How should a portfolio be measured?

In the previous essay, I discussed why it is imperative to measure your portfolio periodically.  In this essay, I will describe how to measure its most important characteristics.

The first principle is to measure the whole portfolio as an entire unit, and not just focus on a particular subset.  What matters is the forest, not the trees.  Read the rest of this entry »

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Why measure your portfolio?

I recently measured and reported on the results of the Cognitive Investing Demonstration Portfolio ( for the second quarter of 2012.  What is the point of this exercise?  What can we learn from it?  Should you be doing something similar with your own portfolio?

The answer is a definite yes.  Many investors, however, neglect this essential task.  Some take a look at their portfolio and skimp on the process, looking only at the bottom line.  They are doing themselves a big disservice and are passing up an opportunity for improvement of their portfolio management process. Read the rest of this entry »

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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 »

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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 »

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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 »

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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.

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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 »

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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.

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How much expertise does it take to be a Cognitive Investor?

This is a follow on essay to the two blog articles, “How much time does it take to be a cognitive investor,” parts one and two.  If you have not read those articles, I recommend reading them first.

The short answer to how much expertise is required to be a cognitive investor is, “less than you might imagine.”  There is a close analogy to the answer how much time it takes.  As long as one focuses on the relevant elements that can really make a difference and does not get distracted by studying topics that have little bearing on investment results, the amount of expertise is easily within the grasp of almost anyone capable of graduating from college.

The required expertise falls into four general categories: finance, mathematics, psychology, and process. Read the rest of this entry »

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How much time does it take to be Cognitive Investor? (part two)

In part one, we answered the question of how much time it takes, assuming you already have a cognitive investing portfolio.  In part two we will discuss how much time it can take to learn the process of becoming a cognitive investor and converting an existing portfolio to one that adheres to the cognitive investing methodology.

The short and simple answer is, “it depends.”  A more complex answer is that it can depend on how different your existing portfolio management process is from a cognitive investing process, how different your portfolio is from a cognitive investor’s portfolio, and how much needs to be learned and unlearned to make a successful transition.  Examining some hypothetical scenarios will illuminate the issues encountered by different types of investors as they make the transition. Read the rest of this entry »

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