Archive for June 2017
Recently, I shared a true story in which I set up a client’s 401k plan five years ago with periodic (bi-weekly) contributions and equal investments into both a US stock index fund and an international stock index fund. Despite the fact that the US index (fund) has outperformed the international index (fund) by a huge margin: 86% vs 29% over the last five years, my client now has more money in the international fund than in the US fund. What gives? I invited my readers to think about it and give me their explanations. Now it’s time to reveal the answer: it’s dollar cost averaging!
Let me show you a stylized example in a three time-period world. There are two indexes. Index A goes from 100 to 105, then 110. Index B goes from 100 to 80, then 100. It’s clear that index A dominates index B since the total return of index A is 10%, that of index B is 0%. Yet an investor who makes equal $100 periodic investments in both index A and B will have more money in B at the end. Here is the math …
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One day two years ago, I got an email from a client of mine. In a very concise manner, he told me he was in Singapore for a business deal and he needed to wire $500k from his investment account to a bank account in Singapore.
To raise the money, I would need to sell some of his highly appreciated investments. I didn’t want him to be surprised by capital gain taxes, so I replied with an explanation of the tax implications.
After that, I was ready to wire the money, so I sent him a short message: “You know our standard procedure, any time a client wants to move more than $10k, he needs to call me to tell me in his own voice.” I totally expected my phone would ring right away.
Instead, I got another email: “I am in Singapore, I don’t have a phone with me, take this email as my authorization to wire the money.”
The Investment Scientist 