Archive for the ‘Asset Classes & Allocation’ Category
Cash Is No Longer Trash
Posted on: November 9, 2023
If you keep your money in cash reserves (usually in the form of a money market fund) in a brokerage account like Fidelity, you are likely to get a yield of over 5%. This has never happened before during my time as an investment advisor. For a long time, cash reserves were paying nothing. No wonder the saying “cash is trash” became a golden rule. But not anymore.
Even banks are offering CDs that have a yield of 5%. However, it’s important to note the difference between a CD and cash reserves. The CD is illiquid money that you can not use until it matures. Cash reserves, on the other hand, are completely liquid. You can withdraw your cash at any time. This is what makes it superior to CDs.
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The Crypto Crash
Posted on: February 8, 2022
Yesterday in a client progress meeting, the client asked me a question: “What do you think of crypto?” I usually get this question either when cryptos are rallying or crashing. As you may know, over the last three months, most cryptos have lost 50% of their value. In fact, I more or less alluded to this in my earlier newsletter. I wrote that in a Fed tightening cycle, the vanguard market will fall first. Decades ago, the vanguard market used to be the emerging market, now it’s the crypto market.
So what do I think of crypto? I have asked myself the same question, read a lot of books and white papers about it, and even took a full-length MIT class on crypto taught by Gary Gansler, who is now the SEC chairman. I have a good understanding of the technical aspect of cryptos, but I still can’t figure out the economic rationale of their existence and their sky-high valuations.
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Recently, some of my clients asked me a very good question: “Why is my portfolio not doing as well as the S&P 500 index? Shouldn’t we invest more in US stocks?”
The answer is very simple. US equity is only one component of their portfolio, and it happened to do the best this year. The best component of the portfolio will always do better than the whole portfolio. That does not mean we should not diversify.
In fact, I hear similar questions all the time. Seven years ago, it was “Why didn’t we invest more in emerging markets? There’s no way the US market will do better than emerging markets.” Five years ago, it was “Why shouldn’t we put everything in gold? All of my friends are investing in gold.” In each case, I had to twist their arms to get them to stay invested in US stocks, and now they are thanking me.
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I took the sensationalist title from a CNBC article I read yesterday. The articles talks about, and I quote, ” … hedge funds, as a category, is experiencing the worst quarter of outflows since the bottom of the financial crisis … there were an avalanche of stories about the industry’s nearly systematic underperforming.”
Readers of my newsletter and blog, The Investment Scientist, can thank me later for warning them years ago.
On April 28, 2011, I published “A Balanced Portfolio to Avoid (II): Hedge Funds Don’t Deliver Outstanding Returns.” Let me quote my former self: “Hedge funds are often peddled as an unique asset class that are uncorrelated with the market. In reality, hedge funds are as much an asset class as Las Vegas is.” The unspoken message is: you should expect to lose money.
On August 15, 2012, I published “Why You should Avoid Hedge Funds.” I wrote that article after I read the book by former hedge fund industry insider Simon Lack, “The Hedge Fund Mirage.” I summarized the book in one sentence for my readers: “Between 1998 and 2010, hedge fund fees totaled $440 billion vs. $9 billion profits for investors. Read the rest of this entry »
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Remember When Everybody Wants to Be in Gold?
At the turn of the year, a few clients asked me a very good question: “Why my portfolio is not doing as well as the S&P 500 index? Shouldn’t we invest more in US stocks?”
The answer is very simple, US equity is only one component of the portfolio, it happened to do the best last year. The best component of the portfolio will always do better than the whole portfolio. That does not mean we should not diversify.
In fact, I got similar questions every year. Four years ago, it was like “Why didn’t we invest more in emerging markets? there’s no way the US market will do better than emerging markets.” Two years ago, it was like “Why shouldn’t we put everything in gold? all of my friends are investing in gold.”
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10. P2P Lending: A New Asset Class?
9. A Lesson From a Client: Celebrity Business Gone Bad
8. The High Cost of Fee-Based Financial Advisors
7. How Often Do Market Corrections Happen?
6. Captive Insurance: A Business Owner’s Heaven?
5. How I Helped a Client Save $100k in One Meeting
4. Variable Annuity Fees You Don’t Know You are Paying
2. Be Careful When Buying a Condo as a Rental Property
1. Profit from Harry Dent’s Prediction? Think Again
Also see Top Ten in July.
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1. ThinkAdvisor highlighted a Maryland study which showed that states which pay the highest fees to Wall Street (for managing pensions) have the lowest returns. That says it all about Wall Street. No wonder Rick Ferri wants you to steer clear of actively managed funds.
2. Reuters Money reported how Health Savings Accounts (HSAs) can be used as retirement savings accounts. This information is especially useful for small business owners and self-employed individuals who tend to neglect their retirement savings and face high deductibility in their health insurance. Here is the garden variety of ways they can save for retirement.
3. DIY Investor Robert Wasilewski encountered a bear while hiking. He survived to write about it, but he mused that the same reactions that kept him in the gene pool will surely “eliminate you from the investment pool.”
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P2P Lending: A New Asset Class?
Posted on: July 27, 2013
P2P Lending
Last night I was “wasting” time on Google+, when I stumbled upon Joe Udo’s blog where he had written about how he made an 11.3% annualized return with P2P lending. The next thing I knew, it was past midnight and I just had spent three hours eyeballs deep in the subject.
Let me first tell you what P2P lending is. P2P stands for person-to-person or peer-to-peer. P2P lending is the practice of lending to strangers, enabled by technology and the web.
The two leading companies in this arena are LendingClub and Prosper. Between the two of them, they’ve enabled nearly $2 billion of lending between investors and borrowers. However, that still pales to the total US consumer credit of $1 trillion.
I am super excited about P2P lending! Let me tell you why.
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Here is a selection of the best wealth management articles around the web for September:
5 reasons your portfolio is too complicated, by Kyle Bumpus
Why analysts are scratching their heads over QE3, by Robert Wasilewski
Under the radar bill could benefit fiduciary rule making, by FI360
Is rebalancing market timing?, by Mike Piper
Choosing a mutual fund – Avoid these 6 mistakes, by Roger Wohlner
Fidelity’s new retirement saving guidelines, by Barbara Friedberg
Can I consistently outperform the market? by Ken Faulkenberry
Dividend reinvestment plans (RIPS) and their benefits, by Dave Scott
Questions to ask when picking a financial advisor, by Carl Richards
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Portfolio Rebalancing Returns
Posted on: August 5, 2011
Asset Class Rebalance
In one of my previous posts, I showed how diversification across asset classes is superior to momentum and contrarian strategies. Today, I am going to show how disciplined rebalancing adds to returns. I will first demonstrate this using a stylized example and then through historical returns.
An example of two asset classes
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MZ Capital 40/60 Portfolio Model
This report shows the construct and performance of a 40/60 model portfolio.
Asset Classes and Fund Selection
There are six asset classes in this portfolio model. The asset allocation is implemented using DFA funds, as shown in the table 1. I explained why DFA funds are better than Vanguard funds here.
| Table 1: Asset Class Funds | ||
| Asset Class | Percentage | Funds |
| US Equity | 10% | DFFVX – US Targeted Value Fund |
| International Equity | 10% | DISVX – International Small Cap Value Fund |
| Emerging Markets | 10% | DFEVX – Emerging Market Value Fund |
| REIT | 10% | DFREX – Real Estate Securities Fund |
| TIPS | 20% | DIPSX – Inflation-Protected Securities Fund |
| Treasuries | 20% | DFIHX – Short-Term Treasuries Fund |
| Muni Bonds | 20% | DFSMX – Short-Term Muni-Bond Fund |
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Recently, I came across a 20 Year Periodic Return Table prepared by Black Rock. I want to share this with you since this table illustrates the investment principles I have been emphasizing: 1) asset class diversification; 2) disciplined rebalancing; and 3) small value tilt. Today’s focus is on 1); the other two points will be discussed in future articles.
20 Year Asset Class Returns
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Is Managed Futures an Asset Class?
Posted on: June 17, 2011
Recently, a high-net-worth investor came to me for my portfolio review service. What caught my attention was that a large chunk of his money was allocated to various commodities trading advisors (CTAs).
CTAs are folks who are licensed to take your money and speculate with it in the futures markets. In 2008, managed futures reportedly returned a total of 14%, beating the equity market by 50%. Since then, CTAs have been heavily promoted by major Wall Street brokerages and wealth management firms as an alternative non-correlated asset class.
But is managed futures an asset class?
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MZ Capital 60/40 Portfolio Model
This report shows the construct and performance of a 60/40 model portfolio.
Asset Classes and Fund Selection
There are six asset classes in this portfolio model. The asset allocation is implemented using DFA funds, as shown in the table 1. I explained why DFA funds are superior here. Read the rest of this entry »
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MZ Capital 70/30 model vs S&P 500
(Performance stats last updated on 8/16/2011) I have maintained 4 model portfolios since the beginning of 2007 to show that successful investing can be extremely simple: one only needs to do 1)prudent allocation, 2)disciplined rebalancing. One does not need Harry Dent’s prescience nor Jim Cramer’s encyclopedic knowledge to be successful in investing.
This report shows the construct and performance of the 70/30 model portfolio, the most aggressive of the four. The chart on the right shows the portfolio value of $100 invested on the first day of 2007, relative to the S&P 500.
Asset Classes and Fund Selection
The Investment Scientist 