Search Results for: swedroe

Power Link Dump: Gas Prices, Commodities, Asset Class Forecasts, & More

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Here are some neat links from readers and interweb wanderings. I want to expand on them later as well.

Petrofix: Hedge and cap gas prices
A website that will let you control your cost of gasoline in the near future – for a price. If gas prices rise, they pay you the difference. If they fall, you are out the hedge price. The risk? Well, first I haven’t checked out the prices. Also you pay now, but who knows if the company will be around to fulfill their promises in the future. I’d rather hedge against higher gas by buying an oil ETF or use real options with better liquidity. (Disclosure: I did buy some OIL in my fun portfolio at end of 2008.)

The Great Commodities Debate with Larry Swedroe and Rick Ferri
A long multi-part series on HardAssetsInvestor about the role of commodities within a portfolio. Should you add them to your asset allocation? Swedroe and Ferri flesh out their arguments in a moderated battle, and I still don’t know who wins. However, I am glad I didn’t buy commodities the last two years or so when they were in vogue.

Jeremy Grantham / GMO 7-Year Asset Class Forecasts
Each month, Jeremy Grantham and GMO publishes on the web its predictions of the future return for various asset styles over the next seven years. You must register for free on his site to download them. Grantham has gotten increased publicity recently due to how accurate his previous predictions have been. You can read his 2009 Q1 newsletter “The Last Hurrah and Seven Lean Years” without registration. In the end, he’s just another guy with an opinion, but at least he is forthright about it.

Breakdown: The Credit CARD Act of 2009
Cap of StopBuyingCrap has a nice concise list of the changes to credit card laws coming in February 2010, in case you didn’t feel like reading the entire thing. It will be interesting to see how this shakes out. I think that rumors of annual fees or eliminating grace periods for people who don’t carry balances are just scare tactics by credit card lobbyists. They’ll continue to make money from merchant transaction fees, as always.

Google PowerMeter
An online tool that monitors your home’s power usage in real time. Currently only available in very limited areas where people have the right “smart meters” already installed. Sounds even cooler than my Kill-a-Watt energy meter.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Should I Buy Gold Now To Hedge Against Future Inflation?

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

Due to the current market conditions, many investors are wondering if investments in gold should be added to their portfolios to hedge against future inflation risks. In the video below (direct link), author Larry Swedroe discusses why he thinks gold is not an appropriate hedge against inflation, as well as some alternative investments.

The debate about gold will probably continue on for eternity, but I tend to lean towards his analysis because gold is too volatile for my tastes. I do like the idea of keeping some physical gold bullion as a hedge against economic collapse, but not as ETFs taking up a huge chunk of my portfolio. I would rather have something that would fit into traditional asset allocations plans, providing both stability and a good (but not perfect) hedge against inflation. So let’s explore the recommended alternatives:

In tax-advantaged accounts like IRAs, Swedroe instead recommends Treasury Inflation-Protected Securities (TIPS) which adjust with the Consumer Price Index (CPI). For this, I have bought shares of the Vanguard Inflation-Protected Securities Fund (VIPSX). I could buy individual funds directly from the government at no cost, but for now I like the simplicity. I even increased my allocation recently.

In taxable accounts, he recommends highly-rated municipal bonds with a relatively short average maturity of 3-5 years. For this, I am looking to buy shares of the Vanguard Limited-Term Tax-Exempt Fund (VMLTX). It is currently about 83% AA/AAA rated municipal bonds, and keeps a maturity of between 2 and 6 years (currently 2.8). The yield is currently a tax-exempt 2.12%, and it has a low expense ratio of 0.20%. If inflation does rise, the yield should rise to keep up.

I’m actually surprised he didn’t bring up commodities funds here as well, which I’ve seen him recommend as insurance against unexpected severe inflation.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

More Lessons From The 2008 Financial Markets

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Larry Swedroe, principal of an asset management company and investment book author, also posted his Lessons That 2008 Taught Us In 2008 on SeekingAlpha. It was a nice compilation that covered a variety of topics from active management to Madoff to your “Plan B”.

Here are some excerpts of a few lessons involving investing and your portfolio:

Don’t forget that companies that managed money themselves were often the victims this year!

Lesson 1: Neither investment banks nor other active managers (including hedge funds) can protect investors from bear markets. […]

If their money managers could protect you, why did firms like Lehman Brothers and Bear Stearns go belly up and Merrill Lynch have to be rescued by Bank of America? It is in the best interest of these firms to manage their risks well. Yet, they have clearly demonstrated that they cannot. As evidence of their lack of ability to forecast events consider that in 2008 Lehman spent $751 million buying back its own stock at an average price of $49.60 and Merrill Lynch spent $5.27 billion buying back its stock in 2007 at an average price of $84.88.(2)

Lots of other historically renowned and recommended active managers had a bad year as well.

Lesson 6: One of the more persistent myths is that active managers can protect you from bear markets. In 2008, the hardest hit sector was financial stocks. Financials comprise a significant portion of the asset class of value stocks. As benchmarks for the active managers we can use the Vanguard Small Value Index Fund that lost 32.1 percent and the Vanguard (Large) Value Fund that lost 36.0 percent.

The following is a list of the returns of some of the actively managed mutual funds with superstar value managers, four of whom were named by Morningstar in June 2008 as their recommendations to run value superstars, their recommendations (those are noted with *): Legg Mason Value Trust lost 55.1 percent; *Dodge & Cox lost 44.3 percent; Dreman Concentrated Value lost 49.5 percent; *Weitz Value lost 40.7 percent; *Schneider Value lost 55.0 percent; and *Columbia Value and Restructuring lost 47.6 percent.

Of course, some actively managed value funds beat those benchmarks. However, how would you have known ahead of time which ones they would be?

Some did guess this would happen. But was it luck or skill?

Lesson 9: There is a great likelihood that each time there is a crisis, some guru will have forecasted it with amazing accuracy. But that ignores two important facts. The first problem is that even blind squirrels occasionally will find acorns. In other words, there are tens of thousands of gurus making forecasts all the time.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Why Sports Betting and Stock Picking Are Similar

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

So how did everyone do in their March Madness pool? In the book Wise Investing Made Simple by Larry Swedroe, there is a great explanation of why stock-picking is very difficult which incorporates sports betting. I’ll try to briefly paraphrase the idea here.

Sports Betting Basics
Let’s stick with college basketball. Earlier this season, Duke played Cornell. If you were simply betting on who was to win beforehand, most people familiar with basketball would pick Duke. Duke has won national championships, has a top-ranked recruiting class, has a famous coach, has better record against stronger opponents.

But, nobody in Vegas or any sports book will take that bet. Instead, you have an adjustment called the point spread. In this case, the spread was 30 points. Now you have to either bet that Duke will beat Cornell by more or less than 30 points. This is much harder.

How was this 30 point spread determined? By the collective opinion of the other gamblers! It is a common misconception that you are betting against the casino. Nope, the point spread constantly moves so that half of all bettors are on either side of the spread. By the time the game is over, the casino doesn’t care who wins. The casinos simply take the bets, pay off the winners, and walk away with their commission. (You have to bet $11 to win $10.) Great deal, huh?

Because of this point spread and commissions, it is very difficult to make consistent money betting on sports. How many professional sports bettors do you know of? A historical study of NBA games showed that the average difference between point spreads and the actual differences in score was less than 1/4 of one point! The collective opinion of gamblers turns out to be very good.

In other words, with the handicap of the point spread, you could bet on Cornell every year and still come out the same as betting on Duke each year. (This year, Duke only won by 13.) When this is true, it is called an efficient market.

Picking Stocks
When people say “buy a company with a strong brand, a wide moat, and good growth prospects”, it is like saying one should just bet on Duke to win. It’s simply not that easy. There is a handicap, but instead of a point spread it is the price of the stock.

A good company will be priced at a premium. For example, people may love eBay, Apple, or Google and think it’s the best business company ever. But at the price you have to pay (the market price), you’re not betting that eBay will be successful, you’re betting if eBay will be more successful than the collective market participants think it will be based on all the information currently available. Again, the data shows that beating this collective prediction is very unlikely.

The argument over whether you can get better risk-adjusted returns from picking individual stocks will probably go on forever. Is it skill? Is it luck? Either way, it is important to know that very few people pull it off over the long term, and I think this analogy illustrates one major reason why. Next time you feel like stock picking, try beating the spread on 10 different sports events first. 🙂

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Weekend Links: Snowflakes And More

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Here are some more links from my weekend reading:

Nina of Queercents found out the hard way that Home Equity Lines of Credit (HELOCs) can be revoked! It was done because her property value had dropped significantly, which makes sense. But not only was it through no adverse action of her own, she had to pay closing costs and various other fees upfront. A classic case of heads I win, tails you lose.

NCN of No Credit Needed has been blogging about living without credit and getting out of debt for two years now. You can read virtually all he knows about debt reduction here.

Heard of the debt snowball? Jaimie of PaidTwice explains the related concept of debt snowflakes. Via Get Rich Slowly.

Pinyo of Moolanomy shares an interview with author Larry Swedroe. I’ve actually got two of his books sitting on my desk right now – the newer Wise Investing Made Simple and the classic The Only Guide to a Winning Investment Strategy You’ll Ever Need. Too bad all this house-buying stuff is getting in the way of me reading them!

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

How Often Should I Rebalance My Investment Portfolio? A Brief Article Review

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I feel like my last post about rebalancing wasn’t as thorough as I’d have liked it to be, so here I go again, adding some quick definitions and including a review of several research articles about the subject.

What is Rebalancing?
Let say you examine your risk tolerance and decide to invest in a mixture of 70% stocks and 30% bonds. As the years go by, your portfolio will drift one way or another. You may drop down to 60% stocks or rise up to 90% stocks. The act of rebalancing involves selling or buying shares in order to return to your initial stock/bond ratio of 70%/30%.

Why Rebalance?
Rebalancing is a way to maintain the risk/reward ratio that you have chosen for your investments. In the example above, doing nothing may leave you with a 90% stock/10% bond portfolio, which is much more aggressive than your initial 70%/30% stock/bond mix.

In addition, rebalancing also forces you to buy temporarily under-performing assets and sell over-performing assets (buy low, sell high). This is the exact opposite behavior of what is shown by many investors, which is to buy in when something is hot and over-performing, only to sell when the same investment becomes out of style (buy high, sell low).

However, in taxable accounts, rebalancing will create capital gains/losses and therefore tax consequences. In some brokerage accounts, rebalancing will incur commission costs or trading fees. This is why, if possible, it is a good idea to redirect any new investment deposits in order to try and maintain your target ratios.

How Often Should I Rebalance My Portfolio?
Some people rebalance on a certain time-based schedule – for example, once every 6-months, every year, or every 2 years. Others wait until certain asset classes shift a certain amount away from their desired targets before taking any action. A good source of research articles about which method is optimal can be found at the AltruistFA Reading Room. I’ve been reading through them the past few days, and I’ll try to provide a very general overview of the articles here.

So what is best? You may be surprised by the fact that not only is there no clear agreement on the answer to this question, but many of the articles actually contradict each other! For instance, compare this Journal of Investing article:

Over this period, regular monthly rebalancing returns dominated less active approaches. Should one infer that daily rebalancing is better still? Our data cannot say, but it seems plausible.

with this excerpt from an Efficient Frontier article:

So, what can we conclude from all this? Monthly rebalancing is too frequent. There are small rewards to increasing one’s rebalancing frequency from quarterly up to several years, but this comes at the price of increased portfolio risk.

Eh? I believe that this is because their results vary significantly with the time period chosen and asset classes being used in their back-tested scenarios.

Then there is this paper from Financial Planning magazine, which used the 25 year period from Oct. 1977-Sept. 2002 and a 60% Stock (S&P 500 Index) and 40% Bond (Lehman Bros. Gov’t Index) as the starting/target allocation. Here are the results for various rebalancing frequencies:

altext

The various rebalancing periods showed minimal performance differences, although annual rebalancing held a slight return margin and a higher risk margin.

Because the risk-adjusted performance differences among the portfolios were small, the answer to the question of when to rebalance–monthly, quarterly, semi-annually, or annually–depends mainly on the costs to the investor of rebalancing.

Efficient Frontier’s Bernstein also agreed in the this last respect, stating “The returns differences among various rebalancing strategies are quite small in the long run.”

In the “wait for a significant shift before taking action” camp is author Larry Swedroe, who I think also presents a very reasonable solution. From a WSJ article:

With major holdings like U.S. stocks, foreign stocks and high-quality U.S. bonds, consider rebalancing whenever your fund holdings get five percentage points above or below your targets, suggests Larry Swedroe, research director at Buckingham Asset Management in St. Louis. For instance, if you have 40% earmarked for bonds, you would rebalance if your bonds got above 45% or fell below 35%.

Meanwhile, for smaller positions in sectors like emerging markets and real-estate investment trusts, Mr. Swedroe recommends a 25% trigger. So if you have 5% targeted for emerging-market stocks, you’d rebalance if emerging markets balloon above 6.25% or fall below 3.75%. “You definitely want to be rebalancing, but you don’t want to be doing it too often,” Mr. Swedroe says. “You want to let stocks go up a bit before you sell, but not so much that you lose control of risk.”

Summary
Since it seems that there is no concrete right answer, I think the most important thing is to just make sure you set up some way to rebalance that does not involve any emotions or market timing. Don’t worry about the details, but don’t let your portfolio run off on its own either. I think the subtitle of one of the articles above sums it up quite well… ‘Tis Better To Have Rebalanced Regularly Than Not At All.

I have personally chosen to rebalance annually. This method keeps it simple while still controlling risk and offering potential extra return. If I recall correctly, it is also recommended in Ferri’s book All About Asset Allocation (review).

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

June 2007 Investment Portfolio Snapshot: Paralysis By Analysis, Call For Suggestions

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I haven’t posted my investment portfolio since April, mainly because it hasn’t really changed much. But here’s another snapshot:

6/07 Portfolio Breakdown
 
Retirement Portfolio
Fund $ %
FSTMX – Fidelity Total Stock Market Index Fund $15,132 19%
VIVAX – Vanguard [Large-Cap] Value Index $14,567 18%
VISVX – V. Small-Cap Value Index $14,251 18%
VGSIX – V. REIT Index $8,163 10%
VTRIX – V. International Value $8,686 11%
VEIEX – V. Emerging Markets Stock Index $8,929 11%
VFICX – V. Int-Term Investment-Grade Bond $7,616 10%
BRSIX – Bridgeway Ultra-Small Market $2,126 3%
Cash none
Total $79,470
 
Fund Transactions Since Last Update
Bought $1,000 of FSTMX on 6/26/07 (23.759 shares)

Thoughts
Another couple of months have gone by, and my desire to re-define my asset allocation remains unfulfilled. All I did was buy some more of a Total US Market fund (FSTMX) through my self-employed 401(k). You’d think someone who writes about money on a daily basis would be on top of such things!

But really, I think I might actually be spending too much time on this. As Jack Bogle has stated, “The greatest enemy of a good plan is the dream of a perfect plan.” There is no perfect asset allocation, and I know that. I keep telling myself, I’m not looking for the perfect plan, just a better one which has been well-reasoned out, and one which I should have little reason to tinker with for a long time.

To achieve such a better plan, I have been re-reading each of my favorite investing books on top of many new ones (including All About Index Funds by Ferri, Unconventional Success by Swensen, Only Guide to a Winning Bond Strategy You’ll Ever Need by Swedroe), looking at their research, comparing their model portfolios, and trying to balance all the advice given. But after all these months, my slow deliberation has really just turned into what academics call “paralysis by analysis” and have been just been putting off making a decision for weeks. I do have some overall changes planned, including:

  • Increasing my allocation to international assets,
  • Decreasing my value tilt, and
  • Increasing my bond allocation.

I want to avoid trying to time the market, or chasing recent performance. But I also don’t want to base my decisions on simply trying to avoid the impression of trying to time the market. Although I’m always open to suggestions, I feel I need to some fresh input. Got an asset allocation suggestion? Ideas on a better value/size/country tilt? Another book to read? Throw it at me.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.