Archive | August, 2015

Is a Pullback Really a Buying Opportunity?

The Canadian, US and international markets all fell more than 5% last week, the sharpest weekly drop we’ve seen in almost four years. Then on August 24, global markets plunged even further. If you were waiting for a pullback to give you a buying opportunity, you just got it. But if you’re sitting in cash and paralyzed with fear, you’ve just learned how you can get into trouble when you invest without a plan.

Let me be clear before we go further: I’m not recommending that investors hoard cash and wait for big drops like this one. Let’s remember that the last time we saw a sharper one-week decline was September 2011. The opportunity cost of being uninvested—even for a couple of months, let alone four years—can be enormous. So if your savings are coming from a regular paycheque, you are better off setting up an automatic investment plan that removes the emotion from your decision making.

However, If you recently came into a large lump sum—from an inheritance, the sale of a property or business, or a pension payout—things are a little different. You are still likely to be better off investing the lump sum immediately rather than spreading it out over a year or two: studies have consistently shown that the all-in move delivers better results about two-thirds of the time.

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It’s Better With Beta

The title of Larry Swedroe’s latest book, The Incredible Shrinking Alpha, raises a question: what happened to the idea that skilled managers can consistently beat the market? In a recent interview with Swedroe, we discussed the idea that this ability hasn’t really disappeared: it’s just that “alpha has become beta.”

What exactly does that mean? In investing jargon, alpha is the name given to the excess return a fund manager achieves through skill. Beta, on the other hand, refers to the returns available to anyone who is willing to accept a known risk. When Swedroe says “alpha has become beta,” he simply means that anyone who understands how to structure a portfolio can increase their expected returns by simply changing their exposure to specific types of risk, known as “factors.”

A factor is a characteristic of a stock that affects its expected return and risk. Factor investing (sometimes marketed as “smart beta”) means identifying which of these characteristics might predict higher returns in the future—even if it also brings more risk—and then building a diversified portfolio that captures those returns in a systematic way,

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Is Beating the Market Harder Than Ever?

Is beating the market harder than it’s ever been? Larry Swedroe thinks so, and he lays out his case in his newest book, The Incredible Shrinking Alpha.

PWL Capital has just published a custom edition of the book, with a foreword I co-wrote with my colleague Ben Felix. In our introduction, Ben and I note that Swedroe likes to use sports analogies when he discusses investing. I recently chatted with Swedroe about the book, and he looked to baseball and tennis to explain why active investors face more difficult obstacles than ever.

Outliers in the outfield

Swedroe begins with an argument that others have invoked before: the disappearance of the .400 hitter in baseball. Since 1903, seven different players have batted .400 or better a total of 12 times. However, that feat has not been accomplished since 1941, when Ted Williams hit .406 for the Boston Red Sox. “Of course, the skill of the pitchers today is much higher, and the fielders are much better,” he notes, so that might explain why batting .400 is considered almost impossible today. However, over the last 50 years,

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