Beware Alternative Investments
The sophisticated asset-pricing models we have today allow us to determine the underlying sources of returns to investments. Specifically, they permit us to identify the factors to which an investment has exposure. However, a problem arises when employing current asset-pricing...
The Surprising Lessons Of QE
On Oct. 29, the Federal Reserve announced the official end to its bond-buying program, otherwise known as quantitative easing (QE). Given all the debate about the efficacy of the Fed’s policy decisions, and the stomach acid created by the many...
Don’t Sell In May; Don’t Go Away
One of the more persistent investment myths holds that a winning strategy is to sell stocks in May and wait to buy back into the market until November. While it is true that stocks have provided greater returns from November...
Understanding Muni Bond Spreads
The municipal bond market has almost $4 trillion in total debt outstanding. That compares with about $18 trillion in outstanding U.S. Treasury debt. Besides market size, municipal bonds differ from Treasurys in that they carry credit risk, are less liquid...
Beware Stars Of Investment Balls
Let’s define “popular” as being liked or admired by the general public. One might reasonably think that popularity is a good thing, right? But when it comes to investing, research shows popularity often comes with lower returns. This correlation can...
Past Returns No Sign Of Future
Earlier this week, we discussed some of the academic literature surrounding historical versus current valuations as a metric for forecasting future returns. We learned that because there’s so much variation over time in the equity risk premium, there isn’t any...
Assessing Expected Returns
At a recent meeting with a nonprofit organization, my firm was asked to explain why we don’t consider historical stock returns the best estimator of future returns. They wanted to understand why we instead rely on our own forecasts. Their...
The Volatility Of Premiums
The stock premium, the annual average return of stocks minus the annual average return of one-month Treasury bills, has historically been high. This fact has, understandably, attracted investors to the stock market. For the period 1927-2013, the stock premium averaged...
Using Factors To Weather Storms
Today we’ll take a look at how the size and value premiums performed in 12 recessions, identified as such by the National Bureau of Economic Research, occurring in the post-World War II era. During that period, the average length of...
Problems With Technical Analysis
There is a wide body of evidence demonstrating the existence of momentum not only in stocks, but across asset classes. There’s also evidence that moving-average indicators provide higher risk-adjusted stock returns in recessions. On the other hand, while major data...
