Market Education Tag

Smart investors exercise discipline, which sounds practical and unsexy. They focus on strategies that really work over the long term rather than get caught up in short-term events. They also understand the work of behavioral economists on topics like overconfidence, recency bias (decisions based on recent events), home country bias, loss...

The bottom line up front: Nobody knows anything. The smartest people who work in the motion picture industry do not know for certain what’s going to be a hit or a flop. “Every time out it’s a guess and, if you’re lucky, an educated one,” wrote William Goldman in “Adventures in...

The use of technology to provide investment advice is not new, but the practice is growing significantly. There is even a term for it now, “robo-advisors.” They are not, as the name suggests, robots, but human beings who use algorithms to manage their clients’ assets. Firms who use these algorithms generally...

The saying “picking up nickels in front of a steamroller” is a good metaphor for what it’s like to buy bonds today.  June 2013 was especially painful for virtually all types of bonds and serves as a reminder for how fast they can fall.  While the sell-off was likely overdone near term, most bonds remain very expensive if one believes in regression to the mean.

Here’s the dilemma: nobody knows when the tide will turn.  What we do know is strategies that have worked well in the past, such as individual bond ladders, bond index funds, and typical “core” bond mutual funds, are all at high risk of earning less than inflation for years to come.  Despite these hurdles, investors can achieve positive real returns if they are willing to approach this asset class differently than they may have in the past.

Spend Risk Wisely

To be successful and preserve wealth, one has to take risks.  The key is spending your risk budget in a way that rewards risk taking rather than penalizes it.  With the combination of historically low rates and an improving economy, it’s time to invest defensively on maturity, offensively on credit, and capitalize on niche opportunities that still offer value.  Emphasizing active bond managers that are specialized, nimble, and proven is also critical to navigating these waters.  This approach is not expected to increase risk; rather, it optimizes the potential return by changing the composition of the risk.

Risks to Avoid / Reduce

Risks to Accept

Interest Rate Risk

Credit Risk

Purchasing Power Risk

Currency Risk

Reinvestment Risk

Credit Spread