Is the Value Premium Really Dead?

Is the Value Premium Really Dead?

Larry Swedroe, Director of Research, 5/29/2018 There has been much debate about the “death” of the value premium. Those making the case it has disappeared believe the publication of research on the premium has led to cash flows, which in turn have eliminated it. They point to the last 10 calendar years of data, during which the value premium was slightly negative, at -0.8%. The value premium (HML, or high minus low) is the annual average return on high book-to-market ratio (value) stocks minus the annual average return on low book-to-market ratio (growth) stocks. Before taking a deeper dive into the data, it’s important to note that all factor premiums, including market beta, have experienced long periods of negative returns. The following table, covering the period 1927 through 2017, shows the odds (expressed as a percentage) of a negative premium over a given time frame. Data in the table is from the Fama/French Data Library. 1-Year 3-Year 5-Year 10-Year 20-Year Market Beta 34 24 18 9 3 Size 41 34 30 23 15 Value 37 28 22 14 6 Momentum 28 16 10 3 0 No matter the horizon, the value premium has been almost as persistent as the market beta premium. Even the market beta premium has been negative in 9% of 10-year periods and in 3% of 20-year periods. Changing Regimes Investors who know their financial history understand that what we might call “regime change,” with value underperforming for a fairly long time, is to be expected. In fact, even though the value premium has been quite large and persistent over the long term, it has been...
Financial Illiteracy’s High Cost

Financial Illiteracy’s High Cost

Larry Swedroe, Director of Research, 6/14/2018 It’s a great tragedy that despite its obvious importance to everyone, our educational system almost totally ignores the field of finance and investments. This is true unless you go to an undergraduate business school or pursue an MBA in finance. Eighteenth-century English poet Thomas Gray wrote, “Where ignorance is bliss, Tis folly to be wise.” When it comes to investing, ignorance certainly is not bliss—it pays to be wise. Just ask investors who lost tens of billions of dollars in the Bernard Madoff scandal. Without a basic understanding of how capital markets work, there is no way individuals can make prudent investment decisions. The sad fact is that surveys have shown fewer than half of U.S. workers have even attempted to estimate how much money they might need in retirement, and many older adults face significant retirement shortfalls. While educational achievement is strongly positively associated with wealth accumulation, research also has found financial literacy has an even stronger and larger effect on wealth. Households that build up more net wealth may be better able to smooth consumption in retirement, and financial literacy enhances the likelihood people will contribute to their retirement savings. Compounding the problem of lower savings is evidence that less financially literate households experience lower risk-adjusted returns. Financial Literacy Research Milo Bianchi contributes to the literature on financial literacy with the study “Financial Literacy and Portfolio Dynamics,” which appeared in the April 2018 issue of The Journal of Finance. Using data obtained from a large French financial institution, Bianchi observed portfolio choices in a widespread investment product called assurance vie, in which households allocate wealth between relatively safe and relatively...
5 Steps to Maximize Your Workday

5 Steps to Maximize Your Workday

Being busy doesn’t necessarily mean you’re getting work done — or doing it well. Tim Maurer lays out the ways you can sidestep interruptions and productivity detours by focusing your time and energy on doing the work you do best when you’re at your best. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them. The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. To view original video click...
Who Will Raise Your Kids If You Can’t?

Who Will Raise Your Kids If You Can’t?

Michael J. Evans, Founder, The Cogent Advisor, 6/3/2015 Who will raise my kids if I can’t? This is a huge and unthinkable question. So it’s no wonder that I frequently hear a multitude of excuses from family, friends and clients – all the parents of young children – who have not yet set up their essential estate plans. Often, the hurdle isn’t finding the right lawyer, or spending the money to get it done. It’s making that gut-wrenching decision about who to designate as the guardians of your minor children in your stead. As unpleasant as the task may be, the consequences of postponing it are worse. In the absence of carefully prepared estate-planning documents with proper designation directions, you’re effectively leaving it up to a judge to decide what is in the best interest of your children, without your input. If you’re facing this sort of wall in your family’s estate-planning process, the following steps may help you make the necessary leap from best intentions to appropriate action. Get Ready: Creating Planning Momentum First, list the people that come immediately to mind as the most likely candidates. Go with your gut, because your first instincts may well be the right ones. Next, narrow down your choices by considering the key questions listed below. For now, don’t try to come up with THE right choice (unless it’s no-brainer obvious). Simply take note of the advantages and disadvantages for each possibility. If you are a couple, think about these questions individually before coming together to share your answers. Are they young enough? Your parents may already have a track record...
Is Passive Investing Destroying the Markets?

Is Passive Investing Destroying the Markets?

By Larry Swedroe Passive investing has been ridiculed by Wall Street for decades. The following list is just a small sample of the criticisms I’ve collected over the years: •Sanford C. Bernstein & Co. strategist Inigo Fraser-Jenkins called it worse than Marxism. •David Smith, fund manager at Hargreaves Lansdown, called passive investors parasites on the financial system. •Tim O’Neill, global co-head of Goldman Sachs’ investment management division, warned investors that if passive investing gets too big, the market won’t function. The common theme is that indexing (and passive investing in general) has become such a force that the market’s price discovery function is no longer working properly. Goldman Sachs’ O’Neill has even called passive investing a “potential bubble machine.” Given the number of questions I get from investors about this issue, one would think that passive investing is now dominating markets. Let’s see if there’s any truth to such beliefs, and whether there’s anything to worry about. The latest research A recent study by Vanguard found that, as of October 2017, about $10 trillion was invested in index funds. While a large figure, it represents less than 20% of the global equity market. Is there anyone who thinks the other 80% of assets are handicapped in their price discovery efforts? Even more important is that, while indexing makes up about 20% of invested assets, Vanguard estimated it actually accounts for only about 5% of trading volume. Is passive investing’s 5% share of trading volume setting prices, or is it active management’s 95% share doing so? Once you know the data, you can see how absurd the claims being made...
Page 1 of 212