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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....

The American Funds Advantage?

I was forwarded an article that American Funds published touting the superiority of its funds relative to index strategies. The piece contains statements like this: “Some investment managers, American Funds among them, have distinguished themselves with a proven track record of consistently outpacing broad market returns.” And other fabulous statements like this: “Obviously, some are playing at a higher level, and using the averag....

Is DFA’s New Research Flawed?

Folks have been lighting up my inbox with questions and comments about an Advisor Perspectives piece by Michael Edesess (link included for the three of you who may not have seen the piece … you three may also not be aware that Miley Cyrus appeared on the MTV Video Music Awards … link not included).

The article is critical of DFA’s recent work on profitability. ....

Can the Size and Value Premiums Be Captured?
The debate about whether the size and value premiums have existed on paper was settled many years ago. The long-term historical data clearly shows robust size and value premiums. The average annual U.S. size and value premiums have been 3.6 and 4.8 percent, respectively, from 1927-2012. What has been more hotly debated, however, is whether these premiums could actually be captured in the real world net of t....
Why Rate Increases Are Almost Certainly Good News for Investors
Interest rates have been so low for so long that rate increases in 2013 have no doubt surprised some investors. Per the Treasury's site, the five-year Treasury rate went from 0.76 percent at the start of the year to 1.63 percent through August 19, and the 10-year Treasury rate increased from 1.86 percent to 2.88 percent over this period. These rate increases have prod....
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....
Quantifying the Behavior Gap
The behavior gap is the difference between the return investors actually earn and the return of the investments themselves. If investors could capably time financial markets, you’d see that investor returns were higher than the investment returns, indicating that investors bought low and sold high.
 
It turns out that most research finds the opposite result. Investors tend to underperform the returns of the underlying investments, which means investors i....
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. ....
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