June 2011
1 post
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September 2008
5 posts
How to protect against inflation:
1. Don’t stick cash under a mattress.
2. Avoid long-term bonds (which get killed by inflation).
3. Gold is a great inflation hedge, but is a terrible long-term investment. Other commodities are similar.
4. TIPS (e.g. VISPX) make excellent inflation hedges AND long-term investments.
5. Short-term investments, like money market funds, short-term bonds,...
The sleep test: lessons from a bear market
Unless you’ve completely avoided the news for the last few weeks, you know the global economy is in trouble. No one knows how bad it will be, when the bottom will hit, or how long it will take to recover. But plenty of “experts” think they know the answer.
So what is an investor to do during this time? It’s pretty obvious what an investor shouldn’t do - sell in a...
HSA as a multi-purpose investment account
At my company (Tumblon), our health insurance plans are high-deductable + HSA. This is a great option for us, though it isn’t perfect for everyone. If you find yourself with a HSA, how should you think about it?
1. Minimally, it is a savings account for near-term medical expenses with some tax advantages. You deposit some of your income, pre-tax; and you can write checks or use a debit card...
International asset allocation: how much is just...
I’m a big believer in international diversification. The days when international stocks were considered “risky” should be long over. An investor who only invests in his or her home country is taking a much greater risk, as Japanese investors realized in 1989.
The case of Japan
The Japanese stock market is still down from its peak after 19 years. So what has happened to various...
August 2008
6 posts
Why is volatility risky?
A bit of theory for you. Modern Portfolio Theory states that markets are efficient, and that returns can be explained by risks. The most common definition of risk is volatility (or beta). [1]
I’ve never been comfortable with the idea of volatility, and only volatility, as risk. It just doesn’t sit right with me. It seems that volatility is only risky over the short term - if something...
Fama and French on small/value premiums and risk
What is the nature of the small (SmB) and value (HmL) premiums proposed by Eugene Fama and Kenneth French? Does this mean that markets aren’t efficient, or is there a Small and a Value risk (“distress risk”) factored in to these premiums that leaves markets efficient? In a 2007 interview with Journal of Indexes, Fama and French discuss this question. And disagree.
Journal...
3 tags
The ideal portfolio
Investors of all stripes spend a lot of time worrying about the ideal portfolio. Financial magazines covers (“7 Best Mutual Funds”, “8 Stocks to Buy Now”) beat out fitness and glamour magazines when it comes to airbrushed deception. Others look for the hot stock tip that will pull a Cisco. (The unprecidented growth, not the unprecidented decline.) Still others worry about the right mix of assets:...
Should I tilt towards small/value stocks?
Fama and French found that in the past, small-cap stocks and value stocks have performed marginally better than the rest of the stock market, when controlling for risk.[1] This is their Nobel-winning three-factor model to describe stock market performance.
We know that there was a small/value premium in the past. What we don’t know is whether or not it will continue, especially now that...
Take your risk with stocks, not bonds
Some investors determine an asset allocation, like 70% stocks/30% bonds, and then try to maximize to maximize returns from each asset class. You can do this on the bond side by looking for higher-returning bonds. Corporate bonds or government-backed mortgage bonds, for instance, tend to return a more better than treasury bonds, the most boring (and safest) kid at the dance.
This is a bad idea.
...
Investment made simple
I’ve been interested in investing for at least 10 years, since I first had something to invest. During that time, I’ve cycled through several investment strategies, from investing heavily in the tech sector in 1999 (great idea!) to holding 25 or so stocks, roughly diversified by sector, to index funds.
Sometimes, investing seems hard. What strategy should you pick? How can you...