Over the past few years there has been a loud and persistent chorus of complaints from market participants about the fact that markets are behaving like simple ‘risk on, risk off’ discounting mechanisms, where almost all of the risk seems to be emanating from a very small number of sources.
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BOE Paper Signals Worrisome Outlook for Equities Post QE
This article is about how central banks have orchestrated a large overshoot in asset prices, and what this means for likely future returns to stocks and bonds in particular. We’ve written on this topic before, but this article approaches the problem from the point of view of central bank policy rather than analyzing valuation metrics.
Keep ReadingPath Dependency in Financial Planning: Retirement Edition
Imagine for a moment sitting at the kitchen table, steaming coffee in hand. The sun is streaming in the windows, bacon is popping in the pan, and Rover drops the paper at your feet. A brilliant Saturday morning by any measure, but today is extra special. Now you’re retired!
Keep ReadingDynamic Asset Allocation for Practitioners Part 5: Robust Risk Parity
In our article on Structural Diversification we explored the idea of holding a universe of assets which, when assembled in thoughtful proportion, might be expected to protect investors against the four major market regimes that they might encounter over the long term.
Keep ReadingDon’t Fear the (Alpha) Reaper
Let us preface this article by saying that we can’t for the life of us figure out why any investor cares about beating the market in the first place. To us, the whole concept of beating the market is a red herring. The only people who should be concerned with beating the market are investment managers themselves, because their compensation is directly tied to this specific objective.
Keep ReadingDynamic Asset Allocation for Practitioners Part 4: Naive Risk Parity
Our last ‘prequel‘ article explored the creation of a policy portfolio that utilizes a framework of structural diversification to hedge against the four major market regimes – inflationary boom, deflationary boom, stagflation and deflationary bust. In the conclusion of the article we said we would investigate a variety of quantitative methods of risk diversification to complement the more theoretical construct of structural diversification. This next instalment introduces naive risk management methods.
Keep ReadingStructural Diversification for All Seasons
Now that we are hip deep in our Dynamic Asset Allocation for Practitioners series (Parts I, II and III), it’s become evident that we may have skipped over some fundamental concepts in our rush to explore the more juicy material. This next series of posts is intended to lay the groundwork for how we think about the broader asset allocation problem.
Keep ReadingPlanning for Adverse Scenarios: Savings Edition
Let’s face it, it’s uncomfortable to acknowledge the fact that fate dominates many of the most meaningful outcomes in life. Take marriage for example. Raise your hand if you had planned in advance to meet the person you ended up marrying on the exact day you met them. No hands?
Keep ReadingValuation Based Equity Market Forecasts – Q2 2013 Update
We endorse the decisive evidence that markets and economies are complex, dynamic systems which are not reducible to linear cause-effect analysis over short or intermediate time frames. However, we are willing to acknowledge the likelihood that the future is likely to rhyme with the past.
Keep ReadingThe Most Important Concept in Wealth Management
Most investors miss the most important concept in wealth management because they are laser focused on returns as the primary benchmark of success. This propensity to chase returns is magnified during periods when markets are shooting the lights out, as investors become acutely aware of how their portfolio is performing relative to whatever index is attracting the most attention at the time.
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