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Should Gold Be in Your Portfolio?
Many well-respected investors and finance writers—from Warren Buffett to Burton Malkiel (author of Random Walk Down Wall Street)—do not believe that investors should own gold as part of their investment portfolios. However, many other investors and commentators argue that gold does belong in most portfolios. Who’s right? In this post, we’ll examine both arguments. Case…
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Don’t Be Fooled by the Boom: Real Estate’s Real Return Story
In previous posts, we saw that real estate has had volatility similar to that of stocks, with correlation low enough to make it a useful portfolio diversifier. But we also want to know what kind of returns to expect from real estate if it is included in a portfolio. Historical Returns on Real Estate Just…
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How Much Real Estate Should I Own? Examining Real Estate Volatility
In a previous post, we saw that real estate is by market value the largest asset class in the world. According to most interpretations of the efficient market hypothesis, this fact suggests that real estate should be a part of most portfolios that adopt an indexing approach. In this post, we’ll continue to look at…
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The World’s Largest Asset Class, and How to Think About It
In previous blogs, we looked at bonds and stocks as asset classes. We developed an approach based on return factors and return correlations to decide which asset classes should be considered by most investors. In this post, we look at real estate. However, unlike the case with stocks and bonds, the vast majority of real…
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Should Country Be an Explanatory Factor in Investing?
In previous posts, we looked at a number of explanatory “factors” which may explain the returns on stocks. But there’s one variable we didn’t discuss. For some reason, in the factor literature, the country of a stock is rarely considered to be a “factor.” But in practice, most investors do consider country to be relevant.…
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How Should We Define Stock Asset Classes?
In a previous set of posts, we looked at how to think about and define asset classes – as they relate to bonds. Now let’s apply the idea of defining an asset class in terms of characteristics to stocks. From the point of view of theoretical finance, the main difference between stocks (equity) and bonds…
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Are Bonds One Asset Class, or Multiple?
Theory and history suggest that for bonds, changes in interest rates are the dominant risk factor. Most of the rest of the risk is explained by credit risk. History also shows that in times of greatest stress, credit risk and liquidity risk can dominate interest rate risk. These characteristics can help think about what role…
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What makes an Asset Class? Bonds as a Case Study
In a previous post, we observed that while seemingly everyone talks about “asset classes,” there is little detail on what an asset class actually is. We offered the following definition: An asset class is a set of assets that have similar expected returns, risks, and that share a high degree of covariance. The next step…
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What Is an Asset Class? A Closer Look at a Common but Vague Term
How would you answer the question, “What is an asset class?” This sounds like a simple question, but it turns out that even large institutions struggle to provide a well-defined answer. In this post, we’ll discuss why it matters and how to define an “asset class.” The Tangency Portfolio and the Risky Asset In a…
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The Illusion of Safety: What “Low Risk” Really Means for Investors
The standard “low risk” asset is short term treasury bills. If you are holding investment assets to be the low-risk part of your portfolio, there is a good argument to hold the lowest risk such investment. For US investors, the two best candidates for low-risk asset are probably T-Bills, and actual cash. Actual Cash The…