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My latest quarterly ramblings to my Financial Professionals list are out: Financial Professionals Summer 2018

The title of this piece is “guaranteed” to make financial regulators hyperventilate and plaintiff’s attorneys salivate, but I think you will find it hyperbole-free. Of course, as Benjamin Franklin famously observed, “in this world nothing can be said to be certain, except death and taxes” but I think these rules come very, very close. Before …

This is an excellent list of how to evaluate scientific evidence.  Almost all the issues are applicable to evaluating whether a manager or investment approach will demonstrate outperformance in the future.  To wit: Differences and change cause variation – that outperformance is subject to a very high level of sheer randomness. Bias is rife – …

In my head I have had a hierarchy of items I disseminate: Quick simple thoughts or forwarding of things to my coworkers via email. If it is a little more interesting also share (via email) with my consulting clients. (These are other RIA firms that have me on retainer for my perspective.  If you are …

John Bogle has cautioned, “Too many investors-individuals and institutions alike-are constantly making investment decisions based on the lessons of the recent, or even the extended, past.” Here is a chart of the major asset classes sorted by the differences between the penultimate downturn and the last one: Asset Class 8/2000 – 9/2002 10/2007 – 2/2009 …

Suppose a client is going to contribute $X per month.  A trade could be done every month, incurring a transaction fee, or every other month, or every third month, etc.  When is the optimal time? It depends on the spread of expected return of the asset class to be invested in over the expected return …

Stock splits are an interesting topic.  There appears to be a widespread belief that a stock is somehow worth more after it splits and a somewhat related myth that lower-priced stocks have less risk and more return. The best way for an individual to think about stock ownership is as if they were buying the …

In my last post (here) I discussed risk vs. uncertainty.  In this post I will discuss three types of risk. Goal Risk – you run out of money in retirement. Absolute Risk – your portfolio fluctuates with the market. Tracking Risk – your portfolio underperforms your neighbor’s portfolio. To minimize Goal Risk, you have to …

I have posted on risk previously (here), but while markets are (relatively) calm, I thought I would talk about risk vs. uncertainty. One of the primary findings from behavioral finance is significant overconfidence in our predictions.  Though some of these might be more than you would want to tackle, I highly recommend the following as …

We practice what is now being called “evidence-based investing” (description here for example) – so-called because sound academic research supports it.  This month I thought I would review the key findings of some of the seminal papers in the field. I present these in chronological order with a one-sentence summary in bold at the end …

In previous posts I have explored After-Tax Returns to Different Types of Accounts and Tax-Efficient Spending from a Portfolio.  In this post, I will expand a little further on how the type of account which holds an investment can affect the distribution of returns. Advisors don’t generally consider the after-tax allocations of their clients’ portfolios …

Let’s assume five different types of accounts are available: A taxable account where the funds are withdrawn to spend during life A taxable account where the funds are left for heirs A deductible IRA (or 401(k), 403(b), etc. the math is the same) A Roth (or again a Roth 401(k), 403(b), etc. the math is …

There are two contradictory forces and one inefficiency at work when income tax rates are changed: First, there is the familiar Laffer Curve effect which effectively says as you increase taxes on labor people substitute untaxed leisure.  I.e. you get less of what you tax.  That is fairly uncontroversial as a theoretical construct, but there …

I read Different a few years ago and highly recommend it.  I thought about our business and how we are different from “wirehouse brokers” (i.e. large firms), and I made this list: We have no idea what the Dow did today, nor do we think it is important. We are bad at sales and good …

In the tax code owning your own home is favorable because you don’t show the rent you are really paying yourself.  Economists call it imputed rental income.  Essentially, you are on the one hand a landlord and on the other the tenant but you don’t report the income but you do take (some of) the …

There are three issues with deciding when to exercise the options: Taxes – obviously they should be minimized. Risk – given that most folks already have extensive exposure to their employers (through their human capital if nothing else) options should frequently be exercised quickly. Return – since the value of an option is comprised of …

While inflation is currently quiescent, there is a great deal of concern that it may reappear with a vengeance in the future.  Currently the spread between nominal (“regular”) treasuries and TIPs (Treasury Inflation Protected Securities) indicates very moderate inflation expectations, but of course the situation could change.  Following are some of the main ways to …

In my previous post, I gave an overview of what an optimal tax code would look like in theory.  Following are my thoughts on the current tax code and how it might be improved specifically.  I’m sure few people will agree with all my thoughts, but hopefully it will spur some thinking.  Here are my …

Fundamental tax reform appears probable soon so I thought it would be worthwhile to share some thoughts on it.  Ideally, taxes should exist solely to raise revenue to fund appropriate functions of government.  When the code is used to reward or penalize particular behavior or groups, it becomes the tangled mess we have today.  I …

There has been a great deal of discussion since 2008 about the stock market exhibiting “fat tails” where the 2008 downturn was considered to be an outlier.  I thought it might be useful to investigate just how “normal” (or not) the market really is.  Normal means the distribution of returns matches the standard bell curve. …