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By default we set up every taxable (i.e. non-retirement) account to have margin but we almost never use it. (You don’t want retirement accounts to have debt at the account level because it gives rise to UBTI – unrelated business taxable income – which is taxed at the high trust rates, but you get no …

My latest quarterly ramblings to my Financial Professionals list are out: Financial Professionals Winter 2019

The optimal savings vehicles are client-specific, both in what they may have available to them, and in what would be prudent for their specific situation.  Nonetheless, in general, this is usually the right order (exceptions and other issues at the end) for a typical client who expects to be in a lower tax bracket in …

Fixed income is held for risk reduction, not return enhancement. It is the ballast that allows the ship of your portfolio to withstand the financial storms that periodically roil the markets. It is conventional wisdom that “correlations go to one” in times of stress, but this is incorrect. Correlations between risky investments go up, but …

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

No advisor is perfect, but there are a few rough indicators (also see The Quality Advisor’s Alpha/Gamma/Sigma and How to Evaluate an Investment Advisor) that I use to recognize the quality of another advisor.  Below are three examples in each category (this is not an exhaustive list), with my favorite simple indicators in bold: Does …

The reason to diversify internationally is not because expected returns are higher on foreign* investments, but because they will be different. Diversification is about risk reduction, not return enhancement. Hedging currency risk is optional in equities but essential in fixed income. The belief that foreign holdings are unnecessary because domestic companies have large foreign sales, …

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 …