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Your financial plan is solid, you’ve even set aside a rainy day fund. Now what? How do you invest well? Get a better understanding of investing with ETFs, asset allocation, rebalancing, and tax-optimization strategies.



How Much Should We Invest in Emerging Markets?

One of the most enduring and best-documented behavioral biases in investing is called “The Home Country Bias.” Despite the availability of well-regarded and highly profitable corporations located throughout the world, investors tend to limit their investments to those companies domiciled in their own country. At one time, a survey of institutional investors in France found that 97% of their equity investments consisted of French companies despite the fact that France represented only 3% of the world’s total equity capitalization. Such a bias is found all over the world. British investors prefer British companies, Japanese investors prefer Japanese companies, and U.S. investors prefer companies domiciled in the United States. Despite the substantial risk-reducing benefits of international diversification, investors all over the […]

Stay the Course, Even While You’re Down

When it comes to investing, doing the right thing is usually counter-intuitive. A prime example we’ve written about before is how investing in down-markets can actually prove advantageous. This is because down markets give investors an opportunity to purchase more than they would be able to afford in an up market (See Invest Despite Volatility). We’ve also written about how individual investors find it difficult to invest rationally and tend to make mistakes by following their intuition, piling in while the market goes up and liquidating as the market goes down. This is otherwise known as timing the market. Burton Malkiel, our Chief Investment Officer views this as often being an investor’s Most Serious Mistake. But something we haven’t quantified […]

Why Index ETFs Are The Automated Investment of Choice

Vanguard Group introduced the first passive investment product, the index fund, in 1975. We’re very proud that our Chief Investment Officer, Burt Malkiel, inspired Jack Bogle, the founder of Vanguard to create the index fund when he published his groundbreaking book, A Random Walk Down Wall Street, in 1973. Eighteen years after Vanguard launched the first index fund, State Street introduced the first exchange-traded fund. ETFs have grown to more than $2 trillion in assets, having recently surpassed index funds. Practically speaking, it wasn’t until the ETF became popular, around 10 years ago, that passive investing could broadly appeal to the masses. An ETF is a basket of investments, which, like an index fund, mirrors an underlying sector or index. […]

The Illusion of Stock-Picking Skill

I first visited a Wall Street firm in 1984. I was there with my longtime collaborator Amos Tversky, who died in 1996, and our friend Richard Thaler, now a guru of behavioral economics. Our host, a senior investment manager, had invited us to discuss the role of judgment biases in investing. I knew so little about finance at the time that I had no idea what to ask him, but I remember one exchange. “When you sell a stock,” I asked him, “who buys it?” He answered with a wave in the vague direction of the window, indicating that he expected the buyer to be someone else very much like him. That was odd: because most buyers and sellers know […]

Even Warren Buffett Prefers Index Funds

In last year’s Berkshire Hathaway annual report and shareholder letter Warren Buffett caused quite a stir by suggesting that upon his demise the assets he was leaving his wife, in trust, should be invested in index funds (see “Warren Buffett: ‘Investing Advice For You–And My Wife,’” “Will Warren Buffett’s investment advice work for you?,” “Warren Buffett’s 90-10 Rule of Thumb for Retirement Investing,” or “The Warren Buffett Guide to Retirement Investing“). The primary reason for the hubbub was probably the contradiction it represented in coming from Mr. Buffett. An endorsement of index investing from the man who is thought of as one of the greatest stock pickers of all time seemed to fly in the face of all that Buffett […]

Attempting to Maximize Your Return Isn’t Always a Good Thing

I am often asked “why shouldn’t I always choose the highest risk portfolio if it’s expected to generate the highest return?” That seems like a very reasonable question. In fact if everyone were rational they should choose the highest risk portfolio for exactly this reason. Unfortunately, very few people are rational. Chasing Returns Will Hurt You As our chief investment officer Burt Malkiel pointed out in Investors’ Most Serious Mistake, individual investors tend to chase returns. In other words they invest after markets have risen and sell when they decline. The chart below illustrates this behavior.                 As you can see cash flows into mutual funds when markets are up and are withdrawn […]

What Long-Term Return Should I Expect?

One of the most common questions posed to our client services team is “What is the expected long-term rate of return I can assume if I invest in a diversified portfolio?” Based on return estimates derived from the market (not Wealthfront’s opinion), an optimally diversified portfolio of low-cost index funds is expected to generate an annual long-term pre-tax  return of 4% – 6%, depending on how much risk you are willing to tolerate. It should be noted that the returns achieved over the past two years were much higher, but as you know past returns are not indicative of future returns. Returns Are Almost Impossible to Predict Some of you might be disappointed with this expected long-term return. I wish it […]

Minimize Your Investment Taxes

Our Chief Investment Officer, Burt Malkiel, famed author of “A Random Walk Down Wall Street,” has spent the past 40 years explaining that investors can’t control the market, so they should focus their efforts on the three investment tactics within their control: Diversify and rebalance your portfolio Minimize fees Minimize taxes Previously, we published posts on the value of diversification and minimizing fees. However, too often the industry avoids talking about one of the most important aspects of maximizing your long-term investment results: minimizing taxes. The Seven Ways to Minimize Taxes There are seven ways Wealthfront can significantly reduce your investment taxes: Using Index Funds Rebalancing your portfolio with dividends Applying different asset allocations for taxable & retirement accounts Tax–loss […]

There’s No Need to Fear Stock Market Corrections

Individual investors react very poorly to stock market corrections. Many individual investors sell when the market declines out of fear it will never come back. The data, which we will present in this post, actually says the opposite. Not only will the market come back, but it will do so a lot sooner than you might think. As you can see from the chart below, over the past 50 years there have been 14 market corrections and 11 bear markets. The industry standard definition of a market correction is a peak-to-trough decline of at least 10% and the definition of a bear market is a peak-to-trough decline of at least 20%. For the purpose of this analysis we rounded up […]