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Smart Beta

Fads and fashions have always been part of the financial markets. Around the turn of the century Internet-related stocks were regarded as reliable instruments for growing and preserving wealth. During the early 2000s, real estate was the instrument of choice for savvy investors. Today “Smart Beta” is the mantra of legions of securities salesmen who claim that broad-based low-cost index funds are sub-optimal and that better results can be obtained by biasing portfolios toward a number of characteristics that promise higher returns. There is no universally accepted definition of “Smart Beta.” What most people using the term have in mind is that it may be possible to gain excess (greater than market) returns using a variety of relatively passive investment […]

Why Should I have Bonds in My Portfolio?

We have received quite a few inquiries of late related to bonds being a part of our client portfolios. Some clients note that bonds currently have a low rate of return and question their use. This post attempts to present the logic behind their continued inclusion. Historically, bonds have been an excellent diversifier, providing considerable portfolio stability. Even in recent years their returns have been negatively correlated with equity returns. Investors who had some bonds in their portfolios during the 2007-2008 financial crisis were at least partially protected by rising bond prices as governments tried to counteract recessionary balances by aggressively lowering interest rates. “History is unlikely to record a change in the important role that fixed income plays over […]

Sacrifice of the Bondholders

Investors throughout the world have been flocking to so-called “safe havens.“ The 10-year U.S. Treasury Bond has recently been trading at a yield between 1.5% and 2%. Short-term U.S. Treasury interest rates are near zero. Even if inflation stays at a 2% rate over the next decade[1], U.S. bonds will be a sure loser, providing negative real (after inflation) rates of return. If interest rates rise to more normal levels, investors will suffer substantial capital losses. Interest rates are also low in the center of Europe as well as in Japan. There are no “safe” economies where savers are able to earn positive real returns on government bonds. Most of the developed countries of the world are burdened with excessive […]

Why You Should Exclude REITs From Taxable Accounts

A few weeks ago, we introduced a new investment mix that excluded real estate from taxable accounts. Some readers asked why I recommended excluding real estate, when in A Random Walk Down Wall Street, I supported the inclusion of REITs in investment portfolios.[1] I encourage people to follow four basic rules of investing: diversify your portfolio, limit fees, rebalance periodically and minimize taxes. When I tell investors to “diversify your portfolio” in my book I mean: Use many asset classes, preferably those that are relatively uncorrelated with each other. When I tell investors to “minimize taxes” in my book I mean: Use index funds to represent asset classes (index funds have very little turnover, which means they have low short-term capital […]

Burt Malkiel On Wealthfront’s Promise

Today I am excited to announce the first significant improvements to Wealthfront’s investment service since I joined the company as chief investment officer. These improvements help minimize taxes and increase returns without exposing clients to more risk. I’ll detail the changes below, but I also wanted to tell you why I joined the company and what my first three months have been like. My mission, through my books, op-ed pieces and speeches, has been to help make it easier for average investors – the little guys — to win in the markets. I was a member of the board of directors of Vanguard, the leader in low-cost index investing, for 28 years. I still serve on Vanguard’s international board, where […]

Investors’ Most Serious Mistake

Without doubt, the most serious mistake individual investors make is trying to time the market. Neither individual nor professional investors are able to make consistently accurate calls on the direction of market prices. In fact, I have never known anyone who knows anyone who has consistently made accurate directional bets on either equity or bond prices. When individual investors try to time the market they are much more likely to buy and sell at the worst times. Emotionally, investors suffer great pain when pessimism is rampant and stock prices fall.  They are more likely to buy when everyone is optimistic and prices are near or at their peak. Behavioral considerations cause investors all too often to shoot themselves in the […]