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

The Benefits Of International Diversification

Ever since the Great Financial Crisis of 2007-2008, when the correlation of all risky assets rose toward 1, investors have been hearing that because of globalization, the world has become flat and the benefits of diversification are gone.

The explanation is generally that the world market has become more integrated and financial markets more globalized. This has led some investors to draw the wrong conclusions about the benefits of international diversification.

With that in mind, we’ll take a deep dive into the issue of how much an allocation to international stocks you should have.

Recent Research From Vanguard

We’ll begin with a look at the February 2019 paper by Vanguard’s research > SEE MORE

Tale Of 2 Stock Markets

Are your politics affecting your investment results?

The fourth quarter of 2018 was a pretty miserable one for investors, with the S&P 500 Index losing 13.5%. And it was looking a lot worse on Christmas, although the index rallied 6.8% in the last week of the year. So how were investors thinking about the market in January? The answer depended on whether you were a Republican or a Democrat! > SEE MORE

Investor Biases & Mutual Funds

The relationship between investment flows and mutual fund performance is of great interest. For example, do investors naively look only at raw returns when making asset allocation decisions, or do they adjust returns for risk, using an asset pricing model?

Mutual Fund Investor Concerns

Itzhak Ben-David, Jiacui Li, Andrea Rossi and Yang Song, authors of the October 2018 study “What Do Mutual Fund Investors Really Care About?”, sought to determine whether investors use prominent asset pricing models—such as the CAPM (capital asset pricing model) and the three- and four-factor versions of Fama-French models—to allocate capital, or whether Morningstar’s star ratings (which do not account for systematic exposure to explanatory factors) explain mutual fund flows better than risk-adjusted returns. > SEE MORE