gold pendulumGold is often touted as a must-have investment for the most intense of risk-mitigation situations, a “when all else fails” hedging instrument. Indeed, pick an ailment: Inflation? Hedge with gold. Economic and political crises? Hedge with gold. Collapse of modern society? Say it with me, folks, “Hedge with gold”. With the global economy as shaky as it is, multiple countries in one crisis or another, and plenty of uncertainty as to what the future holds to go around, gold continues to make the rounds as a necessary holding despite the fact that its value in US dollar terms has been steadily declining over the last four years after reaching a peak in 2011 of almost $1,900 an ounce. In the wake of the Fed’s recent decision to stand pat on interest rates and gold’s subsequent jump today, here are 3 reasons to avoid gold, both as a physical or paper holding, apart from a very small percentage of a well-balanced and diversified passive or lazy investment portfolio:

  • It’s a highly emotional and psychological asset
  • There’s no historical evidence that it hedges well against any risk
  • It has very little practical use

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Tilting Spinning TopTilting, when done intentionally, is generally understood to be the act of pursuing an otherwise seemingly passive or lazy investment approach and then loading up on some specific additional investment so that your portfolio is more heavily weighted or biased toward that investment. This is done for the purposes of trying to earn greater return than the purely passive approach might afford you, i.e. you are attempting to outperform the market. For instance, you may buy an S&P index fund as part of your portfolio and then purchase additional shares of Apple separately. You are then tilted toward Apple in particular and technology more generally because your S&P index fund already contains shares of Apple, giving you exposure to the company and its sector. While there is absolutely nothing wrong with purposely tilting as a practice so long as you understand the risks – it’s your business – you must be wary that you not end up inadvertently doing it in your pursuit of passive portfolio diversification. If you never meant to tilt and your real objective was simply passive diversification all along, then you have done yourself a disservice without realizing it by exposing yourself to unnecessary risk. By paying careful attention to a fund’s holdings during fund selection, you can avoid this. Continue reading

mount-merapi-113620_1280To say that there are some serious headwinds that we as the collective investment community must face these days is putting it lightly. Between financial downturns and outright crises including Japan’s return to recession, Greece’s distaste for austerity, and Russia’s woes with sanctions, collapsing energy prices, and a devastated ruble; the perceived need (not unanimous) for quantitative easing (QE) in Europe eclipsing $1 trillion EUR; stark observations that the world economy is shrinking; and the actions of central banks that catch us on the toilet such as that of Switzerland removing the cap on its currency vis-á-vis the Euro, there is much to digest. How do you protect and defend your financial positions, your financial worth, your current and future holdings against such startling occurrences and circumstances? How do you protect and defend your financial, and hence personal, goals? You can do so by ensuring that you are passively invested in a well-diversified portfolio of broad-based assets with low intercorrelations, in-line with your true risk profile and investment horizon, and take advantage of the might it affords you. Continue reading

HalloweenEffectThe Halloween effect just might be more of a trick than a treat – think less chocolate and more witch’s brew. The end of October and beginning of November mark the start of the six-month period of November-April during which, historical evidence shows, stocks have outperformed when compared with their performance during the other six months of the year, May-October, or with the performance of a general buy-and-hold strategy. Indeed, over the past year, the numbers seem to indicate something similar for the U.S. stock markets as per a mutual fund stand-in, the Vanguard Total Stock Market Index Fund (VTSMX) – positive returns of close to 10% from November 1, 2013 through May 31, 2014, as opposed to only a little over 5% from June 1, 2014 through October 31, 2014. This outperformance continues to lend credence to the concept of market timing and fuel the debate over active versus passive investment strategies. And so, with another potential bumper period for stocks possibly about to get under way, we owe it to ourselves to address the topic and speak to why we shouldn’t give the wolf in sheep’s clothing any candy; why it is not advisable to indulge in this active strategy in spite of evidence of a persistent seasonal pattern.Continue reading

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History & Overview

In one form or another, mutual fund companies have existed in the United States since 1924 with the advent of the Massachusetts Investors Trust managed by Massachusetts Financial Services and later the formation of State Street Investment Corporation (mutual funds as investment vehicles predate these companies). In many ways, the general idea has remained the same ever since – offer small investors, or savers, access to diversified portfolios as a low-risk means of growing financial wealth. Like other financial services vendors, these investment intermediaries match savers with borrowers and provide both parties with risk sharing, liquidity, and reduced information costs. By an Investment Company Institute estimate, mutual funds worldwide accounted for close to $27 trillion USD in investment dollars as of the end of 2012. The industry is significant, needless to say, and these investment vehicles are a lazy strategy favorite. Here we offer a primer on mutual fund companies and funds, complete with a summary of some key judgement metrics. Continue reading