Jason Zweig at the Wall Street Journal published a disturbing article that deserves more attention. The basic story is this. A number of banks sold a complex financial product to retail investors who have subsequently lost quite a bit of money. Here is the basic pitch that was apparently made to individual investors in 2012. You are going to buy an investment product that is currently invested in bonds and is producing 8% in income per year. The performance of this product is tied to the stock price of Apple, however. In exchange for the high income, you take on the risk of a decline in Apple’s stock price. These products were sold when Apple stock was soaring, so a fair number of people apparently saw this as a favorable bet. With the stock down more than 30% from its peak, many of these investors have lost a considerable amount of money. Read Zweig’s piece for more details. These products have a number of variations and he discusses one specific structure. Here is another. The title of Zweig’s article, How Apple Bit Bondholders, Too, gives the impression that bonds were responsible for these losses. This is not the case, but the title serves to illustrate the subtlety of the problem. (more…)
Archive for the ‘Volatility’ Category
The Strange Case of Apple Stock and Structured Products
Posted in Bonds, Investors, Risk, Scams, Volatility, tagged Apple, Apple structured notes, CDs, derivative instrument, Jason Zweig, reverse convertible bond, structured products on February 5, 2013 | Leave a Comment »
Folio Investing Celebrates Its Target Date Folios’ Five-Year Record of Outperformance
Posted in Diversification, ETFs, Investors, Long-term investing, Low Cost Investing, Regular Investing, retirement planning, Risk, Uncategorized, Volatility, tagged diversification strategy, folios, fund performance, Retirement Investing, risk targeting, target date, Target Date Folios, Target Date Funds on January 24, 2013 | Leave a Comment »
Folio Investing’s Successful ETF-Based Alternative to Legacy Target-Date Funds Offers Superior Diversification, Risk Targeting and Flexibility; Firm Seeks Distribution Partner to Broaden Availability
Folio Investing announced today that, over the five years since they were brought to market in December 2007, its Target Date Folios have significantly outperformed traditional target-date funds. The Folios have provided both higher returns and lower volatility than the competing funds during this tumultuous period. (more…)
Gaming The System
Posted in Active Investing, Behavioral Finance, Investors, Market Timing, Media and the markets, Risk, Stock Investing, Volatility, tagged behavioral bias, cognative bias, Gambling, information asymmetry, luck, sports betting, vegas sports books on October 4, 2012 | 8 Comments »
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. (more…)
Saving and Investing for Retirement: Part Five
Posted in Asset Allocation, Bonds, Diversification, ETFs, financial planning, Investors, Long-term investing, Low Cost Investing, Mutual Funds, Portfolio Investing 101, Retirement, retirement income, retirement planning, Risk, Stock Investing, Volatility, Wealth, tagged Defined Contribution, economy, household income, income replacement, Lawrence Kotlikoff, pensions, retirement security, Rob Arnott, saving, Scott Burns, unemployment on October 2, 2012 | 2 Comments »
Effective Actions in an Uncertain World: Part Five of Our Special Five Part Series
There are a number of factors that we need to predict in order to come up with saving and investing strategies for retirement. The values that we assign to these factors will have a huge impact on whether or not we will be able to meet our goals. First, there is the expected return that investors will make on their retirement savings. Second, there is the common estimate that people will need about 85% of their pre-retirement income to support them once they stop working. Finally, there is the potential impact of behavior on savings rates, investing, and spending. (more…)
Saving and Investing for Retirement: Part Four
Posted in 401(k), Active Investing, Asset Allocation, Bonds, Diversification, ETFs, financial planning, Income Investing, Investors, Long-term investing, Retirement, retirement income, retirement planning, Risk, Stock Investing, Volatility, Wealth, tagged Annuities, coupon payments, Fidelity, financial challenge, high yield bonds, Ibbotson, Inflation, junk bonds, MLPs, REITs, retirement income, SPIAs, SWRs, systematic withdrawal, Target Date Funds, TIPS, TIPS ladders on September 28, 2012 | 1 Comment »
Generating Income: Part Four of Our Special Five Part Series
During their working years, investors focus on saving and investing with a goal of building wealth. As they enter retirement, either by ceasing paid employment entirely or by scaling back paid employment, investors shift their focus to using their portfolios to provide a reliable long-term stream of income. This transition from building wealth to income generation is the subject of a great deal of research in retirement planning. Once investors are at or near retirement, the most significant financial challenge is using their accumulated savings to provide substantial income for their retirement years. (more…)
Sector Watch: Spotlight on Defensive Strategy
Posted in Active Investing, Asset Allocation, Diversification, Dividends, financial planning, Personalization, Regular Investing, Risk, Stock Investing, Volatility, Wealth, tagged defensive stocks, Defensive Strategy Folio, Low-Beta, market volatility, Monte Carlo Simulation on September 19, 2012 | 4 Comments »
About four and a half years ago, Folio Investing launched an equity (e.g. stock) portfolio that focused on reducing the impact of market volatility. So-called defensive stocks are those which tend to be fairly insensitive to the mood of the market as a whole. Conventional wisdom suggests that demand for band-aids, electricity and paper does not go up when the market is exuberant, but neither does it collapse when the market swoons. The conventional wisdom also suggests that these stocks will tend to under-perform the broader market during rallies and, over the long-term, that a portfolio of these stocks will deliver modest returns. Our research suggested, however, that it was possible to create a portfolio of defensive stocks that would provide returns to keep up with rallies in the broader market, while still substantially reducing the impact of market volatility. Folio Investing launched the Defensive Strategy Folio that incorporated this research on February 28, 2008. (more…)
The Challenge of Long-Term Income: Part II
Posted in 401(k), Active Investing, Asset Allocation, Commodities, Financial Advisors, financial planning, Income Investing, Investors, Long-term investing, Personalization, Retirement, retirement income, retirement planning, Risk, Stock Investing, Volatility, Wealth, tagged Annuities, Are You A Stock or a Bond?, government bonds, Inflation, interest rates, low-risk, Moshe Milevsky, Rachel Taqqu, Risk Less and Prosper, TIPS, Treasury bonds, ZVI Bodie on September 17, 2012 | 9 Comments »
In Part I of this article, I explained why I have issues with the traditional idea that individuals should provide for their required level of retirement income (beyond what is provided by Social Security and any pensions) entirely with assets with zero risk of loss of principal (e.g. Treasury bonds). In Part II, I discuss the alternative approaches.
There are two investments that have zero loss of principal: traditional Treasury bonds and Treasury Inflation-Protected Securities (TIPS), which are Treasury bonds with embedded protection against inflation.
I agree with the notion that people need to save and invest so as to be able to provide a very reliable and consistent income stream in retirement. Zvi Bodie has presented a compelling argument that investments in stocks do not become less risky as you hold them for longer periods, so that investors cannot rely on stocks as part of their required income stream. I have performed detailed analysis of Bodie’s argument and I agree with his argument: the magnitude of loss that you can face with an equity-heavy portfolio increases the longer you hold the portfolio. As I noted in Part I, William Bernstein has recently advocated for a portfolio in which all of your required income is provided by Treasuries and annuities, largely consistent with Bodie. (more…)
Sector Watch: Spotlight on Utilities
Posted in Active Investing, Diversification, Dividends, financial planning, Investors, Long-term investing, Markets, Personalization, Regular Investing, Stock Investing, Volatility, Wealth, tagged Dow Jones Utilities index, folios, S&P500, S&P500 Index, sector watch, utilities on August 27, 2012 | 1 Comment »
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. (more…)
The Power of Effective Diversification: Part II
Posted in Asset Allocation, Diversification, ETFs, Financial Advisors, financial planning, Investors, Leverage, Long-term investing, Market Outlook, Market Timing, Markets, Retirement, retirement income, retirement planning, Uncategorized, Volatility, Wealth, tagged correlation, diversification, Target Date Folios, Target Date Funds on August 17, 2012 | 4 Comments »
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. (more…)
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