Category: Investments
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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…
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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…
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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…
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Tulipmania Revisited: Separating Hysteria from History
I was in Holland last week, and the Dutch tulips are in full and magnificent bloom. The fields full of technicolor flowers, in a display so extensive and impressive that it seems impossible, might not have made the list of Seven Wonders of the World, solely because they did not…
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From Tangency to Barbell Strategy: What Smart Investors Actually Do
What if one of the most elegant ideas in investment theory turns out to be nearly impossible to apply in the real world? In previous posts, we developed a number of ideas from Modern Portfolio Theory leading to the idea of the Tangency Portfolio. As a reminder, the Tangency Portfolio…
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The Capital Market Line—Is it the Holy Grail?
In a previous post, we introduced the concept of the efficient frontier. The efficient frontier concept is frequently presented in a graph, such as the following. Capital Market Line Now comes the insight of a single “efficient risky portfolio.” The assumption is that an investor can choose to allocate his…
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Does Mean-Variance Optimization Help with Risk Management?
How many times have you heard, or said, “past performance is no guarantee of future performance” or something similar? SEC rule 482 explicitly contains the language “past performance does not guarantee future results,” and the SEC requires this language in rule 482 advertisements. While past performance may not predict future…
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Do You Know How You’re Influenced by Modern Portfolio Theory?
Almost everyone believes that you should diversify your assets – but there are different explanations about why. It is sometimes said (though how anyone would know is another story) that fish are not aware that they swim in water. Similarly, many investors today live in a world shaped by many…
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Are Capitalization-Weighted Indexes (Like the S&P 500) Inferior?
Most financial advisors agree that it’s difficult to beat “the market”. It’s easy to define “beat the market” as generating an investment return (typically before tax, and typically ignoring transactions costs) that is greater than the market return. But what, exactly, is “the market”? Which Stocks in the Index? In…
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Buffett Just Sold His Index Fund Position—Index Investing: Yes or No?
If someone came to you today and asked, “What’s the case for index investing?” what would you say to that person? In light of Warren Buffett’s recent sale of his Vanguard Index Fund position, advisors and clients may be more interested than usual in the case for index investing. There’s…