Hedge funds entered this year coming off their 10th straight year of trailing the return of the S&P 500 Index. And as you can see in the following table, over the 10-year period ending 2018, they underperformed every single major equity asset class by wide margins. They also outperformed virtually riskless one-year Treasuries by less than 1%, and underperformed intermediate and long-term Treasuries. > SEE MORE
Peers Can Change Financial Behavior
Behavioral finance is the study of human behavior. There is extensive literature on how that behavior leads to investment errors, including the mispricing of assets. This is one reason Princeton psychology professor Daniel Kahneman was awarded the Nobel Memorial Prize in Economic Sciences in 2002.
The field also provides us with other important insights from which behavioralists have learned ways to change behaviors for the better. For example, in their book “Nudge,” Richard Thaler and Cass Sunstein described the following real-life experiment in tax compliance. > SEE MORE
Expected Versus Realized Returns
It’s impossible to build an investment plan without estimating the return to stocks (as well as bonds and any alternative investments). One reason is that the estimate of returns determines your need to take risk—how high an allocation to equities you will need to reach your goal.
If your estimate is too high, it’s likely you won’t have sufficient assets to reach your retirement goal. If it’s too low, it could lead you to allocate more to equities, which means taking more risk than necessary. Alternatively, it could lead you to lower your goal, save more or plan on working longer.
Despite its importance, there is much disagreement about how to estimate stock returns. As is always the case, at Beacon Hill Private Wealth we rely on academic evidence. > SEE MORE