Value May Be Down, But It’s Not Out

Value May Be Down, But It’s Not Out

By Larry Swedroe As the director of research for Buckingham Strategic Wealth and The BAM Alliance, I’ve been getting lots of questions about whether the value premium still exists. Today I’ll share my thoughts on that issue. I’ll begin by explaining why I have been receiving such inquiries. Recency bias—the tendency to give too much weight to recent experience and ignore long-term historical evidence—underlies many common investor mistakes. It’s particularly dangerous because it causes investors to buy after periods of strong performance (when valuations are high and expected returns low) and sell after periods of poor performance (when valuations are low and expected returns high). Value Premium Fading? A great example of the recency problem involves the performance of value stocks (another good example would be the performance of emerging market stocks). Using factor data from Dimensional Fund Advisors (DFA), for the 10 years from 2007 through 2017, the value premium (the annual average difference in returns between value stocks and growth stocks) was -2.3%. Value stocks’ cumulative underperformance for the period was 23%. Results of this sort often lead to selling. Investors who know their financial history understand that this type of what we might call “regime change” is to be expected. In fact, even though the value premium has been quite large and persistent over the long term, it’s been highly volatile. According to DFA data, the annual standard deviation of the premium, at 12.9%, is 2.6 times the size of the 4.8% annual premium itself (for the period 1927 through 2017). As further evidence, the value premium has been negative in 37% of years since 1926....
Tuning Out the Noise

Tuning Out the Noise

Learn what a difference the right financial advisor can make! In 2017, Dimensional Fund Advisors conducted an investor feedback survey on behalf of advisors who work with our firm. The findings reveal that investors place a high value on the sense of security they receive from their financial advisor relationships. What do you expect from your financial advisor?   View the original post...
The Only Market Volatility You Can Count On

The Only Market Volatility You Can Count On

By Tim Maurer “As you can see, we’re experiencing rough air at the moment. But as a reminder, we can’t predict rough air,” said the Delta airline pilot ferrying me from St. Louis to Charleston (via Atlanta—always Atlanta), “so please keep your seatbelts on whenever you are seated.” Thank you, sir, for giving me precisely the hint of inspiration I needed to frame this week’s note of encouragement while in the midst of one of the crazier market stretches we’ve seen in several years! Of course, statistically speaking, this momentary bout of stock market extremism is more the norm than the exception.  No, it’s not particularly normal to have thousand-point-up or -down days for the Dow Jones Industrial Index.  But volatility—market ups and downs—is, indeed, more normal than, for example, what happened last year. Did you know that 2017 was one of the least volatile market years in decades?  The U.S. stock market was not only up for the year—but for every month of the year—for the first time ever.  Who would’ve made that prediction late in 2016, in the middle of the craziest election cycle of my two-score-and-two-year lifespan? When considering this aberration, I can say with confidence one of the very few market predictions I (or anybody, for that matter) can responsibly make: The market is more likely to be volatile than not. There are many financial writers and companies who are seeking to capitalize on fear and greed by offering overly optimistic or hopelessly pessimistic takes on any and every market movement.  But the best anyone can actually do with intellectual honesty is to acknowledge the obvious fact that we’re currently experiencing some volatility. And...
Are You Compensated for Fat Tail Risk?

Are You Compensated for Fat Tail Risk?

By Larry Swedroe Despite the fact that financial theory suggests stocks with high volatility should have higher expected returns—because investors cannot fully diversify away from the firm-specific risk in their portfolios—a growing body of empirical evidence demonstrates a negative return premium in higher-volatility stocks (the low-volatility/low-beta anomaly). Research also documents that investor preferences for more volatile stocks are directly associated with preferences for stocks that look like lottery tickets (they have positive skewness and excess kurtosis, or fat tails). The negative premium associated with such stocks persists because of limits to arbitrage. These findings on volatility and kurtosis are important because extreme positive and/or negative returns happen far more regularly than predicted by a normal distribution. For example, the stock market crash of October 1987 is an occurrence that, according to a normal distribution, would happen only once every 150 million years. Events that would be extremely rare under a normal distribution seem to occur empirically far more often than they otherwise should. If kurtosis represents some sort of risk that is unaccounted for in other, more common, risk measures, then extreme returns should influence asset prices—excess kurtosis should be associated with higher expected returns. However, it’s also possible that the aforementioned investor preference for lottery tickets, combined with limits to arbitrage, could result in these risky stocks having negative premiums. Lotterylike distributions have been found in IPOs, “penny stocks,” extreme high-beta stocks and small growth stocks with low profitability and high investment. Research On Kurtosis & Expected Returns Benjamin Blau and Ryan Whitby contribute to the literature on this topic with their study “Idiosyncratic Kurtosis and Expected Returns,”...
Remember the Equifax Breach? Be Worried if You Have Not Done This

Remember the Equifax Breach? Be Worried if You Have Not Done This

By Joe Delaney In a recent conversation with a client, I asked him whether he had put a credit freeze on his files with our three U.S. credit bureaus to protect himself from identity theft since last year’s Equifax breach. His response was understandable and common. No. Nothing has happened to me, so I must be okay. I don’t blame him. We all struggle with the “out of sight, out of mind” effect. We live in a time beyond the 24-hour news cycle. Now, a story that appears in our news feeds at breakfast is eclipsed with another by lunchtime. How are we ever to follow consequences of the events of six months ago? Last September I recommended a few action steps, the most important of which was to put a freeze on your credit. Not a temporary “lock”, which hackers can get around as easily as they can breach your account, but a permanent freeze (check with your state of residence to determine if it is indeed permanent or expires after a period of time). This follow-up article is about why that’s still a vital step to take. WHAT TO DO WHEN YOU KNOW A TSUNAMI IS COMING Think of this from the hackers’ point of view for a moment. There is no point to illegally accessing the personal data of nearly 148 million Americans (60% of the adult US population!) unless you plan to use what you got. But when? When everybody has forgotten all about it. When your guard is down. The breach was like seismic activity that warns of a greater event to come, like...