffling in light of the fact that individual investors have been pulling money out of the market. The S&P 500 is up 22.5% in the last year, while September marks the 17th consecutive month during which investors took money out of equity mutual funds. The outflows from equity mutual funds are not simply due to investors moving from mutual funds to ETFs. A recent analysis by Bianco Research demonstrates that including ETF flows does not change the results. Continue reading
Utility companies are expected to provide fairly stable performance, without too much downside risk. Utilities are also typically expected to provide lower average returns than the broader market. In the last decade, however, utilities have out-performed the broader stock market as investors have become increasingly risk-averse and worried about the prospects for sectors that depend largely on robust economic growth in order to meet their earnings targets. Continue reading
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
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
Guest post by Contributing Editor, Janet Al-Saad, Mint.com.
When it comes to financial wisdom, few people merit as much attention as Warren Buffett. The man renowned as the “Sage of Omaha” built a billion-dollar empire from scratch, all the while maintaining modest spending habits that are the envy of every frugal person everywhere. Liz Claman of the Fox Business Network spoke with Buffett recently, and shares some of his wisdom with Mint Life: Continue reading