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The Sapient Investor

Should I Invest in Individual Countries? Thumbnail

Should I Invest in Individual Countries?

The presence of many individual country ETFs (exchange-traded funds) and CEFs (closed-end funds) makes country-targeted investing easy. It can also be profitable. This article will highlight several characteristics that have provided consistent risk-adjusted excess return, including value-, quality-, and sentiment-related factors.

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Stock Market Allocation Indicator:  Forward Fed Funds Rate Change Thumbnail

Stock Market Allocation Indicator: Forward Fed Funds Rate Change

The dots are coming! The Fed is scheduled to release its famous “dot plot” of forecasts of various key economic figures, including the Fed funds rate, tomorrow (Wednesday, March 20th). The reaction of the Fed funds futures market may portend the stock market’s reaction in the days ahead. In this article, we examine the interest rate changes implied by the 6-month Fed funds futures contract as a potential stock market allocation indicator.

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Vanguard Target Retirement Funds:  Blind Faith in Market Efficiency Thumbnail

Vanguard Target Retirement Funds: Blind Faith in Market Efficiency

Vanguard’s target date funds include a meaningful allocation to international bonds despite their ridiculously low (or in many cases negative!) yields. Their rationale is based on the premise that global capital markets are efficient and asset prices provide a fair return that reflects their risks. This assumption is so firmly embedded in the Vanguard DNA that they are apparently unable to adjust to the compelling evidence that many international bonds are artificially overpriced and should be avoided.

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Should I Invest in Individual Sectors and Industries? Thumbnail

Should I Invest in Individual Sectors and Industries?

The presence of many sector and industry ETFs makes industry-targeted investing convenient and inexpensive. It can also be profitable. This article will highlight several characteristics that have provided consistent risk-adjusted excess return, including value-, momentum-, quality-, and sentiment-related factors.

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Is Tactical Asset Allocation Beneficial? Thumbnail

Is Tactical Asset Allocation Beneficial?

Most of the return from a diversified portfolio is derived from stock market exposure. If an investor can increase or decrease exposure to the stock market at the right time, he or she can avoid much downside loss and gain much upside return. There is more reason to believe that asset classes are inefficiently priced relative to each other than that individual assets are mispriced within asset classes. If that is true, then tactical asset allocation, if done well, can be extremely beneficial.

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How Much Risk is in My Portfolio? Thumbnail

How Much Risk is in My Portfolio?

Measuring risk is the first step in controlling risk. In a diversified portfolio, most risk is systematic risk, since a lot of the non-systematic risk is diversified away. Systematic risk is explained by one or more risk factors such as stock market risk or interest rate risk. My research suggests that four risk factors will capture most of the risk in most portfolios.

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Should I Include Real Estate in My Portfolio? Thumbnail

Should I Include Real Estate in My Portfolio?

Real estate is a huge part of the global capital market, but most portfolios have little exposure. Many investors have an undiversified investment in residential real estate by owning a home, but REITs provide a convenient way of gaining broad exposure to many types of commercial real estate. They also help diversify a portfolio’s stock market risk.

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How Much in U.S. Stocks vs International Stocks?:  Strategic Allocation Thumbnail

How Much in U.S. Stocks vs International Stocks?: Strategic Allocation

Next to the stocks vs bonds allocation, the U.S. vs international stocks decision is the most important for most portfolios. Unlike the 60/40 traditional stocks/bonds mix, there is no well-recognized default position for this choice. I recommend a middle path between two extreme views, with significant flexibility in tactically implementing around the long-term strategic allocation target.

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Why You Should Under-Weight Government Bonds Thumbnail

Why You Should Under-Weight Government Bonds

Although they are often excellent diversifiers of equity market risks, government bonds are not likely to be good investments going forward. Their yields are low (or in some cases, negative!). The marginal buyers for government bonds are often motivated by considerations other than risk and return. This keeps their prices structurally above the levels that would make them attractive to most investors.

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Why You Should Avoid Long-Term Bonds Thumbnail

Why You Should Avoid Long-Term Bonds

Long-term bond yields are low by historical standards. For bonds, current yield = future expected return. Interest rates have much more room to go up than go down, with the risk of losing money on long-term bonds looming large compared to a very modest increment of yield. Stay away from long-term bonds until their incremental yields over short-term bonds justify their much higher level of risk.

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How Does Diversification Work? Thumbnail

How Does Diversification Work?

Most people intuitively understand the appeal of diversification—spreading your risks around so that if something goes wrong in one investment hopefully some others will be doing well. It has to do with the old saying, “don’t put all your eggs in one basket.” But how do you measure diversification? And how much difference does it make in portfolio returns and ending wealth?

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How Much Interest Rate Risk in Bonds?: A Tactical Approach Thumbnail

How Much Interest Rate Risk in Bonds?: A Tactical Approach

The single most important decision in managing a bond portfolio is deciding how much interest rate risk to accept. In an earlier article I introduced the concept of using current market conditions to tactically rebalance around a long-term strategic asset mix. This methodology I call the “Dynamic Model.” This article will apply the same concept to tactically managing the interest rate risk in a bond portfolio and present some back-test results using that approach.

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How Much in Stock vs Bonds?: A Tactical Approach Thumbnail

How Much in Stock vs Bonds?: A Tactical Approach

In an earlier article I introduced the concept of using current market conditions to tactically rebalance between stocks and bonds around a long-term strategic asset mix. This methodology I call the “Dynamic Model” approach to managing the asset mix. In this article, I will explain the model’s methodology and compare its' back-tested performance to a static 60/40 stock/bond asset mix.

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When Should I Rebalance?: A Tactical Approach Thumbnail

When Should I Rebalance?: A Tactical Approach

Many investors assume that their strategic asset mix is somehow sacrosanct. They have been told that they should rebalance back to the strategic targets if their portfolio gets out of whack. This is despite the fact that the quality of the analysis behind the setting of the strategic asset allocation is usually subjective and often quite weak. I believe that using current fundamentals to estimate expected returns of stocks and bonds should guide the tactical rebalancing around the strategic targets.

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