How Fantasy Ruins Football (and Investing)

How Fantasy Ruins Football (and Investing)

By Tim Maurer It’s that time of year again, where the heat of summer recedes, sweatshirts make a comeback and businesses lose billions in flagging productivity due to fantasy football. But it’s not just businesses losing out—fans and players come up short as well. How, after all, can I truly dedicate myself to rooting fully for my beloved Baltimore Ravens if I took Le’Veon Bell—who, for those not acquainted with the best rivalry in football, plays running back for the Steelers—second in the fantasy draft? It can’t be done. It’s just wrong. I’m kidding, right? Partly. But there are more serious personal and financial implications to embracing fantasy (sports or otherwise). The danger in fantasy is its distance from reality. It’s “betting on a future that is not likely to happen,” according to Psychology Today. Our fantasies tend to sensationalize what we’d prefer to imagine while ignoring what we’d prefer to not. Then, when our actual spouse, child, parent, friend or co-worker falls short of the impossibly high bar we’ve set for them, we—and often, they—are crushed. “Emotional suffering is created in the moment we don’t accept what is,” says Eckhart Tolle, who, perhaps unintentionally, delivers a potent dose of truth that especially informs us in our personal dealings with money. Here are a handful of financial fantasies, followed by their unvarnished truths: Fantasy: The market has made 10% per year, so I should expect to make 10% per year. Truth: The market almost never makes 10%. In fact, in the past 88 years, only thrice has the S&P 500 ended the year with a positive return between the numbers 9 and 11! The market’s only consistent...
Women Changing the Face of Business

Women Changing the Face of Business

Manisha Thakor and Kristy Wallace, the CEO of Ellevate Network, launch a conversation about leadership, gender diversity, and what it will take to begin closing the gender achievement gap in business and social entrepreneurism on a recent MoneyZen Podcast. For the original article, click...
Testing the Fama-French Five-Factor Model

Testing the Fama-French Five-Factor Model

By Larry Swedroe The history of asset pricing models is one of evolution. As anomalies are discovered, our knowledge advances and new models are developed. Building on the work of Harry Markowitz, the trio of John Lintner, William Sharpe and Jack Treynor are generally given most of the credit for introducing the first formal asset pricing model, the capital asset pricing model (CAPM). It was developed in the early 1960s, and provided the first precise definition of risk and how it drives expected returns. The CAPM looks at risk and return through a “one-factor” lens—the risk and return of a portfolio are determined only by its exposure to market beta. This beta is the measure of the equity-type risk of a stock, mutual fund or portfolio relative to the risk of the overall market. The CAPM was the financial world’s operating model for about 30 years. With the publication of the 1992 paper “The Cross-Section of Expected Stock Returns” by Eugene Fama and Kenneth French, the CAPM was replaced by the Fama-French three-factor model, which added the size and value factors. Mark Carhart, in his 1997 study, “On Persistence in Mutual Fund Performance,” was the first to use momentum, together with the Fama-French factors, to explain mutual fund returns, and the Carhart four-factor model became the new standard. Five Factors Then, Fama and French, in a new paper, “A Five-Factor Asset Pricing Model,” which appeared in the April 2015 issue of the Journal of Financial Economics, explored a five-factor asset pricing model. Their objective was to determine whether two new factors—profitability (RMW, or robust-minus-weak profitability) and investment (CMA, or...
More Money is Lost Waiting for Corrections Than in Them

More Money is Lost Waiting for Corrections Than in Them

By Larry Swedroe We have data for 91 calendar years (or 1,092 months) of U.S. investment returns over the period 1927 through 2016. The average monthly return to the S&P 500 has been 0.95%, and the average quarterly return was 3.0%. With that background, here’s a short, four-question quiz: 1. If we remove the returns from the best 91 months (an average of just one month a year and 8.5% of the entire period), what is the average return of the remaining 1,001 months? 2. What is the average return of those best-performing 91 months? 3. If we remove the returns of the best-performing 91 quarters (an average of one quarter a year and 25% of the entire time period), what is the average return of the remaining 273 quarters? 4. What is the average return of those best-performing 91 quarters? What many investors don’t know is that most stock returns come in very short and unpredictable bursts. Which is why Charles Ellis offered this advice in his outstanding book, “Investment Policy”: “Investors would do well to learn from deer hunters and fishermen who know the importance of ‘being there’ and using patient persistence—so they are there when opportunity knocks.” It also is likely why, in his 1991 annual report to shareholders, legendary investor Warren Buffett told investors: “We continue to make more money when snoring than when active,” and “Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.” Later, in his 1996 annual report, Buffett added: “Inactivity strikes us as intelligent behavior.” Returning to our...
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