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Smart Beta Misconceptions, Index Investing and Active Management

Top 5 of the Week of July 25

In the Top 5 this week, we kick off with an in-depth look at index and dividend investing and what they can both do for your portfolio according to Ben Reynolds, from Value Walk. Anna Fedorova of Investment Week takes us through some common misconceptions regarding smart beta investing. And Brett Steenbarger, a writer for Forbes, shares with us the psychological keys to investing success.

Jason Voss from Enterprising Investor discusses how active management is still alive and kicking. And Barry Ritholtz, a blogger at Bloomberg considers how CEOs’ wages are incomparable with the “average returns” they deliver…


The Index and Dividend Investing Combo

 

  • Index investing is using index funds to build a passive investment strategy, while in this instance, dividend investing refers to buying individual dividend stocks
  • Use index investing as a holding pattern and benefit from its wide diversification, and purchase high-quality dividend stocks during times of investors’ panic; until then do nothing
  • While both approaches complement each other, the most crucial tool for successful investing is to have an investment plan in the first place and follow it

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Smart Beta Misconceptions

 

  • Smart beta generates alpha: Instead, return comes from rewarded systematic risk factors besides the market factor, which can’t be called alpha
  • That smart beta means high turnover: Though turnover is likely to be higher the manager and strategy can deal with it so it comes “within reasonable bounds”
  • A good factor index requires a sophisticated scoring approach: This is not necessarily the case for smart beta, it can be adding risk as the proprietary models might be the result of data-mining and may not work

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Investing: It’s All Psychological

 

  • There is no mystical secret to successful investing just practice the art of careful, rational decision-making
  • Conviction can be an indicator of overconfidence, as it is rooted in subjectivity—be objective in your observation of market realities instead
  • Though rationality isn’t sexy; it is key to investing and trading success

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Active Management: Alive and Kicking

 

  • Active funds underperform not due to lack of skill, but because of subsequent portfolio management decisions
  • Underperformance comes from “portfolio drag,” such as to much money under management, benchmark track, and over diversification
  • Without portfolio drag, fund managers can achieve outperformance, look out for these truly active funds to invest in

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Huge Earnings But Average Return From CEOs

 

  • There are endless influencing factors that affect whether a company’s stock performs well; the economic environment, inflation and interest rates, and global events, to name but a few
  • The company itself and its market performance can be credited two-thirds of any price movement, while the market itself should receive 40% credit
  • Compensating in salary for what is arguably market-based performance makes little sense and a reform in pay policies should be called for to reflect this

Are you a CEO? Do you believe your earnings reflect your returns? Leave a comment in the section below

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Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form – and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.


 

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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article. The Babinow Team doesn’t necessarily endorse any stocks or shares mentioned in the articles or the author of such articles linked to and summarized in Top 5 of the Week and cannot guarantee the accuracy of its information.