Don’t Put All Those Eggs in Equity
Top 5 of the Week of February 25th
Wisdom Tree’s Jeremy Schwartzheads up our Top 5 this week asking if value investing is unfashionable now. The Evidence-Based Investor Robin Powell explores why active funds are more popular in the media. And the Value Stock Geek takes a deep dive into asset allocation.
Meb Faber, on his own blog, examines just how special the U.S. stock market is historically. And James Osborne of Bason Asset Management discusses the effort behind rationality…
Are You Certain?
- The end of September 2018 saw the close of the worst decade in history for using P/B as a factor to navigate the market with
- Using this lone factor causes “chronic sector tilts” away from the direction of Technology stocks and towards Financial ones
- Many believe there’s an upcoming overturn in the outperformance of growth stocks in favor of value—but how sure are you that Financials will outperform Tech?
Conflicts of Interest
- Even though indexing has boomed, active investing is still more popular, so it makes sense that there is more financial media coverage on it
- But given that only around 1% of active funds outperform the market in the long run, why does the practice still gain so much news space in the media?
- The problem is that one cannot function without the other—that’s not to say everyone is biased, but be aware there may be some conflicts of interest in what you read
Don’t Put All Those Eggs in Equity
- Asset allocation is a crucial subject area to spend time on for any investor, but especially so for the FIRE crowd who are aiming for early retirement
- Putting 100% savings into equity alone is incredibly risky thanks to history’s precedence of horrible drawdowns and “lost decades”
- It all works itself out eventually, if you are invested with a long horizon or you’re dollar cost averaging, but retirees should still consider a much more diversified asset allocation accordingly
Where are your eggs? Share your comments in the section below
Not So Special
- Investors and others have a bias towards thinking that the U.S. stock market performs unlike any other across the globe
- Given that the average CAPE ratio of other countries around the globe is 16, while the U.S. is nearly double, there may be something in it
- Except, low starting CAPE values tend to promote higher future returns 10 years later (which directly contrasts high starting CAPE values, which tend to lead to lower returns 10 years later)
No Second Chances
- A savvy investor looks to evidence over emotion to make many decisions, but evidence only really gives us probabilities—so we play the favorable odds
- The issue with such huge decisions is that there’s no second chance if the first time doesn’t work which is what makes people risk-averse
- It’s important to act as rationally as possible and be ruled by your head rather than panic and make sub-optimal decisions
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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