The Well Tempered Investor

What Fama-French’s Nobel Prize Research Can Tell Us About the Current Market – A Cationary Look on Market Cocentration

In 2013, Eugene Fama and Kenneth French won the Nobel Prize in Economic Sciences. They revised the Capital Asset Pricing Model (CAPM), which simplified the estimation of how much return is required to justify an investment.

The CAPM calculates the expected return by comparing how much investors can expect to earn from investing in the market, such as the S&P 500, with the return on short-term government bonds. This difference, known as the market premium, is then multiplied by beta, which measures how a specific investment moves in relation to the overall market, to derive the expected return. William Sharpe, along with John Lintner and Jan Mossin, developed the CAPM based on Harry Markowitz’s portfolio theory. Sharpe later received the 1990 Nobel Prize in Economic Sciences, shared with Markowitz and Merton Miller, for their foundational work on risk and return.

Fama-French Three-Factor Model

Fama and French later revised the CAPM and introduced two additional factors in their Three-Factor Model, where market risk, the first factor, comes from the original CAPM. The model incorporates two further dimensions to calculate the required rate of return: the effect of company size, and the company’s book value relative to its stock price.

In their research, Fama and French found that smaller companies tended to have higher returns than larger ones. They incorporated this observation into the model as SMB (Small Minus Big). In this factor, the return of large companies is subtracted from that of small companies, which consistently showed positive values, indicating that returns for small companies were greater than those of large companies.

Finding the Right Allocation Between Taxable Account & 401(k) for Early Retirement

Executive Summary

Allocating savings between taxable accounts and 401(k)s significantly impacts retirement flexibility and tax efficiency. While 401(k)s offer tax deferral and employer matches, all withdrawals are fully taxable, and withdrawals before age 59½ incur a 10% penalty. Analysis of four account allocation models across four different scenarios shows that a strategy of contributing to the 401(k) up to the employer match and investing the remainder in a taxable account, consistently maximizes net balances, preserves tax-deferred growth, and provides liquidity for large or unexpected expenses, making it the most effective approach for early retirement readiness and for handling various contingencies in life.

Introduction

Many individuals invest in employer-sponsored retirement accounts, such as a 401(k), but often it becomes their only significant financial asset. While 401(k)s and other employer-sponsored retirement accounts offer tax-deferred growth and employer matches, these benefits come with restrictions. Withdrawals made before age 59½ incur not only ordinary income taxes but also a 10% penalty.

The Roth Conversion Dilemma: Its Gains, Risks, and Strategy

Introduction

A Roth conversion is a process of transferring funds from a traditional retirement account like a Traditional IRA into a Roth IRA. The amount converted is subject to income tax in the year of the conversion, but once in the Roth IRA, future earnings and withdrawals are tax-free. The intent of the conversion is to reduce future tax payments by paying tax early at a lower rate, anticipating a higher future tax rate.

The conventional approach to Roth conversion assumes that it is beneficial only if the tax rate at withdrawal is expected to be higher than at conversion. However, this criterion has limitations, as it overlooks the fact that a Roth conversion can still make gains even if the withdrawal tax rate is slightly lower than the conversion rate, due to tax drag from reinvested required minimum distributions (RMDs).

Three Critical Points for Setting Up a Secure Medicare Plan

The U.S. healthcare system is vast and complex. The introduction of Medicare in 1965 significantly accelerated the growth of the healthcare sector. By 2023, it had grown to $4.8 trillion, representing 16.8% of GDP—the highest percentage in the world. The interactions among various stakeholders, including physicians, hospitals, drug manufacturers, medical device makers, and insurance providers, have resulted in a system that continuously drives up healthcare costs and remains elusive to most.

To the relief of seniors, Medicare, with adequate preparation and timely enrollment, can make healthcare simple and affordable, but the system itself is complex and challenging to navigate. Mistakes in the enrollment process can be costly and, at times, life-threatening.

This article will present a Medicare plan option that offers broad coverage, potentially suitable for those who have prepared well for retirement. It will also discuss three key points for setting up such a plan, along with the consequences of failing to meet them.

Saving for Retirement – How to Practice Future Preference in a Culture Focused on the Present

In his book Tragedy and Hope, Carroll Quigley argues that for a civilization to prosper, two key conditions must be met: individuals delaying gratification and their having unlimited material desires. He refers to the former as “future preference,” which will be the focus of this article in relation to personal finance.

The Role of Future Preference in Early American Culture and its Decline

According to Quigley, early American settlers, many of whom adhered to the Puritan faith, exhibited a strong future preference, which contributed significantly to the development of the United States. The values they cultivated during the 17th century including hard work, self-discipline, and cooperation, continued to shape American culture well into the late 19th century.

However, since the 20th century, cultural shifts have eroded these values. Such changes are evident in literary works like The Sun Also Rises by Ernest Hemingway. The novel centers around a group of American expatriates in Paris who, disillusioned after World War I, spend their time drinking expensive wine day after day and living leisurely. Although the book was published in the 1920s, this culture of “living for the moment” persists today.