With the 10-year treasury at 4.5%, retired and soon-to-be-retired investors are seeing rates they can sink their teeth into for longer—don’t let inertia keep you down. How high will they go? Not my concern. What I am concerned about is that you get paid during your golden years with some cold, hard cash from interest payments. Consider a mix of stocks and bonds. Run your finger along my efficient frontier and understand it’s not necessarily what you invest in but how you invest. In other words, are you diversified? How about your CDs that are maturing? Pay attention because … [Read more...]
“I Can’t Afford to Lose Any More Money,” They Say
As you know from here, here, and here, your investment success may hinge more on how you invest rather than what you invest in. My efficient frontier (EF) series gets to the heart of this. It's a tool for looking back at the risk/reward relationship between stocks and bonds. What it helps to illustrate is that there can be more risk in having all your eggs in one basket. Easy to understand. Hard to do. The key to the EF for you is less about understanding stocks and bonds and more about you understanding you. What is your risk tolerance? What can you handle? I can tell you from experience … [Read more...]
Just When You Think You’re Diversified
What happens when everyone is invested in the same stuff? When you look at the S&P 500 and compare it to, say, target maturity funds or a total stock market index, there’s a ton of overlap. Just when investors think they’re diversifying, a simple look under the hood shows most engines running on the same stuff. That’s not necessarily bad, but let’s not confuse it with diversification. What is a great disservice to the average investor is they read the names of their funds and feel like they are diversified. “Hey, it’s the S&P 500,” they think. “That should be good diversification.” … [Read more...]
Dick Young to Your Survival Guy: “Diversification Is Discipline”
One of the more common trends Your Survival Guy sees in investment portfolios is a lack of diversification. Through the years, investors add more money to the winners while the losers are shoved to the side like misfit toys. Over time, portfolios look less like a toy box and more like a mantle of six or seven trophy stocks. That’s dangerous. If you look at the S&P 500 today, it reminds me of that mantle or trophy case. It looks nice. Who doesn’t like a shiny trophy? But will the winning continue? Yesterday, in a conversation with my father-in-law Dick Young we talked about … [Read more...]
Risk and Reward: An Efficient Frontier
Originally posted July 26, 2018. The Efficient Frontier, created by Harry Markowitz in 1952, measures the efficient diversification of investments that delivers the highest level of return at the lowest possible risk. Investors must consider the trade-offs between risk and reward in their portfolios. You can see on the chart below an efficient frontier line representing risk vs. reward for a portfolio allocated between different proportions of stocks and bonds using data back to 1977. On the vertical axis is the return earned by the portfolios, and along the horizontal axis is a measure … [Read more...]
This is Why Vanguard is Too Big
If you want clear evidence of why Vanguard is too big, then look no further than the money flow into passive index funds. When investors are lulled to sleep by a bull market, they dream about things like early retirement, vacations, and second homes. What they tend to miss is that reversion to the mean is a fact of life. You can take my word for it and that of the father of index funds Jack Bogle. Index funds, like those built based on the S&P 500, weight the shares of a small number of the biggest companies heavier than those of small companies. That's the ugly truth behind the S&P … [Read more...]
Witness the Raw Power of Diversification
Diversification isn’t only a tool to minimize losses when assets fall in value, it has the power to actually increase your return while lowering risk. Here’s how I explained it in December of 2015 (with the chart and associated text updated to 2017): Calculating the Efficient Frontier You need to look at your asset deployment from the top down, focusing on diversification between stocks and bonds. My Efficient Frontier display shows you the power of diversification. Note the left-to-right uphill slanting curve that initiates with a position of 100% bonds and terminates with a position of … [Read more...]
Can You Double Your Money in a Year? Fail at this, and You May Need To
Can you double your money in a year? Not many people can. But if you lost 50% of the value of your portfolio, that’s exactly what you would need to do just to make it back to even. If the prospect of trying to double your money sounds unappealing, I suggest you try not to lose that much in the first place. On this topic, I wrote in November 1994: Unchanged Since the Twenties According to BBC television, the Classic Coke bottle, the VW Beetle and AGA Cooker are the three finest industrial design achievements of the 20th century. You know the Classic coke bottle, you know the VW Beetle, … [Read more...]
Is Your Portfolio Balanced Like a Harley?
With over 100,000 miles of Harley touring behind me, I can assure you of the value of a smooth ride. No one enjoys being jolted and jarred, not on the road or in securities markets. When markets become volatile, every investor is looking for smoother performance. In August 2013 I explained that the key to smooth performance, whether on the road or in markets is counterbalancing. I wrote: Managing a common stock portfolio takes— above all else—patience. Your goal should never be what to sell next; rather, it should be what stocks you can hold through thick and thin. It is true that portfolio … [Read more...]
The Butterfly Effect and Chaotic Markets
Securities markets endure any number of threats each day. Sometimes news that appears dire isn’t necessarily so. Other times, the market overlooks the little signals that portend a rout. After the 2005 revaluation of the yuan by China, I discussed how such seemingly small developments could create major change via the “butterfly effect.” I wrote that September: I’ve written over the years about Chaos Theory, a subject on which I have read extensively. Of the scads of neat books on Chaos Theory on my shelf, I would send you first to Chaos—Making a New Science by James Gleick (author of the … [Read more...]
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