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The Fashionable Investing Trend You Should Avoid

May 28, 2015

Value investing, the art of finding gems among beaten-down stocks, is a time-honored strategy. But recently a simple approach to value has become fashionable: Instead of hunting for bargains, buy all the stocks in the market, but “tilt” so that you own more of those with low prices relative to earnings or underlying business value. Academic research says it earns some extra return, and now lots of mutual funds and ETFs offer such statistical value plays.

So it might surprise you to learn that from 1991 to 2013, investors in value funds underper-formed the S&P 500 by close to a percentage point a year, according to an analysis of fund data by Research Affiliates.

Does this mean the value premium is overhyped?

No, it’s just misunderstood. The same study showed that value funds beat the market by nearly half a percentage point annually over this stretch. But, on average, investors in those funds didn’t capture that edge, because they traded at the wrong times, piling in when the style was hot and selling only after the funds had underperformed. So before you go after the so-called value effect, keep two things in mind.

Value Isn’t a Short-Term Play 
Although there’s evidence that value works in the long run, “you can go decades where value is either in or out of favor,” says Gregg Fisher, chief investment officer for Gerstein Fisher. Indeed, growth stocks—the high-priced antithesis to value shares—largely outpaced the broad market from 1988 to 2000.

“The worst thing you can do is try to time value,” says Jason Hsu, vice chairman at Research Affiliates. If you wait to snap up such stocks until after they’ve done well, you lose part of their advantage—the low prices.

Tilt Lightly (Especially Now) 
The investment community has lately gone on a tilting spree. Rick Ferri, founder of Portfolio Solutions, warns that there’s “an awful lot of money going into a small group of securities.” And there’s evidence that the market has changed as a result: The stocks with the lowest price/earnings ratios are now only 15% cheaper than those with the highest P/Es. The value discount has been closer to 35% in the past.

Ferri recommends keeping the majority of your stock portfolio in an index fund or something else that’s in line with the broad market, devoting no more than 25% to value or other kinds of tilts. And don’t do it at all unless you expect to be invested for a long time. Says Ferri: “With all this recent attention, it might take 20 or 30 years before you see the true benefits.”

Funds Investing: Make More Money and Worry Less

April 5, 2014

Wall St. Journal

You know all that advice you hear about stock investing? You should ignore most of it. If you're investing for a long-term goal such as retirement, then keeping it simple with a portfolio of three to six broad-based, low-cost mutual funds can pay off in the long run. Rebalance on occasion, and you'll be well on your way. Read the complete story here.

Can You Beat the S&P 500 with the S&P 500? (STK 049)

April 2, 2014

Stacking Benjamins

Passive investing guru and Forbes contributor Rick Ferri joins us to talk about a “smart money” strategy that’s cropped up lately: Can you beat the S&P 500 with the S&P 500? His answer may surprise you. Listen to the Podcast here.

Launches Push US-Listed ETFs Above 1,500

August 14, 2013

Investment News

Rick Ferri, founder of the investment firm Portfolio Solutions and a known advocate of passive investing, projects that over the next 20 years, the exchange-traded product industry will at least triple the number of funds on the market. Read the complete story here.

Is It Time to Buy Commodities?

August 4, 2013

The Wall Street Journal

With prices sharply down on many commodities--and stocks at record highs--investors may be wondering: Is it time to swap stocks for soybeans? We investigate.  Read the complete story here.

Putting the Portfolio Odds in Your Favor

July 29, 2013

ETF Daily News

It’s well known that the majority of actively managed mutual funds underperform comparable index funds over any period longer than a few years. In fact, that statement has become so uncontroversial that even mutual fund salespeople freely  acknowledge it. But a recent white paper co-authored by Rick Ferri, A Case for Index Fund Portfolios, takes this idea a step further. Read the complete story here.

Portfolio Structure: Index vs. Active

July 17, 2013

S&P Dow Jones Indexes

Craig Lazzara, Global Head of Index Investment Strategy, S&P Dow Jones Indices interviews Richard A. Ferri, CFA, Founder, Portfolio Solutions LLC. Watch the video here.

What is the Best Way to Invest Your Money?

July 16, 2013


What’s the best way to invest your money? I’m not talking about whether to invest in stocks or bonds or real estate. I assume you’ve already decided on a diversified portfolio of mutual funds or ETFs, most likely covering all three of those popular asset classes. The question is: What kind of funds should you choose? Read the complete story here.

Less is More with Simple ETF Portfolios

July 9, 2013

Index Universe

Less is more. That's the record message of a recent Wall Street Journal piece encouraging the use of an extremely simple portfolio with a bare minimum of funds. The record is hard to dispute. Passive funds often outperform active funds in annual surveys. And combining passive funds into a simple portfolio beats a portfolio of active funds, as Rick Ferri noted in a recent white paper. Read the complete story here.

Diversification means different things in different contexts.  We can speak, for example, of diversification within an equity portfolio — i.e., of holding a number of stocks with potentially-offsetting risks, as opposed to concentrating on only one issue or on a handful of similar stocks.  Or we can think of diversification across asset classes — e.g., by adding bonds, or international stocks, or commodities to a (diversified) U.S. equity portfolio.  Conventional wisdom smiles on these two forms of diversification, and rightly so, since the final diversified portfolio typically has a higher expected return, or lower expected risk, than the starting portfolio.

But diversification might not always be a good idea.

- See more at: http://www.indexologyblog.com/2013/07/19/when-diversification-fails/#sthash.URPARztH.dpuf

Five Bond Questions to Ask Your Financial Advisor Now

June 13, 2013


With emerging market bond funds down 10 percent in the past month and a half, is this really the time to be jacking up exposure to a volatile asset class? Read the complete story here.

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