asset allocation

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pages: 317 words: 106,130

The New Science of Asset Allocation: Risk Management in a Multi-Asset World by Thomas Schneeweis, Garry B. Crowder, Hossein Kazemi

asset allocation, backtesting, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, book value, business cycle, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, diversified portfolio, financial engineering, fixed income, global macro, high net worth, implied volatility, index fund, interest rate swap, invisible hand, managed futures, market microstructure, merger arbitrage, moral hazard, Myron Scholes, passive investing, Richard Feynman, Richard Feynman: Challenger O-ring, risk free rate, risk tolerance, risk-adjusted returns, risk/return, search costs, selection bias, Sharpe ratio, short selling, statistical model, stocks for the long run, survivorship bias, systematic trading, technology bubble, the market place, Thomas Kuhn: the structure of scientific revolutions, transaction costs, value at risk, yield curve, zero-sum game

Issues in Alpha and Beta Determination Problems in Alpha and Beta Determination Multi-Factor Return Estimation: An Example Tracking Alternatives in Alpha Determination Notes xi xix 1 3 4 6 11 14 15 17 20 22 24 26 28 30 33 34 37 39 39 46 48 50 54 56 v vi CONTENTS CHAPTER 4 Asset Classes: What They Are and Where to Put Them Overview and Limitations of the Existing Asset Allocation Process Asset Allocation in Traditional and Alternative Investments: A Road Map Historical Return and Risk Attributes and Strategy Allocation Traditional Stock/Bond Allocation versus Multi-Asset Allocation Risk and Return Comparisons Under Differing Historical Time Periods Extreme Market Sensitivity Market Segment or Market Sensitivity: Does It Matter? How New Is New? Notes CHAPTER 5 Strategic, Tactical, and Dynamic Asset Allocation Asset Allocation Optimization Models Strategic Asset Allocation Tactical Asset Allocation Dynamic Asset Allocation Notes CHAPTER 6 Core and Satellite Investment: Market/Manager Based Alternatives Determining the Appropriate Benchmarks and Groupings Sample Allocations Core Allocation Satellite Investment Algorithmic and Discretionary Aspects of Core/Satellite Exposure Replication Based Indices Peer Group Creation—Style Purity Notes 58 59 61 66 70 71 74 82 84 88 91 92 99 101 107 109 110 111 117 119 120 120 122 126 132 Contents CHAPTER 7 Sources of Risk and Return in Alternative Investments Asset Class Performance Hedge Funds Managed Futures (Commodity Trading Advisors) Private Equity Real Estate Commodities Notes CHAPTER 8 Return and Risk Differences among Similar Asset Class Benchmarks Making Sense Out of Traditional Stock and Bond Indices Private Equity Real Estate Alternative REIT Investments Indices Commodity Investment Hedge Funds Investable Manager Based Hedge Fund Indices CTA Investment Index versus Fund Investment: A Hedge Fund Example Notes CHAPTER 9 Risk Budgeting and Asset Allocation Process of Risk Management: Multi-Factor Approach Process of Risk Management: Volatility Target Risk Decomposition of Portfolio Risk Management Using Futures Risk Management Using Options Covered Call Long Collar Notes CHAPTER 10 Myths of Asset Allocation Investor Attitudes, Not Economic Information, Drive Asset Values Diversification Across Domestic or International Equity Securities Is Sufficient vii 134 135 139 143 148 153 160 166 167 168 170 173 179 179 185 185 189 189 194 195 195 200 202 203 206 206 208 210 212 213 214 viii CONTENTS Historical Security and Index Performance Provides a Simple Means to Forecast Future Excess Risk-Adjusted Returns Recent Manager Fund Return Performance Provides the Best Forecast of Future Return Superior Managers or Superior Investment Ideas Do Not Exist Performance Analytics Provide a Complete Means to Determine Better Performing Managers Traditional Assets Reflect “Actual Values” Better Than Alternative Investments Stock and Bond Investment Means Investors Have No Derivatives Exposure Stock and Bond Investment Removes Investor Concerns as to Leverage Given the Efficiency of the Stock and Bond Markets, Managers Provide No Useful Service Investors Can Rely on Academics and Investment Professionals to Provide Current Investment Models and Theories Alternative Assets Are Riskier Than Equity and Fixed Income Securities Alternative Assets Such as Hedge Funds Are Absolute Return Vehicles Alternative Investments Such as Hedge Funds Are Unique in Their Investment Strategies Hedge Funds Are Black Box Trading Systems Unintelligible to Investors Hedge Funds Are Traders, Not Investment Managers Alternative Investment Strategies Are So Unique That They Cannot Be Replicated It Makes Little Difference Which Traditional or Alternative Indices Are Used in an Asset Allocation Model Modern Portfolio Theory Is Too Simplistic to Deal with Private Equity, Real Estate, and Hedge Funds Notes CHAPTER 11 The Importance of Discretion in Asset Allocation Decisions The Why and Wherefore of Asset Allocation Models Value of Manager Discretion 215 215 216 216 217 217 218 218 218 219 220 221 222 222 223 223 223 225 226 226 230 Contents Manager Evaluation and Review: The Due Diligence Process Madoff: Due Diligence Gone Wrong or Never Conducted Notes CHAPTER 12 Asset Allocation: Where Is It Headed?

As discussed in the previous chapters, confronting and managing the vagaries of change may be the biggest challenge facing the discipline of asset allocation. Asset allocation has entered into a new era that we call the reality phase. Once the favorite toy in the investment room, traditional asset allocation between and among cash, stocks, and bonds must now be extended to include the many competing alternative opportunities for investors. If being made “real” means additional oversight and the loss of investor allure, many asset allocators would simply hope to return to the days 242 THE NEW SCIENCE OF ASSET ALLOCATION when they were viewed as magicians or wizards. Going forward, an asset allocation decision must include investment vehicles offering return opportunities not easily found in other traditional investment vehicles.

Investors often fail to take into account that the underlying business models of the firms offering asset allocation advice directly impact their product mix, their approach to asset allocation, and the relative return and risk scenarios they use in their asset allocation processes. Preface xiii In summary, asset allocation is a dynamic yet reflective process. While it is based in part on a fundamental understanding of the underlying assets, the markets in which they trade, and the pros and cons of the various asset allocation and risk models used to manage those assets, it also requires discretion. Simple reliance on past model based approaches, past data, or past success does not suffice.


pages: 337 words: 89,075

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio by Victor A. Canto

accounting loophole / creative accounting, airline deregulation, Alan Greenspan, Andrei Shleifer, asset allocation, Bretton Woods, business cycle, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, commodity trading advisor, corporate governance, discounted cash flows, diversification, diversified portfolio, equity risk premium, financial engineering, fixed income, frictionless, global macro, high net worth, index fund, inflation targeting, invisible hand, John Meriwether, junk bonds, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low cost airline, low interest rates, market bubble, merger arbitrage, money market fund, new economy, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, Phillips curve, price mechanism, purchasing power parity, risk free rate, risk tolerance, risk-adjusted returns, risk/return, rolling blackouts, Ronald Reagan, Savings and loan crisis, selection bias, seminal paper, shareholder value, Sharpe ratio, short selling, statistical arbitrage, stocks for the long run, survivorship bias, systematic bias, Tax Reform Act of 1986, the market place, transaction costs, Y2K, yield curve, zero-sum game

See asset allocation alpha, 19, 21, 113 active versus passive management, 252-255 elasticity and, 211-212 portable-alpha strategy, 256-257, 260-264, 269-270 in value-timing strategy, 243-250 alpha core, 290n amortization of regulatory fixed costs, 184-185 annual returns for asset classes, 19 asset allocation. See also asset classes; cyclical asset allocation (CAA); strategic asset allocation (SAA) elasticity effect on, 213-217 fixed-income asset allocation, 25-26, 37-38, 119 location-based asset allocation, 24-25, 34-37, 125-126 long-run asset allocation, 40-43, 118, 127, 274-275, 285n periodic table of asset returns, 46 portable-alpha strategy, 256-257, 260-264, 269-270 retirement planning and, 3-4 size-based asset allocation, 23-24, 31-32, 123 style-based asset allocation, 18, 22-23, 26-30, 121 tactical asset allocation (TAA), xx, 18, 60, 101, 254 asset classes.

See location effect coupon rate, 128 cyclical asset allocation (CAA), xx, 18 asset class selection, 18-21 basis of, 100 equity/fixed-income cycles, 53-54 fixed-income asset allocation and, 37-39, 119 fixed-income cycles, 48-52 forecasts and, 100-101, 127-129 hedge funds and, 230-239 investor convictions and, 129-142, 275-281 location cycles, 57-58 location effect, 202-204 location-based asset allocation and, 34-37, 125-126 long-run asset allocation and, 40-43, 118, 127, 274-275 portable-alpha strategy versus, 261 size cycles, 54-55 size-based asset allocation and, 31-32, 123 strategic asset allocation (SAA) versus, 59-65, 254 style cycles, 55-57 style-based asset allocation and, 26-30, 121 tax-rate changes and.

As mentioned earlier, historical returns and the variance–covariance matrix constitute the relevant data for asset allocation. If deviations from trend-lines are random and unpredictable, no benefits can be gained by straying from a long-run strategic asset-allocation strategy. If deviation patterns are not random, however, there are significant potential benefits to cyclical asset allocation (CAA) strategies (defined in Chapter 2, “The Case for Cyclical Asset Allocation”) and/or tactical asset allocation (TAA) strategies (defined in Chapter 3, “Thinking in Cycles”). I have argued fiscal and monetary policy produce shifts in the economy’s aggregate demand and supply.


All About Asset Allocation, Second Edition by Richard Ferri

activist fund / activist shareholder / activist investor, Alan Greenspan, asset allocation, asset-backed security, barriers to entry, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, book value, buy and hold, capital controls, commoditize, commodity trading advisor, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, equity premium, equity risk premium, estate planning, financial independence, fixed income, full employment, high net worth, Home mortgage interest deduction, implied volatility, index fund, intangible asset, inverted yield curve, John Bogle, junk bonds, Long Term Capital Management, low interest rates, managed futures, Mason jar, money market fund, mortgage tax deduction, passive income, pattern recognition, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, selection bias, Sharpe ratio, stock buybacks, stocks for the long run, survivorship bias, too big to fail, transaction costs, Vanguard fund, yield curve

The above reasons are three of the most common triggers for an asset allocation change, although there are many other reasons. For example, starting a new business may prompt people to become more conservative in their asset allocation because they are now taking business risk in other ways as well as needing extra liquidity. A divorce could change both spouses’ asset allocation as each party looks to his or her financial future as a single person rather than as a couple. A serious medical issue may change longterm goals, and this may affect asset allocation. Finally, the death of a spouse may also affect asset allocation decisions because one person has lower liabilities than two.

There are three reasons that index mutual funds and ETFs are an ideal choice for those pursuing an asset allocation strategy in your portfolio: 1. Low tracking error with the indexes. The data used in almost all asset allocation analysis come directly from the return on the market. Accordingly, market-matching index funds and ETFs are a logical investment choice for people who want to make the most of asset allocation analysis. Any deviation from index funds adds an element of risk that was not captured in the asset allocation analysis. Fees Matter in Asset Allocation Planning 313 2. Low expense ratios. In general, stock and bond index funds and ETFs have the lowest investment fees in the industry.

Over your lifetime, how you divide your investments among stocks, bonds, real estate, and other asset classes will explain almost all your portfolio risk and return providing you have the discipline to maintain your plan. This makes the asset allocation decision one of the most important decisions in your life and is worth spending considerable time understanding. At its root, asset allocation is a simple idea: diversify a portfolio across several unlike investments to reduce the risk of a large loss. Controlling risk through a prudent asset allocation plan and proper portfolio maintenance keeps you focused on the big picture during difficult periods in the market cycle, and this discipline is the key to your long-term investment success. INTRODUCTION xiv DIFFERENT ASSET ALLOCATION STRATEGIES There are three different types of asset allocation strategies.


The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk by William J. Bernstein

asset allocation, backtesting, book value, buy and hold, capital asset pricing model, commoditize, computer age, correlation coefficient, currency risk, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, index arbitrage, index fund, intangible asset, John Bogle, junk bonds, Long Term Capital Management, p-value, passive investing, prediction markets, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, South Sea Bubble, stocks for the long run, survivorship bias, the rule of 72, the scientific method, time value of money, transaction costs, Vanguard fund, Wayback Machine, Yogi Berra, zero-coupon bond

International Publishing, 1993. 197 This page intentionally left blank Index Active management, 95–99 Alpha, 89–90, 98 American Association of Individual Investors, 177 American Depositary Receipts (ADRs), 78 Annualized return, 2–3, 5 Asset Allocation (Gibson), 176 Asset-allocation funds, 162–164 Asset-allocation strategy, 26, 143–174 asset-allocation funds in, 162–164 bonds in, 151–152 determining allocation, 143–145, 153–154 dynamic, 137–139, 163–164 executing plan for, 154–161 investment resources for, 175–180 key points for, 173–174 retirement accounts and, 153–154 stock indexing in, 145–151 taxes and, 145 Treasury ladders in, 152 (See also Asset classes; Diversification; Optimal asset allocation) Asset classes: 1926–1998, 9–18, 42 1970–1998, 19–21 in asset allocation process, 76–83 correlation coefficients among, 183–186 law of diminishing returns and, 76 standard deviation of annual returns, 6 Asset variance, 109 Autocorrelation, 106–108 Average return, 2–3 Backtesting, 72 Barra indexes, 99, 126 Baruch, Bernard, 52 Behavioral finance, 139–142 defined, 139 overconfidence and, 139–140 recency and, 47–48, 52, 53, 58–59, 140–141 risk aversion myopia and, 141–142 Benchmarking: alpha in, 89–90, 98 with S&P 500, 60, 78, 79, 86, 88–90, 145 Benzarti, Shlomo, 131 Bid-ask spread, 91, 92, 93, 96 Binomial distribution function, 2, 7 Bogle, John, 175–176 Bond funds, 151–152 Bonds: in asset allocation strategy, 151–152 common stock versus, 24 historical returns of, 23, 24 standard deviation of annual returns, 6 Book value (P/B ratio): data on ranges of, 114 in new era of investing, 124 in value investing, 112–113, 120 variation in returns and, 116–117 Brinson, Gary, 176 Buffett, Warren, 118 Calibration, 140 Capital gains capture, 102, 108 Center for Research in Security Prices, 76 Charles Schwab, 100 Clayman, Michelle, 118 Coin-toss option, 1–5, 29–36, 169 Commissions, 90–91, 92, 96, 152 Common Sense on Mutual Funds (Bogle), 175–176 199 200 Index Common stocks: 1926–1998, 4, 13–16, 17, 42–45 discounted dividend method and, 23–24, 26, 127–132 growth, 97, 112, 117 historical returns on, 23–25 large-company, (See Large-company stocks) long bonds versus, 24 risks and returns of, 1–5 small-company (See Small-company stocks) standard deviation of annual returns, 5–8, 63, 65, 96 Company size: variation in returns and, 116–117 (See also Large-company stocks; Small-company stocks) Complex portfolios, 41–62 defined, 41 efficient frontier, 55–59, 64 foreign assets in, 46–53 professional versus small investors, 59–61 rebalancing, 59 return and risk plot, 41–45 risk dilution, 45–46 small versus big stocks in, 53–55, 75 Compound interest, 17 Constant allocation, 58 Contrarian approach, 59, 104 Contrarian Market Strategy (Dreman), 104 Conventionality, in asset allocation process, 78–79 Cooley, Philip L., 169 Corner portfolios, 65–71 Correlation, 36–40 among asset classes, 183–186 autocorrelation, 106–108 calculating, 39 defined, 37 foreign investments and, 46–53, 72–73 imperfect, 37 Correlation (Cont.): negative, 31, 37 overstating of diversification benefits, 71-74 of small stocks and large stocks, 53–55 zero, 31 Cost of capital, 132 Critical-line technique, 65 Currency risk, 132–137 Dimensional Fund Advisors (DFA), 20, 148, 149, 150, 164 analysis of fund performance 1970–1998, 86 bond funds, 152 global large company index, 74–75 moderate balanced strategy, 82 small-cap index, 54–55, 98–99, 100 Discount rate (DR), 127–130 Discounted dividend method: Glassman-Hassett model and, 127–132 nature of, 23–24, 26 Diversification, 19, 21, 144 benefits of, 33–36, 41–45, 71–74 impact on risk and return, 31–36, 63 international, 46–53, 72–75 overstatement of benefits of, 71–74 (See also Optimal asset allocation) Dividend yield: data on ranges of, 114, 115 market declines and, 166–167 in new era of investing, 124 in value investing, 113–115 Dividends: Dow dividend strategy, 116 growth of, 80 reinvesting, 115 REITs and, 145 Dodd, David, 176 Dollar cost averaging (DCA), 154–155, 159 Dow 36,000 (Glassman and Hassett), 127–132 Dow dividend strategy, 116 Dow Jones Industrial Average, 24–25, 26, 80 Index Dreman, David, 104, 117 Dunn’s law, 99–100 Duration risk, 165–167 Dynamic asset allocation, 137–139 defined, 137 market valuation and, 163–164 overbalancing in, 138 EAFE Index, 38, 39, 46–53, 100, 126 Earnings yield, 119 Econometrics of Financial Markets, The (Campbell, Lo, and MacKinlay), 107–108 Edleson, Michael, 155–159, 176 Efficient frontier, 55–59, 64 Efficient market hypothesis, 104–105, 118–119, 120 Efficient Solutions, 65–71, 181–182 Ellis, Charles, 94 Emerging markets, 49–50, 100, 147–148 European bonds, 152 European stocks, 19, 20, 25, 156 efficient frontier and, 55–59 hedging with, 133 mutual funds, 147 Excess risk, 12–13 Exchange traded funds (ETFs), 149, 151 Expense ratio (ER), 90, 91, 92, 96, 146 Expert opinion, 74 Fama, Eugene, 98, 109, 116–117, 120–124, 148 Financial calculators, 5, 168 Fisher, Kenneth, 109 Fixed asset allocation, 109 Forbes, Malcolm, 104 Foreign assets: correlation and, 47, 72–73 EAFE Index, 38, 39, 46–53, 100, 126 hedging with, 132–137 Foreign tax credit, 161 Forward premium, 135 Forward rates, 135–136 Fraud, investment, 4 French, Kenneth, 98, 116–117, 120–124, 126, 148 201 Fund of funds, 161 Future optimal portfolio composition, 64 Gibson, Roger, 176 Glassman, James, 127–132 Global Investing (Ibbotson and Brinson), 176 Goetzmann, William, 49–50 Gold stocks (See Precious metals equity) Graham, Benjamin, 24, 93, 106, 112, 117, 118, 119–120, 125, 176–177 Graham, John, 104 Grant, James, 178 Great Depression, 14, 19, 112, 166 Growth investing: defined, 112, 118 efficient market theory and, 118–119 value investing versus, 117, 118–120 Growth stocks, 97, 112, 117 Harvey, Campbell, 104 Hassett, Kevin, 127–132 Haugen, Robert A., 119, 176 Hedging, 132–137 cost of, 135–136 defined, 132 extent of, 136–137 Historical optimal allocation, 64 Hubbard, Carl M., 169 Hypothetical optimal allocation, 64 Ibbotson, Roger, 176 Ibbotson Associates, 9–10, 23, 41–42, 44, 93, 178 Imperfect correlation, 37 In sample, 87 In Search of Excellence (Peters), 118 Indexing, 94–103 advantages over active management, 95–99 defined, 95 international, 100 mutual funds in, 145–151, 174 202 Index Indexing (Cont.): of small-company stocks, 101, 102, 148–149 theoretical advantage of, 95–96 Inflation, and real return, 80, 168 Institutional investors: evaluation of, 123–124 market-impact costs and, 86–90, 91–92, 96 pension funds, 103 persistence of investment performance, 90 small investors versus, 59–61 (See also Benchmarking; Mutual funds) Intelligent Investor, The (Graham), 106, 176–177 International diversification: case against, 72 correlation and, 46–53, 72–73 with small stocks, 74–75 sovereign risk and, 72 Inverse correlation, 31, 37 Investment climate, 124–127 Investment Company Institute, 103 Investment fraud, 4 Investment newsletters, 104–105 January effect, 92–94 Japanese bonds, 152 Japanese stocks, 19, 20, 25, 38, 39, 40, 48, 55, 56, 57, 59, 160 Jensen, Michael, 86 Jorion, Phillipe, 49–50 Keynes, John Maynard, 18 Lakonishok, Josef, 120 Large-company stocks, 13 indexing advantage with, 96, 97–98 small-company stocks versus, 53–55, 75 Law of diminishing returns, 76 Lehman Long Bond Index, 162 Local return, 133 Long Term Capital Management, 7 Mackay, Charles, 178 Malkiel, Burton, 101–102, 109, 175 Market capitalization, 13 Market efficiency, 85–110 expenses of funds and, 90–92, 96, 146 indexing and, 94–101 investment newsletters and, 104–105 January effect, 92–94 market-impact costs and, 88–90, 91–92, 96 and persistence of investment performance, 85–88 random walk and, 101, 106–108 rebalancing and, 108–109 survivorship bias and, 101–102 taxes and, 102–103 Market-impact costs: extent of, 91, 92, 96 illustration of, 88–90 Market multiple (See P/E ratio) Market risk premium, 121, 122 Market timing, 104–105, 160 Market valuation, 111–115, 163–164, 174 Markowitz, Harry, 64–65, 71, 177–178 Maximum-return portfolios, 69 Mean reversion, 70, 107, 109 Mean-variance analysis, 44–45, 64–71, 181–182 Mean-variance optimizers (MVOs), 64–71, 181–182 Memoirs of Extraordinary Popular Delusions and the Madness of Crowds (Mackay), 178 Miller, Paul, 115 Minimum-variance portfolios, 65–69 Momentum investing, 101, 108, 109, 123 Money managers (See Institutional investors; Mutual funds) Money market, standard deviation of annual returns, 6 Morgan-Stanley Capital Indexes, 19–20, 133, 149 Index Morningstar: long-term returns, 21 Principia database, 61, 96–97, 101–102, 120, 163–164, 177 standard deviation and, 6, 19 MSCI World Index, 162 Multiple (See P/E ratio) Multiple-asset portfolios, 29–40 coin toss and, 36 correlation in, 36–40 diversification and, 31–36 simple portfolios versus, 31–36 Multiple change, 24 Mutual funds: asset-allocation, 162–164 bond, 151–152 exchange traded (ETFs), 149–151 expenses of, 90–92, 96, 146 hedging, 135 indexing with, 145–151, 174 standard deviation and, 6 supermarkets, 148 turnover of, 130–131 Vanguard Group, 97–100, 146–148, 149, 150, 152, 156, 161–163 MVOPlus, 65–71, 181–182 National Association of Real Estate Investment Trusts (NAREIT), 21 Negative correlation, 31, 37 New era of investing: components of, 124–127 Glassman-Hassett model and, 127–132 New Finance: the Case Against Efficient Markets (Haugen), 119, 176 Newsletters, investment, 104–105 Nonsystematic risk, 12–13 Normal distribution, 7 Oakmark Fund, 88–90 Optimal asset allocation, 63–83 asset-allocation funds in, 162–164 asset classes in, 76–78 calculation of, 64–71 conventionality and, 78–79 203 Optimal asset allocation (Cont.): correlation coefficients, 71–74 international diversification with small stocks, 74–75 risk tolerance and, 79–80, 143 three-step approach to, 75–83 Out of sample, 87 Overbalancing, 138 Overconfidence, 139–140 P/B ratio (See Book value) P/E ratio: data on ranges of, 113, 114 earnings yield as reverse of, 119 in new era of investing, 124 in value investing, 112, 119–120 Pacific Rim stocks, 19, 20, 21, 25, 55–59, 147, 156 Pension funds, 103 (See also Institutional investors) Perfectly reasonable price (PRP), 127–128 Performance measurement: alpha in, 89–90, 98 three-factor model in, 123–124 (See also Benchmarking) Perold, Andre, 141 Persistence of performance, 85–88 Peters, Tom, 118 Piscataqua Research, 103 Policy allocation, 59 Portfolio insurance, 141 Portfolio Selection (Markowitz), 177–178 Precious metals stocks, 19–20, 21, 48, 55, 57, 59 Price, Michael, 162 Professional investors (See Institutional investors) Prudent man test, 60 Random Walk Down Wall Street, A (Malkiel), 101–102, 175 Random walk theory, 106–108, 119 positive autocorrelation and, 106–108 204 Index Random walk theory (Cont.): random walk defined, 106 rebalancing and, 109 Raskob, John J., 16–17 Real estate investment trusts (REITs), 38, 40, 100, 145 defined, 19 index fund, 148 returns on, 19, 21, 25 Real return, 26, 80, 168, 170 Rebalancing: frequency of, 108–109 importance of, 32–33, 35–36, 59, 63, 174 and mean-variance optimizer (MVO), 65 overbalancing in, 138 random walk theory and, 109 rebalancing bonus, 74, 159–160 of tax-sheltered accounts, 159–160 of taxable accounts, 160–161 Recency effects, 47–48, 52, 53, 58–59, 140–141 Regression analysis, 89–90 Reinvestment risk, 23 Representativeness, 118 Research expenses, 92, 95 Residual return, 98 Retirement, 165–172 asset allocation for, 153–154 duration risk and, 165–167 shortfall risk and, 167–172 (See also Tax-sheltered accounts) Return: annualized, 2–3, 5 average, 2–3 coin toss and, 1–5 company size and, 116–117 correlation between risk and, 21 dividend discount method, 23–24, 26, 127–132 efficient frontier and, 55–58 expected investment, 26 historical, problems with, 21–27 Return (Cont.): impact of diversification on, 31–36, 63 market, 168 real, 26, 80, 168, 170 return and risk plot, 31–36, 41–45 risk and high, 18 uncorrelated, 29–31 variation in, 116–117 Risk: common stock, 1–5 correlation between return and, 21 currency, 132–137 duration, 165–167 efficient frontier and, 55–58 excess, 12–13 high returns and, 18 impact of diversification on, 31–36, 63 nonsystematic, 12–13 reinvestment, 23 return and risk plot, 31–36, 41–45 shortfall, 167–172 sovereign, 72 systematic, 13 (See also Standard deviation) Risk aversion myopia, 141–142 Risk dilution, 45–46 Risk-free investments, 10, 15, 152 Risk-free rate, 121 Risk time horizon, 130, 131, 143–144, 167 Risk tolerance, 79–80, 143 Roth IRA, 172 Rukeyser, Lou, 174 Rule of 72, 27 Sanborn, Robert, 88–90 Securities Act of 1933, 92–93 Security Analysis (Graham and Dodd), 93, 118, 125, 176 Selling forward, 132–133 Semivariance, 7 Sharpe, William, 141 Shortfall risk, 167–172 Siegel, Jeremy, 19, 136 Index Simple portfolios, 31–36 Sinquefield, Rex, 148 Small-cap premium, 53, 121, 122 Small-company stocks, 13–16, 25 correlation with large-company stocks, 53–55 efficient frontier and, 55–59 indexing, 101, 102, 148–149 international diversification with, 74–75 January effect and, 92–94 large-company stocks versus, 53–55, 75 “lottery ticket” premium and, 127 tracking error of, 75 Small investors, institutional investors versus, 59–61 Solnik, Bruno, 72 Sovereign risk, 72 S&P 500, 13, 38, 39, 55 as benchmark, 60, 78, 79, 80, 86, 88–89, 145 efficient frontier, 56–57 Spiders (SPDRS), 149 Spot rate, 135 Spread, 91, 92, 93, 96 Standard deviation, 5–8 defined, 6, 63 limitations of, 7 of manager returns, 96 in mean-variance analysis, 65 Standard error (SE), 87 Standard normal cumulative distribution function, 7 Stocks, Bonds, Bills, and Inflation (Ibbotson Associates), 9–10, 41–42, 178 Stocks for the Long Run (Siegel), 19, 136 Strategic asset allocation, 58–59 Survivorship bias, 101–102 Systematic risk, 13 t distribution function, 87 Tax-sheltered accounts: asset allocation for, 153–154 rebalancing, 108–109, 159–160 (See also Retirement accounts) 205 Taxable accounts: asset allocation for, 153–154 rebalancing, 160–161 Taxes: in asset allocation strategy, 145 capital gains capture, 102, 108 foreign tax credits, 161 market efficiency and, 102–103 Technological change: historical, impact of, 125 in new era of investing, 125 Templeton, John, 164 Thaler, Richard, 131, 142 Three-factor model (Fama and French), 120–124 Time horizon, 130, 131, 143–144, 167 Tracking error: defined, 75 determining tolerance for, 83, 145 of small-company stocks, 75 of various equity mixes, 79 Treasury bills: 1926–1998, 10–11 returns on, 25–26 as risk-free investments, 10, 15, 152 Treasury bonds: 1926–1998, 11–13, 42–45 ladders, 152 Treasury Inflation Protected Security (TIPS), 80, 131–132, 172 Treasury notes, 11 Turnover, 95, 102, 130–131, 145 Tweedy, Browne, 148–149, 162, 176 Utility functions, 7 Value averaging, 155–159 Value Averaging (Edleson), 176 Value index funds, 145 Value investing, 77, 111–124 defined, 118 growth investing versus, 117, 118–120 measures used in, 112–114 studies on, 115–118 three-factor model of, 120–124 Value premium, 121–123 206 Index VanEck Gold Fund, 21 Vanguard Group, 97–100, 146–148, 149, 150, 152, 156, 161–163 Variance, 7, 108–109 mean-variance analysis, 44–45, 64–71, 181–182 minimum-variance portfolios, 65–69 Variance drag, 69 Walz, Daniel T., 169 Websites, 178–180 Wilkinson, David, 56, 57, 181–182 Williams, John Burr, 127 Wilshire Associates, 120, 147, 162 World Equity Benchmark Securities (WEBS), 149–151 z values, 87 Zero correlation, 31 About the Author William Bernstein, Ph.D, M.D., is a practicing neurologist in Oregon.

(One caveat about the Vanguard Total International Fund: It is a “fund of funds” and thus not eligible for the foreign tax credit. I recommend the new Vanguard Tax-Managed International Fund for this purpose.) 162 The Intelligent Asset Allocator The Everything Fund Is it possible to find a single fund which will relieve you of all of the trouble of asset allocation? Sure—the mutual fund industry is nothing if not responsive to every whim of the investing public. There are many funds which will provide you with what they consider to be the “optimal” asset allocation; these are called, naturally, asset-allocation funds. There are a few problems with these funds. First, they have not been around for very long, so it is hard to evaluate them.

.): impact of diversification on, 31–36, 63 market, 168 real, 26, 80, 168, 170 return and risk plot, 31–36, 41–45 risk and high, 18 uncorrelated, 29–31 variation in, 116–117 Risk: common stock, 1–5 correlation between return and, 21 currency, 132–137 duration, 165–167 efficient frontier and, 55–58 excess, 12–13 high returns and, 18 impact of diversification on, 31–36, 63 nonsystematic, 12–13 reinvestment, 23 return and risk plot, 31–36, 41–45 shortfall, 167–172 sovereign, 72 systematic, 13 (See also Standard deviation) Risk aversion myopia, 141–142 Risk dilution, 45–46 Risk-free investments, 10, 15, 152 Risk-free rate, 121 Risk time horizon, 130, 131, 143–144, 167 Risk tolerance, 79–80, 143 Roth IRA, 172 Rukeyser, Lou, 174 Rule of 72, 27 Sanborn, Robert, 88–90 Securities Act of 1933, 92–93 Security Analysis (Graham and Dodd), 93, 118, 125, 176 Selling forward, 132–133 Semivariance, 7 Sharpe, William, 141 Shortfall risk, 167–172 Siegel, Jeremy, 19, 136 Index Simple portfolios, 31–36 Sinquefield, Rex, 148 Small-cap premium, 53, 121, 122 Small-company stocks, 13–16, 25 correlation with large-company stocks, 53–55 efficient frontier and, 55–59 indexing, 101, 102, 148–149 international diversification with, 74–75 January effect and, 92–94 large-company stocks versus, 53–55, 75 “lottery ticket” premium and, 127 tracking error of, 75 Small investors, institutional investors versus, 59–61 Solnik, Bruno, 72 Sovereign risk, 72 S&P 500, 13, 38, 39, 55 as benchmark, 60, 78, 79, 80, 86, 88–89, 145 efficient frontier, 56–57 Spiders (SPDRS), 149 Spot rate, 135 Spread, 91, 92, 93, 96 Standard deviation, 5–8 defined, 6, 63 limitations of, 7 of manager returns, 96 in mean-variance analysis, 65 Standard error (SE), 87 Standard normal cumulative distribution function, 7 Stocks, Bonds, Bills, and Inflation (Ibbotson Associates), 9–10, 41–42, 178 Stocks for the Long Run (Siegel), 19, 136 Strategic asset allocation, 58–59 Survivorship bias, 101–102 Systematic risk, 13 t distribution function, 87 Tax-sheltered accounts: asset allocation for, 153–154 rebalancing, 108–109, 159–160 (See also Retirement accounts) 205 Taxable accounts: asset allocation for, 153–154 rebalancing, 160–161 Taxes: in asset allocation strategy, 145 capital gains capture, 102, 108 foreign tax credits, 161 market efficiency and, 102–103 Technological change: historical, impact of, 125 in new era of investing, 125 Templeton, John, 164 Thaler, Richard, 131, 142 Three-factor model (Fama and French), 120–124 Time horizon, 130, 131, 143–144, 167 Tracking error: defined, 75 determining tolerance for, 83, 145 of small-company stocks, 75 of various equity mixes, 79 Treasury bills: 1926–1998, 10–11 returns on, 25–26 as risk-free investments, 10, 15, 152 Treasury bonds: 1926–1998, 11–13, 42–45 ladders, 152 Treasury Inflation Protected Security (TIPS), 80, 131–132, 172 Treasury notes, 11 Turnover, 95, 102, 130–131, 145 Tweedy, Browne, 148–149, 162, 176 Utility functions, 7 Value averaging, 155–159 Value Averaging (Edleson), 176 Value index funds, 145 Value investing, 77, 111–124 defined, 118 growth investing versus, 117, 118–120 measures used in, 112–114 studies on, 115–118 three-factor model of, 120–124 Value premium, 121–123 206 Index VanEck Gold Fund, 21 Vanguard Group, 97–100, 146–148, 149, 150, 152, 156, 161–163 Variance, 7, 108–109 mean-variance analysis, 44–45, 64–71, 181–182 minimum-variance portfolios, 65–69 Variance drag, 69 Walz, Daniel T., 169 Websites, 178–180 Wilkinson, David, 56, 57, 181–182 Williams, John Burr, 127 Wilshire Associates, 120, 147, 162 World Equity Benchmark Securities (WEBS), 149–151 z values, 87 Zero correlation, 31 About the Author William Bernstein, Ph.D, M.D., is a practicing neurologist in Oregon.


pages: 345 words: 87,745

The Power of Passive Investing: More Wealth With Less Work by Richard A. Ferri

Alan Greenspan, asset allocation, backtesting, Benchmark Capital, Bernie Madoff, book value, buy and hold, capital asset pricing model, cognitive dissonance, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, endowment effect, estate planning, Eugene Fama: efficient market hypothesis, fixed income, implied volatility, index fund, intangible asset, John Bogle, junk bonds, Long Term Capital Management, money market fund, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, Ponzi scheme, prediction markets, proprietary trading, prudent man rule, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, survivorship bias, Tax Reform Act of 1986, too big to fail, transaction costs, Vanguard fund, yield curve, zero-sum game

Investment returns for a passive strategic asset allocation are much more likely to earn superior returns than those earned from tactical asset allocation strategies. The nuances of strategic and tactical asset allocation strategy go beyond the scope of this book. For an in-depth study of asset allocation techniques, read All About Asset Allocation, 2nd Edition, by Richard Ferri (McGraw-Hill, 2010). A summary of this book is on my web site at www.RickFerri.com. Summary A high percentage of new money flows into asset classes, sectors, and styles that have had recent high returns. This trend-following behavior likely results in a loss of more than 1 percent per year in investors’ portfolios.

Investors should be aware of which asset classes, styles, and sectors are better placed in tax-advantaged accounts such as a tax-sheltered retirement account and those that are suitable for taxable accounts. Asset allocation is the cornerstone of a prudent investment plan and is the single most important decision that an investor will make in regard to a portfolio. Many issues need to be considered when developing an investment plan. Getting this part of the investment policy right is of paramount importance. Investors would do well to study this subject intently and nail down an appropriate asset allocation that fits their needs. Step 3: Select an Asset Allocation The backbone of an investment plan is its asset allocation. At the 50,000-foot level, asset allocation is all about developing overall return goals while controlling risk.

See S&P 500 State Street Global Investors Staunton, Mike “Stay the course” phrase Stockbroker(s): fiduciary exemption of sales techniques and turn-key plans and Stock funds Stock market crash of 1929 Strategic asset allocation: asset class weightings and benefit from rebalancing portfolio and tactical asset allocation and Strategy, consistency of Strategy indexes Style bias, actively-managed funds and Style indices Styles within categories Subprime mortgage meltdown Survivorship bias: Cowles Commission report and Vanguard 500 Index Fund and Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel Swendon, David F. Swensen, David Swiss Finance Institute Systematic risk Tactical asset allocation: passive asset allocation and strategic asset allocation and timing gap and as zero-sum game Taxes: active funds and control of income tax payment personal trusts and tax-deferred savings tax efficiency Tax loss harvesting/tax swapping Tax Reform Act of 1986 Terminated funds Term risk Testamentary trusts Thatcher, William Theory of Investment Value, The (Williams) Three-factor international portfolios Three-Factor Model.


pages: 367 words: 97,136

Beyond Diversification: What Every Investor Needs to Know About Asset Allocation by Sebastien Page

Andrei Shleifer, asset allocation, backtesting, Bernie Madoff, bitcoin, Black Swan, Bob Litterman, book value, business cycle, buy and hold, Cal Newport, capital asset pricing model, commodity super cycle, coronavirus, corporate governance, COVID-19, cryptocurrency, currency risk, discounted cash flows, diversification, diversified portfolio, en.wikipedia.org, equity risk premium, Eugene Fama: efficient market hypothesis, fixed income, future of work, Future Shock, G4S, global macro, implied volatility, index fund, information asymmetry, iterative process, loss aversion, low interest rates, market friction, mental accounting, merger arbitrage, oil shock, passive investing, prediction markets, publication bias, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Feynman, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, robo advisor, seminal paper, shareholder value, Sharpe ratio, sovereign wealth fund, stochastic process, stochastic volatility, stocks for the long run, systematic bias, systematic trading, tail risk, transaction costs, TSMC, value at risk, yield curve, zero-coupon bond, zero-sum game

., 226, 231–243, 269 returns of skilled active managers, 231–233 and stock picking, 233–243 Adler, Tim, 204 Against the Gods (Bernstein), 148 Agarwal, Vikas, 128 Allen, David, 212 “Allocating Assets in Climates of Extreme Risk” (Cuffe and Goldberg), 166 Alternative assets, 218, 269 failure of diversification with, 127–131 portfolio construction with, 229–230 (See also Private assets) Alternative betas, 179 American Express, 240 American Investment Council, 219, 220 Anderson, Robert, 213, 214 Andretti, Mario, 263 Ang, Andrew, 131 Antidiversification, 123 Aon, 14 AQR, 14, 35 Arbelaez, Camila, 228 ARCH models, 89–91, 98, 145 “Are Optimizers Error Maximizers?” (Kritzman), 212 Arnott, Robert D., 26, 34–35, 57 Asness, Cliff, 26, 27, 70, 182, 224–225 Asset allocation: constant (fixed weight), 95 as implicit forecasting, 2 recommendations for, 134 scenario analysis in, 134 stocks vs. bonds in, 185–195 strategic (see Strategic asset allocations) tactical (see Tactical asset allocation [TAA]) theoretical foundations of, 271–274 (See also Portfolio construction) “Asset Allocation” (Pedersen, Page, and He), 129 “Asset Allocation Implications of the Global Volatility Premium” (Fallon, Park, and Yu), 103 Asset classes, 173–184 asset weights in market portfolio, 17–19 betas for, 19–22 changes over time in, 158–162 correlation forecasting for, 140–143 failure of diversification across, 125–132 influence of macro factors on, 64–66 left- and right-tail correlations for, 125–131 persistence of risk measures in, 112–119, 156 in portfolio construction, 173–184 and risk factor diversification, 130 risk factors models in portfolio optimization, 178–179 risk factors vs., 173–184 risk premiums, 179–184 in 2018 target rate hike, 133 three-year returns on, 73 underlying risk factors for, 162–165 (See also individual classes) Asset weights: fixed, 95 in market portfolio, 17–19 in portfolio optimization, 201, 207–209 Austin, Maureen, 218–219 Average yield, 40–42 Backtests: exceptional, 30 managed volatility, 95–101 of risk parity, 213 for risk premiums, 182–184 of volatility risk premium strategies, 103 without return forecasts, 32 “Bad Is Stronger Than Good” (Baumeister et al.), 132 Bai, Yu, 235 Barclays Aggregate Index, 160–161, 163 Barclays Commercial Mortgage Backed Securities (CMBS) Index, 163–164 Barclays Global Aggregate, 16 Barclays U.S.

—Mark Kritzman President and CEO, Windham Capital Management; Senior Lecturer in Finance, MIT Sloan School of Management; and author of A Practitioner’s Guide to Asset Allocation Sébastien Page presents a rigorous but easy to digest guide to the basics of asset allocation. Whether you invest for fun or profit, his framework for forecasting risk and return to build portfolios will resonate. Clearly written and understandable concepts make Beyond Diversification a one-stop choice for any student of investing. —Bill Stromberg President and CEO, T. Rowe Price In this tour de force, seasoned investor and researcher Sébastien Page provides sophisticated answers to many questions arising in the practice of asset allocation, risk management, forecasting, and portfolio construction.

In this book, count the number of times he reflects on running down the hall to a colleague’s office with questions. Those questions so often stimulate informed, original thinking. Finally, Sébastien and our asset allocation team are grounded in a durable, rigorous process. If you fail to establish a process, you will inevitably succumb to fear or greed. Sébastien’s process ensures our asset allocation team balances judgment with data and analysis in a disciplined, respectable way. Sébastien is a thought leader on asset allocation. He is also an avid (and quite fast) runner, likes the occasional glass of wine, and tells a good story. As to this last point, I think you’ll agree as you learn more about him, his story, and multi-asset investing in the pages to come.


Systematic Trading: A Unique New Method for Designing Trading and Investing Systems by Robert Carver

asset allocation, automated trading system, backtesting, barriers to entry, Black Swan, buy and hold, cognitive bias, commodity trading advisor, Credit Default Swap, diversification, diversified portfolio, easy for humans, difficult for computers, Edward Thorp, Elliott wave, fear index, fixed income, global macro, implied volatility, index fund, interest rate swap, Long Term Capital Management, low interest rates, margin call, Market Wizards by Jack D. Schwager, merger arbitrage, Nick Leeson, paper trading, performance metric, proprietary trading, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, survivorship bias, systematic trading, technology bubble, transaction costs, Two Sigma, Y Combinator, yield curve

Before then, each time you see one or more of these heading boxes it indicates that the material in that section of the book is aimed mainly at the relevant group and is optional for others. Asset allocating investor An asset allocating investor allocates funds amongst, and within, different asset classes. Asset allocators can use systematic methods to avoid the short-term chasing of fads and fashions that they know will reduce their returns. They might be lazy and wise amateur investors, or managing institutional portfolios with long horizons such as pension funds. Asset allocators are sceptical about those who claim to get extra returns from frequent trading. For this reason the basic asset allocation example assumes you can’t forecast how asset prices will perform.

Hopefully this should show you the benefits of rigorously sticking to a position management framework once you’ve designed it. 224 Chapter Fourteen. Asset Allocating Investor T HIS CHAPTER IS FOR ASSET ALLOCATING INVESTORS WHO MOSTLY don’t believe that assets’ prices can be forecasted, and use the ‘no-rule’ trading rule within a systematic framework to allocate trading capital between different assets. Chapter overview Who are you? Introducing the asset allocating investor. Using the framework How you will use the systematic framework for asset allocation. Weekly process The weekly process that asset allocators should use. Trading diary A diary showing how you could have invested over a few hectic weeks of 2008.

But rules can also be extremely simple, like the single rule used by asset allocating investors. It’s also possible to use my framework without any systematic rules at all, as a semi-automatic trader making your own discretionary forecasts. 109 Systematic Trading Chapter overview What makes a good forecast Understand the important properties of the forecasts which trading rules produce. Discretionary trading with stop losses How semi-automatic traders can make forecasts that have the right characteristics. The asset allocating investor’s ‘no-rule’ rule The simplest possible trading rule used by asset allocating investors – a constant and identical forecast for all assets.


pages: 244 words: 58,247

The Gone Fishin' Portfolio: Get Wise, Get Wealthy...and Get on With Your Life by Alexander Green

Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, backtesting, behavioural economics, borderless world, buy and hold, buy low sell high, cognitive dissonance, diversification, diversified portfolio, Elliott wave, endowment effect, Everybody Ought to Be Rich, financial independence, fixed income, framing effect, hedonic treadmill, high net worth, hindsight bias, impulse control, index fund, interest rate swap, Johann Wolfgang von Goethe, John Bogle, junk bonds, Long Term Capital Management, means of production, mental accounting, Michael Milken, money market fund, Paul Samuelson, Ponzi scheme, risk tolerance, risk-adjusted returns, short selling, statistical model, stocks for the long run, sunk-cost fallacy, transaction costs, Vanguard fund, yield curve

Of course, it’s reasonable to ask how you can be sure the asset allocation I’ve recommended here is the very best one for the future. The truth is you can’t. Like so many other factors we’ve discussed, you simply cannot know in advance the “very best” asset allocation. The “perfect” asset allocation is something that can only be recognized in hindsight. The most important thing is to avoid a poor asset allocation. What would that be? Easily, one of the worst is 100% cash. An allocation that is light on equities generally won’t work. And an asset allocation that changes like the seasons is unlikely to get the job done either.

It means that over the long term, your chosen asset allocation is 10 times as important as security selection and market timing combined. HIGHER RETURNS WITH LESS VOLATILITY The goal of asset allocation is to create a diversified portfolio with the highest possible return within an acceptable level of risk. You achieve this by combining noncorrelated assets, like stocks, bonds, and real estate investment trusts (REITs). Academics call it building an efficient portfolio. When I talk to investors about asset allocation, they are often dismissive. “Oh, I understand asset allocation,” many of them say. “That means you should diversify.

“That means you should diversify. I do that already.” But asset allocation is more than simple diversification. If you own an S&P 500 index fund, for example, you are broadly diversified. (After all, you own a piece of 500 different companies.) But you aren’t properly asset allocated, because the S&P 500 only gives you exposure to U.S. large-cap stocks. Other investors tell me they don’t even have an asset allocation. They do. Everyone does. Even if all your money is in Treasury bills, you have an asset allocation. It’s not a particularly good one, however. It’s 100% cash. As we’ve discussed, U.S. stocks have historically returned a little more than 10% annually; bonds, roughly 6%, and money markets, about 4%.


pages: 250 words: 77,544

Personal Investing: The Missing Manual by Bonnie Biafore, Amy E. Buttell, Carol Fabbri

asset allocation, asset-backed security, book value, business cycle, buy and hold, currency risk, diversification, diversified portfolio, Donald Trump, employer provided health coverage, estate planning, fixed income, Home mortgage interest deduction, index fund, John Bogle, Kickstarter, low interest rates, money market fund, mortgage tax deduction, risk tolerance, risk-adjusted returns, Rubik’s Cube, Sharpe ratio, stocks for the long run, Vanguard fund, Yogi Berra, zero-coupon bond

Investments that appear to beat the market often come with sky-high expenses, which bring their returns back to the market average (see page 90). Using an Online Asset Allocation Tool Online asset allocation tools help you choose your asset allocation plan based on your financial situation and risk tolerance. You tell the tool things like your age, how much money you have already, how much you can contribute each year, how much you’ll spend in the future, and so on. The tools show you percentage allocations in different asset classes based on your choices. Major brokerages often have online asset allocation tools to help clients decide how to invest. Here are a couple of examples: • SmartMoney’s One Asset Allocation System. This free tool (http:// tinyurl.com/smartmoneyallocator) helps you choose your asset allocation by dragging sliders to the left or right, as you can see below.

The key to balancing risk and return is something called asset allocation (page 159)—how you divvy up your money among different types of investments. More money in stocks means higher risk and higher long-term returns. More in bonds provides less risk and lower returns. A lot of your investment performance stems from the asset allocation you pick. That means you don’t have to train to be the next Warren Buffett. In fact, once you settle on your asset allocation, your investments don’t need a lot of hand-holding. A handful of index mutual funds apportioned to your asset allocation is all it takes to get started (page 166).

For example, if you want a plan that’s more daring, invest in a fund whose target date is later than your retirement date. That way, the investment plan is less conservative than the norm. Funds 77 Asset Allocation Categories Because asset allocation is one of the most powerful tools in your investment toolbox (page 160), it’s also the first step in deciding which types of funds to buy. Once you have your asset allocation percentages figured out (page 162), you can start looking for funds in the asset type categories you chose. Morningstar shows high-level asset allocation for funds, as you can see on page 80. Here are the main asset categories you’ll find in mutual funds and ETFs: • Stock funds invest in publicly traded stocks issued by companies based in the United States or overseas.


pages: 363 words: 28,546

Portfolio Design: A Modern Approach to Asset Allocation by R. Marston

asset allocation, Bob Litterman, book value, Bretton Woods, business cycle, capital asset pricing model, capital controls, carried interest, commodity trading advisor, correlation coefficient, currency risk, diversification, diversified portfolio, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, family office, financial engineering, financial innovation, fixed income, German hyperinflation, global macro, high net worth, hiring and firing, housing crisis, income per capita, index fund, inventory management, junk bonds, Long Term Capital Management, low interest rates, managed futures, mortgage debt, Nixon triggered the end of the Bretton Woods system, passive investing, purchasing power parity, risk free rate, risk-adjusted returns, Robert Shiller, Ronald Reagan, Sharpe ratio, Silicon Valley, stocks for the long run, superstar cities, survivorship bias, transaction costs, Vanguard fund

In Chapter 2, we will show that post-war stock returns are higher than they have been in the long run. And more importantly, stock returns have been inflated by a rise in price-earnings ratios that may not be sustainable in the long run. Asset allocation requires that the investor understand these assets enough to assess how well they will perform in the future. P1: OTA/XYZ P2: ABC c01 JWBT412-Marston December 20, 2010 16:58 Asset Allocation Printer: Courier Westford 3 INGREDIENTS OF ASSET ALLOCATION Investing has evolved over the last few decades. First, there is the shift away from individual stock selection toward diversification of stock holdings. Instead of choosing the 10 or 20 best stocks for the portfolio, an investment advisor is more likely to make sure the portfolio is properly diversified between different types of stocks.

It’s true that the actual manager chosen for each asset class may have higher or lower risk than the index, but nonetheless the methodology should still provide a reasonably accurate estimate of the risk of the entire portfolio. P1: a/b c08 P2: c/d QC: e/f JWBT412-Marston T1: g December 8, 2010 17:51 Printer: Courier Westford Strategic Asset Allocation 163 BEYOND THE TRADITIONAL EFFICIENT FRONTIER What has been left out of this discussion of asset allocation? The main purpose of asset allocation is to diversify investment risks. Yet the menu of assets we have considered offers relatively little opportunity to diversify into low correlation assets. It’s true that stocks and bonds have a very low correlation. But within the stock and bond categories, almost every asset is highly correlated.

Each year NACUBO conducts a survey of its members to determine the asset allocations that their endowments are following. NACUBO reports two sets of figures, those that equally weight all colleges and universities and a dollar-weighted average. The massive size of the endowments of the richest institutions ensures that the dollar-weighted average is heavily influenced by the asset allocation decisions of the biggest endowments. In 2008, the top 10 institutions had 36 percent of the endowment monies of the 791 institutions in the survey. The dollar-weighted average, therefore, better reflects the asset allocations of Yale’s peers. Figure 13.6 shows the asset allocations over more than three decades.


pages: 335 words: 94,657

The Bogleheads' Guide to Investing by Taylor Larimore, Michael Leboeuf, Mel Lindauer

asset allocation, behavioural economics, book value, buy and hold, buy low sell high, corporate governance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, endowment effect, estate planning, financial engineering, financial independence, financial innovation, high net worth, index fund, John Bogle, junk bonds, late fees, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, margin call, market bubble, mental accounting, money market fund, passive investing, Paul Samuelson, random walk, risk tolerance, risk/return, Sharpe ratio, statistical model, stocks for the long run, survivorship bias, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

The Vanguard LifeStrategy Growth Fund has a fairly aggressive target asset allocation of 80 percent stocks and 20 percent bonds. This fund of funds invests in four Vanguard funds: 1. Total Stock Market Index Fund 2. Total International Stock Index Fund 3. Asset Allocation Fund 4. Total Bond Market Fund The Vanguard LifeStrategy Conservative Growth Fund has a more conservative target asset allocation of 40 percent stocks and 60 percent bonds. This fund of funds invests in five Vanguard funds: 1. Total Stock Market Index Fund 2. Total International Stock Index Fund 3. Asset Allocation Fund 4. Total Bond Market Fund 5.

Short-Term Investment-Grade Bond Fund There are two other funds in the Vanguard LifeStrategy series that offer differing asset allocations. They include the LifeStrategy Moderate Growth Fund, which has a target asset allocation of 60 percent stocks and 40 percent bonds, and the LifeStrategy Income Fund with a very conservative target asset allocation of 80 percent bonds and 20 percent stocks. So there's a good chance that one of these funds of funds might meet your desired asset allocation. The more recent products introduced by some fund companies include life-cycle funds of funds that automatically get more conservative as time goes by.

READ WHAT OTHERS SAY Jack Bogle, author of Common Sense on Mutual Funds: "Asset allocation is critically important; but cost is critically important, too-All other factors pale into insignificance." Frank Armstrong, CFP, Al F, and author of The Informed Investor: "The impact of asset allocation or investment policy swamps the other (investment) decisions." William Bernstein, Ph.D., M.D., author of The Intelligent Asset Allocator and The Four Pillars of Investing: "If you really want to become proficient at asset allocation you are going to have to log off the net, turn off your computer, and go to the bookstore or library and spend several dozen hours reading books."


pages: 232 words: 70,835

A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan by Ben Carlson

Albert Einstein, asset allocation, backtesting, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, book value, business cycle, buy and hold, buy low sell high, commodity super cycle, corporate governance, delayed gratification, discounted cash flows, diversification, diversified portfolio, do what you love, endowment effect, family office, financial independence, fixed income, Gordon Gekko, high net worth, index fund, John Bogle, junk bonds, loss aversion, market bubble, medical residency, Occam's razor, paper trading, passive investing, Ponzi scheme, price anchoring, Reminiscences of a Stock Operator, Richard Thaler, risk tolerance, Robert Shiller, robo advisor, South Sea Bubble, sovereign wealth fund, stocks for the long run, technology bubble, Ted Nelson, transaction costs, Vanguard fund, Vilfredo Pareto

In general, you can assume that 80 percent of outputs come from 20 percent of inputs.1 The 80/20 rule can work in many areas of life, but it's extremely important with investment management. In the case of building a portfolio, asset allocation—how you choose to split your portfolio among asset classes—is the 20 percent input that will get you 80 percent of the way there. In fact, asset allocation may get you closer to 90 percent of the way there according to one study. Roger Ibbotson and Paul Kaplan performed an in-depth study on the drivers of portfolio performance. They wanted to know if it was asset allocation that drove portfolio performance or market timing and active security selection. What they found is that more than 90 percent of a portfolio's long-term variation in return was explained by its asset allocation.

But it would be difficult for the financial media to run the following headlines day after day: Before we get into the particulars about asset allocation and diversification, it's worth noting another piece of negative knowledge—the perfect portfolio. The perfect portfolio or asset allocation does not exist. It will only be known with the benefit of perfect hindsight. You can look back at the historical data and come up with a strategy that would have worked perfectly in the past, but good look getting those same results in the future. Your asset allocation will never be perfect, but here's a little secret for you: no one else's will either. There will always be minor tweaks and changes you could make.

You have to consider trading costs and the toll that second-guessing can take on your psyche after making a move. Just make sure that all changes to an asset allocation or your portfolio holdings are within your stated investment guidelines or process. Once you start shooting from the hip is when mistakes start to add up. Asset allocation helps investors balance out their need for gains with their ability to accept losses. See Table 7.1 to get an approximation of the losses and gains based on historical market returns and different asset allocations between stocks and bonds. If you carry an all-stock portfolio over a period of time measured in decades you can be sure that there will be at least one market crash that cuts your portfolio value in half.


The Smartest Investment Book You'll Ever Read: The Simple, Stress-Free Way to Reach Your Investment Goals by Daniel R. Solin

Alan Greenspan, asset allocation, buy and hold, corporate governance, diversification, diversified portfolio, index fund, John Bogle, market fundamentalism, money market fund, Myron Scholes, PalmPilot, passive investing, prediction markets, prudent man rule, random walk, risk tolerance, risk-adjusted returns, risk/return, transaction costs, Vanguard fund, zero-sum game

Se, financial media Random walk Down WaD Street, A {Malkicl),90, 148, 153, 181 RAS (Risk Assessment Score), 175-78 Su also Asset Allocation Questionnaire ratings, Morningstar, 55-57, 158-59 192 Index ratio, management expense (MER),62--63, 135 rebalancing portfolios, 120, 132-33 regulations for SC(;urities industry, 82, 141-42, 164, 165, 170 Rekenthalcr, John, 55 religious organizations, as Smart Investors, 106 retirement planning. Su Asset Allocation Questionnaire retirement plans (RRPs and RRSPs) ETFs in, 139-40, 169-70 Risk and Return Summary, 179-80 Risk Assessment Score (RAS), 17S--78 Ser also Asset Allocation Questionnaire risk management about risk management, 41 about asset allocation and, 40-41,70-72, 121 - 22 abo ut investment portfolios, 122-23 buying on margin and, 77-78 ETI;s and, 86-87 international stocks and, 130-31,169 prospectus information on risks,60 research on, 162--63 risk return comparison (chart), 14, 74-76 standard deviation to measure risk, 67--68, 85, 126, 138 Su also asset allocation; investment portfolios Rodgers, Kelly, 161 Ross, Ron, 132, 136 RRPs and RRSPs, ETFs in, 139-40, 169-70 Samuelson, Paul A., 107, 163 Sanford, Jeff, 164 Savings-Age Score (SAS), 172-73 Srr also Asset Allocation Questionnaire Scholes, Myron S., 107 Schwab, C harles, 59 Securities Exchange Commission (U.S .), 163 securities industry about the industry, 8-9 analyst fraud in, 39-40, ISS broker/client trust issues, 37, 39-41 , 98-101 ,138, J55, 168 disadvantages of use of, 149-50, ISS-56 house funds, 77-78, 163 myths of, 3-4, 9, 12, 146 qualifications of advisors, 42-43,52 regulation of, 82, 14 1-42, 164, 165, 170 U.S. brokers in Canada's industry, 119, 152 U.S.lCanada similarities, xi-xii Su also financial media; market timing {predicting the future}; stock and fu nd picking Sharpe, William E, 13, 34, 107 Siegel, Jeremy, 73 Simon, Scott, 148 Singer, Brian D., 121 , 162 Index 193 Sinha, Rajceva, 51, 107, 151 Sinquefield, Rex, 145 "sizzle" in H yperactive Trwestor, 32-33 small cap stocks, 113-14 Smart Investo rs about being a Smart Investor, 18-19,75, 144 benefits of being a, 6, 25, 137 books for, 93,152, 181-82 fa mous investors as, 107-9, 168 institutional investors as, 89, 105-7.114,168 percent of all trades, 138 See auo ETFs (exchange traded fu nds); Four-Step Process for Smart Investors; index funds; ris k management Smarr Investor Advisors contact with investors, 133 DFAas, 11 2-14, 168 for large investors, 89 for risk management, 40 when to use an advisor, 114 Smith Barney ho use funds, 77, 163 S&P 500 ETF, 15 S&P 500 Index, 15, 24 S&P Composite Index (U.S.), 29,45, 151 S&prrSX Composite Index about S&PfT'SX composite index, 23-24 standard deviation and risk, 68 use as a benchmark, 46, 83, 135 speculative investing and gambling, 30-3 1,153-54 Spinet, Eliot L, 39, 40 standard deviation, as risk measurement, 67-68, 85, 126, 138 State Street Global Advisors, 106 Stiglin, Joseph E., 163 stocks about stocks, 13-14, 84-87 as asset class, 13,40, 71, 121 buying on margin, 77-78 earnings per share (EPS), 14 international stocks, 19, 130-3 1, 169 prospectus for a stock, 60 risk and, 122-23 risk return comparison (chart), 14, 74-76 small-cap stocks, 113-14 standard deviation to measure price fluctuations, 67-68, 85,126, l38 U.S. stocks. 19, 119, 160 value stocks, 84-87, 114 Su also investment portfolios stock and fu nd picking about stock picking, 6-7, 17, 51-54 COSts and fees, 27-28, 35 decline of, 109-10, 149-50, 168 as desire for order, 31 myths of,}-4, 37, 70,146 research on, 53, 168 stock brokers.

Chapter 21 Too Many Stocks, Too Few Bonds fnvemnmt policy {assu allocation] is the foundation upon which portfolios should be constructed and managed. -Charles D. Ellis, Invmmmt Policy Another imponant factor in proper investing-after taking account of COS t S and understanding risk-is asset allocation. Asset allocation refers to the percentage of an investment portfolio held in each of the major asset classes-stocks, bonds and cash. Many academic studies have shown that the vast majo rity of a portfolio's variabili ty in retu rns is accou nted for by asset allocation. Very little is accounted fo r by either market timing or by picking the "right" security within an asset class. Therefore, it is curious that aU the hype you hear from hyperactive bro kers and advisors relates to market timing and stock picking.

RebaJance your portfolio twice a year to keep your portfolio either aJigned with your original asset aJlocarion or with a new asset allocation that meets your changed investment objectives and/or risk tolerance. T hat's it. Read on for more details on each step. Chapter 34 Step 1: Determine Your Asset Allocation Over 90% ofinvestment returns are determined by how investors allocate their assets versus security selection, market timing and other foctors. -Brinson, Singer and Beebower, "Determinants of Portfolio Performance II : An Update, n Financial Analysts JournaL. May-June 1991 Asset allocation is the division of an investment portfolio among three rypes of invc.


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I Will Teach You To Be Rich by Sethi, Ramit

Albert Einstein, asset allocation, buy and hold, buy low sell high, diversification, diversified portfolio, do what you love, geopolitical risk, index fund, John Bogle, late fees, low interest rates, money market fund, mortgage debt, mortgage tax deduction, Paradox of Choice, prediction markets, random walk, risk tolerance, Robert Shiller, shareholder value, Silicon Valley, survivorship bias, the rule of 72, Vanguard fund

This is the cost of constructing your own perfect portfolio. INVESTING ISN’T A RACE—YOU DON’T NEED A PERFECT ASSET ALLOCATION TOMORROW. Note: Once you own all the funds you need, you can split the money across funds according to your asset allocation—but don’t just split it evenly. Remember, your asset allocation determines how much money you invest in different areas. For example, if you have $250 per month and you buy seven index funds, the average person who knows nothing (i.e., most people) would split the money seven ways and send $35 to each. That’s wrong. Depending on your asset allocation, you’d send more or less money to various funds, using this calculation: (Your monthly total amount of investing money) × (Percentage of asset allocation for a particular investment) = Amount you’ll invest there.

In 1986, researchers Gary Brinson, Randolph Hood, and Gilbert Beebower published a study in the Financial Analysts Journal that rocked the financial world. They demonstrated that more than 90 percent of your portfolio’s volatility is a result of your asset allocation. I know asset allocation sounds like a B.S. phrase—like mission statement and strategic alliance. But it’s not. Asset allocation is your plan for investing, the way you organize the investments in your portfolio between stocks, bonds, and cash. In other words, by diversifying your investments across different asset classes (like stocks and bonds, or, better yet, stock funds and bond funds), you could control the risk in your portfolio—and therefore control how much money, on average, you’d lose due to volatility.

Plus, if you buy individual index funds, you’ll have to rebalance every year to make sure your asset allocation is still what you want it to be (more on this in a minute). Lifecycle funds do this for you, so if you just want an easy way to invest, use one. THE KEY TO CONSTRUCTING A PORTFOLIO IS NOT PICKING KILLER STOCKS! IT’S FIGURING OUT A BALANCED ASSET ALLOCATION THAT WILL LET YOU RIDE OUT STORMS AND SLOWLY GROW OVER TIME. But if you want more control over your investments and you just know you’re disciplined enough to withstand market dips and to take the time to rebalance your asset allocation at least once a year, then choosing your own portfolio of index funds is the right choice for you.


pages: 490 words: 117,629

Unconventional Success: A Fundamental Approach to Personal Investment by David F. Swensen

asset allocation, asset-backed security, Benchmark Capital, book value, buy and hold, capital controls, classic study, cognitive dissonance, corporate governance, deal flow, diversification, diversified portfolio, equity risk premium, financial engineering, fixed income, index fund, junk bonds, law of one price, Long Term Capital Management, low interest rates, market bubble, market clearing, market fundamentalism, money market fund, passive investing, Paul Samuelson, pez dispenser, price mechanism, profit maximization, profit motive, risk tolerance, risk-adjusted returns, Robert Shiller, Savings and loan crisis, shareholder value, Silicon Valley, Steve Ballmer, stocks for the long run, survivorship bias, technology bubble, the market place, transaction costs, Vanguard fund, yield curve, zero-sum game

Academic conclusions about the importance of asset allocation lead many students of markets to conclude that some immutable law of finance dictates the primacy of asset allocation in the investment process. In fact, the studies cited reflect investor behavior, not finance theory. Investors gain important insights into questions of portfolio structure through understanding the forces that place asset allocation in a starring role, while leaving security selection and market timing in the wings. Three basic investment principles inform asset-allocation decisions in well-constructed portfolios. First, long-term investors build portfolios with a pronounced equity bias.

Surprisingly, basic investment principles seem to find little support in real-world asset-allocation activity. ASSET ALLOCATION Asset-allocation decisions take center stage in most investor portfolios, because investors generally own portfolios broadly diversified within asset classes (mitigating the impact of security selection decisions) and investors generally maintain reasonably stable asset-class allocations (mitigating the impact of market-timing decisions).* With two of the three sources of return down for the count, asset allocation takes the prize as the last contender standing. Since long-term portfolio targets play such a powerful role in determining investment outcomes, sensible investors pay careful attention to establishing thoughtful asset-allocation structures.

David Swensen New Haven, Connecticut March 2005 OVERVIEW 1 Sources of Return Capital markets provide three tools for investors to employ in generating investment returns: asset allocation, market timing, and security selection. Explicit understanding of the nature and power of the three portfolio management tools allows investors to emphasize the factors most likely to contribute to long-term investment goals and deemphasize the factors most likely to interfere with long-term goals. Establishing a coherent investment program begins with understanding the relative importance of asset allocation, market timing, and security selection. Asset allocation refers to the long-term decision regarding the proportion of assets that an investor chooses to place in particular classes of investments.


pages: 825 words: 228,141

MONEY Master the Game: 7 Simple Steps to Financial Freedom by Tony Robbins

"World Economic Forum" Davos, 3D printing, active measures, activist fund / activist shareholder / activist investor, addicted to oil, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, backtesting, Bear Stearns, behavioural economics, bitcoin, Black Monday: stock market crash in 1987, buy and hold, Carl Icahn, clean water, cloud computing, corporate governance, corporate raider, correlation does not imply causation, Credit Default Swap, currency risk, Dean Kamen, declining real wages, diversification, diversified portfolio, Donald Trump, estate planning, fear of failure, fiat currency, financial independence, fixed income, forensic accounting, high net worth, index fund, Internet of things, invention of the wheel, it is difficult to get a man to understand something, when his salary depends on his not understanding it, Jeff Bezos, John Bogle, junk bonds, Kenneth Rogoff, lake wobegon effect, Lao Tzu, London Interbank Offered Rate, low interest rates, Marc Benioff, market bubble, Michael Milken, money market fund, mortgage debt, Neil Armstrong, new economy, obamacare, offshore financial centre, oil shock, optical character recognition, Own Your Own Home, passive investing, profit motive, Ralph Waldo Emerson, random walk, Ray Kurzweil, Richard Thaler, risk free rate, risk tolerance, riskless arbitrage, Robert Shiller, Salesforce, San Francisco homelessness, self-driving car, shareholder value, Silicon Valley, Skype, Snapchat, sovereign wealth fund, stem cell, Steve Jobs, subscription business, survivorship bias, tail risk, TED Talk, telerobotics, The 4% rule, The future is already here, the rule of 72, thinkpad, tontine, transaction costs, Upton Sinclair, Vanguard fund, World Values Survey, X Prize, Yogi Berra, young professional, zero-sum game

It’s the most important skill, and it’s the one most investors know little about. So in chapter 4.1, “The Ultimate Bucket List: Asset Allocation,” you’re going to learn the power of asset allocation and be able to implement its gifts to benefit you and your family for the rest of your life. On top of that, you’re going to see in section 6 the exact asset allocation of some of the most successful investors in the world who have consistently produced the highest returns. Yes, you read that right: you’ll be able to model the exact strategies of the best investors on the planet. You’ll have Ray Dalio’s asset allocation! Obviously, past performance doesn’t guarantee future performance, but in the case of Ray Dalio, your strategy is coming from one of the greatest investors of all time, and his focus is getting you the greatest return with the least amount of risk.

So you don’t want to get overconfident. That’s why asset allocation is so important. What do all the smartest people in the world say? “I’m going to be wrong.” So they design their asset allocation ideally to make money in the long term even if they’re wrong in the short term. LET’S TEST YOUR KNOWLEDGE In the coming pages, I’ll be showing you the portfolios, or the asset allocations, designed by some of the greatest investors of all time. Let’s start with a sample from someone you’ve been hearing from throughout this book: David Swensen, Yale’s $23.9 billion–plus man, a true master of asset allocation. Would you be interested in seeing his personal portfolio recommendations?

It’s a system designed to reduce your chances of making the big investment mistakes we all fear: buying something right before it drops in price, or pulling out of an investment right before its price goes up. We’ve already learned the first two keys of asset allocation: diversify across asset classes and diversify across markets. But remember, there’s a third key: diversify across time. And that’s what dollar-cost averaging does for you. Think of it as the way you activate your asset allocation plan. Asset allocation is the theory; dollar-cost averaging is how you execute it. It’s how you avoid letting your emotions screw up the great asset allocation plan you’ve just put together by either delaying investing—because you think the market’s too high and you hope it will drop before you get in—or by ignoring or selling off the funds that aren’t producing great returns at the moment.


pages: 504 words: 139,137

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

activist fund / activist shareholder / activist investor, Alan Greenspan, algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, Black-Scholes formula, book value, Brownian motion, business cycle, buy and hold, buy low sell high, buy the rumour, sell the news, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, currency risk, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, global macro, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, junk bonds, late capitalism, law of one price, Long Term Capital Management, low interest rates, managed futures, margin call, market clearing, market design, market friction, Market Wizards by Jack D. Schwager, merger arbitrage, money market fund, mortgage debt, Myron Scholes, New Journalism, paper trading, passive investing, Phillips curve, price discovery process, price stability, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Thaler, risk free rate, risk-adjusted returns, risk/return, Robert Shiller, selection bias, shareholder value, Sharpe ratio, short selling, short squeeze, SoftBank, sovereign wealth fund, statistical arbitrage, statistical model, stocks for the long run, stocks for the long term, survivorship bias, systematic trading, tail risk, technology bubble, time dilation, time value of money, total factor productivity, transaction costs, two and twenty, value at risk, Vanguard fund, yield curve, zero-coupon bond

The strategic asset allocation of large institutional investors is naturally focused on market risk premiums, specifying the allocation to equities (equity risk premiums), government bonds (term premiums), corporate bonds and other risky debt (credit risk premiums), illiquid and real assets such as real estate, forestland, and infrastructure (liquidity risk premiums), as well as the cash reserves. The strategic asset allocation may also include allocations to alternative risk premiums, such as the styles discussed in this book (value, trend-following, liquidity, carry, low-risk, and quality premiums) or in terms of active investment strategies (e.g., hedge fund allocations across equity, macro, and arbitrage strategies). There are naturally many ways to choose the strategic allocation. Here we consider several methods, namely passive asset allocation, constant rebalanced asset allocation, liquidity-based asset allocation, and risk-based asset allocation. For a hedge fund that is market neutral on average, the strategic allocation can simply be viewed as a flat investment in the market, but hedge funds often use these asset allocation techniques to size their bets across strategies.

Chapter 12 then describes managed futures investing, which is focused on trend-following strategies. 10.1. STRATEGIC ASSET ALLOCATION Large institutional investors often first decide on their long-run strategic asset allocation, that is, the desired typical portfolio consistent with the investment goals around which one can implement tactical bets and security selection views. This strategic asset allocation is crucial to the success of pension funds, endowments, and other investors. The strategic allocation is sometimes called the policy portfolio or the benchmark portfolio. The strategic asset allocation of large institutional investors is naturally focused on market risk premiums, specifying the allocation to equities (equity risk premiums), government bonds (term premiums), corporate bonds and other risky debt (credit risk premiums), illiquid and real assets such as real estate, forestland, and infrastructure (liquidity risk premiums), as well as the cash reserves.

For macro investing to have a chance at success, it must either start with a strong strategic asset allocation and make modest tactical tilts or diversify across many timing strategies. In chapter 12, we see that a simple trend-following timing strategy has performed well when diversified across fifty-some equity, bond, currency, and commodity markets. Tactical Asset Allocation As discussed above, market timing means deciding the allocation to one risky market, say the equity market, which is implicitly a trade-off between cash and equities. Deciding among multiple markets is called tactical asset allocation. The classic tactical asset allocation decision is how to set the relative weights among cash, equities, and bonds.


Capital Ideas Evolving by Peter L. Bernstein

Albert Einstein, algorithmic trading, Andrei Shleifer, asset allocation, behavioural economics, Black Monday: stock market crash in 1987, Bob Litterman, book value, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, computerized trading, creative destruction, currency risk, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, diversification, diversified portfolio, endowment effect, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, high net worth, hiring and firing, index fund, invisible hand, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, mental accounting, money market fund, Myron Scholes, paper trading, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, price anchoring, price stability, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, seminal paper, Sharpe ratio, short selling, short squeeze, Silicon Valley, South Sea Bubble, statistical model, survivorship bias, systematic trading, tail risk, technology bubble, The Wealth of Nations by Adam Smith, transaction costs, yield curve, Yogi Berra, zero-sum game

The beta portfolios that produce the alpha are likely to be eliminated or neutralized, so there will be no reason to be concerned about their risk impact. Consequently, this process provides freedom to seek alphas wherever the manager believes they might be found. The bottom line of Damsma’s team’s current thinking is what he calls “asset allocation goes 2×.” That is, asset allocation for alpha, and asset allocation for beta. Traditionally, sponsors begin with the asset allocation decision—for example, stocks, bonds, cash, or real estate. Under this process, the investor must accept the alpha that goes with the primary beta allocation. While this has been accepted practice, such a process may be limiting the opportunity to earn additional alpha or reduce a sponsor’s risk levels.

In his introduction to Asymmetric Returns: The Future of Active Asset Management, Alexander Ineichen of UBS argues that: “The key tools required to extract alpha are risk management tools. In our view, investors cannot manage returns but they can manage risk. Achieving sustainable positive absolute returns [is] the result, we believe, of taking and managing risk wisely.”10 In today’s terminology, strategic asset allocation begins with formulation of the overall asset allocation in light of the beta risks. The results of this selection process compose a portfolio of asset classes known as the policy portfolio. The policy portfolio ref lects the views of the board of trustees—or an individual investor—about the primary risks they want the portfolio to be exposed to over the long run.

Today’s markets offer many different ways to accomplish the separation of alpha bets from beta bets in the portfolio. As a result, the beta bets—the basic asset allocation that optimally achieves the investor’s long-term goals—need not restrict or constrain the allocation of the alpha portfolio among different asset classes. Short-selling, borrowing, and the use of derivatives can finance the alpha portfolio in such a way that the basic asset allocation strategy of the beta portfolio remains untouched. And careful diversification of alpha bets can limit the amount of variance generated by the search for alpha.* CAPM is no longer a toy or a theoretical curiosity with dubious empirical credentials.


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The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by John C. Bogle

asset allocation, backtesting, buy and hold, creative destruction, currency risk, diversification, diversified portfolio, financial intermediation, fixed income, index fund, invention of the wheel, Isaac Newton, John Bogle, junk bonds, low interest rates, new economy, passive investing, Paul Samuelson, random walk, risk tolerance, risk-adjusted returns, Sharpe ratio, stocks for the long run, survivorship bias, transaction costs, Upton Sinclair, Vanguard fund, William of Occam, yield management, zero-sum game

Whether you are accumulating investment assets during your working years or are making withdrawals from your assets in your retirement years, I hope to help you establish appropriate asset allocations for your future. Ninety-four percent of the differences in portfolio returns is explained by asset allocation. Benjamin Graham believed that your first investment decision should be how to allocate your investment assets: How much should you hold in stocks? How much in bonds? Graham believed that this strategic decision may well be the most important of your investment lifetime. A landmark 1986 academic study confirmed his view. The study found that asset allocation accounted for an astonishing 94 percent of the differences in total returns achieved by institutionally managed pension funds.

Notes 1 An apparent reference to the maxim, “We all have strength enough to endure the misfortunes of others.” 2 The bond yield represents a portfolio consisting of one-half corporate bonds (3.9 percent) and one-half U.S. Treasury 10-year notes (2.3 percent). Chapter Nineteen Asset Allocation II Retirement Investing, and Funds That Set Your Asset Allocation in Advance. IN MY 1993 BOOK Bogle on Mutual Funds, after discussing the large number of asset allocation strategies available to investors, I raised the possibility that “less is more”—that a simple mainstream (i.e., index) balanced fund, 60 percent in U.S. stocks, 40 percent in U.S. bonds, one that provides extraordinary diversification and operates at rock-bottom cost, would offer the functional equivalent of having your entire portfolio overseen by an investment advisory firm.

Chapter Thirteen Profit from the Majesty of Simplicity and Parsimony Note Chapter Fourteen Bond Funds Chapter Fifteen The Exchange-Traded Fund (ETF) Notes Chapter Sixteen Index Funds That Promise to Beat the Market Note Chapter Seventeen What Would Benjamin Graham Have Thought about Indexing? Note Chapter Eighteen Asset Allocation I: Stocks and Bonds Notes Chapter Nineteen Asset Allocation II Note Chapter Twenty Investment Advice That Meets the Test of Time Acknowledgments EULA List of Illustrations Chapter 2 EXHIBIT 2.1 Investment Return versus Market Return. Growth of $1, 1900–2016 EXHIBIT 2.2 Total Stock Returns by the Decade, 1900–2016 (Percent Annually) Chapter 3 EXHIBIT 3.1 S&P 500 versus Total Stock Market Index: Portfolio Comparison, December 2016 EXHIBIT 3.2 S&P 500 and Total Stock Market Index, 1926–2016 EXHIBIT 3.3 Percentages of Actively Managed Mutual Funds Outperformed by Comparable S&P Indexes, 2001–2016 Chapter 4 EXHIBIT 4.1 The Magic of Compounding Returns, the Tyranny of Compounding Costs: Growth of $10,000 over 50 Years EXHIBIT 4.2 The Tyranny of Compounding: Long-Term Impact of Lagging the Market by 2 Percent Chapter 5 EXHIBIT 5.1 Equity Mutual Funds: Returns versus Costs, 1991–2016 Chapter 6 EXHIBIT 6.1 S&P Price Return versus Total Return EXHIBIT 6.2 S&P 500—Dividends per Share EXHIBIT 6.3 Dividend Yields and Fund Expenses, 2016 Chapter 7 EXHIBIT 7.1 S&P Index Fund versus Average Large-Cap Fund: Profit on Initial Investment of $10,000, 1991–2016 EXHIBIT 7.2 The Timing and Selection Penalties: Net Flow into U.S.


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Beyond the 4% Rule: The Science of Retirement Portfolios That Last a Lifetime by Abraham Okusanya

asset allocation, diversification, diversified portfolio, high net worth, longitudinal study, low interest rates, market design, mental accounting, Paul Samuelson, quantitative easing, risk tolerance, risk-adjusted returns, Robert Shiller, seminal paper, tail risk, The 4% rule, transaction costs, William Bengen

Pfau concluded that global diversification helps more often than not – although it doesn’t provide a complete panacea for market risk in retirement. Fig. 61: Sustainable withdrawal rate with UK-centric vs. global asset allocation My research shows that a global asset allocation (ie 50/50 global equity/global bond split) results in a slightly lower sustainable withdrawal in 58% of historical periods when we compare it to a UK asset allocation. So, in 42% of historical periods between 1900 and 2016, global asset allocation results in higher SWR. A closer look at the results reveals some particularly interesting patterns. Fig. 62 below shows the historical worst case, 10th, 50th and 90th percentile withdrawal rates for UK and global portfolios.

Fig. 55 overleaf shows the historical withdrawal rates for a 30-year retirement starting after 1900, using various asset allocations. Fig. 55: Sustainable withdrawal rates for various asset allocation Fig. 55 shows higher equity allocation tends to support higher withdrawal rates. This is consistent through most historical periods. Fig. 56 shows a summary of the historical worst case, 10th, 50th and 90th percentile net withdrawal rate (net of 1%pa fee) for varying degrees of allocation to equities, based on a 30-year horizon. Fig. 56: Gross withdrawal rates for various equity/bond allocations Another way to view this is to look at the success rate of various asset allocations for a given withdrawal rate over multiple time periods.

The US bond market has an average of 0.5% real return above the UK. 4. The exact rate will vary depending on the asset allocation Bengen’s original research is based on a 50/50 equity-bond portfolio. He strongly recommended that equity allocation in a retirement portfolio should be no less than 50% and no more than 75%. Fig. 24: Nominal annual income under safe withdrawal rate for a 50/50 UK equity/bond portfolio Fig. 25: Real annual income under safe withdrawal rate for a 50/50 UK equity/bond portfolio Fig. 26: Maximum sustainable withdrawal rate (UK vs. US) Asset allocation plays a crucial role in determining the SWR for each retiree.


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Financial Freedom: A Proven Path to All the Money You Will Ever Need by Grant Sabatier

8-hour work day, Airbnb, anti-work, antiwork, asset allocation, bitcoin, buy and hold, cryptocurrency, diversified portfolio, Donald Trump, drop ship, financial independence, fixed income, follow your passion, full employment, Home mortgage interest deduction, index fund, lifestyle creep, loss aversion, low interest rates, Lyft, money market fund, mortgage debt, mortgage tax deduction, passive income, remote working, ride hailing / ride sharing, risk tolerance, robo advisor, side hustle, Skype, solopreneur, stocks for the long run, stocks for the long term, TaskRabbit, the rule of 72, time value of money, uber lyft, Vanguard fund

You can find an editable version of this spreadsheet at https://financialfreedombook.com/tools. STEP 3: DETERMINE YOUR TARGET ASSET ALLOCATION Next you need to determine your target asset allocation, which is the percentage of each asset (e.g., stocks, bonds, and cash) you have in your investment accounts. Your target asset allocation determines the level of risk/reward of your investment portfolio and is one of the most important investment decisions you will need to make. No matter which target allocation you choose, you will need to monitor and maintain this asset allocation across all of your investment accounts. Typically, stocks are riskier investments than bonds, so the more stocks you hold in your portfolio, the risker it is, meaning the more it could go up or down in value.

Set a foundation—a baseline number that you are going to invest in each account over each period. Step 3: Determine your target asset allocation. Next you need to determine your target asset allocation, which is the percentage of each asset (e.g., stocks, bonds, and cash) you have in your investment accounts. Your target asset allocation determines the level of risk/reward of your investment portfolio and is one of the most important investment decisions you will need to make. The best way to pick your target asset allocation is based on how long it will be before you need to use the money. If you are ten or more years away from walking away, I recommend you invest 100 percent in stocks for now.

Thank you for teaching me that social capital is a thing and waking me up to the world. GLOSSARY Asset allocation—Your asset allocation is the percentage of each asset (for example, stocks, bonds, and cash) you have in your investment accounts. Your target asset allocation determines the level of risk/reward of your investment portfolio. Typically, stocks are riskier investments than bonds, so the more stocks you hold in your portfolio, the risker it is—meaning the more it could go up or down. To pick your target asset allocation, figure out how long it will be before you need to use the money. The more time you have before you need to withdraw your investments, the riskier your target asset allocation should be, because you have more time to weather short-term ups and downs and participate in the long-term potential gains.


pages: 407 words: 114,478

The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein

Alan Greenspan, asset allocation, behavioural economics, book value, Bretton Woods, British Empire, business cycle, butter production in bangladesh, buy and hold, buy low sell high, carried interest, corporate governance, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, diversification, diversified portfolio, Edmond Halley, equity premium, estate planning, Eugene Fama: efficient market hypothesis, financial engineering, financial independence, financial innovation, fixed income, George Santayana, German hyperinflation, Glass-Steagall Act, high net worth, hindsight bias, Hyman Minsky, index fund, invention of the telegraph, Isaac Newton, John Bogle, John Harrison: Longitude, junk bonds, Long Term Capital Management, loss aversion, low interest rates, market bubble, mental accounting, money market fund, mortgage debt, new economy, pattern recognition, Paul Samuelson, Performance of Mutual Funds in the Period, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Savings and loan crisis, South Sea Bubble, stock buybacks, stocks for the long run, stocks for the long term, survivorship bias, Teledyne, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

What we haven’t yet discussed is exactly how much of your assets you should expose to the market, or even what we mean by “the market.” These two issues—how much of your overall assets you should place in stocks and how you should allocate your assets between different classes of stocks—form the core of “asset allocation.” In the 1980s, famed investor Gary Brinson and his colleagues published a pair of papers purporting to demonstrate that more than 90% of the variation in investment returns is due to asset allocation and less than 10% to timing and stock selection. These articles have been hotly contested by practitioners and academicians ever since. However, this controversy completely misses the point: it does not matter how much of your return is determined by timing or stock selection—no sane investor denies that these are important determinants of return.

However, this controversy completely misses the point: it does not matter how much of your return is determined by timing or stock selection—no sane investor denies that these are important determinants of return. It’s just that you can’t control the results of timing and selection—asset allocation is the only factor you can positively impact. In other words, since you cannot successfully time the market or select individual stocks, asset allocation should be the major focus of your investment strategy, because it is the only factor affecting your investment risk and return that you can control. It’s important to make perfectly clear what we can and cannot do.

Step Three: Size and Value Steps one and two—the stock/bond and domestic/foreign decisions—constitute asset allocation’s heavy lifting. Once you’ve answered them, you’re 80% of the way home. If you’re lazy or just plain not interested, you can actually get by with only three asset classes, and thus, three mutual funds: the total U.S. stock market, foreign stocks, and short-term bonds. That’s it—done. However, there are a few relatively simple extra portfolio wrinkles that are worth incorporating into your asset allocation repertoire. We’ve already talked about the extra return offered by value stocks and small stocks.


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The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

Albert Einstein, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bear Stearns, Bernie Madoff, Black Swan, bond market vigilante , book value, Bretton Woods, BRICs, British Empire, business cycle, business process, buy and hold, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, commoditize, commodity super cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, equity risk premium, family office, fiat currency, fixed income, follow your passion, full employment, George Santayana, global macro, Greenspan put, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, inverted yield curve, invisible hand, junk bonds, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, market microstructure, Minsky moment, moral hazard, Myron Scholes, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, proprietary trading, purchasing power parity, quantitative easing, random walk, Reminiscences of a Stock Operator, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, savings glut, selection bias, Sharpe ratio, short selling, SoftBank, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, stocks for the long run, stocks for the long term, survivorship bias, tail risk, The Great Moderation, Thomas Bayes, time value of money, too big to fail, Tragedy of the Commons, transaction costs, two and twenty, unbiased observer, value at risk, Vanguard fund, yield curve, zero-sum game

It was able to generate positive returns on the year since it is allowed to go long and short all asset categories except for cash, which, because we do not take leverage, is constrained to always be zero or long. Tactical asset allocation has worked for us both in the model sense and in the discretionary sense. But then again, we are small and nimble, so we can do it. There are many models of tactical asset allocation that seem to work, and I have discussed them at Drobny Conferences. We have done momentum models on returns, on correlations, and have even run efficient frontiers that, using ETFs, generate returns very similar to what Yale has generated through its asset allocation process and successful manager selection. So I believe that tactical asset allocation works, though it is very difficult to make it work for very large investors like CalPERS or for the entire investment industry.

Running more risk in normal times means you are running at a slightly higher volatility. But when a true crisis hits and the markets collapse, you have the protection when you need it. Does asset allocation work in a world where extreme events happen more often than predicted? Asset allocation works if you put in the correct forward-looking returns. If you knew what the returns were going to be, the models would come back with perfect portfolios. The problem is not with asset allocation but with figuring out what returns and what correlations to use. Should you be using 30-year correlations when you are nervous about the one week when all markets collapse simultaneously?

To an absolute return investor, cash is an essential asset. When other assets have negative returns forecast over the next 6 or 12 months, there is no reason to not hold a low return cash portfolio. As an absolute return macro manager, I believe in tactical asset allocation and that clearly distinguished my approach from the Endowment Model, where asset allocation is never done tactically. The Endowment Model’s core approach consists of a long-term process where equity-like returns are being generated in a diversified portfolio. How do you value cash? The prevailing wisdom looks at cash on a historical basis, which completely neglects the inherent opportunity costs associated with a lack of cash.


Work Less, Live More: The Way to Semi-Retirement by Robert Clyatt

asset allocation, backtesting, buy and hold, currency risk, death from overwork, delayed gratification, diversification, diversified portfolio, do what you love, eat what you kill, employer provided health coverage, estate planning, Eugene Fama: efficient market hypothesis, financial independence, fixed income, future of work, independent contractor, index arbitrage, index fund, John Bogle, junk bonds, karōshi / gwarosa / guolaosi, lateral thinking, Mahatma Gandhi, McMansion, merger arbitrage, money market fund, mortgage tax deduction, passive income, rising living standards, risk/return, Silicon Valley, The 4% rule, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, transaction costs, unpaid internship, upwardly mobile, Vanguard fund, work culture , working poor, zero-sum game

Richard Ferri recently wrote a clear, well-researched book on asset allocation, All About Asset Allocation (McGraw Hill), which digs deeper into the research and data underlying Rational Investing principles. It may be the best follow-on reader for those seeking more information after reading this chapter. William J. Bernstein has also written about asset allocation in The Four Pillars of Investing, Lessons for Building a Winning Portfolio (McGraw-Hill). Larry E. Swedroe outlines the benefits of low-fee index investing, though with less focus on the power of asset allocation. Titles include: • The Only Guide to a Winning Investment Strategy You’ll Ever Need: The Way Smart Money Invests Today (St.

These funds are designed for institutional investors that generally are sophisticated asset allocators. As a result, DFA will not sell directly to individuals. Nonetheless, DFA funds are available to individuals if you purchase them through a DFA-approved financial adviser. Reading this chapter and a good basic investing book such as Richard Ferri’s All About Asset Allocation should give you the knowledge you need to be able to be taken on as a client by a DFA-certified adviser at a reasonable fee, as he or she will not need to spend serious time educating you on asset allocation. Shop around. And if you cannot find an adviser who will work on a fee-only basis or offer you reasonable fees in your area, then you can look into some who have historically provided feeonly services and access to DFA funds at fair prices—around 0.2% or less of assets under their management—along with individualized advice and reports.

The third section includes a list of funds, by asset class, that you can use to implement the portfolio. Portfolio asset allocations The table below lists the asset classes and their percentage allocations for the Rational Investing portfolio. These percentages are the result of many inputs and choices and extensive computer modeling with DFA-approved financial adviser Tom Orecchio, of Greenbaum & Orecchio, Inc. In the chart below, asset class is the type or category of financial securities in which you hope to invest. The portfolio asset allocation is the percentage of your total savings you invest in that asset class. The historical return shows the performance, in percentage terms, by which investments in that asset class have grown, including dividends and capital appreciation—that is, the increase in price over time.


Commodity Trading Advisors: Risk, Performance Analysis, and Selection by Greg N. Gregoriou, Vassilios Karavas, François-Serge Lhabitant, Fabrice Douglas Rouah

Asian financial crisis, asset allocation, backtesting, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, compound rate of return, constrained optimization, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, discrete time, distributed generation, diversification, diversified portfolio, dividend-yielding stocks, financial engineering, fixed income, global macro, high net worth, implied volatility, index arbitrage, index fund, interest rate swap, iterative process, linear programming, London Interbank Offered Rate, Long Term Capital Management, managed futures, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, p-value, Pareto efficiency, Performance of Mutual Funds in the Period, Ponzi scheme, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, stochastic process, survivorship bias, systematic trading, tail risk, technology bubble, transaction costs, value at risk, zero-sum game

TABLE 20.2 Correlations Across CTA and Traditional Asset Classes, January 1990 to February 2003 CTA QU Index CTA QU Index SCM Bond Index S&P/TSX S&P 500 MSCI EAFE 1 0.20 −0.12 −0.13 −0.19 SCM S&P/ TSX S&P 500 1 0.32 0.26 0.20 1 0.75 0.66 1 0.70 MSCI EAFE 1 363 Incorporating CTAs into the Asset Allocation Process INCORPORATING CTA TO THE ASSET ALLOCATION PROCESS In this section, we show the results obtained by applying the mean-VaR framework explained previously. We compute the efficient frontier and the optimal portfolio allocation for a Canadian pension fund assuming that the portfolio manager has a VaR limit, that is, the manager does not want to lose more than a specified amount each month, with a specified probability (typically 1 or 5 percent). The individual asset classes can vary within specific limits. As a result, a relatively conservative asset allocation was chosen to match the allocations of conservative investors, pension funds, and institutions.

Using these benchmark assets, the author estimates the efficiency gain or loss each CTA produces and analyzes the robustness of this kind of efficiency measurement with respect to the number of moments used. Chapter 17 aims at providing an overview of the industry and to quantify its added value when included in portfolios (mean/variance optimization). Different statistics and asset allocations studies are displayed within a fixed or dynamic framework. A dynamic framework takes into account time evolutions. On the asset allocation side, it then implies working in a three-dimensional environment (mean/variance/time framework) and dealing with efficient surfaces rather than efficient frontiers. Chapter 18 examines whether CTA percent changes in NAVs follow random walks.

Recall that, in a risk/return framework, the efficient frontier represents all the risk/return combinations where the risk is minimized for a specific return (or the return is maximized for a specific risk). Each minima (or maxima) is reached thanks to an optimal asset allocation. The process of constructing efficient frontiers through an asset weight optimization is summarized in this definition: For all possible target portfolio returns, find portfolio weights (i.e., asset allocation) such as the portfolio volatility is minimized and the following constraints are respected: no short sale, full investment, and weight limits if any. 316 PROGRAM EVALUATION, SELECTION, AND RETURNS Clearly, the resulting efficient frontier depends on the returns, volatility, and correlations of the considered assets, but it also depends on the constraints (maximum and minimum weight limit, no short selling, and full investment) fixed by the portfolio manager.


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Capital Allocators: How the World’s Elite Money Managers Lead and Invest by Ted Seides

Albert Einstein, asset allocation, behavioural economics, business cycle, coronavirus, COVID-19, crowdsourcing, data science, deliberate practice, diversification, Everything should be made as simple as possible, fake news, family office, fixed income, high net worth, hindsight bias, impact investing, implied volatility, impulse control, index fund, Kaizen: continuous improvement, Lean Startup, loss aversion, Paradox of Choice, passive investing, Ralph Waldo Emerson, risk tolerance, Sharpe ratio, sovereign wealth fund, tail risk, The Wisdom of Crowds, Toyota Production System, zero-sum game

Sophisticated quantitative analysis to improve allocator outcomes is still in the early innings. CIOs use some long-standing tools to look at past markets in calibrating base rates and expectations in asset allocation, risk management, and performance assessment. Financial technology companies are pushing the envelope to help public equity managers improve. Their work may be a sign of things to come. Asset allocation The math of asset allocation draws on Modern Portfolio Theory, developed by Harry Markowitz in 1952. Taking inputs of expected return, standard deviation, and correlation across asset classes, Markowitz’s model uses mean-variance optimization to create an efficient frontier.

Through quantitative analysis and informed judgement of market conditions, CIOs selected a strategic asset allocation best positioned to meet their objectives. These targets were a significant driver of investment returns and laid the foundation for implementation. Steve Rattner at Willett Advisors contends that in a normal world, the bulk of return comes from beta. Alpha will always be a much smaller component no matter how good you are at picking managers and no matter how good the managers are. More recently, CIOs have fine-tuned the lens of the policy portfolio. Asset allocation may drive performance in retrospect, but few, if any, CIOs profess skill in forecasting asset class returns.

Capital Allocators How the world’s elite money managers lead and invest Ted Seides Contents Praise for Capital Allocators About the Author Acknowledgments About Capital Allocators How to Use This Book Introduction Active versus Passive The case for passive management The case for active management Part 1: Toolkit Chapter 1: Interviewing Defining the purpose Preparing Setting the stage Active listening Receiving feedback Additional tips Summary To learn more Chapter 2: Decision-Making Why this is so hard Making better decisions Summary To learn more Chapter 3: Negotiations Preparation Updating views Additional tips Summary To learn more Chapter 4: Leadership Define a vision Set standards of conduct Communicate consistently and frequently Behave authentically Inspire and motivate Adapt and evolve Summary To learn more Chapter 5: Management Hiring Organizational design Project management Talent development Time management Summary To learn more Part 2: Investment Frameworks Chapter 6: Governance Roles and responsibilities Investment committee Incentives Summary To learn more Chapter 7: Investment Strategy Purpose Time horizon Natural habitat Policy portfolio Team structure Summary To learn more Chapter 8: Investment Process Sourcing managers Target characteristics Due diligence Portfolio construction Monitoring Icing on the cake Summary To learn more Chapter 9: Technological Innovation Asset allocation Risk measurement Risk management Performance assessment Leading edge of data analytics Summary To learn more Chapter 10: Case Study of Uncertainty Part 3: Nuggets of Wisdom Chapter 11: Investment Lessons Nature of markets Inconvenient truths Managing volatility Investment selection Gaining an edge Asset class perspectives Chapter 12: Life Lessons Managing emotions Continuous improvement Relationships Work ethic Facing reality What matters most Chapter 13: The Top 10 Appendices Appendix A: Initial Manager Meeting Outline Background Investment approach Initial meeting question list Appendix B: To Learn More Interviewing Decision-making Negotiations Leadership Management Governance Investment strategy Investment process Data analysis Appendix C: Directory of Guests on Capital Allocators Publishing details For the virtuous circle of guests and listeners on the Capital Allocators podcast And especially for my wife Vanessa, whose enthusiastic support from the front row seat lights up the stage Praise for Capital Allocators Through his podcast, Ted has talked with the best investment minds in the world.


pages: 542 words: 145,022

In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest by Andrew W. Lo, Stephen R. Foerster

Alan Greenspan, Albert Einstein, AOL-Time Warner, asset allocation, backtesting, behavioural economics, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, Charles Babbage, Charles Lindbergh, compound rate of return, corporate governance, COVID-19, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, Edward Glaeser, equity premium, equity risk premium, estate planning, Eugene Fama: efficient market hypothesis, fake news, family office, fear index, fiat currency, financial engineering, financial innovation, financial intermediation, fixed income, hiring and firing, Hyman Minsky, implied volatility, index fund, interest rate swap, Internet Archive, invention of the wheel, Isaac Newton, Jim Simons, John Bogle, John Meriwether, John von Neumann, joint-stock company, junk bonds, Kenneth Arrow, linear programming, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, new economy, New Journalism, Own Your Own Home, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, prediction markets, price stability, profit maximization, quantitative trading / quantitative finance, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, selection bias, seminal paper, shareholder value, Sharpe ratio, short selling, South Sea Bubble, stochastic process, stocks for the long run, survivorship bias, tail risk, Thales and the olive presses, Thales of Miletus, The Myth of the Rational Market, The Wisdom of Crowds, Thomas Bayes, time value of money, transaction costs, transfer pricing, tulip mania, Vanguard fund, yield curve, zero-coupon bond, zero-sum game

In 1985, Sharpe took up a new research focus: dealing with the key issues investors faced when deciding on how much to invest in various asset classes such as stocks, bonds, real estate, and cash. He prepared a package of educational materials for investors that included the book Asset Allocation Tools, optimization software, and relevant databases. In 1986, Sharpe took a two-year leave from Stanford to establish William F. Sharpe Associates, a consulting firm that focused on the research and development of procedures to assist pension funds, endowments, and foundations with their asset allocation decisions. His academic status at Stanford changed in 1989 from active professor to professor emeritus, allowing him to give up regular teaching and devote more time to his firm.

It remains to be seen whether the age-based system [investing a percent in bonds equal to one’s age] does better than other systems.”98 In addition, “You shouldn’t be investing in bonds on a short-term basis.”99 Bogle wasn’t a huge fan of frequent rebalancing to an asset allocation target, nor was he a fan of tactical asset allocation or market timing. At best, rebalancing should occur no more than once a year.100 His asset mix was around 50 percent in stocks and 50 percent in bonds.101 In his opinion, it was also important to understand what kind of an investor you are. “Are you an investor, or are you a speculator?

What is the risk you want to take [relative to] your human capital, other parts of your wealth structure? And so, the target-date funds, which are stylized ways … of thinking of numerical asset allocation, are not taking account of what we should be accounting for [in terms of risks]. What’s the risk? And how is the risk changing? And what [are] the dynamics of risk? … A new target-date fund of the future will be a risk-managed fund.” Scholes describes an approach whereby investors first determine the maximum drawdown they feel comfortable with, then change their asset allocation (perhaps between stocks and bonds) as the anticipated risks in the asset classes change. How can an investor anticipate a change in risk?


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The Clash of the Cultures by John C. Bogle

Alan Greenspan, asset allocation, buy and hold, collateralized debt obligation, commoditize, compensation consultant, corporate governance, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, estate planning, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Glass-Steagall Act, Hyman Minsky, income inequality, index fund, interest rate swap, invention of the wheel, John Bogle, junk bonds, low interest rates, market bubble, market clearing, military-industrial complex, money market fund, mortgage debt, new economy, Occupy movement, passive investing, Paul Samuelson, Paul Volcker talking about ATMs, Ponzi scheme, post-work, principal–agent problem, profit motive, proprietary trading, prudent man rule, random walk, rent-seeking, risk tolerance, risk-adjusted returns, Robert Shiller, seminal paper, shareholder value, short selling, South Sea Bubble, statistical arbitrage, stock buybacks, survivorship bias, The Wealth of Nations by Adam Smith, transaction costs, two and twenty, Vanguard fund, William of Occam, zero-sum game

Where do these estimates come from? Well, here is what one large corporation tells us: “We consider current and expected asset allocations, as well as historical and expected returns on various categories of plan assets . . . evaluating general market trends as well as key elements of asset class returns such as expected earnings growth, yields and spreads. Based on our analysis of future expectations of asset performance, past return results, and our current and expected asset allocations, we have assumed an 8.0 percent long-term expected return on those assets” (italics added, General Electric Annual Report, 2010).

As a result, retirement savers make many of the mistakes already discussed—not saving enough, being either too conservative or too aggressive in their asset allocation, taking loans from a 401(k), cashing out early—simply because they’ve received inadequate preparation for these critical investment decisions. The fund industry has not helped, marketing their hottest funds and giving inadequate attention to the critical role played by asset allocation. The New Pension Plan Given the tenuous funding of DB plans, the widespread failures in the existing DC plan structure—including both 401(k) plans and IRAs—we ought to carefully consider and then implement changes that move us to a retirement plan system that is simpler, more rational, and less expensive.

See Defined benefit (DB) pension plans; Defined contribution (DC) pension plans; Retirement system “People-who-live-in-glass-houses” syndrome PIMCO (Pacific Investment Management Company) Pioneer Fund Politics Portfolio managers, experience and stability of Portfolio turnover: actively managed equity funds exchange traded funds index funds mutual funds Stewardship Quotient and Positive Alpha Press, financial Pricing strategy PRIMECAP Management Company Principals Product, as term Product proliferation, in mutual fund industry Product strategy Profit strategy Proxy statement access by institutional investors, proposed Proxy vote disclosure by mutual funds Prudent Man Rule Public accountants Putnam, Samuel Putnam Management Company Quantitative techniques Random Walk Down Wall Street, A (Malkiel) Rappaport, Alfred Rating agencies Real market Redemptions, shareholder Regulatory issues REIT index fund Retirement accumulation, inadequate Retirement system: about Ambachtsheer, Keith, on asset allocation and investment selection components conflicts of interest costs, excessive current flaws in flexibility, excessive 401(k) retirement plans ideal investor education, lack of longevity risk, failure to deal with mutual funds in New Pension Plan, The pensions, underfunded recommendations retirement accumulation, inadequate savings, inadequacy of “Seven Deadly Sins,” speculation and stock market collapse and value extracted by financial sector Returns: asset allocation and balanced funds defined benefit pension plans projections of equity mutual funds exchange traded funds investment large-cap funds market mutual fund industry speculative Wellington Fund Reversion to the mean (RTM) Riepe, James S.


pages: 149 words: 43,747

How I Invest My Money: Finance Experts Reveal How They Save, Spend, and Invest by Brian Portnoy, Joshua Brown

asset allocation, behavioural economics, bitcoin, blockchain, blue-collar work, buy and hold, coronavirus, COVID-19, cryptocurrency, diversification, diversified portfolio, estate planning, financial independence, fixed income, high net worth, housing crisis, index fund, John Bogle, low interest rates, mental accounting, passive investing, prediction markets, risk tolerance, Salesforce, Sharpe ratio, time value of money, underbanked, Vanguard fund

The firm is entirely bootstrapped from day one – no private equity, no debt, no outside investors. This is both strategically and emotionally important to us. My 401(k) is invested in the exact same asset allocation model as we use for our clients. I own the same funds, in the same proportions, that my clients of comparable risk tolerance own. I’m in an all-equity model because I’m relatively young, can bear risk and will not be accessing this capital for at least another 25 years. Every other employee of Ritholtz Wealth is also invested in the same asset allocation models as our clients. This was a very important decision we made early on. We eat our own cooking with our own personal retirement accounts.

Bonds reduce downside volatility and provide dry powder for rebalancing during bear markets. I sit on the investment committee at my firm. We spend the majority of our time contemplating what we call “the most important decision,” which is the asset allocation of our clients’ portfolios. This decision includes the mix of domestic and international stocks, small and large cap companies, and exposure to factors such as value, momentum, and shareholder yield. Afterwards, we determine the mechanism for implementing the asset allocation decision. We combine both long-term strategic allocation with medium-term tactical decisions. If international stocks are cheap compared to stocks in the US, we will tilt the portfolio more towards international stocks than the benchmark suggests.

I came to a major realization during the course of this project about money, life, and making plans for the future. I’ve learned that the reasons behind our individual portfolios and investment choices reveal a lot more about us than we might initially think. Are we too busy helping others to maintain an orderly asset allocation for ourselves? Are we spending too much time obsessing over formulas, tradeoffs and proportions, to the detriment of remaining focused on the big picture? Are our personal portfolios an accurate representation of the investment philosophies we espouse in public, or have they deviated from the dogma for one reason or another?


pages: 194 words: 59,336

The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life by J L Collins

asset allocation, Bernie Madoff, Black Monday: stock market crash in 1987, buy and hold, compound rate of return, currency risk, diversification, financial independence, full employment, German hyperinflation, index fund, inverted yield curve, John Bogle, lifestyle creep, low interest rates, money market fund, Mr. Money Mustache, nuclear winter, passive income, payday loans, risk tolerance, side hustle, The 4% rule, Vanguard fund, yield curve

Want a smoother ride? Willing to accept a potentially lower long-term return and slower wealth accumulation? Just increase the percentage in VBTLX. Comfortable with volatility? Want more growth? Add more to VTSAX. Now that we’ve introduced this idea of asset allocation, we’ll explore it a bit more next. Chapter 14 Selecting your asset allocation Life is balance and choice. Add more of this, lose a little of that. When it comes to investing, that balance and choice is informed by your temperament and goals. Financial geeks like me are the aberration. Sane people don’t want to be bothered.

The market always goes up 8. Why most people lose money in the market 9. The Big Ugly Event 10. Keeping it simple: Considerations and tools 11. Index funds are really just for lazy people, right? 12. Bonds 13. Portfolio ideas to build and keep your wealth 14. Selecting your asset allocation 15. International funds 16. TRFs: The simplest path to wealth of all 17. What if you can’t buy VTSAX? Or even Vanguard? 18. What is it about Vanguard anyway? 19. The 401(k), 403(b), TSP, IRA and Roth buckets 20. RMDs: The ugly surprise at the end of the tax-deferred rainbow 21.

Until you are comfortable with the risks that come with the rewards you seek, the answer is no. In the end, only you can decide. Fortunately, investing doesn’t have to be an all or nothing proposition. If you are willing to give up some performance, there are ways to smooth out the ride a bit. It is done with asset allocation, which we’ll discuss in Chapter 14. Note: In referencing the market’s performance in this chapter, you may have noticed I jump between using the Dow and the S&P as the indexes. I prefer the S&P because it is broader and therefore a bit more precise. But the Dow goes back further in history and is more useful (and available) for the long view.


pages: 130 words: 11,880

Optimization Methods in Finance by Gerard Cornuejols, Reha Tutuncu

asset allocation, call centre, constrained optimization, correlation coefficient, diversification, financial engineering, finite state, fixed income, frictionless, frictionless market, index fund, linear programming, Long Term Capital Management, passive investing, Sharpe ratio, transaction costs, value at risk

Given these considerations the robust optimization problem given in (OROP) takes the following form max{ min µT x − lxT Qx} (7.11) x∈X (µ,Q)∈U which is equivalent to minx∈X {max(µ,Q)∈U −µT x + lxT Qx}. This problem can be ex- 90CHAPTER 7. ROBUST OPTIMIZATION MODELS AND TOOLS IN FINANCE pressed as a saddle-point problem and be solved using the technique outlined in [6]. 7.3.2 Robust Asset Allocation: A Case Study This material in this section is adapted from the article [16]. We apply the robust optimization approach discussed in the previous section to an asset allocation problem. We consider a universe of 5 asset classes: large cap growth stocks, large cap value stocks, small cap growth stocks, small cap value stocks, and fixed income securities. To represent each asset class, we use a monthly log-return time series of corresponding market indices: Russell 1000 growth and value indices for large cap stocks, Russell 2000 growth and value indices for small cap stocks, and Lehman Brothers US Intermediate Government/Credit Bond index for fixed income securities.

The Journal of Risk, 2:21–41, 2000. [13] W. F. Sharpe. Determining a fund’s effective asset mix. Investment Management Review, pages 59–69, December 1988. [14] W. F. Sharpe. Asset allocation: Management style and performance measurement. Journal of Portfolio Management, pages 7–19, Winter 1992. [15] W.F. Sharpe. The Sharpe ratio. Journal of Portfolio Management, Fall:49–58, 1994. [16] R. H. Tütüncü and M. Koenig. Robust asset allocation. Technical report, Department of Mathematical Sciences, Carnegie Mellon University, August 2002. To appear in Annals of Operations Research. [17] S. Uryasev. Conditional value-at-risk: Optimization algorithms and applications.

Tütüncü Optimization in Finance Advanced Lecture on Mathematical Science and Information Science I Dept. of Mathematical and Computing Sciences Tokyo Institute of Technology Department of Mathematical Sciences Carnegie Mellon University 2003 Contents Preface xi 1 Introduction 1.1 Continuous Optimization: A Brief Classification 1.1.1 Linear Optimization . . . . . . . . . . . 1.1.2 Quadratic Optimization . . . . . . . . . 1.1.3 Conic Optimization . . . . . . . . . . . . 1.2 Optimization with Data Uncertainty . . . . . . 1.2.1 Stochastic Optimization . . . . . . . . . 1.2.2 Robust Optimization . . . . . . . . . . . 1.3 Financial Mathematics . . . . . . . . . . . . . . 1.3.1 Portfolio Selection and Asset Allocation 1.3.2 Pricing and Hedging of Options . . . . . 1.3.3 Risk Management . . . . . . . . . . . . . 1.3.4 Asset Liability Management . . . . . . . . . . . . . . . . . . . 2 Linear Programming: Theory and Algorithms 2.1 The Linear Programming Problem . . . . . . . . 2.2 Duality . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Optimality Conditions . . . . . . . . . . . . . . . 2.4 The Simplex Method . . . . . . . . . . . . . . . . 2.4.1 Basic Solutions . . . . . . . . . . . . . . . 2.4.2 Simplex Iterations . . . . . . . . . . . . . 2.4.3 The Tableau Form of the Simplex Method 2.5 Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 LP Models and Tools in Finance 3.1 Derivative Securities and The Fundamental Theorem of 3.1.1 Replication . . . . . . . . . . . . . . . . . . . . 3.1.2 Risk-Neutral Probabilities . . . . . . . . . . . . 3.2 Arbitrage Detection Using Linear Programming . . . . 3.3 Risk Measures: Conditional Value-at-Risk . . . . . . . iii . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


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Reset: How to Restart Your Life and Get F.U. Money: The Unconventional Early Retirement Plan for Midlife Careerists Who Want to Be Happy by David Sawyer

"World Economic Forum" Davos, Abraham Maslow, Airbnb, Albert Einstein, asset allocation, beat the dealer, bitcoin, Black Monday: stock market crash in 1987, Cal Newport, cloud computing, cognitive dissonance, content marketing, crowdsourcing, cryptocurrency, currency risk, David Attenborough, David Heinemeier Hansson, Desert Island Discs, diversification, diversified portfolio, Edward Thorp, Elon Musk, fake it until you make it, fake news, financial independence, follow your passion, gig economy, Great Leap Forward, hiring and firing, imposter syndrome, index card, index fund, invention of the wheel, John Bogle, knowledge worker, loadsamoney, low skilled workers, Mahatma Gandhi, Mark Zuckerberg, meta-analysis, mortgage debt, Mr. Money Mustache, passive income, passive investing, Paul Samuelson, pension reform, risk tolerance, Robert Shiller, Ronald Reagan, Silicon Valley, Skype, smart meter, Snapchat, stakhanovite, Steve Jobs, sunk-cost fallacy, TED Talk, The 4% rule, Tim Cook: Apple, Vanguard fund, William Bengen, work culture , Y Combinator

Your partner and you can each squirrel away £20k a tax year into an Isa, and £40k into a pension (unless you earn more than £100k). So unless you’re Mr and Mrs Moneybags, you won’t run out of tax-advantaged homes for your money any time soon. 6. Two types of asset allocation Before we come to the big reveal – the RESET portfolio – a note on asset allocation[381]. There are two types of asset allocation: your stash asset allocation and your net worth asset allocation. Let me explain: Stash: the suggested RESET portfolio is based on a 100% equity allocation, invested in six index-tracking funds across six different geographies (there is a super-easy option, too, which I’ll come to in a minute).

[379] “put a kilt on”: Meaning, as used in this sentence, translate US advice to a Scottish/UK context, particularly regarding the tax system and fund selection. [380] (…rules are slightly different in Scotland): “Tax relief on pension contributions explained – Which.co.uk.” 24 May. 2018, toreset.me/380. [381] a note on asset allocation: “Asset Allocation – Investopedia.” toreset.me/381. Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. [382] according to the Office for National Statistics: “Most common age at death, by socio-economic position in England...” 21 Feb. 2017, toreset.me/382

We’re including here your current work pension – that you can’t get out of, and wouldn’t want to – that is invested as far as possible the RESET way. Net worth: for most UK midlife professionals, their net worth asset allocation will break down as follows: stash, house equity and you/your partner’s final salary pension (if you’re lucky). For example, let’s say you are lucky and your net worth allocation is: Stash: £150k. House equity (house value minus money you still owe on the mortgage): £150k. Final salary pension transfer value (we’ll come to that later): £150k. Now do you feel better? Your asset allocation is now a conservative: one-third equities, one-third home and one-third final salary. So when that bear market inevitably comes, take heart that your net worth is diversified, even if your stash asset allocation is aggressive (100% equities during the wealth-amassing period). 7.


pages: 201 words: 62,593

The Automatic Millionaire, Expanded and Updated: A Powerful One-Step Plan to Live and Finish Rich by David Bach

asset allocation, diversified portfolio, financial independence, index fund, job automation, late fees, money market fund, Own Your Own Home, risk tolerance, robo advisor, transaction costs, Vanguard fund

One last bit of advice on these funds—just select one! Too many people are now selecting two or three target dated funds. You only need one of these funds close to your retirement date. WHY BALANCED FUNDS AND ASSET ALLOCATION FUNDS MAKE SENSE If for some reason your plan doesn’t offer a target dated fund, then I’m sure they will offer an asset allocation fund or a balanced fund. An asset allocation or balanced fund does all the work for you, similar to a target dated fund, offering the right mix of cash, bonds, and stocks in one fund. You don’t have to create an Automatic Millionaire Investment Pyramid.

You can invest in preselected and professionally managed target dated mutual funds, asset allocation funds, or balanced funds through a traditional IRA, Roth IRA, or SEP IRA. If you are working with a financial advisor at a bank or brokerage firm, tell him or her that you’d like to look at target dated, asset allocation fund and balanced fund options. Your advisor should be able to point you in the right direction. In addition, I’ve highlighted some full-service options below. If you want to do this yourself, there are ways to invest without a broker or advisor. To get you started, here is a list (in no particular order) of companies that offer asset allocation and balanced funds.

Combined, they account for 71 percent of the industry, so here’s a list to start with: Vanguard 1-877-662-7447 www.​vanguard.​com Ask about the Vanguard Life Strategy Funds (Vanguard’s asset allocation funds) and Target Retirement Funds. Also ask about the Vanguard STAR Fund (this is a “fund of funds” asset allocation product created using various Vanguard funds). Finally, ask about the Vanguard Balanced Fund, a very low-cost balanced fund with an excellent long-term track record. Fidelity Investments 1-800-FIDELITY (343-3548-9) www.​fidelity.​com Ask about the Fidelity Freedom Funds. These asset allocation funds come with a due date (e.g., 2020, 2030, 2040, 2050). The idea is that you invest in the fund with the date closest to when you think you’re going to want to start taking money out of the fund (e.g., when you plan to retire).


pages: 348 words: 82,499

DIY Investor: How to Take Control of Your Investments & Plan for a Financially Secure Future by Andy Bell

asset allocation, bank run, Bear Stearns, Black Monday: stock market crash in 1987, buy and hold, collapse of Lehman Brothers, credit crunch, currency risk, diversification, diversified portfolio, estate planning, eurozone crisis, fixed income, high net worth, hiring and firing, Isaac Newton, junk bonds, Kickstarter, lateral thinking, low interest rates, money market fund, Northern Rock, passive investing, place-making, quantitative easing, selection bias, short selling, South Sea Bubble, technology bubble, transaction costs, Vanguard fund

Split between asset classes There are many different rules of thumb when it comes to asset allocation, such as the rule that your equity exposure, as a percentage, should be 100 minus your age. That may work, but it doesn’t tell you what the remainder should be in. There are many diverse views on asset allocation splits and there is clearly no right answer. I have deliberately avoided straying into suggesting what sectors you should and shouldn’t invest in, as this changes daily. But the following table provides examples of typical risk-adjusted asset allocations. table 18.2 Risk-adjusted asset locations You can find actively managed funds covering the above sectors by searching on any of the websites referred to at the end of Chapter 9.

table 18.3 A well-diversified portfolio of investments There are, of course, very many variations of the above, but you will see that it is a diversified portfolio that can be put together in literally minutes. Rebalancing your portfolio There are two reasons why you will need to revisit the asset allocation of your portfolio at regular intervals. First because markets change and experts’ views of what a sensible asset allocation strategy actually is can change, and secondly because growth or losses in certain parts of your portfolio can leave it unbalanced. This means you need to monitor the relevance of your asset allocation strategy at least every couple of years, and ideally annually. Correlation When looking at different asset classes and sectors, it is helpful to understand how they may be correlated.

You can adapt this list to include any of the other risks mentioned above that are relevant to you: table 18.1 Risk and risk appetite Risk Appetite for risk Capital value falling by 0–10 per cent Capital value falling by 10–20 per cent Capital value falling by 20–50 per cent Income falling by 0–10 per cent Income falling by 10–20 per cent Income falling by 20–50 per cent Objectives target missing deadline by: < 1 year 1–3 years 3–5 years Objectives target missing amount by: 0–5 per cent 5–10 per cent 10–20 per cent I live forever I am ill and can no longer work Property prices shoot up (I am saving for a house deposit) University fees shoot up (I am investing for my kids’ tuition fees) I lose my job Your attitude to risk Attitude to risk is a deeply personal thing, influenced by our psychological make-up, our experiences of gain or loss and our sense of security in the world. We all want ‘as much as possible’ from our investments, but we are not all prepared to take the same level of risk to get a particular return. This means it is not possible to create a one-size-fits-all asset allocation model for everybody. So it is important to go for an asset allocation strategy that reflects your personality. There are a number of tools to help you work this out. Risk-profiling tools There are several good risk-profiling tools available free on the internet. There is a very simple one on the Standard Life website. Put ‘Standard Life risk profiler’ into a search engine to find it quickly.


pages: 353 words: 88,376

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett by Jack (edited By) Guinan

Albert Einstein, asset allocation, asset-backed security, book value, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, clean water, collateralized debt obligation, computerized markets, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, fear index, financial engineering, fixed income, Glass-Steagall Act, implied volatility, index fund, intangible asset, interest rate swap, inventory management, inverted yield curve, junk bonds, London Interbank Offered Rate, low interest rates, margin call, money market fund, mortgage debt, Myron Scholes, passive investing, performance metric, risk free rate, risk tolerance, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, short squeeze, statistical model, time value of money, transaction costs, yield curve, zero-coupon bond

Related Terms: • Balance Sheet • Depreciation • Tangible Asset • Current Assets • Intangible Asset 14 The Investopedia Guide to Wall Speak Asset Allocation What Does Asset Allocation Mean? An investment strategy that aims to balance risk and reward by spreading investments across three main asset classes—equities, bonds, and cash—in accordance with an individual’s goals, risk tolerance, and investment horizon. Historically, different asset classes have varying degrees of risk and return and therefore behave differently over time. Investopedia explains Asset Allocation There is no simple formula to determine the proper asset allocation for every individual. However, the consensus among financial professionals is that asset allocation is one of the most important investment components.

However, the consensus among financial professionals is that asset allocation is one of the most important investment components. In other words, individual securities selection is secondary to the way an investor allocates investments across stocks, bonds, and cash. Some mutual funds, called life-cycle, or target-date funds, use asset allocation to provide investors with portfolios that align with an investor’s age, appetite for risk, and investment objectives. However, some critics argue that these kinds of standardized funds are problematic because individual investors require individual solutions, not a one-size-fits-all approach.

This theory was pioneered by Harry Markowitz in his paper “Portfolio Selection,” which was published in 1952 in the Journal of Finance. The four basic steps involved 182 The Investopedia Guide to Wall Speak in portfolio construction are (1) security valuation, (2) asset allocation, (3) portfolio optimization, and (4) performance measurement. Related Terms: • Asset Allocation • Correlation • Efficient Market Hypothesis—EMH • Mutual Fund • Risk Modified Duration What Does Modified Duration Mean? A formula that expresses the   measurable change in the   Macaulay Duration  Modified Duration =  value of a security in response    YTM  to a change in interest rates.


The Handbook of Personal Wealth Management by Reuvid, Jonathan.

asset allocation, banking crisis, BRICs, business cycle, buy and hold, carbon credits, collapse of Lehman Brothers, correlation coefficient, credit crunch, cross-subsidies, currency risk, diversification, diversified portfolio, estate planning, financial deregulation, fixed income, global macro, high net worth, income per capita, index fund, interest rate swap, laissez-faire capitalism, land tenure, low interest rates, managed futures, market bubble, merger arbitrage, negative equity, new economy, Northern Rock, pattern recognition, Ponzi scheme, prediction markets, proprietary trading, Right to Buy, risk tolerance, risk-adjusted returns, risk/return, short selling, side project, sovereign wealth fund, statistical arbitrage, systematic trading, transaction costs, yield curve

In short, while it is important to get forecasts – and any subsequent investment ឣ 16 PORTFOLIO INVESTMENT _________________________________________________ advice following them – right, it is equally important to demonstrate to the investor how and why the approach taken to arrive at any conclusions is reached. These days, the vast majority of advisers understand the merits of a defined longer-term asset allocation policy. Typically, this involves relaying the fact that a strategic asset allocation strategy explains most of the variability in returns over the longer term. However, wealth managers have responded to this differently and a closer look at a wealth manager’s chosen methodologies in place can permit a reasonable assessment of the manager’s intellectual capabilities to deal with an investor’s precise requirements.

This can be seen by observing the difference between the performances of two portfolios constructed using an identical asset allocation in the Figure 1.2.3 example below. 2.00% 1.00% Tracking error -40.00% 0.00% Source: Citi Private Bank as at December 2008 This figure is for discussion purposes only and for use in the context of this particular chapter. Past performance is no indication of future results. Real results may vary. Figure 1.2.3 Quantifiably different: the active portfolio relative to the asset allocation an index representative portfolio The pricing behaviour of the two portfolios shown in the figure is clearly correlated but is still staggeringly different.

CAF’s core activity is to provide innovative financial services to charities and their supporters. Philip Watson assumed the position of Head of Investment Analysis and Advisory Group (IAAG) at Citi Private Bank EMEA in April 2006, having previously been a senior portfolio analyst since 2003. He oversees a team of 12 professionals who manage the asset allocation and portfolio construction of the Bank’s high-net-worth clients. The work of IAAG is a competitive differentiator for Citi Private Bank, contributing to its intellectual leadership and forming the cornerstone of investment conversation with clients. Philip has been with Citi for eight years.


pages: 332 words: 81,289

Smarter Investing by Tim Hale

Albert Einstein, asset allocation, buy and hold, buy low sell high, capital asset pricing model, classic study, collapse of Lehman Brothers, corporate governance, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, fiat currency, financial engineering, financial independence, financial innovation, fixed income, full employment, Future Shock, implied volatility, index fund, information asymmetry, Isaac Newton, John Bogle, John Meriwether, Long Term Capital Management, low interest rates, managed futures, Northern Rock, passive investing, Ponzi scheme, purchasing power parity, quantitative easing, random walk, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, South Sea Bubble, technology bubble, the rule of 72, time value of money, transaction costs, Vanguard fund, women in the workforce, zero-sum game

When I started work in the industry, I too was led to believe that an investor’s total return was therefore about 90% due to asset allocation and 10% due to active decisions. What it refers to is the variation, i.e. changes in returns over time, not what proportion of total return is attributable to investment policy. You would be amazed how many people still misquote this study. The relevance of this study is that it implies that even sophisticated players implicitly accept that it is difficult to beat markets and constrain their active decision-making. A similar study was undertaken in the UK looking at 300 pension funds (Blake et al., 1999). It concluded that: ‘Strategic asset allocation accounts for most of the time-series variation in portfolio returns, while market timing and asset selection appear to have been less important.’

As ever, in investing there is no right or wrong answer, just answers that probably give you a better chance of surviving with your investment programme intact and your goals achieved. It is worth bearing in mind the wise words of John Bogle: ‘Asset allocation [your mix of building blocks] is not a panacea. It is a reasoned – if imperfect – approach to the inevitable uncertainty of the financial markets.’ And as William Bernstein succinctly agrees: ‘Since the future cannot be predicted, it is impossible to specify in advance what the best asset allocation will be. Rather, our job is to find an allocation that will do reasonably well under a wide range of circumstances.’ 7.2 Building a portfolio for all seasons It is impossible to tell what lies ahead, but history does provide us with some insight into the magnitudes and frequencies of both sides of the coin.

market capitalisation emerging markets market efficiency market returns market risk, 2nd equities, 2nd market timing, 2nd, 3rd, 4th, 5th and DIY investors winning points from market-based returns market-beating strategies see active management/managers markets falling trying and failing to beat the market, 2nd, 3rd, 4th Marshall, Ray maturity (interest rate) risk, 2nd Meriwether, John Modern Portfolio Theory (MPT), 2nd money-weighted returns Morningstar, 2nd MPT (Modern Portfolio Theory) MSCI Emerging Markets Index MSCI World Index mutual funds, 2nd, 3rd MVO (means-variance optimisation) software Myners Report National Savings Certificates nest eggs noise and confusion reducing, 2nd Northern Rock Norway OEICs (open-ended investment companies), 2nd, 3rd, 4th lifestyle, risk-managed product choices off-menu assets, 2nd commodity futures gold hedge funds, 2nd, 3rd private equity, 2nd structured products, 2nd on-menu assets, 2nd, 3rd bonds commercial property defensive asset classes developed global equity markets emerging markets Return Engine asset classes smaller companies value equities online brokerage accounts, 2nd, 3rd, 4th, 5th administration optimisation software passive investors, 2nd fund costs index lifestyle/risk-managed funds product choices passive index fund providers vs active investors, 2nd, 3rd Paulson, John pensions active funds, 2nd contribution rates investing for retirement, 2nd estimating how much to save misselling target date funds tax on performance active managers and performance over time short-term, 2nd see also risk and return philanthropic works philosophy-free investing Piattelli-Palmarini, Massimo pitfalls for investors portfolio choices, 2nd financial capacity for losses financial need to take risk and gold risk profile/emotional tolerance for losses six Smarter portfolios summary matrix portfolio construction, 2nd, 3rd 90/10 portfolios approach to blended, 2nd bonds, 2nd, 3rd Defensive Mix diversification, 2nd, 3rd, 4th, 5th global, 2nd, 3rd, 4th, 5th, 6th and DIY investors emerging markets, 2nd, 3rd, 4th, 5th, 6th equity market diversifiers, 2nd growth-oriented Return Engine, 2nd long-term investors Modern Portfolio Theory (MPT), 2nd non-GBP currency exposure, 2nd past and future events smaller and value companies, 2nd, 3rd see also asset mix portfolios and DIY investors implementation, 2nd, 3rd maintenance, 2nd obsessive monitoring of rebalancing, 2nd, 3rd smarter and the stockbroking model taking an income from in retirement see also asset mix private equity, 2nd probability problems product choices, 2nd building-block benchmark choices choosing your market benchmark/proxy exchange-traded funds (ETFs) global home bias index-fund investing investment trusts lifestyle/risk-managed OEICs, 2nd mapping funds to passive products target date funds unit trusts/OEICs, 2nd product engineering psychometric testing, 2nd, 3rd rational thinking, 2nd, 3rd avoiding irrational behaviour REITs (global real estate), 2nd, 3rd, 4th, 5th return and risk characteristics, 2nd residual risk retirement, investing for, 2nd estimating how much to save return capture Return Engine asset classes developed global equity markets performance portfolio construction, 2nd returns and the average investor bonds conventional inflation-linked commodity futures developed global equity markets emerging markets on equities, and industry costs estimating future gold hedge funds improving on investment policy returns market returns and market timing market-based money-weighted REITs (global real estate), 2nd return history of building blocks time-weighted value equities see also risk and return risk, 2nd, 3rd, 4th bonds, 2nd choices of asset classes currency risk defensive assets equity risk, 2nd, 3rd five key investment risk factors and global diversification handling and hazards limited choices market risk, 2nd and portfolio choices REITs, 2nd residual risk-free assets smaller companies value equities, 2nd risk profiling, 2nd, 3rd psychometric testing risk and return, 2nd bonds conventional inflation-linked commodity futures defensive assets developed global equity markets emerging markets gold hedge funds and portfolio construction private equity REITs, 2nd Return Engine asset classes, 2nd smaller companies, 2nd structured products value equities, 2nd, 3rd risk tolerance and portfolio choices, 2nd risk-managed OEICs ROF (rip off factor) Samsung Electronics saving for retirement versus smarter investing, 2nd school fees Schwab, Charles Schwed, Fred, 2nd securities selection of, 2nd and active managers transfers to online accounts Selftrade Sharpe, William, 2nd, 3rd Shiller, Robert Siegel, Laurence Sinquefield, Rex Sippdeal Sipps smaller companies portfolio construction, 2nd, 3rd product choices, 2nd, 3rd benchmarks return and risk characteristics, 2nd size risk, 2nd the small-cap premium, 2nd, 3rd Spain Standard Chartered Bank stock market crashes stockbroking model strategic asset allocation structural risk on bonds structured products, 2nd and dividends principal protection risk and return Swensen, David, 2nd, 3rd, 4th, 5th on hedge funds on private equity tactical asset allocation see market timing Tanous, Peter target date funds taxes, 2nd, 3rd DIY investors, 2nd, 3rd, 4th personal allowances TER (total expense ratio) time-weighted returns Tobin, James Separation Theorem, 2nd ‘too good to be true’ investments, 2nd top-down approach total equity market total-expense ratios tracker funds see index funds tracking error fees and costs contributing to management experience effect on replication methods affecting size contributing to turnover contributing to Trump, Donald Tversky, Amos, 2nd unit trusts, 2nd, 3rd, 4th United Kingdom active funds, research on performance, 2nd equity funds and diversification industry costs of product choices underperforming the market FTSE 100 Index, 2nd, 3rd, 4th FTSE All-Share Index, 2nd, 3rd, 4th, 5th FTSE Index-linked gilts gilts, 2nd, 3rd, 4th, 5th, 6th and global equity markets index-linked investor behaviour and portfolio construction, global diversification tax breaks United States behaviour of average investors CGM Focus Fund equity fund performance index tracker funds private equity research on active management Russell 1000 Index treasuries Wilshire 5000 university fees value companies, 2nd, 3rd dividends outperformance of growth stocks portfolio construction, 2nd, 3rd product choices, 2nd benchmarks return and risk characteristics, 2nd, 3rd past returns Vanguard, 2nd, 3rd research on UK actively managed funds, 2nd venture capital, 2nd Vinik, Jeff Vodafone volatility bonds equity markets wealth creation ‘get rich, slow’ process wealth-destroying behaviour, 2nd, 3rd zero-sum game and hedge funds and investment philosophy, 2nd ‘A book of investment wisdom and common sense for the ages.


pages: 304 words: 22,886

Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler, Cass R. Sunstein

Al Roth, Albert Einstein, asset allocation, availability heuristic, behavioural economics, call centre, carbon tax, Cass Sunstein, choice architecture, continuous integration, currency risk, Daniel Kahneman / Amos Tversky, desegregation, diversification, diversified portfolio, do well by doing good, endowment effect, equity premium, feminist movement, financial engineering, fixed income, framing effect, full employment, George Akerlof, index fund, invisible hand, late fees, libertarian paternalism, loss aversion, low interest rates, machine readable, Mahatma Gandhi, Mason jar, medical malpractice, medical residency, mental accounting, meta-analysis, Milgram experiment, money market fund, pension reform, presumed consent, price discrimination, profit maximization, rent-seeking, Richard Thaler, Right to Buy, risk tolerance, Robert Shiller, Saturday Night Live, school choice, school vouchers, systems thinking, Tragedy of the Commons, transaction costs, Vanguard fund, Zipcar

Most teachers know that students tend to sit in the same seats in class, even without a seating chart. But status quo bias can occur even when the stakes are much larger, and it can get us into a lot of trouble. For example, in retirement savings plans, such as 401(k)s, most participants pick an asset allocation and then forget about it. In one study conducted in the late 1980s, participants in TIAA-CREF, the pension plan of many college professors, the median number of changes in the asset allocation of the lifetime of a professor was, believe it or not, zero. In other words, over the course of their careers, more than half of the participants made exactly no changes to the way their contributions were being allocated.

One company switched from an opt-in regime to active decisions and found that participation rates increased by about 25 percentage points.8 A related strategy is to simplify the enrollment process. One study tested this idea by analyzing a simplified enrollment form.9 New employees were handed enrollment cards during orientation with a “yes” box for joining the plan at a 2 percent savings rate and a preselected asset allocation. Employees did not have to spend time choosing a savings rate and asset allocation; they could just check the “yes” box for participation. As a result, participation rates during the first four months of employment jumped from 9 percent to 34 percent. These simplified enrollment procedures are very much in the spirit of the “channel factors” we mentioned in Chapter 3.

Employees who want to join must decide how much to put aside, and how to allocate their investments among the funds offered in the plan. Forms can be a headache, and many employees just put them aside. An alternative is to adopt automatic enrollment. Here’s how it works. When an employee first becomes eligible, she receives a form indicating that she will be enrolled in the plan (at a specified savings rate and asset allocation), unless she actively fills out a form asking to opt out. Automatic enrollment has proven to be an extremely effective way to increase enrollment in U.S. defined-contribution plans.6 In one plan studied in an early paper by Brigitte Madrian and Dennis Shea (2001), participation rates under the opt-in approach were barely 20 percent after three months of employment, gradually increasing to 65 percent after thirty-six months.


No Slack: The Financial Lives of Low-Income Americans by Michael S. Barr

active measures, asset allocation, Bayesian statistics, behavioural economics, business cycle, Cass Sunstein, cognitive load, conceptual framework, Daniel Kahneman / Amos Tversky, financial exclusion, financial innovation, Home mortgage interest deduction, income inequality, information asymmetry, it's over 9,000, labor-force participation, late fees, London Interbank Offered Rate, loss aversion, low interest rates, machine readable, market friction, mental accounting, Milgram experiment, mobile money, money market fund, mortgage debt, mortgage tax deduction, New Urbanism, p-value, payday loans, race to the bottom, regulatory arbitrage, Richard Thaler, risk tolerance, Robert Shiller, search costs, subprime mortgage crisis, the payments system, transaction costs, unbanked and underbanked, underbanked

In sum, the study predicts that two groups should express a larger preference for overwithholding: those with illiquid assets and those with only one asset. There are numerous challenges in exploiting the relationship between withholding preferences and asset allocation to detect dynamic inconsistency. There are many other factors related to both asset allocation and wanting to overwithhold. With the many variables in the DAHFS study’s rich data set, we argue, the independent relationship between asset allocation and the preference to overwithhold is isolated. These control variables include measures such as race, education, and other demographic variables as well as employment status, income, income volatility, having a credit card, and whether the sample member participates “often” in his or her household’s financial decisionmaking.

The theoretical prediction of existing models with presentbiased preferences is testable by estimating the following relationship: oi = a + ∑ g g Pgi + ϕf ( X i ) + ei , (10-2) g where oi is an indicator for whether tax filer i expresses a preference for overwithholding, Pgi is an indicator for the tax filer’s asset allocation group, Xi is a vector of demographic and socioeconomic controls, f (z) is an arbitrary and flexible function of the control variables, and ei represents unobservable characteristics of tax filers that are potentially related to whether they express a preference for overwithholding or to their asset allocation group. The unobservables may include things like financial-planning ability or a bias toward the status quo, to the extent that these are not captured by the proxy measures.

The study applies ordinary least squares to uncover the gg coefficients, which are simply the regression-adjusted average likelihoods of wanting to overwithhold for the g asset allocation groups. For convenience, the study estimates equation 10-2 with a constant so the gg ­values represent the mean differences with respect to the group with no assets, and the estimate of a yields the percentage who want to overwithhold among those with no assets. In models of present-biased preferences, the study predicts different magnitudes for the a and gg values.3 In principle, the distribution of individuals across these asset allocation groups represents, among other things, their revealed preference for liquid and illiquid saving, which in turn depends on individuals’ time 2.


pages: 368 words: 145,841

Financial Independence by John J. Vento

Affordable Care Act / Obamacare, Albert Einstein, asset allocation, diversification, diversified portfolio, estate planning, financial independence, fixed income, high net worth, Home mortgage interest deduction, low interest rates, money market fund, mortgage debt, mortgage tax deduction, oil shock, Own Your Own Home, passive income, retail therapy, risk tolerance, the rule of 72, time value of money, transaction costs, young professional, zero day

c09.indd 235 26/02/13 2:51 PM c09.indd 236 Exhibit 9.3 Investment Growth Based on Rates of Return 1980 to 2012 11.0% 75% Stocks and 25% Bonds 50% Stocks and 50% Bonds 10.0% 20% Stocks and 80% Bonds <Lower Return 236 - Rate of Return - Higher Return> 100% Stock 100% Bonds 9.0% 10.0 11.0 12.0 <Less Volatility 13.0 14.0 - Risk 15.0 - 16.0 More Volatility> 17.0 18.0 26/02/13 2:51 PM Managing Your Investments 237 Asset Allocation and Rebalancing5 Asset allocation is an investment strategy that provides a systematic approach to diversification that may help you establish the most efficient blend of assets based on your particular risk tolerance level and investing time horizon. Studies have shown that asset allocation is more important than all other factors in managing your investments. Although it is helpful to work with a professional money manager who has a proven successful track record, selecting the right balance of asset classes is more important. Asset allocation seeks to control investment risk by diversifying a portfolio among the four major asset classes: 1.

Now that you have selected your ideal asset allocation model based on your acceptable risk tolerance, it is important to monitor and maintain this allocation. Rebalancing your portfolio is one of the essential aspects of maintaining a successful investment strategy over time. Rebalancing requires you to analyze the changes in your asset allocation model periodically and make changes in an attempt to bring you back to your original allocation. You do this by selling and buying various investments within each of the asset classes, to maintain your established asset allocation. Suppose the original asset allocation model you established included 1 percent cash, 28 percent stock, and 71 percent bonds.

Each asset class has a different level of risk as well as potential rate of return. The basic idea is that while one asset class may be increasing in value one or more of the others may be decreasing. Therefore, asset allocation and diversification may help you ride out market fluctuations and protect your portfolio from a major loss in any one asset class. They may also provide you with the staying power and control over your emotions even after a big downturn in the market. However, it is important to understand that asset allocation and diversification do not guarantee against loss. They are simply strategies that may help smooth the ride to your financial independence, point X.


pages: 44 words: 13,346

Extreme Early Retirement: An Introduction and Guide to Financial Independence (Retirement Books) by Clayton Geoffreys

asset allocation, dividend-yielding stocks, financial independence, index fund, passive income, risk tolerance, The 4% rule

If your investment is only focused on a few stocks, then obviously your return is heavily reliant on how those stocks or the entire stock market performs. One thing you can do is give more attention to your asset allocation. This is where you divide your funds into different types of investments, and more often than not, asset allocation is a decisive factor that will formulate the outcome of your investment’s return. You have direct control of your asset allocation, so if for example you want to have 50% on stocks, 40% on bonds, and 10% on real estate, you can do that at your own expense. Another thing is to keep your costs at a low level because there is absolutely no reason for you to be investing at a high cost when you can comparatively invest elsewhere at a much lower cost.

With index funds, you also know exactly what it is you are investing into, unlike actively-managed funds where the portfolio manager might begin investing into certain stocks and at some point engage in another type of investment, hence, affecting your asset allocation. In this case, you get completely thrown off course with your asset allocation and it becomes more difficult to formulate a solution to balance the scales and continue raking in returns. Just remember, if you are engaged with actively-managed funds and you decide to invest in other things or sell a few of your investments due to your asset allocation being thrown off course, you will incur taxes and trading fees. On the other hand, index funds provide great consistency and you save more money, allowing room for further investments.

However, other early retirees suggest that 25 or 30 is a safe number because extreme early retirement is all about being financially independent. You want to maximize your funds as much as possible after which you can invest from those funds. Basically, the earnings you get from annual interest will continue to grow and that is the reason why you want to invest as early in your life as possible. Depending on your asset allocation, you may or may not see that much of a difference, but again, in a few years' time you will have enough funds in circulation from which you gain the momentum to invest again. Finally, you must always make it a point to be physically or at least mentally active in your retired life to avoid boredom.


pages: 305 words: 98,072

How to Own the World: A Plain English Guide to Thinking Globally and Investing Wisely by Andrew Craig

Airbnb, Alan Greenspan, Albert Einstein, asset allocation, Berlin Wall, bitcoin, Black Swan, bonus culture, book value, BRICs, business cycle, collaborative consumption, diversification, endowment effect, eurozone crisis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Future Shock, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, Long Term Capital Management, low cost airline, low interest rates, Market Wizards by Jack D. Schwager, mortgage debt, negative equity, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, passive income, pensions crisis, quantitative easing, Reminiscences of a Stock Operator, road to serfdom, Robert Shiller, Russell Brand, Silicon Valley, smart cities, stocks for the long run, the new new thing, The Wealth of Nations by Adam Smith, Yogi Berra, Zipcar

That said, it is key to have a basic understanding of what they are, if only so you can best understand the suggestions that follow later in this book. Asset allocation As we have seen briefly already, what is also of great importance is having an idea of what proportion of your wealth you should have in each of these categories. Dividing your resources among the different investment vehicles is what is known as “asset allocation”. Asset allocation is actually one of the most important things to be aware of when investing, but it is something that far too few people understand or even think about.

THREE IMPORTANT GOALS Once you have finished this chapter you should be on the road to knowing how to make decisions about asset allocation, invest in individual assets and learn how to “trade”. 1. Learn how to make decisions about asset allocation Throughout the book, I have stressed how important it is to invest in a wide variety of assets. The previous chapter outlined a largely formulaic way of achieving this. If you are prepared to get to grips with further aspects of finance, you will get to the stage where you can finesse your asset allocation in order to take advantage of phases where one asset is performing more strongly than the others.

One of the reasons relatively few people succeed in making big-picture asset allocation decisions is quite simply that relatively few people take the time to understand and look at all asset classes, or even to work out how to invest in them. I would argue that this is true for nearly all private individuals and many professional investors. That said, there are plenty of examples of professional investors who have made these calls over the years. Increasingly, you are able to find out who these people are and follow their advice, often entirely free of charge. OPTIMAL ASSET ALLOCATION ALSO CHANGES WITH YOUR AGE One of the universal rules of sensible investment is that you should become more conservative with your investments the closer you get to retirement.


pages: 416 words: 106,532

Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond: The Innovative Investor's Guide to Bitcoin and Beyond by Chris Burniske, Jack Tatar

Airbnb, Alan Greenspan, altcoin, Alvin Toffler, asset allocation, asset-backed security, autonomous vehicles, Bear Stearns, bitcoin, Bitcoin Ponzi scheme, blockchain, Blythe Masters, book value, business cycle, business process, buy and hold, capital controls, carbon tax, Carmen Reinhart, Clayton Christensen, clean water, cloud computing, collateralized debt obligation, commoditize, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, disintermediation, distributed ledger, diversification, diversified portfolio, Dogecoin, Donald Trump, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, fiat currency, financial engineering, financial innovation, fixed income, Future Shock, general purpose technology, George Gilder, Google Hangouts, high net worth, hype cycle, information security, initial coin offering, it's over 9,000, Jeff Bezos, Kenneth Rogoff, Kickstarter, Leonard Kleinrock, litecoin, low interest rates, Marc Andreessen, Mark Zuckerberg, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, packet switching, passive investing, peer-to-peer, peer-to-peer lending, Peter Thiel, pets.com, Ponzi scheme, prediction markets, quantitative easing, quantum cryptography, RAND corporation, random walk, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Ross Ulbricht, Salesforce, Satoshi Nakamoto, seminal paper, Sharpe ratio, Silicon Valley, Simon Singh, Skype, smart contracts, social web, South Sea Bubble, Steve Jobs, transaction costs, tulip mania, Turing complete, two and twenty, Uber for X, Vanguard fund, Vitalik Buterin, WikiLeaks, Y2K

With the tools of MPT it’s possible to construct a portfolio that stays within an investor’s risk profile while still generating returns sufficient to meet long-term financial goals and objectives. The innovative investor recognizes that the overall risk of his or her portfolio can be reduced by including assets that are uncorrelated to the traditional capital markets, such as bitcoin and its digital siblings. TRADITIONAL ASSET ALLOCATION For many years, traditional asset allocation models strictly focused on defining percentages of a portfolio in either stocks or bonds. For instance, the American Association of Individual Investors provides simplified models for three types of investors:4 • Aggressive investors: 90 percent diversified stock and 10 percent fixed income • Moderate investors: 70 percent diversified stock and 30 percent fixed income • Conservative investors: 50 percent diversified stock and 50 percent fixed income These three simple models can be used by people of different ages who have different investment time horizons.

As a small portion of the innovative investor’s overall portfolio, alternatives are an effective way to balance risk and provide a cushion in the case of a stock or bond meltdown. ALTERNATIVE INVESTMENTS AND THE INNOVATIVE INVESTOR Today’s innovative investor can build an investment portfolio and asset allocation strategy with a clear understanding of risk and reward, and the inclusion of alternative investments can help. This has not been lost on wealth management firms that are now looking more aggressively into how alternative investments can be used to improve client returns. For example, Morgan Stanley has outlined asset allocation models for its high net worth investors with under $25 million in investable assets; those models recommend 56 percent stocks, 19 percent bonds, 3 percent cash, and 22 percent alternatives.

The impact of this is seen in a 2015 survey among financial advisors that found they had placed 73 percent of their clients in alternative investments, and that nearly three-quarters of advisors planned to maintain their current alternative investment allocations.14 The survey also showed that in terms of asset allocation, most advisors were recommending a range of 6 percent to 15 percent of a client’s portfolio in alternatives. A smaller but not insignificant percentage of advisors recommended 16 percent to 25 percent of their clients’ portfolios in alternatives. Bitcoin and other cryptoassets are alternative assets that can be safely and successfully incorporated into well-diversified portfolios to meet these asset allocation recommendations.15 However, every alternative investment has its unique set of characteristics, and the innovative investor must understand these.


pages: 571 words: 105,054

Advances in Financial Machine Learning by Marcos Lopez de Prado

algorithmic trading, Amazon Web Services, asset allocation, backtesting, behavioural economics, bioinformatics, Brownian motion, business process, Claude Shannon: information theory, cloud computing, complexity theory, correlation coefficient, correlation does not imply causation, data science, diversification, diversified portfolio, en.wikipedia.org, financial engineering, fixed income, Flash crash, G4S, Higgs boson, implied volatility, information asymmetry, latency arbitrage, margin call, market fragmentation, market microstructure, martingale, NP-complete, P = NP, p-value, paper trading, pattern recognition, performance metric, profit maximization, quantitative trading / quantitative finance, RAND corporation, random walk, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, Silicon Valley, smart cities, smart meter, statistical arbitrage, statistical model, stochastic process, survivorship bias, transaction costs, traveling salesman

Merton, R. (1976): “Option pricing when underlying stock returns are discontinuous.” Journal of Financial Economics, Vol. 3, pp. 125–144. Michaud, R. (1998): Efficient Asset Allocation: A Practical Guide to Stock Portfolio Optimization and Asset Allocation, 1st ed. Harvard Business School Press. Ledoit, O. and M. Wolf (2003): “Improved estimation of the covariance matrix of stock returns with an application to portfolio selection.” Journal of Empirical Finance, Vol. 10, No. 5, pp. 603–621. Raffinot, T. (2017): “Hierarchical clustering based asset allocation.” Journal of Portfolio Management, forthcoming. Rokach, L. and O. Maimon (2005): “Clustering methods,” in Rokach, L. and O.

Index Absolute return attribution method Accounting data Accuracy binary classification problems and measurement of AdaBoost implementation Adaptable I/O System (ADIOS) Alternative data Amihud's lambda Analytics Annualized Sharpe ratio Annualized turnover, in backtesting Asset allocation classical areas of mathematics used in covariance matrix in diversification in Markowitz's approach to Monte Carlo simulations for numerical example of practical problems in quasi-diagonalization in recursive bisection in risk-based. See also Risk-based asset allocation approaches tree clustering approaches to Attribution Augmented Dickey-Fuller (ADF) test. See also Supremum augmented Dickey-Fuller (SADF) test Average holding period, in backtesting Average slippage per turnover Backfilled data Backtesters Backtesting bet sizing in common errors in combinatorial purged cross-validation (CPCV) method in cross-validation (CV) for customization of definition of “false discovery” probability and flawless completion as daunting task in general recommendations on machine learning asset allocation and purpose of as research tool strategy risk and strategy selection in synthetic data in uses of results of walk-forward (WF) method of Backtest overfitting backtesters’ evaluation of probability of bagging to reduce combinatorial purged cross-validation (CPCV) method for concerns about risk of cross-validation (CV) method and decision trees and proneness to definition of discretionary portfolio managers (PMs) and estimating extent of features stacking to reduce general recommendations on historical simulations in trading rules and hyper-parameter tuning and need for skepticism optimal trading rule (OTR) framework for probability of.

Stacked Feature Importance 8.6 Experiments with Synthetic Data Exercises References Note Chapter 9 Hyper-Parameter Tuning with Cross-Validation 9.1 Motivation 9.2 Grid Search Cross-Validation 9.3 Randomized Search Cross-Validation 9.4 Scoring and Hyper-parameter Tuning Exercises References Bibliography Notes PART 3 BACKTESTING Chapter 10 Bet Sizing 10.1 Motivation 10.2 Strategy-Independent Bet Sizing Approaches 10.3 Bet Sizing from Predicted Probabilities 10.4 Averaging Active Bets 10.5 Size Discretization 10.6 Dynamic Bet Sizes and Limit Prices Exercises References Bibliography Notes Chapter 11 The Dangers of Backtesting 11.1 Motivation 11.2 Mission Impossible: The Flawless Backtest 11.3 Even If Your Backtest Is Flawless, It Is Probably Wrong 11.4 Backtesting Is Not a Research Tool 11.5 A Few General Recommendations 11.6 Strategy Selection Exercises References Bibliography Note Chapter 12 Backtesting through Cross-Validation 12.1 Motivation 12.2 The Walk-Forward Method 12.3 The Cross-Validation Method 12.4 The Combinatorial Purged Cross-Validation Method 12.5 How Combinatorial Purged Cross-Validation Addresses Backtest Overfitting Exercises References Chapter 13 Backtesting on Synthetic Data 13.1 Motivation 13.2 Trading Rules 13.3 The Problem 13.4 Our Framework 13.5 Numerical Determination of Optimal Trading Rules 13.6 Experimental Results 13.7 Conclusion Exercises References Notes Chapter 14 Backtest Statistics 14.1 Motivation 14.2 Types of Backtest Statistics 14.3 General Characteristics 14.4 Performance 14.5 Runs 14.6 Implementation Shortfall 14.7 Efficiency 14.8 Classification Scores 14.9 Attribution Exercises References Bibliography Notes Chapter 15 Understanding Strategy Risk 15.1 Motivation 15.2 Symmetric Payouts 15.3 Asymmetric Payouts 15.4 The Probability of Strategy Failure Exercises References Chapter 16 Machine Learning Asset Allocation 16.1 Motivation 16.2 The Problem with Convex Portfolio Optimization 16.3 Markowitz's Curse 16.4 From Geometric to Hierarchical Relationships 16.5 A Numerical Example 16.6 Out-of-Sample Monte Carlo Simulations 16.7 Further Research 16.8 Conclusion APPENDICES 16.A.1 Correlation-based Metric 16.A.2 Inverse Variance Allocation 16.A.3 Reproducing the Numerical Example 16.A.4 Reproducing the Monte Carlo Experiment Exercises References Notes PART 4 USEFUL FINANCIAL FEATURES Chapter 17 Structural Breaks 17.1 Motivation 17.2 Types of Structural Break Tests 17.3 CUSUM Tests 17.4 Explosiveness Tests Exercises References Chapter 18 Entropy Features 18.1 Motivation 18.2 Shannon's Entropy 18.3 The Plug-in (or Maximum Likelihood) Estimator 18.4 Lempel-Ziv Estimators 18.5 Encoding Schemes 18.6 Entropy of a Gaussian Process 18.7 Entropy and the Generalized Mean 18.8 A Few Financial Applications of Entropy Exercises References Bibliography Note Chapter 19 Microstructural Features 19.1 Motivation 19.2 Review of the Literature 19.3 First Generation: Price Sequences 19.4 Second Generation: Strategic Trade Models 19.5 Third Generation: Sequential Trade Models 19.6 Additional Features from Microstructural Datasets 19.7 What Is Microstructural Information?


How I Became a Quant: Insights From 25 of Wall Street's Elite by Richard R. Lindsey, Barry Schachter

Albert Einstein, algorithmic trading, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, asset allocation, asset-backed security, backtesting, bank run, banking crisis, Bear Stearns, Black-Scholes formula, Bob Litterman, Bonfire of the Vanities, book value, Bretton Woods, Brownian motion, business cycle, business process, butter production in bangladesh, buy and hold, buy low sell high, capital asset pricing model, centre right, collateralized debt obligation, commoditize, computerized markets, corporate governance, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency risk, discounted cash flows, disintermediation, diversification, Donald Knuth, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, full employment, George Akerlof, global macro, Gordon Gekko, hiring and firing, implied volatility, index fund, interest rate derivative, interest rate swap, Ivan Sutherland, John Bogle, John von Neumann, junk bonds, linear programming, Loma Prieta earthquake, Long Term Capital Management, machine readable, margin call, market friction, market microstructure, martingale, merger arbitrage, Michael Milken, Myron Scholes, Nick Leeson, P = NP, pattern recognition, Paul Samuelson, pensions crisis, performance metric, prediction markets, profit maximization, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Reminiscences of a Stock Operator, Richard Feynman, Richard Stallman, risk free rate, risk-adjusted returns, risk/return, seminal paper, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, sorting algorithm, statistical arbitrage, statistical model, stem cell, Steven Levy, stochastic process, subscription business, systematic trading, technology bubble, The Great Moderation, the scientific method, too big to fail, trade route, transaction costs, transfer pricing, value at risk, volatility smile, Wiener process, yield curve, young professional

I hypothesized a world in which all asset classes had the same performance, but within each asset class the performance of individual securities varied significantly. In this hypothetical world, security selection explained 100 percent of the difference in the performance among funds, while asset allocation had no impact whatsoever. I essentially created a world with a single asset class, thus rendering the asset allocation decision irrelevant. I then applied the BHB methodology, and it revealed that asset allocation determined 100 percent of performance and security selection determined none of it—the exact opposite of the truth.15 JWPR007-Lindsey May 7, 2007 17:15 Mark Kritzman 261 The Future for Quants Quantitative analysis has advanced from the fringes of the investment management profession to the mainstream and is well on the way to becoming the dominant paradigm of the investment industry.

Peter Bernstein asked me to tackle the question of the relative importance of asset allocation and security selection, so I did. It occurred to me that the obvious way to address the issue was to simulate returns by holding fixed one decision and varying the other. Then I could determine which decision generated more dispersion in wealth. This experiment would allow me to measure the dispersion in performance that arises naturally by engaging in a particular investment activity. Other approaches for sorting out the relative importance of asset allocation and security selection, such as Brinson, Hood, and Beebower (BHB)12 and Ibbotson and Kaplan13 focused on the realized returns of managed portfolios; consequently, these studies failed to disentangle investment behavior from investment opportunity.

Our paper examined a corollary of their result: In the presence of money illusion, the correlation between stock and bond returns will be abnormally high during periods of high inflation. For the United States, it was shown that inflation had exactly this effect on stock/bond correlations during the postwar era. As a result, asset allocation strategies that are based on the high correlation coefficients calculated using data from the 1970s and early 1980s can be expected to generate inefficient portfolios in regimes of low inflation. JWPR007-Lindsey 82 May 7, 2007 16:44 h ow i b e cam e quant Ray LeClair and I wrote a paper, “Revenue Recognition Certificates: A New Security,” in which we explored the concept and potential benefits of a new type of security.14 This security provides returns as a specified function of a firm’s sales or gross revenues over a defined period of time, say 10 years, and then expires worthless.


Trade Your Way to Financial Freedom by van K. Tharp

asset allocation, backtesting, book value, Bretton Woods, buy and hold, buy the rumour, sell the news, capital asset pricing model, commodity trading advisor, compound rate of return, computer age, distributed generation, diversification, dogs of the Dow, Elliott wave, high net worth, index fund, locking in a profit, margin call, market fundamentalism, Market Wizards by Jack D. Schwager, passive income, prediction markets, price stability, proprietary trading, random walk, Reminiscences of a Stock Operator, reserve currency, risk tolerance, Ronald Reagan, Savings and loan crisis, Sharpe ratio, short selling, Tax Reform Act of 1986, transaction costs

I think it’s how one makes trading decisions.” Portfolio managers tend to talk about “asset allocation” as being important for their success. Now think about the words asset allocation. What do they mean to you? Chances are, you think they mean what asset class to select for your assets. This is what it means to most portfolio managers because by charter they must be fully (at least 95 percent) invested. Thus, they think of asset allocation as a decision about which asset class to select. Was this your definition? Brinson and his colleagues defined asset allocation to mean how much of one’s capital was devoted to stocks, bonds, or cash.2 When they defined it that way, they discovered that asset allocation, and not the what-to-buy decision, accounted for 91.5 percent of the performance variability of 82 pension plans over a 10-year period.

Brinson and his colleagues defined asset allocation to mean how much of one’s capital was devoted to stocks, bonds, or cash.2 When they defined it that way, they discovered that asset allocation, and not the what-to-buy decision, accounted for 91.5 percent of the performance variability of 82 pension plans over a 10-year period. As a result, portfolio managers and academics have started to stress the importance of asset allocation. Although Brinson and his colleagues found that stock selection and other types of decisions were not that significant to the performance, the lotto bias causes many people to continue to think that asset allocation means selecting the right asset class. Yet what’s important is the how-much decision, not the investment selection decision.

These results are excellent, but if you believe you will be in serious trouble if you lose 20 percent or more, Kaufman suggests that you trade only a portion of your funds. Kaufman also talks about asset allocation, which he defines as “the process of distributing investment funds into one or more markets or vehicles to create an investment profile with the most desirable return-risk ratio.” Asset allocation may simply amount to trading half of your capital with one active investment (that is, a stock portfolio) while the rest of your capital is in short-term yield-bearing instruments such as government bonds. On the other hand, asset allocation may involve combining many investment vehicles in a dynamic approach—such as actively trading stocks, commodities, and the forex market.


pages: 482 words: 121,672

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition) by Burton G. Malkiel

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, beat the dealer, Bernie Madoff, bitcoin, book value, butter production in bangladesh, buttonwood tree, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, Detroit bankruptcy, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, equity risk premium, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial engineering, financial innovation, financial repression, fixed income, framing effect, George Santayana, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Japanese asset price bubble, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, margin call, market bubble, Mary Meeker, money market fund, mortgage tax deduction, new economy, Own Your Own Home, PalmPilot, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Salesforce, short selling, Silicon Valley, South Sea Bubble, stock buybacks, stocks for the long run, sugar pill, survivorship bias, Teledyne, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond, zero-sum game

In this chapter, I will show you that whatever your aversion to risk—whatever your position on the eat-well, sleep-well scale—your age, income from employment, and specific responsibilities in life go a long way toward helping you determine the mix of assets in your portfolio. FIVE ASSET-ALLOCATION PRINCIPLES Before we can determine a rational basis for making asset-allocation decisions, certain principles must be kept firmly in mind. We’ve covered some of them implicitly in earlier chapters, but treating them explicitly here should prove very helpful. The key principles are: 1. History shows that risk and return are related. 2.

If you panicked and became physically ill because a large proportion of your assets was invested in common stocks, then clearly you should pare down the stock portion of your portfolio. Thus, subjective considerations also play a major role in the asset allocations you can accept, and you may legitimately stray from those recommended here depending on your aversion to risk. 3. Persistent Saving in Regular Amounts, No Matter How Small, Pays Off One final preliminary before presenting the asset-allocation guide. What do you do if right now you have no assets to allocate? So many people of limited means believe that it is impossible to build up a sizable nest egg. Accumulating meaningful amounts of retirement savings often seems out of reach.

In the Talmud, Rabbi Isaac said that one should always divide one’s wealth into three parts: a third in land, a third in merchandise (business), and a third ready at hand (in liquid form). Such an asset allocation is hardly unreasonable, but we can improve on this ancient advice because we have more refined instruments and a greater appreciation of the considerations that make different asset allocations appropriate for different people. The general ideas behind the recommendations have been spelled out in detail above. For those in their twenties, a very aggressive investment portfolio is recommended.


pages: 447 words: 104,258

Mathematics of the Financial Markets: Financial Instruments and Derivatives Modelling, Valuation and Risk Issues by Alain Ruttiens

algorithmic trading, asset allocation, asset-backed security, backtesting, banking crisis, Black Swan, Black-Scholes formula, Bob Litterman, book value, Brownian motion, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delta neutral, discounted cash flows, discrete time, diversification, financial engineering, fixed income, implied volatility, interest rate derivative, interest rate swap, low interest rates, managed futures, margin call, market microstructure, martingale, p-value, passive investing, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk/return, Satyajit Das, seminal paper, Sharpe ratio, short selling, statistical model, stochastic process, stochastic volatility, time value of money, transaction costs, value at risk, volatility smile, Wiener process, yield curve, zero-coupon bond

The simplest way to incorporate this effect is by splitting the asset allocation contribution in two parts, one reflecting the currency performance itself, and the second reflecting the actual asset allocation contribution, that is, the original one, minus the currency effect: To determine the currency attribution effect, we have first, to define currency returns rci, equal to 0 for each of the portfolio lines or sub-sets quoted in the portfolio currency, and, for the other ones, equal to the appreciation or depreciation of other currencies vis-à-vis the portfolio currency; this allows to compute the global currency return rcB of the benchmark, as follows: second, to compute, for each portfolio line or sub-set, the currency attribution effect, by using the same formula as for the asset allocation attribution (Eq. 14.3), but applied here on the currency impact rcBi − rcB: and deduct this amount from the original asset allocation contribution, for obtaining the actual asset allocation contribution. Coming back to our example, the portfolio is in USD, but the Nikkei sub-set has made its performance primarily in JPY, and during the year 2005, the JPY has depreciated by 12.69% against the USD. So that, for the Nikkei portfolio subset, the actual asset allocation contribution has to be reduced by the corresponding (negative, here) currency contribution.

The second component of the attribution focuses on the returns (invested at different dates than for the benchmark, the portfolio returns are different), and is called “stock selection attribution”: the portfolio manager's skill can be quantified about this aspect, by considering the impact of the portfolio returns on the benchmark weights: Finally, we have to add the interaction of both effects: a different weighting can be associated to a better or worst return, depending on the investment date:3 Applied to the above example, we obtain the result in Figure 14.8, showing that the portfolio manager's skill was mainly noticeable in the stock selection in the Nasdaq and Nikkei sub-sets, and in the Nikkei asset allocation. Figure 14.8 Result of the portfolio manager's choices Impact of the Currencies on the Performance Attribution If the portfolio in invested in one or several currencies other than the portfolio currency, in these cases the appreciation or depreciation of a currency of an asset (or a sub-set of the portfolio) is affecting the portfolio performance and therefore the performance attribution. The simplest way to incorporate this effect is by splitting the asset allocation contribution in two parts, one reflecting the currency performance itself, and the second reflecting the actual asset allocation contribution, that is, the original one, minus the currency effect: To determine the currency attribution effect, we have first, to define currency returns rci, equal to 0 for each of the portfolio lines or sub-sets quoted in the portfolio currency, and, for the other ones, equal to the appreciation or depreciation of other currencies vis-à-vis the portfolio currency; this allows to compute the global currency return rcB of the benchmark, as follows: second, to compute, for each portfolio line or sub-set, the currency attribution effect, by using the same formula as for the asset allocation attribution (Eq. 14.3), but applied here on the currency impact rcBi − rcB: and deduct this amount from the original asset allocation contribution, for obtaining the actual asset allocation contribution.

Index 4-moments CAPM actual (ACT) number of days AI see Alternative Investments “algorithmic” trading Alternative Investments (AI) American options bond options CRR pricing model option pricing rho amortizing swaps analytic method, VaR annual interest compounding annualized volatility autocorrelation corrective factor historical volatility risk measures APT see Arbitrage Pricing Theory AR see autoregressive process Arbitrage Pricing Theory (APT) ARCH see autoregressive conditional heteroskedastic process ARIMA see autoregressive integrated moving average process ARMA see autoregression moving average process ask price asset allocation attribution asset swaps ATM see at the money ATMF see at the money forward options at the money (ATM) convertible bonds options at the money forward (ATMF) options attribution asset allocation performance autoregression moving average (ARMA) process autoregressive (AR) process autoregressive conditional heteroskedastic (ARCH) process autoregressive integrated moving average (ARIMA) process backtesting backwardation basket CDSs basket credit derivatives basket options BDT see Black, Derman, Toy process benchmarks Bermudan options Bernardo Ledoit gain-loss ratio BGM model see LIBOR market model BHB model (Brinson’s) bid price binomial distribution binomial models binomial processes, credit derivatives binomial trees Black, Derman, Toy (BDT) process Black and Karasinski model Black–Scholes formula basket options beyond Black–Scholes call-put parity cap pricing currency options “exact” pricing exchange options exotic options floor pricing forward prices futures/forwards options gamma processes hypotheses underlying jump processes moneyness sensitivities example valuation troubles variations “The Black Swan” (Taleb) bond convexity bond duration between two coupon dates calculation assumptions calculation example callable bonds in continuous time duration D effective duration forwards FRNs futures mathematical approach modified duration options physical approach portfolio duration practical approach swaps uses of duration bond futures CFs CTD hedging theoretical price bond options callable bonds convertible bonds putable bonds bond pricing clean vs dirty price duration aspects floating rate bonds inflation-linked bonds risky bonds bonds binomial model CDSs convexity credit derivatives credit risk exotic options forwards futures government bonds options performance attribution portfolios pricing risky/risk-free spot instruments zero-coupon bonds see also bond duration book value method bootstrap method Brinson’s BHB model Brownian motion see also standard Wiener process bullet bonds Bund (German T-bond) 10-year benchmark futures callable bonds call options call-put parity jump processes see also options Calmar ratio Capital Asset Pricing Model (CAPM) 4-moments CAPM AI APT vs CAPM Sharpe capitalization-weighted indexes capital market line (CML) capital markets caplets CAPM see Capital Asset Pricing Model caps carry cash and carry operations cash flows cash settlement, CDSs CBs see convertible bonds CDOs see collateralized debt obligations CDSs see credit default swaps CFDs see contracts for difference CFs see conversion factors charm sensitivity cheapest to deliver (CTD) clean prices clearing houses “close” prices CML see capital market line CMSs see constant maturity swaps Coleman, T.


pages: 519 words: 118,095

Your Money: The Missing Manual by J.D. Roth

Airbnb, Alan Greenspan, asset allocation, bank run, book value, buy and hold, buy low sell high, car-free, Community Supported Agriculture, delayed gratification, diversification, diversified portfolio, do what you love, estate planning, Firefox, fixed income, full employment, hedonic treadmill, Home mortgage interest deduction, index card, index fund, John Bogle, late fees, lifestyle creep, low interest rates, mortgage tax deduction, Own Your Own Home, Paradox of Choice, passive investing, Paul Graham, random walk, retail therapy, Richard Bolles, risk tolerance, Robert Shiller, speech recognition, stocks for the long run, traveling salesman, Vanguard fund, web application, Zipcar

Financial advisers suggest you create an investment policy statement, or IPS, which is simply your target asset allocation (see the Note below) and instructions to yourself for how to set and maintain it. Note Asset allocation is the way your money is divided among your different investments; it's just a fancy way of saying "the things you've invested in." The classic example is the basic 60/40 split: 60% invested in stocks and 40% in bonds. To learn more about asset allocation, read the SEC's "Beginner's Guide to Asset Allocation" at http://tinyurl.com/SEC-assets. You can learn more here: http://tinyurl.com/GRS-alloc.

In that case, you might consider a fund like Fidelity Freedom 2035, which includes a mix of investments that make sense for people who plan to retire in 2035 (when they'll be around 65). Lifecycle funds have a lot of things going for them. For example, you get: Automatic asset allocation, since lifecycle funds include various asset classes. International exposure. Lifecycle funds are collections of mutual funds, including some international investments. Automatic rebalancing. Fund managers adjust lifecycle funds' asset allocation to make them more conservative as you get older. The main drawback of lifecycle funds is that you don't have any control over them. For example, if you want the international portion of your stocks to be 50% (or more), you're out of luck.

Minimum investment requirements create another problem, too: When you first invest, you probably won't be able to afford every fund in your target portfolio. So you may have to start with just one fund instead of jumping right into your plan for three or eight, but that's okay. When you're just beginning to invest, your contributions are far more important than your asset allocation (Know Your Goals). So don't sweat it if you can't get your target asset allocation perfect right off the bat. The most important step is to actually get started investing. If you pay yourself first (see Get in the game) and make investing a habit, you will be able to fund your future. Make it automatic After you've set up your investment account, it's time to remove the human element from the equation to make sure you don't sacrifice 6.5% to the behavior gap (Being on Your Best Behavior) or forget to send your investment check every month.


pages: 263 words: 89,368

925 Ideas to Help You Save Money, Get Out of Debt and Retire a Millionaire So You Can Leave Your Mark on the World by Devin D. Thorpe

asset allocation, buy and hold, call centre, diversification, estate planning, fixed income, Home mortgage interest deduction, index fund, junk bonds, knowledge economy, low interest rates, money market fund, mortgage tax deduction, payday loans, random walk, risk tolerance, Skype, Steve Jobs, transaction costs, women in the workforce, zero-sum game

It is prudent for most people to keep a portion of their investments in equities even after retirement because retirement itself can last twenty years or more. There are no absolute rules in asset allocation, but many investors seem to see about two-thirds of a portfolio as a limit for any single asset class. Some investors use asset allocation shifts as a way to “time the market,” that is they shift their asset allocation not based on changes in their own circumstances (like nearing retirement) but they shift as their opinion of the markets changes. This practice will increase the risk in your portfolio because you are adding a new variable to the equation.

Note that all of the benefits of dollar cost averaging are overwhelmed by brokerage commissions or mutual fund loads. Avoid them. See how easy that was. Dollar cost averaging is something you’re probably already getting the benefit of and now can fully understand. What Is Asset Allocation And How Do I Do It? Asset allocation is the practice of strategically balancing a portfolio among several asset classes. There are three classes of assets that typical families should include in their investments: stocks or equities, bonds and cash. When you finish reading this short article, you’ll know all you need to know to properly balance your portfolio.

Chances are, you’ll do even worse and risk making your allocation shifts at the wrong times, causing losses you wouldn’t otherwise experience. As you go through life, you can and should slowly adjust your asset allocation. This can often be accomplished simply by investing new dollars in the asset class you’d like to grow. Over time, this should have the effect of reducing the percentage of your portfolio invested in other assets. In this way, you never need to sell assets just to shift your allocation. Thoughtful adjustments to your asset allocation will better prepare you for retirement. What Is A Money Market Fund And How Do I Use One? Learning about money market funds and how to use them in your investing programs can help you make better investment decisions, both protecting your assets and allowing you to earn more in the long run.


pages: 416 words: 118,592

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, backtesting, Bear Stearns, beat the dealer, Bernie Madoff, book value, BRICs, butter production in bangladesh, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial engineering, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Japanese asset price bubble, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, margin call, market bubble, Mary Meeker, money market fund, mortgage tax deduction, new economy, Own Your Own Home, PalmPilot, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, stock buybacks, stocks for the long run, sugar pill, survivorship bias, The Myth of the Rational Market, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

In this chapter, I will show you that whatever your aversion to risk—whatever your position on the eat-well, sleep-well scale—your age, income from employment, and specific responsibilities in life go a long way toward helping you determine the mix of assets in your portfolio. FIVE ASSET-ALLOCATION PRINCIPLES Before we can determine a rational basis for making asset-allocation decisions, certain principles must be kept firmly in mind. We’ve covered some of them implicitly in earlier chapters, but treating them explicitly here should prove very helpful. The key principles are: History shows that risk and return are related.

If you panicked and became physically ill because a large proportion of your assets was invested in common stocks, then clearly you should pare down the stock portion of your portfolio. Thus, subjective considerations also play a major role in the asset allocations you can accept, and you may legitimately stray from those recommended here depending on your aversion to risk. 3. Persistent Saving in Regular Amounts, No Matter How Small, Pays Off One final preliminary before presenting the asset-allocation guide. What do you do if right now you have no assets to allocate? So many people of limited means believe that it is impossible to build up a sizable nest egg. Accumulating meaningful amounts of retirement savings often seems out of reach.

In the Talmud, Rabbi Isaac said that one should always divide one’s wealth into three parts: a third in land, a third in merchandise (business), and a third ready at hand (in liquid form). Such an asset allocation is hardly unreasonable, but we can improve on this ancient advice because we have more refined instruments and a greater appreciation of the considerations that make different asset allocations appropriate for different people. The general ideas behind the recommendations have been spelled out in detail above. For those in their twenties, a very aggressive investment portfolio is recommended.


pages: 433 words: 53,078

Be Your Own Financial Adviser: The Comprehensive Guide to Wealth and Financial Planning by Jonquil Lowe

AltaVista, asset allocation, banking crisis, BRICs, buy and hold, correlation coefficient, cross-subsidies, diversification, diversified portfolio, estate planning, fixed income, high net worth, money market fund, mortgage debt, mortgage tax deduction, negative equity, offshore financial centre, Own Your Own Home, passive investing, place-making, Right to Buy, risk/return, short selling, zero-coupon bond

The main differences between the portfolios are the proportions invested in bonds (more for income seekers), the split of equities between UK and international (a higher proportion in international for growth seekers) and the use of hedge funds for growth. Asset allocation is highly personalised. The mix that works for one investor cannot simply be transported across to another. You can find a useful free online tool to help you select an asset allocation that may be suitable for you at the website of the Iowa Public Employees Retirement System, www.ipers.org/calcs/AssetAllocator.html. Although this is a US site and the tool is denominated in dollars, you can interpret it as if it were in pounds.

You can use timing diversification on the way into the market, the way out or both. It can be used with any investment that is ‘fungible’ M10_LOWE7798_01_SE_C10.indd 304 05/03/2010 09:51 10 n Managing your wealth 305 Cash 5% Bonds 30% Shares 45% Property 20% ASSET ALLOCATION AT START OF YEAR Bonds 26% Cash 5% Shares 49% Property 21% ASSET ALLOCATION AT END OF YEAR Figure 10.3 How portfolio allocation can drift (divisible into units where one unit is the same as another), such as shares and bonds, units in an investment fund, and so on. On the way into the market, instead of investing a single lump sum, you invest in regular smaller amounts – for example, monthly.

Equity – emerging markets Shares in companies in countries that are undergoing rapid development and expected to deliver high growth, such as India and China. Growth. Commodities Investments may be in commodities direct Growth. or via derivatives (see p. 325). Asset mix. Funds that choose an asset allocation for you Asset allocation Funds that invest in a spread of cash, Income. bonds, equities and possibly other assets. Growth. The name of the fund indicates its aim; for example, defensive and cautious funds are for low-risk investors; balanced, aggressive and flexible funds suit higher-risk investors. Lifestyle, lifecycle, target date Fund starts by investing mainly in equities and shifts towards bonds and cash as a pre-set maturity date approaches (see p. 306).


The Permanent Portfolio by Craig Rowland, J. M. Lawson

Alan Greenspan, Andrei Shleifer, asset allocation, automated trading system, backtesting, bank run, banking crisis, Bear Stearns, Bernie Madoff, buy and hold, capital controls, correlation does not imply causation, Credit Default Swap, currency risk, diversification, diversified portfolio, en.wikipedia.org, fixed income, Flash crash, high net worth, High speed trading, index fund, inflation targeting, junk bonds, low interest rates, margin call, market bubble, money market fund, new economy, passive investing, Ponzi scheme, prediction markets, risk tolerance, stocks for the long run, survivorship bias, technology bubble, transaction costs, Vanguard fund

Confiscation of assets Consumer Price Index Corporate debt: cash investment in company stocks as corporate bonds as Costs: active vs. passive investing bond-related cash-related commercial Permanent Portfolio fund dollar cost averaging gold-related implementation rebalancing incurring stock-related taxes as (see Taxes) trading Counterparty risk Coxon, Terry Craigslist Creditor protection Credit risk Credit Suisse Currency crises Currency risk: bond-related cash-related gold-related stock-related Cyber attacks Das Safe db X-Trackers db X-Tracker Sovereign Eurozone 25+ Default risk Deflation: bonds impacted by economic condition of gold impacted by Depressions. See Recessions and depressions Developing country investing Diversification: asset allocation and (see Asset allocation) asset class correlations and asset-economy correlation and cash reserves for failure of financial safety through geographic hard asset neglect lacking illusion of implementation strategies based on institutional Permanent Portfolio rebalancing to maintain risk in one asset type lacking risk-sharing assets lacking stock strong unpredictability addressed through Dividends and interest.

See also Retirement plans Performance: 25/75 portfolio 50/50 portfolio 60/40 portfolio 75/25 portfolio actively managed portfolio backtesting past performance bond cash costs impacting (see Costs; Taxes) diversification impacting (see Diversification) financial safety by nonreliance on past performance flexibility of expectations about gold growth of inflation-adjusted or real limited losses in over time performance chasing Permanent Portfolio (see also specific asset performance) Permanent Portfolio fund rebalancing increasing long-term SPIVA report on stability impacting stock survivorship bias in reports on volatility impacting (see Market volatility) Permanent Exchange Traded Fund, Global X Permanent Portfolio: asset allocation in (see Asset allocation; Bonds; Cash; Gold; Stocks) commercial Permanent Portfolio funds description of diversification in (see Diversification) flexibility of, to expect unexpected Golden Rules of financial safety for implementation of international investments in (see International investments) modification of passive investing through performance of (see Performance) rebalancing and maintenance of (see Rebalancing and maintenance) resources on simplicity approach to tax considerations for (see Taxes) Variable Portfolio vs.

To use the Permanent Portfolio, you simply divide your investment capital into four equal chunks, one for each asset class. Once each year, you rebalance your portfolio. If any part of your portfolio has dropped to less than 15% of the whole, or grown to over 35% of the total, then you reset all four parts to 25%. That's it. That's all the work involved. Because this asset allocation is diversified, the entire portfolio performs well under most circumstances. Browne writes: “The portfolio's safety is assured by the contrasting qualities of the four investments—which ensure that any event that damages one investment should be good for one or more of the others. And no investment, even at its worst, can devastate the portfolio—no matter what surprises lurk around the corner—because no investment has more than 25% of your capital.”


pages: 236 words: 77,735

Rigged Money: Beating Wall Street at Its Own Game by Lee Munson

affirmative action, Alan Greenspan, asset allocation, backtesting, barriers to entry, Bear Stearns, Bernie Madoff, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, call centre, Credit Default Swap, diversification, diversified portfolio, estate planning, fear index, fiat currency, financial engineering, financial innovation, fixed income, Flash crash, follow your passion, German hyperinflation, Glass-Steagall Act, global macro, High speed trading, housing crisis, index fund, joint-stock company, junk bonds, managed futures, Market Wizards by Jack D. Schwager, Michael Milken, military-industrial complex, money market fund, moral hazard, Myron Scholes, National best bid and offer, off-the-grid, passive investing, Ponzi scheme, power law, price discovery process, proprietary trading, random walk, Reminiscences of a Stock Operator, risk tolerance, risk-adjusted returns, risk/return, Savings and loan crisis, short squeeze, stocks for the long run, stocks for the long term, too big to fail, trade route, Vanguard fund, walking around money

This chapter is all about the way Wall Street took some academic ideas and twisted them to sell people securities. Not only that, the very concept of diversification and asset allocation was turned into a sales pitch that after 1987 started to develop cracks in its foundation. A new take on risk—or perhaps the proper one in the first place—is outlined so you can control it. Today’s Outrage: Pie Town It makes me sick to see pie charts and asset allocation pimped out to the average investor. What makes it worse is when I ask the average investor why they have a particular allocation, and they clearly don’t know how it was selected for them.

This book is written to unravel and illuminate those questions. I get to the bottom of why it’s necessary for Wall Street to have a strategy for every investor, a market for every man, and a philosophy to suit any temperament. If you are a buy and hold investor and are disillusioned by the meltdown, or if you found your asset allocation pie chart to be dubious at best, keep reading. I show you where those concepts came from, why they work or don’t work, and let you be the judge. The very first company that ever floated stock in 1602 was a shaky operation that paid its dividend half in cash and half in spice. Not exactly awe inspiring.

You would think the incredible returns would prove a buy-and-hold approach. Hindsight identifies a needle in a haystack. But it doesn’t help you today going forward. Buy and hold is a phrase that has very little actual meaning and doesn’t describe any type of investment philosophy as much as a dogma or sales pitch. Even worse, as we enter the modern age of the asset-allocation pie chart, we realize risk has been understated and the very nature of illustration has been misrepresented. Many salespeople in my industry find these ideas dangerous. Why? Essentially, I indict their intellectual credibility and expose their deficiencies. By the end of this section you’ll have a clear idea of how to move forward without the baggage that you and Wall Street have saddled each other with.


pages: 239 words: 60,065

Retire Before Mom and Dad by Rob Berger

Airbnb, Albert Einstein, Apollo 13, asset allocation, Black Monday: stock market crash in 1987, buy and hold, car-free, cuban missile crisis, discovery of DNA, diversification, diversified portfolio, en.wikipedia.org, fixed income, hedonic treadmill, index fund, John Bogle, junk bonds, mortgage debt, Mr. Money Mustache, passive investing, Ralph Waldo Emerson, robo advisor, The 4% rule, the rule of 72, transaction costs, Vanguard fund, William Bengen, Yogi Berra, Zipcar

But you should take comfort that for long-term buy and hold investors, market crashes make us richer if, and only if, we stick to our investment plan. The Right Asset Allocation As you know, Asset Allocation refers to the mix of stock and bond funds in our portfolio. The most important decision you’ll make when it comes to Asset Allocation is how much money to invest in bond funds and how much in stock funds. We’ve used a 70% stock fund and 30% bond fund Asset Allocation as an example throughout this book. But a 70/30 portfolio is not the only reasonable choice. So what does this have to do with surviving a market crash?

Most 401(k)s today offer TDR funds. Find the TDR fund in your 401(k) that corresponds to the year you want to retire. It doesn’t have to be the exact year. Remember, TDRs come in five-year increments. Just find the closest one. Now use what you learned in the last chapter to evaluate the fund’s expenses and asset allocation. Take the fund’s ticker symbol and search for the fund in Morningstar.com. Once you find it, the Expense Ratio will be near the top of the page under the heading “Expenses.” It’s that simple. As we discussed, 401(k) and other workplace retirement plans come with a set list of investments for you to choose.

The first thing we note is that it has an Expense Ratio of 53 basis points. Not as low as we’d like but not awful. Of course, we don’t even know what FMILX invests in. Is it a stock or bond fund, U.S. or international, large cap or small cap? Fortunately, Morningstar gives us the answer. We learn from the “Asset Allocation” box when we search the ticker in Morningstar that the fund holds just over 82% of its assets in U.S. stocks and about 15% in non-U.S. stocks. We also know from what Morningstar calls the “Style Map” that the fund invests in large companies. So far, so good. Now we want to understand the fund’s past performance.


pages: 443 words: 51,804

Handbook of Modeling High-Frequency Data in Finance by Frederi G. Viens, Maria C. Mariani, Ionut Florescu

algorithmic trading, asset allocation, automated trading system, backtesting, Bear Stearns, Black-Scholes formula, book value, Brownian motion, business process, buy and hold, continuous integration, corporate governance, discrete time, distributed generation, fear index, financial engineering, fixed income, Flash crash, housing crisis, implied volatility, incomplete markets, linear programming, machine readable, mandelbrot fractal, market friction, market microstructure, martingale, Menlo Park, p-value, pattern recognition, performance metric, power law, principal–agent problem, random walk, risk free rate, risk tolerance, risk/return, short selling, statistical model, stochastic process, stochastic volatility, transaction costs, value at risk, volatility smile, Wiener process

Hong Kong: IEEE; 2003. p 355–362. Beaver W. Financial ratios as predictors of failure. J Account Res 1966;4:71–111. Berle A, Means G. The modern corporation and private property. New York: Harcourt; 1932. Black F, Litterman R. Asset allocation: combining investor views with market equilibrium. Fixed income research. Goldman Sachs & Co., New York; 1990. Black F, Litterman R. Global asset allocation with equities, bonds, and currencies. Fixed income research, Goldman Sachs & Co., New York; 1991. Bornholdt S. Expectation bubbles in a spin model of markets: intermittency from frustration across scales. Int J Mod Phys C 2001;12:667–674.

We show that the Fourier estimator outperforms the realized volatility/covariance estimator to a significant extent, in particular for high frequency observations and when the noise component is relevant; in general, it has a better performance even in comparison to the methods specifically designed to handle market microstructure contaminations. Finally, in Section 10.6, we consider the gains offered by the Fourier estimator over other covariance measures from the perspective of an asset-allocation decision problem, following the approach of Fleming et al. (2001), who study the impact of volatility timing versus unconditional mean–variance efficient static asset-allocation strategies and of selecting the appropriate sampling frequency or choosing between different bias and variance reduction techniques for the realized covariance matrices. In particular, we show that the Fourier estimator carefully extracts information from noisy high frequency asset price data for the purpose of realized variance/covariance estimation and allows for nonnegligible utility gains in portfolio management. 246 CHAPTER 10 Multivariate Volatility Estimation by Fourier Methods 10.2 Fourier Estimator of Multivariate Spot Volatility Suppose that the prices of n assets p(t) = (p1 (t), . . . , pn (t)) are observed at a continuous time, whose evolutions are continuous semimartingales satisfying the following Itô stochastic differential equations dpj (t) = d j σi (t)dW i + bj (t) dt, j = 1, . . . , n, (10.1) i=1 where W = (W 1 , . . . , W d ) are independent Brownian motions on a filtered probability space satisfying the usual conditions and σ∗∗ and b∗ are adapted random processes satisfying (H) E T (b (t)) dt < ∞, i 2 E 0 0 T j (σi (t))4 dt <∞ i = 1, . . . , d, j = 1, . . . , n.

Heteroskedasticity Robust Standard Errors are Listed in Parentheses 286 CHAPTER 10 Multivariate Volatility Estimation by Fourier Methods 10.6 Application: Asset Allocation In this section, we consider a different approach to the comparison of covariance estimators with high frequency data, in the context of a relevant economic criterion, developed in Mancino and Sanfelici (2011b). We consider the gains offered by the Fourier estimator over other covariance measures from the perspective of an asset-allocation decision problem, following the approach of Fleming et al. (2001, 2003), Engle and Colacito (2006), Bandi et al. (2008), and De Pooter et al. (2008), who study the impact of volatility timing versus unconditional mean–variance efficient static asset-allocation strategies and of selecting the appropriate sampling frequency or choosing between different bias and variance reduction techniques for the realized covariance matrices.


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, behavioural economics, Bernie Madoff, Black Swan, Bob Litterman, bond market vigilante , book value, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, carbon credits, Carmen Reinhart, central bank independence, classic study, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, deal flow, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global macro, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, inverted yield curve, invisible hand, John Bogle, junk bonds, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, pension time bomb, performance metric, Phillips curve, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, savings glut, search costs, selection bias, seminal paper, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stock buybacks, stocks for the long run, survivorship bias, systematic trading, tail risk, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

Striving to build a bridge between academic and practitioner worlds, this book focuses on intuition and contains almost no equations and only very basic statistics [7]. For many academics the book will thus seem insufficiently rigorous, while for some practitioners it may be too intense. My target audience, unsurprisingly, is in the middle: experienced professional investors still hungry to learn, including top-down asset allocators and fund trustees—as well as advanced finance students in CFA or MBA programs. Outline When designing the book’s structure, I needed to find a compromise between discussing broad issues common to many asset classes and providing evidence on specific asset classes, strategies, or factors.

Figure 2.7 shows proxies of ex ante real yields of major U.S. asset classes over a very long historical period. Real yields are calculated as explained in Appendix B. Clearly, these yields vary a lot over time. If we take them at face value, the relative attractiveness of different asset classes varies drastically over time, suggesting that value-oriented market timing or tactical asset allocation strategies can be profitable. These indicators have their own shortcomings, but empirical evidence indicates that they do have some ability to forecast long-term asset returns. Figure 2.7. Forward-looking real yields of U.S. equities, corporate bonds, Treasuries, and housing, 1900–2009. Sources: Bloomberg, Robert Shiller’s website, Moody’s, Ibbotson Associates (Morningstar), Federal Reserve Board, Davis–Lehnert–Martin (2008)/Lincoln Institute of Land Policy, National Bureau of Economic Research.

It is unlikely that money illusion was complete, in the sense of all investors making the mistake described above; but an insufficient adjustment for inflation effects is enough to distort market pricing, given the extreme sensitivity of equity prices to their discount rates. The continuing popularity of the “Fed model”—an asset allocation analysis comparing (real) earnings yields with (nominal) bond yields—is suggestive of money illusion. The money illusion anomaly at the market level is non-diversifiable and slow moving, making it particularly unattractive to arbitrage. Related anomalies have been observed in equity, bond, and housing markets.


pages: 340 words: 100,151

Secrets of Sand Hill Road: Venture Capital and How to Get It by Scott Kupor

activist fund / activist shareholder / activist investor, Airbnb, Amazon Web Services, asset allocation, barriers to entry, Ben Horowitz, Benchmark Capital, Big Tech, Blue Bottle Coffee, carried interest, cloud computing, compensation consultant, corporate governance, cryptocurrency, discounted cash flows, diversification, diversified portfolio, estate planning, family office, fixed income, Glass-Steagall Act, high net worth, index fund, information asymmetry, initial coin offering, Lean Startup, low cost airline, Lyft, Marc Andreessen, Myron Scholes, Network effects, Paul Graham, pets.com, power law, price stability, prudent man rule, ride hailing / ride sharing, rolodex, Salesforce, Sand Hill Road, seminal paper, shareholder value, Silicon Valley, software as a service, sovereign wealth fund, Startup school, the long tail, Travis Kalanick, uber lyft, VA Linux, Y Combinator, zero-sum game

., professionals who manage large pools of capital) often have a defined asset allocation policy by which they invest. They might for example choose to invest 20 percent of their assets in bonds, 40 percent in publicly traded equities, 25 percent in hedge funds, 10 percent in buyout funds, and 5 percent in VC funds. There are numerous other asset classes for consideration and x-number of percentage allocations between the assets classes that institutional investors might pursue. As we’ll see when we talk about the Yale University endowment, the objectives of the particular investor will determine the asset allocation strategy. So, if we agree that VC is an asset class, why is it not a “good” one?

The Mighty Bulldog One of the best examples of modern asset allocation is the Yale University endowment. Its current, and long-standing, chief investment officer is David Swensen, whom people credit with designing the allocation model that many leading institutional investors follow today. There are Yale acolytes who are now running a large number of other US-based endowments and foundations, thus helping to introduce the Yale endowment model to a variety of other institutions. Interestingly enough, Yale came to its current asset allocation model on the heels of a disastrous run of investment returns.

Alternatively, Yale could significantly adjust the amount it takes from the endowment, but that would make it hard for the endowment to know how much of its assets it could hold in liquid versus illiquid investments, making longer-term asset allocation planning more difficult. Finally, since the goal of the endowment is to be perpetual and to grow its assets over time, if the endowment had to provide more cash to the university every time the stock market were down, the endowment returns would likely suffer as a result. To address this challenge, Yale uses what’s called a “smoothing model” to determine the amount of money it contributes each year to the university’s budget. This enables the university to plan its expenses with more certainty and allows the endowment to plan its asset allocation model with more certainty as well.


pages: 285 words: 58,517

The Network Imperative: How to Survive and Grow in the Age of Digital Business Models by Barry Libert, Megan Beck

active measures, Airbnb, Amazon Web Services, asset allocation, asset light, autonomous vehicles, big data - Walmart - Pop Tarts, business intelligence, call centre, Clayton Christensen, cloud computing, commoditize, crowdsourcing, data science, disintermediation, diversification, Douglas Engelbart, Douglas Engelbart, future of work, Google Glasses, Google X / Alphabet X, independent contractor, Infrastructure as a Service, intangible asset, Internet of things, invention of writing, inventory management, iterative process, Jeff Bezos, job satisfaction, John Zimmer (Lyft cofounder), Kevin Kelly, Kickstarter, Larry Ellison, late fees, Lyft, Mark Zuckerberg, Mary Meeker, Oculus Rift, pirate software, ride hailing / ride sharing, Salesforce, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, six sigma, software as a service, software patent, Steve Jobs, subscription business, systems thinking, TaskRabbit, Travis Kalanick, uber lyft, Wall-E, women in the workforce, Zipcar

For example, in response to the belief about physical assets above, one could think, “Physical assets are actually riskier than other assets,” or “Digital networks help firms reduce risk.” Find an inversion that resonates with you—one that you think might actually be true—and consider how this new belief would change your guiding principles, asset allocation, capabilities, and key metrics. Extrapolate what implications these new core beliefs and the resulting principles, asset allocation, capabilities, and metrics would have for your business. Observe what is happening in your industry and, more broadly, how different core beliefs might help you address or prevent disruption. Consider the implications these beliefs could have for your customers, employees, suppliers, and investors.

It is much harder to grasp it culturally, because of the institutional significance these offerings can have.2 This last paragraph emphasizes a key point: this type of change is hard. Institutional memory, historical bias, politics, laziness, and even nostalgia stand in the way of companies that want, or need, to pivot their business models away from less-valuable assets. Further, leaders don’t always think of themselves as asset allocators or think of their businesses as portfolios. Every Decision Is about Capital Allocation If you took an introduction to economics course in college, you likely encountered Gregory Mankiw’s Principles of Economics.3 This popular textbook opens with ten principles of economics, and the first is this: people face trade-offs.

For one-third of companies, the capital allocation was almost exactly the same as the previous year—a 0.99 correlation.5 It’s astounding. A lot can change in a year. Externally, your industry may see new entrants, new technologies, and new customer preferences. Internally, you learn about business model performance, the capabilities of new leaders, and the performance of new assets. But despite all that new information, asset allocation changes very little year to year. If that sounds like a problem to you, you’re right. It makes little sense, given new information, to do the same old thing, but that’s what most of us do. The same McKinsey study found that the most active reallocators, regardless of sector, delivered returns to shareholders 30 percent higher than the least active reallocators.


pages: 261 words: 70,584

Retirementology: Rethinking the American Dream in a New Economy by Gregory Brandon Salsbury

Alan Greenspan, Albert Einstein, asset allocation, Bear Stearns, behavioural economics, buy and hold, carried interest, Cass Sunstein, credit crunch, Daniel Kahneman / Amos Tversky, diversification, estate planning, financial independence, fixed income, full employment, hindsight bias, housing crisis, loss aversion, market bubble, market clearing, mass affluent, Maui Hawaii, mental accounting, mortgage debt, mortgage tax deduction, National Debt Clock, negative equity, new economy, RFID, Richard Thaler, risk tolerance, Robert Shiller, side project, Silicon Valley, Steve Jobs, the rule of 72, Yogi Berra

If you want to get a better idea of when you will be in a position to retire and what it will cost, you need to start planning as soon as you can get a plan in place. Plans help you stick to commitments and avoid regret, as well as the fear of loss. Decide on an Asset Allocation Strategy The road to your financial security is full of obstacles that you need to negotiate. Your asset allocation strategy can help you through these obstacles by helping you reduce the impact of market and economic volatility. An asset allocation strategy is synonymous with the old adage “don’t put all of your eggs in one basket.” As the last few years have taught us, markets and the overall economy can be volatile and hard to predict.

As the last few years have taught us, markets and the overall economy can be volatile and hard to predict. Investing all your assets in one place or in one type of investment vehicle is closer to gambling than it is to prudent investing. By spreading your assets across multiple asset classes, you reduce the overall risk associated with just one asset class. An appropriate asset allocation also takes into consideration your risk tolerance, your financial resources, and your timeframe. The way you view or frame your portfolio can also help you diversify it. View your portfolio in the broad sense as a whole, rather than in a narrow sense, in pieces and parts. And view your portfolio as a long-term tool, rather than a day-to-day investment.

Try to pick a day, like New Year’s Day or your birthday or April 15th, to reassess your financial plan and see what changes should be made. Sitting down and doing a budget and creating a financial plan are good ideas, but you will find that any plan and any budget will become less and less applicable as time goes on. Your risk tolerance will change, your appropriate asset allocation will change, and your financial resources will change. Therefore, your plan will have to change accordingly if you want to meet your long-term goals and objectives. Develop a Financial Plan When you know the goal for your financial future, you need a road map to get there. Your financial plan provides the direction needed for this journey.


pages: 511 words: 151,359

The Asian Financial Crisis 1995–98: Birth of the Age of Debt by Russell Napier

Alan Greenspan, Asian financial crisis, asset allocation, bank run, banking crisis, banks create money, Berlin Wall, book value, Bretton Woods, business cycle, Buy land – they’re not making it any more, capital controls, central bank independence, colonial rule, corporate governance, COVID-19, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, currency risk, debt deflation, Deng Xiaoping, desegregation, discounted cash flows, diversification, Donald Trump, equity risk premium, financial engineering, financial innovation, floating exchange rates, Fractional reserve banking, full employment, Glass-Steagall Act, hindsight bias, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, if you build it, they will come, impact investing, inflation targeting, interest rate swap, invisible hand, Japanese asset price bubble, Jeff Bezos, junk bonds, Kickstarter, laissez-faire capitalism, lateral thinking, Long Term Capital Management, low interest rates, market bubble, mass immigration, means of production, megaproject, Mexican peso crisis / tequila crisis, Michael Milken, Money creation, moral hazard, Myron Scholes, negative equity, offshore financial centre, open borders, open economy, Pearl River Delta, price mechanism, profit motive, quantitative easing, Ralph Waldo Emerson, regulatory arbitrage, rent-seeking, reserve currency, risk free rate, risk-adjusted returns, Ronald Reagan, Savings and loan crisis, savings glut, Scramble for Africa, short selling, social distancing, South China Sea, The Wealth of Nations by Adam Smith, too big to fail, yield curve

If the market consensus is correct that US interest rates are rising, this would mitigate against an acceleration in capital inflows. Already Asia is not attracting significant new equity portfolio inflows and this will continue as long as momentum remains in Latin America and Europe. In recent meetings with global asset allocators, it has become clear that Asia’s many documented problems are filtering up to the most senior levels. UK global asset allocators, with twice as much money in Asia as in the United States, are questioning whether Asian equities are really a long-term warrant on economic growth. Some reductions in weightings could occur if the current accounts do not begin to improve and provide the liquidity momentum to satisfy such investors.

— Andy Haldane, Chief Economist at the Bank of England For my colleagues at CLSA from 1995 to 1998 “Forsan et haec olim meminisse iuvabit.” “A joy it will be one day, perhaps, to remember even this.” The Aeneid About the author Professor Russell Napier has been an adviser on asset allocation to global investment institutions for over 25 years. He is author of Anatomy of The Bear: Lessons From Wall Street’s Four Great Bottoms and Keeper of the Library of Mistakes, a business and financial history library based in Edinburgh. He has founded and runs a course called ‘A Practical History of Financial Markets’ and also an online marketplace (ERIC) for the sale of high-quality investment research to institutions.

The more foreign ownership was permitted in other markets, particularly in the potentially very large markets of India and China, the more this dynamic of liquidation in other Asian markets would accelerate. It could, of course, be offset by ever larger flows of capital into Asian equities in total. Foreign investors’ reallocation of capital from Southeast Asia and Hong Kong to Taiwan in 1996 indicated how shifts in asset allocation in the region had potential impacts for monetary policy, economic growth and not just directly for the prices of domestic equities. The need for institutional investors to follow benchmark indices and adapt to changes in those indices had, and still has now, economic as well as investment implications, particularly for emerging markets operating managed exchange rate regimes.


pages: 162 words: 50,108

The Little Book of Hedge Funds by Anthony Scaramucci

Alan Greenspan, Andrei Shleifer, asset allocation, Bear Stearns, Bernie Madoff, business process, carried interest, corporate raider, Credit Default Swap, diversification, diversified portfolio, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, financial engineering, fixed income, follow your passion, global macro, Gordon Gekko, high net worth, index fund, it's over 9,000, John Bogle, John Meriwether, Long Term Capital Management, mail merge, managed futures, margin call, mass immigration, merger arbitrage, Michael Milken, money market fund, Myron Scholes, NetJets, Ponzi scheme, profit motive, proprietary trading, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk-adjusted returns, risk/return, Ronald Reagan, Saturday Night Live, Sharpe ratio, short selling, short squeeze, Silicon Valley, tail risk, Thales and the olive presses, Thales of Miletus, the new new thing, too big to fail, transaction costs, two and twenty, uptick rule, Vanguard fund, Y2K, Yogi Berra, zero-sum game

That being said, hedge funds are not for everyone nor are they a substitute for other investment vehicles. For many people, mutual funds—with a swirl of alternative asset or hedge fund exposure—are probably the best option. It isn’t a one-size-fits-all sort of approach; however, a portfolio of hedge fund portfolios can be sleeved into most investors’ tactical asset allocation. A word of warning: Before anyone invests in this industry, they must heed this surgeon general’s warning—investing without proper due diligence or proper personal risk assessment can be bad for your mental and financial health. Do your homework. Be prepared. Have a proper screen. Research.

Maybe years from now regulators will require an IQ test or a note from a psychiatrist or possibly a rectal exam (Lord knows many of us have our brains down there!), but until then read the partnership documents carefully and seek out professional advice before investing. Both sophisticated investors and unsophisticated ones have a need for protection against risk. With careful analysis and the right due diligence and asset allocation one can achieve this goal by using hedge funds as an investment tool. The Institutional Invasion In early 2000, hedge funds were in trouble. Julian Robertson’s Tiger Fund had been overtaken by “mouse clicks and momentum.” George Soros’ Quantum Fund was down 21 percent and Stan Druckenmiller was leaving the fund after a dozen years; they, too, would be closing the curtain on their original proposition.

Discussed in a paper entitled “Portfolio Selection,” this theory postulated that it was not enough to simply maximize returns but one must maximize risk-adjusted returns, whereby returns would be based upon a given level of inherent risk. The key to his theory was that the risk of a portfolio is dependent upon the relationship among its securities. In other words, if you picked the right securities or had the right asset allocation you could get out on the efficient frontier and actually find a scenario where you earned more reward yet took less risk. Back in the 1950s, the problem with this approach was that it was not easy to implement—there simply wasn’t enough time or resources to calculate the correlations between thousands of stocks—or (at that time) just 25!


file:///C:/Documents%20and%... by vpavan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Alan Greenspan, AOL-Time Warner, asset allocation, Bear Stearns, Berlin Wall, book value, business cycle, buttonwood tree, buy and hold, Carl Icahn, corporate governance, corporate raider, currency risk, disintermediation, diversification, diversified portfolio, Donald Trump, estate planning, financial engineering, fixed income, index fund, intangible asset, interest rate swap, John Bogle, junk bonds, Larry Ellison, margin call, Mary Meeker, money market fund, Myron Scholes, new economy, payment for order flow, price discovery process, profit motive, risk tolerance, shareholder value, short selling, Silicon Valley, Small Order Execution System, Steve Jobs, stocks for the long run, stocks for the long term, tech worker, technology bubble, transaction costs, Vanguard fund, women in the workforce, zero-coupon bond, éminence grise

Now you're ready to take the next crucial steps: determining how much risk you can tolerate and how to allocate your funds among the many investment options. Risk tolerance and asset allocation go hand in hand. Risk is the possibility that your investment won't produce the level of returns that you were expecting. All investments are risky, and some are riskier than others. But in general, the higher the risk, the greater the potential reward. Higher risk also carries higher potential for loss and greater uncertainty about the level of return. The opposite is also true: the lower the risk, the lower the potential return. And low risk carries lower potential for loss and more certainty about level of return. Asset allocation is the process by which investors find the best possible returns for the level of risk they are willing to accept.

If you want diversification without much fuss, try a hybrid fund, which blends stocks and bonds for a one-stop-shopping approach. You give up control over how much of your assets are invested in stocks or bonds, since hybrid fund managers have wide discretion over the ratios of each that they buy. If you like the convenience of a hybrid and don't mind letting someone else do your asset allocation, at least make sure the fund is buying tax-free bonds if your money is not in a retirement account. That way, you will be shielded from paying ordinary income taxes on the dividends that bonds pay. You might want to try a variant to index funds called the "exchange-traded fund." ETFs are packages of shares traded on a stock exchange.

Sure, you should read analysts' reports. They are a good way to start your own research, but consider them just one more piece of information. Never buy a stock based solely on an analyst's recommendation. Instead, ask yourself: Is the stock right for me because it helps diversify my portfolio, or because it helps me meet an asset allocation goal? Am I expecting to hold the stock for the long term? Do I understand the company, and why I'd like to own it? Do I understand it well enough to know why I might want to sell the stock, beyond a short-term failure to meet analysts' expectations? Answering these questions in the affirmative is enough to justify owning a stock— far more than any analyst's say-so.


pages: 670 words: 194,502

The Intelligent Investor (Collins Business Essentials) by Benjamin Graham, Jason Zweig

3Com Palm IPO, accounting loophole / creative accounting, air freight, Alan Greenspan, Andrei Shleifer, AOL-Time Warner, asset allocation, book value, business cycle, buy and hold, buy low sell high, capital asset pricing model, corporate governance, corporate raider, Daniel Kahneman / Amos Tversky, diversified portfolio, dogs of the Dow, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, George Santayana, hiring and firing, index fund, intangible asset, Isaac Newton, John Bogle, junk bonds, Long Term Capital Management, low interest rates, market bubble, merger arbitrage, Michael Milken, money market fund, new economy, passive investing, price stability, Ralph Waldo Emerson, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, shareholder value, sharing economy, short selling, Silicon Valley, South Sea Bubble, Steve Jobs, stock buybacks, stocks for the long run, survivorship bias, the market place, the rule of 72, transaction costs, tulip mania, VA Linux, Vanguard fund, Y2K, Yogi Berra

Applied Materials Applied Micro Devices appreciation arbitrages Archer-Daniels-Midland Ariba Aristotle Arnott, Robert artwork “as if” statements. See pro forma statements Asness, Clifford asset allocation: and advice for investors; and aggressive investors; and defensive investors; plan of; and history and forecasting of stock market; and inflation; and institutional investors; and investments vs. speculation; and market fluctuations; tactical. See also diversification asset backing. See book value assets: elephantiasis of; and per-share earnings; and security analysis; and stock selection for aggressive investors; and stock selection for defensive investors. See also asset allocation; specific company Association for Investment Management and Research AT&T Corp.

But that’s like thinking that an all-soprano chorus can handle singing “Old Man River” better than a soprano soloist can. No matter how many sopranos you add, that chorus will never be able to nail all those low notes until some baritones join the group. Likewise, if all your holdings go up and down together, you lack the investing harmony that true diversification brings. A professional “asset-allocation” plan can help. Major changes. If you’ve become self-employed and need to set up a retirement plan, your aging parents don’t have their finances in order, or college for your kids looks unaffordable, an adviser can not only provide peace of mind but help you make genuine improvements in the quality of your life.

“You’ll be sorry if you don’t…” “exclusive” “You should focus on performance, not fees.” “Don’t you want to be rich?” “can’t lose” “The upside is huge.” “There’s no downside.” “I’m putting my mother in it.” “Trust me.” “commodities trading” “monthly returns” “active asset-allocation strategy” “We can cap your downside.” “No one else knows how to do this.” Getting to Know You A leading financial-planning newsletter recently canvassed dozens of advisers to get their thoughts on how you should go about interviewing them.4 In screening an adviser, your goals should be to: determine whether he or she cares about helping clients, or just goes through the motions establish whether he or she understands the fundamental principles of investing as they are outlined in this book assess whether he or she is sufficiently educated, trained, and experienced to help you.


pages: 300 words: 77,787

Investing Demystified: How to Invest Without Speculation and Sleepless Nights by Lars Kroijer

Andrei Shleifer, asset allocation, asset-backed security, Bernie Madoff, bitcoin, Black Swan, BRICs, Carmen Reinhart, clean tech, compound rate of return, credit crunch, currency risk, diversification, diversified portfolio, equity premium, equity risk premium, estate planning, fixed income, high net worth, implied volatility, index fund, intangible asset, invisible hand, John Bogle, Kenneth Rogoff, low interest rates, market bubble, money market fund, passive investing, pattern recognition, prediction markets, risk tolerance, risk/return, Robert Shiller, selection bias, sovereign wealth fund, too big to fail, transaction costs, Vanguard fund, yield curve, zero-coupon bond

Of course it would be great if the performance of your various assets in no way correlated, but unfortunately that is not very realistic. Most things link to the economy somehow. If we were presented with perfect data sets regarding the values, risks and correlations of an investor’s other assets we would be able to do some sort of scientific optimisation of asset allocation. That, however, is almost impossible. The idea of taking assets, including intangible ones, and optimising allocations based on them probably sounds like nonsense to most people. But while we don’t have the data or desire to do these calculations in a scientific way it’s still worth nurturing your gut instinct about how this all fits together.

So if you need to borrow money and can do it through your property then that may be the cheapest way. 2 Although the quoted property investment companies that are represented in the index trackers only represent a small proportion of the value of the world’s total property that is also true of many other industries. Also, if this small quoted representation of property holding suggested that those quoted were extra attractive we would trust the market to have this reflected in the share price relative to other securities. 3 According to Richard Ferri’s excellent book All About Asset Allocation (McGraw-Hill Professional, 2010) about two-thirds of the total value of commercial property in the US is owned by corporations, many of which you are already invested in through the general equity market index. 4 There is obviously a millennia-long price history of commodities, but to my knowledge not in an aggregated index that can be replicated in financial products like ETFs or mutual funds. 5 The total return index includes interest on the ‘free’ cash when investing in futures.

Buy as broad an index tracker as you can and as cheaply as you can. If you do that, you are doing pretty well. 1 At the time of writing, in the UK the only way to buy the Vanguard funds below £100,000 is through Alliance Trust. Vanguard has been making noises about introducing easier and more direct options. 2 See The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk by William Bernstein (American Media International LLC, 2004). part four Other things to think about chapter 15 * * * Pension and insurance For many individuals their investing lives are dominated less by issues relating to their rational portfolio, but rather by the options and choices with regard to pensions, life annuities and related products.


Hedgehogging by Barton Biggs

activist fund / activist shareholder / activist investor, Alan Greenspan, asset allocation, backtesting, barriers to entry, Bear Stearns, Big Tech, book value, Bretton Woods, British Empire, business cycle, buy and hold, diversification, diversified portfolio, eat what you kill, Elliott wave, family office, financial engineering, financial independence, fixed income, full employment, global macro, hiring and firing, index fund, Isaac Newton, job satisfaction, junk bonds, low interest rates, margin call, market bubble, Mary Meeker, Mikhail Gorbachev, new economy, oil shale / tar sands, PalmPilot, paradox of thrift, Paul Samuelson, Ponzi scheme, proprietary trading, random walk, Reminiscences of a Stock Operator, risk free rate, Ronald Reagan, secular stagnation, Sharpe ratio, short selling, Silicon Valley, transaction costs, upwardly mobile, value at risk, Vanguard fund, We are all Keynesians now, zero-sum game, éminence grise

Over the 10 years that ended June 30, 2004, the Yale Endowment compounded at 16.8% per annum, which works out to be about 13% real. Over the past 20 years, the compound return has been 16.1%, which means that the value of the endowment has increased more than tenfold. Swensen is very doubtful that the next decade will be as bountiful. His current asset allocation and asset class return expectations solve for a real return of 6.2% per annum, with a risk or volatility of 11.1%.The present asset allocation emphasizes alternative asset classes, which tend to have much wider return dispersions between managers. Thus, he is hopeful that good manager selection will enable Yale to achieve a better real return ccc_biggs_ch11_149-161.qxd 11/29/05 7:03 AM Page 161 From One Generation to Another 161 than the 6%.

Because the average investor was switching (or being switched by a broker) at exactly the wrong time either from one fund to another or into cash. For the public investor, market timing and being fashionable has been a futile and costly activity. The neo-con’s idea that the average American should actively run and make asset allocation decisions with a portion of his Social Security account is madness. During the 1980s and the 1990s the U.S. mutual fund model created great wealth for its purveyors—the investment management companies, the brokers, and the portfolio managers—but utterly failed America’s individual investors.

Of course, the dismal results for individual investors are partly their own fault as well.They are simply not equipped, either in terms of temperament, research resources, or time commitment, to compete with the professionals. Rational individuals wouldn’t dream of competing against professional athletes for money or against professional card players.Why would they in the financial markets? However, the individuals do need to make their own long-term asset allocations decisions. This can be done if they have at least a general concept of secular and cyclical cycles and some sense of contrarian investing. Index funds should be the means of implementation. THE DIFFERENCE BETWEEN SECULAR AND CYCLICAL BEAR MARKETS Let’s start with the definitions of secular and cyclical bear markets.To me, a secular bear market is a decline in the major stock averages of at least 40 percent—and considerably more in secondary stocks—where the decline lasts at least three to five years.


pages: 319 words: 106,772

Irrational Exuberance: With a New Preface by the Author by Robert J. Shiller

Alan Greenspan, Andrei Shleifer, asset allocation, banking crisis, benefit corporation, Benoit Mandelbrot, book value, business cycle, buy and hold, computer age, correlation does not imply causation, Daniel Kahneman / Amos Tversky, demographic transition, diversification, diversified portfolio, equity premium, Everybody Ought to Be Rich, experimental subject, hindsight bias, income per capita, index fund, Intergovernmental Panel on Climate Change (IPCC), Joseph Schumpeter, Long Term Capital Management, loss aversion, Mahbub ul Haq, mandelbrot fractal, market bubble, market design, market fundamentalism, Mexican peso crisis / tequila crisis, Milgram experiment, money market fund, moral hazard, new economy, open economy, pattern recognition, Phillips curve, Ponzi scheme, price anchoring, random walk, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, Small Order Execution System, spice trade, statistical model, stocks for the long run, Suez crisis 1956, survivorship bias, the market place, Tobin tax, transaction costs, tulip mania, uptick rule, urban decay, Y2K

Shiller, “Public Resistance to Indexation: A Puzzle,” Brookings Papers on Economic Activity, 1 (1997): 159–211. 10. See Jack VanDerhei, Russell Galer, Carol Quick, and John Rea, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity,” Perspective (Investment N O TE S TO PAG E S 218–223 265 Company Institute, Washington, D.C.), 5(1) (1999): 2. Results are based on a sample that covers 6.6 million active participants. 11. According to the ICI/EBRI study (VanDerhei et al., “401(k) Plan Asset Allocation”), 24.5% of the participants in the 1996 sample had 80% or more of their plan balances invested in equity funds. This figure underestimates their exposure to the stock market, since the category of equity funds excludes investments in their own company’s stock and exposure to the stock market from balanced funds.

One may feel that if one can participate in just one more year of an advancing stock market—assuming it advances for another year—that will help assuage the pain. Of course, one also thinks that the market may well go down. But how does one weigh the potential emotional expense of such a possible loss at the time that one is making the asset allocation decision? Perhaps one feels that the potential loss will not be much more diminishing to one’s ego than the failure to participate has already been. Of course, one likely realizes that one takes the risk of entering the market just as it begins a downward turn. But the psychological cost of such a potential future loss may not be so much greater relative to the very real regret at having been out of the market in the past.

King and Ross Levine, “Finance and Growth: Schumpeter May Be Right,” Quarterly Journal of Economics, 108 (1993): 717–37; Rafael LaPorta, Florencio Lopez-de-Silanes, and Andrei Shleifer, “Corporate Ownership around the World,” Journal of Finance, 54 (1999): 471–518; and Jeffrey Wurgler, “Financial Markets and the Allocation of Capital,” unpublished paper, Yale University, 1999. 2. One study finds that individual investors tend to be less heavily invested in stocks during business cycle troughs, when expected returns tend to be high, while institutional investors tend to do the opposite, and hence to work in the direction of stabilizing the market. See Randolph Cohen, “Asset Allocation Decisions of Individuals and Institutions,” unpublished paper, Harvard Business School, 1999. A Merrill Lynch survey shows that professional fund managers outside the United States have been generally selling U.S. stocks during bull markets since 1994, but there is no such clear pattern for U.S. fund managers; see Trevor Greetham, Owain Evans, and Charles I.


pages: 354 words: 26,550

High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems by Irene Aldridge

algorithmic trading, asset allocation, asset-backed security, automated trading system, backtesting, Black Swan, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, computerized trading, diversification, equity premium, fault tolerance, financial engineering, financial intermediation, fixed income, global macro, high net worth, implied volatility, index arbitrage, information asymmetry, interest rate swap, inventory management, Jim Simons, law of one price, Long Term Capital Management, Louis Bachelier, machine readable, margin call, market friction, market microstructure, martingale, Myron Scholes, New Journalism, p-value, paper trading, performance metric, Performance of Mutual Funds in the Period, pneumatic tube, profit motive, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, statistical model, stochastic process, stochastic volatility, systematic trading, tail risk, trade route, transaction costs, value at risk, yield curve, zero-sum game

“Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk.” Journal of Finance 19, 425–442. Sharpe, William F., 1966. “Mutual Fund Performance.” Journal of Business 39 (1), 119–138. Sharpe, William F., 1992. “Asset Allocation: Management Style and Performance Measurement.” Journal of Portfolio Management, Winter 7–19. Sharpe, William F., 2007. “Expected Utility Asset Allocation.” Financial Analysts Journal 63 (September/October), 18–30. References 321 Simpson, Marc W. and Sanjay Ramchander, 2004. “An Examination of the Impact of Macroeconomic News on the Spot and Futures Treasury Markets.”

What Proportion of the Portfolio Should Be Invested into Which Trading Strategy? After the performance of individual securities and trading strategies has been assessed and the best performers identified, the composition of the master portfolio is determined from the best-performing strategies. This step of the process is known as asset allocation and involves determining the relative weights of strategies within the master portfolio. The easiest approach to portfolio optimization is to create an equally weighted portfolio of the best-performing strategies. Although the equally weighted framework diversifies the risk of the overall portfolio, it may not diversify the risk as well as a thorough portfolio optimization process.

Asset Pricing (2nd edition). Princeton, NJ: Princeton University Press. Cohen, K., S. Maier, R. Schwartz and D. Whitcomb, 1981. “Transaction Costs, Order Placement Strategy, and Existence of the Bid-Ask Spread.” Journal of Political Economy 89, 287–305. Colacito, Riccardo and Robert Engle, 2004. “Multiperiod Asset Allocation with Dynamic Volatilities.” Working paper. Coleman, M., 1990. “Cointegration-Based Tests of Daily Foreign Exchange Market Efficiency.” Economic Letters 32, 53–59. Connolly, Robert A. and Chris Stivers, 2005. “Macroeconomic News, Stock Turnover, and Volatility Clustering in Daily Stock Returns.”


pages: 416 words: 39,022

Asset and Risk Management: Risk Oriented Finance by Louis Esch, Robert Kieffer, Thierry Lopez

asset allocation, Brownian motion, business continuity plan, business process, capital asset pricing model, computer age, corporate governance, discrete time, diversified portfolio, fixed income, implied volatility, index fund, interest rate derivative, iterative process, P = NP, p-value, random walk, risk free rate, risk/return, shareholder value, statistical model, stochastic process, transaction costs, value at risk, Wiener process, yield curve, zero-coupon bond

Asset management Fund management Portfolio management • Asset allocation & market timing • Stock picking • Currency allocation • Portfolio risk management • Fund risk management Asset and risk management • • • • • Stop loss Credit equivalent VBP VaR MRO Risk management Figure P1 Asset and risk management 1 In fact, the statistical distribution of an equity is leptokurtic but becomes normal over a sufficiently long period. 9 Portfolio Risk Management1 9.1 GENERAL PRINCIPLES This involves application of the following: • To portfolios managed traditionally, that is, using: — asset allocation with a greater or lesser risk profile (including, implicitly, market timing); — a choice of specific securities within the category of equities or options (stock picking); — currency allocation. • To particularly high-risk portfolios (said to have a ‘high leverage effect’) falling clearly outside the scope of traditional management (the most frequent case), a fivefold risk management method that allows: — daily monitoring by the client (and intraday monitoring if market conditions require) of the market risks to which he or she is exposed given the composition of his or her portfolio. — monitoring of equal regularity by the banker (or wealth manager where applicable) of the client positions for which he or she is by nature the only person responsible.

Optimising the Global Portfolio via VaR 283 Finally, the major advantage of this method is that it allows a portfolio to be optimised in terms of asset allocation as well as stock picking, which is not the case with the pooling methods. In pooling, the combinations of benchmarks do not take account of the correlation between these and still less take account of the correlation between each asset making up the benchmarks. This is the great advantage of the method, as asset allocation accounts for the greater part of a portfolio manager’s work. 11 Institutional Management: APT Applied to Investment Funds The APT1 model described in Section 3.3.2 allows the behaviour of investment funds to be analysed in seven points. 11.1 ABSOLUTE GLOBAL RISK Normal volatility (the ‘standard deviation’ of statisticians) is a measurement of the impact of all market conditions observed during a year on the behaviour of an asset.

Active management therefore suggests that the market is fully efficient. 48 This type of situation is known in price theory as a zero total game. Refer for example to Binmore K., Jeux et théorie des jeux, De Boeck & Larcier, 1999. 104 Asset and Risk Management Two main principles allow the target set to be achieved. 1) Asset allocation, which evolves over time and is also known as market timing, consists of putting together a portfolio consisting partly of the market portfolio or an index portfolio and partly of a risk-free asset (or one that is significantly less risk than equities, such as a bond). The respective proportions of these two components are then changed as time passes, depending on whether a rise or a fall in the index is anticipated. 2) Stock picking consists of putting together a portfolio of equities by choosing the securities considered to be undervalued and likely to produce a return higher than the market return in the near or more distant future (market reaction).


Getting Started With Ledger by Rolf Schröder

asset allocation, bitcoin, don't repeat yourself, machine readable

Getting Started With Ledger February 21, 2016 80cd614 Rolf Schröder & Others Contents Assumptions & Promises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 An introduction to Ledger 2 3 1.1 Double-entry Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.2 Ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.3 Installing Ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.3.1 Linux, Mac OS X & BSD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.3.2 Windows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 A first teaser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.4 2 The Setup 7 2.1 Common files . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2 Private data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2.1 Going meta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.2.2 Other files . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.3 Orchestrating ecoystem & private data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.4 Tmux & Tmuxinator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.5 Your own setup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3 Reports 10 3.1 Balance reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.2 Register reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.3 Advanced Report Filtering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.4 Sample Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.4.1 Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.5 Recurring Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.6 Other Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.7 Visualization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4 Updating the journal 17 4.1 Cash transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.2 Electronic transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.2.1 The general work flow for electronic transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Putting it all together with an example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.3.1 Update misc.tmp.txt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.3.2 Get data from NorthBank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.3.3 Get data from SouthBank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.3.4 Merging everything . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.3 1 5 Advanced 22 5.1 Formatting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.2 Virtual postings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5.3 Automated Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.4 Resetting a balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6 Investing with Ledger 28 6.1 Dealing with commodities & market values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 6.2 Reporting gain & loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 6.3 Asset Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7 The End 7.1 31 Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Assumptions & Promises This book is written for first timer users of Ledger (surprise!).

Hence, The checking account values $3,500 + $600 = $4,100 while the broker account values (50 - 10) * $60 = $2,400. A total gain of $1,500 was achieved due to the shares doubling in valuation. This can be seen using --gain: $ led -X $ --gain bal Assets $ ledger --gain bal $1,500.00 Assets:Broker $ led --gain reg 42-05-28 Commodities reval ued <Revalued> 6.3 $1,500.00 $1,500.00 Asset Allocation You may want to know how your money is distributed among different asset classes. This can be easily achieved by having distinct “allocation” accounts which will serve as placeholders whenever money is put into any asset class. Using automated transactions & the virtual allocation accounts allow to get an easy overview.


pages: 287 words: 62,824

Just Keep Buying: Proven Ways to Save Money and Build Your Wealth by Nick Maggiulli

Airbnb, asset allocation, Big Tech, bitcoin, buy and hold, COVID-19, crowdsourcing, cryptocurrency, data science, diversification, diversified portfolio, financial independence, Hans Rosling, index fund, it's over 9,000, Jeff Bezos, Jeff Seder, lifestyle creep, mass affluent, mortgage debt, oil shock, payday loans, phenotype, price anchoring, risk-adjusted returns, Robert Shiller, Sam Altman, side hustle, side project, stocks for the long run, The 4% rule, time value of money, transaction costs, very high income, William Bengen, yield curve

While this advice wasn’t incorrect, it made me focus on all the wrong things financially as a recent college graduate. Despite having only $1,000 in my retirement account at the time, I spent hundreds of hours analyzing my investment decisions over the next year. I had Excel spreadsheets filled with net worth projections and expected returns. I checked my account balances daily. I questioned my asset allocation to the point of neurosis. Should I have 15% of my money in bonds? Or 20%? Why not 10%? I was all over the place. They say that obsession is a young man’s game. I learned this truth all too well. But despite my intense fixation on my investments, I spent no time analyzing my income or spending.

Tastes can change suddenly and impact income. Your Own Product(s) Variable Full ownership. Personal satisfaction. Can create a valuable brand. Very labor intensive. No guarantee of payoff. No matter what mix of income-producing assets you end up choosing, the optimal asset allocation is the one that will work best for you and your situation. Remember that two people can have very different investment strategies and they can both be right. Now that we have talked about what you should invest in, we will spend some time discussing why you shouldn’t invest in individual stocks

Few investors move their money into Treasury bills while they slowly move their money into stocks. I know this anecdotally because I’ve spoken with financial advisors who have told me so. They have had countless conversations where prospective clients had been in cash for years waiting on the right time to get into the market. But I also know this from the monthly asset allocation survey conducted by the American Association of Individual Investors (AAII). The AAII survey shows that, since 1989, the average individual investor has had over 20% of their portfolio allocated in cash.⁸⁶ Even though the premise doesn’t work because investors don’t do this in practice, I’ve examined the data anyway.


pages: 398 words: 86,855

Bad Data Handbook by Q. Ethan McCallum

Amazon Mechanical Turk, asset allocation, barriers to entry, Benoit Mandelbrot, business intelligence, cellular automata, chief data officer, Chuck Templeton: OpenTable:, cloud computing, cognitive dissonance, combinatorial explosion, commoditize, conceptual framework, data science, database schema, DevOps, en.wikipedia.org, Firefox, Flash crash, functional programming, Gini coefficient, hype cycle, illegal immigration, iterative process, labor-force participation, loose coupling, machine readable, natural language processing, Netflix Prize, One Laptop per Child (OLPC), power law, quantitative trading / quantitative finance, recommendation engine, selection bias, sentiment analysis, SQL injection, statistical model, supply-chain management, survivorship bias, text mining, too big to fail, web application

If this represents an average number of allocation rows per asset, then we would have 600,000 rows in a final report covering 10,000 assets. Assume we’ve inserted some sample representative data into the above schema. What data would the allocation report rows contain? Let’s take a simple case, an asset allocated to two cost centers. An SQL query to retrieve our allocations is: select * from assets inner join assets_cost_centers on assets.asset_id = assets_cost_centers.asset_id inner join cost_centers on assets_cost_centers.cost_center_id = cost_centers.cost_center_id; Two sample rows might look like the following: asset_idnamedescriptionasset_idcost_center_ideffective_datepercentagecost_center_idnamedescription 1 web server the box… 1 1 2012-01-01… 0.20000 1 IT 101 web services 1 web server the box… 1 2 2012-01-01… 0.80000 2 SAAS 202 software services The percentage attribute in each row gives us the ratio of the asset’s cost that the cost center will be charged.

An SQL query to retrieve our allocations is: select * from assets inner join assets_cost_centers on assets.asset_id = assets_cost_centers.asset_id inner join cost_centers on assets_cost_centers.cost_center_id = cost_centers.cost_center_id; Two sample rows might look like the following: asset_idnamedescriptionasset_idcost_center_ideffective_datepercentagecost_center_idnamedescription 1 web server the box… 1 1 2012-01-01… 0.20000 1 IT 101 web services 1 web server the box… 1 2 2012-01-01… 0.80000 2 SAAS 202 software services The percentage attribute in each row gives us the ratio of the asset’s cost that the cost center will be charged. In general, the total asset allocation to the cost center in each row is the product of the allocation percentages on the relationships in between the asset and the cost center. For an asset with n such relationships, the total allocation percentage, atotal, is given by: If the server costs us $1,000/month, the IT 101 cost center will pay $200 and the IS 202 cost center will pay $800.

For this row, we have A server with a $3,000 monthly charge would, therefore, cost the SAAS 202 cost center $21 per month. These are only the two corner cases, representing the shortest and the longest queries. We’ll also need queries for all the cases in between if we continue with this design to cover assets allocated to departments and products allocated to cost centers. Each new level of the query adds to a combinatorial explosion and begs many questions about the design. What happens if we change the allocation rules? What if a product can be allocated directly to a cost center instead of passing through a department?


pages: 353 words: 148,895

Triumph of the Optimists: 101 Years of Global Investment Returns by Elroy Dimson, Paul Marsh, Mike Staunton

asset allocation, banking crisis, Berlin Wall, Black Monday: stock market crash in 1987, book value, Bretton Woods, British Empire, buy and hold, capital asset pricing model, capital controls, central bank independence, classic study, colonial rule, corporate governance, correlation coefficient, cuban missile crisis, currency risk, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, European colonialism, fixed income, floating exchange rates, German hyperinflation, index fund, information asymmetry, joint-stock company, junk bonds, negative equity, new economy, oil shock, passive investing, purchasing power parity, random walk, risk free rate, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, stocks for the long run, survivorship bias, Tax Reform Act of 1986, technology bubble, transaction costs, yield curve

In the remainder of this section, we highlight three areas where we feel our study changes the way individual investors should think about investment. The areas relate to (1) asset allocation, (2) tax management, and (3) mutual fund fees. In section 14.5 we will turn to other issues that are also of relevance to individuals, but which are at the heart of institutional investment strategies. These issues are (4) indexation, (5) active management, (6) anomalies and regularities in stock returns, and (7) international diversification. We start with the implications of our work for asset allocation. The classic US asset allocation, as described by Loeb (1996) and others, is one-tenth in cash, with risky assets split roughly 60 percent in stocks and 40 percent in bonds.

We discuss some of the investment implications of our findings. We emphasize how we should alter our judgments in the light of a reduced estimate for the future equity risk premium. There are strong inferences that can be drawn about the role for active management, the case for index funds, levels of management fees, tax management, asset allocation, international diversification, and strategies for exploiting anomalies and regularities. Chapter 14 summarizes the implications of our research for investors and investment institutions. In chapter 15 we extend this discussion to the cost of capital and the impact of an attenuated equity premium on real investment decisions.

Today’s real interest rates and bond yields are, of course, much higher than the twentieth century average. Compared to the equity risk premium from recent decades, today’s forward-looking equity premium is lower. This changing balance in expected rewards has significant implications for individual investors. It highlights the importance of the investor’s asset allocation strategy, and puts the spotlight on enhancing net performance by avoiding tax- and cost-drag. 14.5 Implications for investment institutions It is somewhat artificial to segregate individual from institutional investment strategy. Nevertheless, there are several implications of our research that go straight to the heart of institutional portfolio management.


Investment: A History by Norton Reamer, Jesse Downing

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, book value, break the buck, Brownian motion, business cycle, buttonwood tree, buy and hold, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, Cornelius Vanderbilt, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, dogs of the Dow, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, flying shuttle, Glass-Steagall Act, Gordon Gekko, Henri Poincaré, Henry Singleton, high net worth, impact investing, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, John Bogle, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, margin call, means of production, Menlo Park, merger arbitrage, Michael Milken, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Performance of Mutual Funds in the Period, Ponzi scheme, Post-Keynesian economics, price mechanism, principal–agent problem, profit maximization, proprietary trading, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Sand Hill Road, Savings and loan crisis, seminal paper, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, tail risk, technology bubble, Teledyne, The Wealth of Nations by Adam Smith, time value of money, tontine, too big to fail, transaction costs, two and twenty, underbanked, Vanguard fund, working poor, yield curve

One study draws data from a combination of two databases (the TASS and the HFR) and performs an analysis of funds of funds over an eight-year period. The study concludes that, in fact, funds of funds do succeed, in aggregate, in adding value net of fees. Equally interesting, however, is the performance attribution: the funds of funds are successful because of sound strategic asset allocation rather than tactical asset allocation. In fact, the study finds that on average, the tactical asset allocation seems to add zero or negative value in most years, though part of this may be due to the underlying managers’ liquidity constraints (a fund of funds cannot reallocate funds immediately, since the funds are often at the whim of redemption windows).31 Illiquidity of the Vehicle Hedge funds are less liquid than many other investment vehicles available in the market.

UMIFA specified that assets should be deployed across asset classes (diversification) while UPMIFA updated those codes by New Clients and New Investments 125 additionally stipulating that investments must be executed in accordance with a prudent person standard and “in good faith.”10 Diversification is continuing to be a highly effective investment strategy for endowments. By way of example, as of June 2005, the average educational endowment held 53 percent in domestic equity, 23 percent in domestic fixed income, and 5 percent in cash.11 Six years later, by June 2011, the average educational endowment’s asset allocation was 16 percent in domestic equities, 10 percent in fixed income, 17 percent in international equities, 53 percent in alternative strategies, and 4 percent in cash or other general assets.12 In short, endowment diversification is following the current investment trends by becoming more international, as well as taking advantage of more niche strategies.

This creates a difficult problem of finding an investment adviser willing and able to take on such a responsibility at what is often an inadequate level of compensation. It is on this conundrum that the frequently heard advice for the average individual client to limit himself or herself to low-cost index products rests. Consequently, there is, sadly, no alternative to individuals’ accepting some level of responsibility for their own asset allocation—a daunting task for all but a very few. For those still early in accumulation careers, a balanced approach, coupled with courageous dollar cost averaging appears to be required. But undertaking and maintaining such a strategy requires nerves of steel at certain times. INVESTMENT AND SOCIAL CHANGE Given that the powerful project of democratization is well underway, our expectations of it can be extended further.


pages: 733 words: 179,391

Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo

Alan Greenspan, Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, bitcoin, Bob Litterman, Bonfire of the Vanities, bonus culture, break the buck, Brexit referendum, Brownian motion, business cycle, business process, butterfly effect, buy and hold, capital asset pricing model, Captain Sullenberger Hudson, carbon tax, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, confounding variable, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, democratizing finance, Diane Coyle, diversification, diversified portfolio, do well by doing good, double helix, easy for humans, difficult for computers, equity risk premium, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Glass-Steagall Act, global macro, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, information security, interest rate derivative, invention of the telegraph, Isaac Newton, it's over 9,000, James Watt: steam engine, Jeff Hawkins, Jim Simons, job satisfaction, John Bogle, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, language acquisition, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, megaproject, merger arbitrage, meta-analysis, Milgram experiment, mirror neurons, money market fund, moral hazard, Myron Scholes, Neil Armstrong, Nick Leeson, old-boy network, One Laptop per Child (OLPC), out of africa, p-value, PalmPilot, paper trading, passive investing, Paul Lévy, Paul Samuelson, Paul Volcker talking about ATMs, Phillips curve, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, proprietary trading, public intellectual, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Solow, Sam Peltzman, Savings and loan crisis, seminal paper, Shai Danziger, short selling, sovereign wealth fund, Stanford marshmallow experiment, Stanford prison experiment, statistical arbitrage, Steven Pinker, stochastic process, stocks for the long run, subprime mortgage crisis, survivorship bias, systematic bias, Thales and the olive presses, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, uptick rule, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

Using statistical estimates derived from Principle 2 and the CAPM, portfolio managers can construct diversified long-only portfolios of financial assets that offer investors attractive risk-adjusted rates of return at low cost. Principle 4: Asset Allocation. Choosing how much to invest in broad asset classes is more important than picking individual securities, so the asset allocation decision is sufficient for managing the risk of an investor’s savings. Principle 5: Stocks for the Long Run. Investors should hold mostly equities for the long run. Principle 1 is straightforward: the only way investors would willingly take on a higher-risk asset is if they’re given an incentive for doing so, and that incentive comes in the form of higher expected return.

There are fancier heuristics that attempt to reduce your risk as you get closer to retirement, like investing a percentage of 100-minus-your-age in stocks and the rest in bonds, so a twenty-year-old will have 80 percent in stocks, while a sixty-five-year-old will only have 35 percent in stocks. The idea is to adjust your asset allocation to suit your risk tolerance and your long-run investment objectives. Principle 5 makes your asset allocation decision even simpler: just hold stocks for the long run. This principle is based on the hugely influential book Stocks for the Long Run, written by the Wharton financial economist Jeremy Siegel.2 First published in 1994, this book is now in its fifth edition, and has become the “buy and hold Bible” of the investment management industry.

Portfolio optimization tools are only useful if the assumptions of stationarity and rationality are good approximations to reality. The notion of passive investing is changing due to technological advances, and risk management should be a higher priority, even for passive index funds. Principle 4A: Asset Allocation. The boundaries between asset classes are becoming blurred, as macro factors and new financial institutions create links and contagion across previously unrelated assets. Managing risk through asset allocation is no longer as effective today as it was during the Great Modulation. Principle 5A: Stocks for the Long Run. Equities do offer attractive returns over the very long run, but few investors can afford to wait it out.


pages: 517 words: 139,477

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel

Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, break the buck, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, carried interest, central bank independence, cognitive dissonance, compound rate of return, computer age, computerized trading, corporate governance, correlation coefficient, Credit Default Swap, currency risk, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Financial Instability Hypothesis, fixed income, Flash crash, forward guidance, fundamental attribution error, Glass-Steagall Act, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Minsky moment, Money creation, money market fund, mortgage debt, Myron Scholes, new economy, Northern Rock, oil shock, passive investing, Paul Samuelson, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Gordon, Robert Shiller, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, the payments system, The Wisdom of Crowds, transaction costs, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, uptick rule, Vanguard fund

The high probability that bonds and even bank accounts will outperform stocks in the short run is the primary reason why it is so difficult for many investors to stay in stocks.3 STANDARD MEASURES OF RISK The risk—defined as the standard deviation of average real annual returns—for stocks, bonds, and bills based on the historical sample of over 200 years is displayed in Figure 6-2. Standard deviation is the measure of risk used in portfolio theory and asset allocation models. FIGURE 6-2 Standard Deviation of Average Real Stock, Bond, and Bill Returns Over Various Holding Periods: Historical Data and Random Walk Hypothesis 1802–2012 Although the standard deviation of stock returns is higher than for bond returns over short-term holding periods, once the holding period increases to between 15 and 20 years, stocks become less risky than bonds.

The circle on the curve indicates the minimum risk achievable by combining a varying proportion of stocks and bonds. The curve that connects these points represents the risk and return of all blends of portfolios from 100 percent bonds to 100 percent stocks. This curve, called the efficient frontier, is the heart of modern portfolio analysis and is the foundation of asset allocation models. Note that the allocation that achieves the minimum risk is a function of the investor’s holding period. Investors with a 1-year horizon seeking to minimize their risk should hold almost their entire portfolio in bonds, and that is also true for those with the 2-year horizon. At a 5-year horizon, the allocation of stock rises to 25 percent in the minimum-risk portfolio, and it further increases to more than one-third when investors have a 10-year horizon.

As noted earlier, when prices are a random walk, the risk over any holding period is a simple function of the risk over a single period, so that the relative risk of different asset classes does not depend on the holding period. In that case the efficient frontier is invariant to the time period, and asset allocation does not depend on the investment horizon of the investor. When security markets do not obey random walks, that conclusion cannot be maintained.6 CONCLUSION No one denies that, in the short run, stocks are riskier than fixed-income assets. But in the long run, history has shown that stocks are actually safer than bonds for long-term investors whose goal is to preserve the purchasing power of their wealth.


pages: 302 words: 86,614

The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds by Maneet Ahuja, Myron Scholes, Mohamed El-Erian

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Alan Greenspan, Asian financial crisis, asset allocation, asset-backed security, backtesting, Bear Stearns, Bernie Madoff, book value, Bretton Woods, business process, call centre, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, en.wikipedia.org, family office, financial engineering, fixed income, global macro, high net worth, high-speed rail, impact investing, interest rate derivative, Isaac Newton, Jim Simons, junk bonds, Long Term Capital Management, managed futures, Marc Andreessen, Mark Zuckerberg, merger arbitrage, Michael Milken, Myron Scholes, NetJets, oil shock, pattern recognition, Pershing Square Capital Management, Ponzi scheme, proprietary trading, quantitative easing, quantitative trading / quantitative finance, Renaissance Technologies, risk-adjusted returns, risk/return, rolodex, Savings and loan crisis, short selling, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, stock buybacks, systematic bias, systematic trading, tail risk, two and twenty, zero-sum game

Perhaps the most important application of this portfolio engineering has nothing to do with the firm’s Pure Alpha strategy. In 1994, faced with his own portfolio management decisions, Dalio created the “All Weather portfolio”—a passive asset allocation that was designed to take full advantage of diversification. “In the mid-90s I started to accumulate some money that I wanted to use to establish a family trust, and for that trust I wanted the right asset allocation mix,” he recalls. “That’s when I created the All Weather portfolio, which now accounts for virtually all of that family trust money.” In 2001, following the equity market crash, Britt Harris, CIO of the Verizon pension fund, would become Bridgewater’s first institutional client to use All Weather.

Regarding All Weather, Dalio wrote, “I believe that, as this approach is increasingly adopted, it will have a radical beneficial impact on asset allocation that will be of a similar magnitude to that of traditional portfolio theory as it gained acceptance.” Indeed, following the stress test of the 2008 financial crisis when most investor portfolios were down 40 percent into the stock market bottom, an All Weather portfolio was down less than 10 percent. Over its lifetime, it has outperformed the conventional 60/40 stock/bond asset allocation with only half the risk. Seeing the potential for such a strategy, other money managers quickly sought to replicate the passive All Weather approach, and the industry adopted the name “Risk Parity” for such approaches.


pages: 402 words: 110,972

Nerds on Wall Street: Math, Machines and Wired Markets by David J. Leinweber

"World Economic Forum" Davos, AI winter, Alan Greenspan, algorithmic trading, AOL-Time Warner, Apollo 11, asset allocation, banking crisis, barriers to entry, Bear Stearns, Big bang: deregulation of the City of London, Bob Litterman, book value, business cycle, butter production in bangladesh, butterfly effect, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, Charles Babbage, citizen journalism, collateralized debt obligation, Cornelius Vanderbilt, corporate governance, Craig Reynolds: boids flock, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Danny Hillis, demand response, disintermediation, distributed generation, diversification, diversified portfolio, electricity market, Emanuel Derman, en.wikipedia.org, experimental economics, fake news, financial engineering, financial innovation, fixed income, Ford Model T, Gordon Gekko, Hans Moravec, Herman Kahn, implied volatility, index arbitrage, index fund, information retrieval, intangible asset, Internet Archive, Ivan Sutherland, Jim Simons, John Bogle, John Nash: game theory, Kenneth Arrow, load shedding, Long Term Capital Management, machine readable, machine translation, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, market fragmentation, market microstructure, Mars Rover, Metcalfe’s law, military-industrial complex, moral hazard, mutually assured destruction, Myron Scholes, natural language processing, negative equity, Network effects, optical character recognition, paper trading, passive investing, pez dispenser, phenotype, prediction markets, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Reminiscences of a Stock Operator, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Metcalfe, Ronald Reagan, Rubik’s Cube, Savings and loan crisis, semantic web, Sharpe ratio, short selling, short squeeze, Silicon Valley, Small Order Execution System, smart grid, smart meter, social web, South Sea Bubble, statistical arbitrage, statistical model, Steve Jobs, Steven Levy, stock buybacks, Tacoma Narrows Bridge, the scientific method, The Wisdom of Crowds, time value of money, tontine, too big to fail, transaction costs, Turing machine, two and twenty, Upton Sinclair, value at risk, value engineering, Vernor Vinge, Wayback Machine, yield curve, Yogi Berra, your tax dollars at work

These AI systems are much more modest than the grand AI ultimate goal of machine sentience. They are typically the extended applications of quantitative techniques, enhanced by machine learning. Artificial learning systems are now being applied in finance and investment. Applications include asset allocation, quantitative equity portfolio management, market making, and currency trading. That was 1995. To hear how some of this turned out, keep reading the next chapter. Notes 1. One of those numerical meteorology problems led to the discovery of deterministic chaos, the strong dependence of a result on what was presumed to be meaninglessly small differences in the inputs.

The simplest Basic—Variables fixed in advance AVG1 SBP gene LAG1 AVG2 LAG2 AVG1 BRP gene LAG1 AVG2 LAG2 Snappy Version—Variables and transforms coded VAR ID X FORM AVG1 LAG1 AVG2 LAG2 VAR ID Really Snappy Version—As above, plus variation in algebraic form PRED ID PRED ID OP VAR ID X FORM VAR ID X FORM AVG1 AVG1 LAG1 LAG1 AVG2 AVG2 LAG2 LAG2 Figure 8.4 Chromosomes for Global Tactical Asset Allocation (GTAA) and Tactical Currency Allocation (TCA) Models Perils and Pr omise of Evolutionary Computation on Wall Str eet 193 chromosomes assumed that the standard predictor variables used in the existing models were utilized, and only the transforms were adjusted. A more complex variant allowed the predictor variables to change as well as the transform.

Perils and Pr omise of Evolutionary Computation on Wall Str eet 195 Let’s simplify the problem by assuming the questions of what and how to predict have been decided. These were in fact the conditions that we faced at First Quadrant. The investment strategies in place called for forecasts of particular financial variables (broad market returns for the asset allocation, stock industry groups and common factors for equity strategies). The methodology of automated data collection and forecasting with expanding window time series regressions was already institutionalized. Much of the ongoing research therefore centered on questions of what to predict with, which by itself is a very large problem.


pages: 425 words: 122,223

Capital Ideas: The Improbable Origins of Modern Wall Street by Peter L. Bernstein

Albert Einstein, asset allocation, backtesting, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black-Scholes formula, Bonfire of the Vanities, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, corporate raider, debt deflation, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, full employment, Glass-Steagall Act, Great Leap Forward, guns versus butter model, implied volatility, index arbitrage, index fund, interest rate swap, invisible hand, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Arrow, law of one price, linear programming, Louis Bachelier, mandelbrot fractal, martingale, means of production, Michael Milken, money market fund, Myron Scholes, new economy, New Journalism, Paul Samuelson, Performance of Mutual Funds in the Period, profit maximization, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk free rate, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, stochastic process, Thales and the olive presses, the market place, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, transfer pricing, zero-coupon bond, zero-sum game

Meanwhile, Fouse was designing another product that has become increasingly important for Wells Fargo: tactical asset allocation, a method of calculating separately the expected returns for the stock market, the bond market, and the market for cash equivalents like Treasury bills. Then the assets are shifted to the market or markets that appear relatively most attractive. Although Sharpe (and Vertin, too) was skeptical about the feasibility of this idea at first, Fouse managed to successfully combine Sharpe’s theoretical concepts with the ideas of Markowitz, Tobin, and John Burr Williams. Although the notion is buy-low-sell-high, tactical asset allocation differs from so-called market timing in two ways.

There is ERISA to regulate corporate pension funds, and there are employee savings plans that enable employees to manage their own pension funds. There are markets for options (puts and calls) and markets for futures, and markets for options on futures. There is program trading, index arbitrage, and risk arbitrage. There are managers who provide portfolio insurance and managers who offer something called tactical asset allocation. There are butterfly swaps and synthetic equity. Corporations finance themselves with convertible bonds, zero-coupon bonds, bonds that pay interest by promising to pay more interest later on, and bonds that give their owners the unconditional right to receive their money back before the bonds come due.

In 1969, convinced that professional portfolio management sorely lacked discipline, William Fouse (above right) proposed the establishment of an index fund to his boss at Mellon Bank’s trust department, and was “figuratively thrown out of the policy meeting” for his efforts. He left after this confrontation to work for McQuown and Vertin at Wells Fargo. There he led them in developing applications of the new thinking, including the dividend discount model, asset allocation, and indexing. While living on a tugboat and teaching at Berkeley, Barr Rosenberg (left) launched a consulting practice in 1969 that played a dominant role in introducing portfolio managers to applications of the theories of Sharpe, Markowitz, and Fama. He left consulting in 1985 to start his own portfolio management group, which now has some $10 billion under management.


pages: 385 words: 128,358

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market by Steven Drobny

Abraham Maslow, Alan Greenspan, Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, buy low sell high, capital controls, central bank independence, commoditize, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, currency risk, diversification, diversified portfolio, family office, financial engineering, fixed income, glass ceiling, Glass-Steagall Act, global macro, Greenspan put, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, inverted yield curve, John Meriwether, junk bonds, land bank, Long Term Capital Management, low interest rates, managed futures, margin call, market bubble, Market Wizards by Jack D. Schwager, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, Nixon triggered the end of the Bretton Woods system, oil shale / tar sands, oil shock, out of africa, panic early, paper trading, Paul Samuelson, Peter Thiel, price anchoring, proprietary trading, purchasing power parity, Reminiscences of a Stock Operator, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, tail risk, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, Vision Fund, yield curve, zero-coupon bond, zero-sum game

The smart real money accounts like Harvard Management Company or the Yale Endowment Fund rely on diversification as their essential risk management tool.They do not have stop-losses, nor do they believe in micromanaging their portfolio.They start out by setting their asset allocation mix and then, through rebalancing, they actually increase the risk. We can illustrate this with a simple case study. Say they start out with an asset allocation mix of 50 percent equities and 50 percent bonds, and equities go down 20 percent.They now have approximately 45 percent of their portfolio in equities and 55 percent in bonds.To keep their asset allocation mix stable, they’ll go out and sell some bonds and buy some equities to get back to 50 percent in each. If the stock market drops another 20 percent, they’ll do the same thing again.

Not by diversifying through markets or by geographic regions but through how they trade. The great trades in global macro are when you combine carry with gamma.When a high yielding currency is cheap, for example, is when you can get tremendous outsized returns. THE RESEARCHER 129 Why do you think asset allocators find global macro the most difficult of the hedge fund strategies to understand? Number one, it’s not easy to assess quantitatively because it’s nonsystematic. Second, because the differences in the managers are very important in terms of how they trade rather than where they trade. Third, because the largest group of managers is in the mixed area between the guys who really shouldn’t be doing it and the guys who are doing all right but will never be superstars.

To reiterate, it is difficult to precisely define the global macro strategy because these elements of style drift and flexibility allow managers enhanced dexterity in times of crisis. But the ability to position themselves for outsized profits during such market inflection points is one reason why global macro managers should be included in the portfolios of all investors and asset allocators. Global macro has historically performed well, especially so during times of turmoil when other strategies and markets are doing poorly. As such, the addition of global macro hedge funds to any portfolio should serve as a hedge and a diversification tool, thus reducing risk. Given their idiosyncratic nature and open mandate, individual macro funds can offer a wide variety of returns.


pages: 368 words: 32,950

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile by Alexander Davidson

accounting loophole / creative accounting, algorithmic trading, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, Big bang: deregulation of the City of London, buy and hold, capital asset pricing model, central bank independence, corporate governance, Credit Default Swap, currency risk, dematerialisation, discounted cash flows, diversified portfolio, double entry bookkeeping, Edward Lloyd's coffeehouse, Elliott wave, equity risk premium, Exxon Valdez, foreign exchange controls, forensic accounting, Glass-Steagall Act, global reserve currency, high net worth, index fund, inflation targeting, information security, intangible asset, interest rate derivative, interest rate swap, inverted yield curve, John Meriwether, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market fundamentalism, Nick Leeson, North Sea oil, Northern Rock, pension reform, Piper Alpha, price stability, proprietary trading, purchasing power parity, Real Time Gross Settlement, reserve currency, Right to Buy, risk free rate, shareholder value, short selling, The Wealth of Nations by Adam Smith, transaction costs, value at risk, yield curve, zero-coupon bond

They can move prices by their buy and sell decisions, and by accepting or rejecting a bid for a company in which they hold shares, may determine the success of the bid.  156 HOW THE CITY REALLY WORKS ________________________________ Fund managers cannot invest in anything they like, as they are subject to asset allocation and asset eligibility requirements. Some funds invest in large blue chips, others in small companies, some in the UK and others abroad. These boundaries are known as the fund manager’s universe. Some fund managers are top-down, which means that they start with the global macroeconomic view and, within this framework, select individual stocks.

Under changes to accounting standards, pension funds have been required to account for future liabilities on a current basis, which means that they must have assets to meet them. As a result of the pressures, some companies have closed schemes or increased contributions, and there has been some shift in investment from equities into bonds. Liability-driven investment (LDI) responds to the need to match the asset allocation of a pension scheme more closely with future liabilities, but it requires a more sophisticated approach than shifting from equities into fixed income, given the payment profiles of funds, coupled with inflation and interest rate risk, according to the IMA. So far, LDI accounts for only 6 per cent of total pension fund assets under management, and is seen by some as only a partial solution.

It found that many pension fund trustees lacked the investment expertise to assess services sold to them by investment consultants and fund managers, and relied on a small number of investment consultants supplying bundled actuarial and investment advice. Myners found that pension funds devoted insufficient resources to asset allocation, and that unclear contractual structures created unnecessary incentives for short termism in investment. He said there was insufficient focus on adding value through shareholder engagement, and that pension fund trustees should voluntarily adopt best-practice principles for investment decision making on a ‘comply or explain’ basis.


pages: 249 words: 77,342

The Behavioral Investor by Daniel Crosby

affirmative action, Asian financial crisis, asset allocation, availability heuristic, backtesting, bank run, behavioural economics, Black Monday: stock market crash in 1987, Black Swan, book value, buy and hold, cognitive dissonance, colonial rule, compound rate of return, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, disinformation, diversification, diversified portfolio, Donald Trump, Dunning–Kruger effect, endowment effect, equity risk premium, fake news, feminist movement, Flash crash, haute cuisine, hedonic treadmill, housing crisis, IKEA effect, impact investing, impulse control, index fund, Isaac Newton, Japanese asset price bubble, job automation, longitudinal study, loss aversion, market bubble, market fundamentalism, mental accounting, meta-analysis, Milgram experiment, moral panic, Murray Gell-Mann, Nate Silver, neurotypical, Nick Bostrom, passive investing, pattern recognition, Pepsi Challenge, Ponzi scheme, prediction markets, random walk, Reminiscences of a Stock Operator, Richard Feynman, Richard Thaler, risk tolerance, Robert Shiller, science of happiness, Shai Danziger, short selling, South Sea Bubble, Stanford prison experiment, Stephen Hawking, Steve Jobs, stocks for the long run, sunk-cost fallacy, systems thinking, TED Talk, Thales of Miletus, The Signal and the Noise by Nate Silver, Tragedy of the Commons, trolley problem, tulip mania, Vanguard fund, When a measure becomes a target

Notes 10 Jason Zweig, Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich (Simon & Schuster, 2008), p. 62. 11 Lisa Kramer, ‘Does the caveman within tell you how to invest?’ Psychology Today (August 18, 2004); and M. J. Kamstra, L. A. Kramer, D. Levi and R. Wermers, ‘Seasonal Asset Allocation: Evidence from Mutual Fund Flows’ (December 2013). 12 Camelia M. Kuhnen and Brian Knutson, ‘The influence of affect on beliefs, preferences, and financial decisions,’ Journal of Financial and Quantitative Analysis (June 2011). 13 Harari, Sapiens, p. 9. 14 Kabir Sehgal, ‘What happens to your brain when you negotiate about money,’ Harvard Business Review (October 26, 2015). 15 Ibid. 16 João Vieito, Armando F.

Using this simple, mechanical strategy, Siegel notes modest outperformance when applied to the DJIA and a healthy 4% per annum outperformance when tested on the NASDAQ from 1972 to 2006. Taking a similar approach, Meb Faber tested a ten-month moving average (ten-month SMA) approach in his ‘A Quantitative Approach to Tactical Asset Allocation,’ now the second most downloaded paper on The Social Science Research Network. Faber measured the ten-month average at the end of the last trading day of each month and bought when the monthly price was above the ten-month SMA and sold and moved to cash when the monthly price was below that level.

Likewise, any rules aimed at timing market participation should lead to infrequent action and look for every excuse to stay invested. The Philosophical Economics blog suggests an interesting twist on market timing – specifically, looking at market timing in much the same way that we consider asset allocation. An investor with a long-term 40/60 allocation to stocks and cash would have little hope of an impressive return, tilted as they are toward safety. Likewise, any system that keeps investors on the sidelines 60% of the time will harm their performance dramatically. However, just as a prudent investor might keep a small portion of her wealth in low-risk assets for protection of principal and sanity, a behavioral investor can follow a systematic process for infrequently taking risk off of the table when the market is poised to do its worst.


pages: 333 words: 76,990

The Long Good Buy: Analysing Cycles in Markets by Peter Oppenheimer

Alan Greenspan, asset allocation, banking crisis, banks create money, barriers to entry, behavioural economics, benefit corporation, Berlin Wall, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, book value, Bretton Woods, business cycle, buy and hold, Cass Sunstein, central bank independence, collective bargaining, computer age, credit crunch, data science, debt deflation, decarbonisation, diversification, dividend-yielding stocks, equity premium, equity risk premium, Fall of the Berlin Wall, financial engineering, financial innovation, fixed income, Flash crash, foreign exchange controls, forward guidance, Francis Fukuyama: the end of history, general purpose technology, gentrification, geopolitical risk, George Akerlof, Glass-Steagall Act, household responsibility system, housing crisis, index fund, invention of the printing press, inverted yield curve, Isaac Newton, James Watt: steam engine, Japanese asset price bubble, joint-stock company, Joseph Schumpeter, Kickstarter, Kondratiev cycle, liberal capitalism, light touch regulation, liquidity trap, Live Aid, low interest rates, market bubble, Mikhail Gorbachev, mortgage debt, negative equity, Network effects, new economy, Nikolai Kondratiev, Nixon shock, Nixon triggered the end of the Bretton Woods system, oil shock, open economy, Phillips curve, price stability, private sector deleveraging, Productivity paradox, quantitative easing, railway mania, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Shenzhen special economic zone , Simon Kuznets, South Sea Bubble, special economic zone, stocks for the long run, tail risk, Tax Reform Act of 1986, technology bubble, The Great Moderation, too big to fail, total factor productivity, trade route, tulip mania, yield curve

It is not surprising that equities are the poorest performer in the despair phase, because this is the point in the cycle when investors anticipate a downturn in profits. What is perhaps more surprising is quite how large the potential is for outperformance by diversifying into other asset classes at this point in the cycle. It is this difference that strengthens the case for diversifying or for active asset allocation strategies as the cycle matures so that investors may increase or decrease exposures in different assets at the same time to maximise the likely risk and volatility. In the hope phase, equities tend to offer by far the best returns, with a clear ranking of the asset classes. In all six cycles, equities have outperformed bonds, and in four of the six cycles, bonds have outperformed commodities.

After all, the yield or valuation is one way of illustrating the expected or required return that an investor demands for putting money into a risky relative to a risk-free asset (or the risk premium). One of the famous discussions about this relationship, and its implications for investors and asset allocation, followed a controversial speech given by George Ross Goobey, general manager of the Imperial Tobacco pension fund in the UK in 1956 to the Association of Superannuation and Pension Funds (ASPF).2 He argued the merits of investing in equities to generate inflation-linked growth for pension funds.

., and Price, F. (2017). Exploring the link between the macroeconomic and financial cycles. In J. Hambur and J. Simon (Eds.), Monetary policy and financial stability in a world of low interest rates (RBA annual conference volume). Sydney, Australia: Reserve Bank of Australia. Campbell, J. (2000, Fall). Strategic asset allocation: Portfolio choice for long-term investors. NBER Reporter [online]. Available at https://admin.nber.org/reporter/fall00/campbell.html Claessens, S., Kose, M. A., and Terrones, M. E. (2011). How do business and financial cycles interact? IMF Working Paper 11/88. Cribb, J., and Johnson P. (2018). 10 years on – Have we recovered from the financial crisis?


The Global Money Markets by Frank J. Fabozzi, Steven V. Mann, Moorad Choudhry

asset allocation, asset-backed security, bank run, Bear Stearns, Bretton Woods, buy and hold, collateralized debt obligation, credit crunch, currency risk, discounted cash flows, discrete time, disintermediation, Dutch auction, financial engineering, fixed income, Glass-Steagall Act, high net worth, intangible asset, interest rate derivative, interest rate swap, land bank, large denomination, locking in a profit, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, money market fund, moral hazard, mortgage debt, paper trading, Right to Buy, short selling, stocks for the long run, time value of money, value at risk, Y2K, yield curve, zero-coupon bond, zero-sum game

CHAPTER 14 Bank Regulatory Capital he primary players in the global money markets are banking and financial institutions which include investment banks, commercial banks, thrifts and other deposit and loan institutions. Banking activity and the return it generates reflects the bank’s asset allocation policies. Asset allocation decisions are largely influenced by the capital considerations that such an allocation implies and the capital costs incurred. The cost of capital must, in turn, take into account the regulatory capital implications of the positions taken by a trading desk. Therefore, money market participants must understand regulatory capital issues regardless of the products they trade or they will not fully understand the cost of their own capital or the return on its use.

An appreciation of these concepts and tools is essential to an understanding of the functioning of the global money markets. The final chapter of the book, Chapter 14, describes bank regulatory capital issues. As noted, the primary players in the global money markets are large financial institutions, in particular depository institutions. These entities are subject to risk-based capital requirement. The asset allocation decisions by managers of depository institutions are largely influenced by how much capital they are compelled to hold and the capital costs incurred. As a result, these money market participants must risk-based capital issues regardless of the products they trade or else they will not fully understand the cost of their own capital or the return on its use.

Although the BIS is not a regulatory body per se and its pronouncements carry no legislative weight, to maintain investors and public confidence national authorities endeavor to demonstrate that they follow the Basel rules at a minimum. The purpose of this chapter is to outline the main elements of the Basel rules, which are in the process of being updated and modernized as Basel II. Money market participants are cognizant of the basic tenets of the rules, so as to optimize their asset allocation as well as their hedging policy. Derivatives for instance require a significantly lower level of capital allocation than cash products, which (along with their liquidity) is a primary reason for their use as hedging instruments. In addition, the credit quality of a bank’s counterparty also affects significantly the level of capital charge, and regulatory rules influence a bank’s lending policy and counterparty limit settings.


pages: 426 words: 115,150

Your Money or Your Life: 9 Steps to Transforming Your Relationship With Money and Achieving Financial Independence: Revised and Updated for the 21st Century by Vicki Robin, Joe Dominguez, Monique Tilford

asset allocation, book value, Buckminster Fuller, buy low sell high, classic study, credit crunch, disintermediation, diversification, diversified portfolio, fiat currency, financial independence, fixed income, fudge factor, full employment, Gordon Gekko, high net worth, index card, index fund, intentional community, job satisfaction, junk bonds, Menlo Park, money market fund, Parkinson's law, passive income, passive investing, profit motive, Ralph Waldo Emerson, retail therapy, Richard Bolles, risk tolerance, Ronald Reagan, Silicon Valley, software patent, strikebreaker, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, Vanguard fund, zero-coupon bond

This will reduce portfolio risk and probably increase returns as well.” Designing Your Own ʺENOUGH . . . AND THEN SOMEʺ FI3 Portfolio Your “portfolio” is a fancy way of saying the sum of your investments across “asset classes”—which simply means types of investment vehicles such as cash, bonds, stocks, real estate, foreign currency and commodities. Asset allocation is the art and science of distributing your nest egg across various classes to balance risk and reward. Instead of putting all your eggs in one basket, you are wisely limiting your market risk by spreading your money across various asset classes. This is a smart, sensible and time-tested strategy.

This approach takes the guesswork out of where and how to invest your capital, which is often the reason many people avoid the stock market in the first place. For those who plan on sticking with the FI investment program yet are willing to take some risk with a portion of their capital, this would be a very viable option. These funds enable you to pick the asset allocation that fits your long-term investment objective. Best of all, the fund automatically rebalances to maintain a consistent allocation among stocks, bonds and short-term investments. Puzzling through these options, through the risks and rewards of different paths, Sally H. decided to split her investment portfolio using the “enough . . . and then some” description of the nest egg you have at Crossover.

Here’s his explanation: Mark’s suggestions for Your NEW FI Investment Strategy The most conservative approach for this strategy would be to use the Life-Strategy Income Fund, the first of the four Vanguard Funds. Although marketed as a fund for those in retirement, it is also applicable for those who are FI and no longer working for money. This fund seeks current income and has some growth of capital. The fund applies a fixed formula that over time should reflect an asset allocation of approximately 60 percent of the fund’s assets to bonds, 20 percent to short-term reserves and 20 percent to common stocks. A balanced approach would be to use the Life-Strategy Conservative Growth Fund. This balanced approach literally balances your need for long-term growth of capital along with your need for income.


pages: 345 words: 86,394

Frequently Asked Questions in Quantitative Finance by Paul Wilmott

Abraham Wald, Albert Einstein, asset allocation, beat the dealer, Black-Scholes formula, Brownian motion, butterfly effect, buy and hold, capital asset pricing model, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delta neutral, discrete time, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, fudge factor, implied volatility, incomplete markets, interest rate derivative, interest rate swap, iterative process, lateral thinking, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, martingale, Myron Scholes, Norbert Wiener, Paul Samuelson, power law, quantitative trading / quantitative finance, random walk, regulatory arbitrage, risk free rate, risk/return, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, stochastic volatility, transaction costs, urban planning, value at risk, volatility arbitrage, volatility smile, Wiener process, yield curve, zero-coupon bond

The work later won Markowitz a Nobel Prize for Economics but is rarely used in practice because of the difficulty in measuring the parameters volatility, and especially correlation, and their instability. 1963 Sharpe, Lintner and Mossin William Sharpe of Stanford, John Lintner of Harvard and Norwegian economist Jan Mossin independently developed a simple model for pricing risky assets. This Capital Asset Pricing Model (CAPM) also reduced the number of parameters needed for portfolio selection from those needed by Markowitz’s Modern Portfolio Theory, making asset allocation theory more practical. See Sharpe (1963), Lintner (1963) and Mossin (1963). 1966 Fama Eugene Fama concluded that stock prices were unpredictable and coined the phrase “market efficiency.” Although there are various forms of market efficiency, in a nutshell the idea is that stock market prices reflect all publicly available information, that no person can gain an edge over another by fair means.

A much nicer, more realistic, time dependence than we get from the EWMA model. In GARCH(p, q) the (p, q) refers to there being p past variances and q past returns in the estimate: Why? Volatility is a required input for all classical option-pricing models, it is also an input for many asset-allocation problems and risk estimation, such as Value at Risk. Therefore it is very important to have a method for forecasting future volatility. There is one slight problem with these econometric models, however. The econometrician develops his volatility models in discrete time, whereas the option-pricing quant would ideally like a continuous-time stochastic differential equation model.

Whether this matters or not depends on several factors:• Are you holding stock for speculation or are you hedging derivatives? • Are the returns independent and identically distributed (i.i.d.), albeit non normally? • Is the variance of the distribution finite? • Can you hedge with other options? Most basic theory concerning asset allocation, such as Modern Portfolio Theory, assumes that returns are normally distributed. This allows a great deal of analytical progress to be made since adding random numbers from normal distributions gives you another normal distribution. But speculating in stocks, without hedging, exposes you to asset direction; you buy the stock since you expect it to rise.


pages: 302 words: 80,287

When the Wolves Bite: Two Billionaires, One Company, and an Epic Wall Street Battle by Scott Wapner

activist fund / activist shareholder / activist investor, AOL-Time Warner, asset allocation, Bear Stearns, Bernie Madoff, Carl Icahn, corporate governance, corporate raider, Credit Default Swap, deal flow, independent contractor, junk bonds, low interest rates, Mark Zuckerberg, Michael Milken, multilevel marketing, Pershing Square Capital Management, Ponzi scheme, price discrimination, Ronald Reagan, short selling, short squeeze, Silicon Valley, Tim Cook: Apple, unbiased observer

Do employees reap their own rewards throughout the hard-fought corporate struggle? A BuzzFeed News story that covered the fallout from another high-profile activist campaign cited a study from a few years ago that critics might say casts doubt on that question. According to a 2013 paper titled “The Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Industry Concentration,” “employees of target firms experience a reduction in work hours and stagnation in wages despite an increase in labor productivity.”1 In other words, some experts say, while the activist investor may in fact cause positive changes that improve a company’s performance, the actual rank-and-file employee may not feel those changes in their own experience.

Carl Icahn, “Carl Icahn Issues Statement Regarding Herbalife,” carlicahn.com, August 26, 2016. 7. Letter to Investors, Pershing Square Capital Management, December 7, 2016. Coda: Big Thoughts 1. Alon Brav, Wei Jiang, and Hyunseob Kim, “The Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Industry Concentration,” Abstract, p 1. INDEX AB Electrolux, 120 Ackman, William A., 1, 2, 10–11, 14–15, 16, 17–18, 21, 22, 31, 64, 69, 70–71, 72–74, 78, 87–88, 96, 98, 99, 100, 111, 130, 134–135, 137, 141–165, 171, 181–182, 189, 199, 201–202 assets under management, 165, 210 at AXA Center in 2014, 160–162 characterized, 17, 22, 23, 24, 25, 75 (see also Ackman, William A.: psychological profile of) consumer groups contacted by, 142–143 at Delivering Alpha conferences, 157, 208 deposition in May 2003, 32–33 email to Pearson, 179 emails to FTC Chairwoman, 189–190, 196–197 father of, 23, 24, 25, 26, 161 first stock purchase of, 27 and FTC settlement, 199, 201 and Handler, 204–205, 208 at Harbor Investment Conference, 152 at Harvard College and Business School, 25–26, 27 and Icahn, 2, 33–35, 100, 101–109, 113, 114, 147, 157–158, 205, 206, 207–208, 212, 215 and Johnson, 76–77, 162, 180, 195, 209 lawsuit against Icahn in 2004, 35 lobbying of, 141–144, 152, 153 and Loeb, 88–89, 90, 91 modified position on Herbalife, 215 money made for investors by, 165 money spent on Herbalife campaign, 168 psychological profile of, 5–9 (see also Ackman, William A.: characterized) public persona of, 8 restructuring Herbalife short position, 148–149 at Robin Hood Investment Conference, 149–150 sister Jeanne, 25 at Sohn special event in 2012, 78–80, 81, 83, 89 statement to author about Hallwood issue, 102 taking Pershing Square public, 180 and Valeant, 174–175, 178, 210 visit to FTC headquarters, 142 worst investment of, 40 See also Pershing Square Capital Management Ackman-Ziff real-estate brokerage firm, 24 Actavis, 170 activists.

See also pyramid schemes Porter, Michael, 153 Post Holdings, 148 “Preliminary Report on Bill Ackman” (Dietz), 5–9 Pre-Paid Legal Services, 3031, 32, 33 PricewaterhouseCoopers (PwC), 133, 139–140 Protess, Ben, 96 proxy fights, 38, 72, 118, 119, 120, 126, 128, 215 put options, 148–149, 178, 215 pyramid schemes, 13, 14, 19, 44, 138, 181 laws concerning, 17, 75, 112 and recruiting, 149 See also Herbalife: as pyramid scheme Ramey, Tim, 83, 132, 133, 200 Ramirez, Edith, 142, 143, 144, 189–190, 196, 198 Rausch, George, 28 Reagan, Ronald, 43 Real Bill Ackman, The (website), 178 “Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Industry Concentration, The,” 214 real estate investment trusts (REIT), 29, 30, 33 recessions, 119. See also Great Recession redemptions, 30, 33, 180, 210 Regan, Trish, 100 regulators, 73, 85, 89, 193. See also Federal Trade Commission; Securities and Exchange Commission Reuters, 155 Rich, Jessica, 146 Richard, Christine S., 10, 12–13, 14, 15, 17, 18, 19–20, 64–67, 79, 160 RJR Nabisco, 126 Robin Hood Investment Conference, 149, 190 Rockefeller Center, 29 Rogers, Kenny, 46 Rory, Kim, 97 Roth, William V., 47 Rudman, Warren B., 47 Russia, 58 Salix Pharmaceuticals, 171 Sánchez, Linda T., 137–138, 144 Sánchez, Loretta, 144 Sard, George, 167–168 Saxon Industries, 120–121 Schaitkin, Keith, 34, 35, 111 Schechter, David, 186 Schiller, Howard, 181 Schnall, Elliot, 116–117, 118 Schuessler, Jack, 36 Schulman, Diane, 12, 20 Schultz, Howard, 40 Sears department store chain, 37 Securities and Exchange Commission (SEC), 1, 10, 63, 64, 88, 91, 96, 112, 121, 125, 128, 139, 149, 150, 170, 205 investigating Ackman, 180 and Madoff, 190 Seyforth, Mark, 43–44 shale gas, 183 shareholder activists, 1–4, 9, 29, 36, 70, 82, 119, 127 impact on corporate culture, 213–214 share prices decreases, 6, 11, 16, 32, 38, 39, 63, 64, 71, 76, 82, 83, 93, 94, 100, 117, 119, 133, 151, 152, 154, 155, 163, 164, 174, 175, 179, 183–184, 187, 188, 193, 206 increases, 2, 3, 32, 36, 68, 70, 71, 84, 85, 88, 96, 97, 113, 129, 133, 134, 139, 140, 148, 150, 161, 165, 168, 169, 171, 180, 182, 183, 184, 187, 188, 195, 197, 211 Kennedy Slide on Wall Street (1962), 117 See also Herbalife: stock prices of; Valeant pharmaceutical company: stock prices of Shaw, Bryan, 133 short selling, 10, 12, 13, 30, 31, 59, 62, 63, 83, 108, 127, 147, 170, 174 of Herbalife shares, 17, 64–65, 66, 68, 72, 73, 75, 76, 109, 147, 148–149, 199, 201–202 and short squeezes, 85, 106, 107, 112, 139, 148, 202, 203, 215 Silverman, Howard, 117 Simplicity Pattern, 121 Singapore, 58 Singer, Paul, 164 Slater, Robert, 120 Slendernow company, 43, 44 Small Business Administration, 62 Société du Louvre, 113 Sohn, Paul, 134–137, 138–139, 143 Sohn special event, 75–81.


pages: 389 words: 81,596

Quit Like a Millionaire: No Gimmicks, Luck, or Trust Fund Required by Kristy Shen, Bryce Leung

Affordable Care Act / Obamacare, Airbnb, Apollo 13, asset allocation, barriers to entry, buy low sell high, call centre, car-free, Columbine, cuban missile crisis, Deng Xiaoping, digital nomad, do what you love, Elon Musk, fear of failure, financial independence, fixed income, follow your passion, Great Leap Forward, hedonic treadmill, income inequality, index fund, John Bogle, junk bonds, longitudinal study, low cost airline, Mark Zuckerberg, mortgage debt, Mr. Money Mustache, obamacare, offshore financial centre, passive income, Ponzi scheme, risk tolerance, risk/return, side hustle, Silicon Valley, single-payer health, Snapchat, Steve Jobs, subprime mortgage crisis, supply-chain management, the rule of 72, working poor, Y2K, Zipcar

The research was done, our portfolio designed, our investment funds picked out, and our combined life savings ($100,000) sitting in our brokerage accounts, waiting for their marching orders. Here’s the portfolio Bryce and I decided on: It had a 60 percent equity/40 percent fixed-income asset allocation, with the equity portion split evenly among Canada, the United States, and EAFE. “Ready?” Bryce asked. “Yes. I . . . I think . . . ,” I stammered. My heart raced. This was the first truly “rich person” thing I had ever done. I had gone from being relieved to have any money at all to learning how to grow it.

“Go back to the research.” Step 4: Rebalance There’s a fourth step to Modern Portfolio Theory. It sounds relatively simple but there’s a lot of nuance behind it, and it saved us during the Great Financial Crisis. Here’s how. Modern Portfolio Theory states that after you pick your asset allocations, you need to monitor how your holdings fluctuate over time, and if they start to deviate too much from your allocation targets, you should rebalance. So, for example, if my initial portfolio targets changed like so, then Modern Portfolio Theory would instruct me to do the following: Asset Action Amount Canadian Index SELL 2% USA Index SELL 2% EAFE Index SELL 1% Bonds BUY 5% While this simple act of rebalancing may not seem like that big of a deal, it allows the investor to do some pretty clever things.

And if it’s not obvious why overriding your emotions is important, let’s see what happens in a crash situation. During the 2008 crisis, every few days there would be another stomach-churning five-to-seven-hundred-point drop in the stock market. This caused my overall portfolio to go down since the majority of my holdings was in equities. But when I pulled up my asset allocation, it actually looked something like this: Even though the overall size of my pie was shrinking, my bond holdings were going up! This is because in times of financial crisis, money flows from things that are risky (stocks) into things that are safe (bonds). Surrounded by alarming headlines and our dwindling portfolio size, every instinct in my body screamed at me to sell it all, run shrieking into the woods, and never invest again.


A Primer for the Mathematics of Financial Engineering by Dan Stefanica

asset allocation, Black-Scholes formula, capital asset pricing model, constrained optimization, delta neutral, discrete time, Emanuel Derman, financial engineering, implied volatility, law of one price, margin call, quantitative trading / quantitative finance, risk free rate, Sharpe ratio, short selling, time value of money, transaction costs, volatility smile, yield curve, zero-coupon bond

The expected values, standard deviations, and correlations of the rates of return of the assets are: 0.08; (11 0.12; (12 0.16; (13 0.05; (14 /-L1 /-L2 /-L3 /-L4 Se- qT -C, - Ke- rT - if C, if Se(r-q)T Se(r-q)T < > K· K' (iii) Show that f(x) is a strictly increasing function and S e -qT - 0.25; - 0.25; 0.25; 0, \j i = 1 : 3. 0.25; P1,2 0.25; P2,3 0.30; P1,3 0.20; Pi,4 { - - K e- rT -0 < f(x) < - 0 < f(x) < Se- qT Se- qT - 0 if 0,' if Se(r-q)T Se(r-q)T <_ K', > K. (iv) For w~~t range of call option values does the problem f(x) = 0 have a posItive solution? Compare your result to the range g' . (3.92). Iven In (i) Find the asset allocation for a minimal variance portfolio with 12% expected rate of return; (ii) Find the asset allocation for a maximum expected return portfolio with standard deviation of the rate of return equal to 24%. 5. A .three mon~hs a~-~he-money call on an underlying asset with spot pnce 30 paymg d:vldend~ continuously at a 2% rate is worth $2.5. Assume that the nsk free mterest rate is constant at 6%.

In other words, a portfolio where th~ :veight of ~sset i in the portfolio is equal to WO,i, for i = 1 : 4, is the mlllImum vanance portfolio with rate of return J-Lp. 0 Example: Find a minimal variance portfolio with 11:5% .expected rate. of return, if four assets can be traded to set up the portfoho, gIVen the follOWIng data on the rates of return of the assets: J-LI J-L2 J-L3 J-L4 0.09; 0"1 0.12; 0"2 0.15; 0"3 0.06; 0"4 = = = 0.2; 0.3; 0.35; 0.15; PI,2 P2,3 PI,3 pi,4 - 0.5; 0.25; 0.35; 0, \;j i = WO,4 An,l An,2 The asset allocation for a minimal variance portfolio with 11.5% expected rate of return is as follows: 54.75% in asset 1, 44.03% in asset 2, 13.5% in asset 3, while shorting an amount of asset 4 equal to 12.29% of the value of the portfolio. For example, if the value of the portfolio is $1,000,000, then $122,872 of asset 4 is shorted (borrowed and sold for cash) $547,452 is invested in asset 1, $440,377 is invested in asset 2, and $135,042 is invested in asset 3.


pages: 303 words: 84,023

Heads I Win, Tails I Win by Spencer Jakab

Alan Greenspan, Asian financial crisis, asset allocation, backtesting, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, book value, business cycle, buy and hold, collapse of Lehman Brothers, correlation coefficient, crowdsourcing, Daniel Kahneman / Amos Tversky, diversification, dividend-yielding stocks, dogs of the Dow, Elliott wave, equity risk premium, estate planning, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, fear index, fixed income, geopolitical risk, government statistician, index fund, Isaac Newton, John Bogle, John Meriwether, Long Term Capital Management, low interest rates, Market Wizards by Jack D. Schwager, Mexican peso crisis / tequila crisis, money market fund, Myron Scholes, PalmPilot, passive investing, Paul Samuelson, pets.com, price anchoring, proprietary trading, Ralph Nelson Elliott, random walk, Reminiscences of a Stock Operator, risk tolerance, risk-adjusted returns, Robert Shiller, robo advisor, Savings and loan crisis, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, subprime mortgage crisis, survivorship bias, technology bubble, transaction costs, two and twenty, VA Linux, Vanguard fund, zero-coupon bond, zero-sum game

Named for the principality with the famous casino, Monte Carlo simulations have nothing to do with gambling. Instead they involve running many simulated outcomes to determine probable ones. Each time there will be forty randomly selected stock and forty randomly selected Treasury note returns. The first scenario uses the same asset allocation as the original example, a 60/40 split between stocks and bonds rebalanced annually. The second scenario employs what at first might seem like a riskier strategy. Instead of 60 percent we’ll start with an aggressive 85 percent stock allocation at age twenty-five and reduce it by a percentage point each year.

Since then the industry has become a lot more sophisticated and, unless you’re willing to take an unemotional look at your portfolio and get back to your age-appropriate setting yourself on a regular basis, choosing a cheap fund that does it automatically is often the best bet. Such funds go by different names, including “target date” or “life cycle” (not to be confused with “lifestyle funds”). The basic idea is to do more or less what I did in the second example by establishing a “glide path” of asset allocation that rebalances and gets less risky as retirement nears. For example, one offered by mutual fund giant Vanguard Group supposedly appropriate for me, a forty-six-year-old, is the Vanguard Target Retirement 2035 Fund. Nearly 50 percent of assets are in U.S. stocks and a bit less than a third in international ones.

Hindsight will only make you money if you have a time machine to go along with it, so you would have to see something in a manager’s style or written statements that made him or her one of those 3 percent of stars. I doubt you can. Even if you pay little attention to the name of the man or woman managing your fund and instead are more of an asset allocator, picking a category of fund you think will do well, those numbers also need to be viewed with a jaundiced eye. Their actual results may in fact be worse than what asset managers claim. Industry statistics slice and dice the performance of every single fund and also every category in mind-numbing detail, but there’s one important piece of information they leave out: the funds that are no longer with us.


Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies by Jeremy J. Siegel

addicted to oil, Alan Greenspan, asset allocation, backtesting, behavioural economics, Black-Scholes formula, book value, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, cognitive dissonance, compound rate of return, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Money creation, Myron Scholes, new economy, oil shock, passive investing, Paul Samuelson, popular capitalism, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, stock buybacks, stocks for the long run, subprime mortgage crisis, survivorship bias, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, uptick rule, Vanguard fund, vertical integration

In the long run, getting out of the market at the peak does not guarantee that you will beat the buy-and-hold investor. 2 Chapter 19 on behavioral economics analyzes how investors’ aversion to taking losses, no matter how small, affects portfolio performance. 28 PART 1 The Verdict of History FIGURE 2–2 Average Total Real Returns after Major Twentieth-Century Market Peaks ($100 Initial Investment) STANDARD MEASURES OF RISK The risk—defined as the standard deviation of average real annual returns—for stocks, bonds, and bills based on the historical sample of over 200 years is displayed in Figure 2-3. Standard deviation is the measure of risk used in portfolio theory and asset allocation models. Although the standard deviation of stock returns is higher than for bond returns over short-term holding periods, once the holding period increases to between 15 and 20 years, stocks become less risky than bonds. Over 30-year periods, the standard deviation of a portfolio of equities falls to less than three-fourths that of bonds or bills.

The circle falling somewhere on the curve indicates the minimum risk achievable by combining stocks and bonds. The curve that connects these points represents the risk and return of all blends of portfolios from 100 percent bonds to 100 percent stocks. This curve, called the efficient frontier, is the heart of modern portfolio analysis and is the foundation of asset allocation models. Investors can achieve any combination of risk and return along the curve by changing the proportion of stocks and bonds. Moving up the 5 Short-term Treasury securities such as bills have often enjoyed safe-haven status. Rising bond prices in a tumultuous equity market also occurred during the October 19, 1987, stock market crash, but much of the rise then was predicated on the (correct) belief that the Fed would lower short-term rates. 6 This section, which contains some advanced material, can be skipped without loss of continuity.

In 20 percent of all 10-year periods from 1926, stocks have fallen short of a 2.0 percent real return. For most long-term investors, inflation-indexed bonds should dominate nominal bonds in a portfolio. 8 For an excellent review of this literature see Luis M. Viceira and John Y. Campbell, Strategic Asset Allocation: Portfolio Choice for Long-Term Investors, New York: Oxford University Press, 2002. Also see Nicholas Barberis, “Investing for the Long Run When Returns Are Predictable,” Journal of Finance, vol. 55 (2000), pp. 225–264. Paul Samuelson has shown that mean reversion will increase equity holdings if investors have a risk aversion coefficient greater than unity, which most researchers find is the case.


pages: 526 words: 144,019

A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History by Diana B. Henriques

Alan Greenspan, asset allocation, bank run, banking crisis, Bear Stearns, behavioural economics, Bernie Madoff, Black Monday: stock market crash in 1987, break the buck, buttonwood tree, buy and hold, buy low sell high, call centre, Carl Icahn, centralized clearinghouse, computerized trading, Cornelius Vanderbilt, corporate governance, corporate raider, Credit Default Swap, cuban missile crisis, Dennis Tito, Edward Thorp, Elliott wave, financial deregulation, financial engineering, financial innovation, Flash crash, friendly fire, Glass-Steagall Act, index arbitrage, index fund, intangible asset, interest rate swap, It's morning again in America, junk bonds, laissez-faire capitalism, locking in a profit, Long Term Capital Management, margin call, Michael Milken, money market fund, Myron Scholes, plutocrats, Ponzi scheme, pre–internet, price stability, proprietary trading, quantitative trading / quantitative finance, random walk, Ronald Reagan, Savings and loan crisis, short selling, Silicon Valley, stock buybacks, The Chicago School, The Myth of the Rational Market, the payments system, tulip mania, uptick rule, Vanguard fund, web of trust

In March 1982, LOR placed a dramatic advertisement in Pensions & Investment Age, an influential industry publication. The ad explained that the firm’s strategy “has the effect of insuring an equity portfolio against loss—a guaranteed equity investment.” LOR had started referring to its product as “dynamic asset allocation,” and the ad claimed that a dollar invested according to the strategy in 1971 would have grown to $2.61 ten years later, compared to $1.89 from an investment in the S&P 500 and $2.18 from Treasury bills. Michael Clowes, a founding editor of the pension industry publication, offered a blessedly simple explanation of the new strategy: “Leland and Rubinstein had developed a computer program that would tell a pension fund, or the fund’s money manager, to sell stocks and increase cash in a carefully measured way as stock prices fell.

In late 1983, LOR had licensed its portfolio insurance concept as the basis for Aetna’s “Guaranteed Equity Management,” or GEM, strategy. One of the things that made the GEM strategy “so remarkable,” one ad for the product noted, was the “impeccable” credentials of Leland O’Brien Rubinstein Associates: “They provide dynamic asset allocation services and nothing but. Currently, they are serving 20 other portfolios totaling over $600 million.” Remarkable, but true: in the short time since the flattering Fortune magazine article in the spring of 1982, the total assets protected by portfolio insurance—by LOR directly and by its licensees—had grown from $150 million to $600 million.

chuckling and expressing surprise: Ibid. In a flash, the penny dropped: LOR interview 2016. testing their concept on a small scale: Ibid. It was a great success: Clowes, The Money Flood, pp. 210–11. to introduce their idea for “portfolio insurance” to the world: Later, the concept would be called “dynamic hedging” and “dynamic asset allocation,” but the evidence that “portfolio insurance” was the original name is indisputable: the first paper about the concept that Leland published is “Who Should Buy Portfolio Insurance?” (Working Paper No. 95, Institute of Business and Economic Research, University of California at Berkeley, December 1979).


Concentrated Investing by Allen C. Benello

activist fund / activist shareholder / activist investor, asset allocation, barriers to entry, beat the dealer, Benoit Mandelbrot, Bob Noyce, Boeing 747, book value, business cycle, buy and hold, carried interest, Claude Shannon: information theory, corporate governance, corporate raider, delta neutral, discounted cash flows, diversification, diversified portfolio, Dutch auction, Edward Thorp, family office, fixed income, Henry Singleton, high net worth, index fund, John Bogle, John von Neumann, junk bonds, Louis Bachelier, margin call, merger arbitrage, Paul Samuelson, performance metric, prudent man rule, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, shareholder value, Sharpe ratio, short selling, survivorship bias, technology bubble, Teledyne, transaction costs, zero-sum game

This must have been an extraordinarily difficult conversion because his public reputation was tied to his skill as an economist, and he had to acknowledge semi‐publicly that his macroeconomic ideas didn’t provide him with any “superior knowledge.” His investment performance improved after his 1932 intellectual shift. Chambers et al. note that his subsequent improvement in returns was a result of his “no longer having to make top‐down asset allocation decisions which compromised his stock‐picking instincts” because “he could now take greater care in timing the purchases of those stocks he liked.” The portfolio he managed for King’s College outshone the market throughout the 1930s, except for the crash of 1938, when he lost two‐thirds of his fortune.

Outside its holding in Sequoia, and its brief flirtation with a technology investor, Grinnell also directly held between 8 to 10 other stocks, but little in the way of cash and fixed income. Rosenfield and Gordon purposely minimized Grinnell’s exposure to fixed income:67 We didn’t really like having fixed income. We always had the philosophy that cash was the inverse relationship of having enough good ideas. We didn’t have asset allocation, no consultant. If we had enough good ideas, we had zero cash. Grinnell College: The School of Concentration 169 The board, however, wanted Gordon to hold more in fixed income so that the endowment didn’t need to sell stocks to pay the college’s operating expenses. The board would say, “You’re encroaching upon endowment:”68 The board would say, “You’ve had to sell stocks to give us our 5 percent,” if we’d be fully invested.

The board was about 90 percent attorneys when I was there. It was really amazing. Gordon says they often had trouble finding ideas anyway, and tended to hold more cash than they thought was ideal:69 Cash and good ideas were an inverse relationship. So, if we had cash, it means we had a shortage of good ideas. It wasn’t because of asset allocation. And there were times we didn’t have any cash when we would need to spend capital gains [to meet the college’s 4.75 percent annual draw]. Rosenfield and Gordon kept Grinnell’s investment expenses cut to the bone. Grinnell had no investment staff, no consultants, and no chief investment officer.


Risk Management in Trading by Davis Edwards

Abraham Maslow, asset allocation, asset-backed security, backtesting, Bear Stearns, Black-Scholes formula, Brownian motion, business cycle, computerized trading, correlation coefficient, Credit Default Swap, discrete time, diversified portfolio, financial engineering, fixed income, Glass-Steagall Act, global macro, implied volatility, intangible asset, interest rate swap, iterative process, John Meriwether, junk bonds, London Whale, Long Term Capital Management, low interest rates, margin call, Myron Scholes, Nick Leeson, p-value, paper trading, pattern recognition, proprietary trading, random walk, risk free rate, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, statistical model, stochastic process, systematic trading, time value of money, transaction costs, value at risk, Wiener process, zero-coupon bond

The correlation between asset 1 and asset 2 The expected return and volatility of the resulting portfolio will depend on the weighting of the assets. As the weighting changes between assets, the risk/reward of the portfolio will also change. However, the path between the two assets won’t be a straight line because of the non‐linearity in the volatility calculation. (See Figure 3.11, Asset Allocation.) On a trading desk, the temptation might be to assign all of the assets to the portfolio with the highest return. However, trading desks are typically limited by risk rather than capital. As a result, getting a better risk/reward relationship allows a trading desk to take on larger positions.

(See Figure 3.12, Risk/Return.) 80 RISK MANAGEMENT IN TRADING 16.0% 100% Asset 1 Expected Return 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 100% Asset 2 9.0% 4.0% 4.5% 5.0% 5.5% 6.0% 7.0% 6.5% 7.5% 8.0% Portfolio Volatility Asset 1 Asset 2 FIGURE 3.11 Expected return (μ) Volatility (σ) Correlation (ρ) 15.0% 10.0% 7.5% 5.0% 50% Asset Allocation 2.35 k/R ew ard 2.25 2.20 Ris 2.15 tim al 2.10 2.05 Op Average Return / Volatility 2.30 2.00 1.95 1.90 1.85 Weight of Asset 1 FIGURE 3.12 Risk/Return 0% 10 0. .0 % 90 .0 % 80 % 70 .0 60 .0 % 50 .0 % .0 % 40 0% 30 . % 20 .0 10 .0 % 0 1.80 81 Financial Mathematics NORMAL DISTRIBUTIONS In finance, the most important continuous probability distribution is called the normal distribution.

As a result, the trading desk might be able to give each strategy a $700,000 VAR limit. In other words, compared to investing in a single strategy, diversification might allow the trading desk to increase its expected profit by 40 percent. Combining multiple trading strategies is an example of an asset allocation problem. Mathematically, the core concept behind diversification is that variance (the square of the standard deviation) is additive. (See Equation 4.3, Portfolio Variance.) σ2P = σ2A + σB2 + 2ρσ A σB (4.3) where σP Dollar Volatility of the combined portfolio σP Dollar Volatility of strategy A σP Dollar Volatility of strategy B ρ Correlation between strategy A and strategy B TRADE SURVEILLANCE After a trade is made, it is common for trading firms to monitor the trading process to ensure that firm policies are being followed.


Solutions Manual - a Primer for the Mathematics of Financial Engineering, Second Edition by Dan Stefanica

asset allocation, Black-Scholes formula, constrained optimization, delta neutral, financial engineering, implied volatility, law of one price, risk free rate, yield curve, zero-coupon bond

Let 均 x 0=(阳 均0 , 1 , X协 Zωa Z 缸 a丑 n1 沁0=(λ λ 沁0,1 , λ 沁O叩 ω ,2公). From (8.1) it follows that \7 (x,)..)F(xo, λ0) = 0 is equivalent 179 180 CHAPTER 8. LAGRANGE MULTIPLIERS. NEWTON'S JVIETHOD. eη 飞八 ZZ 缸, 2 队,川 -3 "ZZ 在-·龟, 0 , hm 12132 ZZ mm 一一十= λλJzll 十十 22J4 句B A - - 矶, 认入川, ;「 (ii) Find the asset allocation for a maximum expected return portfolio with standard deviation of the rate of return equal to 24%. 0; 0; 0; 13. Solution: For i 二 1 : 4 , denote by Wi the weight of asset i in the portfolio. Recall that the expected value and the variance of the rate of return of a portfolio made of the four assets given above are , respectively, 、 、E E, , , f'51 飞 。

(8.6) (i) We are looki吨 for a portfolio with given expected rate of return E[R] = 0.12 and minimal variance of the rate of return. Using (8 .4-8.6) , we obtain that this problem can be written as the following constrained optimization problem: 且ndω° such that gErof(ω) = f(ω0) , + 6X2 + 13 and 2 D 几位 ) E[R] = ω1μl 十 ω2μ2+ω3μ3 十 ω4μ4; var(R) = ω?σ? 十 ω2σ~+ω;σ; 十 ωiσ~ I D 2 凡 (x) 工 181 (i) Find the asset allocation for a mi山nal variance portfolio with 12% expected rate of return; 000020·7 。; hL ,," , 一­ 4EA diU2' 们向 Cο. O EflJll σba WUW 1μe 4ιu·τ···4 ρUQU ωt f w u H M 4L m h z-7 'b s QU m m E S 8.1. SOLUTIONS TO CHAPTER 8 EXERCISES 呐咄 w t扭ler陀e ω (8.7) =( ωi) 山 )i= 吐= f(ω 叫) = 0.0625ωi + 0.0625ω;+0Oω9ω:+O 04tωρi 一 0.03125w1W2 - 0.0375ω2ω3 十 0.0375ω1ω3; (8.8) 飞 /ωl 十 ω2 十 ω3 十 ω4- 1 g(ω) = \ 0 伽1 十 O 山2 + 0.16ω3+ 0 伽4 一- 0.12 ) (8.9) It is easy to see that rank( \7 g(ω)) = 2 for 缸lY ωεJR 4 , since The Lagrange multipliers method can therefore be used variance portfolio.


pages: 198 words: 53,264

Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick

activist fund / activist shareholder / activist investor, Airbnb, Albert Einstein, AOL-Time Warner, asset allocation, Bear Stearns, behavioural economics, bitcoin, Bretton Woods, buy and hold, buy low sell high, Carl Icahn, cognitive bias, cognitive dissonance, Credit Default Swap, cryptocurrency, Daniel Kahneman / Amos Tversky, endowment effect, financial engineering, financial innovation, fixed income, global macro, hindsight bias, index fund, initial coin offering, invention of the wheel, Isaac Newton, Jim Simons, John Bogle, John Meriwether, Kickstarter, Long Term Capital Management, loss aversion, low interest rates, Market Wizards by Jack D. Schwager, mega-rich, merger arbitrage, multilevel marketing, Myron Scholes, Paul Samuelson, Pershing Square Capital Management, quantitative easing, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Thaler, Robert Shiller, short squeeze, Snapchat, Stephen Hawking, Steve Jobs, Steve Wozniak, stocks for the long run, subprime mortgage crisis, transcontinental railway, two and twenty, value at risk, Vanguard fund, Y Combinator

He was able to achieve these results because he stopped trying to play the impossible game of outthinking everybody else in the near term. Figuring out what the average opinion expects the average opinion to be was beyond even one of the most brilliant men to ever lace 'em up. The lesson for us mortals is obvious: Do not play this game! Think long term and focus on asset allocation. Successful investors construct portfolios that allow them to capture enough of the upside in a bull market without feeling as if they're getting left behind, and a portfolio that allows them to survive a bear market when everyone around them is losing their mind. This is no small feat, simple as this sounds; this is a very difficult exercise.

It's hard to tell yourself that you held onto a stock that doubled because you thought it would double again. We can't know what the future holds, so it's crucial that we minimize regret. Harry Markowitz who practically invented modern portfolio theory once spoke about how regret drove his own asset allocation: “I visualized my grief if the stock market went way up and I wasn't in it – or it went way down and I was completely in it. My intention was to minimize my future regret.”18 The best way to minimize future regret when you have big gains or losses is to sell some. There's no right amount, but for example, if you sell 20% and the stock doubles, hey, at least you still have 80% of it.


pages: 535 words: 158,863

Superclass: The Global Power Elite and the World They Are Making by David Rothkopf

"World Economic Forum" Davos, airport security, Alan Greenspan, anti-communist, asset allocation, Ayatollah Khomeini, bank run, barriers to entry, Bear Stearns, Berlin Wall, Big Tech, Bob Geldof, Branko Milanovic, Bretton Woods, BRICs, business cycle, carried interest, clean water, compensation consultant, corporate governance, creative destruction, crony capitalism, David Brooks, Doha Development Round, Donald Trump, fake news, financial innovation, fixed income, Francis Fukuyama: the end of history, Gini coefficient, global village, high net worth, income inequality, industrial cluster, informal economy, Internet Archive, Jeff Bezos, jimmy wales, John Elkington, joint-stock company, knowledge economy, Larry Ellison, liberal capitalism, Live Aid, Long Term Capital Management, Mahatma Gandhi, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, Martin Wolf, mass immigration, means of production, Mexican peso crisis / tequila crisis, Michael Milken, Mikhail Gorbachev, military-industrial complex, Nelson Mandela, old-boy network, open borders, plutocrats, Ponzi scheme, price mechanism, proprietary trading, Savings and loan crisis, shareholder value, Skype, special economic zone, Steve Jobs, Thorstein Veblen, too big to fail, trade liberalization, trickle-down economics, upwardly mobile, vertical integration, Vilfredo Pareto, Washington Consensus, William Langewiesche

Certainly one thing that strikes any student of elites throughout history is that more today are associated with great institutions (rather than, say, status derived from family ties or purely from individual accomplishments) than at any time in the past. Nonetheless, in most organizations, one or two—at most just a tiny handful—of senior executives have the preponderance of power to make critical decisions. Perhaps the most important of these have to do with asset allocation, the central decisionmaking responsibility of any leader, and agenda-setting, the often underestimated tool that as we will see is perhaps the single greatest unifying perquisite of the superclass. THE POWER OF MONEY Historically, the definition of being rich was having the resources that enabled one not to have to work for a living.

When justifying the benefits to society of allowing giant paydays for the wealthy, one of the first rationales given is that such people are best able to reinvest the money and thus create jobs and fuel growth. The merits of the argument aside, it is certainly true that having substantial financial resources translates into that asset allocation power mentioned earlier, enabling those who have it to decide which projects get resources, which ideas are supported, and who will have a chance at big returns in the future. Today, for example, many of the business leaders who grew rich on the information technology boom—Sun Microsystems cofounder Vinod Khosla, Google founders Sergey Brin and Larry Page, AOL founder Steve Case, eBay founder Pierre Omidyar, and Microsoft founders Bill Gates and Paul Allen, to name a few—are all invested in one way or another in alternative energy companies, another “paradigm-shifting” set of technologies.

AGENDA-SETTING Of all the powers the superclass possesses, one of the clearest and most important is the ability to set agendas for the rest of us. These individuals can’t necessarily always make final decisions, they can’t always project force, they can’t always even agree. But in their own organizations, as presidents and chairmen, chief investment officers and commanders, they can set priorities, guide critical asset allocation decisions, and determine who among their subordinates will have the most influence. And in the context of meetings like Davos, where specific outcomes, despite Klaus Schwab’s protestations to the contrary, are few and far between, what they can do very well is shape a majority view among participating elites—or tap into the zeitgeist of the elite—and thereby set an agenda for the companies and governments they control and influence the agenda-setting of others that follow them, compete with them, or emulate them.


pages: 389 words: 109,207

Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", Albert Einstein, anti-communist, asset allocation, Bear Stearns, beat the dealer, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black-Scholes formula, Bletchley Park, Brownian motion, buy and hold, buy low sell high, capital asset pricing model, Claude Shannon: information theory, computer age, correlation coefficient, diversified portfolio, Edward Thorp, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, Henry Singleton, high net worth, index fund, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, John Meriwether, John von Neumann, junk bonds, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Michael Milken, Myron Scholes, New Journalism, Norbert Wiener, offshore financial centre, Paul Samuelson, publish or perish, quantitative trading / quantitative finance, random walk, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Ronald Reagan, Rubik’s Cube, short selling, speech recognition, statistical arbitrage, Teledyne, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, traveling salesman, value at risk, zero-coupon bond, zero-sum game

In 1974 Paul Samuelson wrote that a high-PQ trader “is in effect possessed of a ‘Maxwell’s Demon’ who tells him how to make capital gains from his effective peek into tomorrow’s financial page reports.” Like Maxwell’s demon, Shannon’s stock system turns randomness into profit. Shannon’s “demon” partitions his wealth into two assets. As the asset allocation crosses the 50 percent line from either direction, the demon makes a trade, securing an atom-sized profit or making an atom-sized purchase—and it all adds up in the long run. The “trick” behind this is simple. The arithmetic mean return is always higher than the geometric mean. Therefore, a volatile stock with zero geometric mean return (as assumed here) must have a positive arithmetic mean return.

It’s impractical to gauge everyone’s taste for salt—or risk. Thorp was managing money not only for wealthy individuals but for corporate pensions and Harvard University’s endowment. For most of these investors, Princeton-Newport was just one of many investments. The investors could do their own asset allocation. It was Thorp’s job to provide an attractive financial product. Undoubtedly, investors judged the fund largely by its risk-adjusted return. In articles published in 1972 and 1976, Harry Markowitz made this point most forcefully. The utility function of a long-term investor should be denominated in compound return, not terminal wealth, Markowitz suggested.

Economists are not primarily in the business of studying gambling systems. Nor did the exotic doings of arbitrageurs attract much attention from the theorists of Samuelson’s generation. The main issue of academic interest on which the Kelly system appeared to have something new to say was the asset allocation problem of the typical investor. How much of your money should you put in risky, high-return stocks, and how much in low-risk, low-return investments like bonds or savings accounts? The Kelly answer is to put all of your money in stocks. In fact, several authors have concluded that the index fund investor is justified in using a modest degree of leverage.


pages: 432 words: 106,612

Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever by Robin Wigglesworth

Albert Einstein, algorithmic trading, asset allocation, Bear Stearns, behavioural economics, Benoit Mandelbrot, Big Tech, Black Monday: stock market crash in 1987, Blitzscaling, Brownian motion, buy and hold, California gold rush, capital asset pricing model, Carl Icahn, cloud computing, commoditize, coronavirus, corporate governance, corporate raider, COVID-19, data science, diversification, diversified portfolio, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, fear index, financial engineering, fixed income, Glass-Steagall Act, Henri Poincaré, index fund, industrial robot, invention of the wheel, Japanese asset price bubble, Jeff Bezos, Johannes Kepler, John Bogle, John von Neumann, Kenneth Arrow, lockdown, Louis Bachelier, machine readable, money market fund, Myron Scholes, New Journalism, passive investing, Paul Samuelson, Paul Volcker talking about ATMs, Performance of Mutual Funds in the Period, Peter Thiel, pre–internet, RAND corporation, random walk, risk-adjusted returns, road to serfdom, Robert Shiller, rolodex, seminal paper, Sharpe ratio, short selling, Silicon Valley, sovereign wealth fund, subprime mortgage crisis, the scientific method, transaction costs, uptick rule, Upton Sinclair, Vanguard fund

“A given investment in active may or may not be the best decision for an individual particular investor but for the system overall there is a benefit in the efficient allocation of capital,” Fraser-Jenkins argued.21 “Rather than looking at the real economy and seeking to understand its future development, passive allocation self-referentially looks to the financial economy to inform its asset allocation choices.” There is a conundrum at the heart of the efficient-markets hypothesis, often called the Grossman-Stiglitz Paradox after a seminal 1980 paper written by hedge fund manager Sanford Grossman and the Nobel laureate economist Joseph Stiglitz.22 “On the Impossibility of Informationally Efficient Markets” was a frontal assault on Eugene Fama’s theory, pointing out that if market prices truly perfectly reflected all relevant information—such as corporate data, economic news, or industry trends—then no one would be incentivized to collect the information needed to trade.

Rowe Price, 127, 234, 244 Trump, Donald, 246 Tsai, Gerald, 34 Tufts University, 47, 48 Tull, Robert, 195–96, 247 Turner, Grant, 260 Turner, Judith, 58 Twardowski, Jan, xi, 97, 101, 104, 127 at Russell Investments, 142 setting up Vanguard FIIT (“Bogle’s Folly”), 108–9, 110–14 Unilever, 255–56 Union League Club, 97, 99, 100–101 Union Warren Savings Bank, 128 United Airlines, 230 United States Oil Fund (USO), 248 Universities Superannuation Scheme (USS), 274–76 University of Besançon, 23 University of British Columbia, 186 University of California, Berkeley, 42, 58, 137, 138, 161, 187 University of California, Los Angeles (UCLA), 42, 43, 169, 206–7, 234–35 University of Chicago, 52–53, 75 Booth at, 50, 140–41 Booth gift to, 157–58 Fama at, 47–50, 63, 140 Grauer at, 186–87 Lorie and CRSP, 30–33, 35–36, 52–53 Markowitz at, 38–41 Miller at, 48–49, 63, 138, 140, 147 Sauter at, 123 Sinquefield at, 35, 63, 64, 140 University of Dijon, 23 University of Kansas, 139 University of Kentucky, 72 University of Leuven, 47 University of Pennsylvania, 153 value investing, 7, 152, 154 value stocks, 154–56 VanEck Vectors Gold Miners ETF, 242, 242n VanEck Vectors Junior Gold Miners ETF, 262–63 Vanguard billion-dollar milestones of, 119–20, 121 Bogle-Brennan schism, 130–34 DFA and, 146 ETFs, 166–68, 200–201, 256 fee structure, 116–17, 120–21, 123 founding of, 11–12, 104–10, 104n “Giant Three” scenario, 297–99 growth of, 119–20, 121–22 gun stock boycott, 285–87 Malvern headquarters of, 125–26 rise of, 119–35 Vanguard, HMS, 104, 126 Vanguard Adviser, 121 Vanguard Extended Market Index Fund, 124 Vanguard First Index Investment Trust (FIIT), 107–17, 121–22 loads, 115–17 name change of, 121–22 selling, 114–15 setting up, 107–14 Vanguard 500 Index Fund, 15, 122–25, 133–34, 181 Vanguard Index Trust, 122 Vanguard Total Bond Market Index Fund, 261 Vanguard Total Stock Market Index Fund, 123–25 Varley, John, 205 Vasi, Alonso Segura, 257 Velocity Shares Daily Inverse VIX Short Term ETN, 247–48 Vertin, James “Jim,” xi at Wells Fargo, 62, 69–72, 73–74, 81, 187 retirement, 184 Vestager, Margrethe, 296 Vietnam War, 63, 139–40, 161 Visa, 256 volatility, 40, 74, 151, 152–53 volatility index, 247–48 Volcker, Paul, 17–18, 119, 185 Volkswagen, 236 von Neumann, John, 43 Wachter, Paul, 160 Wagner, Susan, 204, 210, 212, 224 Wagner, Wayne, 71, 76 Wallace, David Foster, 265–66 Wall Street Crash of 1929, 27, 88, 89, 92, 225–26 Wall Street Journal, 27, 29, 33, 82, 83, 84, 122, 137, 152, 160, 180, 252 Walmart, 198 Wang, Zexi, 254 Warwick Municipal Bond Fund, 117–18 Washington Post, 4, 7, 8, 17 Wasserstein, Bruce, 210 Weber, Clifford, 176–77, 182 Wellington, Arthur Wellesley, Duke of, 92, 103 Wellington Management Company, 53, 88, 92–104, 115, 127, 130 Wells Fargo, 106, 152–53, 188 Amex and Most, 175 McQuown’s hiring, 57–59 Netzly at, 236–37 origin story of index investing, 69–77, 164–65 WFIA’s relationship with, 185–88 Wells Fargo Investment Advisors (WFIA), 76–77, 79–81, 122, 184–86 Dunn at, 185–86, 193–95 Grauer at, 188–93 “Tactical Asset Allocation” fund, 189n Wells Fargo’s relationship with, 185–88 Wells Fargo Management Sciences, 69–77 McQuown’s departure, 81–82, 184 McQuown’s hiring, 58–59, 61–62 McQuown-Vertin battles, 69–70 Wells Fargo Nikko Investment Advisors (WFNIA), 190–92 Wells Fargo Stagecoach Fund, 74–75, 81, 141, 143 Wheeler, Dan, xii, 138, 161–64 background of, 161 at DFA, 138, 161, 162–64 Where Are the Customers’ Yachts?

The S&P 500 index itself had the ticker SPX, so the marketing people attached to the SPDR project suggested that the fund could use SXY. The proposal was shot down on grounds of being too rude—to the lament of financial headline writers for years to come—so they settled on SPY as a nod to the spider nickname. * In fact, the success of WFIA’s “Tactical Asset Allocation” fund—a strategy started by Fouse that flitted between stocks, bonds, and cash according to preset rules, and had just 10 percent of its money in equities when Black Monday struck—burnished its reputation. * She was equally adept at managing up and down. David Burkart, a young fund manager at BGI, recalls a 2000 party at a pool hall to celebrate a big investment mandate win, with Dunn in attendance.


pages: 212 words: 70,224

How to Retire the Cheapskate Way by Jeff Yeager

asset allocation, car-free, employer provided health coverage, estate planning, FedEx blackjack story, financial independence, fixed income, Pepto Bismol, pez dispenser, rent control, ride hailing / ride sharing, risk tolerance, Ronald Reagan, Zipcar

There are four aspects to this rule: Develop a proclivity for safe(r) investments over more risky ones. After all, if you can live comfortably on less money, you don’t need to gamble so aggressively on high-risk investments. The preservation of capital becomes the overriding consideration. Create an individualized asset allocation plan, a plan for what types of investments make sense for you and involve whatever level of risk you can tolerate and still sleep well at night. Remember, in the very act of diversification there is, almost without exception, greater security. “Ton-tog-an-y. Isn’t that Lakota for ‘Don’t put all your eggs in one basket’?”

By Bernicke’s use of the phrase “tug-of-war,” one might imagine that the tendency to naturally spend less as we age (as reflected in the USBLS survey) is pretty much a wash with a projected annual inflation rate of 3 or 4 percent. In other words, you might expect that in the end, the tug-of-war ends in a tie. You might need a Cheapskate Intervention if your idea of asset allocation is to bet on the same horse to win, place, and show. But when you apply the suppositions behind reality retirement planning to some hypothetical situations, the outcome is anything but a Mexican standoff. In his article, Bernicke uses the example of a couple with an $800,000 retirement nest egg and a need for $60,000 in after-tax spending money in their first year of retirement, which they hope will be at age fifty-five.


pages: 504 words: 126,835

The Innovation Illusion: How So Little Is Created by So Many Working So Hard by Fredrik Erixon, Bjorn Weigel

Airbnb, Alan Greenspan, Albert Einstein, American ideology, asset allocation, autonomous vehicles, barriers to entry, Basel III, Bernie Madoff, bitcoin, Black Swan, blockchain, Blue Ocean Strategy, BRICs, Burning Man, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, classic study, Clayton Christensen, Colonization of Mars, commoditize, commodity super cycle, corporate governance, corporate social responsibility, creative destruction, crony capitalism, dark matter, David Graeber, David Ricardo: comparative advantage, discounted cash flows, distributed ledger, Donald Trump, Dr. Strangelove, driverless car, Elon Musk, Erik Brynjolfsson, Fairchild Semiconductor, fear of failure, financial engineering, first square of the chessboard / second half of the chessboard, Francis Fukuyama: the end of history, general purpose technology, George Gilder, global supply chain, global value chain, Google Glasses, Google X / Alphabet X, Gordon Gekko, Greenspan put, Herman Kahn, high net worth, hiring and firing, hockey-stick growth, Hyman Minsky, income inequality, income per capita, index fund, industrial robot, Internet of things, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, Joseph Schumpeter, Just-in-time delivery, Kevin Kelly, knowledge economy, laissez-faire capitalism, low interest rates, Lyft, manufacturing employment, Mark Zuckerberg, market design, Martin Wolf, mass affluent, means of production, middle-income trap, Mont Pelerin Society, Network effects, new economy, offshore financial centre, pensions crisis, Peter Thiel, Potemkin village, precautionary principle, price mechanism, principal–agent problem, Productivity paradox, QWERTY keyboard, RAND corporation, Ray Kurzweil, rent-seeking, risk tolerance, risk/return, Robert Gordon, Robert Solow, Ronald Coase, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, Steve Ballmer, Steve Jobs, Steve Wozniak, subprime mortgage crisis, technological determinism, technological singularity, TED Talk, telemarketer, The Chicago School, The Future of Employment, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, transportation-network company, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, uber lyft, University of East Anglia, unpaid internship, Vanguard fund, vertical integration, Yogi Berra

To take just one example, Norway’s SWF alone manages about $860 billion and owns 1.3 percent of all corporate equity in the world.24 SWFs will most likely expand over the foreseeable future and continue to mitigate economic booms and busts for their government masters. Their growth, with 7 percent compound annual growth rate until 2020, according to PwC, will continue, with the total SWF volume expected to reach $9 trillion by the same year.25 Their strategies for asset allocation will likely continue along that trend as well. They will go on investing in foreign currencies like the greenback, the euro and the Swiss franc. Wall Street, Nasdaq, the London Stock Exchange, and other key stock markets will get a good portion of their capital as well. Investment in private companies and infrastructure are also favored investment targets – all the more so recently as their traditional assets have become more volatile.

It also taxes energy production, and quite heavily too. Hence, the conduct of the fund is an integral part of a system of political management. If that is the political anchor of Norway’s SWF, imagine, then, how the SWFs in less open and transparent countries are run. Politics likely motivates the asset allocation of SWFs too. Simply put, they do not have a capitalist agenda, and given how much revenues for SWFs fluctuate with the course of commodity prices, they can also be unreliable owners, suddenly needing to change track. And it is not only the revenue flutuations that divert attention from a capitalist agenda.

Despite increased revenues, up 6 percent from 2011 to 2012, the Gulf states cut transfers to SWFs by almost 40 percent. At the same time, SWF investments in the Gulf rose to 54 percent, up from 33 percent the previous year.28 It is possible, at least theoretically, that this change was for strict investment reasons, but in reality the sudden change of asset allocation was politically motivated. The SWFs had to return capital back home in order to help governments stem opposition. The sovereign wealth funds have done much to burnish their political credentials. In the aftermath of the financial crisis, their critics were quickly silenced when Western corporates pleaded with SWFs to invest and to save credit-dry Western companies from bankruptcy.


pages: 156 words: 15,746

Personal Finance with Python by Max Humber

asset allocation, backtesting, bitcoin, cryptocurrency, data science, Dogecoin, en.wikipedia.org, Ethereum, passive income, web application

Invest Max Humber1 (1)Toronto, Ontario, Canada Invest in your future, don’t dilute your finances. —Kendrick Lamar I am not an authority on investing. So, I can’t (and won’t) tell you which stocks you should pick or how you should structure your personal investment portfolio. I can, however, give you an awesome mechanism for setting up asset allocations and adhering to a routine of continuous rebalancing. Rebalancing1 your investment portfolio against target allocations is a good idea because it keeps risk in check and forces you to remove the emotion from your investment decisions. When your portfolio is up, it’s really hard to sell, and when you take a hit, it’s just as hard to buy.


pages: 231 words: 76,283

Work Optional: Retire Early the Non-Penny-Pinching Way by Tanja Hester

Affordable Care Act / Obamacare, Airbnb, anti-work, antiwork, asset allocation, barriers to entry, buy and hold, crowdsourcing, diversification, estate planning, financial independence, full employment, General Magic , gig economy, hedonic treadmill, high net worth, independent contractor, index fund, labor-force participation, lifestyle creep, longitudinal study, low interest rates, medical bankruptcy, mortgage debt, Mr. Money Mustache, multilevel marketing, obamacare, passive income, post-work, remote working, rent control, ride hailing / ride sharing, risk tolerance, robo advisor, side hustle, stocks for the long run, tech worker, Vanguard fund, work culture

So protecting yourself really works both ways: insulating yourself against the investments that carry volatility risk by also holding stable assets like bonds, but also not investing so conservatively that you miss out on growth you need to make your money last your full retirement. That’s the importance of asset allocation: to balance both sides of that equation. The old standard allocation advice was to subtract your age from 100 to determine the percentage of your invested assets that you should have in stocks. So if you’re 30 right now, you’d have 70% of your investments in stocks and 30% in bonds. However, people are living longer than ever, and with bond yields down, many experts are recommending that you shift the starting number to 110 or even 120.

But innovators will surely come along who may find ways that you can spend slightly more and increase your standard of living while still stretching your portfolio for your full life span. And the best investment options may shift over time. When that happens, you want to know about it. BULLETPROOF PLANNING CHECKLIST Determine your asset allocation for both long-term growth and risk management. Decide which withdrawal strategy you’ll use. Create your bare-bones budget and determine how you’ll cut expenses if you need to. Determine what your sources of backup capital will be. Make sure you have adequate insurance for your circumstances.


pages: 272 words: 76,154

How Boards Work: And How They Can Work Better in a Chaotic World by Dambisa Moyo

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, Airbnb, algorithmic trading, Amazon Web Services, AOL-Time Warner, asset allocation, barriers to entry, Ben Horowitz, Big Tech, bitcoin, Black Lives Matter, blockchain, Boeing 737 MAX, Bretton Woods, business cycle, business process, buy and hold, call centre, capital controls, carbon footprint, collapse of Lehman Brothers, coronavirus, corporate governance, corporate social responsibility, COVID-19, creative destruction, cryptocurrency, deglobalization, don't be evil, Donald Trump, fake news, financial engineering, gender pay gap, geopolitical risk, George Floyd, gig economy, glass ceiling, global pandemic, global supply chain, hiring and firing, income inequality, index fund, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Jeff Bezos, knowledge economy, labor-force participation, long term incentive plan, low interest rates, Lyft, money: store of value / unit of account / medium of exchange, multilevel marketing, Network effects, new economy, old-boy network, Pareto efficiency, passive investing, Pershing Square Capital Management, proprietary trading, remote working, Ronald Coase, Savings and loan crisis, search costs, shareholder value, Shoshana Zuboff, Silicon Valley, social distancing, Social Responsibility of Business Is to Increase Its Profits, SoftBank, sovereign wealth fund, surveillance capitalism, The Nature of the Firm, Tim Cook: Apple, too big to fail, trade route, Travis Kalanick, uber lyft, Vanguard fund, Washington Consensus, WeWork, women in the workforce, work culture

Size takes into consideration how company size, defined by market capitalization, drives stock returns; an investor’s strategy can target large, midsize, or small companies. In terms of quality, factor investing ranks companies highly if they demonstrate low debt, stable earnings, consistent asset growth, and strong corporate governance. Factor investing has become more common over the past decade. In 2018, it accounted for 16 percent of asset allocation by institutional investors, according to a global study by Invesco. Its growing role means that the factors most attractive to investors will be of increasing importance to corporate boards in coming years. The ascent of factor investing will require boards to think carefully about how their company fits into investors’ portfolios.

Ash, Timothy Garton. “The EU’s Core Values Are Under Attack as Never Before. It Must Defend Them.” The Guardian, May 7, 2018. www.theguardian.com/commentisfree/2018/may/07/eu-core-values-viktor-orban-hungary-fidesz-party-expel-parliament-grouping. Asl, Farshid M., and Erkko Etula. “Advancing Strategic Asset Allocation in Multi-Factor World.” Journal of Portfolio Management 39, no. 1 (2012). Babcock, Linda, and Sara Laschever. Women Don’t Ask: Negotiation and the Gender Divide. Princeton, NJ: Princeton University Press, 2003. Bank of England. “Climate Change: Why It Matters to the Bank of England.” www.bankofengland.co.uk/KnowledgeBank/climate-change-why-it-matters-to-the-bank-of-england.


pages: 369 words: 128,349

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing by Vijay Singal

3Com Palm IPO, Andrei Shleifer, AOL-Time Warner, asset allocation, book value, buy and hold, capital asset pricing model, correlation coefficient, cross-subsidies, currency risk, Daniel Kahneman / Amos Tversky, diversified portfolio, endowment effect, fixed income, index arbitrage, index fund, information asymmetry, information security, junk bonds, liberal capitalism, locking in a profit, Long Term Capital Management, loss aversion, low interest rates, margin call, market friction, market microstructure, mental accounting, merger arbitrage, Myron Scholes, new economy, prediction markets, price stability, profit motive, random walk, Richard Thaler, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, short squeeze, survivorship bias, Tax Reform Act of 1986, transaction costs, uptick rule, Vanguard fund

Moreover, industries with no related futures markets are likely to show greater momentum than industries where information regarding real assets is aggregated in futures prices. Industry portfolios constructed in this manner generate returns that may be much larger than the S&P 500 return. Description Investment practitioners believe that asset allocation among bonds, domestic stocks, and foreign stocks should be altered over time depending on individual circumstances and economic conditions.1 This chapter proposes taking asset allocation a step further, to allocation among different industries. One industry may be hot today and another may be hot next month depending on changing fads, individual preferences, national requirements, or political expediency.

., CFA OXFORD UNIVERSITY PRESS BEYOND THE RANDOM WALK Financial Management Association Survey and Synthesis Series The Search for Value: Measuring the Company’s Cost of Capital Michael C. Ehrhardt Managing Pension Plans: A Comprehensive Guide to Improving Plan Performance Dennis E. Logue and Jack S. Rader Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation Richard O. Michaud Real Options: Managing Strategic Investment in an Uncertain World Martha Amram and Nalin Kulatilaka Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing Hersh Shefrin Dividend Policy: Its Impact on Form Value Ronald C. Lease, Kose John, Avner Kalay, Uri Loewenstein, and Oded H.


pages: 421 words: 128,094

King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone by David Carey

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, asset allocation, banking crisis, Bear Stearns, Bonfire of the Vanities, business cycle, Carl Icahn, carried interest, collateralized debt obligation, corporate governance, corporate raider, credit crunch, deal flow, diversification, diversified portfolio, financial engineering, fixed income, Future Shock, Gordon Gekko, independent contractor, junk bonds, low interest rates, margin call, Menlo Park, Michael Milken, mortgage debt, new economy, Northern Rock, risk tolerance, Rod Stewart played at Stephen Schwarzman birthday party, Sand Hill Road, Savings and loan crisis, sealed-bid auction, Silicon Valley, sovereign wealth fund, Teledyne, The Predators' Ball, éminence grise

Beginning in the early 2000s many state pension funds were required to disclose returns on individual private equity and venture capital funds in which they had invested, making the returns a matter of public record for the first time. 10 Blackstone’s 2002 fund: CalPERS Fund Report as of Dec. 31, 2008; Oregon Public Employees’ Retirement Fund, Alternative Equity Portfolio as of Mar. 31, 2009. 11 By the late 1990s, banks: Center for Private Equity and Entrepreneurship, Tuck School of Business at Dartmouth, Note on Private Equity Asset Allocation, Case #5-0015, updated Aug. 18, 2003 (hereafter Note on Allocation), 14. 12 The typical pension fund: 2009 Wilshire Report on State Retirement Systems: Funding Levels and Asset Allocations, Wilshire Associates, Inc., 11–12; Note on Allocation, 2–3. 13 Giant pensions: Ibid., 1; CalPERS Fund Report as of Dec. 31, 2005. 14 Between 2003 and 2008: 2009 Wilshire Report on State Retirement Systems, 11. 15 But those whose profits: Heino Meerkatt, John Rose, Michael Brig, Heinrich Liechenstein, M.

As investors dumped stocks, bonds, and other liquid assets at fire-sale prices, the value of their overall portfolios sank relative to their private equity holdings, which were valued based on their long-term potential and thus didn’t slump as much. As a result, private equity rose as a percentage of the investors’ total assets, which threw the investors’ asset allocations out of whack. Private equity’s investors had to curtail new commitments to buyout funds in order to rebalance their accounts. Private equity also faced another enormous problem. More than $800 billion of leveraged bank loans and junk bonds were due for refinancing from 2012 to 2014. Even if the economy turned up by then, many companies might still be worth less than the bloated sums paid for them, meaning that there might not be enough collateral to refinance their debt.


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

"Friedman doctrine" OR "shareholder theory", Abraham Wald, activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, Andrei Shleifer, AOL-Time Warner, asset allocation, asset-backed security, bank run, beat the dealer, behavioural economics, Benoit Mandelbrot, Big Tech, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, card file, Carl Icahn, Cass Sunstein, collateralized debt obligation, compensation consultant, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, democratizing finance, Dennis Tito, discovery of the americas, diversification, diversified portfolio, Dr. Strangelove, Edward Glaeser, Edward Thorp, endowment effect, equity risk premium, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Glass-Steagall Act, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Bogle, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, market bubble, market design, Michael Milken, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, power law, prediction markets, proprietary trading, prudent man rule, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, rolodex, Ronald Reagan, seminal paper, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, Skinner box, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, stocks for the long run, tech worker, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, Two Sigma, Tyler Cowen, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

Books directly or indirectly descended from Fisher’s work now adorn the desks of hedge fund managers, pension consultants, financial advisers, and do-it-yourself investors. The increasingly dominant quantitative side of the financial world—that strange wonderland of portfolio optimization software, enhanced indexing, asset allocators, credit default swaps, betas, alphas, and “model-derived” valuations—is a territory where Professor Fisher would feel intellectually right at home. He is perhaps not the father, but certainly a father of modern Wall Street. Hardly anyone calls him that, though. Economists honor Fisher for his theoretical breakthroughs, but outside the discipline his chief claim to lasting fame is the horrendous stock market advice he proffered in the late 1920s.

It wasn’t just the consultants and research shops. San Francisco’s Wells Fargo Investment Advisors built upon its pioneering indexing work to become what was in 2008, under the name Barclays Global Investors, the biggest money manager on the planet. Number two, State Street Global, was a big indexer and asset allocator as well.14 Every other money manager of any size in the world now uses at least some of the quantitative tools introduced in the 1970s by finance professors. What’s more, one 1970s quant tool made it far beyond the money management industry. Armed with Ibbotson’s measure of the equity risk premium and Barra’s (or some other firm’s) measure of a stock’s riskiness in relation to the overall market, one could now calculate any publicly traded company’s cost of capital.

Chan and Josef Lakonishok found that beta actually worked well in explaining stock market behavior from 1926 through 1982. It was only after 1982 that it ceased to fit the data. Chan and Lakonishok proposed that what changed the results after 1982 was the rise of investment strategies built around CAPM—indexing, asset allocation, beta-based performance measurement, and the like. The behavior of investors had changed, which in turn had changed the nature of investment returns. The practical triumph of the capital asset model had weakened its predictive power. Starting in the late 1970s, Chan and Lakonishok found, stocks that belonged to the S&P 500 index dramatically outperformed the rest of the market.


pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, asset allocation, Basel III, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamond, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, fear index, financial engineering, financial innovation, Flash crash, forward guidance, Garrett Hardin, Gini coefficient, Glass-Steagall Act, global reserve currency, high net worth, High speed trading, hindsight bias, hype cycle, income inequality, inflation targeting, interest rate swap, inverted yield curve, Isaac Newton, Jaron Lanier, John Perry Barlow, joint-stock company, joint-stock limited liability company, junk bonds, Kodak vs Instagram, Kondratiev cycle, Large Hadron Collider, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, low interest rates, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, plutocrats, Ponzi scheme, precautionary principle, proprietary trading, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tragedy of the Commons, trickle-down economics, two and twenty, Two Sigma, Tyler Cowen, Washington Consensus, wealth creators, working poor, yield curve

If you can buy cocoa futures in London for $1,000 a ton, and sell them immediately in New York for $1,001, that’s arbitrage, and you are making a guaranteed profit. The words “guaranteed profit” are magical in finance, and so arbitrage is a beloved feature of the markets, appearing in very many complicated forms, in every imaginable cranny of every imaginable market. asset allocation An approach to investment that has grown in popularity with modern theories of efficient markets. If it’s impossible to do a better job of picking and choosing shares than the market does—which is what many studies of the stock market claim to have proved—it follows that you should save the time you spend on picking stocks and spend it instead on choosing the right areas of the market to be in.

Don’t think about BP versus Shell versus Exxon, think about whether you should be in oil at all; more generally, think about the balance between stocks and bonds and property and commodities, developed and emerging markets, and then allocate your assets accordingly, investing preferably via cheap pooled funds wherever possible. This balance of asset allocation is, in the modern theory of investing, the most important thing to get right. assets and liabilities The two main categories on a balance sheet, always depicted with assets on the left, liabilities on the right. Your “equity,” i.e., the stuff you actually own outright, is always equal to your assets minus your liabilities.


pages: 321

Finding Alphas: A Quantitative Approach to Building Trading Strategies by Igor Tulchinsky

algorithmic trading, asset allocation, automated trading system, backpropagation, backtesting, barriers to entry, behavioural economics, book value, business cycle, buy and hold, capital asset pricing model, constrained optimization, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, currency risk, data science, deep learning, discounted cash flows, discrete time, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial engineering, financial intermediation, Flash crash, Geoffrey Hinton, implied volatility, index arbitrage, index fund, intangible asset, iterative process, Long Term Capital Management, loss aversion, low interest rates, machine readable, market design, market microstructure, merger arbitrage, natural language processing, passive investing, pattern recognition, performance metric, Performance of Mutual Funds in the Period, popular capitalism, prediction markets, price discovery process, profit motive, proprietary trading, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, selection bias, sentiment analysis, shareholder value, Sharpe ratio, short selling, Silicon Valley, speech recognition, statistical arbitrage, statistical model, stochastic process, survivorship bias, systematic bias, systematic trading, text mining, transaction costs, Vanguard fund, yield curve

As mentioned earlier, this is immensely useful in predictive modeling to counter the effects of the curse of dimensionality. One of the most commonly used nonparametric dimensionality reduction algorithms in quantitative finance is principal component analysis (PCA). It has been used successfully for building statistical risk models, developing asset allocation algorithms for portfolio construction (principal portfolios), and clustering. Thinking in Algorithms131 An extension of PCA, sparse principal component analysis (sPCA), adds a sparsity constraint on input variables. In ordinary PCA, the components are usually linear combinations of all input variables; sPCA overcomes this limitation by finding components that contain just a few independent variables.

SHRINKAGE ESTIMATORS When dealing with datasets of high dimensionality and limited data samples, we can often improve upon naive or raw estimators by combining them with some additional information about the problem, usually in the form of a structural estimator. Essentially, shrinkage converts an unbiased raw estimator into an improved biased one. A very popular and successful application of shrinkage is in improving the estimates of the covariance matrix for asset allocation and risk management. Ledoit and Wolf (2004) demonstrate that by shrinking the sample estimator of the covariance matrix toward a structural estimator (based on the constant correlation model), they are able to construct portfolios that outperform those based on the naive sample estimator of the covariance matrix.


pages: 297 words: 91,141

Market Sense and Nonsense by Jack D. Schwager

3Com Palm IPO, asset allocation, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Brownian motion, buy and hold, collateralized debt obligation, commodity trading advisor, computerized trading, conceptual framework, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fixed income, global macro, high net worth, implied volatility, index arbitrage, index fund, Jim Simons, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, managed futures, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, merger arbitrage, negative equity, pattern recognition, performance metric, pets.com, Ponzi scheme, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, selection bias, Sharpe ratio, short selling, statistical arbitrage, statistical model, subprime mortgage crisis, survivorship bias, tail risk, transaction costs, two-sided market, value at risk, yield curve

If market conditions then change so that there are many prevalent trends, trend-following methods will be very profitable, while countertrend traders will suffer losses. Rebalancing keeps the asset allocation among the different market strategies represented by different managers constant. Without rebalancing, assets would be more heavily concentrated in the strategies that worked best in the past. If market conditions then change, the largest asset allocations would be in the strategies that are most vulnerable. In effect, rebalancing helps mitigate the negative impact of the inevitable shifts in market conditions, which can result in being overweight, an outperforming strategy when that strategy has run its course and is about to turn negative; and being underweight, a strategy that is about to have a huge run.


pages: 135 words: 26,407

How to DeFi by Coingecko, Darren Lau, Sze Jin Teh, Kristian Kho, Erina Azmi, Tm Lee, Bobby Ong

algorithmic trading, asset allocation, Bernie Madoff, bitcoin, blockchain, buy and hold, capital controls, collapse of Lehman Brothers, cryptocurrency, distributed ledger, diversification, Ethereum, ethereum blockchain, fiat currency, Firefox, information retrieval, litecoin, margin call, new economy, passive income, payday loans, peer-to-peer, prediction markets, QR code, reserve currency, robo advisor, smart contracts, tulip mania, two-sided market

Peer-to-Peer (P2P) is a network where each node has an equal permission to validating data and it allows two individuals to interact directly with each other. Q - R Range Bound This TokenSets strategy automates buying and selling within a designated range and is only intended for bearish or neutral markets. Rebalance It is a process of maintaining a desired asset allocation of a portfolio by buying and selling assets in the portfolio. Risk Assessor Someone who stakes value against smart contracts in Nexus Mutual. He/she is incentivized to do so to earn rewards in NXM token, as other users buy insurance on the staked smart contracts. S Smart Contracts A smart contract is a programmable contract that allows two counterparties to set conditions of a transaction without needing to trust another third party for the execution.


pages: 364 words: 101,286

The Misbehavior of Markets: A Fractal View of Financial Turbulence by Benoit Mandelbrot, Richard L. Hudson

Alan Greenspan, Albert Einstein, asset allocation, Augustin-Louis Cauchy, behavioural economics, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Black-Scholes formula, British Empire, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, carbon-based life, discounted cash flows, diversification, double helix, Edward Lorenz: Chaos theory, electricity market, Elliott wave, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, Fellow of the Royal Society, financial engineering, full employment, Georg Cantor, Henri Poincaré, implied volatility, index fund, informal economy, invisible hand, John Meriwether, John von Neumann, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market microstructure, Myron Scholes, new economy, paper trading, passive investing, Paul Lévy, Paul Samuelson, plutocrats, power law, price mechanism, quantitative trading / quantitative finance, Ralph Nelson Elliott, RAND corporation, random walk, risk free rate, risk tolerance, Robert Shiller, short selling, statistical arbitrage, statistical model, Steve Ballmer, stochastic volatility, transfer pricing, value at risk, Vilfredo Pareto, volatility smile

So, to compensate them for taking that risk, they naturally demand and often get a higher return. The same reasoning—that people instinctively understand the market is very risky—helps explain why so much of the world’s wealth remains in safe cash, rather than in anything riskier. The Wall Street mantra is asset allocation: Deciding how to divide your portfolio among cash, bonds, stocks, and other asset classes is far more important than the specific stocks or bonds you pick. A typical broker’s recommendation, based on Markowitz-Sharpe portfolio theory, is 25 percent cash, 30 percent bonds, and 45 percent stocks.

Chapter XII Ten Heresies of Finance 230 “Consider the so-called Equity Premium Puzzle…” A good summary of their initial paper, and the difficulty it had in getting published, is provided in Mehra and Prescott 2003. 231 “The same reasoning…” For more on this, see Babeau, André and Sbano 2002. In fact, the precise asset allocation recommendations can vary from that 25-30-45 mix, depending on what the market is doing at any particular time. 232 “The ultimate fear…” See Embrechts, Klüppelberg and Mikosch 1997. 234 “Concentration is common…” See Lantsman, Major and Mangano 2002. 235 “One day when I was working…” Alexander’s “Filter” method attracted a great deal of attention–and similar methods have been devised and tried since his day.


pages: 328 words: 96,678

MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them by Nouriel Roubini

"World Economic Forum" Davos, 2021 United States Capitol attack, 3D printing, 9 dash line, AI winter, AlphaGo, artificial general intelligence, asset allocation, assortative mating, autonomous vehicles, bank run, banking crisis, basic income, Bear Stearns, Big Tech, bitcoin, Bletchley Park, blockchain, Boston Dynamics, Bretton Woods, British Empire, business cycle, business process, call centre, carbon tax, Carmen Reinhart, cashless society, central bank independence, collateralized debt obligation, Computing Machinery and Intelligence, coronavirus, COVID-19, creative destruction, credit crunch, crony capitalism, cryptocurrency, currency manipulation / currency intervention, currency peg, data is the new oil, David Ricardo: comparative advantage, debt deflation, decarbonisation, deep learning, DeepMind, deglobalization, Demis Hassabis, democratizing finance, Deng Xiaoping, disintermediation, Dogecoin, Donald Trump, Elon Musk, en.wikipedia.org, energy security, energy transition, Erik Brynjolfsson, Ethereum, ethereum blockchain, eurozone crisis, failed state, fake news, family office, fiat currency, financial deregulation, financial innovation, financial repression, fixed income, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, future of work, game design, geopolitical risk, George Santayana, Gini coefficient, global pandemic, global reserve currency, global supply chain, GPS: selective availability, green transition, Greensill Capital, Greenspan put, Herbert Marcuse, high-speed rail, Hyman Minsky, income inequality, inflation targeting, initial coin offering, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invention of movable type, Isaac Newton, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, junk bonds, Kenneth Rogoff, knowledge worker, Long Term Capital Management, low interest rates, low skilled workers, low-wage service sector, M-Pesa, margin call, market bubble, Martin Wolf, mass immigration, means of production, meme stock, Michael Milken, middle-income trap, Mikhail Gorbachev, Minsky moment, Modern Monetary Theory, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Mustafa Suleyman, Nash equilibrium, natural language processing, negative equity, Nick Bostrom, non-fungible token, non-tariff barriers, ocean acidification, oil shale / tar sands, oil shock, paradox of thrift, pets.com, Phillips curve, planetary scale, Ponzi scheme, precariat, price mechanism, price stability, public intellectual, purchasing power parity, quantitative easing, race to the bottom, Ralph Waldo Emerson, ransomware, Ray Kurzweil, regulatory arbitrage, reserve currency, reshoring, Robert Shiller, Ronald Reagan, Salesforce, Satoshi Nakamoto, Savings and loan crisis, Second Machine Age, short selling, Silicon Valley, smart contracts, South China Sea, sovereign wealth fund, Stephen Hawking, TED Talk, The Great Moderation, the payments system, Thomas L Friedman, TikTok, too big to fail, Turing test, universal basic income, War on Poverty, warehouse robotics, Washington Consensus, Watson beat the top human players on Jeopardy!, working-age population, Yogi Berra, Yom Kippur War, zero-sum game, zoonotic diseases

Likewise, automation in finance could help us exit the relentless boom-and-bust cycles of financial history. In the current financial system, humans make credit, lending, insurance, and asset allocation decisions. We are subject to distorted incentives, partial information, and a myriad of cognitive biases. That’s where bubbles begin. Suppose instead that financial technology, artificial intelligence, big data, the Internet of Things, and 5G networks combine to guide financial decisions. Identical and objective criteria decide who gets a mortgage, which rates of interest, or asset allocations that diversify investment optimally across a wide range of asset classes. Human inconsistencies disappear.


pages: 289 words: 95,046

Chaos Kings: How Wall Street Traders Make Billions in the New Age of Crisis by Scott Patterson

"World Economic Forum" Davos, 2021 United States Capitol attack, 4chan, Alan Greenspan, Albert Einstein, asset allocation, backtesting, Bear Stearns, beat the dealer, behavioural economics, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, bitcoin, Bitcoin "FTX", Black Lives Matter, Black Monday: stock market crash in 1987, Black Swan, Black Swan Protection Protocol, Black-Scholes formula, blockchain, Bob Litterman, Boris Johnson, Brownian motion, butterfly effect, carbon footprint, carbon tax, Carl Icahn, centre right, clean tech, clean water, collapse of Lehman Brothers, Colonization of Mars, commodity super cycle, complexity theory, contact tracing, coronavirus, correlation does not imply causation, COVID-19, Credit Default Swap, cryptocurrency, Daniel Kahneman / Amos Tversky, decarbonisation, disinformation, diversification, Donald Trump, Doomsday Clock, Edward Lloyd's coffeehouse, effective altruism, Elliott wave, Elon Musk, energy transition, Eugene Fama: efficient market hypothesis, Extinction Rebellion, fear index, financial engineering, fixed income, Flash crash, Gail Bradbrook, George Floyd, global pandemic, global supply chain, Gordon Gekko, Greenspan put, Greta Thunberg, hindsight bias, index fund, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), Jeff Bezos, Jeffrey Epstein, Joan Didion, John von Neumann, junk bonds, Just-in-time delivery, lockdown, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, Mark Spitznagel, Mark Zuckerberg, market fundamentalism, mass immigration, megacity, Mikhail Gorbachev, Mohammed Bouazizi, money market fund, moral hazard, Murray Gell-Mann, Nick Bostrom, off-the-grid, panic early, Pershing Square Capital Management, Peter Singer: altruism, Ponzi scheme, power law, precautionary principle, prediction markets, proprietary trading, public intellectual, QAnon, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Nader, Ralph Nelson Elliott, random walk, Renaissance Technologies, rewilding, Richard Thaler, risk/return, road to serfdom, Ronald Reagan, Ronald Reagan: Tear down this wall, Rory Sutherland, Rupert Read, Sam Bankman-Fried, Silicon Valley, six sigma, smart contracts, social distancing, sovereign wealth fund, statistical arbitrage, statistical model, stem cell, Stephen Hawking, Steve Jobs, Steven Pinker, Stewart Brand, systematic trading, tail risk, technoutopianism, The Chicago School, The Great Moderation, the scientific method, too big to fail, transaction costs, University of East Anglia, value at risk, Vanguard fund, We are as Gods, Whole Earth Catalog

He suggested using a standard risk-return model based on Harry Markowitz’s Modern Portfolio Theory method that encouraged the multi-basket diversification approach (the very approach derided by Spitznagel and Taleb). It didn’t work, at least at first. Through a series of tweaks and new methods based in part on his work on vector autoregressions, Litterman ultimately designed a model that spit out optimal asset allocations depending on investors’ risk appetites. It became known as the Black-Litterman model, which went on to become one of the most influential money management tools in the world. In 1994, Litterman was elevated to head of risk management for the entire firm. But he was more interested in trading using the model he’d developed with Black.

That’s why Taleb said Safe Haven amounted to Spitznagel’s “monumental f*** you to the investment industry.” “Hedge fund managers hate my book,” he told me. Because he was essentially arguing that nearly everything they do—diversifying, market timing, buying gold and bonds, leveraging up to juice returns—is wrong, mere theater. “The whole asset allocation industry is an empty narrative,” he said. Spitznagel does make an exception for value investors in the vein of Warren Buffett and Buffett’s mentor, Benjamin Graham. Value investors search for unloved, beaten-down investments that for one reason or another have fallen out of favor. As such, they are priced below their true worth and provide the opportunity for substantial upside.


pages: 139 words: 33,246

Money Moments: Simple Steps to Financial Well-Being by Jason Butler

Albert Einstein, asset allocation, behavioural economics, buy and hold, Cass Sunstein, Cornelius Vanderbilt, diversified portfolio, estate planning, financial independence, fixed income, happiness index / gross national happiness, index fund, intangible asset, John Bogle, longitudinal study, loss aversion, Lyft, Mark Zuckerberg, mortgage debt, Mr. Money Mustache, passive income, placebo effect, Richard Thaler, ride hailing / ride sharing, Steve Jobs, time value of money, traffic fines, Travis Kalanick, Uber and Lyft, uber lyft, Vanguard fund, Yogi Berra

It makes no sense to invest in individual companies or sectors of the stockmarket (like Korean technology or European companies) because the potential returns are not sufficient to outweigh the much higher risks. Abraham Okusanya is a UK-based investment researcher who has created the concept of the No-Brainer portfolio. The idea is that the starting point for the asset allocation of your portfolio should be based on how investors across the world allocate capital across different types of financial assets as shown in the pie chart below.49 Doeswijk, Ronald Q. and Lam, Trevin and Swinkels, Laurens, Historical Returns of the Market Portfolio (June 1 2017) This equates to a portfolio with 50% invested in bonds and 50% in equities.


pages: 375 words: 105,067

Pound Foolish: Exposing the Dark Side of the Personal Finance Industry by Helaine Olen

Alan Greenspan, American ideology, asset allocation, Bear Stearns, behavioural economics, Bernie Madoff, buy and hold, Cass Sunstein, Credit Default Swap, David Brooks, delayed gratification, diversification, diversified portfolio, Donald Trump, Elliott wave, en.wikipedia.org, estate planning, financial engineering, financial innovation, Flash crash, game design, greed is good, high net worth, impulse control, income inequality, index fund, John Bogle, Kevin Roose, London Whale, longitudinal study, low interest rates, Mark Zuckerberg, Mary Meeker, money market fund, mortgage debt, multilevel marketing, oil shock, payday loans, pension reform, Ponzi scheme, post-work, prosperity theology / prosperity gospel / gospel of success, quantitative easing, Ralph Nader, RAND corporation, random walk, Richard Thaler, Ronald Reagan, Saturday Night Live, Stanford marshmallow experiment, stocks for the long run, The 4% rule, too big to fail, transaction costs, Unsafe at Any Speed, upwardly mobile, Vanguard fund, wage slave, women in the workforce, working poor, éminence grise

In the written testimony Ghilarducci submitted, her words were even more prescient. “Shifting responsibility to workers and bullying them from the pulpit to save like professional money managers…will encourage the high income, not the low, to save in individualistic ways, grow up a whole industry of vendors, and divert human activity toward tending to asset allocation and mutual fund performance.” How accurate was Ghilarducci? Let’s turn to the numbers. As of the end of 2011, we had $17.9 trillion in retirement savings divided among individual retirement accounts ($4.9 trillion), defined contribution plans ($4.5 trillion), defined benefit plans ($2.4 trillion), government plans ($4.5 trillion), and with the remainder in annuity reserves, a number that is expected to increase significantly over the coming decade.

When the floor opened for audience participation, I realized women are asking the same questions I hear at almost every financial seminar I attended, either in person or via webinar, the seminars where the vast majority of attendees are almost always male. “How would you recommend the average investor prepare for the end of quantitative easing?” asked one. Another inquired how asset allocation fit in with risk management since pretty much all categories of investment had fallen significantly during the 2008 economic crash. About the only thing female-specific about this session is that the vast majority of the attendees and all of those asking questions were women. A few weeks before the Citi breakfast, I met with Linda Descano, who I admit I liked immediately.


pages: 829 words: 187,394

The Price of Time: The Real Story of Interest by Edward Chancellor

"World Economic Forum" Davos, 3D printing, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, asset allocation, asset-backed security, assortative mating, autonomous vehicles, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, Ben Bernanke: helicopter money, Bernie Sanders, Big Tech, bitcoin, blockchain, bond market vigilante , bonus culture, book value, Bretton Woods, BRICs, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, cashless society, cloud computing, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, commodity super cycle, computer age, coronavirus, corporate governance, COVID-19, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cryptocurrency, currency peg, currency risk, David Graeber, debt deflation, deglobalization, delayed gratification, Deng Xiaoping, Detroit bankruptcy, distributed ledger, diversified portfolio, Dogecoin, Donald Trump, double entry bookkeeping, Elon Musk, equity risk premium, Ethereum, ethereum blockchain, eurozone crisis, everywhere but in the productivity statistics, Extinction Rebellion, fiat currency, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, full employment, gig economy, Gini coefficient, Glass-Steagall Act, global reserve currency, global supply chain, Goodhart's law, Great Leap Forward, green new deal, Greenspan put, high net worth, high-speed rail, housing crisis, Hyman Minsky, implied volatility, income inequality, income per capita, inflation targeting, initial coin offering, intangible asset, Internet of things, inventory management, invisible hand, Japanese asset price bubble, Jean Tirole, Jeff Bezos, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Rogoff, land bank, large denomination, Les Trente Glorieuses, liquidity trap, lockdown, Long Term Capital Management, low interest rates, Lyft, manufacturing employment, margin call, Mark Spitznagel, market bubble, market clearing, market fundamentalism, Martin Wolf, mega-rich, megaproject, meme stock, Michael Milken, Minsky moment, Modern Monetary Theory, Mohammed Bouazizi, Money creation, money market fund, moral hazard, mortgage debt, negative equity, new economy, Northern Rock, offshore financial centre, operational security, Panopticon Jeremy Bentham, Paul Samuelson, payday loans, peer-to-peer lending, pensions crisis, Peter Thiel, Philip Mirowski, plutocrats, Ponzi scheme, price mechanism, price stability, quantitative easing, railway mania, reality distortion field, regulatory arbitrage, rent-seeking, reserve currency, ride hailing / ride sharing, risk free rate, risk tolerance, risk/return, road to serfdom, Robert Gordon, Robinhood: mobile stock trading app, Satoshi Nakamoto, Satyajit Das, Savings and loan crisis, savings glut, Second Machine Age, secular stagnation, self-driving car, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, Stanford marshmallow experiment, Steve Jobs, stock buybacks, subprime mortgage crisis, Suez canal 1869, tech billionaire, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tim Haywood, time value of money, too big to fail, total factor productivity, trickle-down economics, tulip mania, Tyler Cowen, Uber and Lyft, Uber for X, uber lyft, Walter Mischel, WeWork, When a measure becomes a target, yield curve

Edward Chancellor * * * THE PRICE OF TIME The Real Story of Interest Atlantic Monthly Press New York Contents List of Illustrations List of Figures Introduction: The Anarchist and the Capitalist PART ONE Of Historical Interest 1 Babylonian Birth 2 Selling Time 3 The Lowering of Interest 4 The Chimera 5 John Bull Cannot Stand Two Per Cent 6 Un Petit Coup de Whisky PART TWO How Low Rates Begot Lower Rates 7 Goodhart’s Law 8 Secular Stagnation 9 The Raven of Basel 10 Unnatural Selection 11 The Promoter’s Profit 12 A Big Fat Ugly Bubble 13 Your Mother Needs to Die 14 Let Them Eat Credit 15 The Price of Anxiety 16 Rusting Money PART THREE The Game of Marbles 17 The Mother and Father of All Evil 18 Financial Repression with Chinese Characteristics Conclusion: The New Road to Serfdom Postscript: The World Turned Upside Down Acknowledgements Select Bibliography Notes Index About the Author Edward Chancellor is the author of Devil Take the Hindmost: A History of Financial Speculation which has been translated into many languages and was a New York Times Book of the Year. After reading history at Cambridge and Oxford, he worked for Lazard Brothers and until 2014 he was a senior member of the asset allocation team at GMO. He is currently a columnist for Reuters Breakingviews and has contributed to the Wall Street Journal, the Financial Times, MoneyWeek and the New York Review of Books. In 2008, he received the George Polk Award for financial reporting for his article “Ponzi Nation” in Institutional Investor.

‘Defined contribution’ pension schemes involved employers paying a certain amount of cash into their workers’ pension pots but gave no guaranteed income on retirement. These ‘DC’ pensions generally received lower employer contributions and delivered inferior investment returns. (Lower returns were due to higher management fees and inferior asset allocation.) Henceforth, workers in company pension schemes faced the prospect of reduced retirement incomes. Naturally, large amounts of fudge obscured the full extent of the mounting crisis. In the United States, pension providers assumed unrealistically high returns on their plan investments.51 At the same time, the discount rate used to calculate their liabilities was held above the market rate of interest.52 To cap it all, the Internal Revenue Service permitted private pension plan providers to use outdated mortality assumptions, further understating liabilities.53 The widespread use of dubious pensions assumptions produced, in the words of one commentator, an ‘intertemporal accounting error’.54 Had more realistic assumptions been employed, many pension providers would have been found insolvent.

In August 2013, chief financial officer Pierre Wautier had also killed himself. 30. This figure assumes that the balanced portfolio is divided 60/40 between equities and Treasury bonds. The historic average return of US equities has been around 6 per cent and US Treasuries around 2 per cent. ‘Rebalancing’ the portfolio to maintain this asset allocation has historically provided some incremental gain. 31. In late 2018, Boston money manager GMO forecast that the S&P 500 would have annual real returns of 4.4 per cent, assuming that valuations remained unchanged. Since the yield on US Treasuries was roughly in line with expected inflation, real bond returns might be expected to yield close to zero.


pages: 374 words: 114,600

The Quants by Scott Patterson

Alan Greenspan, Albert Einstein, AOL-Time Warner, asset allocation, automated trading system, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, Blythe Masters, Bonfire of the Vanities, book value, Brownian motion, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, Carl Icahn, centralized clearinghouse, Claude Shannon: information theory, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Doomsday Clock, Dr. Strangelove, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, Financial Modelers Manifesto, fixed income, Glass-Steagall Act, global macro, Gordon Gekko, greed is good, Haight Ashbury, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, index fund, invention of the telegraph, invisible hand, Isaac Newton, Jim Simons, job automation, John Meriwether, John Nash: game theory, junk bonds, Kickstarter, law of one price, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, Mark Spitznagel, merger arbitrage, Michael Milken, military-industrial complex, money market fund, Myron Scholes, NetJets, new economy, offshore financial centre, old-boy network, Paul Lévy, Paul Samuelson, Ponzi scheme, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, risk-adjusted returns, Robert Mercer, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Savings and loan crisis, Sergey Aleynikov, short selling, short squeeze, South Sea Bubble, speech recognition, statistical arbitrage, The Chicago School, The Great Moderation, The Predators' Ball, too big to fail, transaction costs, value at risk, volatility smile, yield curve, éminence grise

Over a sultry August weekend, Wall Street’s legions of traders, bankers, and hedge fund titans tried to relax, hopping in their Bentleys and BMWs, their Maseratis and Mercedeses, and retreating to the soft sands of the Hamptons beaches or jetting away for quick escapes to anywhere but New York City or Greenwich. They knew trouble was coming. It struck Monday with the force of a sledgehammer. Cliff Asness walked to the glass partition of his corner office and frowned at the rows of cubicles that made up AQR’s Global Asset Allocation group. GAA was replete with hotshot traders and researchers who scoured the globe in search of quantitative riches in everything from commodity futures to currency derivatives. On the other side of the building, separated by a wall that ran down the middle of the office, AQR’s Global Stock Selection team labored away.

Instead, many believed the goal should be to design better bridges—or, in the case of the quants, better, more robust models that could withstand financial tsunamis, not create them. There were some promising signs. Increasingly, firms were adapting models that incorporated the wild, fat-tailed swings described by Mandelbrot decades earlier. J. P. Morgan, the creator of the bell curve–based VAR risk model, was pushing a new asset-allocation model incorporating fat-tailed distributions. Morningstar, a Chicago investment-research group, was offering retirement-plan participants portfolio forecasts based on fat-tailed assumptions. A team of quants at MSCI BARRA, Peter Muller’s old company, had developed a cutting-edge risk-management strategy that accounted for potential black swans.


pages: 289 words: 113,211

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber

affirmative action, Albert Einstein, asset allocation, backtesting, beat the dealer, behavioural economics, Black Swan, Black-Scholes formula, Bonfire of the Vanities, book value, butterfly effect, commoditize, commodity trading advisor, computer age, computerized trading, disintermediation, diversification, double entry bookkeeping, Edward Lorenz: Chaos theory, Edward Thorp, family office, financial engineering, financial innovation, fixed income, frictionless, frictionless market, Future Shock, George Akerlof, global macro, implied volatility, index arbitrage, intangible asset, Jeff Bezos, Jim Simons, John Meriwether, junk bonds, London Interbank Offered Rate, Long Term Capital Management, loose coupling, managed futures, margin call, market bubble, market design, Mary Meeker, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, oil shock, Paul Samuelson, Pierre-Simon Laplace, proprietary trading, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk/return, Robert Shiller, Robert Solow, rolodex, Saturday Night Live, selection bias, shareholder value, short selling, Silicon Valley, statistical arbitrage, tail risk, The Market for Lemons, time value of money, too big to fail, transaction costs, tulip mania, uranium enrichment, UUNET, William Langewiesche, yield curve, zero-coupon bond, zero-sum game

In terms of risk management, rather than simply measuring the portfolio’s current risk level—a trivial exercise for equity portfolios—the analysis tries to determine the link between risk and sizing: that is, how good the manager is at modulating risk—pushing leverage and position size up and down—in response to market conditions and trading success. Scribe Reports also proved valuable for helping make asset allocation and hire/fire decisions for investors, funds of funds, and those within a hedge fund who were overseeing the stable of managers. The problem with hedge funds is that they are deliberately opaque. They don’t want anyone to know their positions, lest others trade against them or emulate their strategies.

It is clear from a risk management perspective that hedge fund classification provides no unification, hardly even a common thread. Not only do hedge funds cover the waterfront of investment strategies, of which the traditional asset management strategies are only a small part, but those executed by hedge funds are only one point on the spectrum of a surprisingly broad realm of business endeavor that might be called asset allocation businesses. We have already discussed the shorter-term role of the hedge fund in providing liquidity to the market; in that capacity the hedge fund manager is acting as a quasi market maker, taking over a function that has traditionally been the domain of the floor trader or the sellside firm, but which, with the speed of communication and transparency of the market micro structure, can now be outsourced.


pages: 669 words: 210,153

Tools of Titans: The Tactics, Routines, and Habits of Billionaires, Icons, and World-Class Performers by Timothy Ferriss

Abraham Maslow, Adam Curtis, Airbnb, Alexander Shulgin, Alvin Toffler, An Inconvenient Truth, artificial general intelligence, asset allocation, Atul Gawande, augmented reality, back-to-the-land, Ben Horowitz, Bernie Madoff, Bertrand Russell: In Praise of Idleness, Beryl Markham, billion-dollar mistake, Black Swan, Blue Bottle Coffee, Blue Ocean Strategy, blue-collar work, book value, Boris Johnson, Buckminster Fuller, business process, Cal Newport, call centre, caloric restriction, caloric restriction, Carl Icahn, Charles Lindbergh, Checklist Manifesto, cognitive bias, cognitive dissonance, Colonization of Mars, Columbine, commoditize, correlation does not imply causation, CRISPR, David Brooks, David Graeber, deal flow, digital rights, diversification, diversified portfolio, do what you love, Donald Trump, effective altruism, Elon Musk, fail fast, fake it until you make it, fault tolerance, fear of failure, Firefox, follow your passion, fulfillment center, future of work, Future Shock, Girl Boss, Google X / Alphabet X, growth hacking, Howard Zinn, Hugh Fearnley-Whittingstall, Jeff Bezos, job satisfaction, Johann Wolfgang von Goethe, John Markoff, Kevin Kelly, Kickstarter, Lao Tzu, lateral thinking, life extension, lifelogging, Mahatma Gandhi, Marc Andreessen, Mark Zuckerberg, Mason jar, Menlo Park, microdosing, Mikhail Gorbachev, MITM: man-in-the-middle, Neal Stephenson, Nelson Mandela, Nicholas Carr, Nick Bostrom, off-the-grid, optical character recognition, PageRank, Paradox of Choice, passive income, pattern recognition, Paul Graham, peer-to-peer, Peter H. Diamandis: Planetary Resources, Peter Singer: altruism, Peter Thiel, phenotype, PIHKAL and TIHKAL, post scarcity, post-work, power law, premature optimization, private spaceflight, QWERTY keyboard, Ralph Waldo Emerson, Ray Kurzweil, recommendation engine, rent-seeking, Richard Feynman, risk tolerance, Ronald Reagan, Salesforce, selection bias, sharing economy, side project, Silicon Valley, skunkworks, Skype, Snapchat, Snow Crash, social graph, software as a service, software is eating the world, stem cell, Stephen Hawking, Steve Jobs, Stewart Brand, superintelligent machines, TED Talk, Tesla Model S, The future is already here, the long tail, The Wisdom of Crowds, Thomas L Friedman, traumatic brain injury, trolley problem, vertical integration, Wall-E, Washington Consensus, We are as Gods, Whole Earth Catalog, Y Combinator, zero-sum game

Kyle Bass at one point bought $1 million worth of nickels (roughly 20 million coins). Why? Because their face value was 5 cents and their scrap metal value was 6.8 cents at the time. That’s an immediate gain of $360,000. Nicely done. Asset allocation: “They absolutely, beyond a shadow of a doubt, know they’re going to be wrong . . . so they set up an asset allocation system that will make them successful. They all agree asset allocation is the single most important investment decision.” In Money: Master the Game, Ray Dalio elaborated for Tony: “When people think they’ve got a balanced portfolio, stocks are three times more volatile than bonds.


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The End of Work: Why Your Passion Can Become Your Job by John Tamny

Albert Einstein, Andy Kessler, Apollo 13, asset allocation, barriers to entry, basic income, Bernie Sanders, cloud computing, commoditize, David Ricardo: comparative advantage, do what you love, Downton Abbey, future of work, George Gilder, haute cuisine, income inequality, Jeff Bezos, knowledge economy, Larry Ellison, Mark Zuckerberg, Palm Treo, Peter Thiel, profit motive, Saturday Night Live, Silicon Valley, Stephen Hawking, Steve Ballmer, Steve Jobs, There's no reason for any individual to have a computer in his home - Ken Olsen, trickle-down economics, universal basic income, upwardly mobile, Yogi Berra

I wrote good prospecting letters and was able to get meetings with a lot of rich people, but I ignored the advice from management to find an existing team to work with. That was the direction that Goldman PCS was heading in, and it would have benefited someone like me, who lacked quantitative skills. Why not join a team so that I could focus on getting prospects in the door while more numerate but shyer team members formulated asset-allocation pitches? Comparative advantage works in all walks of life. Instead, I foolishly went it alone, expecting people to entrust the fruits of their life’s work to a kid in his twenties with no real financial and market knowledge. I was good at getting meetings but had little interest in the actual Goldman products.


pages: 505 words: 142,118

A Man for All Markets by Edward O. Thorp

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", 3Com Palm IPO, Alan Greenspan, Albert Einstein, asset allocation, Bear Stearns, beat the dealer, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, book value, Brownian motion, buy and hold, buy low sell high, caloric restriction, caloric restriction, carried interest, Chuck Templeton: OpenTable:, Claude Shannon: information theory, cognitive dissonance, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Edward Thorp, Erdős number, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, Garrett Hardin, George Santayana, German hyperinflation, Glass-Steagall Act, Henri Poincaré, high net worth, High speed trading, index arbitrage, index fund, interest rate swap, invisible hand, Jarndyce and Jarndyce, Jeff Bezos, John Bogle, John Meriwether, John Nash: game theory, junk bonds, Kenneth Arrow, Livingstone, I presume, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, Mason jar, merger arbitrage, Michael Milken, Murray Gell-Mann, Myron Scholes, NetJets, Norbert Wiener, PalmPilot, passive investing, Paul Erdős, Paul Samuelson, Pluto: dwarf planet, Ponzi scheme, power law, price anchoring, publish or perish, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, RFID, Richard Feynman, risk-adjusted returns, Robert Shiller, rolodex, Sharpe ratio, short selling, Silicon Valley, Stanford marshmallow experiment, statistical arbitrage, stem cell, stock buybacks, stocks for the long run, survivorship bias, tail risk, The Myth of the Rational Market, The Predators' Ball, the rule of 72, The Wisdom of Crowds, too big to fail, Tragedy of the Commons, uptick rule, Upton Sinclair, value at risk, Vanguard fund, Vilfredo Pareto, Works Progress Administration

Zucker, adapted for ebook Cover design: Pete Garceau Cover photograph: © Leigh Wiener v4.1 ep Contents Cover Title Page Copyright Preface Foreword Chapter 1: Loving to Learn Chapter 2: Science Is My Playground Chapter 3: Physics and Mathematics Chapter 4: Las Vegas Chapter 5: Conquering Blackjack Chapter 6: The Day of the Lamb Chapter 7: Card Counting for Everyone Chapter 8: Players Versus Casinos Chapter 9: A Computer That Predicts Roulette Chapter 10: An Edge at Other Gambling Games Chapter 11: Wall Street: The Greatest Casino on Earth Chapter 12: Bridge with Buffett Chapter 13: Going into Partnership Chapter 14: Front-Running the Quantitative Revolution Chapter 15: Rise… Chapter 16: …And Fall Chapter 17: Period of Adjustment Chapter 18: Swindles and Hazards Chapter 19: Buying Low, Selling High Chapter 20: Backing the Truck Up to the Banks Chapter 21: One Last Puff Chapter 22: Hedging Your Bets Chapter 23: How Rich Is Rich? Chapter 24: Compound Growth: The Eighth Wonder of the World Chapter 25: Beat Most Investors by Indexing Chapter 26: Can You Beat the Market? Should You Try? Chapter 27: Asset Allocation and Wealth Management Chapter 28: Giving Back Chapter 29: Financial Crises: Lessons Not Learned Chapter 30: Thoughts Epilogue Appendix A: The Impact of Inflation on the Dollar Appendix B: Historical Returns Appendix C: The Rule of 72 and More Appendix D: Performance of Princeton Newport Partners, LP Appendix E: Our Statistical Arbitrage Results for a Fortune 100 Company Photo Insert Dedication Acknowledgments Notes Bibliography By Edward O.

Be aware that information flows down a “food chain,” with those who get it first “eating” and those who get it late being eaten. Finally, don’t bet on an investment unless you can demonstrate by logic, and if appropriate by track record, that you have an edge. Whether or not you try to beat the market, you can do better by properly managing your wealth, which I talk about next. Chapter 27 * * * ASSET ALLOCATION AND WEALTH MANAGEMENT Private wealth in the industrially advanced countries is spread among major asset classes such as equities (common stocks), bonds, real estate, collectibles, commodities, and miscellaneous personal property. If investors choose index funds for each asset class in which they wish to invest, their combined portfolio risk and return will depend on how they allocate among asset classes.


Mastering Private Equity by Zeisberger, Claudia,Prahl, Michael,White, Bowen, Michael Prahl, Bowen White

Alan Greenspan, asset allocation, backtesting, barriers to entry, Basel III, Bear Stearns, book value, business process, buy low sell high, capital controls, carbon credits, carried interest, clean tech, commoditize, corporate governance, corporate raider, correlation coefficient, creative destruction, currency risk, deal flow, discounted cash flows, disintermediation, disruptive innovation, distributed generation, diversification, diversified portfolio, family office, fixed income, high net worth, impact investing, information asymmetry, intangible asset, junk bonds, Lean Startup, low interest rates, market clearing, Michael Milken, passive investing, pattern recognition, performance metric, price mechanism, profit maximization, proprietary trading, risk tolerance, risk-adjusted returns, risk/return, Savings and loan crisis, shareholder value, Sharpe ratio, Silicon Valley, sovereign wealth fund, statistical arbitrage, time value of money, transaction costs, two and twenty

., doubling down on known entities). Seasoned LPs may over time develop an appetite for co-investments—investing directly into portfolio company equity side by side with a GP—and direct investments to improve economics and fine-tune their investment allocation.14 DENOMINATOR EFFECT: The denominator effect refers to an asset allocation problem caused by a sudden drop in the value of an LP’s public equity portfolio in times of market turmoil. During market shocks, valuations of illiquid assets—and PE in particular—adjust more slowly, if at all. As a result, the value of an LP’s overall portfolio (the denominator) drops more quickly than the value of its PE allocation, causing an increase in an LP’s exposure to PE as a percentage of total AUM, often significantly beyond its target allocation.

During the investment period, monitoring and performance tracking are an ongoing process, no different from that in public equity portfolios. To benchmark the portfolio against that of its peers, data from fund of funds, advisors or data providers is used to show aggregate quartile performance of the overall industry by vintage year, geography and sector. Insights gained from this exercise will inform future asset allocation decisions. Direct Investment Risk The number of LPs with ambitions to execute direct deals—i.e., investing in private companies without going through managed funds—is increasing. We dedicate a full chapter13 to this discussion as the risks involved and the commitment needed to make both co-investments and direct deals a successful component of an institutional portfolio are not trivial.


Design of Business: Why Design Thinking Is the Next Competitive Advantage by Roger L. Martin

algorithmic management, Apple Newton, asset allocation, autism spectrum disorder, Buckminster Fuller, business process, Frank Gehry, global supply chain, high net worth, Innovator's Dilemma, Isaac Newton, mobile money, planned obsolescence, QWERTY keyboard, Ralph Waldo Emerson, risk tolerance, Salesforce, scientific management, six sigma, Steve Ballmer, Steve Jobs, stock buybacks, supply-chain management, Wall-E, winner-take-all economy

The Pressures of Time The third reason that reliability tends to trump validity in business settings is, quite simply, time. A reliable system can generate tremendous time savings; once designed, it eliminates the need for subjective and thoughtful analysis by an expensive and time-pressed manager or professional. Hence the appeal of automated asset-allocation systems at investment advisory firms: before new clients even meet an adviser, the clients complete a questionnaire designed to reliably assess their investment horizons, risk tolerance, and investment goals. The data feeds into a program that impersonally graphs the recommended mix of stocks, bonds, and other investments.


pages: 186 words: 49,251

The Automatic Customer: Creating a Subscription Business in Any Industry by John Warrillow

Airbnb, airport security, Amazon Web Services, asset allocation, barriers to entry, call centre, cloud computing, commoditize, David Heinemeier Hansson, discounted cash flows, Hacker Conference 1984, high net worth, Jeff Bezos, Network effects, passive income, rolodex, Salesforce, sharing economy, side project, Silicon Valley, Silicon Valley startup, software as a service, statistical model, Steve Jobs, Stewart Brand, subscription business, telemarketer, the long tail, time value of money, zero-sum game, Zipcar

Russell, Mark, “Private Clubs Cut Fees as Golfers Find Less Time for Tee,” Sunday Age, January 17, 2010. newsstore.fairfax.com.au/apps/viewDocument.ac;jsessionid=EDEC72100CFB2E466A2A2353EE4EE47Fsy=afr&pb=all_ffx&dt=selectRange&dr=1month&so=relevance&sf=text&sf=headline&rc=10&rm=200&sp=brs&cls=19059&clsPage=1&docID=SAG100117MG3BA5GE1R9. 2. Sullivan, Paul, “Financial Advice Gleaned from a Day in the Hot Seat,” New York Times, June 17, 2011. nytimes.com/2011/06/18/your-money/asset-allocation/18wealth.html. CHAPTER 6: THE FRONT-OF-THE LINE MODEL 1. “Premier Success Plans,” Salesforce.com, last modified March 12, 2014. www2.sfdcstatic.com/assets/pdf/datasheets/DS_SuccessPlans.pdf. 2. “Mission Critical Success,” Salesforce.com, last modified July 7, 2013. www2.sfdcstatic.com/assets/pdf/datasheets/MCS_Datasheet.pdf.


pages: 172 words: 49,890

The Dhandho Investor: The Low-Risk Value Method to High Returns by Mohnish Pabrai

asset allocation, backtesting, beat the dealer, Black-Scholes formula, book value, business intelligence, call centre, cuban missile crisis, discounted cash flows, Edward Thorp, Exxon Valdez, fixed income, hiring and firing, index fund, inventory management, John Bogle, Mahatma Gandhi, merger arbitrage, passive investing, price mechanism, Silicon Valley, time value of money, transaction costs, two and twenty, zero-sum game

Incorporating some of these index-like traits in your portfolio is likely to lead to results that are vastly superior to the broad indexes. I’m a big fan of David Swensen, who manages the $15 billion Yale endowment. He’s been at Yale for two decades and has delivered an annualized return of 16.1 percent over that period (compared to 12.3 percent for the S&P 500 Index).2 Using a very atypical approach to asset allocation, he moved Yale almost entirely out of bonds 20 years ago and mainly into private equity, venture capital, hedge funds, and concentrated value funds like Chieftain. Swenson observed, for example, there just wasn’t much difference in performance between the best- and worstperforming bond fund.


pages: 271 words: 52,814

Blockchain: Blueprint for a New Economy by Melanie Swan

23andMe, Airbnb, altcoin, Amazon Web Services, asset allocation, banking crisis, basic income, bioinformatics, bitcoin, blockchain, capital controls, cellular automata, central bank independence, clean water, cloud computing, collaborative editing, Conway's Game of Life, crowdsourcing, cryptocurrency, data science, digital divide, disintermediation, Dogecoin, Edward Snowden, en.wikipedia.org, Ethereum, ethereum blockchain, fault tolerance, fiat currency, financial innovation, Firefox, friendly AI, Hernando de Soto, information security, intangible asset, Internet Archive, Internet of things, Khan Academy, Kickstarter, Large Hadron Collider, lifelogging, litecoin, Lyft, M-Pesa, microbiome, Neal Stephenson, Network effects, new economy, operational security, peer-to-peer, peer-to-peer lending, peer-to-peer model, personalized medicine, post scarcity, power law, prediction markets, QR code, ride hailing / ride sharing, Satoshi Nakamoto, Search for Extraterrestrial Intelligence, SETI@home, sharing economy, Skype, smart cities, smart contracts, smart grid, Snow Crash, software as a service, synthetic biology, technological singularity, the long tail, Turing complete, uber lyft, unbanked and underbanked, underbanked, Vitalik Buterin, Wayback Machine, web application, WikiLeaks

.; spending) in the shorter term to realize value before it is lost. The currency itself thus encourages economic activity. Demurrage, then, is the compact concept of an attribute, the idea of an automatic motivating or incitory property being built in to something. Further, another aspect of demurrage currencies (or really all digital network–based asset allocation, tracking, interaction, and transaction structures) is the notion of periodic automatic redistribution of the currency (the resource) across all network nodes at certain prespecified times, or in the case of certain events. Demurrage features could become a powerful and standard currency administration tool.


pages: 516 words: 157,437

Principles: Life and Work by Ray Dalio

Alan Greenspan, Albert Einstein, asset allocation, autonomous vehicles, backtesting, Bear Stearns, Black Monday: stock market crash in 1987, cognitive bias, currency risk, Deng Xiaoping, diversification, Dunning–Kruger effect, Elon Musk, financial engineering, follow your passion, global macro, Greenspan put, hiring and firing, iterative process, Jeff Bezos, Long Term Capital Management, margin call, Market Wizards by Jack D. Schwager, microcredit, oil shock, performance metric, planetary scale, quantitative easing, risk tolerance, Ronald Reagan, Silicon Valley, Steve Jobs, transaction costs, yield curve

Larry Summers has since said that the advice he got from us was the most important in shaping this market. When the Treasury did create the bonds, they followed the structure we recommended. DISCOVERING RISK PARITY By the mid-1990s, I had enough money to set up a trust for my family, so I began to think about what the best asset allocation mix for preserving wealth over generations would look like. In my years as an investor, I had seen all sorts of economic and market environments and all kinds of ways that wealth could be created and destroyed. I knew what drove asset returns, but I also knew that no matter what asset class one held, there would come a time when it would lose most of its value.

There were only two big forces to worry about: growth and inflation. Each could either be rising or falling, so I saw that by finding four different investment strategies—each one of which would do well in a particular environment (rising growth with rising inflation, rising growth with falling inflation, and so on)—I could construct an asset-allocation mix that was balanced to do well over time while being protected against unacceptable losses. Since that strategy would never change, practically anyone could implement it. And so, with help from Bob and Dan, I created a portfolio mix that I could comfortably put my trust money in for the next hundred or more years.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, bond market vigilante , book value, borderless world, Bretton Woods, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, capital controls, Carl Icahn, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, currency risk, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, disinformation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, Glass-Steagall Act, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, junk bonds, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, long and variable lags, Louis Bachelier, low interest rates, market bubble, Mexican peso crisis / tequila crisis, Michael Milken, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, planned obsolescence, plutocrats, Post-Keynesian economics, price mechanism, price stability, prisoner's dilemma, profit maximization, proprietary trading, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Savings and loan crisis, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, stock buybacks, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

It is interesting, though, that Chen's data shows that the real economy can also be thought of as predicting the stock market (with real weakness portending financial strength), turning the conventional notion of the stock market as the leader WALL STREET and the real world as the follower on its head. When things move in opposite directions, it's admittedly hard to say which is the cause and which is the effect. allocation A good deal of Wall Street time is devoted to asset allocation — figuring out where to put money. Analysts are deployed, both on the buy (customer) and sell (broker) sides, to scrutinize the health of the national economies, industrial sectors, and classes of assets. Though lots of institutional investors are restricted in what they can buy — managers of high-tech mutual funds can't buy auto stocks, and insurance companies don't buy penny stocks — even the most tightly specified have to figure out just what to buy, sell, and hold.

Wall Street firms also deposited their clients' funds with hotshot thrifts, who would then turn around and buy the (often dubious) securities the firms were peddling (Mayer 1990, pp. 296-297). Of course, the U.S. Treasury ultimately picked up the tab for this exercise in market efficiency. 36. Lewis 1989b, p. 31. 37. Figures from Federal Reserve's flow of funds statistics. 38. Greenspan explained that these freelancers pounced when they perceived "subopti-mal asset allocations" (Greenspan 1989, p. 268; Jaroslovsky 1989). 39- Lexecon's argument is also damaged by Michael Barclay's (1996) findings that Nasdaq stocks with wide bid-ask spreads that subsequently shifted to the NYSE showed significant declines in the spread on exchange listing. 40. Several calls to Bennett asking for an interview went unreturned.


pages: 179 words: 59,704

Meet the Frugalwoods: Achieving Financial Independence Through Simple Living by Elizabeth Willard Thames

Airbnb, asset allocation, barriers to entry, basic income, behavioural economics, buy and hold, carbon footprint, delayed gratification, dumpster diving, East Village, financial independence, food desert, hedonic treadmill, IKEA effect, index fund, indoor plumbing, lifestyle creep, loss aversion, low interest rates, McMansion, mortgage debt, passive income, payday loans, risk tolerance, side hustle, Stanford marshmallow experiment, universal basic income, working poor

Successful investing entails the following: buying and holding diversified, low-fee stocks for decades, avoiding the temptation to time the market, not pulling money in and out of the market, and not following the market on a daily basis. Invest and hold (for years upon years) and, more likely than not, your money will make more money. This is an oversimplification of investing, and there are other variables such a rebalancing and asset allocation, as well as decreasing your exposure to risk as you near traditional retirement age, but this is the basic gist. If you want to grow your wealth, you need to avail yourself of the stock market. Investing in low-fee index funds is as straightforward as any other facet of online banking, and you can set up an account online by yourself in minutes.


Quantitative Trading: How to Build Your Own Algorithmic Trading Business by Ernie Chan

algorithmic trading, asset allocation, automated trading system, backtesting, Bear Stearns, Black Monday: stock market crash in 1987, Black Swan, book value, Brownian motion, business continuity plan, buy and hold, classic study, compound rate of return, Edward Thorp, Elliott wave, endowment effect, financial engineering, fixed income, general-purpose programming language, index fund, Jim Simons, John Markoff, Long Term Capital Management, loss aversion, p-value, paper trading, price discovery process, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Ray Kurzweil, Renaissance Technologies, risk free rate, risk-adjusted returns, Sharpe ratio, short selling, statistical arbitrage, statistical model, survivorship bias, systematic trading, transaction costs

Empirical studies have found that a portfolio that consists of low-beta stocks generally has lower risk and thus a higher Sharpe ratio. For example, in a paper titled “Risk Parity Portfolios” (not publicly distributed), Dr. Edward Qian at PanAgora Asset Management argued that a typical 60–40 asset allocation between stocks and bonds is not optimal because it is overweighted with risky assets (stocks in this case). Instead, to achieve a higher Sharpe ratio while maintaining the same risk level as the 60–40 portfolio, Dr. Qian recommended a 23–77 allocation while leveraging the entire portfolio by 1.8.


pages: 274 words: 60,596

Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School by Andrew Hallam

Albert Einstein, asset allocation, Bernie Madoff, buy and hold, diversified portfolio, financial independence, George Gilder, index fund, John Bogle, junk bonds, Long Term Capital Management, low interest rates, Mary Meeker, new economy, passive investing, Paul Samuelson, Ponzi scheme, pre–internet, price stability, random walk, risk tolerance, Silicon Valley, South China Sea, stocks for the long run, survivorship bias, transaction costs, Vanguard fund, yield curve

When arbitration lawyer Daniel Solin was writing his book, Does Your Broker Owe You Money?, a broker told him: Training for a new broker goes something like this: Study and take the Series 7, 63, 65 and insurance exams. I spent three weeks learning to sell. If a broker wants to learn about (asset allocation and diversification) it has to be done on the broker’s own time.3 This might explain why it’s often common to find investors of all ages without any bonds in their portfolios. Predominantly trained as salespeople, it’s possible that many financial representatives aren’t schooled in the practice of diversifying investment accounts with stocks and bonds.


pages: 256 words: 60,620

Think Twice: Harnessing the Power of Counterintuition by Michael J. Mauboussin

affirmative action, Alan Greenspan, asset allocation, Atul Gawande, availability heuristic, Benoit Mandelbrot, Bernie Madoff, Black Swan, butter production in bangladesh, Cass Sunstein, choice architecture, Clayton Christensen, cognitive dissonance, collateralized debt obligation, Daniel Kahneman / Amos Tversky, deliberate practice, disruptive innovation, Edward Thorp, experimental economics, financial engineering, financial innovation, framing effect, fundamental attribution error, Geoffrey West, Santa Fe Institute, George Akerlof, hindsight bias, hiring and firing, information asymmetry, libertarian paternalism, Long Term Capital Management, loose coupling, loss aversion, mandelbrot fractal, Menlo Park, meta-analysis, money market fund, Murray Gell-Mann, Netflix Prize, pattern recognition, Performance of Mutual Funds in the Period, Philip Mirowski, placebo effect, Ponzi scheme, power law, prediction markets, presumed consent, Richard Thaler, Robert Shiller, statistical model, Steven Pinker, systems thinking, the long tail, The Wisdom of Crowds, ultimatum game, vertical integration

Gould lived another twenty years.22 Two other issues are worth mentioning. The statistical rate of success and failure must be reasonably stable over time for a reference class to be valid. If the properties of the system change, drawing inference from past data can be misleading. This is an important issue in personal finance, where advisers make asset allocation recommendations for their clients based on historical statistics. Because the statistical properties of markets shift over time, an investor can end up with the wrong mix of assets. Also keep an eye out for systems where small perturbations can lead to large-scale change. Since cause and effect are difficult to pin down in these systems, drawing on past experiences is more difficult.


pages: 276 words: 59,165

Impact: Reshaping Capitalism to Drive Real Change by Ronald Cohen

"World Economic Forum" Davos, asset allocation, benefit corporation, biodiversity loss, carbon footprint, carbon tax, circular economy, commoditize, corporate governance, corporate social responsibility, crowdsourcing, decarbonisation, diversification, driverless car, Elon Musk, family office, financial independence, financial innovation, full employment, high net worth, housing crisis, impact investing, income inequality, invisible hand, Kickstarter, lockdown, Mark Zuckerberg, microbiome, minimum viable product, moral hazard, performance metric, risk-adjusted returns, risk/return, Silicon Valley, sovereign wealth fund, Steve Ballmer, Steve Jobs, tech worker, TED Talk, The Wealth of Nations by Adam Smith, transaction costs, zero-sum game

This new strategy will focus on affordable and sustainable energy, work and economic growth, sustainable innovation and sustainable cities. By the end of 2018, PME reported that 8.8 per cent of its investments were contributing to the SDGs, and that it aims to hit 10 per cent soon.22 The Dutch civil service pension fund, ABP, has stated that it wants to double the assets allocated to ‘high-sustainability investments’, to €58 billion ($64 billion). Its priorities include reducing its carbon footprint, investing in education, promoting safe working conditions, respecting human rights and eradicating child labor.23 ABP also announced that it will divest its entire holdings in tobacco and nuclear weapons – worth an estimated €3.3 billion ($3.7 billion) – and several other large Dutch funds have also cut tobacco firms from their portfolios in recent years.24 An increasing number of pension funds in other countries, including Norway’s KLP, Sweden’s AP funds, Denmark’s Pension Danmark and the National Employment Savings Trust (NEST) in the UK, are also heading in the same direction, emphasizing the particular concerns of their pension savers.


pages: 544 words: 168,076

Red Plenty by Francis Spufford

Adam Curtis, affirmative action, anti-communist, Anton Chekhov, asset allocation, Buckminster Fuller, clean water, cognitive dissonance, computer age, double helix, Fellow of the Royal Society, John von Neumann, Kickstarter, Kim Stanley Robinson, Kitchen Debate, linear programming, lost cosmonauts, market clearing, MITM: man-in-the-middle, New Journalism, oil shock, Philip Mirowski, plutocrats, profit motive, RAND corporation, scientific management, Simon Kuznets, the scientific method

The ‘marginalist revolution’ of the late nineteenth century was little known, and with it the characteristic mathematical formalisations of Western economics. Those who were well-enough informed to know about the ‘socialist calculation debate’ (see below, introduction to part II) were conscious that their proposals for optimal asset allocation presupposed a Walrasian model of general equilibrium, but Pareto was reputed only as a quasi-fascist, and Keynes as one more ‘bourgeois apologist’, whose fancy footwork could not disguise the unchanging operations of capital, as diagnosed once and for ever by Marx. For Marx’s formulation of the labour theory, see Freedman, ed., Marx on Economics, pp. 27–63; Leszek Kolakowski, Main Currents of Marxism: The Founders, the Golden Age, the Breakdown, translated from the Polish by P.S.Falla, one-volume edition (New York: W.W.Norton, 2005), pp. 219–26.

The ‘marginalist revolution’ of the late nineteenth century was little known, and with it the characteristic mathematical formalisations of Western economics. Those who were well-enough informed to know about the ‘socialist calculation debate’ (see below, introduction to part II) were conscious that their proposals for optimal asset allocation presupposed a Walrasian model of general equilibrium, but Pareto was reputed only as a quasi-fascist, and Keynes as one more ‘bourgeois apologist’, whose fancy footwork could not disguise the unchanging operations of capital, as diagnosed once and for ever by Marx. For Marx’s formulation of the labour theory, see Freedman, ed., Marx on Economics, pp. 27–63; Leszek Kolakowski, Main Currents of Marxism: The Founders, the Golden Age, the Breakdown, translated from the Polish by P.S.Falla, one-volume edition (New York: W.W.Norton, 2005), pp. 219–26.


pages: 575 words: 171,599

The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund by Anita Raghavan

"World Economic Forum" Davos, airport security, Asian financial crisis, asset allocation, Bear Stearns, Bernie Madoff, Boeing 747, British Empire, business intelligence, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, delayed gratification, estate planning, Etonian, glass ceiling, high net worth, junk bonds, kremlinology, Larry Ellison, locking in a profit, Long Term Capital Management, Marc Andreessen, mass immigration, McMansion, medical residency, Menlo Park, new economy, old-boy network, Ponzi scheme, risk tolerance, rolodex, Ronald Reagan, short selling, Silicon Valley, sovereign wealth fund, stem cell, technology bubble, too big to fail

But while the profits were piling up, the goodwill between the two key partners, Trehan and Rajaratnam, frayed. One day in early 2006, Rajaratnam, Gupta, and Trehan were meeting at Galleon’s offices when Rajaratnam started laying into Trehan. Instead of BroadStreet serving as the investment manager of Voyager, Rajaratnam was angling for Galleon to be making the asset allocation decisions at Voyager (and getting a bit of the lucrative management fees). At one point, Rajaratnam became so abusive that Trehan, a seasoned investor with a successful track record, got fed up and said, “I don’t want to do business with you if that is the way you are going to act.” Then Trehan walked out of Rajaratnam’s office.

By 2009, the markets had snapped back and his Galleon group of funds was on track to earn 20 percent in performance fees, the lucrative payments that had propelled him to the billionaires’ club in the first place. Some big investors—so-called funds of funds—which allocate money to hedge funds, were close to pouring their money back in after pulling their cash in 2008. Galleon was on a list of about ten different funds that large asset allocators were considering funnelling cash to, Rajaratnam had learned. After a horrific 2008, it looked like 2009 was going to be just fine. Rajaratnam was finally feeling relaxed and good about the world. He and his wife, Asha, were set to leave for London the next day for the premiere of Today’s Special, an independent film he helped finance.


pages: 237 words: 64,411

Humans Need Not Apply: A Guide to Wealth and Work in the Age of Artificial Intelligence by Jerry Kaplan

Affordable Care Act / Obamacare, Amazon Web Services, asset allocation, autonomous vehicles, bank run, bitcoin, Bob Noyce, Brian Krebs, business cycle, buy low sell high, Capital in the Twenty-First Century by Thomas Piketty, combinatorial explosion, computer vision, Computing Machinery and Intelligence, corporate governance, crowdsourcing, driverless car, drop ship, Easter island, en.wikipedia.org, Erik Brynjolfsson, estate planning, Fairchild Semiconductor, Flash crash, Gini coefficient, Goldman Sachs: Vampire Squid, haute couture, hiring and firing, income inequality, index card, industrial robot, information asymmetry, invention of agriculture, Jaron Lanier, Jeff Bezos, job automation, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kiva Systems, Larry Ellison, Loebner Prize, Mark Zuckerberg, mortgage debt, natural language processing, Nick Bostrom, Own Your Own Home, pattern recognition, Satoshi Nakamoto, school choice, Schrödinger's Cat, Second Machine Age, self-driving car, sentiment analysis, short squeeze, Silicon Valley, Silicon Valley startup, Skype, software as a service, The Chicago School, The Future of Employment, Turing test, Vitalik Buterin, Watson beat the top human players on Jeopardy!, winner-take-all economy, women in the workforce, working poor, Works Progress Administration

We don’t need to take from the wealthy and give to the less fortunate because our economy is not standing still; it’s continually expanding, and this growth is likely to quicken. So all we need to do is distribute the benefits of future growth more widely, and the problem will slowly melt away. A carefully crafted program of tax incentives, portfolio transparency, and increased individual control over asset allocation based on the PBI offers us a way to keep from capsizing in the rising tide of concentrating prosperity. So why can’t our chosen leaders better assess the situation and take corrective actions? Because you can’t steer when you can’t see, and you can’t discuss what you can’t articulate. At the moment, our public discourse lacks the concepts and exemplars to properly describe what’s likely to happen as technological progress accelerates, much less to guide us to reasonable solutions.


pages: 222 words: 50,318

The Option of Urbanism: Investing in a New American Dream by Christopher B. Leinberger

addicted to oil, American Society of Civil Engineers: Report Card, asset allocation, big-box store, centre right, commoditize, credit crunch, David Brooks, desegregation, Donald Shoup, Donald Trump, drive until you qualify, edge city, Ford Model T, full employment, General Motors Futurama, gentrification, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, knowledge economy, Lewis Mumford, McMansion, mortgage tax deduction, new economy, New Urbanism, peak oil, Ponzi scheme, postindustrial economy, RAND corporation, Report Card for America’s Infrastructure, reserve currency, Richard Florida, Savings and loan crisis, Seaside, Florida, the built environment, transit-oriented development, urban planning, urban renewal, urban sprawl, value engineering, walkable city, white flight

Seventy-five billion square feet of nonresidential space will be built with 60 billion [square feet] replacing space that existed in 2000: New nonresidential development will equal all such development that existed in 2000.”23 This is a tremendous amount of development that, if it follows current asset allocation, will require around thirty-five percent of American investment capital during that period. This would be the largest portion the country will invest in any asset class—more than government and corporate research and development, more than all of the capital investment in publicly traded companies, and more than the country’s defense spending.


pages: 189 words: 64,571

The Cheapskate Next Door: The Surprising Secrets of Americans Living Happily Below Their Means by Jeff Yeager

An Inconvenient Truth, asset allocation, Boeing 747, carbon footprint, delayed gratification, do what you love, dumpster diving, index card, job satisfaction, late fees, mortgage debt, new economy, payday loans, Skype, upwardly mobile, Zipcar

Of cheapskate portfolios I was made privy to, the key characteristics were these: Diversification with a large percentage of bonds and other lending investments, and a smaller share of equities than is typically promoted in the financial media. Minimizing fees, particularly by investing in index mutual funds or “exchange-traded funds,” which are so-called “baskets”of related securities designed to track existing indexes like the S&P 500. Rebalancing investments periodically, according to an asset allocation plan. Dollar-cost averaging, or, in other words, continually investing on a regular schedule to even out fluctuations in the markets. Remembering that “pigs get fat, hogs get slaughtered” (as one cheapskate put it). Cheapskates don’t get too greedy or aggressive, because it’s only money, and the cheapskate next door doesn’t need that much of it to be truly happy.


Bulletproof Problem Solving by Charles Conn, Robert McLean

active transport: walking or cycling, Airbnb, Amazon Mechanical Turk, asset allocation, availability heuristic, Bayesian statistics, behavioural economics, Big Tech, Black Swan, blockchain, book value, business logic, business process, call centre, carbon footprint, cloud computing, correlation does not imply causation, Credit Default Swap, crowdsourcing, David Brooks, deep learning, Donald Trump, driverless car, drop ship, Elon Musk, endowment effect, fail fast, fake news, future of work, Garrett Hardin, Hyperloop, Innovator's Dilemma, inventory management, iterative process, loss aversion, megaproject, meta-analysis, Nate Silver, nudge unit, Occam's razor, pattern recognition, pets.com, prediction markets, principal–agent problem, RAND corporation, randomized controlled trial, risk tolerance, Silicon Valley, SimCity, smart contracts, stem cell, sunk-cost fallacy, the rule of 72, the scientific method, The Signal and the Noise by Nate Silver, time value of money, Tragedy of the Commons, transfer pricing, Vilfredo Pareto, walkable city, WikiLeaks

When we add risk tolerance, a different strategy emerges than hedging by buying annuities. Heuristics like a longevity runway and compound growth get us to a rich solution set to an all too real problem. There is also the need for many to increase their savings rate to extend the runway. That should be addressed along with asset allocation to avoid outliving your savings. Case Study: How to Make Really Long‐Term Investments Investments like bridges, mines, roads, and infrastructure have long lives. There is uncertainty over the future operating environment that has to be factored in to the problem solving up front. There is the need to deal with a range of possible outcomes, which often requires flexibility to address the value of future development options that are either enabled or blocked by the decision today (another kind of conditional probability).


pages: 231 words: 64,734

Safe Haven: Investing for Financial Storms by Mark Spitznagel

Albert Einstein, Antoine Gombaud: Chevalier de Méré, asset allocation, behavioural economics, bitcoin, Black Swan, blockchain, book value, Brownian motion, Buckminster Fuller, cognitive dissonance, commodity trading advisor, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, delayed gratification, diversification, diversified portfolio, Edward Thorp, fiat currency, financial engineering, Fractional reserve banking, global macro, Henri Poincaré, hindsight bias, Long Term Capital Management, Mark Spitznagel, Paul Samuelson, phenotype, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, random walk, rent-seeking, Richard Feynman, risk free rate, risk-adjusted returns, Schrödinger's Cat, Sharpe ratio, spice trade, Steve Jobs, tail risk, the scientific method, transaction costs, value at risk, yield curve, zero-sum game

After the dust has settled, you would have likely been safer with no safe haven at all. Here we see the fundamental difference between a tactical versus a strategic investment, particularly in the context of safe haven investing. A strategic safe haven is about mitigating systematic risk in a portfolio through asset allocations that are more fixed in nature and then letting the dynamic interplay between its parts create the portfolio effect. A tactical safe haven, on the other hand, is about mitigating systematic risk in a portfolio by periodically and actively moving in and out of certain “safe” allocations, with the well‐intentioned purpose of saving on the high cost of that safety when times are good.


Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals by David Aronson

Albert Einstein, Andrew Wiles, asset allocation, availability heuristic, backtesting, Black Swan, book value, butter production in bangladesh, buy and hold, capital asset pricing model, cognitive dissonance, compound rate of return, computerized trading, Daniel Kahneman / Amos Tversky, distributed generation, Elliott wave, en.wikipedia.org, equity risk premium, feminist movement, Great Leap Forward, hindsight bias, index fund, invention of the telescope, invisible hand, Long Term Capital Management, managed futures, mental accounting, meta-analysis, p-value, pattern recognition, Paul Samuelson, Ponzi scheme, price anchoring, price stability, quantitative trading / quantitative finance, Ralph Nelson Elliott, random walk, retrograde motion, revision control, risk free rate, risk tolerance, risk-adjusted returns, riskless arbitrage, Robert Shiller, Sharpe ratio, short selling, source of truth, statistical model, stocks for the long run, sugar pill, systematic trading, the scientific method, transfer pricing, unbiased observer, yield curve, Yogi Berra

Arditti, “Can Analysts Distinguish Between Real and Randomly Generated Stock Prices?,” Financial Analysts Journal 34, no. 6 (November/ December 1978), 70. 18. J.J. Siegel, Stocks for the Long Run, 2nd ed. (New York: McGraw-Hill, 1998), 243. 19. G.R. Jensen, R.R. Johnson, and J.M. Mercer, “Tactical Asset Allocation and Commodity Futures: Ways to Improve Performance,” Journal of Portfolio Management 28, no. 4 (Summer 2002). 20. C.R. Lightner, “A Rationale for Managed Futures,” Technical Analysis of Stocks & Commodities (2003). Note that this publication is not a peer-reviewed journal but the article appeared to be well supported and its findings were consistent with the peer-reviewed article cited in the prior note. 21.

Grains (corn, soybeans, soybean meal, soybean oil, and wheat); financials (5year T-notes, 10-year T-notes, long-term treasury bonds); currencies (Australian, British, Canadian, German, Swiss, and Japanese); energy (heating oil, natural gas, crude oil, and unleaded gas); cattle; metals (gold, copper, and silver); and soft/tropical (coffee, cotton, and sugar). G.R. Jensen, R.R. Johnson, and J.M. Mercer, “Tactical Asset Allocation and Commodity Futures,” Journal of Portfolio Management 28, no. 4 (Summer 2002). An asset-class benchmark measures the returns earned and risks incurred by investing in a specific asset class, with no management skill. Lars Kestner, Quantitative Trading Strategies: Harnessing the Power of Quantitative Techniques to Create a Winning Trading Program (New York: McGraw-Hill, 2003), 129–180.


Mastering Book-Keeping: A Complete Guide to the Principles and Practice of Business Accounting by Peter Marshall

accounting loophole / creative accounting, asset allocation, book value, double entry bookkeeping, information retrieval, intangible asset, the market place

We simply draw up a statement showing the balances left on the ledger after we have compiled the trading, profit and loss account. Using the trial balance on page 140 we will compile a balance sheet for internal use, that also meets the requirements of the Companies Act 1985 (Format 1). Compiling a company balance sheet step by step 1. Make a heading: ‘Fixed assets’. Allocate three cash columns on the right of a sheet of paper, and head them ‘Cost’, ‘Less provision for depreciation’, and ‘Net book value’. Underneath, record the values for each fixed asset. Net book value means value after depreciation. On the left write against each the name of the asset concerned.


pages: 263 words: 75,455

Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors by Wesley R. Gray, Tobias E. Carlisle

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, Andrei Shleifer, asset allocation, Atul Gawande, backtesting, beat the dealer, Black Swan, book value, business cycle, butter production in bangladesh, buy and hold, capital asset pricing model, Checklist Manifesto, cognitive bias, compound rate of return, corporate governance, correlation coefficient, credit crunch, Daniel Kahneman / Amos Tversky, discounted cash flows, Edward Thorp, Eugene Fama: efficient market hypothesis, financial engineering, forensic accounting, Henry Singleton, hindsight bias, intangible asset, Jim Simons, Louis Bachelier, p-value, passive investing, performance metric, quantitative hedge fund, random walk, Richard Thaler, risk free rate, risk-adjusted returns, Robert Shiller, shareholder value, Sharpe ratio, short selling, statistical model, stock buybacks, survivorship bias, systematic trading, Teledyne, The Myth of the Rational Market, time value of money, transaction costs

He is a graduate of the University of Queensland in Australia with degrees in law and business (management). About the Companion Website This book includes a companion website, which can be found at www.wiley.com/go/quantvalue. This website includes: A screening tool to find stocks using the model in the book. A tool designed to facilitate the implementation for a variety of tactical asset allocation models. A back-testing tool that allows users to compare performance among competing investment strategies. A blog about recent developments in quantitative value investing. Index Accruals detecting earnings manipulation Activism and cloning Adjustment bias Alpha and adjusted performance sustainable Altman, Edward I.


The Fix: How Bankers Lied, Cheated and Colluded to Rig the World's Most Important Number (Bloomberg) by Liam Vaughan, Gavin Finch

Alan Greenspan, asset allocation, asset-backed security, bank run, banking crisis, Bear Stearns, Bernie Sanders, Big bang: deregulation of the City of London, buy low sell high, call centre, central bank independence, collapse of Lehman Brothers, corporate governance, credit crunch, Credit Default Swap, eurozone crisis, fear of failure, financial deregulation, financial innovation, fixed income, interest rate derivative, interest rate swap, Kickstarter, light touch regulation, London Interbank Offered Rate, London Whale, low interest rates, mortgage debt, Neil Armstrong, Northern Rock, performance metric, Ponzi scheme, Ronald Reagan, social intelligence, sovereign wealth fund, subprime mortgage crisis, urban sprawl

The same day, a senior Barclays banker in England broke ranks during a televised interview with Bloomberg and admitted his bank had felt forced into lowballing its submissions. “We had one week in September where our treasurer, who takes his responsibilities pretty seriously, said: ‘Right, I’ve had enough of this, I’m going to quote the right rates,”’ said Tim Bond, head of asset-allocation research at Barclays at the time. “All we got for our pains was a series of media articles saying that we were having difficulty financing.” Anything With Four Legs 47 Bond was referring to the first week of September 2007, when Bloomberg published a column asking: “So what the hell is happening at Barclays and its Barclays Capital securities unit that is prompting its peers to charge it premium interest rates in the money market?”


pages: 233 words: 71,342

Straight Flush: The True Story of Six College Friends Who Dealt Their Way to a Billion-Dollar Online Poker Empire--And How It All Came Crashing Down... by Ben Mezrich

asset allocation, call centre, urban sprawl

Hilt paused at the door, giving Scott a chance to fix his tie one last time. Then he led the way inside. I have to admit, this all looks pretty good.” Hilt was leaning forward in the seat next to Scott, at the edge of the mahogany desk, poking through the huge stack of papers in front of them. Balance sheets, financial statements, asset allocations—all of it printed out at their request by the bank manager, who had now stepped outside to give them time to look through things in private. Even more important than the papers, to Scott, was the manager himself; Scott hadn’t been able to stifle his surprise when he first stepped foot into the island bank and caught sight of the well-dressed, midfifties American, with his neatly combed silver hair, traditional-looking wire-rimmed glasses, and impeccable gray suit.


pages: 695 words: 194,693

Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann

Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, banking crisis, Benoit Mandelbrot, Black Swan, Black-Scholes formula, book value, Bretton Woods, Brownian motion, business cycle, capital asset pricing model, Cass Sunstein, classic study, collective bargaining, colonial exploitation, compound rate of return, conceptual framework, Cornelius Vanderbilt, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, delayed gratification, Detroit bankruptcy, disintermediation, diversified portfolio, double entry bookkeeping, Edmond Halley, en.wikipedia.org, equity premium, equity risk premium, financial engineering, financial independence, financial innovation, financial intermediation, fixed income, frictionless, frictionless market, full employment, high net worth, income inequality, index fund, invention of the steam engine, invention of writing, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, laissez-faire capitalism, land bank, Louis Bachelier, low interest rates, mandelbrot fractal, market bubble, means of production, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, new economy, passive investing, Paul Lévy, Ponzi scheme, price stability, principal–agent problem, profit maximization, profit motive, public intellectual, quantitative trading / quantitative finance, random walk, Richard Thaler, Robert Shiller, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, spice trade, stochastic process, subprime mortgage crisis, Suez canal 1869, Suez crisis 1956, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, time value of money, tontine, too big to fail, trade liberalization, trade route, transatlantic slave trade, tulip mania, wage slave

People seemed not to understand the difference between stocks and bonds. They tended to divide their portfolio equally across the choices presented in their 401(k) plans, regardless of whether there were more bond funds or stock funds. The implications of this study and similar experiments testing investor skill at basic asset allocation are that people might not be able to manage their own investments. The future might be better for the average person if someone else decided for them. Walking down this logical path leads to a paternalistic state that disempowers the individual. This is contrary to American values and the early theme of a shareholder democracy.

See also life annuities Anthony and Cleopatra, 107 antichretic loans, 42 antitrust prosecution: in ancient Athens, 76; US law enabling, 448 antoninianus, 131 Antwerp, Elizabethan merchants in, 308 Apum, 61–63 Arabic mathematics, 238, 240–41 Arabic numerals, 238, 241, 248 Aragonese kings: bailiwicks of, 215; Knights Templar as mercenaries for, 210, 214 Archytas, 94–95 argentarii, 110, 112 Aristotle: on origin of coins, 98–99, 100, 101; on usury, 233 Armstrong, Barbara, 497 Art of War (Sunzi), 160 as (Roman coin), 129, 130 asiento, 334–35, 336, 337, 339 asset allocation: by individual investors, 514–15. See also portfolio optimization asset valuation models: alternative use of capital and, 237; risk premium and, 237 assignats, 391–92, 400 Assur, 60–62 Astana graveyard, 177–78 Athens, ancient: banks of, 81–85, 90, 91; commercial law system of, 80–81; court system of, 17, 73, 75 (see also jurors, Athenian); democracy in, 17, 92, 94, 95, 96, 101, 102; expenditures for ceremonial events in, 84; financial literacy in, 17, 85–86, 91, 94–95; fiscal structure for, 92, 94; grain imported by, 73, 75–76, 91, 102; interest loans in, 41; investments facilitated by bankers of, 84–85, 90; loan contract for merchant voyage from, 77–81; monetization of economy in, 17; money and mental framework in, 95; silver mined by, 87–90; summary of finance in, 17, 90–91, 101–2; tetradrachm coins of, 89, 93, 96–98, 102; trial of grain dealers in, 75–76.


pages: 294 words: 82,438

Simple Rules: How to Thrive in a Complex World by Donald Sull, Kathleen M. Eisenhardt

Affordable Care Act / Obamacare, Airbnb, Apollo 13, asset allocation, Atul Gawande, barriers to entry, Basel III, behavioural economics, Berlin Wall, carbon footprint, Checklist Manifesto, complexity theory, Craig Reynolds: boids flock, Credit Default Swap, Daniel Kahneman / Amos Tversky, democratizing finance, diversification, drone strike, en.wikipedia.org, European colonialism, Exxon Valdez, facts on the ground, Fall of the Berlin Wall, Glass-Steagall Act, Golden age of television, haute cuisine, invention of the printing press, Isaac Newton, Kickstarter, late fees, Lean Startup, Louis Pasteur, Lyft, machine translation, Moneyball by Michael Lewis explains big data, Nate Silver, Network effects, obamacare, Paul Graham, performance metric, price anchoring, RAND corporation, risk/return, Saturday Night Live, seminal paper, sharing economy, Silicon Valley, Startup school, statistical model, Steve Jobs, TaskRabbit, The Signal and the Noise by Nate Silver, transportation-network company, two-sided market, Wall-E, web application, Y Combinator, Zipcar

. [>] According to the: “Retirement Savings Assessment 2013,” Fidelity, accessed January 23, 2014, http://www.fidelity.com/inside-fidelity/individual-investing/fidelity-unveils-new-retirement-preparednessmeasure. [>] When employers offered: Sheena S. Iyengar and Emir Kamenica, “Choice Proliferation, Simplicity Seeking, and Asset Allocation,” Journal of Public Economics 94, no. 7–8 (2010): 530–39. For a broader review of the related literature, see Roy Yong-Joo Chua and Sheena S. Iyengar, “Empowerment Through Choice? A Critical Analysis of the Effects of Choice in Organizations,” Research in Organizational Behavior 27 (2006): 41–79. [>] Overwhelmed by complexity: The perceived complexity of a choice is influenced not only by the number of options, but also by other factors including how the options are categorized, the number of attributes per option, and ease of comparison across options.


pages: 300 words: 79,315

Getting Things Done: The Art of Stress-Free Productivity by David Allen

Albert Einstein, Alvin Toffler, asset allocation, cognitive dissonance, conceptual framework, Everything should be made as simple as possible, George Santayana, index card, Kickstarter, knowledge worker, Ralph Waldo Emerson, rolodex

Shifting to a Positive Organizational Culture It doesn’t take a big change to increase the productivity standards of a group. I continually get feedback indicating that with a little implementation, this method immediately makes things happen more quickly and more easily. The constructive evaluation of activities, asset allocations, communications, policies, and procedures against purposes and intended outcomes has become increasingly critical for every organization I know of. The challenges to our companies continue to mount, with pressures coming these days from globalization, competition, technology, shifting markets, and raised standards of performance and production.


pages: 444 words: 86,565

Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum, Joshua Pearl, Joseph R. Perella

accelerated depreciation, asset allocation, asset-backed security, bank run, barriers to entry, Benchmark Capital, book value, business cycle, capital asset pricing model, collateralized debt obligation, corporate governance, credit crunch, discounted cash flows, diversification, equity risk premium, financial engineering, fixed income, impact investing, intangible asset, junk bonds, London Interbank Offered Rate, performance metric, risk free rate, shareholder value, sovereign wealth fund, stocks for the long run, subprime mortgage crisis, technology bubble, time value of money, transaction costs, yield curve

For example, the interpolated yield for a 10-year Treasury note can be obtained from Bloomberg by typing “ICUR10,” then pressing <GO>. 91 Located under “Daily Treasury Yield Curve Rates.” 92 The 30-year Treasury bond was discontinued on February 18, 2002, and reintroduced on February 9, 2006. 93 Morningstar acquired Ibbotson Associates in March 2006. Ibbotson Associates is a leading authority on asset allocation, providing products and services to help investment professionals obtain, manage, and retain assets. Morningstar’s annual Ibbotson® SBBI® (Stocks, Bonds, Bills, and Inflation) Valuation Yearbook is a widely used reference for cost of capital input estimations for U.S.-based businesses. 94 Bloomberg function: “ICUR20” <GO>. 95 While there are currently no 20-year Treasury bonds issued by the U.S.


pages: 324 words: 92,805

The Impulse Society: America in the Age of Instant Gratification by Paul Roberts

"Friedman doctrine" OR "shareholder theory", 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, Abraham Maslow, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Alan Greenspan, American Society of Civil Engineers: Report Card, AOL-Time Warner, asset allocation, business cycle, business process, carbon tax, Carl Icahn, Cass Sunstein, centre right, choice architecture, classic study, collateralized debt obligation, collective bargaining, computerized trading, corporate governance, corporate raider, corporate social responsibility, creative destruction, crony capitalism, David Brooks, delayed gratification, disruptive innovation, double helix, Evgeny Morozov, factory automation, financial deregulation, financial engineering, financial innovation, fixed income, Ford Model T, full employment, game design, Glass-Steagall Act, greed is good, If something cannot go on forever, it will stop - Herbert Stein's Law, impulse control, income inequality, inflation targeting, insecure affluence, invisible hand, It's morning again in America, job automation, John Markoff, Joseph Schumpeter, junk bonds, knowledge worker, late fees, Long Term Capital Management, loss aversion, low interest rates, low skilled workers, mass immigration, Michael Shellenberger, new economy, Nicholas Carr, obamacare, Occupy movement, oil shale / tar sands, performance metric, postindustrial economy, profit maximization, Report Card for America’s Infrastructure, reshoring, Richard Thaler, rising living standards, Robert Shiller, Rodney Brooks, Ronald Reagan, shareholder value, Silicon Valley, speech recognition, Steve Jobs, stock buybacks, technological determinism, technological solutionism, technoutopianism, Ted Nordhaus, the built environment, the long tail, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, Tyler Cowen, Tyler Cowen: Great Stagnation, value engineering, Walter Mischel, winner-take-all economy

NPR Staff, “Tired of Inequality One Economist Said It’ll Only Get Worse,” NPR.org, Sept. 12, 2013, http://www.npr.org/2013/09/12/221425582/tired-of-inequality-one-economist-says-itll-only-get-worse. 36. Ibid. 37. Hannah Kuchler, “Data Pioneers Watching Us Work,” Financial Times, February 17, 2014. 38. NPR, “Tired of Inequality.” 39. Paul Sullivan, “Twitter Tantalizes, but Beware the I.P.O.” The New York Times, Oct. 25, 2013, http://www.nytimes.com/2013/10/26/your-money/asset-allocation/twitter-tantalizes-but-beware-the-ipo.htmlhpw. 40. “IPO Performance,” graph, Renaissance Capital IPO Center, http://www.renaissancecapital.com/ipohome/press/mediaroom.aspxmarket=us. 41. Susan Fleck, John Glasser, and Shawn Sprague, “The Compensation-Productivity Gap: A Visual Essay,” Monthly Labor Review (Jan. 2011). 42.


High-Frequency Trading by David Easley, Marcos López de Prado, Maureen O'Hara

algorithmic trading, asset allocation, backtesting, Bear Stearns, Brownian motion, capital asset pricing model, computer vision, continuous double auction, dark matter, discrete time, finite state, fixed income, Flash crash, High speed trading, index arbitrage, information asymmetry, interest rate swap, Large Hadron Collider, latency arbitrage, margin call, market design, market fragmentation, market fundamentalism, market microstructure, martingale, National best bid and offer, natural language processing, offshore financial centre, pattern recognition, power law, price discovery process, price discrimination, price stability, proprietary trading, quantitative trading / quantitative finance, random walk, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, Tobin tax, transaction costs, two-sided market, yield curve

Not all algorithmic trading occurs at high frequency, but all high-frequency trading requires algorithms. It is useful to contrast the divergent worlds of the low-frequency (LF) traders and the HF traders. Financial analysts’ conferences are one milieu where LF traders converse on subjects as broad and complex as monetary policy, asset allocation, stock valuations and financial statement analysis. HFT conferences are reunions where computer scientists meet to discuss Internet protocol connections, machine learning, numeric algorithms to determine the position of an order in a queue, the newest low-latency co-location architecture, game theory and, most important of all, the latest variations to exchanges’ matching engines.


pages: 293 words: 88,490

The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction by Richard Bookstaber

asset allocation, bank run, Bear Stearns, behavioural economics, bitcoin, business cycle, butterfly effect, buy and hold, capital asset pricing model, cellular automata, collateralized debt obligation, conceptual framework, constrained optimization, Craig Reynolds: boids flock, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, dark matter, data science, disintermediation, Edward Lorenz: Chaos theory, epigenetics, feminist movement, financial engineering, financial innovation, fixed income, Flash crash, geopolitical risk, Henri Poincaré, impact investing, information asymmetry, invisible hand, Isaac Newton, John Conway, John Meriwether, John von Neumann, Joseph Schumpeter, Long Term Capital Management, margin call, market clearing, market microstructure, money market fund, Paul Samuelson, Pierre-Simon Laplace, Piper Alpha, Ponzi scheme, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, Richard Feynman, risk/return, Robert Solow, Saturday Night Live, self-driving car, seminal paper, sovereign wealth fund, the map is not the territory, The Predators' Ball, the scientific method, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, tulip mania, Turing machine, Turing test, yield curve

Though, as a practical matter, many apparently unleveraged asset managers have leverage gained through secured-lending transactions and derivative exposure. And even absent leverage, institutions can also be put into forced selling mode, either through redemptions or through violating risk and asset allocation constraints. 17. To keep from getting too far into the weeds, I haven’t included some of the details of the flows of funding and collateral through other intermediary agents, such as triparty agents like Bank of New York Mellon Corporation, JP Morgan, and Euroclear (though JP Morgan and BNY Mellon will appear when I discuss the 2008 crisis); repo central counterparties like Fixed Income Clearing Corporation, LCH.


pages: 339 words: 95,270

Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace by Matthew C. Klein

Alan Greenspan, Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, Berlin Wall, Bernie Sanders, Branko Milanovic, Bretton Woods, British Empire, business climate, business cycle, capital controls, centre right, collective bargaining, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, deglobalization, deindustrialization, Deng Xiaoping, Donald Trump, Double Irish / Dutch Sandwich, Fall of the Berlin Wall, falling living standards, financial innovation, financial repression, fixed income, full employment, George Akerlof, global supply chain, global value chain, Great Leap Forward, high-speed rail, illegal immigration, income inequality, intangible asset, invention of the telegraph, joint-stock company, land reform, Long Term Capital Management, low interest rates, Malcom McLean invented shipping containers, manufacturing employment, Martin Wolf, mass immigration, Mikhail Gorbachev, Money creation, money market fund, mortgage debt, New Urbanism, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, open economy, paradox of thrift, passive income, reserve currency, rising living standards, Robert Shiller, Ronald Reagan, savings glut, Scramble for Africa, sovereign wealth fund, stock buybacks, subprime mortgage crisis, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tim Cook: Apple, trade liberalization, Wolfgang Streeck

A 2019 study by Franziska Hünnekes, Moritz Schularick, and Christoph Trebesch concluded that “Germany could have become about 2 to 3 trillion Euros richer [between 2009 and 2017] had its returns in global markets corresponded to those earned by Norway or Canada, respectively.” Strikingly, Germans’ poor returns have been caused almost entirely by their remarkable inability to pick the right stocks and bonds, rather than broader differences in asset allocation compared to savers in other countries. This abysmal performance looks even worse compared to what could have been achieved by buying German assets. The same study concluded that “domestic returns were significantly higher than the return earned abroad.” Between 1999 and 2017, German assets have returned about 2.4 percentage points more each year on average than Germany’s foreign assets.


pages: 347 words: 97,721

Only Humans Need Apply: Winners and Losers in the Age of Smart Machines by Thomas H. Davenport, Julia Kirby

"World Economic Forum" Davos, AI winter, Amazon Robotics, Andy Kessler, Apollo Guidance Computer, artificial general intelligence, asset allocation, Automated Insights, autonomous vehicles, basic income, Baxter: Rethink Robotics, behavioural economics, business intelligence, business process, call centre, carbon-based life, Clayton Christensen, clockwork universe, commoditize, conceptual framework, content marketing, dark matter, data science, David Brooks, deep learning, deliberate practice, deskilling, digital map, disruptive innovation, Douglas Engelbart, driverless car, Edward Lloyd's coffeehouse, Elon Musk, Erik Brynjolfsson, estate planning, financial engineering, fixed income, flying shuttle, follow your passion, Frank Levy and Richard Murnane: The New Division of Labor, Freestyle chess, game design, general-purpose programming language, global pandemic, Google Glasses, Hans Lippershey, haute cuisine, income inequality, independent contractor, index fund, industrial robot, information retrieval, intermodal, Internet of things, inventory management, Isaac Newton, job automation, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joi Ito, Khan Academy, Kiva Systems, knowledge worker, labor-force participation, lifelogging, longitudinal study, loss aversion, machine translation, Mark Zuckerberg, Narrative Science, natural language processing, Nick Bostrom, Norbert Wiener, nuclear winter, off-the-grid, pattern recognition, performance metric, Peter Thiel, precariat, quantitative trading / quantitative finance, Ray Kurzweil, Richard Feynman, risk tolerance, Robert Shiller, robo advisor, robotic process automation, Rodney Brooks, Second Machine Age, self-driving car, Silicon Valley, six sigma, Skype, social intelligence, speech recognition, spinning jenny, statistical model, Stephen Hawking, Steve Jobs, Steve Wozniak, strong AI, superintelligent machines, supply-chain management, tacit knowledge, tech worker, TED Talk, the long tail, transaction costs, Tyler Cowen, Tyler Cowen: Great Stagnation, Watson beat the top human players on Jeopardy!, Works Progress Administration, Zipcar

As global financial environments (interest rates, economic growth, etc.) change, stepping up means saying how automated advice should change with them. At Betterment, for example, one of the larger and more successful startups in the robo-advisor space, there is a “Behavioral Finance and Investing” department made up of five experts focusing on how to improve their system’s investment advice, determining the right asset allocation, changing investment management strategies over time, and “behavioral design”—trying to nudge Betterment customers toward more rational economic behaviors with their investments. Stepping aside to perform tasks that computers don’t do well is a viable prospect for many financial advisors. Grant Easterbrook, who covered financial technology firms as an industry analyst (he’s now moved to a financial technology startup) told us that, while creating an investment portfolio is relatively easy to automate, it still requires a human touch to provide complex financial planning for individuals with substantial assets.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

accounting loophole / creative accounting, Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bear Stearns, Bernie Madoff, book value, British Empire, buy and hold, central bank independence, collective bargaining, commodity trading advisor, compensation consultant, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, land bank, law of one price, light touch regulation, Long Term Capital Management, low interest rates, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, military-industrial complex, minimum wage unemployment, Money creation, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, Robert Solow, rolodex, Savings and loan crisis, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tragedy of the Commons, transaction costs, ultimatum game, union organizing, Vilfredo Pareto, working-age population, World Values Survey

Then in 1975, the SEC named the three largest ones, Moody’s, Standard & Poor’s and Fitch, as Nationally Recognized Statistical Rating Organizations and made the capital that banks had to hold dependent on these agencies’ judgment of the quality of the securities they owned. Private endowments, foundations and mutual funds also used these ratings in setting asset allocation guidelines for their investment managers. Thus the SEC was in effect giving the agencies a quasi-monopoly to sell a license to issue securities. If they rated a security badly, demand would be very low because banks would have to hold too much capital in reserve for them. Essentially, the opinions 98 ECONOMISTS AND THE POWERFUL of the agencies had attained the force of law.


pages: 330 words: 99,044

Reimagining Capitalism in a World on Fire by Rebecca Henderson

"Friedman doctrine" OR "shareholder theory", Airbnb, asset allocation, behavioural economics, benefit corporation, Berlin Wall, Bernie Sanders, business climate, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, carbon tax, circular economy, collaborative economy, collective bargaining, commoditize, corporate governance, corporate social responsibility, crony capitalism, dark matter, decarbonisation, disruptive innovation, double entry bookkeeping, Elon Musk, Erik Brynjolfsson, export processing zone, Exxon Valdez, Fall of the Berlin Wall, family office, fixed income, George Akerlof, Gini coefficient, global supply chain, greed is good, Greta Thunberg, growth hacking, Hans Rosling, Howard Zinn, Hyman Minsky, impact investing, income inequality, independent contractor, index fund, Intergovernmental Panel on Climate Change (IPCC), joint-stock company, Kickstarter, Lyft, Marc Benioff, Mark Zuckerberg, Max Levchin, means of production, meta-analysis, microcredit, middle-income trap, Minsky moment, mittelstand, Mont Pelerin Society, Neil Armstrong, Nelson Mandela, opioid epidemic / opioid crisis, Paris climate accords, passive investing, Paul Samuelson, Philip Mirowski, plant based meat, profit maximization, race to the bottom, ride hailing / ride sharing, Ronald Reagan, Rosa Parks, Salesforce, scientific management, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Snapchat, sovereign wealth fund, Steven Pinker, stocks for the long run, Tim Cook: Apple, total factor productivity, Toyota Production System, uber lyft, urban planning, Washington Consensus, WeWork, working-age population, Zipcar

Press mentions of ESG have increased more than eightfold between 2015 and 2018.46 Among large and midsize companies, 80 and 60 percent, respectively, say that the increasing focus on ESG indexes has raised awareness about ESG at their companies and has led to real change,47 and nearly half of Japanese retail investors claim to recognize the importance of considering ESG in their investment decisions. In the last two years the percentage of Japanese financial assets allocated to sustainable investments has increased from 3 to nearly 20 percent.48 Clearly much remains to be done, but Hiro’s preliminary success is deeply encouraging. The widespread use of material, replicable, comparable ESG metrics is a game changer, potentially enabling investors to develop a much richer understanding of the relationship between a firm’s investments in social and environmental performance and returns to the individual firm—as at JetBlue—and returns to the portfolio as a whole—as at GPIF.


pages: 304 words: 99,836

Why I Left Goldman Sachs: A Wall Street Story by Greg Smith

Alan Greenspan, always be closing, asset allocation, Bear Stearns, Black Swan, bonus culture, break the buck, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, East Village, fear index, financial engineering, fixed income, Flash crash, glass ceiling, Glass-Steagall Act, Goldman Sachs: Vampire Squid, high net worth, information asymmetry, London Interbank Offered Rate, mega-rich, money market fund, new economy, Nick Leeson, proprietary trading, quantitative hedge fund, Renaissance Technologies, short selling, short squeeze, Silicon Valley, Skype, sovereign wealth fund, Stanford marshmallow experiment, statistical model, technology bubble, too big to fail

There were a number of endowments, foundations, and philanthropies out there who took the bait and bought Clorox. When my bosses pressured me to try to sell Clorox to some of my bigger clients, I knew immediately that it would not be up their alley. They would have been offended, in fact, had I broached it with them, because they can do asset allocation and portfolio management themselves. Why on earth would they need a complex black box called Clorox that generated outsize fees for Wall Street? They could achieve the same thing using exchange-listed stocks, futures, and options. I pushed back on pushing Clorox to my clients. It was not in their best interest.


pages: 329 words: 99,504

Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud by Ben McKenzie, Jacob Silverman

algorithmic trading, asset allocation, bank run, barriers to entry, Ben McKenzie, Bernie Madoff, Big Tech, bitcoin, Bitcoin "FTX", blockchain, capital controls, citizen journalism, cognitive dissonance, collateralized debt obligation, COVID-19, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, cryptocurrency, data science, distributed ledger, Dogecoin, Donald Trump, effective altruism, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, experimental economics, financial deregulation, financial engineering, financial innovation, Flash crash, Glass-Steagall Act, high net worth, housing crisis, information asymmetry, initial coin offering, Jacob Silverman, Jane Street, low interest rates, Lyft, margin call, meme stock, money market fund, money: store of value / unit of account / medium of exchange, Network effects, offshore financial centre, operational security, payday loans, Peter Thiel, Ponzi scheme, Potemkin village, prediction markets, proprietary trading, pushing on a string, QR code, quantitative easing, race to the bottom, ransomware, regulatory arbitrage, reserve currency, risk tolerance, Robert Shiller, Robinhood: mobile stock trading app, Ross Ulbricht, Sam Bankman-Fried, Satoshi Nakamoto, Saturday Night Live, short selling, short squeeze, Silicon Valley, Skype, smart contracts, Steve Bannon, systems thinking, TikTok, too big to fail, transaction costs, tulip mania, uber lyft, underbanked, vertical integration, zero-sum game

The Labor Department issued guidance in March 2022 encouraging people to “exercise extreme care” before investing their retirement savings in crypto. But just three months later, in June, Senators Cynthia Lummis and Kirsten Gillibrand went on cable news to push back. Senator Lummis: “I think the Labor Department is wrong. I think [401(k) investments in crypto are] a wonderful idea. It should be part of a diversified asset allocation.” Senator Gillibrand agreed. “It made me want to throw a brick through my TV,” John said. “They’re enabling it.” For many lawmakers raking in large political donations from the crypto industry, it simply wasn’t in their political or financial interest to look out for the “little guy.” It was up to critics like Stark—who had no skin in the game, who didn’t make money off of his crypto criticism—to put forward that argument.


pages: 326 words: 106,053

The Wisdom of Crowds by James Surowiecki

Alan Greenspan, AltaVista, Andrei Shleifer, Apollo 13, asset allocation, behavioural economics, Cass Sunstein, classic study, congestion pricing, coronavirus, Daniel Kahneman / Amos Tversky, experimental economics, Frederick Winslow Taylor, George Akerlof, Great Leap Forward, Gregor Mendel, Howard Rheingold, I think there is a world market for maybe five computers, interchangeable parts, Jeff Bezos, John Bogle, John Meriwether, Joseph Schumpeter, knowledge economy, lone genius, Long Term Capital Management, market bubble, market clearing, market design, Monkeys Reject Unequal Pay, moral hazard, Myron Scholes, new economy, offshore financial centre, Picturephone, prediction markets, profit maximization, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, Robert Shiller, Ronald Coase, Ronald Reagan, seminal paper, shareholder value, short selling, Silicon Valley, South Sea Bubble, tacit knowledge, The Nature of the Firm, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Toyota Production System, transaction costs, ultimatum game, vertical integration, world market for maybe five computers, Yogi Berra, zero-sum game

After all, if you knew what investing wisely was, you’d do it yourself. Obviously you can look at performance, but we know that short-term performance is an imperfect indicator of skill at best. In any one quarter, a manager’s performance may be significantly better or worse depending on factors that have absolutely nothing to do with his stock-picking or asset-allocation skills. So investors need more evidence that a mutual-fund manager’s decisions are reasonable. The answer? Look at how a manager’s style compares to that of his peers. If he’s following the same strategy—investing in the same kinds of stocks, allocating money to the same kinds of assets—then at least investors know he’s not irrational.


pages: 385 words: 111,113

Augmented: Life in the Smart Lane by Brett King

23andMe, 3D printing, additive manufacturing, Affordable Care Act / Obamacare, agricultural Revolution, Airbnb, Albert Einstein, Amazon Web Services, Any sufficiently advanced technology is indistinguishable from magic, Apollo 11, Apollo Guidance Computer, Apple II, artificial general intelligence, asset allocation, augmented reality, autonomous vehicles, barriers to entry, bitcoin, Bletchley Park, blockchain, Boston Dynamics, business intelligence, business process, call centre, chief data officer, Chris Urmson, Clayton Christensen, clean water, Computing Machinery and Intelligence, congestion charging, CRISPR, crowdsourcing, cryptocurrency, data science, deep learning, DeepMind, deskilling, different worldview, disruptive innovation, distributed generation, distributed ledger, double helix, drone strike, electricity market, Elon Musk, Erik Brynjolfsson, Fellow of the Royal Society, fiat currency, financial exclusion, Flash crash, Flynn Effect, Ford Model T, future of work, gamification, Geoffrey Hinton, gig economy, gigafactory, Google Glasses, Google X / Alphabet X, Hans Lippershey, high-speed rail, Hyperloop, income inequality, industrial robot, information asymmetry, Internet of things, invention of movable type, invention of the printing press, invention of the telephone, invention of the wheel, James Dyson, Jeff Bezos, job automation, job-hopping, John Markoff, John von Neumann, Kevin Kelly, Kickstarter, Kim Stanley Robinson, Kiva Systems, Kodak vs Instagram, Leonard Kleinrock, lifelogging, low earth orbit, low skilled workers, Lyft, M-Pesa, Mark Zuckerberg, Marshall McLuhan, megacity, Metcalfe’s law, Minecraft, mobile money, money market fund, more computing power than Apollo, Neal Stephenson, Neil Armstrong, Network effects, new economy, Nick Bostrom, obamacare, Occupy movement, Oculus Rift, off grid, off-the-grid, packet switching, pattern recognition, peer-to-peer, Ray Kurzweil, retail therapy, RFID, ride hailing / ride sharing, Robert Metcalfe, Salesforce, Satoshi Nakamoto, Second Machine Age, selective serotonin reuptake inhibitor (SSRI), self-driving car, sharing economy, Shoshana Zuboff, Silicon Valley, Silicon Valley startup, Skype, smart cities, smart grid, smart transportation, Snapchat, Snow Crash, social graph, software as a service, speech recognition, statistical model, stem cell, Stephen Hawking, Steve Jobs, Steve Wozniak, strong AI, synthetic biology, systems thinking, TaskRabbit, technological singularity, TED Talk, telemarketer, telepresence, telepresence robot, Tesla Model S, The future is already here, The Future of Employment, Tim Cook: Apple, trade route, Travis Kalanick, TSMC, Turing complete, Turing test, Twitter Arab Spring, uber lyft, undersea cable, urban sprawl, V2 rocket, warehouse automation, warehouse robotics, Watson beat the top human players on Jeopardy!, white picket fence, WikiLeaks, yottabyte

Students will still go to university, but the economic models of universities will be challenged as the ROI of a degree becomes increasingly questioned and the burden of student loans reduces an economy’s ability to compete. In practical terms, every course at a progressive, modern university will be a STEM-based programme because if your profession is not using technology, students won’t be able to apply their skills vocationally. Finance competencies like risk, trading, asset allocation and market analysis will increasingly be about coding or codifying the systems that execute these black-box functions. Medical students will learn to use a broad range of technologies, understand smart diagnostics, learn about sensor networks and learn to operate robotic surgery equipment. New medical fields will be increasingly common.


pages: 354 words: 105,322

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, blockchain, Boeing 747, Bonfire of the Vanities, Bretton Woods, Brexit referendum, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, currency risk, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, driverless car, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, Glass-Steagall Act, global macro, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, low interest rates, machine readable, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, Minsky moment, Money creation, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, operational security, Paul Samuelson, Peace of Westphalia, Phillips curve, Pierre-Simon Laplace, plutocrats, prediction markets, price anchoring, price stability, proprietary trading, public intellectual, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk free rate, risk-adjusted returns, Robert Solow, Ronald Reagan, Savings and loan crisis, Silicon Valley, sovereign wealth fund, special drawing rights, stock buybacks, stocks for the long run, tech billionaire, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, We are all Keynesians now, Westphalian system

Complexity theory is a branch of physics. Bayes’ theorem is applied mathematics. Complexity and Bayes fit together hand in glove for solving capital markets problems. Capital markets are complex systems nonpareil. Market participants must forecast continually to optimize trading strategies and asset allocations. Forecasting capital markets is treacherous because they do not behave according to the Markovian stochastics widely used on Wall Street. A Markov chain has no memory; capital markets do. Capital markets produce surprises, no different from the butterfly effect identified by Lorenz in 1960. Since 2009 I have achieved superior results using complexity and Bayes to navigate the uncharted waters of systemic risk.


pages: 398 words: 111,333

The Einstein of Money: The Life and Timeless Financial Wisdom of Benjamin Graham by Joe Carlen

Abraham Maslow, Albert Einstein, asset allocation, Bernie Madoff, book value, Bretton Woods, business cycle, business intelligence, discounted cash flows, Eugene Fama: efficient market hypothesis, full employment, index card, index fund, intangible asset, invisible hand, Isaac Newton, John Bogle, laissez-faire capitalism, margin call, means of production, Norman Mailer, oil shock, post-industrial society, price anchoring, price stability, reserve currency, Robert Shiller, the scientific method, Vanguard fund, young professional

Conversely, when greed prevails, strong margins become scarce. In fact, in a broader application of the principle, as the margin of safety narrows across many stocks (or particular groups of stocks—e.g., tech stocks during the late 1990s), that can be an indication that a market correction is imminent. James Montier, a Graham-inspired asset-allocation professional at GMO, a large global-investment-management firm with more than $100 billion under management, sees the sharp market drop of late 2008, and 2009 through the prism of the margin of safety. In a recent Wall Street Journal article, Mr. Montier stated that from 2006 to early 2008, “people were acting with no regard to a margin of safety.


pages: 403 words: 110,492

Nomad Capitalist: How to Reclaim Your Freedom With Offshore Bank Accounts, Dual Citizenship, Foreign Companies, and Overseas Investments by Andrew Henderson

Affordable Care Act / Obamacare, Airbnb, airport security, Albert Einstein, Asian financial crisis, asset allocation, bank run, barriers to entry, birth tourism , bitcoin, blockchain, business process, call centre, capital controls, car-free, content marketing, cryptocurrency, currency risk, digital nomad, diversification, diversified portfolio, Donald Trump, Double Irish / Dutch Sandwich, Elon Musk, failed state, fiat currency, Fractional reserve banking, gentrification, intangible asset, land reform, low interest rates, medical malpractice, new economy, obamacare, offshore financial centre, passive income, peer-to-peer lending, Pepsi Challenge, place-making, risk tolerance, side hustle, Silicon Valley, Skype, too big to fail, white picket fence, work culture , working-age population

For instance, residential property that I know people are buying and for which there is an active market. I want a lot more of my money in those kind of properties that bring in income and that I know are relatively liquid compared to other lands. But, I still want that smaller, yet significant part of my portfolio in land investments that I can sell in the long-term. Having addressed your asset allocation strategy, the next issue to resolve is how you will find the properties you want to purchase. There are several ways to find land for sale overseas. However, none are immediately obvious if you do not have any knowledge of the country you are looking to invest in. One option is to use a broker.


pages: 367 words: 110,161

The Bond King: How One Man Made a Market, Built an Empire, and Lost It All by Mary Childs

Alan Greenspan, asset allocation, asset-backed security, bank run, Bear Stearns, beat the dealer, break the buck, buy and hold, Carl Icahn, collateralized debt obligation, commodity trading advisor, coronavirus, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, diversification, diversified portfolio, Edward Thorp, financial innovation, fixed income, global macro, high net worth, hiring and firing, housing crisis, Hyman Minsky, index card, index fund, interest rate swap, junk bonds, Kevin Roose, low interest rates, Marc Andreessen, Minsky moment, money market fund, mortgage debt, Myron Scholes, NetJets, Northern Rock, off-the-grid, pneumatic tube, Ponzi scheme, price mechanism, quantitative easing, Robert Shiller, Savings and loan crisis, skunkworks, sovereign wealth fund, stem cell, Steve Jobs, stocks for the long run, The Great Moderation, too big to fail, Vanguard fund, yield curve

They color coded the responses: green indicated something Pimco should get into, but wasn’t doing yet; yellow meant something was complementary to what the firm already did but required additional resources. Red: don’t do it. Pimco put the returned matrices on top of one another for a color-coded “road map,” El-Erian said. The road map would show them where to go, how to achieve that optimal “diversified portfolio,” customized by Pimco’s clients, for Pimco’s clients. Green: asset-allocation funds, which invest across strategies, for diversification. Direct private equity investments were red. Equities were yellow: maybe do it. Yes, sure, Gross had publicly slagged stocks over the decades. But it was usually for show, or an emotional response, the kind he still couldn’t control in interviews even after all these years of speeches and TV appearances.


pages: 492 words: 118,882

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

"World Economic Forum" Davos, accounting loophole / creative accounting, Ada Lovelace, Adam Curtis, Airbnb, Alan Greenspan, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, behavioural economics, Ben Bernanke: helicopter money, bitcoin, Bletchley Park, blockchain, Bretton Woods, Brexit referendum, business cycle, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Charles Babbage, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, crowdsourcing, cryptocurrency, data science, David Graeber, deep learning, deskilling, Diane Coyle, discrete time, disruptive innovation, distributed ledger, diversification, double entry bookkeeping, Ethereum, ethereum blockchain, fiat currency, financial engineering, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, Glass-Steagall Act, Higgs boson, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, large denomination, Large Hadron Collider, Lewis Mumford, liquidity trap, London Whale, low interest rates, low skilled workers, M-Pesa, machine readable, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, Michael Milken, MITM: man-in-the-middle, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, power law, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, robo advisor, Satoshi Nakamoto, Satyajit Das, Savings and loan crisis, savings glut, seigniorage, seminal paper, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, Stuart Kauffman, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Vitalik Buterin, Von Neumann architecture, Washington Consensus

She is also the creator of ‘Threadneedle’, an experimental tool for simulating fractional reserve banking systems. 31Constant Proportion Portfolio Insurance (CPPI)- CPPI is a method of portfolio insurance in which the investor sets a floor on the value of his portfolio and then structures asset allocation around that decision. The two asset classes are classified as a risky asset (usually equities or mutual funds), and a riskless asset of either cash or Treasury bonds. The percentage allocated to each depends on how aggressive the investment strategy is. Appendix A: Bibliography and References Bibliography Chapter 1 Basel Committee on Banking Supervision. (2016).


pages: 476 words: 118,381

Space Chronicles: Facing the Ultimate Frontier by Neil Degrasse Tyson, Avis Lang

Albert Einstein, Apollo 11, Apollo 13, Arthur Eddington, asset allocation, Berlin Wall, Boeing 747, carbon-based life, centralized clearinghouse, cosmic abundance, cosmic microwave background, dark matter, Gordon Gekko, high-speed rail, informal economy, invention of movable type, invention of the telescope, Isaac Newton, James Webb Space Telescope, Johannes Kepler, Karl Jansky, Kuiper Belt, Large Hadron Collider, Louis Blériot, low earth orbit, Mars Rover, Mars Society, mutually assured destruction, Neil Armstrong, orbital mechanics / astrodynamics, Pluto: dwarf planet, RAND corporation, Ronald Reagan, Search for Extraterrestrial Intelligence, SETI@home, space junk, space pen, stem cell, Stephen Hawking, Steve Jobs, the scientific method, trade route

(c) Assurances.—The United States shall seek assurances from the Russian Government that it places a higher priority on fulfilling its commitments to the International Space Station than it places on extending the life of the Mir Space Station, including assurances that Russia will not utilize assets allocated by Russia to the International Space Station for other purposes, including extending the life of Mir. (d) Equitable Utilization.—In the event that any International Partner in the International Space Station Program willfully violates any of its commitments or agreements for the provision of agreed upon Space Station-related hardware or related goods or services, the Administrator should, in a manner consistent with relevant international agreements, seek a commensurate reduction in the utilization rights of that Partner until such time as the violated commitments or agreements have been fulfilled.


pages: 358 words: 119,272

Anatomy of the Bear: Lessons From Wall Street's Four Great Bottoms by Russell Napier

Alan Greenspan, Albert Einstein, asset allocation, banking crisis, Bear Stearns, behavioural economics, book value, Bretton Woods, business cycle, buy and hold, collective bargaining, Columbine, cuban missile crisis, desegregation, diversified portfolio, fake news, financial engineering, floating exchange rates, Fractional reserve banking, full employment, Glass-Steagall Act, global macro, hindsight bias, Kickstarter, Long Term Capital Management, low interest rates, market bubble, Michael Milken, military-industrial complex, Money creation, mortgage tax deduction, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, oil shock, price stability, reserve currency, risk free rate, Robert Gordon, Robert Shiller, Ronald Reagan, short selling, stocks for the long run, yield curve, Yogi Berra

The rapid growth in pension funds was spurred by a decision of the National Labor Relations Board in 1948 forcing Inland Steel to include negotiations on pensions as part of the collective bargaining process. Not only did strong growth in assets ensue from this decision, but employers were prepared to consider more risky asset allocations with a view to enhancing returns and restraining the size of future corporate contributions to these funds. In pursuit of higher returns, pension fund portfolios’ weightings in equities increased. FIGURE 96. KEY SAVINGS VEHICLES IN THE USA AND THEIR COMMITMENT TO EQUITIES Source: Federal Reserve, Flow of Funds Accounts of the United States.


pages: 602 words: 120,848

Winner-Take-All Politics: How Washington Made the Rich Richer-And Turned Its Back on the Middle Class by Paul Pierson, Jacob S. Hacker

accounting loophole / creative accounting, active measures, affirmative action, air traffic controllers' union, Alan Greenspan, asset allocation, barriers to entry, Bear Stearns, Bonfire of the Vanities, business climate, business cycle, carried interest, Cass Sunstein, clean water, collective bargaining, corporate governance, Credit Default Swap, David Brooks, desegregation, employer provided health coverage, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, Glass-Steagall Act, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, John Bogle, knowledge economy, laissez-faire capitalism, Martin Wolf, medical bankruptcy, moral hazard, Nate Silver, new economy, night-watchman state, offshore financial centre, oil shock, Paul Volcker talking about ATMs, Powell Memorandum, Ralph Nader, Ronald Reagan, Savings and loan crisis, shareholder value, Silicon Valley, Tax Reform Act of 1986, The Wealth of Nations by Adam Smith, three-martini lunch, too big to fail, trickle-down economics, union organizing, very high income, War on Poverty, winner-take-all economy, women in the workforce

Economic Mobility Initiative: An Initiative of the Pew Charitable Trusts (February 2008). 17 Wojciech Kopczuk, Emmanuel Saez, and Jae Song, “Uncovering the American Dream: Inequality and Mobility in Social Security Earnings Data Since 1937,” National Bureau of Economic Research (NBER) Working Paper No. 13345 (August 2007), 14, 40. 18 Miles Corak, “Chasing the Same Dream, Climbing Different Ladders: Economic Mobility in the United States and Canada,” Economic Mobility Initiative: An Initiative of the Pew Charitable Trusts (January 2009), 7. 19 See table 3.13: Change in Private Sector Employer-Provided Pension Coverage, 1979–2006 in Lawrence Mishel, Jared Bernstein, and Heidi Shierholz, The State of Working America 2008/2009 (Cornell: Cornell University Press, 2008). 20 Jack VanDerhei, Sarah Holden, and Luis Alonso, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2008,” Employee Benefit Research Institute No. 335 (October 2009): 16. 21 Alicia H. Munnell, Anthony Webb, and Francesca Golub-Sass, “The National Retirement Risk Index: After the Crash,” Center for Retirement Research at Boston College Brief No. 9–22 (October 2009). 22 David Himmelstein, Deborah Thorne, Elizabeth Warren, and Steffie Woolhandler, “Medical Bankruptcy in the United States, 2007: Results of a National Study,” American Journal of Medicine 122: 8 (2007): 741–746. 23 Organization for Economic Cooperation and Development, OECD Health Data 2009—Frequently Requested Data (November 2009), http://www.irdes.fr/EcoSante/DownLoad/OECDHealthData_FrequentlyRequestedData.xls. 24 Jacob S.


pages: 320 words: 33,385

Market Risk Analysis, Quantitative Methods in Finance by Carol Alexander

asset allocation, backtesting, barriers to entry, Brownian motion, capital asset pricing model, constrained optimization, credit crunch, Credit Default Swap, discounted cash flows, discrete time, diversification, diversified portfolio, en.wikipedia.org, financial engineering, fixed income, implied volatility, interest rate swap, low interest rates, market friction, market microstructure, p-value, performance metric, power law, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk tolerance, risk-adjusted returns, risk/return, seminal paper, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, stochastic volatility, systematic bias, Thomas Bayes, transaction costs, two and twenty, value at risk, volatility smile, Wiener process, yield curve, zero-sum game

Jensen, M., (1969) Risk, the pricing of capital assets, and the evaluation of investment portfolios. Journal of Business, 42, 167–247. Joanes, D.N. and Gill, C.A. (1998) Comparing measures of sample skewness and kurtosis. The Statistician 47, 183–189. Jurczenko, E. and Maillet, B. (2006) Multi-moment Asset Allocation and Pricing Models. John Wiley & Sons, Ltd, Chichester. Kaplan, P. and Knowles, J. (2004) Kappa: A generalised downside-risk performance measure. Journal of Performance Measurement 8, 42–54. Keating, C. and Shadwick, F. (2002) A universal performance measure. Journal of Performance Measurement, 6, 59–84.


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

Admiral Zheng, Alan Greenspan, An Inconvenient Truth, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Bear Stearns, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, classic study, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, equity risk premium, financial engineering, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, Future Shock, German hyperinflation, Greenspan put, Herman Kahn, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, Nelson Mandela, Nick Bostrom, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, risk free rate, Robert Shiller, rolling blackouts, Ronald Reagan, Savings and loan crisis, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, stocks for the long run, structural adjustment programs, subprime mortgage crisis, tail risk, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, tontine, too big to fail, transaction costs, two and twenty, undersea cable, value at risk, W. E. B. Du Bois, Washington Consensus, Yom Kippur War

Unfortunately, as we shall see in the next chapter, a bet on bricks and mortar is very far from being as safe as houses. And you do not need to live in New Orleans to find that out the hard way. 5 Safe as Houses It is the English-speaking world’s favourite economic game: property. No other facet of financial life has such a hold on the popular imagination. No other asset-allocation decision has inspired so many dinner-party conversations. The real estate market is unique. Every adult, no matter how economically illiterate, has a view on its future prospects. Even children are taught how to climb the property ladder, long before they have money of their own.al And the way we teach them is literally to play a property game.


pages: 482 words: 125,973

Competition Demystified by Bruce C. Greenwald

additive manufacturing, airline deregulation, AltaVista, AOL-Time Warner, asset allocation, barriers to entry, book value, business cycle, creative destruction, cross-subsidies, deindustrialization, discounted cash flows, diversified portfolio, Do you want to sell sugared water for the rest of your life?, Everything should be made as simple as possible, fault tolerance, intangible asset, John Nash: game theory, Nash equilibrium, Network effects, new economy, oil shock, packet switching, PalmPilot, Pepsi Challenge, pets.com, price discrimination, price stability, revenue passenger mile, search costs, selective serotonin reuptake inhibitor (SSRI), shareholder value, Silicon Valley, six sigma, Steve Jobs, transaction costs, vertical integration, warehouse automation, yield management, zero-sum game

And Sam’s Club stores, although they have multiplied in number, have not produced the same stellar results as the traditional discount centers. When Wal-Mart began to report financial information by segment, in the mid 1990s, Sam’s Clubs were considerably less profitable. They earned about 45 percent less per dollar of assets allocated to them than did the discount centers. And this was after fifteen years of experience with this format, time enough to work out the kinks. Explanation 4: Things Are Cheaper in the South Wal-Mart had lower rental (by 0.3 percent of sales) and payroll expenses (by 1.1 percent of sales) than the industry averages.


pages: 1,164 words: 309,327

Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris

active measures, Andrei Shleifer, AOL-Time Warner, asset allocation, automated trading system, barriers to entry, Bernie Madoff, Bob Litterman, book value, business cycle, buttonwood tree, buy and hold, compound rate of return, computerized trading, corporate governance, correlation coefficient, data acquisition, diversified portfolio, equity risk premium, fault tolerance, financial engineering, financial innovation, financial intermediation, fixed income, floating exchange rates, High speed trading, index arbitrage, index fund, information asymmetry, information retrieval, information security, interest rate swap, invention of the telegraph, job automation, junk bonds, law of one price, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market clearing, market design, market fragmentation, market friction, market microstructure, money market fund, Myron Scholes, National best bid and offer, Nick Leeson, open economy, passive investing, pattern recognition, payment for order flow, Ponzi scheme, post-materialism, price discovery process, price discrimination, principal–agent problem, profit motive, proprietary trading, race to the bottom, random walk, Reminiscences of a Stock Operator, rent-seeking, risk free rate, risk tolerance, risk-adjusted returns, search costs, selection bias, shareholder value, short selling, short squeeze, Small Order Execution System, speech recognition, statistical arbitrage, statistical model, survivorship bias, the market place, transaction costs, two-sided market, vertical integration, winner-take-all economy, yield curve, zero-coupon bond, zero-sum game

Trading and Exchanges FINANCIAL MANAGEMENT ASSOCIATION Survey and Synthesis Series The Search for Value: Measuring the Company’s Cost of Capital Michael C. Ehrhardt Managing Pension Plans: A Comprehensive Guide to Improving Plan Performance Dennis E. Logue and Jack S. Rader Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation Richard O. Michaud Real Options: Managing Strategic Investment in an Uncertain World Martha Amram and Nalin Kulatilaka Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing Hersh Shefrin Dividend Policy: Its Impact on Firm Value Ronald C. Lease, Kose John, Avner Kalay, Uri Loewenstein, and Oded H.

Although each of these stories should have decreased fundamental values, even when taken together, they were not so significant or so surprising that they could have reasonably accounted for the 36 percent drop in the Dow from its August 25 high to its October 19 close. Several factors besides portfolio insurance selling probably contributed to the crash. First, prices may have been above fundamental values before the crash. Managers who believed that portfolio insurance protected them from significant loss may have switched their asset allocations from bonds to stocks in the months before the crash. The pressure of their purchases may have created a small bubble as prices quickly rose in the first three quarters of 1987. FIGURE 28-3. Dow Jones Industrial Average, September-November 1987 Source: Bridge Information Systems. Second, the huge volumes that traders wanted to trade during the crash exceeded the trade processing capacity of the New York Stock Exchange and its floor traders.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

Abraham Wald, Alan Greenspan, Albert Einstein, An Inconvenient Truth, Andrei Shleifer, anti-communist, AOL-Time Warner, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black-Scholes formula, Blythe Masters, book value, Bretton Woods, British Empire, business cycle, capital asset pricing model, carbon tax, Carl Icahn, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, Garrett Hardin, George Akerlof, Glass-Steagall Act, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Nixon triggered the end of the Bretton Woods system, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, Ponzi scheme, precautionary principle, price discrimination, price stability, principal–agent problem, profit maximization, proprietary trading, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, subprime mortgage crisis, tail risk, Tax Reform Act of 1986, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, Tragedy of the Commons, transaction costs, Two Sigma, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

At companies where employees are automatically enrolled, with an option to opt out, some nine in ten employees accept the automatic enrollment and make their monthly contributions. This acute form of “status quo” bias extends to the investment choices people make in their 401(k) plans. In plans that offer a default asset allocation—a mixture of stocks and bonds, usually—about three quarters of all participants accept it. Similarly, if a plan’s default option involves investing in the parent company’s stock, many people accept that, too. “[T]his pattern of investment was unaffected by the prominent bankruptcies of Enron, WorldCom, Global Crossing, and many other firms in the aftermath of the collapse of the technology bubble,” Laibson notes.


pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

"World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Bear Stearns, Ben Bernanke: helicopter money, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bretton Woods, BRICs, business climate, business cycle, buy and hold, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Dr. Strangelove, Edward Snowden, eurozone crisis, fiat currency, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global macro, global reserve currency, global supply chain, Goodhart's law, Growth in a Time of Debt, guns versus butter model, Herman Kahn, high-speed rail, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, junk bonds, Kenneth Rogoff, labor-force participation, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, market design, megaproject, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mutually assured destruction, Nixon triggered the end of the Bretton Woods system, obamacare, offshore financial centre, oil shale / tar sands, open economy, operational security, plutocrats, Ponzi scheme, power law, price stability, public intellectual, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, Solyndra, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, undersea cable, uranium enrichment, Washington Consensus, working-age population, yield curve

Whether the loss of confidence in the dollar results from external threats or internal neglect, investors should ask two questions: What comes next? and How can wealth be preserved in the transition? ■ Three Paths The dollar’s demise will take one of three paths. The first is world money, the SDR; the second is a gold standard; and the third is social disorder. Each of these outcomes can be foreseen, and each presents an asset-allocation strategy best able to preserve wealth. The substitution of SDRs for dollars as the global reserve currency is already under way, and the IMF has laid out a ten-year transition plan that the United States has informally endorsed. This blueprint involves increasing the amount of SDRs in circulation and building out an infrastructure of SDR-denominated investable assets, issuers, investors, and dealers.


pages: 515 words: 132,295

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, Alan Greenspan, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, Bear Stearns, behavioural economics, Big Tech, bonus culture, Bretton Woods, British Empire, business cycle, buy and hold, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, data science, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, electricity market, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial intermediation, Ford Model T, Frederick Winslow Taylor, George Akerlof, gig economy, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Greenspan put, guns versus butter model, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Bogle, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Kickstarter, knowledge economy, labor-force participation, London Whale, Long Term Capital Management, low interest rates, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, proprietary trading, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Ronald Reagan, Satyajit Das, Savings and loan crisis, scientific management, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, stock buybacks, subprime mortgage crisis, technology bubble, TED Talk, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, Tragedy of the Commons, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, vertical integration, zero-sum game

“Few people have the math skills, financial sophistication, or time to make sense of often conflicting financial advice and make sound investment decisions.” The complexity of the system results in high numbers of people taking money out early, squandering the tax benefits of such programs, or simply making bad choices in terms of asset allocation. Indeed, anyone who has ever tried to pore over the benefits websites of their employer to try to make the smartest decision (or, God forbid, call the help line “advisers”) knows what she means. Even for people who know something about finance it’s a confusing maze of options, and as behavioral economics research shows us, more options often result in bad decisions or no decision at all.29 IRAs, which freelancers and people who don’t have access to 401(k)s use to save, are even worse, since they offer fewer investor protections and typically have even higher fees.30 Yet bad policy decisions and the desire of both the public and private sector to push retirement responsibilities onto individuals have resulted in a system where such programs are now the norm for most people—or at least most wealthy people.


pages: 523 words: 143,139

Algorithms to Live By: The Computer Science of Human Decisions by Brian Christian, Tom Griffiths

4chan, Ada Lovelace, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Albert Einstein, algorithmic bias, algorithmic trading, anthropic principle, asset allocation, autonomous vehicles, Bayesian statistics, behavioural economics, Berlin Wall, Big Tech, Bill Duvall, bitcoin, Boeing 747, Charles Babbage, cognitive load, Community Supported Agriculture, complexity theory, constrained optimization, cosmological principle, cryptocurrency, Danny Hillis, data science, David Heinemeier Hansson, David Sedaris, delayed gratification, dematerialisation, diversification, Donald Knuth, Donald Shoup, double helix, Dutch auction, Elon Musk, exponential backoff, fault tolerance, Fellow of the Royal Society, Firefox, first-price auction, Flash crash, Frederick Winslow Taylor, fulfillment center, Garrett Hardin, Geoffrey Hinton, George Akerlof, global supply chain, Google Chrome, heat death of the universe, Henri Poincaré, information retrieval, Internet Archive, Jeff Bezos, Johannes Kepler, John Nash: game theory, John von Neumann, Kickstarter, knapsack problem, Lao Tzu, Leonard Kleinrock, level 1 cache, linear programming, martingale, multi-armed bandit, Nash equilibrium, natural language processing, NP-complete, P = NP, packet switching, Pierre-Simon Laplace, power law, prediction markets, race to the bottom, RAND corporation, RFC: Request For Comment, Robert X Cringely, Sam Altman, scientific management, sealed-bid auction, second-price auction, self-driving car, Silicon Valley, Skype, sorting algorithm, spectrum auction, Stanford marshmallow experiment, Steve Jobs, stochastic process, Thomas Bayes, Thomas Malthus, Tragedy of the Commons, traveling salesman, Turing machine, urban planning, Vickrey auction, Vilfredo Pareto, Walter Mischel, Y Combinator, zero-sum game

When it comes to portfolio management, it turns out that unless you’re highly confident in the information you have about the markets, you may actually be better off ignoring that information altogether. Applying Markowitz’s optimal portfolio allocation scheme requires having good estimates of the statistical properties of different investments. An error in those estimates can result in very different asset allocations, potentially increasing risk. In contrast, splitting your money evenly across stocks and bonds is not affected at all by what data you’ve observed. This strategy doesn’t even try to fit itself to the historical performance of those investment types—so there’s no way it can overfit. Of course, just using a fifty-fifty split is not necessarily the complexity sweet spot, but there’s something to be said for it.


pages: 497 words: 144,283

Connectography: Mapping the Future of Global Civilization by Parag Khanna

"World Economic Forum" Davos, 1919 Motor Transport Corps convoy, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 9 dash line, additive manufacturing, Admiral Zheng, affirmative action, agricultural Revolution, Airbnb, Albert Einstein, amateurs talk tactics, professionals talk logistics, Amazon Mechanical Turk, Anthropocene, Asian financial crisis, asset allocation, autonomous vehicles, banking crisis, Basel III, Berlin Wall, bitcoin, Black Swan, blockchain, borderless world, Boycotts of Israel, Branko Milanovic, BRICs, British Empire, business intelligence, call centre, capital controls, Carl Icahn, charter city, circular economy, clean water, cloud computing, collateralized debt obligation, commoditize, complexity theory, continuation of politics by other means, corporate governance, corporate social responsibility, credit crunch, crony capitalism, crowdsourcing, cryptocurrency, cuban missile crisis, data is the new oil, David Ricardo: comparative advantage, deglobalization, deindustrialization, dematerialisation, Deng Xiaoping, Detroit bankruptcy, digital capitalism, digital divide, digital map, disruptive innovation, diversification, Doha Development Round, driverless car, Easter island, edge city, Edward Snowden, Elon Musk, energy security, Ethereum, ethereum blockchain, European colonialism, eurozone crisis, export processing zone, failed state, Fairphone, Fall of the Berlin Wall, family office, Ferguson, Missouri, financial innovation, financial repression, fixed income, forward guidance, gentrification, geopolitical risk, global supply chain, global value chain, global village, Google Earth, Great Leap Forward, Hernando de Soto, high net worth, high-speed rail, Hyperloop, ice-free Arctic, if you build it, they will come, illegal immigration, income inequality, income per capita, industrial cluster, industrial robot, informal economy, Infrastructure as a Service, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Internet of things, Isaac Newton, Jane Jacobs, Jaron Lanier, John von Neumann, Julian Assange, Just-in-time delivery, Kevin Kelly, Khyber Pass, Kibera, Kickstarter, LNG terminal, low cost airline, low earth orbit, low interest rates, manufacturing employment, mass affluent, mass immigration, megacity, Mercator projection, Metcalfe’s law, microcredit, middle-income trap, mittelstand, Monroe Doctrine, Multics, mutually assured destruction, Neal Stephenson, New Economic Geography, new economy, New Urbanism, off grid, offshore financial centre, oil rush, oil shale / tar sands, oil shock, openstreetmap, out of africa, Panamax, Parag Khanna, Peace of Westphalia, peak oil, Pearl River Delta, Peter Thiel, Philip Mirowski, Planet Labs, plutocrats, post-oil, post-Panamax, precautionary principle, private military company, purchasing power parity, quantum entanglement, Quicken Loans, QWERTY keyboard, race to the bottom, Rana Plaza, rent-seeking, reserve currency, Robert Gordon, Robert Shiller, Robert Solow, rolling blackouts, Ronald Coase, Scramble for Africa, Second Machine Age, sharing economy, Shenzhen special economic zone , Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, six sigma, Skype, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, South China Sea, South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, Stuxnet, supply-chain management, sustainable-tourism, systems thinking, TaskRabbit, tech worker, TED Talk, telepresence, the built environment, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, Tim Cook: Apple, trade route, Tragedy of the Commons, transaction costs, Tyler Cowen, UNCLOS, uranium enrichment, urban planning, urban sprawl, vertical integration, WikiLeaks, Yochai Benkler, young professional, zero day

The subsequent volumes of Hardt and Negri’s trilogy, Multitude and Commonwealth, continue this intellectual struggle against capitalism’s appropriation of property, advocating instead greater unity among dispersed communities of peoples. 9. One estimate suggests $2 trillion in emerging market pension assets allocated to other emerging markets by 2020. See Jay Pelosky, “Emerging Market Portfolio Globalization: The Next Big Thing” (New America Foundation, World Economic Roundtable policy paper, July 17, 2014). 10. Martin Neil Baily and Douglas J. Elliott, “The Role of Finance in the Economy: Implications for Structural Reform of the Financial Sector” (Brookings Institution, July 11, 2013).


pages: 487 words: 151,810

The Social Animal: The Hidden Sources of Love, Character, and Achievement by David Brooks

"World Economic Forum" Davos, Abraham Maslow, Albert Einstein, asset allocation, assortative mating, Atul Gawande, behavioural economics, Bernie Madoff, business process, Cass Sunstein, choice architecture, classic study, clean water, cognitive load, creative destruction, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, deliberate practice, disintermediation, Donald Trump, Douglas Hofstadter, Emanuel Derman, en.wikipedia.org, fake it until you make it, fear of failure, financial deregulation, financial independence, Flynn Effect, George Akerlof, Henri Poincaré, hiring and firing, impulse control, invisible hand, Jeff Hawkins, Joseph Schumpeter, labor-force participation, language acquisition, longitudinal study, loss aversion, medical residency, meta-analysis, mirror neurons, Monroe Doctrine, Paul Samuelson, power law, Richard Thaler, risk tolerance, Robert Shiller, school vouchers, six sigma, social intelligence, Stanford marshmallow experiment, Steve Jobs, Steven Pinker, tacit knowledge, the scientific method, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Tyler Cowen, Walter Mischel, young professional

People who are given a prescription pain reliever they are told costs $2.50 a pill experience much more pain relief than those given what they are told is a 10-cent pill (even though all the pills are placebos). As Jonah Lehrer writes, “Their predictions became self-fulfilling prophecies.” Then there is inertia. The mind is a cognitive miser. It doesn’t like to expend mental energy. As a result people have a bias toward maintaining the status quo. TIAA-CREF offers college professors a range of asset-allocation options for their retirement accounts. According to one study, most of the participants in those plans make zero allocation changes during their entire professional careers. They just stick with whatever was the first option when they signed up. Then there is arousal. People think differently depending on their state of mind.


pages: 519 words: 155,332

Tailspin: The People and Forces Behind America's Fifty-Year Fall--And Those Fighting to Reverse It by Steven Brill

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, airport security, American Society of Civil Engineers: Report Card, asset allocation, behavioural economics, Bernie Madoff, Bernie Sanders, Blythe Masters, Bretton Woods, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carl Icahn, carried interest, clean water, collapse of Lehman Brothers, collective bargaining, computerized trading, corporate governance, corporate raider, corporate social responsibility, Credit Default Swap, currency manipulation / currency intervention, deal flow, Donald Trump, electricity market, ending welfare as we know it, failed state, fake news, financial deregulation, financial engineering, financial innovation, future of work, ghettoisation, Glass-Steagall Act, Gordon Gekko, hiring and firing, Home mortgage interest deduction, immigration reform, income inequality, invention of radio, job automation, junk bonds, knowledge economy, knowledge worker, labor-force participation, laissez-faire capitalism, low interest rates, Mahatma Gandhi, Mark Zuckerberg, Michael Milken, military-industrial complex, mortgage tax deduction, Neil Armstrong, new economy, Nixon triggered the end of the Bretton Woods system, obamacare, old-boy network, opioid epidemic / opioid crisis, paper trading, Paris climate accords, performance metric, post-work, Potemkin village, Powell Memorandum, proprietary trading, quantitative hedge fund, Ralph Nader, ride hailing / ride sharing, Robert Bork, Robert Gordon, Robert Mercer, Ronald Reagan, Rutger Bregman, Salesforce, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, stock buybacks, Tax Reform Act of 1986, tech worker, telemarketer, too big to fail, trade liberalization, union organizing, Unsafe at Any Speed, War on Poverty, women in the workforce, working poor

Report: https://www.ici.org/​research/​stats/​retirement/​ret_17_q1 [inactive]. In 1950, institutional investors: Note that the 1950 number represents all stock equity, whereas the 2009 number represents the 1,000 largest corporations. See Matteo Tonello and Stephan Rahim Rabimov, “The 2010 Institutional Investment Report: Trends in Asset Allocation and Portfolio Composition,” The Conference Board Research Report, November 2010, https://ssrn.com/​abstract=1707512. In 1960, stock was held: PolitiFact used historical data from the New York Stock Exchange to compute these averages: Warren Fiske, “Mark Warner Says Average Holding Time for Stocks Has Fallen to Four Months,” PolitiFact, July 6, 2016, http://www.politifact.com/​virginia/​statements/​2016/​jul/​06/​mark-warner/​mark-warner-says-average-holding-time-stocks-has-f/.


pages: 444 words: 151,136

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

Alan Greenspan, Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Black Swan, bond market vigilante , book value, Branko Milanovic, bread and circuses, break the buck, Bretton Woods, BRICs, business climate, business cycle, capital asset pricing model, carbon tax, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, foreign exchange controls, Fractional reserve banking, full employment, German hyperinflation, Great Leap Forward, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, land bank, land reform, liquidity trap, Long Term Capital Management, lost cosmonauts, low interest rates, McMansion, mega-rich, military-industrial complex, Money creation, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, proprietary trading, pushing on a string, quantitative easing, RAND corporation, rent control, rent stabilization, reserve currency, risk free rate, riskless arbitrage, Ronald Reagan, Savings and loan crisis, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, stocks for the long run, Tax Reform Act of 1986, The Great Moderation, the scientific method, time value of money, too big to fail, Two Sigma, upwardly mobile, War on Poverty, Yogi Berra, young professional

There is a good reason for this: as Ibbotson and Sinquefield have shown, longterm returns of the stock market have been high, reflecting risk and a premium over inflation. From 1925 to 2007, large-cap stocks averaged a total return of 10.4 percent, while inflation was just 3 percent (using the official yardstick).7 There are no straightforward decision rules for asset allocation that can be gleaned from fundamental data that are stable and reliable over time; so the conventional wisdom is that it is best to stick with stocks unless you have some need for money in the next few years. In the late 1980s, Charlie Minter and his partner Stan Selvigson warned of a coming credit crisis.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

air freight, Alan Greenspan, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, business cycle, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, full employment, Glass-Steagall Act, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, Les Trente Glorieuses, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, proprietary trading, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, subprime mortgage crisis, tail risk, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen, Tyler Cowen: Great Stagnation, vertical integration, very high income, winner-take-all economy, zero-sum game

Basel III A first area of focus was reaching agreement on a new Basel III accord (after the failures of Basel I and II demonstrated by the crisis) governing bank capital, risk-management – including management of market risk – macroprudential regulation and liquidity risk.4 Basel I, which imposed a minimum set of capital requirements for banks, had been agreed by the Basel Committee on Banking Supervision in 1988. Ironically, one of its main aims was to weaken the feared competition from undercapitalized Japanese banks, which then promptly failed in the financial crisis of the 1990s. The essence of Basel I was risk-weighting of assets, with assets allocated to five risk classes. Ironically and dangerously, these weights treated government debt as riskless and put triple-A-rated mortgage-backed securities into the next least risky category. International banks were required to fund themselves with capital equal to 8 per cent of their risk-weighted assets.


pages: 499 words: 148,160

Market Wizards: Interviews With Top Traders by Jack D. Schwager

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", Alan Greenspan, Albert Einstein, asset allocation, backtesting, beat the dealer, Bretton Woods, business cycle, buy and hold, commodity trading advisor, computerized trading, conceptual framework, delta neutral, Edward Thorp, Elliott wave, fixed income, implied volatility, index card, junk bonds, locking in a profit, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, Michael Milken, money market fund, Nixon triggered the end of the Bretton Woods system, pattern recognition, Paul Samuelson, Ralph Nelson Elliott, random walk, Reminiscences of a Stock Operator, short selling, Teledyne, transaction costs, uptick rule, yield curve, zero-sum game

[Portfolio insurance is the systematic sale of stock index futures to reduce the risk exposure in a stock portfolio as prices decline. See Appendix 1 for more detail.] That was one of the new elements. On one hand, you had a reduction in the elements of stability. On the other hand, you had the creations of the 1980s—portfolio insurance, program trading, and global asset allocation—which tended to exert a unidirectional impact. By that, I mean that participants in these strategies tend to be buyers and sellers at the same time. The stock market was not prepared to handle it. Where were you, positionwise, coming in on October 19? I came in very much long exposed—80 to 90 percent—and I increased my exposure during the day.


pages: 565 words: 164,405

A Splendid Exchange: How Trade Shaped the World by William J. Bernstein

Admiral Zheng, asset allocation, bank run, Benoit Mandelbrot, British Empire, call centre, clean water, Columbian Exchange, Corn Laws, cotton gin, David Ricardo: comparative advantage, death from overwork, deindustrialization, Doha Development Round, domestication of the camel, double entry bookkeeping, Easter island, Eratosthenes, financial innovation, flying shuttle, Gini coefficient, God and Mammon, high-speed rail, ice-free Arctic, imperial preference, income inequality, intermodal, James Hargreaves, John Harrison: Longitude, Khyber Pass, low skilled workers, non-tariff barriers, Paul Samuelson, placebo effect, Port of Oakland, refrigerator car, Silicon Valley, South China Sea, South Sea Bubble, spice trade, spinning jenny, Steven Pinker, Suez canal 1869, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, trade liberalization, trade route, transatlantic slave trade, transcontinental railway, two and twenty, upwardly mobile, working poor, zero-sum game

Also by William J. Bernstein The Intelligent Asset Allocator The Four Pillars of Investing The Birth of Plenty WILLIAM J. BERNSTEIN To Jane List of Maps ix Introduction 1 1 Sumer 20 2 The Straits of Trade 43 3 Camels, Perfumes, and Prophets 54 4 The Baghdad-Canton Express 77 5 The Taste of Trade and the Captives of Trade 110 6 The Disease of Trade 130 7 Da Gama's Urge 152 8 A World Encompassed 198 9 The Coming of Corporations 214 10 Transplants 241 11 The Triumph and Tragedy of Free Trade 280 12 What Henry Bessemer Wrought 316 13 Collapse 338 14 The Battle of Seattle 366 Acknowledgments 387 Notes 389 Bibliography 429 Illustration Credits 449 Ancient Silk Routes 3 World Trade System, Third Millennium BC 25 Ancient Canals at Suez 37 Winter Monsoon Winds and Summer Monsoon Winds 39 Athenian Grain Routes 45 Incense Lands and Routes 63 The World of Medieval Trade 80 The Spice Islands 114 Eastern Mediterranean Spice/Slave Trade, Circa AD 1250 126 The Black Death, Act I: AD 540-800 137 The Black Death, Act II: 1330-1350 141 The Tordesillas Line in the West 169 Da Gama's First Voyage, 1497-1499 171 The Global Wind Machine 201 Banda (Nutmeg) Islands 227 Strait of Hormuz 231 Dutch Empire in Asia at its Height in the Seventeenth Century 233 Coffee-Growing Area and Ports of Late-Medieval Yemen 250 The Sugar Islands 269 Pearl River Estuary 285 The Erie Canal and Saint Lawrence Systems in 1846 325 World Oil Flows, Millions of Barrels per Day 368 The circumstances could not have been more ordinary: a September morning in a hotel lobby in central Berlin.


Analysis of Financial Time Series by Ruey S. Tsay

Asian financial crisis, asset allocation, backpropagation, Bayesian statistics, Black-Scholes formula, Brownian motion, business cycle, capital asset pricing model, compound rate of return, correlation coefficient, data acquisition, discrete time, financial engineering, frictionless, frictionless market, implied volatility, index arbitrage, inverted yield curve, Long Term Capital Management, market microstructure, martingale, p-value, pattern recognition, random walk, risk free rate, risk tolerance, short selling, statistical model, stochastic process, stochastic volatility, telemarketer, transaction costs, value at risk, volatility smile, Wiener process, yield curve

ISBN: 0-471-41544-8 CHAPTER 9 Multivariate Volatility Models and Their Applications In this chapter, we generalize the univariate volatility models of Chapter 3 to the multivariate case and discuss some methods for simplifying the dynamic relationships between volatility processes of multiple asset returns. Multivariate volatilities have many important financial applications. They play an important role in portfolio selection and asset allocation, and they can be used to compute the Value at Risk of a financial position consisting of multiple assets. Consider a multivariate return series {rt }. We adopt the same approach as the univariate case by rewriting the series as rt = µt + at , where µt = E(rt | Ft−1 ) is the conditional expectation of rt given the past information Ft−1 , and at = (a1t , . . . , akt ) is the shock, or innovation, of the series at time t.


pages: 442 words: 39,064

Why Stock Markets Crash: Critical Events in Complex Financial Systems by Didier Sornette

Alan Greenspan, Asian financial crisis, asset allocation, behavioural economics, Berlin Wall, Black Monday: stock market crash in 1987, Bretton Woods, Brownian motion, business cycle, buy and hold, buy the rumour, sell the news, capital asset pricing model, capital controls, continuous double auction, currency peg, Deng Xiaoping, discrete time, diversified portfolio, Elliott wave, Erdős number, experimental economics, financial engineering, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, global village, implied volatility, index fund, information asymmetry, intangible asset, invisible hand, John von Neumann, joint-stock company, law of one price, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, market design, market fundamentalism, mental accounting, moral hazard, Network effects, new economy, oil shock, open economy, pattern recognition, Paul Erdős, Paul Samuelson, power law, quantitative trading / quantitative finance, random walk, risk/return, Ronald Reagan, Schrödinger's Cat, selection bias, short selling, Silicon Valley, South Sea Bubble, statistical model, stochastic process, stocks for the long run, Tacoma Narrows Bridge, technological singularity, The Coming Technological Singularity, The Wealth of Nations by Adam Smith, Tobin tax, total factor productivity, transaction costs, tulip mania, VA Linux, Y2K, yield curve

Portfolio Selection: Efficient Diversification of Investment (Wiley, New York). 289. Mauboussin, M. J. and Hiler, R. (1999). Rational Exuberance? Equity research report of Credit Suisse First Boston, January 26. 290. Maug, E. and Naik, N. (1995). Herding and Delegated Portfolio Management: The Impact of Relative Performance Evaluation on Asset Allocation, Working paper, Duke University, Durham, NC. 291. McCarty, P. A. (1986). Effects of feedback on the self-confidence of men and women, Academy of Management Journal 29, 840–847. 292. Meakin, P. (1998). Fractals, Scaling, and Growth Far from Equilibrium (Cambridge University Press, Cambridge, U.K. and New York). 293.


pages: 598 words: 172,137

Who Stole the American Dream? by Hedrick Smith

Affordable Care Act / Obamacare, Airbus A320, airline deregulation, Alan Greenspan, anti-communist, asset allocation, banking crisis, Bear Stearns, Boeing 747, Bonfire of the Vanities, British Empire, business cycle, business process, clean water, cloud computing, collateralized debt obligation, collective bargaining, commoditize, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Deng Xiaoping, desegregation, Double Irish / Dutch Sandwich, family office, financial engineering, Ford Model T, full employment, Glass-Steagall Act, global supply chain, Gordon Gekko, guest worker program, guns versus butter model, high-speed rail, hiring and firing, housing crisis, Howard Zinn, income inequality, independent contractor, index fund, industrial cluster, informal economy, invisible hand, John Bogle, Joseph Schumpeter, junk bonds, Kenneth Rogoff, Kitchen Debate, knowledge economy, knowledge worker, laissez-faire capitalism, Larry Ellison, late fees, Long Term Capital Management, low cost airline, low interest rates, manufacturing employment, market fundamentalism, Maui Hawaii, mega-rich, Michael Shellenberger, military-industrial complex, MITM: man-in-the-middle, mortgage debt, negative equity, new economy, Occupy movement, Own Your Own Home, Paul Samuelson, Peter Thiel, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ponzi scheme, Powell Memorandum, proprietary trading, Ralph Nader, RAND corporation, Renaissance Technologies, reshoring, rising living standards, Robert Bork, Robert Shiller, rolodex, Ronald Reagan, Savings and loan crisis, shareholder value, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Solyndra, Steve Jobs, stock buybacks, tech worker, Ted Nordhaus, The Chicago School, The Spirit Level, too big to fail, transaction costs, transcontinental railway, union organizing, Unsafe at Any Speed, Vanguard fund, We are the 99%, women in the workforce, working poor, Y2K

Memo to President-Elect Barack Obama, December 15, 2008. http://​s3.​documentcloud.​org/​documents/​285065/​summers-​12-​15-​08-​memo.​pdf. VanDerhei, Jack. “Evaluation of the Adequacy and Structure of U.S. Voluntary Retirement Plans, with Special Emphasis on 401(k) Plans.” Benefits Quarterly, Third Quarter 2010. ———. “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in2009.” EBRI Issue Brief No. 350, Employee Benefits Research Institute, Washington, DC, November 2010. ———. “Measuring Retirement Income Adequacy: Calculating Realistic Income Replacement Rates.” EBRI Issue Brief No. 297, Employee Benefits Research Institute, Washington, DC, September 2006. ———.


pages: 1,239 words: 163,625

The Joys of Compounding: The Passionate Pursuit of Lifelong Learning, Revised and Updated by Gautam Baid

Abraham Maslow, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, Albert Einstein, Alvin Toffler, Andrei Shleifer, asset allocation, Atul Gawande, availability heuristic, backtesting, barriers to entry, beat the dealer, Benoit Mandelbrot, Bernie Madoff, bitcoin, Black Swan, book value, business process, buy and hold, Cal Newport, Cass Sunstein, Checklist Manifesto, Clayton Christensen, cognitive dissonance, collapse of Lehman Brothers, commoditize, corporate governance, correlation does not imply causation, creative destruction, cryptocurrency, Daniel Kahneman / Amos Tversky, deep learning, delayed gratification, deliberate practice, discounted cash flows, disintermediation, disruptive innovation, Dissolution of the Soviet Union, diversification, diversified portfolio, dividend-yielding stocks, do what you love, Dunning–Kruger effect, Edward Thorp, Elon Musk, equity risk premium, Everything should be made as simple as possible, fear index, financial independence, financial innovation, fixed income, follow your passion, framing effect, George Santayana, Hans Rosling, hedonic treadmill, Henry Singleton, hindsight bias, Hyman Minsky, index fund, intangible asset, invention of the wheel, invisible hand, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, Jeff Bezos, John Bogle, Joseph Schumpeter, junk bonds, Kaizen: continuous improvement, Kickstarter, knowledge economy, Lao Tzu, Long Term Capital Management, loss aversion, Louis Pasteur, low interest rates, Mahatma Gandhi, mandelbrot fractal, margin call, Mark Zuckerberg, Market Wizards by Jack D. Schwager, Masayoshi Son, mental accounting, Milgram experiment, moral hazard, Nate Silver, Network effects, Nicholas Carr, offshore financial centre, oil shock, passive income, passive investing, pattern recognition, Peter Thiel, Ponzi scheme, power law, price anchoring, quantitative trading / quantitative finance, Ralph Waldo Emerson, Ray Kurzweil, Reminiscences of a Stock Operator, reserve currency, Richard Feynman, Richard Thaler, risk free rate, risk-adjusted returns, Robert Shiller, Savings and loan crisis, search costs, shareholder value, six sigma, software as a service, software is eating the world, South Sea Bubble, special economic zone, Stanford marshmallow experiment, Steve Jobs, Steven Levy, Steven Pinker, stocks for the long run, subscription business, sunk-cost fallacy, systems thinking, tail risk, Teledyne, the market place, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, time value of money, transaction costs, tulip mania, Upton Sinclair, Walter Mischel, wealth creators, Yogi Berra, zero-sum game

Over the years, I have come to appreciate the fact that investing is a field of simplifications and approximations rather than of extreme precision and quantitative wizardry. I also have realized that investing is less a field of finance and more a field of human behavior. The key to investing success is not how much you know but how you behave. Your behavior will matter far more than your fees, your asset allocation, or your analytical abilities. Even low-cost index funds won’t be able to help you if you succumb to behavioral biases. Most of the time, the real risk is not in the markets but in our behavior. Emotional intelligence has a much bigger impact on the success or failure of investors than the college they attended or the complexity of their investment strategy.


Termites of the State: Why Complexity Leads to Inequality by Vito Tanzi

accounting loophole / creative accounting, Affordable Care Act / Obamacare, Alan Greenspan, Andrei Shleifer, Andrew Keen, Asian financial crisis, asset allocation, barriers to entry, basic income, behavioural economics, bitcoin, Black Swan, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, clean water, crony capitalism, David Graeber, David Ricardo: comparative advantage, deindustrialization, Donald Trump, Double Irish / Dutch Sandwich, experimental economics, financial engineering, financial repression, full employment, George Akerlof, Gini coefficient, Gunnar Myrdal, high net worth, hiring and firing, illegal immigration, income inequality, indoor plumbing, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jean Tirole, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labor-force participation, libertarian paternalism, Long Term Capital Management, low interest rates, market fundamentalism, means of production, military-industrial complex, moral hazard, Naomi Klein, New Urbanism, obamacare, offshore financial centre, open economy, Pareto efficiency, Paul Samuelson, Phillips curve, price stability, principal–agent problem, profit maximization, pushing on a string, quantitative easing, rent control, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Second Machine Age, secular stagnation, self-driving car, Silicon Valley, Simon Kuznets, synthetic biology, The Chicago School, The Great Moderation, The Market for Lemons, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, Tyler Cowen: Great Stagnation, universal basic income, unorthodox policies, urban planning, very high income, Vilfredo Pareto, War on Poverty, Washington Consensus, women in the workforce

The growth of contingent liabilities in many countries in recent years should be cause for concerns. Contingent liabilities are related to but must be distinguished from the future government liabilities associated with defined-benefit pensions or with public health care systems, in which the costs of these programs are expected to grow over time and to significantly exceed the assets allocated to them, as is now the case in the United States and in many European and other countries (see Tanzi, 2016b). These liabilities are also not reported in the fiscal deficits and thus also lead to statistics that do not correctly measure the true fiscal situation of a country. However, these liabilities, which arise from demographic changes or from the rising cost of health protection, are not the result of unlikely and catastrophic events but, within some ranges, are known and anticipated costs, deferred in time and not shown in the current budgets.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", "there is no alternative" (TINA), "World Economic Forum" Davos, affirmative action, Alan Greenspan, Albert Einstein, algorithmic trading, Andy Kessler, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, BRICs, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, carbon credits, Carl Icahn, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Daniel Kahneman / Amos Tversky, deal flow, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Dr. Strangelove, Dutch auction, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial engineering, financial independence, financial innovation, financial thriller, fixed income, foreign exchange controls, full employment, Glass-Steagall Act, global reserve currency, Goldman Sachs: Vampire Squid, Goodhart's law, Gordon Gekko, greed is good, Greenspan put, happiness index / gross national happiness, haute cuisine, Herman Kahn, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", job automation, Johann Wolfgang von Goethe, John Bogle, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Michael Milken, Mikhail Gorbachev, Milgram experiment, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Phillips curve, planned obsolescence, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, Reminiscences of a Stock Operator, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk free rate, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, stock buybacks, survivorship bias, tail risk, Teledyne, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, two and twenty, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

—Yves Smith, Founder of www.nakedcapitalism.com and Author of ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism “Most books written about the global financial crisis have been written by those who only became wise after the event. Das is not one of them. Long before the collapse of Lehman Brothers, he warned about the flaws in modern finance. Extreme Money is his account of what went wrong. Read it!” —Edward Chancellor, Member of GMO’s Asset Allocation Team and Author of Devil Take the Hindmost: A History of Financial Speculation “A rich analysis told with color and verve.” —Philip Augar, Author of Reckless: The Rise and Fall of the City Praise for Traders, Guns & Money “...a distinctly timely book...tries to reach out to the mathematically challenged to explain how the world of derivatives “really” works...explaining not only the high-minded theory behind the business and its various products but the sometimes sordid reality of the industry, illustrated by lively anecdotes...very up to date, covering some of the new areas of finance, such as credit derivatives...also gives an excellent sense of the all-important cultural aspect of the business, detailing the complexities of trading-floor politics, the dangerously skewed incentive systems, the obsession with money and the cultural chasm that separates derivative traders from many of their clients—and from many other parts of the bank.”


pages: 612 words: 179,328

Buffett by Roger Lowenstein

Alan Greenspan, asset allocation, Bear Stearns, book value, Bretton Woods, buy and hold, Carl Icahn, cashless society, collective bargaining, computerized trading, corporate raider, credit crunch, cuban missile crisis, Eugene Fama: efficient market hypothesis, index card, index fund, interest rate derivative, invisible hand, Jeffrey Epstein, John Meriwether, junk bonds, Long Term Capital Management, Michael Milken, moral hazard, Paul Samuelson, random walk, risk tolerance, Robert Shiller, Ronald Reagan, Savings and loan crisis, selection bias, Teledyne, The Predators' Ball, traveling salesman, Works Progress Administration, Yogi Berra, young professional, zero-coupon bond

These new futures contracts, which traded next to pork bellies and cattle, enabled speculators to bet on the direction of the entire stock market. To a Graham-and-Dodd investor, of course, a stock derived its value from the underlying, individual business. But the new breed of “investor,” who was buying the market whole, did not even know which stocks he owned. Security analysis was irrelevant. On Wall Street, if not in Omaha, “asset allocation” was the rage.39 Instead of looking for individual issues, the portfolio manager first decided how much to invest in “stocks,” treating them as a generic class. The total could be and was continually rejiggled, resulting in sudden wholesale shifts. As an offshoot, managers were letting computer models influence and even make their buy-sell decisions.


pages: 1,202 words: 424,886

Stigum's Money Market, 4E by Marcia Stigum, Anthony Crescenzi

accounting loophole / creative accounting, Alan Greenspan, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, Black-Scholes formula, book value, Brownian motion, business climate, buy and hold, capital controls, central bank independence, centralized clearinghouse, corporate governance, credit crunch, Credit Default Swap, cross-border payments, currency manipulation / currency intervention, currency risk, David Ricardo: comparative advantage, disintermediation, distributed generation, diversification, diversified portfolio, Dutch auction, financial innovation, financial intermediation, fixed income, flag carrier, foreign exchange controls, full employment, Glass-Steagall Act, Goodhart's law, Greenspan put, guns versus butter model, high net worth, implied volatility, income per capita, intangible asset, interest rate derivative, interest rate swap, inverted yield curve, junk bonds, land bank, large denomination, locking in a profit, London Interbank Offered Rate, low interest rates, margin call, market bubble, market clearing, market fundamentalism, Money creation, money market fund, mortgage debt, Myron Scholes, offshore financial centre, paper trading, pension reform, Phillips curve, Ponzi scheme, price mechanism, price stability, profit motive, proprietary trading, prudent man rule, Real Time Gross Settlement, reserve currency, risk free rate, risk tolerance, risk/return, Savings and loan crisis, seigniorage, shareholder value, short selling, short squeeze, tail risk, technology bubble, the payments system, too big to fail, transaction costs, two-sided market, value at risk, volatility smile, yield curve, zero-coupon bond, zero-sum game

Buoyant Domestic Stock Markets Grab Oil Dollars While the recycling of petrodollars was relatively sparse for a while for the reasons cited above, an added reason almost certainly was the buoyancy of the stock markets within the oil-exporting nations beginning in 2003 through February 2006, when prices peaked and began a sharp correction, likely causing a shift in asset allocation toward bonds, including Treasury securities. Saudi Arabia’s stock market, for example, gained a whopping 800% over 2003 to the peak in early 2006. The same can be said for many other Middle East stock markets, some of which increased by even larger amounts. Egyptian shares, for example, increased by 1,400% during the same period.


Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen

3Com Palm IPO, accelerated depreciation, accounting loophole / creative accounting, Airbus A320, Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, banking crisis, Bear Stearns, Bernie Madoff, big-box store, Black Monday: stock market crash in 1987, Black-Scholes formula, Boeing 747, book value, break the buck, Brownian motion, business cycle, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, capital controls, Carl Icahn, Carmen Reinhart, carried interest, collateralized debt obligation, compound rate of return, computerized trading, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, cross-subsidies, currency risk, discounted cash flows, disintermediation, diversified portfolio, Dutch auction, equity premium, equity risk premium, eurozone crisis, fear index, financial engineering, financial innovation, financial intermediation, fixed income, frictionless, fudge factor, German hyperinflation, implied volatility, index fund, information asymmetry, intangible asset, interest rate swap, inventory management, Iridium satellite, James Webb Space Telescope, junk bonds, Kenneth Rogoff, Larry Ellison, law of one price, linear programming, Livingstone, I presume, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, market bubble, market friction, money market fund, moral hazard, Myron Scholes, new economy, Nick Leeson, Northern Rock, offshore financial centre, PalmPilot, Ponzi scheme, prediction markets, price discrimination, principal–agent problem, profit maximization, purchasing power parity, QR code, quantitative trading / quantitative finance, random walk, Real Time Gross Settlement, risk free rate, risk tolerance, risk/return, Robert Shiller, Scaled Composites, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, Skype, SpaceShipOne, Steve Jobs, subprime mortgage crisis, sunk-cost fallacy, systematic bias, Tax Reform Act of 1986, The Nature of the Firm, the payments system, the rule of 72, time value of money, too big to fail, transaction costs, University of East Anglia, urban renewal, VA Linux, value at risk, Vanguard fund, vertical integration, yield curve, zero-coupon bond, zero-sum game, Zipcar

For an analysis of the effect of uncertainty about the expected return see I. A. Cooper, “Arithmetic Versus Geometric Mean Estimators: Setting Discount Rates for Capital Budgeting,” European Financial Management 2 (July 1996), pp. 157–167; and E. Jacquier, A. Kane, and A. J. Marcus, “Optimal Estimation of the Risk Premium for the Long Run and Asset Allocation: A Case of Compounded Estimation Risk,” Journal of Financial Econometrics 3 (2005), pp. 37–55. When future returns are forecasted to distant horizons, the historical arithmetic means are upward-biased. This bias would be small in most corporate-finance applications, however. 10Some of the disagreements simply reflect the fact that the risk premium is sometimes defined in different ways.


pages: 2,045 words: 566,714

J.K. Lasser's Your Income Tax by J K Lasser Institute

accelerated depreciation, Affordable Care Act / Obamacare, airline deregulation, asset allocation, book value, business cycle, collective bargaining, distributed generation, employer provided health coverage, estate planning, Home mortgage interest deduction, independent contractor, intangible asset, medical malpractice, medical residency, money market fund, mortgage debt, mortgage tax deduction, passive income, Ponzi scheme, profit motive, rent control, Right to Buy, telemarketer, transaction costs, urban renewal, zero-coupon bond

Where death occurred before 1982 and a surviving spouse materially participated in the operation of a farm or other business, the estate could have elected to treat the farm or business property as an “eligible joint interest,” which means that part of the investment in the property was attributed to the surviving spouse’s services and that part was not included in the deceased spouse’s estate. Where such an election was made, the survivor’s basis for income tax purposes includes the estate tax value of property included in the decedent’s estate. 5.19 Allocating Cost Among Several Assets Allocation of basis is generally required in these cases: when the property includes land and building; the land is to be divided into lots; securities or mutual-fund shares are purchased at different times; stock splits; and in the purchase of a business. Purchase of land and building. To figure depreciation on the building, part of the purchase price must be allocated to the building.


pages: 1,845 words: 567,850

J.K. Lasser's Your Income Tax 2014 by J. K. Lasser

accelerated depreciation, Affordable Care Act / Obamacare, airline deregulation, asset allocation, book value, business cycle, collective bargaining, distributed generation, employer provided health coverage, estate planning, Home mortgage interest deduction, independent contractor, intangible asset, medical malpractice, medical residency, mortgage debt, mortgage tax deduction, obamacare, passive income, Ponzi scheme, profit motive, rent control, Right to Buy, telemarketer, transaction costs, urban renewal, zero-coupon bond

Where death occurred before 1982 and a surviving spouse materially participated in the operation of a farm or other business, the estate could have elected to treat the farm or business property as an “eligible joint interest,” which means that part of the investment in the property was attributed to the surviving spouse’s services and that part was not included in the deceased spouse’s estate. Where such an election was made, the survivor’s basis for income tax purposes includes the estate tax value of property included in the decedent’s estate. 5.19 Allocating Cost Among Several Assets Allocation of basis is generally required in these cases: when the property includes land and building; the land is to be divided into lots; securities or mutual-fund shares are purchased at different times; stock splits; and in the purchase of a business. Purchase of land and building To figure depreciation on the building, part of the purchase price must be allocated to the building.


J.K. Lasser's Your Income Tax 2016: For Preparing Your 2015 Tax Return by J. K. Lasser Institute

accelerated depreciation, Affordable Care Act / Obamacare, airline deregulation, asset allocation, book value, business cycle, collective bargaining, distributed generation, employer provided health coverage, estate planning, Home mortgage interest deduction, independent contractor, intangible asset, medical malpractice, medical residency, mortgage debt, mortgage tax deduction, passive income, Ponzi scheme, profit motive, rent control, Right to Buy, transaction costs, urban renewal, zero-coupon bond

Where death occurred before 1982 and a surviving spouse materially participated in the operation of a farm or other business, the estate could have elected to treat the farm or business property as an “eligible joint interest,” which means that part of the investment in the property was attributed to the surviving spouse’s services and that part was not included in the deceased spouse’s estate. Where such an election was made, the survivor’s basis for income tax purposes includes the estate tax value of property included in the decedent’s estate. 5.19 Allocating Cost Among Several Assets Allocation of basis is generally required in these cases: when the property includes land and building; the land is to be divided into lots; securities or mutual-fund shares are purchased at different times; stock splits; and in the purchase of a business. Purchase of land and building. To figure depreciation on the building, part of the purchase price must be allocated to the building.


J.K. Lasser's Your Income Tax 2022: For Preparing Your 2021 Tax Return by J. K. Lasser Institute

accelerated depreciation, Affordable Care Act / Obamacare, airline deregulation, anti-communist, asset allocation, bike sharing, bitcoin, business cycle, call centre, carried interest, collective bargaining, coronavirus, COVID-19, cryptocurrency, distributed generation, distributed ledger, diversification, employer provided health coverage, estate planning, Home mortgage interest deduction, independent contractor, intangible asset, medical malpractice, medical residency, mortgage debt, mortgage tax deduction, passive income, Ponzi scheme, profit motive, rent control, ride hailing / ride sharing, Right to Buy, sharing economy, TaskRabbit, Tax Reform Act of 1986, transaction costs, zero-coupon bond

Where death occurred before 1982 and a surviving spouse materially participated in the operation of a farm or other business, the estate could have elected to treat the farm or business property as an “eligible joint interest,” which means that part of the investment in the property was attributed to the surviving spouse's services and that part was not included in the deceased spouse's estate. Where such an election was made, the survivor's basis for income tax purposes includes the estate tax value of property included in the decedent's estate. 5.19 Allocating Cost Among Several Assets Allocation of basis is generally required in these cases: when the property includes land and building; the land is to be divided into lots; securities or mutual fund shares are purchased at different times; stock splits; and in the purchase of a business. Purchase of land and building. To figure depreciation on the building, part of the purchase price must be allocated to the building.