Ben FelixIndex funds are mainstream. At year end 2021 more of the US stock market was owned by index funds than by actively managed funds. Funds only own about 30% of the US market, but taking a broader view of institutional investors, assets have been shifting toward more passive institutions.
Index investing as a theoretically optimal investment strategy works best in an efficient market, but if everyone turns into a passive index investor the market can’t be efficient. This is commonly known as the Grossman-Stiglitz Paradox, and it has some people raising the alarm about a tipping point for market efficiency.
The Index Fund Tipping PointBen Felix2022-11-16 | Index funds are mainstream. At year end 2021 more of the US stock market was owned by index funds than by actively managed funds. Funds only own about 30% of the US market, but taking a broader view of institutional investors, assets have been shifting toward more passive institutions.
Index investing as a theoretically optimal investment strategy works best in an efficient market, but if everyone turns into a passive index investor the market can’t be efficient. This is commonly known as the Grossman-Stiglitz Paradox, and it has some people raising the alarm about a tipping point for market efficiency.
Investors in ARKK - many of whom arrived late to the party - have experienced dramatic ups and downs, with an emphasis on downs for most investors.
The fund crashed 77% in 2021 and 2022 after taking in huge inflows. The question anyone still holding these funds must be asking - or should be asking - is whether it will recover. ------------------ Follow Ben Felix on - Twitter: twitter.com/benjaminwfelix
Over the last 10 years I have spoken to thousands of individual investors about their investments and financial plans while working at PWL Capital, and I have interviewed some of the smartest people in finance, economics, and psychology on the Rational Reminder podcast.
This is what I have learned. These are all lessons that investors will learn eventually, though many will learn them the hard way.
0:29 1. You’re not that smart (relative to the market). 0:42 2. This time is always different. 1:03 3. The market is forward-looking. 1:20 4. Market forecasts are not useful. 1:34 5. Time in the market beats timing the market. 1:47 6. Most funds do not beat the market. 2:12 7. Incentives matter. 2:26 8. Expected economic growth and stock returns are unrelated. 3:12 9. Good portfolio management does not make up for bad financial planning. 3:27 10. Risk and expected returns are positively related. 3:42 11. The risk-expected return trade-off has a term structure. 3:58 12. Fees and taxes matter. 4:12 13. Complexity and costs are positively related. 4:27 14. There is no single optimal investment strategy. 4:44 15. The best investment strategy for you is the one that you can stick with. 5:00 16. There is no such thing as a “passive” investment. 5:14 17. Wealth does not give you access to market-beating investments. 5:30 18. Diversification is (still) the only free lunch in investing. 5:44 19. Investments should be evaluated on process, not outcome. 5:58 20. Investing has been solved.
Home country bias - overweighting your home country’s stocks relative to their capitalization weights - is detrimental at the extremes, but modest home country bias is theoretically, practically, and empirically useful.
It can reduce fees and taxes, it may hedge the cost of local consumption, and it reduces exposure to the potential mistreatment of foreign investors when times get tough.
It may also be helpful psychologically due to the role of social comparison in determining individual happiness. ------------------ Follow Ben Felix on - Twitter: twitter.com/benjaminwfelix
Conventional wisdom and popular personal financial advice suggest that portfolios should contain at least some bonds and that asset allocations should shift increasingly into bonds as investors move toward retirement, but new research suggests that this thinking is due for an update. ------------------ Follow Ben Felix on - Twitter: twitter.com/benjaminwfelix
I’m noticing investors being worried about stock market valuations. When stock market valuations are higher, expected returns are lower. High valuations are not great for long-term investors. But saying that stock market valuations are high misses a lot of nuance. Which stocks are we talking about, and even more broadly, which markets? ------------------ Follow Ben Felix on - Twitter: twitter.com/benjaminwfelix
Discussion with the co-author of Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms: youtu.be/CHxNpN-2lmw?t=1416
ESG investing - that is investing that puts an emphasis on the environmental, social, and governance characteristics of companies - continues to be popular. Investors may want to avoid ESG-related risks, or to feel good about their portfolio, which are legitimate motivations. But how much good is ESG investing actually doing? ------------------ Follow Ben Felix on - Twitter: twitter.com/benjaminwfelix
The salience of yield is no secret to financial product manufacturers, resulting in products being manufactured and marketed based on their high distribution yields.
But distribution yields are not investment returns, they are not sufficient to assess expected returns, and, in the way that they are used to market financial products, often to unsophisticated investors, they can be misleading.
This quote is often used as an argument against diversified investment strategies, but the thing is, Warren Buffett was probably not talking about you when he referred to people who know what they’re doing.
If you think that you are included in Buffett’s group of “people who know what they’re doing” you may have investment hubris, which can cost you in the long-run.
People spend so much time worrying about the next downturn that they miss out on market returns, which tend to be positive in the long-run.
These errors lead investors to hold more conservative portfolios than a more optimistic investor would, to avoid participating in the stock market altogether, and to sabotage their long-term returns with short-term decision-making. There are some potential solutions.
Related podcast episode: The (Expected) Cost of Pessimism (Plus Matthew Dicks on the Value of Storytelling) | RR 267 youtu.be/qVHT2PEEuDg ------------------ Follow Ben Felix on - Twitter: twitter.com/benjaminwfelix
I realized after posting that his claim was even worse than I initially thought.
The S&P 500 returned around 12% per year 1926-2022 measured as an arithmetic average.
Measured as a geometric average, which is what matters to investors, it has been closer to 10%. ------------------ Follow Ben Felix on - Twitter: twitter.com/benjaminwfelix
Unfortunately, his logic is flawed, and retirement spending math is not as simple as he suggests. ------------------ Follow Ben Felix on - Twitter: twitter.com/benjaminwfelix
That sounds great, especially for people with high incomes, but I will argue that it's a misrepresentation.
There are up to 3 layers of tax on permanent life insurance that need to be considered. ------------------ Follow Ben Felix on - Twitter: twitter.com/benjaminwfelix
With a 5% return on cash, why would anyone want to invest in stocks? I know that cash feels good because its nominal value is stable - it feels safe, but it is counterintuitively extremely risky for long-term investors.
The payoffs of structured notes can seem like a free lunch, but banks are not selling them to you because they’re your friend. When you’re having dinner with lions you have to make sure you’re at the table, not on the menu. ------------------ Follow Ben Felix on - Twitter: twitter.com/benjaminwfelix
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Das, S. R., & Statman, M. (2013). Options and structured products in behavioral portfolios. Journal of Economic Dynamics and Control, 37(1), 137–153. doi.org/10.1016/j.jedc.2012.07.004Covered Calls: The Income IllusionBen Felix2023-06-20 | Some investors are attracted to covered call funds because of their high income yields and seemingly high risk-adjusted returns. However, the appearance of high income and high risk-adjusted returns is the result of clever financial product design, not of actual improvements to returns or risk-adjusted returns.
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Farago, A., & Hjalmarsson, E. (2023). Long-horizon stock returns are positively skewed. Review of Finance, 27(2), 495–538. doi.org/10.1093/rof/rfac021
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I have told you in many of my videos that low-cost total market index funds are the most sensible investments for most people - just own the market. I stand by that statement, but as true as it is, there is a lot more nuance to making good asset allocation decisions. How do you know if you’re like most people? And if you’re not like most people, how should your portfolio be different from the market?
Sharpe, W.F. (1964), CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*. The Journal of Finance, 19: 425-442. doi.org/10.1111/j.1540-6261.1964.tb02865.x
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BETERMIER, S., CALVET, L.E. and SODINI, P. (2017), Who Are the Value and Growth Investors?. The Journal of Finance, 72: 5-46. doi.org/10.1111/jofi.12473
Betermier, Sebastien and Calvet, Laurent E. and Knüpfer, Samuli and Soerlie Kvaerner, Jens, What Do the Portfolios of Individual Investors Reveal About the Cross-Section of Equity Returns? (February 24, 2022). Available at SSRN: ssrn.com/abstract=3795690 or http://dx.doi.org/10.2139/ssrn.3795690
Jensen, Theis Ingerslev and Kelly, Bryan T. and Pedersen, Lasse Heje, Is There a Replication Crisis in Finance? (February 2021). NBER Working Paper No. w28432, Available at SSRN: ssrn.com/abstract=3781319International DiversificationBen Felix2023-03-15 | Meet with PWL Capital: calendly.com/d/3vm-t2j-h3p
International stocks have trailed US stocks for more than 100 years. Performance aside, the US market is well diversified across industries, makes up more than 50% of the global stock market, and lots of US companies have international revenue exposure. Additionally, international diversification has gotten less effective over time as correlations across markets have increased.
These arguments for forgoing international diversification in favor of US stocks do seem compelling at the surface, but, as I will explain, they’re flimsy, at best. International diversification is crucial, both theoretically and empirically, to sensible portfolio construction.
van Binsbergen, Jules H. and Hua, Sophia and Wachter, Jessica A., Is The United States A Lucky Survivor: A Hierarchical Bayesian Approach (March 1, 2022). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: ssrn.com/abstract=3689958 or http://dx.doi.org/10.2139/ssrn.3689958
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BEKAERT, G., HODRICK, R. J., & ZHANG, X. (2009). International Stock Return Comovements. The Journal of Finance, 64(6), 2591–2626. doi:10.1111/j.1540-6261.2009.01512.x
Zixuan (Kevin) Wang and Luis Viceira. Working Paper. “Global Portfolio Diversification for Long-Horizon Investors”. Copy at tinyurl.com/ycvedksg
Bekaert, G., Hoyem, K., Hu, W.-Y., & Ravina, E. (2017). Who is internationally diversified? Evidence from the 401(k) plans of 296 firms. Journal of Financial Economics, 124(1), 86–112. doi:10.1016/j.jfineco.2016.12.010
Sinquefield, R. A. (1996). Where are the gains from international diversification? Financial Analysts Journal, 52(1), 8–14. doi.org/10.2469/faj.v52.n1.1961
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Heston, S. L., & Rouwenhorst, K. G. (1994). Does industrial structure explain the benefits of international diversification? Journal of Financial Economics, 36(1), 3–27. doi:10.1016/0304-405x(94)90028-0The 2.7% Rule for Retirement SpendingBen Felix2022-12-22 | Meet with PWL Capital: calendly.com/d/3vm-t2j-h3p
You can find the Rational Reminder podcast on Google Podcasts: google.com/podcasts?feed=aHR0cHM6Ly9yYXRpb25hbHJlbWluZGVyLmxpYnN5bi5jb20vcnNz Apple Podcasts: itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582?mt=2 Spotify Podcasts: open.spotify.com/show/6RHWTH9iW7hdnA7eAg7ukO?si=hjZNfLKuSjSeWX38GPqhVA ------------------Investing in Your Financial LiteracyBen Felix2022-10-18 | Investing in your own financial literacy might be one of the best investments that you can make. If you’re watching my videos I’m probably preaching to the choir, but around two-thirds of adults worldwide are financially illiterate. Even in Canada, one of the most financially literate countries in the world, about a third of the population is financially illiterate. Financial literacy is broadly defined as peoples’ ability to process economic information and make informed decisions about financial planning, wealth accumulation, debt, and pensions.
This is the private equity pitch in a nutshell. It’s obvious theoretically that Illiquid assets in markets that are more difficult to access would have higher expected returns and opportunities for managers to add value by bringing new information to the market, possibly even enough to justify the high fees, estimated at around 6 or 7% all-in.
Timestamps: 0:00 Intro 1:26 Evaluating the performance of private equity is not straightforward 3:30 My bone to pick with the 2014 paper 6:09 Ludovic Phalippou’s insights to private equity 8:02 Testing the diversification claim 11:20 Main takeaways
This hedonic treadmill of conspicuous consumption is difficult to escape. An important question is whether people with luxury vehicles actually enjoy their vehicles more.
Referenced in this video: The influence of positionality in car-purchasing behaviour on the downsizing of new cars: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.utwente.nl/en/et/ce/research/tem/pdf/2011_Hoen_Geurs_The_influence_of_positionality.pdf Why don't we learn from poor choices? The consistency of expectation, choice, and memory clouds the lessons of experience: https://efaidnbmnnnibpcajpcglclefindmkaj/https://dornsife.usc.edu/assets/sites/780/docs/11_jcp_schwarz___xu_why_we_don_t_learn__fin_.pdf Temporal Adjustments in the Evaluation of Events: The ‘‘Rosy View’’https://sci-hub.se/https://doi.org/10.1006/jesp.1997.1333 Luxury car owners are not happier than frugal car owners link.springer.com/article/10.1007/s12232-015-0223-2 Balance andrewhallam.com/balance The Next Millionaire Next Door rowman.com/ISBN/9781493052752/The-Next-Millionaire-Next-Door-Enduring-Strategies-for-Building-Wealth
Characteristics like high economic growth expectations and attractive valuations compel some investors to overweight emerging markets in their portfolios, but there are some often overlooked facts, costs, and risks that should be carefully considered.
Making the housing decision requires careful consideration of both the financial and non-financial impacts, and the way that they interact with each other. There is no universally right way to approach housing. In many cases, contrary to conventional wisdom and societal pressure, renting is a better option than owning, both financially and from the perspective of subjective well-being.
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google.com/podcasts?feed=aHR0cHM6Ly9yYXRpb25hbHJlbWluZGVyLmxpYnN5bi5jb20vcnNz Apple Podcasts:
itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582?mt=2 Spotify Podcasts:
open.spotify.com/show/6RHWTH9iW7hdnA7eAg7ukO?si=hjZNfLKuSjSeWX38GPqhVA ------------------Will Climate Change Crash the Stock Market?Ben Felix2021-10-09 | A changing climate creates physical risk potentially affecting businesses, communities and the economy. Changing weather patterns, and previously habitable areas becoming uninhabitable due to temperature or flooding are examples of the physical risks of climate change. The transitional risk of climate change arises from the response of consumers and governments to climate change. The possibility that consumers will demand a lower carbon impact from products and services, and that governments will introduce regulations or taxes designed to reduce emissions, creates meaningful uncertainty for businesses.
Timestamps: 0:00 Climate change in asset prices 3:11 Is climate risk priced in the way that Pastor’s model suggests? 6:11 Transitional risk observed in asset prices 8:23 Carbon-intensive firms in portfolios 10:57 My final thoughts
Timestamps: 0:00 Trading with Today’s Tech 2:00 Robinhood Investors 4:23 The Impact of Trading on a Mobile App 5:58 The Perception of Free Trades 9:50 Final Thoughts
Timestamps: 0:00 How much is enough? 1:03 What is Happiness? 4:04 PERMA and Well-Being 6:22 Time, money, and happiness 9:48 Spending money for happiness 11:42 The Four Cs 13:13 Setting anti-goals and the Five Factors of Well-Being
Timestamps: 0:00 "Ben, why do you still have a job?" 1:00 What isn't Financial Advice? 3:08 What is Financial Advice? 10:36 Should you get Professional Financial Advice? 12:19 Reasons to Seek Expert Advice ------------------
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Larger companies like Apple and Tesla make up a larger portion of the market compared to smaller companies, and these relative weights are reflected in a market capitalization weighted index fund. Letting the market dictate your portfolio weights has lots of advantages, but pushing the fundamental logic behind index investing one step further leads to the potential for significant improvements in portfolio construction.
Timestamps: 0:00 Market Capitalization Weighted Index Fund Explained 1:00 The Efficient Market Hypothesis 3:25 Let’s Get Back to Basics 4:51 Capital Asset Pricing Model (CAPM) 6:40 Empirical Anomalies in the Market 8:56 Risk Premiums 12:30 What I do with my Own Money ------------------
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