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Trend Following Works the Weakest After Financial Crises

Time-series momentum examines the trend of an asset with respect to its own past performance. This is different than cross-sectional momentum (often referred to as Carhart momentum), which compares the performance of an asset with respect to the performance of another asset. Research into time-series momentum has found it to be persistent across both time…

Explaining The ‘Disposition Effect’

There is a large body of academic evidence demonstrating that individual investors are subject to the “disposition effect.” Those suffering from this phenomenon, which was initially described by Hersh Shefrin and Meir Statman in their 1985 paper, “The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence,” tend to sell…

The Irrelevance of Dividends

Research has established that dividend policy should be irrelevant to stock returns, yet investors have long demonstrated an irrational preference for them. Mutual fund providers are well-aware of this fact. Earlier this week, we reviewed a pair of studies showing that mutual fund managers exploit investors’ well-documented preference for cash dividends to attract assets by artificially “juicing”…

Mutual Funds Lace Portfolios with Dividend “Juice”

It has long been known that many investors have a preference for cash dividends. From the perspective of classical financial theory, this behavior is an anomaly. The reason is that, in their 1961 paper, “Dividend Policy, Growth, and the Valuation of Shares,” Merton Miller and Franco Modigliani famously established that dividend policy should be irrelevant…

The Fading Benefits of Low Volatility Strategies

Low-volatility strategies have quickly become the darling of many investors, thanks largely to trauma caused by the bear market that arose from the 2008-2009 financial crisis combined with academic research showing that the low-volatility anomaly exists in equity markets around the globe. Earlier this week, we took a detailed look at a 2016 study from David Blitz,…

The Top 10 Places Your Next Dollar Should Go

There is no shortage of receptacles clamoring for your money each day. No matter how much money you have or make, it could never keep up with all the seemingly urgent invitations to part with it. Separating true financial priorities from flash impulses is an increasing challenge, even when you’re trying to do the right…

Choosing Between Roth and Traditional IRAs

Among the most important decisions investors make is their choice of location for assets within the various alternatives available for retirement (tax-advantaged) accounts. Allocating between a traditional IRA (a pretax, tax-deferred account) and a Roth IRA (a post-tax, tax-free account) can have a pronounced impact on retirement outcomes, given the $14 trillion in tax-advantaged retirement…

The Costs of Socially Responsible Investing

Socially responsible investing (SRI) aligns ethical and financial concerns for investors. SRI has gradually developed over time to include the consideration of firms’ environmental, social and governance (ESG) performance. Of note is that, while SRI has evolved, the original practice of negative screening for the stocks of companies involved in harmful or controversial activities (so-called…

Mispricing Drives the Value Premium

There’s extensive literature documenting that value stocks (the stocks of companies with low prices relative to a valuation metric, such as earnings, book value, cash flow or sales) possess a strong, persistent and pervasive tendency to outperform growth stocks. While there’s no debate about the existence of the value premium, there’s a major debate about…

Is Your Attitude Toward Work Killing Your Retirement Dreams?

Do you have a generally positive or negative impression of the word “retirement”? I ask because it dovetails nicely with a series of questions (inspired by Rick Kahler) that I use to begin most speaking engagements. These questions are designed to incite self-awareness, offering us clues about how our life experiences have shaped the (often unarticulated…

Value and Momentum Are a Powerful Combo

Two of the most powerful explanatory factors in finance are value and momentum. Research on both has been published for more than 20 years. However, it was not until recently that the two have been studied in combination and across markets. The study “Value and Momentum Everywhere” by Clifford Asness, Tobias Moskowitz and Lasse Pedersen,…

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