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Perspective on High-Frequency Trading

I have received a number of questions since “60 Minutes” ran a piece on high-frequency trading (HFT) on March 30 (lest we forget, this is the same “60 Minutes” that ran a piece in 2010 that predicted the municipal market would implode in 2011, and we all know how that turned out). I’ll summarize what I think we know about HFT at this point, a viewpoint that runs counter to the perspective offered on “60 Minutes.”....

Smart Beta Can Be Smart But Is Not New

I held off writing about smart beta strategies as long as I could. The world, after all, is awash in such pieces. I couldn’t ignore it any longer, though, because virtually every piece I’ve read that’s critical of smart beta misses one fundamental point: The term “smart beta” may be new (and has certainly been effective from a marketing perspective) but the underlying strategies themselves are not.

Most of the debate has centered on the non-market-capitalization weighting schemes of smart be....

Do Corporate Bonds Add Value in Portfolios?

I frequently get asked about the merits of corporate bonds, both investment-grade (IG) and high-yield (HY), relative to government and municipal bonds. I don’t believe the risk-return profile for long-term investors (particularly taxable individual investors) is improved by owning IG or HY corporate bonds compared with simply owning a diversified portfolio of stocks and high-quality government bonds.

The key here is to understand that corporate bonds are essentially nothing more than a ....

How to Make Your Own Investment-Grade Corporate Bond Fund
Last week, I outlined how to construct a portfolio of stocks and high-quality bonds to replicate the returns of high-yield corporate bonds. This week I’m tackling investment-grade corporate bonds.

The same basic logic as last week holds: There’s not much unique about investment-grade corporate bonds that you can’t achieve with a diversified portfolio of stocks and high-quality bonds. The only difference is you don’t need as much in stocks to replicate the returns of ....
How to Make Your Own High-Yield Corporate Bond Fund
With interest rates at low levels for a number of years now, many investors have moved some portion of their high-quality bond portfolios to higher-yielding investments like high-yield corporate bonds. I’ve long argued that there’s not much these strategies add relative to a traditional stock fund and high-quality bond strategy. Further, the traditional stock fund and high-quality bond allocation strategy tends to have lower costs and be more tax efficient. This is a bit of a qualitative argument though, and I wanted....
How “Moneyball” and Investing Are Related

Michael Lewis authored “Moneyball” back in 2003, and it seems like it immediately captured the attention of baseball fans and insiders everywhere. Since that time, its concepts have been applied to numerous areas including basketball, which is in the midst of a seismic shift in how basketball is evaluated and what skills and actions contribute th....

What More Can We Expect from Stocks?
A reader asked if I could expand on my post from two weeks back on expected stock returns. Specifically, he asked if I could focus on how tilts toward certain types of stocks could be expected to provide (or subtract) additional expected return beyond what we expect the overall market to do.
 
In that post, I noted that a reasonable expectation for the long-term real return of U.S. stocks was about 4 percent. ....
Is High Inflation All But Guaranteed?
Many pundits (and a good number of individual investors) have been predicting high inflation as a result of the Federal Reserve’s monetary policy. Over the four years ending 2012, inflation has averaged just 2.2 percent per year, and currently the market expects inflation over the next five years to be just 2.1 percent per year. Clearly, realized inflation has been low and the market expects inflation to be low in the future, which can hardly be interpreted as signs that high inflation is a foregone conclusion. This ....
What Should We Expect from Stocks?
The past year or so has provided a vibrant debate about the long-term returns stock market investors should expect. Part of this discussion has been driven by the long-term return assumptions used by public pension plans in the U.S. It’s also been driven by the great stock market performance of the past few years and how that should impact long-term expected returns. Further, some investors seem to be worri....
Investor, Behave Thyself!
Numerous studies have documented the counterproductive tendencies of individual investors. These include paying excessive mutual fund fees, holding tax-inefficient portfolios, having improper asset allocations, chasing returns and poorly diversifying portfolios. My colleague Carl Richards has aptly termed this collection of behaviors "The Behavior Gap," since they can greatly reduce the returns that investors could have earned. I firmly believe corre....
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