From the category archives:
In the 1960s, a few leaders in economic/financial thought developed the Capital Asset Pricing Model (CAPM, pronounced “cap-em”) as a means of pricing securities. The CAPM states that expected returns for an investment should be directly related to the asset’s non-diversifiable risk.
Years later, Eugene Fama and Kenneth French developed their “Three-Factor Model,” which states that [...]
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I’ve seen a lot of different ways to calculate the rate of return on a home purchase, but my favorite so far is the one William Bernstein provides in The Investor’s Manifesto.
First, he separates the decision to purchase a home from the decision to finance that purchase with borrowing. We calculate the rate of return [...]
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Over the last ten years or so, there’s been a great deal of discussion about what constitutes a “safe withdrawal rate” during retirement. The most common rule of thumb (resulting from the famous “Trinity Study“) is to start with a withdrawal rate equal to 4% of your portfolio value on the day you retire, and [...]
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Hypotheses cannot be proven. They can only be disproved. As Taleb reminds us, even with hundreds of thousands of white swan sightings and no black swan sightings, it was never possible to prove the statement “all swans are white.” Yet one single sighting of a black swan could (and did) immediately disprove the statement.
In finance, [...]
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If I were to choose one thing from the academic world of finance that I think more individual investors need to know about, it would be the efficient market hypothesis.
The name “efficient market hypothesis” sounds terribly arcane. But its significance is huge for investors, and (at a basic level) it’s not very hard to understand.
So [...]
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A recent Get Rich Slowly post asked whether one should stop investing for retirement in order to pay off debt. It’s an important question, and one that I’ve attempted to tackle before. But what I really want to talk about are the comments that were left on the GRS post.
They’re frightening. And I’m not saying [...]
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Carl from Behavior Gap recently posed an important question over at Morningstar’s blog. He asks whether laziness is a significant motivator in investment advisors’ tendency to steadfastly recommend a buy and hold strategy. Carl writes,
“I have found that there is a subculture in the advice industry that dismisses any inquiry about the economy, the markets, [...]
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Two recent snippets of news:
“Equity index fund assets made up 13 percent of all equity mutual fund assets at the end of 2008…up from 3.3 percent in 1994.”
“$11.6 billion in fresh investments have gone into index funds this year, versus $5.6 billion pulled out of actively managed funds overall.”
My guess is that investors are slowly [...]
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In my experience, supply and demand aren’t explicitly discussed very often when talking about investing. But changes in demand for a stock–or, more relevant to index investors, demand for stocks in general–are of tremendous importance.
Over any period, the return from the stock market is determined by three factors:
Changes in the market’s P/E ratio,
Earnings growth, and
Dividend [...]
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In his recent weekly address, President Obama outlined some proposed changes regarding retirement savings. I think all four of the proposed actions/changes are excellent, but that’s not what interests me most about the speech.
What I can’t get past is this quote:
“If you work hard and meet your responsibilities, this country is going to honor our [...]
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In the field of investing, people often talk about “investment time frames” or “investment time horizons.” The idea is that the longer the time frame considered, the more likely the “expected outcome” is to occur. For example, over longer periods of time:
Stocks become more likely to earn a positive return, and
High-risk investments become more [...]
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