Don’t Exclude Emerging Markets


Thirty years ago, emerging markets made up only about 1% of world equity market capitalization, and just 18% of global GDP. As such, the ability to invest in emerging markets was limited—the few funds available were high-cost, actively managed funds.

Today the world looks very different. Emerging markets represent about 13% of global equity capitalization, and more than half of global GDP. In addition, the cost of obtaining exposure to emerging markets has decreased considerably. The expense ratio of Vanguard’s Emerging Markets Stock Index Fund Admiral Shares (VEMAX), for example, is just 0.14%.

Two Common Mistakes; Return
Yet despite emerging market stocks representing about one-eighth of global equity market capitalization, the vast majority of investors has much smaller allocations to them, dramatically underweighting the asset > SEE MORE

Retirement’s Routes To Failure


Retiring without sufficient assets to maintain a minimally acceptable lifestyle (which each person defines in their unique way) is an unthinkable outcome. That’s why, when investors are planning for retirement, the most important question is usually something like: How much can I plan on withdrawing from my portfolio without having a significant chance of outliving my savings?

The answer is generally expressed in terms of what is referred to as a safe withdrawal rate—the percentage of the portfolio you can withdraw the first year, with future withdrawals adjusted for inflation.

A Simulation Solution
While historical returns can provide insights, it’s critical that investors not make the mistake of simply projecting the past into the future. Current valuation metrics > SEE MORE

Are You Compensated For Your Risk?

Despite the fact that financial theory suggests stocks with high volatility should have higher expected returns—because investors cannot fully diversify away from the firm-specific risk in their portfolios—a growing body of empirical evidence demonstrates a negative return premium in higher-volatility stocks (the low-volatility/low-beta anomaly).

Research also documents that investor preferences for more volatile stocks are directly associated with preferences for stocks that look like lottery tickets (they have positive skewness and excess kurtosis, or fat tails). The negative premium associated with such stocks persists because of limits to arbitrage.

These findings on volatility and kurtosis are important because extreme positive and/or negative returns happen far more regularly > SEE MORE

An Alternative Approach to Alternatives: Investing With Even More Style


Traditionally, most portfolios have been dominated by public equities and bonds. The risks associated with the equity portion of those portfolios are typically dominated by exposure to market beta. And because equities are riskier than bonds, market beta’s share of the risk in a traditional 60/40 portfolio is actually much greater than 60%. In fact, it can be 85% or more.

The severe financial crisis of 2008 led many investors, including institutions, to search for alternatives. Among the usual suspects were private equity and hedge funds. Unfortunately, the evidence demonstrates that the correlation to equities of both these alternatives has been quite high.

For example, Niels Pedersen, Sebastien Page and Fei He—authors of the study “Asset Allocation: Risk Models for Alternative Investments,” which appeared in the May/June 2014 issue of the CFA Institute’s Financial Analysts Journal—found that the correlation of private equity and hedge funds to stocks was 0.71 and 0.79, respectively.

Most of the returns to those types of alternative investments are explained by the returns to stocks (in other words, the same market beta risk they are trying to diversify). This is the same conclusion that Cliff Asness, Robert Krail > SEE MORE

Financial Spring Cleaning: Life Insurance Audit


So much of the maintenance of our personal finances falls into the category of “boring, but important.” But when it comes to life insurance, our subconscious resistance to the topic is further compounded because, unlike retirement or career planning, your pot of gold at the end of the life insurance rainbow is actually a headstone.

We don’t like to talk about life insurance for numerous reasons, but especially because it requires acknowledgment of the fragility of our own lives, and of those we love. But considering the extremely high probability of our mortality, life insurance is one of the most important topics to include in your financial spring cleaning.

To ensure your life insurance planning is on track, ask and answer these five questions:

1. Where are your policies? Yes, it’s important to know where your original, physical policies are (and it’s a good idea to communicate that information to the Personal Representative in your will). But you also want to ensure that all of the policies you think you own are, indeed, active.