My blog provides valuable insights into Nobel Prize-winning financial strategies for investors. By utilizing decades of worldwide peer-reviewed capital markets research and analysis, I demonstrate how to build better investment portfolios with lower risks. I also examine common financial media misinformation and how investors can make better financial decisions.
A quick online search for “Dow rallies 500 points” yields a cascade of news stories with similar titles, as does a similar search for “Dow drops 500 points.”
These types of headlines may make little sense to some investors, given that a “point” for the Dow and what it means to an individual’s portfolio may be unclear. The potential for misunderstanding also exists among even experienced market participants, given that index levels have risen over time and potential emotional anchors, such as a 500-point move, do not have the same impact on performance as they used to. With this in mind, we examine what a point move in the Dow means and the impact it may have on an investment portfolio.
IMPACT OF INDEX CONSTRUCTION
The Dow Jones Industrial Average was first calculated in 1896 and currently consists of 30 large cap US stocks. The Dow is a price-weighted index, which is different than more common market capitalization-weighted indices. An example may help put this difference in weighting methodology in perspective. Consider two companies that have a total market capitalization of $1,000. Company A has 1,000 shares outstanding that trade at $1 each, and Company B has 100 shares outstanding that trade at $10 each. In a market capitalization-weighted index, both companies would have the same weight since their total market caps are the same. However, in a price-weighted index, Company B would have a larger weight due to its higher stock price. This means that changes in Company B’s stock would be more impactful to a price-weighted index than they would be to a market cap-weighted index.
Dimensional’s Co-CEO and Chief Investment Officer answers questions about investment returns, benchmarks, and evaluating managers.
Investors often start the year by evaluating how their portfolios have performed. Gerard O’Reilly recently sat down with Scott Mardy, a Vice President and Investment Strategist with the firm, to talk about what investors should consider when evaluating investment performance.
Your performance evaluation framework should answer a simple question: Has your money manager delivered what they committed to deliver?
The point of analyzing performance data is to help investors make informed investment decisions. The noisier the data, the weaker the inferences you can make.
If you’re going to invest time understanding how a manager operates and potentially commit assets to them, you want a manager who is as committed to the long term as you are.
Over short time periods, outperforming or underperforming a benchmark is not necessarily evidence that a manager failed to deliver what they said they would deliver.
There’s no magic time frame for considering returns—different time frames provide different information.
When politicians hide the cost of government, ‘free college’ and ‘Medicare for all’ sound like bargains.
Steve H. Hanke and Stephen J.K. Walters
Margaret Thatcher famously said the problem with socialism is that you “always run out of other people’s money.” The trouble with resisting socialism is that until the money runs out, free-spending progressive policies are remarkably seductive. Their appeal comes from what economists call lying prices: advertised prices that don’t reflect the full cost of what you’re buying.
‘Modern monetary theory’ rests on dangerous, false premises. The U.S. won’t grow its way out of the red.
By: Desmond Lachman
Do deficits matter? Between Republican tax cuts and Democratic spending proposals, U.S. lawmakers act as if the answer is no. Lately, academic economists have echoed the sentiment, advocating large, unfunded infrastructure spending programs—the main thrust of former International Monetary Fund chief economist Olivier Blanchard’s recent presidential address to the American Economic Association. “Put bluntly,” Mr. Blanchard said, “public debt may have no fiscal cost.”
This view, known as modern monetary theory, rests on false premises. One is that the U.S. government will likely be able to borrow at low rates indefinitely. Another is that so long as the U.S. nominal growth rate is greater than the rate at which its government borrows, America can always grow its way out of debt problems.
David Jones Head of Financial Advisor Services, EMEA and Vice President Dimensional Fund Advisors Ltd.
As much as I value the unfettered access to information the internet provides, I recognize the potential harm that too much information can cause.
Take, for example, a friend of mine, who was experiencing some troubling medical symptoms. Typing her symptoms into a search engine led to an evening of research and mounting consternation. By the end of the night, the vast quantity of unfiltered information led her to conclude that something was seriously wrong. One of the key characteristics that distinguishes an expert is their ability to filter information and make increasingly refined distinctions about the situation at hand.
For example, you might describe your troubling symptoms to a doctor simply as a pain in the chest, but a trained physician will be able to ask questions and test several hypotheses before reaching the conclusion that rather than having the cardiac arrest you suspected, you have something completely different. While many of us may have the capacity to elevate our understanding to a high level within a chosen field, reaching this point takes time, dedication, and experience. My friend, having convinced herself that something was seriously wrong, booked an appointment with a physician. The doctor asked several pertinent questions, performed some straightforward tests, and recommended the following treatment plan: reassurance and education.
The names, addresses, contact information and passport numbers of over 300 million people who stayed at a Starwood hotel property may have been accessed in a major data hack, Marriott hotels reported Friday. Marriott's data team confirmed that the Starwood guest reservation database — which contains up to 500 million accounts — had been compromised, and the hacking may have been ongoing since 2014.
Unfortunately, there may not be a lot of individuals can do to completely protect themselves in response. Even a credit freeze may not a comprehensive solution.
“Sellers were out in force on the market today after negative news on the economy.” It’s a common line in TV finance reports. But have you ever wondered who is buying if so many people are selling?
The notion that sellers can outnumber buyers on down days doesn’t make sense. What the newscasters should say, of course, is that prices adjusted lower because would-be buyers weren’t prepared to pay the former price.
It has been more than 50 years since the idea of stock prices containing all relevant information was put forth. Information might come in the form of data from a company’s financial statements, news about a new product, a change in the regulatory environment, or simply a shift of investors’ tastes and preferences toward owning different investments.
Information is incorporated into security prices through the buying and selling process. While fair prices may not depend on a certain level of trading, over $400 billion of stocks traded on average each day in the world equity markets suggests that a great deal of information is incorporated into stock prices.1