Among the most important decisions investors make is their choice of location for assets within the various alternatives available for retirement (tax-advantaged) accounts. Allocating between a traditional IRA (a pretax, tax-deferred account) and a Roth IRA (a post-tax, tax-free account) can have a pronounced impact on retirement outcomes, given the $14 trillion in tax-advantaged retirement…
Socially responsible investing (SRI) aligns ethical and financial concerns for investors. SRI has gradually developed over time to include the consideration of firms’ environmental, social and governance (ESG) performance. Of note is that, while SRI has evolved, the original practice of negative screening for the stocks of companies involved in harmful or controversial activities (so-called…
Bond ladders are frequently criticized in the financial media and even among some professional advisors (who, I would point out, are often able to use only bond mutual funds or ETFs). Earlier this week, we corrected some common misperceptions regarding individually tailored laddered municipal bond portfolios. Today we’ll move on to the many advantages of…
A number of articles were written at the end of 2008 noting the fact that, for the prior 40-year period, stocks had not outperformed safer bonds. For the period 1969 through 2008, the S&P 500 Index returned 9%, and so did long-term (20-year) Treasury bonds. Results for large-cap growth and small-cap growth stocks were even…
Traditional retirement planning calls for gradually reducing an investor’s equity allocation and increasing the allocation to safe bonds. Perhaps the most well-known example of this concept is the adage that your stock allocation should be equal to 100 minus your age (or with now-longer life expectancies, 110 minus your age). The gradually declining equity (DE)…
Portfolio-based risk factors are identified through diversified, zero-cost, long/short portfolios that may link stock returns to systematic risk. There is a substantial amount of evidence in the academic literature that some portfolio-based risk factors explain well the cross section of stock returns. Using a size factor and value factor in addition to the market factor,…
It has been well-documented that profitability is positively correlated with stock returns. Firms with higher profits earn higher returns. The profitability factor has also been shown to eliminate most of the well-known anomalies that can represent problems for the Fama-French four-factor model (i.e., returns that cannot be explained by exposure to the factors of beta,…
I often hear criticisms from the financial media and some professional advisors about the use of bond ladders. Whenever the criticism comes from professional advisors, however, I’ve noticed it generally involves firms that use only bond mutual funds or ETFs instead of individual, tailored bond portfolios, whether in the form of a bond ladder or…
There’s extensive literature documenting that value stocks (the stocks of companies with low prices relative to a valuation metric, such as earnings, book value, cash flow or sales) possess a strong, persistent and pervasive tendency to outperform growth stocks. While there’s no debate about the existence of the value premium, there’s a major debate about…
Defined benefit (DB) pension funds promise retirement benefits dependent upon an employee’s earnings history, tenure of service and age. When a DB pension fund is underfunded (when asset values are lower than the value of their liabilities, or the promised pension benefits), conflicts of interest can arise. This conflict can occur because a reported funding…
As with all financial assets, real estate investment trust (REIT) valuations should equal the discounted present value of expected future cash flows. REIT prices thus reflect the growth potential of cash flow (rents, expenses) and/or the time variation in expected returns (interest rates and risk premium, which is the discount rate). Given currently low yields…
The investment policies of state and local government pension systems have shifted markedly in recent years toward alternative investment classes, such as private equity, real estate and venture capital. For example, as of January 2016, the California Public Employees’ Retirement System (or CalPERS) had almost 20% of its $276 billion portfolio invested in these asset…
It’s been well-documented that, in equity investing, assets have earned premiums because they are exposed to the risks of a certain factor. Given that the literature provides us with a veritable factor “zoo” (there are more than 300), for investors to consider adding exposure to a factor, it should meet the following criteria: Persistent: It…
Robert Novy-Marx’s 2012 paper, “The Other Side of Value: The Gross Profitability Premium,” not only provided investors with new insights into the cross section of stock returns, it helped explain Warren Buffett’s superior performance—he bought value companies with higher profitability metrics. Key Findings About Profitability Novy-Marx’s study, which covered the period 1962 through 2010, used…
The world of finance and asset pricing used to be fairly simple. At first, there was just the single-factor capital asset pricing model, with market risk (beta) as the sole factor to explain the differences in returns of diversified portfolios. Over time, the working model evolved into a still relatively simple four-factor model, adding value,…