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.
This report features a market review that discusses global stock trends, U.S. stock returns, and U.S. Treasury yields. There's also an article illustrating the magnitude and speed of the economic recovery since the onset of COVID-19 and the subsequent recession, as well as an academic article: Financial Decision-Making in Married Couples
When markets turn volatile and uncertainty rises, it’s common for investors to flock to what they perceive to be safer assets. Despite well-documented perils to such market-timing maneuvers, it can be tough to overcome the urge to get out of the market and wait on the sidelines until markets return to “normal.” (Professor Amit Goyal discusses the potential shortcomings of market-timing strategies here).
Flows into money market funds indicate many investors have again flown the coop since the current market downturn began in late February. Government money market funds (MMFs) are a popular destination for investors seeking a “safe” port, andFigure 1shows that more than $1 trillion has poured into the category since February 19. By way of comparison, government MMFs experienced year-to-date net outflows of more than $30 billion before the downturn. While we don’t know exactly where the money came from, we believe it’s safe to assume that a significant portion came from equities.
1. Financial science becomes a driving force in well-designed portfolios.
Academic evidence casts light on the challenges with traditional investment approaches, such as security selection and market prediction, and pushes advisors toward more robust, research-informed investment strategies.
2. Theoretical and empirical research identifies drivers of investment returns.
Research shows that stocks offering higher expected returns can be identified using company size, relative price, and profitability. For bonds, information in the yield curve and credit spreads reveals higher expected returns.
3. Global information and competition further advance the market’s pricing power.
Each day, the global security markets process billions of dollars in trades between buyers and sellers—and their collective wisdom helps drive securities prices toward fair value.
It’s easy to feel anxious about investing these days. Those who claim they can foresee market moves are out in force, on screen after screen, citing factors such as trade wars or the inverted yield curve as signals that stocks will soon go down.
Maybe we will have a recession, maybe we won’t—but be wary of predictions on how markets will behave. It’s a losing game. The results of those who try to time markets or pick winners have been studied extensively, and there is no compelling evidence they do better than you would expect by chance.
There’s a misconception in the markets: value stocks have lost their vigor.
Value stocks have underperformed growth stocks over the past decade. In the US, the annualized compound return has been 12.9% for value stocks, or those trading at a low price relative to their book value. That contrasts with 16.3% annualized compound return for growth stocks, or those with a high relative price.1
