FREE NEWSLETTER

With logic and statistics, you can persuade your family to index—fine work that’ll be undone by your cousin with a warmed-over stock pick.

My Regrets

EVERY SO OFTEN, I’m asked about my biggest investment mistakes—and I really don’t have much to say. Yes, like many others, I dabbled in individual stocks and actively managed mutual funds early in my investing career. Yes, like everybody who’s truly diversified, there are always parts of my portfolio that are generating disappointing short-term results. But such things don’t cause me any regrets.
Instead, as I look back, my big financial regrets fall into four buckets:
Pound foolish.

Read more »

A Combustible Mix

THERE’S NO SUBJECT that gets me more worked up than market volatility—and especially the danger posed by high-frequency trading (HFT). Volatility has become part of the “new normal,” thanks to fundamental changes in how the market operates.
Remember the flash crash of 2010? I haven’t forgotten the unsettling events of May 6, 2010, when the Dow Jones Industrial Average dropped 600 points in just five minutes. For a few minutes, starting around 2:45 p.m.,

Read more »

Want $870,000?

SENTENCES THAT begin with “I can’t” drive me nuts—and I especially dislike the sentence, “I can’t save.”
“Pish-tosh,” I say.  Every household in America earning at least the median income can save for the future. If they try hard, many lower-income Americans could also save.
Of course, the amount saved will vary, but even small amounts can help over the long haul. If a household earning $40,000 a year can sock away enough to generate $300 or $400 in monthly retirement income to supplement whatever they get from Social Security,

Read more »

It Sure Adds Up

MY FINANCIAL advisor has been on a mission to reduce my investment costs. He’s been replacing my low-cost, broad-based index mutual funds with the exchange-traded fund (ETF) version. He believes this will improve my investment returns over the long run.
For instance, if you own Vanguard Total International Stock Index Fund—a mutual fund—you’re currently paying 0.11% in annual expenses. But Vanguard’s ETF alternative charges just 0.08%, equal to a savings of three cents a year for every $100 invested.

Read more »

Fatten That Policy

I WORKED in the investment department of three different insurance companies. But I never had any interest in buying a whole-life insurance policy. I knew term insurance was the best way to get the maximum death benefit for my premium dollars.
Instead, as a mutual fund manager, I was always more interested in investing in the stock market. (That said, I didn’t invest in the first mutual fund I managed. Why not? I didn’t want to pay the 7% “load”—the upfront sales commission.)
But my attitude toward whole-life insurance changed six years ago.

Read more »

High Times

READERS KNOW I love my baseball. There’s an old unwritten rule that, when a pitcher is working a perfect game, nobody talks to him. The position players leave the hurler alone since he needs to be “in the zone.” Fans grow more nervous as the game progresses and the ninth inning draws near. With each passing out, the prized perfect game comes closer into view.
I’m getting the same antsy feeling when it comes to highflying tech stocks.

Read more »

Money Guide

Quality Effect

ONE OF THE MOST recent contributions to factor investing comes from Robert Novy-Marx, a finance professor at the University of Rochester (“The Other Side of Value: The Gross Profitability Premium,” Journal of Financial Economics, 2013, Vol. 108, No. 1). He examined the stock market performance of companies based on their profitability, as measured by the ratio of gross profits to assets. Gross profits are a company’s revenues minus what it cost the company to make the goods that were sold. Don’t confuse gross profits with net income, which is the earnings number that investors typically look at. Novy-Marx notes that net income isn’t necessarily a good indicator of profitability because it can be depressed by, say, spending on research and development or an aggressive advertising campaign. That spending can mean greater profits down the road, yet it takes a short-term toll on reported earnings and thus can make companies look less profitable than they really are. Novy-Marx found that buying companies with high gross profits, which is a form of growth investing, generates higher stock market returns. He also found that the strategy is especially effective if you buy more profitable companies, but focus on those with lower share prices relative to book value. In other words, by combining Novy-Marx’s quality criteria with French and Fama’s value criteria, you should be able to identify stocks that are profitable but undervalued. It would be hard to argue that buying more profitable companies is a riskier strategy, so there’s a greater danger that the premium offered by the quality (or "profitability") effect will disappear relatively quickly. Among the funds focused on this area are iShares Edge MSCI USA Quality Factor ETFiShares Edge MSCI International Quality Factor ETF and Vanguard U.S. Quality Factor ETF. As these funds and others seek to exploit Novy-Marx’s insight, the stocks involved could see their prices bid up—and future returns will be lower. Next: Changing Weights Previous: Momentum Effect Article: Just Like Warren?
Read more »

Manifesto

NO. 27: RISK and potential return are inextricably linked. If an investment holds out the prospect of high returns, we should presume it’s highly risky—even if we can’t figure out what the risk is.

Truths

NO. 120: INFLATION is the friend of borrowers, but the enemy of savers. If you have money invested, you need to earn an after-tax return that outpaces the inflation rate—or your money will lose purchasing power. But if you’re a borrower, inflation is good news, because it allows you to repay the money you owe with depreciated dollars.

Act

MAKE END-OF-LIFE decisions. Ponder who should make medical and financial choices for you if you’re incapacitated. Draw up powers of attorney that reflect those wishes. Add a living will, detailing what life-prolonging medical procedures you want taken. Decide whether to donate your organs. Specify what sort of funeral you want. Choose an executor.

Think

DICTATOR GAME. In experiments, a “dictator” is given money or some other prize and gets to decide how to split it with another person. If a dictator’s goal was maximum financial gain, he or she wouldn’t give anything. But in experiments, dictators typically share part of the prize, suggesting they’re concerned with fairness and perhaps with how they’re perceived.

Second Look

Retirement

It’s a Stretch

FROM LISTENING to financial talk radio shows, it seems the hot topic these days is the SECURE Act and how it’s hurt the middle class. One caller had $2 million in his IRA, and was worried about the impact of the stretch IRA’s elimination on his children and grandchildren.
What am I missing here? I thought IRAs were a vehicle to help average Americans save for their retirement, not an estate-planning tool. Under the new law,

Read more »

Family Finance

School’s Out

THIS TIME of year, nightly news shows often feature a montage of clips from various commencement and graduation speeches. The speakers, mostly well-known business people, politicians and celebrities, dish out anecdotes and inspirational words to hordes of newly minted college graduates.
If I were ever invited to speak at a commencement, I’d offer a more commonsense approach, sharing some of the insights I’ve gained from working in higher education for more than two decades.

Read more »

Investing

Going Mainstream

PAST PERFORMANCE is no guarantee of future results—and that’s especially true once an investment goes from backwater to broad acceptance. Take real-estate investment trusts. Over the past 15 years, they have been embraced by investors, leading to great returns as folks loaded up on REITs. But that widespread acceptance was a onetime event—and returns from here will likely be more modest, especially with equity REITs yielding just 3.4%, versus almost 9% at year-end 1999.

Read more »

Lists

Saving: 10 Questions

IF YOU DON’T save diligently, you are highly unlikely to amass a decent-size nest egg. Time to make amends? Here are 10 questions to ponder:

Do you regularly spend more than planned? Try writing down every purchase you make. That’ll tell you where your dollars are going—and make you think twice before spending.
How much of your income goes toward fixed living costs? We’re talking about items such as mortgage or rent, car payments,

Read more »
Home Call to Action

Mindset

Falling for Flattery

ARE YOU WORTH IT? According to many sellers, you are—even if they have no idea who you are.
Economics generally divides consumed goods into necessities and luxuries. But behavioral economists understand that we need luxuries, at least psychologically. Purchasing things for ourselves is a way to self-validate, to say we are more than our base needs.
Who hasn’t felt good about an accomplishment and used that as a reason to splurge,

Read more »

My Regrets

EVERY SO OFTEN, I’m asked about my biggest investment mistakes—and I really don’t have much to say. Yes, like many others, I dabbled in individual stocks and actively managed mutual funds early in my investing career. Yes, like everybody who’s truly diversified, there are always parts of my portfolio that are generating disappointing short-term results. But such things don’t cause me any regrets.
Instead, as I look back, my big financial regrets fall into four buckets:
Pound foolish.

Read more »

A Combustible Mix

THERE’S NO SUBJECT that gets me more worked up than market volatility—and especially the danger posed by high-frequency trading (HFT). Volatility has become part of the “new normal,” thanks to fundamental changes in how the market operates.
Remember the flash crash of 2010? I haven’t forgotten the unsettling events of May 6, 2010, when the Dow Jones Industrial Average dropped 600 points in just five minutes. For a few minutes, starting around 2:45 p.m.,

Read more »

Want $870,000?

SENTENCES THAT begin with “I can’t” drive me nuts—and I especially dislike the sentence, “I can’t save.”
“Pish-tosh,” I say.  Every household in America earning at least the median income can save for the future. If they try hard, many lower-income Americans could also save.
Of course, the amount saved will vary, but even small amounts can help over the long haul. If a household earning $40,000 a year can sock away enough to generate $300 or $400 in monthly retirement income to supplement whatever they get from Social Security,

Read more »

It Sure Adds Up

MY FINANCIAL advisor has been on a mission to reduce my investment costs. He’s been replacing my low-cost, broad-based index mutual funds with the exchange-traded fund (ETF) version. He believes this will improve my investment returns over the long run.
For instance, if you own Vanguard Total International Stock Index Fund—a mutual fund—you’re currently paying 0.11% in annual expenses. But Vanguard’s ETF alternative charges just 0.08%, equal to a savings of three cents a year for every $100 invested.

Read more »

Fatten That Policy

I WORKED in the investment department of three different insurance companies. But I never had any interest in buying a whole-life insurance policy. I knew term insurance was the best way to get the maximum death benefit for my premium dollars.
Instead, as a mutual fund manager, I was always more interested in investing in the stock market. (That said, I didn’t invest in the first mutual fund I managed. Why not? I didn’t want to pay the 7% “load”—the upfront sales commission.)
But my attitude toward whole-life insurance changed six years ago.

Read more »

High Times

READERS KNOW I love my baseball. There’s an old unwritten rule that, when a pitcher is working a perfect game, nobody talks to him. The position players leave the hurler alone since he needs to be “in the zone.” Fans grow more nervous as the game progresses and the ninth inning draws near. With each passing out, the prized perfect game comes closer into view.
I’m getting the same antsy feeling when it comes to highflying tech stocks.

Read more »

Free Newsletter

Home Call to Action

Manifesto

NO. 27: RISK and potential return are inextricably linked. If an investment holds out the prospect of high returns, we should presume it’s highly risky—even if we can’t figure out what the risk is.

Act

MAKE END-OF-LIFE decisions. Ponder who should make medical and financial choices for you if you’re incapacitated. Draw up powers of attorney that reflect those wishes. Add a living will, detailing what life-prolonging medical procedures you want taken. Decide whether to donate your organs. Specify what sort of funeral you want. Choose an executor.

Truths

NO. 120: INFLATION is the friend of borrowers, but the enemy of savers. If you have money invested, you need to earn an after-tax return that outpaces the inflation rate—or your money will lose purchasing power. But if you’re a borrower, inflation is good news, because it allows you to repay the money you owe with depreciated dollars.

Think

DICTATOR GAME. In experiments, a “dictator” is given money or some other prize and gets to decide how to split it with another person. If a dictator’s goal was maximum financial gain, he or she wouldn’t give anything. But in experiments, dictators typically share part of the prize, suggesting they’re concerned with fairness and perhaps with how they’re perceived.

Money Guide

Start Here

Quality Effect

ONE OF THE MOST recent contributions to factor investing comes from Robert Novy-Marx, a finance professor at the University of Rochester (“The Other Side of Value: The Gross Profitability Premium,” Journal of Financial Economics, 2013, Vol. 108, No. 1). He examined the stock market performance of companies based on their profitability, as measured by the ratio of gross profits to assets. Gross profits are a company’s revenues minus what it cost the company to make the goods that were sold. Don’t confuse gross profits with net income, which is the earnings number that investors typically look at. Novy-Marx notes that net income isn’t necessarily a good indicator of profitability because it can be depressed by, say, spending on research and development or an aggressive advertising campaign. That spending can mean greater profits down the road, yet it takes a short-term toll on reported earnings and thus can make companies look less profitable than they really are. Novy-Marx found that buying companies with high gross profits, which is a form of growth investing, generates higher stock market returns. He also found that the strategy is especially effective if you buy more profitable companies, but focus on those with lower share prices relative to book value. In other words, by combining Novy-Marx’s quality criteria with French and Fama’s value criteria, you should be able to identify stocks that are profitable but undervalued. It would be hard to argue that buying more profitable companies is a riskier strategy, so there’s a greater danger that the premium offered by the quality (or "profitability") effect will disappear relatively quickly. Among the funds focused on this area are iShares Edge MSCI USA Quality Factor ETFiShares Edge MSCI International Quality Factor ETF and Vanguard U.S. Quality Factor ETF. As these funds and others seek to exploit Novy-Marx’s insight, the stocks involved could see their prices bid up—and future returns will be lower. Next: Changing Weights Previous: Momentum Effect Article: Just Like Warren?
Read more »

Second Look

Retirement

It’s a Stretch

FROM LISTENING to financial talk radio shows, it seems the hot topic these days is the SECURE Act and how it’s hurt the middle class. One caller had $2 million in his IRA, and was worried about the impact of the stretch IRA’s elimination on his children and grandchildren.
What am I missing here? I thought IRAs were a vehicle to help average Americans save for their retirement, not an estate-planning tool. Under the new law,

Read more »

Family Finance

School’s Out

THIS TIME of year, nightly news shows often feature a montage of clips from various commencement and graduation speeches. The speakers, mostly well-known business people, politicians and celebrities, dish out anecdotes and inspirational words to hordes of newly minted college graduates.
If I were ever invited to speak at a commencement, I’d offer a more commonsense approach, sharing some of the insights I’ve gained from working in higher education for more than two decades.

Read more »

Investing

Going Mainstream

PAST PERFORMANCE is no guarantee of future results—and that’s especially true once an investment goes from backwater to broad acceptance. Take real-estate investment trusts. Over the past 15 years, they have been embraced by investors, leading to great returns as folks loaded up on REITs. But that widespread acceptance was a onetime event—and returns from here will likely be more modest, especially with equity REITs yielding just 3.4%, versus almost 9% at year-end 1999.

Read more »

Lists

Saving: 10 Questions

IF YOU DON’T save diligently, you are highly unlikely to amass a decent-size nest egg. Time to make amends? Here are 10 questions to ponder:

Do you regularly spend more than planned? Try writing down every purchase you make. That’ll tell you where your dollars are going—and make you think twice before spending.
How much of your income goes toward fixed living costs? We’re talking about items such as mortgage or rent, car payments,

Read more »

Mindset

Falling for Flattery

ARE YOU WORTH IT? According to many sellers, you are—even if they have no idea who you are.
Economics generally divides consumed goods into necessities and luxuries. But behavioral economists understand that we need luxuries, at least psychologically. Purchasing things for ourselves is a way to self-validate, to say we are more than our base needs.
Who hasn’t felt good about an accomplishment and used that as a reason to splurge,

Read more »