ACTIONABLE ADVICE FOR FINANCIAL ADVISORS: Newsletters and Commentaries Focused on Investment Strategy

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2014-05-29 A Stealth Recovery by Pamela Rosenau of HighTower Advisors

In the fall of 2010, I had written that several indicators suggested the U.S. was entering “stealth economic recovery” mode. This “stealth” recovery coupled with low interest rates and changing demographics were going to usher us into “the age of the Dividend Darlings -- companies that pay sizeable, sustainable, and growing dividends.” Investors would not only replace their income exposure to lower yielding bonds, but also focus on growing income in the equity market.

2014-04-04 Do You Think You Can Be Effective in Market Forecasting? by Robert Isbitts of Sungarden Investment Research

It is important to understand that no one can predict the future with certainty. Investors should take so-called expert forecasts with a grain of salt. Effective portfolio management is not about forecasting the future and then clinging to that forecast. It?s about continuously evaluating information and market conditions and then making adjustments when necessary to pursue the ultimate goal. To paraphrase long time market watcher Steve Leuthold, ?Predictions are for show, our decisions within the portfolio are for dough.?

2014-03-27 The Media?s Incomplete Coverage of the Active/Passive Debate by Roger Nusbaum of AdvisorShares

Barron?s revisited the debate between active and passive portfolio management with it?s conclusion revealed in the article?s title; Go Active for Bonds, but Index Your Stocks. This is an important issue for market participants to explore and the revisit every so often.

2013-11-19 Asset Class Allocation and Portfolios: Critique and Complication by Adam Jared Apt (Article)

In Part 1 of this essay, I explained that for asset class allocation to become an investment practice, it required a foundation of theory. And Modern Portfolio Theory was that foundation. But today, most financial journalists and investment advisors who proffer advice centered on asset class allocation are?if I may judge from their writings?oblivious of this. And why shouldn’t they be? Theory is abstract and difficult to apprehend.

2013-10-10 Better Beta Is No Monkey Business by Patrick Rudden of AllianceBernstein

The infinite monkey theorem states that a monkey hitting keys at random on a typewriter keyboard for an infinite amount of time will almost surely type a given text, such as the complete works of William Shakespeare. This makes perfect sense to me, but says more about infinity than it does about monkeys.

2013-10-01 The Eight Principles of Value Investing by Scott Clemons and Michael Kim (Article)

In any environment, but especially one characterized by uncertainty, eight principles of investing are critical. These bedrock beliefs help guide our thinking at the levels of asset allocation, security selection and identification of the third-party managers we engage to help manage our clients’ assets.

2013-09-24 William Bernstein ? “Stocks for the Long Run” by Michael Edesess (Article)

William Bernstein’s reading of history is that if you want to build a nest egg and protect against the “four horsemen” that threaten it over the long term, the best thing to do is invest in a globally diversified stock portfolio.

2013-07-30 The Power of Diversification and Safe Withdrawal Rates by Geoff Considine (Article)

When Bill Bengen published his seminal research in 1994, a 4% safe withdrawal rate (SWR) was clearly attainable with a variety of asset allocations. But bond yields are lower now than they were then, and equity returns for the next 20 years are unlikely to exceed those of the prior two decades. Indeed, a new paper by three highly respected researchers showed that SWRs for stock-bond portfolios are well below 4%. But as I will demonstrate, a 4% SWR is still possible with a more diversified portfolio ? and without subjecting clients to additional risk.

2013-06-19 The Art of Low Turnover by Bill Smead of Smead Capital Management

We have argued vociferously that active managers have given up their preferred position in the investing marketplace to passive indexes because of high turnover. A recent Wall Street Journal article referenced 78% turnover as being the average among large-cap US equity funds. Studies have shown that as much as 144 basis points each year in return is chewed up by trading costs. Explaining turnover and its impact is one thing, but it is more important to ask a question. How do you practice low turnover while seeking maximal long-term performance?

2013-05-07 How to Construct a Low-Cost Conservative Portfolio by Geoff Considine (Article)

One of the greatest challenges for investors today is constructing low-risk portfolios that provide the best returns using low-cost funds or ETFs. Doing so requires advisors to define risk as the potential for retirees to fail to achieve their financial goals, instead of as volatility, as it is traditionally measured. I will show how to construct a low-cost portfolio that minimizes this definition of risk while generating a reasonable real return.

2013-04-30 Implementing Behavioral Portfolio Management by C. Thomas Howard, PhD (Article)

Behavioral portfolio management is based on the notion that if the advisor can redirect his or her emotions and mitigate the impact of client emotions, it is possible to build superior portfolios by harnessing market emotions. This article describes how this can be done and presents evidence of the superiority of focusing on investor behavior when constructing and managing portfolios.

2013-04-16 Using Behavioral Data to Earn Superior Returns by C. Thomas Howard, PhD (Article)

Emotional crowds dominate pricing; that was the first basic principle, which I demonstrated last week. This would seem to indicate that BDIs earn superior returns by taking positions opposite the crowds. But this is not necessarily the case.

2013-04-02 Choosing an Actively Managed Fund: What Works and What Doesn’t by Joe Tomlinson (Article)

Few topics have been studied as closely as selecting actively managed funds that will outperform the market. Advisors who use such funds need to be confident in their choices ? and justify their methodology to clients. Here’s what the latest academic research says on this highly contentious issue.

2013-03-19 Putting GMO’s Ideas to Work: Protected Leveraged Investing by Geoff Considine (Article)

Fears of market overvaluation lead many advisors to seek to protect against downside movements while retaining as much upside potential as possible. Recent research from GMO illustrates a low-cost way to accomplish this: decreasing equity exposure and concentrating that allocation in high-beta securities.

2013-02-27 Specializing in Tax-Friendly Investment Strategies by Jim Tillar, Steve Wenstrup of Tillar-Wenstrup

Since the turn of the century (2000) investors have not had to think much about tax-friendly investment strategies due to two major bear markets. But times have changed. The stock market is near all-time highs and many, if not all, of investors' loss carry forwards have been used up. More importantly, the Obama administration has already raised tax rates on the wealthy and the outlook is for tax increases to broaden as part of the solution to taming our debt and deficit problems. The bottom line is that investors need a new strategy for this environment.

2013-02-26 Howard Marks? Warnings and How to Protect your Portfolio by Geoff Considine (Article)

Howard Marks, founder and chairman of Oaktree Capital Management, wrote in a recent memo that the biggest danger to investors is their willingness to buy risky assets that are likely to provide low returns. Market conditions may not fully reflect current risk; option prices, for example, are very low. Some firms ? notably PIMCO ? recommend investors buy put options to protect their portfolios. I propose an alternative strategy that will be resilient to the potential shocks of increased volatility and higher interest rates, without incurring the cost of options.

2013-02-19 Tough Times for Classic Value Investors by Laurence B. Siegel (Article)

While the U.S. equity market has performed exceptionally well since its bottom in March 2009, Warren Buffett's Berkshire Hathaway has trailed the index by nearly 6%. Buffett is among a number of prominent classic-value investors who have fared poorly over this period. Over long time horizons, value investing has consistently outperformed growth strategies and the broad market index. So what is causing this recent phenomenon?

2013-02-19 Asset Class Allocation and Portfolios by Adam Jared Apt (Article)

Asset class allocation has been so thoroughly absorbed into the culture of investing that today, most investment guidance is built around it, and you may even have heard that it is the foundation of an investment plan. And like nearly all respectable investment ideas, it is misunderstood and abused. One misconception is that asset class allocation and portfolio management are the same thing. I'll explain why they aren't later, but let's start by considering another misconception.

2013-02-05 Comparing Advisors to Jim Cramer: Measuring your Professional Alpha by Bob Veres (Article)

Jim Cramer, Suze Orman and other so-called investment pundits and gurus are constantly telling consumers that they can do a great job of managing their portfolios on their own. Let's look at what the research has to say about the various investment performance benefits that advisors should be able to give their clients during the accumulation phase of their lives ? excess returns above what do-it-yourself investors could obtain on their own. I call those excess returns 'professional alpha.'

2013-01-15 The Nothing That Is by Michael Lewitt (Article)

The world is awash in money. But money isn't what it used to be. I would point to two characteristics of modern money that should be keeping portfolio managers up at night (they certainly keep me up at night).

2012-12-27 The Best Investment-Related Quotes by Glenn Frank (Article)

I've compiled a list of my favorite investment-related quotes. They come from a range of sources ? including many outside the world of finance. I hope that they provide wisdom and inspiration for the year ahead.

2012-11-27 The Superiority of Dividends: A Comparison of Value Strategies by Geoff Considine (Article)

Dividend-focused strategies have won the allegiance of many prominent investors, including Rob Arnott, Bill Gross and Jeremy Siegel. Others claim value-based strategies offer superior risk-adjusted returns. Both sides can claim a partial victory in this debate, but I will show that, when understood properly, dividend strategies offer a crucial edge - one that many investors will find attractive.

2012-11-06 Asset Location: Nine Tips to Create ?Tax Alpha? by Glenn Frank (Article)

With campaign season finally over, taxes are going to dominate the debate in Washington in the months ahead ? however things shake out at the polls today. It's going to be confusing; it's going to be uncertain. But many of the most critical questions advisors will ask can be answered with an analytical approach to deciding where to 'house' assets ? in taxable or tax-sheltered accounts.

2012-11-06 Six Technology Integration Disasters to Avoid by Jennifer Goldman (Article)

Technology integration is the Holy Grail for today's top-performing financial advisors. When applications talk to each other, advisors can run their practices more efficiently, save money and reduce the size of their staff. That all sounds great, but I'm writing to offer a word of caution: I've seen many such efforts end in disaster.

2012-10-09 Is Gluskin's David Rosenberg Right about Utilities? by Geoff Considine (Article)

They're not the sexiest property on the Monopoly board, but in today's market, there's plenty of evidence mounting that utilities are a great source of income. Indeed, Gluskin Sheff's David Rosenberg made the case for utilities in a recent commentary.

2012-10-09 High-Dividend Yield Strategy under the Microscope by Michael Nairne (Article)

High-dividend yield stocks have become the favorite recommendation of a host of advisors, but an undue focus on income alone obscures the irreducible fact that long-term investment success is based on the total return of a portfolio including both income and capital growth. This raises two questions. How has the total return of a high-dividend yield strategy fared relative to the market? How does its total-return performance compare to the returns of other possible stock-selection strategies?

2012-10-09 Letter to the Editor by Various (Article)

A reader responds to Rob Arnott's commentary, The Glidepath Illusion, which was published on September 25.

2012-09-25 Value Investing in a Macro-Driven Environment by Robert Huebscher (Article)

The GoodHaven Fund (GOODX) is managed by Larry Pitkowsky and Keith Trauner. For most of the previous decade, Larry and Keith held research, portfolio management, and executive positions with the Fairholme Fund. I spoke with them last week.

2012-09-25 How to Build a Portfolio by Adams Jared Apt (Article)

This is the first of a set of three articles intended for the educated layman, in which I will combine the core ideas presented in my preceding articles into a comprehensive description of how to put together a portfolio. In this one, I'll explain what is often called Modern Portfolio Theory.

2012-09-18 The Trend is Your Friend by Keith C. Goddard, CFA (Article)

John Hussman's recent market commentary, The Trend is Your Fickle Friend, highlighted the limitations of trend-following investment strategies that rely on moving-average crossover rules as a primary filter. But an extensive study conducted by our firm demonstrated that a simple moving-average crossover system outperforms buy-and-hold, while reducing drawdown risk and volatility.

2012-09-11 Hedged Equity Value Goes Beyond Performance by Emmett Maguire III, CFA (Article)

Advisors often overlook the value a hedged equity manager can inject into a portfolio, as recent outperformance of long only indices (S&P 500) has overridden other considerations. The case for hedged strategies, however, goes beyond relative returns.

2012-09-04 The Ultimate Income Strategy - Higher Yield and Lower Volatility by Geoff Considine (Article)

Investors, especially those in the de-accumulation phase of their retirement, count on high income and low volatility. Achieving the best possible tradeoff between yield and risk is a major challenge for advisors. Over the last two years, I've shown how to construct a low-risk portfolio - the ultimate income portfolio (UIP) - that yields over 9.0%. Let's look back at how those portfolios performed and the components of this year's UIP.

2012-08-07 Letter to the Editor by Various (Article)

A reader responds to Bob Veres' article, The Alternative to AUM-Based Fees: The Total Profitability Retainer Formula , which was published last week.

2012-07-31 Venerated Voices by Venerated Voices (Article)

We published our quarterly update for the Venerated Voices awards. Rankings were issued in three categories: The Top 25 Venerated Voices by Firm, The Top 25 Venerated Voices by Advisor and The Top 10 Venerated Voices by Commentary.

2012-07-24 High Yield and Low Risk: Finding the Best Closed-End Funds by Geoff Considine (Article)

Yield-starved investors have ventured into exotic - and often risky - assets, including hedge funds, non-traded REITs and private placements. But an asset class that has been around since 1893 offers a compelling combination of low risk and high income. A carefully selected portfolio of closed-end funds (CEFs) will yield 8% with less volatility than the S&P 500.

2012-07-10 The Plight of the Conservative Retiree by Michael Nairne (Article)

Today's extraordinarily low rates on top of a lower equity premium leave conservative retirees with the risk of heightened capital depletion as poorer portfolio returns may be inadequate to offset the combined impact of withdrawals and inflation.

2012-07-10 The Disruptive Rainmaker by Beverly Flaxington (Article)

We brought a new advisor into our firm two years ago - a rainmaker. In the beginning he added a lot of value and we were excited to have him. Lately he has been disruptive - boldly and publicly questioning some of the decisions my partners and I have made. Should I put up with the behavior?

2012-06-12 The Problems with Trying to Benchmark Unconstrained Portfolios by Ken Solow (Article)

Benchmarking unconstrained, 'go-anywhere' managers is difficult. Common methods to determine an appropriate benchmark - such as an ex-post regression of how the fund was invested - can obscure the actions of the manager. Is the only solution to simply select an arbitrary benchmark and proceed accordingly?

2012-06-05 Finding the Best Dividend Fund by Geoff Considine (Article)

Assets are flowing into dividend-stock funds. But many experts are warning that those investors are setting themselves up for significant losses. Using an objective methodology that assesses tradeoff between yield and risk, we can determine those funds that investors should prefer - and a few they should avoid.

2012-05-01 Making the Right Wager on Client Longevity by Manish Malhotra (Article)

Using annuities to fund retirement is anathema to most advisors, who view the loss of control over one's capital and impossibility of a bequest as nonstarters for their clients. But as clients reach the later stages of their retirement, those arguments no longer apply. A single-premium immediate annuity is superior to a TIPS ladder or a systematic-withdrawal portfolio for funding the last phase of retirement.

2012-05-01 Why MLPs Belong in Your Portfolio by Geoff Considine (Article)

One would think that an asset class yielding 7% and carrying less volatility than do equities would be popular with investors. Yet, despite those attributes, master limited partnerships (MLPs) remain unknown or ignored by large numbers of investors. The case for MLPs is compelling, so it's time for a deep examination of the special properties of this asset class.

2012-04-17 The Rebalancing Problem by Michael Nairne (Article)

Selling winning asset classes to buy losers runs counter to human nature. But doing so with discipline can increase the potential return of a portfolio while critically maintaining its risk profile. The rebalancing premium is an important and often overlooked addition to returns of properly managed portfolios.

2012-04-03 Gassed Up but No Place to Go by Geoff Considine, PhD (Article)

When a great investor points to a vastly underpriced asset, a natural first reaction is to devise the best strategy for buying it. Sometimes, however, the impediments to that strategy prove too great, something anyone will soon discover who listens to Jeremy Grantham's assertion that 'everyone who has a brain should be thinking of how to make money' long-term on natural gas.

2012-03-20 Bob Rodriguez on the Dangers in Today's Markets by Robert Huebscher (Article)

Bob Rodriguez is the managing partner and chief executive officer of Los Angeles-based First Pacific Advisors. In this interview, he discusses how the challenges faced by the US economy will impact the capital markets.

2012-02-14 The Dividend Yield Love Affair by Michael Nairne (Article)

Employee share-based compensation is now a significant expense deduction for public companies and hence, is already accounted for on the financial statements. Concerns that options-related stock issuance nullifies the impact of stock buybacks are accordingly overstated. This bolsters the view that you need to look at stock buybacks as an additional form of cash remittance to shareholders and not simply at dividends.

2012-02-07 Jeremy Siegel, Rob Arnott and Other Experts Forecast Equity Returns by Laurence B. Siegel (Article)

A forecast of the equity risk premium (ERP) tells you how much to save, how to allocate assets between equities and fixed income, and how much you can consume. Given its great importance, the CFA Institute recently convened a group of top-level academics and practitioners to forecast future ERPs - and to reflect on similar predictions they had made a decade ago.

2011-12-27 The Ten Best Articles You Probably Missed by Robert Huebscher (Article)

Great articles don't always get the readership they deserve. Here are 10 articles that you might have missed, but I believe merit reading.

2011-12-20 Do-It-Yourself Equity-Indexed Annuities by Geoff Considine, Ph.D. (Article)

Equity indexed annuities offer retirees a compelling combination of guaranteed income and participation in the market?s upside. But EIAs are exceedingly complex and have been the subject of numerous regulatory challenges. For those who seek a simpler alternative with a comparable return profile, a combination of fixed-income securities and options is viable choice.

2011-12-13 Harnessing the Power of Momentum by Michael Nairne (Article)

A market phenomena that we can harness on behalf of our clients is momentum - the propensity for price trends to persist in the short-term. I examine the origins of momentum, illustrate its return premium and consider how managers can leverage momentum on behalf of investors.

2011-11-08 An International Perspective on Safe Withdrawal Rates by Wade Pfau (Article)

Prospective retirees must consider whether they are comfortable basing retirement decisions on the impressive but perhaps anomalous numbers found in historical US data. What has been safe for US retirees in the past has been far less secure for their foreign counterparts.

2011-11-01 The Danger in European Stocks by Geoff Considine, Ph.D. (Article)

European equity prices, depressed by fears of a sovereign debt crisis, are cheap to such a degree that William Bernstein, author of The Intelligent Asset Allocator, called them a true bargain. Income-oriented investors, in particular, may be tempted by 4.2% dividend yields and a market-wide P/E ratio of approximately 11. My analysis, however, contradicts Bernstein's and shows the underlying risk those investments carry.

2011-11-01 What, Me Worry? by Scott A. MacKillop (Article)

As we gnash our teeth over the latest crisis du jour let's remember that difficulties do not, ultimately, prevent progress. On the contrary, over my lifetime progress has continued unimpeded despite a more or less constant stream of difficulties.

2011-10-11 The Global ?Old Normal? by Michael Nairne (Article)

Amidst a torrent of dismal economic news and plunging stock prices, investment horizons have become increasingly short-sighted. The new normal of faltering growth and painful deleveraging appears to be only too true. However, investors capable of taking a long-term, global view will find forces at work that will likely drive resurgent world growth akin to that which occurred in the decades right after World War II.

2011-09-27 Reexamining Bill Gross' Decision to Sell Treasury Bonds by Geoff Considine (Article)

Bill Gross made headlines in February by asserting that Treasury bonds were not providing enough yield to make them worth the risk and reducing his allocation to zero in the PIMCO Total Return Fund. The subsequent rally forced him to admit his mistake in August, but by then his fund was trailing 90% of its peers and having its worst year since 1995. I will examine Gross' decision in retrospect, to illustrate its tactical and strategic costs and benefits for his shareholders.

2011-08-30 Why High-Yield Bonds Make Sense Today by Geoff Considine, Ph.D. (Article)

None other than Gluskin Sheff's Dave Rosenberg, the widely followed analyst who was been consistently bearish in the current market cycle, said last week that high-yield bonds are 'a good place to be right now.' Recent price declines have made them attractive in the short term, and their risk-adjusted returns make them attractive to longer-term strategic investors.

2011-08-16 A Commentary on the Correction by Michael Nairne (Article)

Market corrections are always painful and this one particularly so because of the lingering anxiety from memories of the 2008-2009 market crash. I explore the history of stock market corrections and examines the dynamics of the recent downturn as well as actions that may be warranted, depending on individual circumstances.

2011-08-02 Improving on the Ultimate Income Portfolio by Geoff Considine (Article)

The Ultimate Income Portfolio, which was published in this newsletter July 6 of last year, has delivered the risk-adjusted returns that I projected. Here's a detailed look at how last year's portfolio performed and several ways it can be improved in today's environment.

2011-07-12 Harold Evensky on the New Rules for Wealth Management by Robert Huebscher (Article)

If you don't have a copy of The New Wealth Management on your bookshelf, you should. From gauging the risk tolerance of your clients to measuring the performance of their portfolios, this book provides comprehensive guidance for virtually every aspect of a financial advisory practice. Harold Evensky, the lead author, spoke with me last week and highlighted some key themes in the newly released second edition.

2011-07-12 The Real Story behind Bond Yields by Michael Nairne (Article)

One of the most important questions that individuals should ask before making any investment is 'Am I being paid enough for the risk of this investment?' I analyze the returns available today from government bonds and answer this important question for this asset class.

2011-07-05 The Chinese Black Swan by Vitaliy Katsenelson (Article)

Party rulers in China are trapped in a position that chess players deeply fear - zugzwang - where any move make puts you at disadvantage. In China, the cost of both action and inaction is potential economic collapse.

2011-06-28 An Important Challenge to ?Stocks for the Long Run? by Geoff Considine (Article)

Jeremy Siegel's dictum - to invest in stocks for the long run - faces a new challenge. A recent paper by Robert Stambaugh, a Wharton colleague, and Lubos Pastor of the University of Chicago says that once you take into account the uncertainty of estimating future returns, stocks are not nearly as attractive to retirement-oriented investors as Siegel has claimed.

2011-05-24 How to Build a Low-Risk High-Income Portfolio by Geoff Considine (Article)

Prominent investors, including Bill Gross and Warren Buffett, now say that the yields on long-term government debt do not justify the risks. But is this perception correct? I offer a way to answer that question - and to construct a low-risk high-income portfolio - using the prices of put options to derive the true risk levels of various asset classes.

2011-05-10 Lessons from the Farm by Michael Nairne (Article)

Farmers know all about droughts. Droughts occur in nearly all climates and impair all types of crops. They are unpredictable, yet are recurring and can last for years. Likewise, performance droughts abound in the world of investing.

2011-05-10 What Return can we Expect from Stocks? by Adam Jared Apt (Article)

What return can we expect from stocks over the long term? This sentence contains four problematic terms: 'return,' 'expect,' 'stocks,' and 'long term.' Intended for the educated laymen, this article considers each in turn.

2011-05-10 Howard Marks on the Human Side of Investing-Q & A by Robert Huebscher (Article)

Howard Marks is widely regarded for his thought-provoking essays on the discipline and process of value investing. He is the chairman and co-founder of California-based Oaktree Capital, and he delivered the keynote address at the Value Investing Congress in Pasadena last week. Here are excerpts from the Q&A.

2011-04-26 When is a Fiduciary not a Fiduciary? by Jeffrey Briskin (Article)

You would think every investment professional who claims to be acting in a fiduciary capacity for his or her clients understands exactly what that entails. But the results of a recent survey of brokers and RIAs indicates that many apply their own personal 'fiduciary litmus test' when determining where these responsibilities start and end.

2011-03-22 No Shortcuts to Greatness by Vitaliy Katsenelson (Article)

Nothing defined Alan Greenspan's tenure as chairman of the Federal Reserve Bank more than his wholehearted embrace of capitalism. According to a current Fed governor, however, both Greenspan's Fed and the Fed today have not been the stalwarts of capitalism that the Maestro believed them to be.

2011-03-15 Margin Shrinkage - It Can Happen to You by Vitaliy Katsenelson (Article)

Profit margins are a tick away from all-time highs and are creating the impression of cheap equity valuations. But that impression is a mirage, because today's generous margins are destined to shrink.

2011-03-08 The Sweet Spot by Michael Nairne (Article)

Today?s low interest rates and lackluster stock valuations suggest portfolio returns going forward will be modest. Investors in search of higher return opportunities need to consider small-company value stocks. We explore how this asset class can improve portfolio performance for long-term, patient investors and deal with its risks and limitations.

2011-02-22 Bruce Berkowitz on the Exceptional Value in the Financial Sector by Robert Huebscher (Article)

Fairholme's Bruce Berkowtiz, US stock-fund manager of the decade, discusses his large position in the financial sector and why he believes the big bets he is making do not amount to Russian roulette. He also comments on his recent nomination of former Florida Governor Charlie Crist to the board of St. Joes.

2011-02-15 Toward an Understanding of Risk by Robert Huebscher (Article)

How should clients think about risk in their portfolios? Advisor Perspectives put that question to a cross-section of prominent advisors and academics. Their answers encompassed diverse opinions and underscored how crucial that question is to the investment process.

2011-02-08 Optimizing Your Fixed Income Allocation by Geoff Considine, Ph.D. (Article)

Here's a little-known fact: The traditional 60/40 portfolio, when using the aggregate-bond index for its fixed-income allocation, has a 99% correlation to the returns of the S&P 500. One way to overcome the limited diversification value offered by the aggregate index is to use a risk-parity approach. In this article, I explore the concept of risk parity in asset allocation and how it provides value for portfolio management.

2011-01-11 What's Past is Prologue by Michael Nairne (Article)

With nearly two centuries of stock market performance history now available, investors should be well-armed intellectually to deal with the vicissitudes of equity investing. Many, however, are not. I explore this history and what it means for future performance.

2010-12-14 US More Likely to Learn From (Than Repeat) Japan's Mistakes by Bob Doll (Article)

In this report, Bob Doll, BlackRock's Chief Equity Strategist for Fundamental Equities and head of the US Large Cap Series equity team, homes in on some of the most striking points of comparison between the two countries' situations and experiences to support the contention that the United States will avoid Japan's fate.

2010-12-06 The Dangers of Rebalancing by Michael Edesess (Article)

Every portfolio should be rebalanced to its targeted asset allocation, we are taught. Indeed, there may be no other precept as routinely and studiously practiced among financial advisors. But does rebalancing either increase expected return or reduce risk? If so, why? The answers to those questions reveal that it may be prudent to rebalance, but not for the reasons you think.

2010-12-06 Real Return Expectations by Michael Nairne (Article)

There is nothing more important to long-term investors than the real rate-of-return that they can reasonably expect to earn on their investments. We forecast the expected real annual return for US stocks over the next 10 years and then set out ways to potentially improve on what many will find to be a discouragingly low expected return.

2010-11-30 QE2: Beware the Perils of its Success by Vitaliy Katsenelson (Article)

QE2 is like a drug prescription that comes with a list of side effects that are often worse than the disease it was supposed to cure. It is difficult to know the unintended consequences of QE2, but it may result in a substantial decline in the dollar, stagflation, lower economic growth and much higher interest rates.

2010-11-16 A Reading List for 2010: Part 2 by Vitaliy Katsenelson (Article)

Updated for 2010 and in time for the holidays, here is the latest installment of my recommended books. I originally wrote this list in 2008 and again last year. I intend to keep adding to and revising it every year. It contains seven sections: Selling, Think Like an Investor, Behavioral Investing, Economics, Stock Market History, Risk and Books for the Soul. The first three sections were presented last week and the remaining four are presented here.

2010-11-16 Using Buy-Side Analytics to Improve Stock Selections by C. Thomas Howard, PhD (Article)

Buy-side active equity managers regularly "put their money where their mouth is" by ranking and weighting their best stock ideas within their portfolios, and this information can be used to better identify which stocks will deliver superior future performance.

2010-11-09 A Reading List for 2010 by Vitaliy Katsenelson (Article)

Updated for 2010 and in time for the holidays, here is the latest installment of my recommended books. I originally wrote this list in 2008 and again last year. I intend to keep adding to and revising it every year. It contains seven sections: Selling, Think Like an Investor, Behavioral Investing, Economics, Stock Market History, Risk and Books for the Soul. The first three sections are presented below and the remaining four will be presented next week.

2010-11-09 Bogus Numbers by Michael Nairne (Article)

The crux of the difference between the 'cheap' and 'overvalued' market valuation views lies in the selection of earnings numbers, of which there are two basic sets. The broadest traditional measure is 'as reported' earnings which includes all charges except the cumulative impact of accounting changes, discontinued operations and extraordinary items. Is the market cheap by the appropriate measure?

2010-10-26 An Exceptional Resource for Asset Allocation by Michael Edesess (Article)

Roger C. Gibson's fine and exemplary book, Asset Allocation: Balancing Financial Risk, Fourth Edition, shows that character and conscience-based counseling still exist, even in the financial profession. It is still possible for advisors to look out for their clients' long-term interests.

2010-10-12 Letter to the Editor by Various (Article)

In this letter to the Editor, a reader responds to our article, The Misguided Promise of 529 Plans, which appeared last week. We were wrong, the reader says, to compare 529 plan performance to the 'market,' and solutions superior to our recommended zero-coupon muni bond strategy are available through actively-managed equity funds.

2010-10-05 The Myopic Bond Market by Michael Nairne (Article)

Many investors seem to believe that today's low bond yields are proof positive that inflation rates will stay low for many years. Michael Nairne assesses how successful the bond market has been in anticipating future inflation and how well bonds have performed historically in low yield environments. Bond strategies today need to reflect our findings.

2010-10-05 A September to Remember by Ron Surz (Article)

In his quarterly market analysis, Ron Surz notes that September has historically been the worst performing month for US stock markets, losing 1% on average over the past 85 years, while the average return in the other 11 months was a positive 1.3%. Not so this September. Surz reviews global market performance and provides his thoughts on peer group analysis and target date funds.

2010-09-28 A Better Alternative - Natural Resource Equities by RS Investments (Article)

Investors look to the commodity market to provide three primary benefits: portfolio diversification, inflation protection, and equity-like returns. However, empirical data shows that over the last decade, shifts in underlying fundamentals have undermined the role which commodities are expected to play in a diversified portfolio, particularly relative to natural resource equities. RS Investments reviews the return streams generated by both commodities and natural resource equities in the context of the benefits expected from each investment option. We thank them for their sponsorship.

2010-09-07 The Free Lunch Illustrated by Michael Nairne (Article)

One of the most remarkable discoveries in modern finance is the ability to improve the expected return of a portfolio while simultaneously reducing its risk. In this guest contribution, which advisors can share with clients, Michael Nairne explains that the proverbial "free lunch" does exist, its exploitation requires a focus not only on the returns and volatility of the assets in the portfolio but on the degree of covariance between those assets.

2010-08-24 What Investors Really Want by Robert Huebscher (Article)

Using a mean-variance optimizer to construct a retirement portfolio that sits on the efficient frontier is tantamount to dining on a well-prepared meal that was pureed in a blender, believes Meir Statman, a professor of finance at Santa Clara University. Statman's research focuses on behavioral finance, and how advisors can help investors make smarter decisions.

2010-07-27 Active Managers Add More Value in Bull than Bear Markets by Jane Li, CFA, CAIA (Article)

In this guest contribution, Jane Li of FundQuest argues that both active and passive investing have their strengths and weaknesses; it depends on the market segment in question and on the economic climate. Active managers tend to add value in bull markets, but their value is shakier in bear markets.

2010-07-20 Beyond The Stars: Improving Active Fund Selection Based On Manager Skill by Michael Ervolini (Article)

After a brief review of known shortcomings of common fund evaluation methodologies, Mike Ervolini introduces a new approach based upon analytics that his firm has developed. Rather than relying on non-predictive metrics such as past performance, his approach looks at investment processes in relation to deeper skills that managers possess regarding buying, selling, and position-sizing.

2010-07-06 And the Winner Is... by Michael Nairne (Article)

As investors rush into U.S. Treasury bonds in response to a weakening economy that may portend the onset of deflation, this begs the question whether there is a superior deflationary hedge. History can be instructive in this regard, as Michael Nairne explains in this guest contribution.

2010-06-08 Three Words to Blow Away Clients by Dan Richards (Article)

Every advisor's goal is to build deep relationships with key clients, partly to foster loyalty and increase the assets you have from them, partly to open the door to referrals. One way to do that is to have clients "wowed" by their experience in dealing with you, and Dan Richards says three key words will create that "wow" effect with important clients.

2010-06-01 Municipal Bond Market Insights by Northern Trust Investments (Article)

Not surprisingly, the most profitable investment trends tend to be those with the most staying power. That could be particularly good news for investors in municipal bonds, since structural forces are in place that may make tax-free bonds - and the income they generate - even more valuable in the years to come. Northern Trust provides their secular outlook for municipals, and we thank them for their sponsorship.

2010-05-18 Actively Passive or Passively Active? by Craig L. Israelsen, Ph.D. (Article)

The active-passive debate typically centers on the nature of the investment product - whether it is an actively managed fund or a passive index fund. This, however, is only one aspect of that debate, and to consider it alone represents too simplistic a view, says Craig Israelsen in this guest contribution. A broader issue, namely how a portfolio of actively or passively managed funds is managed over time, has a more profound impact on whether one is truly an active or passive investor.

2010-04-20 Lessons from Yale?s Endowment Model and the Financial Crisis by Geoff Considine, Ph.D. (Article)

The Yale endowment's performance during the financial crisis was worse than what would be mathematically expected, but not significantly enough to question the endowment model's tenets. Moreover, Yale's performance and philosophy suggest two very important lessons for advisors and investors- to diversify beyond equities and fixed income, and that some illiquid asset classes can be an important source of alpha.

2010-03-23 The Best Books on Passive Investing by Indudeep Chhachhi & Edward R. Wolfe (Article)

Two finance professors, Edward Wolfe and Indu Chhachhi, survey the literature on passive investing and offer their recommendations for authors and books. Whichever side of the active-passive debate you take, these books should be required reading. The evolution through which the literature on passive investing has gone is striking. Early writers started out with a point to prove: that passive investing is the only way to invest that makes sense. Today, the writing in this area has moved beyond "proving a point" to expanding on what is a settled issue.

2010-03-02 Asset Allocation for Grantham?s Seven Lean Years by Geoff Considine, Ph.D. (Article)

Followers of Jeremy Grantham know his consistently accurate long-term forecasts well, as well as his ability to identify and avoid asset bubbles and steer clients into high-performing asset classes. Grantham's prescience is remarkable but not irreplicable. Geoff Considine shows that his Monte Carlo simulations nearly match Grantham's forecasts, and he reviews the implications for asset allocations.

2010-03-02 The Elusiveness of Persistence by Michael Nairne (Article)

In this guest contribution, Michael Nairne examines a manager's track record, and highlights the critical question of persistence in performance - whether a manager's past performance is predictive of future performance. Certainly, he says, considering the avalanche of media articles on top winning funds and the endless sales pitches to investors trumpeting "best in class" managers, one would assume that there is some reasonable level of persistence in performance...

2010-02-09 Transforming Your Business with an Integrated Solution by Marie Swift (Article)

Marie Swift evaluates the various systems and processes that are kicked-off at a typical firm from one of the most common client interactions - an inbound call. Many firms work with disparate software systems and utilize far too many manual tasks - resulting in duplicate data entry and poor customer service. Conversely, Marie evaluates this same scenario utilizing an integrated software and services solution, Tamarac Advisor 9, and finds dramatic gains in efficiency, accuracy and overall firm profitability. We thank Tamarac for their sponsorship.

2010-02-09 China?s Quest for a Shortcut to Greatness by Vitaliy Katsenelson (Article)

The Chinese economy must be getting out of control, because the Chinese government is doing the unthinkable: It is desperately trying to put the brakes on its economy. Author and fund manager Vitaliy Katsenelson looks back at how China got into this trouble and looks forward to China's prospects.

2010-02-05 Discounts and Relative Performance by Rob Arnott of Research Affiliates

Arnott reviews the methodology behind fundamental indexing. Over the short term, fundamental indices take on much greater exposure in volatile markets to companies which underperformed relative to their economic size. This article explores the performance implications of the difference in relative valuation multiples.

2010-02-02 Who will Pay for the Burlington Acquisition? by Vitaliy Katsenelson (Article)

According to investment manager Vitaliy Katsenelson, Warren Buffett overpaid in Berkshire's acquisition of Burlington Northern. He states, "Though I agree with Buffett's assessment of the Kraft-Cadbury deal, I fear that investors and media are completely ignoring Berkshire's own, $30-billion-plus acquisition of a very cyclical, capital-intensive, not terrifically high-return-on-capital business - Burlington Northern."

2010-02-02 More Government in the Financial Sector to Save Capitalism by Vitaliy Katsenelson (Article)

In this article, Vitaliy Katsenelson argues that, despite his free market bias, the "too big to fail" banks will benefit from tighter regulation.

2010-01-26 Diversification Really Does Pay Off by Geoff Considine, Ph.D. (Article)

The last decade severely tested investors' belief in the value of diversification and strategic asset allocation, leading some in the financial media to assert that diversification and asset allocation failed and were worthless during the crash of 2007-2008. Now is an ideal moment to look back and assess the carnage.

2010-01-12 Bruce Berkowitz on the Keys to Success for the Fairholme Fund by Robert Huebscher (Article)

Bruce Berkowitz, manager of the Fairholme Fund, was just named Morningstar's US fund manager of the year. In our interview, he discusses current market conditions, the thesis behind several of his largest positions, his views on health care reform, and the elements of the macro environment that concern him most.

2010-01-05 Risk Management through Costless Collars by Geoff Considine (Article)

Nassim Taleb and Zvi Bodie are among those who advocate a wealth management strategy that includes options. Despite their evangelism, though, options are rarely a part of retirement portfolios. The costless collar, a straightforward options strategy, gives investors the upside of an asset class (such as equities) while absolutely limiting the downside risk.

2010-01-05 Perspectives on 2009 and Beyond by Ron Surz (Article)

We are again privileged to provide Ron Surz' award-winning market commentary. Surz examines global performance in Q4, 2009 and the prior decade.

2009-12-15 Investing in Range-bound Markets by Vitaliy Katsenelson (Article)

Vitaliy Katsenelson, a frequent contributor to these pages, reviews his thesis for secular market cycles, why the US markets remain locked in a range-bound state, and what it will take for them to exit from that state.

2009-12-08 Dubai?s Moon Shot by Vitaliy Katsenelson (Article)

Dubai is like NASA; both have proven that anything is possible when you ignore economic costs. As Vitaliy Katsenelson writes, many technological discoveries were made in the process of putting a man on the moon; but the project did have, and was expected to have, a negative return on capital.

2009-12-01 To Roth or not to Roth, That is the Question by David B. Loeper, CIMA, CIMC (Article)

With the new Roth conversion rules about to be lifted next year and a "one-time special offer" available to allow investors to spread the tax bite of conversion over two years, more and more Roth conversion calculators are showing up every day. Be wary, says Dave Loeper of Wealthcare Capital. If you use one of these calculators, don't say he didn't warn you about how misleading the results can be.

2009-11-17 Our Steroidally Challenged Economy by Vitaliy Katsenelson (Article)

Vitaliy Katsenelson writes that the US economy is like a marathon runner who, after suffering an injury, takes steroids in order to return to racing. His performance is fine, but what don't see are the risks, just as our economy is now "steroidally challenged."

2009-10-27 Managing Downside Risk in Retirement Planning by Geoff Considine, Ph.D. (Article)

Boston University professor Zvi Bodie advocates a retirement investment strategy that offers investors some of the upside potential in equities tempered with downside protection against bear markets and a low-risk inflation hedge via heavy allocation to TIPS. Geoff Considine examines Bodie's strategy and shows that it will work very effectively, including in a bear market like the one just experienced.

2009-09-29 Strategic and Tactical Perspectives on Gold by Geoff Considine, Ph.D. (Article)

There are good reasons for investors to maintain a long-term strategic allocation to gold, which has clear, positive portfolio benefits (due to low correlation to other asset classes). That said, gold is in an historic run-up in value and has been generating unsustainably high returns. Because of its high price and rising volatility, Geoff Considine argues there is significant tactical risk in gold.

2009-09-29 Taste Testing Investment Style Sausages by Ron Surz (Article)

Equity indexes, like those offered by Russell and S&P are the investment-world equivalent of sausages - chopped up pieces of meat in tightly wrapped packages. Most shoppers buy sausages based on brand name, as do investors when they choose their benchmarks. In this guest contribution, Ron Surz dissects these index sausages and explains the real differences in their ingredients.

2009-09-15 Theoretical Support for the Moving Average Crossover by Keith C. Goddard, CFA (Article)

In this guest contribution, Keith Goddard matches an appropriate descriptive theory about how asset markets work with recently published normative theory using Ted Wong's moving average crossover as an indicator for timing portfolio changes in active portfolio management strategies. He proposes that the theory of "Rational Belief Equilibrium" in asset markets, developed by Stanford professor, Mordecai Kurz, helps to explain why moving average crossovers have demonstrated predictive value in the stock market, and why they might continue to offer predictive value in the future.

2009-09-08 Are REITs Now Undervalued? by Geoff Considine, Ph.D. (Article)

The last couple of years have been rough for real estate, but there was a time not too long ago when it seemed that this was a 'special' asset class, with REITs providing valuable diversification benefits and consistently high returns. Do today's low valuations represent an opportunity to buy? Can investors expect a return to low correlations for REITs with the major equity market indexes?

2009-09-08 Infrastructure Investing by Michael D. Underhill (Article)

With global markets improving, liquidity returning to the credit markets, and valuations improving, the infrastructure market looks promising. In this guest contribution, Michael Underhill argues that infrastructure assets,when chosen correctly, can diversify an investor's portfolio because of their low correlation with other asset groups, their consistent returns coupled with lowered levels of risk, and their potential for inflation-linked returns.

2009-09-08 Letters to the Editor by Various (Article)

We have two letters to the Editor, commenting on our articles about Politics and Fund Mangers and Jim Cramer.

2009-09-01 Additional Thoughts on the ?New Normal? by Geoff Considine, Ph.D. (Article)

A number of readers responded to Geoff Considine's article three weeks ago, What the New Normal Means for Asset Allocation, including Larry Katz, Director of Research at Merriman, whose response we published last week. Katz criticized Considine along a number of dimensions, and in this guest contribution Considine defends his New Normal asset allocation.

2009-08-25 Should Investors Hold More Equities Near Retirement? by Ron Surz (Article)

A just-published paper argues that investors should hold more equities as they near retirement, contrary to conventional wisdom and to the glide paths employed by the target date fund industry. Ron Surz examines this research, and argues that the authors of the paper failed to properly consider the risks inherent in such a strategy.

2009-08-11 What the New Normal Means for Asset Allocation by Geoff Considine, Ph.D. (Article)

Bill Gross of PIMCO forecasts a New Normal - slow economic growth, higher inflation, and increasing correlations among asset classes. If this view is correct, what should investors do? Geoff Considine examines the implications for asset allocation and financial planning by stress-testing some well-known asset allocations to see how well they will serve investors in the forecast environment.

2009-07-21 The Retirement Portfolio Showdown: Jeremy Siegel v. Zvi Bodie by Geoff Considine, Ph.D. (Article)

When investing for retirement over long time horizons, advisors can choose from two apparently conflicting approaches. They can follow the advice of Wharton professor Jeremy Siegel, who has steadfastly advocated equity-centric portfolios, most notably in his highly popular book, Stocks for the Long Run. Or they can listen to Boston University professor Zvi Bodie, who says equities are simply too risky over the long term, and the core of a retirement portfolio should be Treasury Inflation Protected Securities (TIPS). Geoff Considine's article shows how to resolve this conflict.

2009-07-21 Taking Care of Compliance by William G. Mulligan (Article)

Without technology and automation, compliance will consume valuable time and resources. Even when things go relatively well, important regulatory obligations and requirements often fall through the cracks. William Mulligan of HedgeOP argues that getting the right tools in place doesn't just simplify a firm's regulatory responsibilities; it also sends a strong message to clients that the firm is trustworthy, operationally sound and up-to-date with its fiduciary responsibilities.

2009-07-07 Letters to the Editor Moving Average: Holy Grail or Fairy Tale by Various (Article)

In the second set of our letters to the Editor, we publish a series of responses to Ted Wong's article last week, Moving Average: Holy Grail or Fairy Tale - Part 2.

2009-06-23 Compelling Evidence That Active Management Really Works by Ken Solow (Article)

The majority of academic studies conclude that active management does not add value for investors. However, a closer look at how many studies were conducted reveals several flaws in their methodology that are not as well-known as the accepted conclusion about active versus passive management. Guest contributor Ken Solow revisits work by two Yale researchers showing the value added through active management.

2009-06-16 High-Yield Bonds A Potential Opportunity for the Risk Tolerant by Northern Trust Investments (Article)

High-yield bonds have recently offered investors historically high spreads relative to Treasury and investment-grade corporate bonds, presenting attractive current income potential in today's low-rate environment. The current recessionary environment also poses a heightened risk of default, underscoring the importance of security selection and intensive analysis of underlying fundamentals. We thank Northern Trust Investments for this contribution and their sponsorship.

2009-06-16 What Separates Great from Ordinary CRM Systems by Gary Kinghorn (Article)

In this guest contribution, Gary Kinghorn of AdviceAmerica says that effective CRM system must be centralized applications where all team members can view, share and update information, such as client tasks, documents, data and portfolios. This ensures everyone has current and accurate information at a glance.

2009-06-02 Helping Advisors Grow by Susan Weiner (Article)

George Tamer, Director of Institutional Sales at TD AMERITRADE Institutional, discusses the innovative strategies advisors are using to add clients and improve profitability. Tamer is also seeing an upturn in merger activities, and describes how advisors looking to buy or sell a firm can best position themselves. We thank them for their sponsorship.

2009-05-19 David Swensen's Ascent by Mebane Faber (Article)

Mebane Faber provides an excerpt from his new book, The Ivy Portfolio, on the ascent of David Swensen and the development of the tools employed to manage Yale's endowment. Faber shows the data Swensen used to determine Yale's aggressive allocation to alternative asset classes.


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