IS “SMART BETA” truly smarter and better?
The world of smart beta, sometimes called factor investing, used to be fairly easy to grasp. In 1981, academic Rolf Banz noted that small-company stocks didn’t just outperform their larger brethren. Rather, they outperformed by more than could be explained by their extra risk, as reflected in greater share price volatility. Similarly, in 1992, finance professors Eugene Fama and Kenneth French documented the strong performance of bargain-priced value stocks—and noted that this couldn’t be explained by volatility,
YOU CAN TELL THE story of my generation in myriad ways—including through our evolution as investors. I entered the world of stock investing with the purchase of shares in Twentieth Century (now American Century) Select Fund. It was the summer of 1987 and I was 26 years old. By autumn, the stock market had crashed and the value of my shares along with it. It was the first of three major market declines that my generation would face.
I HAVE MADE SOME glaring investment mistakes over the years. For instance, in my 20s, I was too conservative. I opened an individual retirement account and regularly invested the maximum annual contribution in a mortgage-backed bond fund. I still think about how much further ahead I would have been, if I had invested more of the money in stocks.
In my 30s, I received a $5,000 performance award from my employer. I wanted to invest the money,
AS INVESTORS FLOCK to stocks in search of heady returns, this is a good time to think about risk. Remember, nobody has a clue how stocks will perform over the short-term, so it’s best to focus on things we can control—namely investment costs, taxes, risk and our savings rate.
Short-term risk is often assessed using beta and standard deviation. I just added a section on those two volatility measures to HumbleDollar’s money guide. While researching the new section,
AS A CHILD, I THOUGHT my father had a memory problem. He had a habit of repeating stories and sayings. It made me feel sad, until I figured out it was intentional. He didn’t believe in bells: School was never out.
“Make it a habit to keep and grow some of the money you make,” was one of Dad’s sayings. I was reminded of it recently, after reading that seven out of 10 Americans have less than $1,000 in their savings account—the sort of place you might turn if you have a financial emergency.
JEALOUSY IS A TERRIBLE thing—and often unjustified. Our apparently self-assured coworker may be racked by self-doubt. Our rich neighbor may be far less happy than we imagine. And those institutional investors, who can buy all kinds of exotic investments that we can only lust after, may be clocking returns that are notably unimpressive.
This last thought was driven home by Ben Carlson’s short, engaging new book, Organizational Alpha: How to Add Value in Institutional Asset Management.
FORGET YOUR political persuasions. Forget health care, terrorism, Roe vs. Wade, the environment, education, women’s rights and voting rights. Instead, focus solely on the economy and markets. Should a Trump presidency affect how you manage your money?
No doubt about it, there’s a temptation to act—and I’ll admit to three modest portfolio changes. In recent months, I’ve invested more in funds that own gold stocks, inflation-indexed Treasurys and foreign stocks, especially emerging markets. But none of these would count as a major portfolio change,
EARLY IN OUR ADULT life, we get involved with all kinds of dubious financial types. There are the actively managed funds that quickly lose their charm, the insurance salespeople who try to force their policies on us, the market strategists who take us to all the wrong places and the hot stocks that let us down none too gently.
By the time folks get to HumbleDollar, however, I figure they’ve finished playing the field.
FINANCIAL MARKETS have two primary functions: They can allow us to grow wealthy over time—and they can drive us completely batty along the way. As you mull that mixed blessing, consider six additional thoughts:
1. Spreading our investment bets widely is prudent and betting everything on one stock is foolish. But over the short term, the prudent strategy can lose us money, while behaving foolishly can earn us handsome gains. The lesson: We shouldn’t judge a long-term investment strategy by its short-term results.
WHEN DECIDING whether it’s worth taking an investment risk, your starting point should be the so-called risk-free rate. That’s the return you can earn by taking little or no risk. Got your eye on an investment that might perform better? You need to decide whether the potential extra return, relative to the risk-free rate, is worth the added danger involved.
When experts talk about the risk-free rate, they usually point to some sort of Treasury security.
REAL ESTATE seminars. Initial public stock offerings. International lotteries. Hedge funds. Franchising opportunities. Penny stocks. Multi-level marketing companies.
This is the American lexicon of easy wealth—and yet the only people who seem to end up rich are those who peddle this nonsense. It’s the story of the California gold rush: Riches accrued not to the miners, but to those who sold them shovels, picks, pans and other supplies.
To be sure, hollow promises and empty hype are rife in other areas of our life.
STOCK INVESTORS this year are fretting over Brexit, tighter monetary policy and lackluster economic growth. But every year, there’s another compelling reason to bail out of the stock market.
Think about the past half-century: We’ve had wars, political crises, financial crises, double-digit inflation, a double-dip recession, terrorist attacks and more. And yet, if you had stashed $10,000 in a global stock portfolio at year-end 1969 and sat tight through all the subsequent turmoil, you would have more than $450,000 today.
IF THERE’S MONEY you’ll need to spend in the next 12 months, you don’t want to put it at risk, so savings accounts, money market funds and similar cash investments are the only prudent choice. But as your time horizon lengthens, holding cash becomes less and less appealing. The reason: Your money’s purchasing power is pretty much guaranteed to shrink, once inflation and taxes take their toll.
Got cash in your long-term investment portfolio?
WITH STOCKS IN turmoil, investors are once again fretting over risk. But what aspect of risk should we worry about? Whenever the notion arises, it’s worth contemplating three questions.
What are the odds of success or failure? Over the past 50 years, the S&P 500 (with dividends reinvested) has lost money in 11 calendar years, equal to once every four or five years. With odds like that, an occasional losing year should be no great surprise.
STOCKS GET ALL THE attention, which seems a tad unfair. The value of bonds worldwide is some 35% greater than the value of all stocks—plus many other parts of our financial life look suspiciously like bonds. How so? Think about all the streams of steady income that folks collect.
We pull in interest from bank products like savings accounts and certificates of deposit. We collect Social Security retirement benefits. If we’re lucky, we are the recipients of a traditional employer pension plan.