The Well Tempered Investor

The State of Finance Professionals – A Decade After the PBS Documentary “The Retirement Gamble”

From 1990 to 2007, the size of the finance industry grew at a rate that was 64% faster than that of the entire economy. This rapid expansion of the financial sector, which occurred without proper oversight, played a significant role in triggering one of the most severe economic downturns in history in 2008. The aftermath of this recession left a lasting impact, fostering distrust and resentment among the public towards the finance industry. The documentary made by PBS titled The Retirement Gamble, created a few years after the crisis, depicted the discontented hard-working people who had been sold unsuitable financial products, leaving them in the dark about their investments.

Despite the widespread availability of the internet in the early 2010s, there existed a profound informational asymmetry between finance professionals and the general public. It was a common practice then that investment products used in retirement accounts, such as 401k, as well as in individual brokerage accounts, unbeknownst to investors, had excessively high management fees. Combined with additional fees paid to administrators of these accounts, including financial advisors, the total management cost could exceed 2% of the portfolio value. The journalist in the documentary is shocked to discover how the cost of 2% a year, seemingly a small number, can significantly diminish one’s investment returns in the long run, due to its compounding effect.

Portfolio Rebalancing – The Effects of its Systematic Implementation

Investors buy and sell financial instruments, often influenced by media reports and public sentiment. However, through decades of research, scholars have largely concluded that any information publicly available is already reflected in asset prices, resulting in an expected return to zero at any given point in time. The economist John Maynard Keynes even described perceived information as merely noise. In contrast, professional financial managers distinguish themselves from these “noise traders” by employing periodic portfolio rebalancing to systematize and bring discipline to their investment processes. The question remains: does this approach introduce predictability to investments?

To perform portfolio rebalancing, one needs predefined asset allocation targets, such as 60% stocks and 40% bonds, and the process involves adjusting the portfolio back to these target allocations when it drifts away from them. For example, when the stocks in the portfolio appreciates to 70% at the end of the year, one would sell a portion of it and invest in bonds and bring back the portfolio to the original target. Wealth managers widely recommend this practice suggesting that it allows investors to buy assets when they are undervalued and sell them when they are overvalued, potentially benefiting all investors. The aim of this article is to assess the validity of this presumption, and make a casual examination of portfolio rebalancing and evaluate whether it is suitable for every investor.

Intervening with the Free Market – How California’s Minimum Wage Hike Distorts the Economy

Economists are often concerned with finding an optimal resource allocation where no one can be made better off or worse off, called Pareto-efficiency. Despite the ever-increasing government interventions in the economy since the Great Depression, the forces of the free market have largely determined this allocation in the US, including the prices and quantities of goods and services transacted.

However, allowing the free market to determine economic outcomes inevitably creates winners and losers, and critics have been proposing alternatives to this system. In the field of welfare economics, scholars like John Rawls argues for increasing the welfare of the disadvantaged. Rawls believes that increasing the welfare of the well-off individuals does not increase that of the worse-off individuals, thus society should be concerned only with helping the underprivileged. While it sounds righteous in theory, how feasible is it in practice?

How to Determine if You Can Buy a Home

Buying a home started to be accessible for many Americans in the 1950s with the introduction of the 30-year mortgage. The economic and political dominance of the US in the post World War II era also provided buyers with a favorable environment for homeownership. However, in recent years, it has become increasingly unattainable for many due to the disproportionate rise of home prices relative to incomes. In the current environment, aspiring homeowners must conduct an honest and realistic assessment of their situations, since buying a home exceeding their means can have financially detrimental consequences.

Although homeownership in recent decades has been seen as a common milestone in one’s life, making a decision to buy a home is complex, and can be challenging. It requires a careful consideration of various factors including location, price, interest rate, and monthly mortgage payment, among others. What is evident is that buying a home is no longer for the average person.

Why ETFs Are More Tax-Efficient Than Mutual Funds

One of the important aspects of investing is the impact of tax consequences. When investors sell stocks and funds for profit, they are likely aware that these transactions create taxable events. However, they might not be often aware that fund managers also realize capital gains, which are passed on to investors. This means investors are taxed multiple times from the same fund: when they sell it for gains, and when the manager sells stocks within the fund for gains.

This risk for the increased tax burden arises notably from closed-end mutual funds (henceforth referred to as mutual funds), which are portfolios of stocks which could number in thousands. They settle at the end of each trading day, and the fund company is responsible for managing the buying and selling of stocks within the funds.