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Arbitrage Capital Increases Market Efficiency

  • August 15th, 2016
  • ETF

The hypothesis of an efficient market is based on the concept that informed, rational traders would arbitrage away any temporary deviations from “correct” prices. Thus, price efficiency depends upon the actions of arbitrageurs and the availability of arbitrage capital. When arbitrage capital is plentiful, anomalies should be quickly eliminated. However, if capital is scarce or… Read More

Investors Like Lotteries

  • August 15th, 2016
  • ETF

There’s substantial evidence from the field of behavioral finance that individual investors have a strong preference for investments that exhibit the same characteristics as lottery tickets. Two of these characteristics are high kurtosis (or fat tails) and positive skewness, meaning values to the right of (or more than) the mean are fewer but farther from… Read More

How to Make the Most of Working with a Financial Advisor

  • August 15th, 2016
  • BAM Author

As someone who has long made a living as a financial advisor, I have an inherent bias toward retaining one. I even have one myself, because I believe personal finance is more personal than it is finance. However, paradoxically, I fear that the vast majority of those who retain the services of a financial advisor… Read More

The Costs of Socially Responsible Investing

  • August 15th, 2016
  • BAM Author

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… Read More

Differing Definitions Of Quality

  • August 15th, 2016
  • ETF

The 1997 publication of Mark Carhart’s paper, “On Persistence in Mutual Fund Performance,” led to the four-factor model (which added momentum to market beta, size and value) becoming the workhorse model in finance. The next major contribution came from Robert Novy-Marx. His 2012 paper, “The Other Side of Value: The Gross Profitability Premium,” provided investors… Read More

Low Vol Advantage Not What You’d Expect

  • August 15th, 2016
  • ETF

One of the problems for the first formal asset pricing model developed by financial economists, the Capital Asset Pricing Model (CAPM), was that it predicted a positive relationship between risk and return. However, empirical studies have found the actual relationship to be flat, or even negative. Over the last 50 years, the most “defensive” stocks… Read More

Choosing Between Roth & Traditional IRAs

  • August 15th, 2016
  • ETF

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… Read More

Do You Choose a Declining or Rising Equity Strategy in Retirement?

  • August 8th, 2016
  • BAM Author

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)… Read More

Mispricing Drives the Value Premium

  • August 1st, 2016
  • BAM Author

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… Read More

Is Your Attitude Toward Work Killing Your Retirement Dreams?

  • August 1st, 2016
  • BAM Author

Do you have a generally positive or negative impression of the word “retirement”? I ask because it dovetails nicely with a series of questions (inspired by Rick Kahler) that I use to begin most speaking engagements. These questions are designed to incite self-awareness, offering us clues about how our life experiences have shaped the (often unarticulated… Read More

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