Category Archives: Rebalancing

Sector Watch: Low-Beta Stocks

Financial theory suggests that risk and return go hand-in-hand:

Small company stocks tend to be riskier and outperform large company stocks. Long-term bonds tend to be riskier and outperform short-term bonds. Corporate bonds tend to be riskier than Treasury bonds (with comparable terms) and outperform Treasuries over time.

However, there is one group of stocks that has consistently defied this risk/return relationship: Low-beta stocks. A low-beta strategy involves selecting stocks that have a lower-than-average beta value. (Beta is a measure of the stocks’ volatility and adding low-beta stocks to your portfolio can help investors build a diversified portfolio.) The good news for investors here is that Continue reading

The Biggest Unknown in Financial Planning

In a recent blog post, I reviewed a new book on the future of the Equity Risk Premium (ERP).  For those who are not familiar with the ERP, it is the additional return that investors expect to receive for bearing the risk of owning company stock vs. owning a low-risk asset like government bonds.  As readers of the  book, Rethinking the Equity Risk Premium will discover, there is little agreement on how the ERP should be measured historically and even less consensus on how to estimate the future ERP.

We all know that there is no guarantee that stocks will deliver higher returns than bonds. In fact, at the depths of the last market crash (think back to early 2009) bonds had out-performed stocks over a trailing period of more than 40 years.  If markets are at all rational, it would make sense that Continue reading

Dr. Andrew Lo: ‘Buy and Hold’ Does Not Work Anymore

Dr. Andrew Lo is a thought leader in the world of portfolio management.

The MIT/Sloan School of Management professor and Director of MIT’s Laboratory for Financial Engineering has been widely quoted on the implications of the 2008 financial crisis. One theme that Dr. Lo emphasizes repeatedly is that the risks associated with different asset classes can vary dramatically over time and for this reason, risk must be tracked, forecasted and budgeted.

In a world in which the risk of any given asset class (and therefore, also the risk of any portfolio of asset classes) can change dramatically in a short period of time, a passive buy-and-hold approach may, in fact, result in unacceptable levels of volatility. Continue reading

From the Portfolioist Book Shelf: Risk Less and Prosper by Zvi Bodie and Rachelle Taqqu

The recently-published book by Zvi Bodie and Rachelle Taqqu, Risk Less and Prosper: Your Guide to Safer Investing, provides a unique perspective on how to meet the challenge of long-term financial planning.  The book is well-organized into a number of steps required for identifying and organizing long-term goals and thinking through how to meet these goals.  The presentation is built around a narrative in which a group of people meet to try to figure out how to meet their long-term goals and how to deal with the uncertainty associated with both their lives and their investments. Continue reading

Just Put the Ball in Play

Guest Blog by Robert P. Seawright, CIO, Madison Avenue Securities. 

On account of the success of Moneyball (both the book and the movie, nicely satirized here), baseball management is often compared to investment management, and with good reason. Moneyball focused on the 2002 season of the Oakland Athletics, a team with one of the smallest budgets in baseball.  At the time, the A’s had lost three of their star players to free agency because they could not afford to keep them.  A’s General Manager Billy Beane, armed with reams of performance and other statistical data, his interpretation of which was rejected by “traditional baseball men” (and also armed with three terrific young starting pitchers), assembled a team of seemingly undesirable players on the cheap that proceeded to win 103 games and the division title.

Unfortunately, much of the analysis of Moneyball from an investment perspective is focused upon the idea of looking for cheap assets and outwitting the opposition in trading for those assets.  Continue reading

Why You Don’t Have to Occupy Wall Street

MyPlanIQ recently ran an interesting article in their weekly newsletter regarding the Occupy Wall Street movement and the overwhelming wealth disparity in the world. What we liked about this article was the actionable advice towards the end that 401(k) plan participants can take to retain control over building their own wealth—without having to march on Wall Street. Continue reading

Asset Allocation: An Alternative View

In a recent article, I analyzed a model portfolio designed by Money magazine, in conjunction with analysts at Morningstar.  The focus of my piece was whether I could reconcile the projections of risk and return for this portfolio with my own calculations.  I was pleasantly surprised that the results seemed very consistent.

As a follow-up to that piece, I wanted to see whether I could improve this portfolio in terms of the projected performance. Continue reading

Sanity Checking Estimates of ‘Expected Returns’ in Retirement Planning

One of the most important variables in creating an investment strategy to meet a specific goal (such as retirement) is what you assume about the future returns from stocks, bonds, and other available investment opportunities.  Another highly important input to planning is your estimate of the risk associated with each investment alternative.  These estimates of future risk and return will determine how much you need to save, when you can expect to retire, and how much income you can expect in retirement.  Where do these estimates come from?  Continue reading

Tax Loss Harvesting Season is Here

Believe it or not, year-end is right around the corner which means that it’s time for investors to start thinking about their tax implications. In order to help you make sense of it all, we wanted to share this article originally published last year by guest blogger Steve Thorpe. Enjoy–

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

Don’t Fumble Your Retirement Planning

Guest blog by Lauren Tivnan, Managing Editor, Portfolioist.com.

More and more participants in 401(k) plans are using Target Date Funds according to the nonpartisan Employee Benefit Research Institute (ERBI). Here at the Portfolioist, we think this is great news. For more than a year now, we’ve been writing about the benefits of Target Date Funds (and more specifically, our line-up of Target Date Folios) along with a variety of postings on the importance of planning and saving for retirement.

The ERBI study found that… Continue reading