Archive for category Investor education

Consider changing your dream

Many investors bristle when I state that most individual investors should not buy individual stocks.  I recently was told by a reader of my blog, “You have taken a lot of the fun out of investing by pointing out the problems of buying individual stocks.  Owning index funds is boring.”

I have attempted to extinguish their dream.  They dream of buying the next Apple or Amazon when the companies are small and insignificant compared to what the companies and their stock prices will become in the future.  Someone who invested $5000 in Apple stock ten years ago would now have over $300,000 worth of stock, if he or she had not sold any along the way.  The Amazon investor would have about $63,000. Read the rest of this entry »

1 Comment

Are volatile markets something to be feared?

Volatility is one of the most misunderstood concepts in investing.  It is usually presented as something bad and to be avoided.  This is shortsighted, misleading, and efforts to reduce it can create more problems than solutions.  Investors should instead welcome and profit from the opportunities created by volatile markets. Read the rest of this entry »

Leave a comment

Lessons from the Facebook IPO and its aftermath

The short saga of Facebook stock performance during its brief life as a public company has provided a valuable opportunity for self-directed investors to learn some extremely valuable lessons about investing.  It is unfortunate that most of them will let this opportunity slip by, and they will go on to make similar errors again and again. Read the rest of this entry »

Leave a comment

How effective are TIPS as an inflation hedge?

In the previous blog posting, I examined how effective gold was as an inflation hedge.  The answer was not very.  In this essay, I tackle the question of how effective TIPS perform as an inflation hedge.  If any asset should protect you from inflation, surely an asset called Treasury Inflation-Protected Securities should do this, right?  Let’s see.

Read the rest of this entry »

Leave a comment

How effective is gold as an inflation hedge?

If you go to almost any source for reasons to invest in gold, one of the first reasons it cites is for an inflation hedge.  A quote from the World Gold Council (one of the most reputable sources of information about gold) is typical, “Investors often rely on gold to counter the effects of inflation.”

In the spirit of challenging embedded assumptions, I decided to probe deeper to determine just how effective gold is as an inflation hedge.  Just because every purveyor of precious metals cites this “fact” and many market pundits echo this assumption, it does not mean that their assumption is based on accurate data or reflects an accurate interpretation of history. Read the rest of this entry »

Leave a comment

Why not wait for interest rates to rise before investing in long-term bonds?

Don asks an excellent question:

The basic principle of your book, as I understand it, is to invest in uncorrelated securities and periodically rebalance them. We can’t know which investments will go up and which will go down. But it really doesn’t matter as long as, over the long run, the investments make uncorrelated “up and down” fluctuations. Rebalancing will force you to sell high and buy low.

I believe in this principle with one reservation. If a particular class of investment is already “pegged” at one extreme of its viable range (that is, it is up against some fixed limit), then that investment can only move in one direction. For an example, consider long-term bonds, which are sensitive to interest rates. The Federal Funds Rate is approximately zero, which means it can only go higher. Therefore, for now, long-term bond prices can only go down, not up. In order for bonds to fluctuate “up and down” to generate rebalancing opportunities, interest rates need to be higher than zero, to give some room on the “up” side.

It seems to me that long-term bonds can play an important role in a rebalancing strategy when the Federal Funds Rate is in a “normal” range–at least, greater than zero. This gives bond prices room to move in both directions. But for now, there’s only one way they can go. Therefore a wise investor would not invest in bonds until the Funds Rate rises a little.

I expect that you will disagree with this, and I would be interested to learn why.

Read the rest of this entry »

Leave a comment

What are the chances that a limit order will be filled?

How far from the previous day’s market closing price? Buy order   (below the previous day’s closing price) Sell order (above the previous day’s closing price)
0% (at the closing price) 97% 98%
0.25% 94% 97%
0.50% 90% 95%
1.0% 81% 92%
2.0% 68% 81%
3.0% 58% 69%
4.0% 50% 57%
5.0% 42% 45%
6.0% 35% 35%
10.0% 18% 11%
15.0% 9% 3%
20.0% 5% 1%

Read the rest of this entry »

Leave a comment

How much fluctuation should I expect of the stock market?




Probability of Price Increase





















This data set applies to the Vanguard Index Trust 500 mutual fund for the 24-year time period between January 1, 1988 and December 31, 2011.  This data set takes into account dividends and is “investable,” unlike market indexes.  The performance mirrors the S&P 500 index, with a small drag due to expenses. Read the rest of this entry »

Leave a comment

How to determine the suitability of an investment portfolio?

Many investors’ existing portfolios are not well suited to accomplish their goals.  But how does one determine whether a portfolio is well constructed or poorly constructed?

I have categorized the important elements into five categories.  These broad categories are asset allocation appropriateness, diversification, security selection, investment decision-making process, and tax efficiency.  These categories are not mutually exclusive, due to the subjective nature of the task and the fact that most investment decisions have a wide range of effects and consequences. Read the rest of this entry »

, , ,

Leave a comment