Investment Myths & Fantasies

Have the Markets Discounted the End of Quantitative Easing?

Conventional wisdom holds that stock and bond market prices reflect investors’ expectations about the future.  This is one of the key arguments against market timing:  not only does your view of what’s going to happen have to be right, it has to different from the consensus because that’s already priced into the market. For example, if you think rising interest rates will damage stock market prices, and therefore you should sell or reduce your stock holdings, it’s not enough to be correct, your expectation must also differ from that of most other investors. As the great British economist John Maynard […]

Active vs. Passive Investing

How we characterize something often determines how we think about it.  For example, psychologists have shown that we respond differently to an investment represented as having a 45% probability of gain than we would if it were represented as having a 55% probability of loss.  From time immemorial, of course, salesmen have understood this perfectly well and exploited such behavioral biases to their own advantage. But I’ve been thinking about this in a different context: that of active vs. passive investing. Note that I did not characterize this as active and passive investing, but rather as active vs. passive, which […]

Where’s the Value Added?

In my blog, “Costs Matter!” I show how dramatically higher fees will compound over time to reduce investors’ cumulative wealth. But costs are only one side of the investment coin, the other side of which is returns. Frankly, I don’t care if Fund A costs me more than Fund B, if my net returns from Fund A are higher than those from Fund B. So what we need to understand is whether the financial services industry succeeds in delivering  better-than-market returns net of the fees and expenses investors incur. That’s the industry’s value proposition: pay us to manage your money […]