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Blog | The Portfolio Doctor

The Portfolio Doctor

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.

Lessons for the Next Crisis

It will soon be the 10-year anniversary of when, in early October 2007, the S&P 500 Index hit what was its highest point before losing more than half its value over the next year and a half during the global financial crisis.

Over the coming weeks and months, as other anniversaries of major crisis-related events pass (for example, 10 years since the bank run on Northern Rock or 10 years since the collapse of Lehman Brothers), there will likely be a steady stream of retrospectives on what happened as well as opinions on how the environment today may be similar or different from the period leading up to the crisis. It is difficult to draw useful conclusions based on such observations; financial markets have a habit of behaving unpredictably in the short run. There are, however, important lessons that investors might be well-served to remember: Capital markets have rewarded investors over the long term, and having an investment approach you can stick with—especially during tough times—may better prepare you for the next crisis and its aftermath.

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Investing versus Gambling | The Problem with Commodities

Gambling is speculation. One cannot assume any expectations based on the amount of risk one takes. You could win $50 million from a $5 lottery ticket or you could bet $50,000 and win nothing. Investing is quite different. Investing in capital markets has a positive expected return for risk taken.

Stock markets worldwide have reliably rewarded long-term investors. For example, over the past eighty years, investors who held the S&P 500 (including dividends) for at least 12 years would always have had positive returns.

Commodities, like many things that come out of Wall Street are easy to sell and hard to trust. Though the Commodities market is sometimes in vogue, they are too volatile to be held for the long-term. According to a Goldman Sachs Group Inc. study from 2016, a portfolio of stocks, bonds and commodities showed a worse return in the period from 1987 to 2015 than a portfolio of just equities and debt. They also may not be a good hedge during stock market declines: Commodities fell more than U.S. equities during the recent stock market declines in 2008, 2010, 2011 and 2015.

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Why Diversification is the Closest Thing to a Free Lunch in Investing

The reliability of investment outcomes and the relationship to performance in a diversified portfolio

The benefits of diversification is something we discuss at great length with our clients. In addition to the commonly discussed benefits of diversification: increased returns and volatility reduction; the other lost leader is the positive impact that diversification has on delivering reliable outcomes.

In a research paper by Wei Dai, PhD of Dimensional Fund Advisors, Dai identified that the most reliable drivers of expected returns, or what they call dimensions, are the premiums associated with company size, relative price and profitability. But that isn’t the end of making sound investment decisions when choosing what companies to include in a fund or which equities to include in a portfolio.

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How Behavioral Biases Can Skew Your Perception of Risk

It is in our behavioral nature to assess risk based on identifiable examples, not only can that mindset skew decision making, it can leave us vulnerable to risks we are not as familiar with and closed off from opportunities we may believe to be too risky. These things coupled together do not make for clarity of thought when making investment choices.

Availability Bias or Availability Heuristic is “a mental shortcut that relies on immediate examples that come to a given person’s mind when evaluating a specific topic, concept, method or decision.”

As we live in the aftermath of the Great Recession, though the strides that the markets have taken between then and now have been impressive, investors maintain an availability bias that “safe is good” and “risky is bad.” Unfortunately, that leaves investors with quite a dilemma.

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