Monthly Archives: March 2012

Should You Invest In an Initial Public Offering?

Guest Blog by Vanessa Richardson,

Facebook recently filed for an initial public offering (IPO) to raise $5 billion in its IPO, putting its total valuation at $100 billion. Many investors, both institutional and individual, are drooling over the prospects of buying into the hottest company on the block – for now.

I say for now, because other investors are questioning how profitable the social network is, how fast revenues are growing, and whether the company is worth a $5 billion valuation. (It will be three times more expensive than Google was at its IPO).

Thus the question: should the typical Joe Investor consider investing in Facebook or any other hot company? Continue reading

From the Portfolioist Bookshelf: Rethinking the Equity Risk Premium

Where do we come up with the idea that stocks “should” provide returns substantially greater than bonds?

What are the factors that determine the expected future return of stocks as compared to bonds?

The answers to these questions are at the core of studies into the equity risk premium (ERP) and the CFA Institute has recently published a book of essays written by ERP thought leaders titled, “Rethinking The Equity Risk Premium”.  This book is available in digital format (Adobe PDF) at no cost (or for $0.99 at the Amazon e-bookstore if you want a copy for your e-reader).  The content is dense–this book is 164 pages long. The list of contributors to the volume is impressive and the writing is outstanding, which makes the book a rare “must read” for investment advisors and policy makers. Continue reading

The Big Retirement Shift: From Saving Up to Drawing Down

The financial services industry is in a period of substantial change.  Low interest rates, new regulations and additional scrutiny are changing the landscape.  Perhaps the biggest change is the transition of the first wave of Baby Boomers from working to retirement.  Not only is this generation huge, but its also the first “401(k)” generation. The  introduction of self-directed retirement accounts, such as 401(k) plans, coincided with the “Baby Boomer Generation” (people born between 1946 and 1964) entering their peak saving years.

Beyond the 401(k)

The 401(k) plan was first introduced in 1980.   In 1980, the oldest Boomers were 34 years old and entering the age range at which people really start to save.  Not surprisingly, the financial services industry created a multitude of new financial products to pitch to these people.  Thus began the era of the mutual fund. Continue reading

Beyond VIX: The Outlook for Market Risk

A couple of notable statistics pertaining to current market conditions are VIX and implied volatility numbers for the S&P 500 and other major market indexes.  For those who are not familiar with these measures, they are ways to quantify risk.  Implied volatility is the market’s consensus view of risk.  VIX is an index that tracks very near-term implied volatility.  There is a great deal that we can see in the market by looking at these numbers.

The trailing 3-month volatility of SPY (an S&P 500 ETF) is below 12% and VIX is at 16.3 (16.3%) as I write this.  The trailing 1-year volatility for SPY is 22.7%.  Market volatility in the last several months has been very low.

Now let’s look forward.

There are several major market indexes that are worth watching.  Continue reading

Retirement: Demographics and Destiny

In a recent interview in The Wall Street Journal titled “Bad New for Boomers,” Rob Arnott presents a fairly grim view of the retirement income that investors can expect to generate from their investment portfolios.  His thesis is that aside from all of the economic turmoil that may constrain future earnings growth, there is an additional substantial problem for investors: supply vs. demand.  As the Baby Boomers retire, they will become sellers of equities as they draw down their life savings to provide retirement income.  Having this huge generation steadily cashing out of the market, will increase the balance of sellers vs. buyers of equities and will thereby drive down equity prices.

It is crucial for investors to understand that Continue reading

Financial Services for the Masses

JP Morgan has gotten considerable attention in the press for a recent statement that serving clients with less than $100,000 in assets is unprofitable.  Not surprisingly, one response to this statement has been to frame it in terms of the message that financial institutions just want rich clients and don’t want to spend their time working with the small guy.  The broader story is quite interesting and has long-term implications for both financial services firms and their clients.

Smaller customers (those with less than $100,000 in the bank) are looking less attractive as clients these days for two reasons:

1) Low interest rates mean that a bank makes less money on its deposits.

2) New regulations have capped the fees that banks can charge for a range of services.

One of the persistent themes in the investment advisory business has been Continue reading

Dr. Andrew Lo: ‘Buy and Hold’ Does Not Work Anymore

Dr. Andrew Lo is a thought leader in the world of portfolio management.

The MIT/Sloan School of Management professor and Director of MIT’s Laboratory for Financial Engineering has been widely quoted on the implications of the 2008 financial crisis. One theme that Dr. Lo emphasizes repeatedly is that the risks associated with different asset classes can vary dramatically over time and for this reason, risk must be tracked, forecasted and budgeted.

In a world in which the risk of any given asset class (and therefore, also the risk of any portfolio of asset classes) can change dramatically in a short period of time, a passive buy-and-hold approach may, in fact, result in unacceptable levels of volatility. Continue reading