Objective research to aid investing decisions

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Individual Investing

What does it take for an individual investor to survive and thrive while swimming with the institutional and hedge fund sharks in financial market waters? Is it better to be a slow-moving, unobtrusive bottom-feeder or a nimble remora sharing a shark’s meal? These blog entries cover success and failure factors for individual investors.

Return on Gems

Do gems offer good returns? How do the returns of these tangible assets compare with those of other asset classes? In the April 2011 version of their paper entitled “Hard Assets: The Returns on Rare Diamonds and Gems”, Luc Renneboog and Christophe Spaenjers examine recent returns on precious gems in U.S. dollars. They concentrate on the upper end of gem quality for three categories: white diamonds, colored diamonds and other gems (emeralds, rubies and sapphires). They consider gem attributes such as weight, color, clarity, cut, location of sale, auction house, brand and certification as allowed by subsample sizes. Using worldwide auction data spanning 1999 (the first year of representative coverage in the source database) through 2010 (3,952 total sales), along with the contemporaneous values of the U.S. Consumer Price Index and returns for other worldwide asset markets, they find that: Keep Reading

Benefit of Tax-deferred Retirement Savings?

How effective are tax-deferred savings in avoiding federal income taxes over a lifetime? In their May 2011 paper entitled “The Tax Benefit of Income Smoothing”, Kristian Rydqvist, Steven Schwartz and Joshua Spizman estimate the lifetime benefit of postponing federal income tax liability until retirement by contributing pre-tax dollars to individual or employer-sponsored retirement savings while working. They quantify the benefit as the reduction in average annual lifetime federal income tax rate. They assume a base case of 40 work years (ages 25-65) and a number of retirement years equal to life expectancy minus 65. Using the complete time-series of U.S. income tax history (with focus on 2010 tax tables), they find that: Keep Reading

Value of Full-service Brokers?

Do individual investors truly benefit from using full service brokers? In the February 2011 draft of their paper entitled “What is the Impact of Financial Advisors on Retirement Portfolio Choices and Outcomes?”, John Chalmers and Jonathan Reuter compare outcomes for those Oregon University System’s Optional Retirement Plan participants who choose a firm that uses brokers to provide personal face-to-face financial services (HIGH level of service) and participants who choose the most popular lower-service firm (LOW level of service). Using demographic and monthly/annual account-level data from earliest availability (mostly 1997 or 1998) through 2009, they find that: Keep Reading

Stated Beliefs Versus Trading Behavior

Do individual investors actually trade on their stated beliefs? In their February 2011 paper entitled “Do Investors Put Their Money Where Their Mouth Is? Stock Market Expectations and Trading Behavior”, Christoph Merkle and Martin Weber compare quarterly risk and return expectation survey responses to actual trading data and portfolio holdings for a group of self-directed individual UK investors. Using this investor data, along with contemporaneous measures of actual FTSE All-Share Index returns and volatility during 2008 through 2010 (first survey in September 2008 and last in September 2010), they find that: Keep Reading

Get Genetic Screening for Your Financial Advisor?

What accounts for the persistence in diversity of investor beliefs and behaviors? Why does logical inference from common data not drive common attitudes and actions? In their March 2011 paper entitled “Serotonin and Risk Taking: How Do Genes Change Financial Choices?”, Camelia Kuhnen, Gregory Samanez-Larkin and Brian Knutson investigate differences in investing beliefs and behaviors associated with variations of a single gene (the serotonin transporter). Using demographic and financial information, tests of cognitive ability and numeracy, and measurements of attitudes toward financial decisions for 60 individuals recruited to be representative of San Francisco Bay Area adults, they find that: Keep Reading

Performance of Emerging Markets ETFs

Do emerging markets exchange-traded funds (ETF) reliably track and on average achieve the returns of benchmark indexes? In their February 2011 paper entitled “Evaluating the Performance of Global Emerging Markets Equity Exchange-Traded Funds”, David Blitz and Joop Huij examine the performances of emerging markets ETFs comprised of country markets such as South Korea, China, India, Brazil, South Africa and Russia. Stock markets in these countries generally exhibit higher volatilities, lower liquidities and regulatory differences compared to developed markets. Using monthly closing trades, net asset values and expense data for seven ETFs that track broad emerging markets indexes, manage at least $100 million in assets and have live histories of at least one year from inception (ranging from April 2003 to July 2007) through December 2010, they find that: Keep Reading

Distribution of OTC Stock Returns

Do stocks trading on Over-the-Counter (OTC) markets, generally off limits for institutional traders, present in aggregate a good opportunity for individual investors? In their December 2010 paper entitled “Do Investors Overpay for Stocks with Lottery-Like Payoffs? An Examination of the Returns on OTC Stocks”, Bjørn Eraker and Mark Ready examine returns on U.S. OTC Bulletin Board and Pink Sheet stocks. Using stock price and firm data for 11,260 OTC companies (about a third of which were once listed) over the period 2000 through 2008, they find that: Keep Reading

Dollar-weighted Returns for Equity Investors

A reader interested in the gap between time-weighted equity returns and actual dollar-weighted returns experienced by investors flagged critiques of prior studies described in:

“Returns for Investors (Rather Than Markets)”: “…the actual aggregate (timing) experience of equity investors is inferior to passive buy-and-hold stock market returns. An active approach of buying after pronounced capital outflows from the market and selling after pronounced capital inflows to the market is likely to be successful.”

“Actual Return Experience of Hedge Fund Investors”: …actual hedge fund investor return/risk experience, due to the timing of entries and exits, is much worse than that indicated by the continuously measured returns and volatilities of the funds themselves.”

The critiques of these findings are a January 2008 paper entitled “Dollar-Weighted Returns to Stock Investors: A New Look at the Evidence” by Aneel Keswani and David Stolin, and a November 2010 paper entitled “Historical Returns: Hindsight Bias in Dollar-Weighted Returns” by Simon Hayley. Using the same data considered in the first study above, along with some additional data, the authors of these critiques argue that: Keep Reading

A Few Notes on What Investors Really Want

Author Meir Statman states that his 2010 book What Investors Really Want “is about what we want from our investments. It is about how we think about our investments, how we feel about them, and how investment markets drive us crazy as we try to cajole them into giving us what we want… The sum of our wants and behaviors makes financial markets go up or down as we herd together or go our separate ways, sometimes inflating bubbles and at other times popping them.” Reflecting on “what we really want from our investments” with citations to a large body behavioral finance research, he concludes that: Keep Reading

Reference Price Adjustments for Winners and Losers

Do investors think differently about winning and losing positions? In their paper entitled “Why Do Investors Update Reference Prices Asymmetrically?”, Susan Grant, Ying Xie and Dilip Soman conduct four laboratory experiments to investigate differences in thought processes engaged by individual investors experiencing winning and losing investments. Using results of experiments involving 60-95 university students (mostly undergraduate) enrolled in business courses, they find that: Keep Reading

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