TIPS versus Nominal Bonds

I’ve been getting lots of questions lately about the merits of owning Treasury Inflation-Protected Securities (TIPS) versus nominal bonds. With that in mind, today I’ll discuss how to determine which is the more appropriate strategy. To begin, we need to recognize there are two ways one can hold TIPS and nominal bonds: purchase the bonds individually or invest in mutual funds/ETFs. When investing through taxable accounts and IRAs, one can do either. However, in corporate retirement plans, such as a 401(k), one is limited to funds.
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Portfolio Pain and the Difficulties of Discipline

Earlier this week, I discussed why it’s so hard to be a disciplined investor, which generally is a prerequisite for being a successful one. Building on this theme, the “Factor Views” section of J.P. Morgan Asset Management’s third-quarter 2018 review provides another example of why successful investing is simple, but not easy.
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Maintaining a Globally Diversified Portfolio

Since the financial crisis of 2008, U.S. equities have earned substantially higher returns than international equities. Ken French’s data shows that the U.S. equity market has earned annualized returns of 15.6 percent per year from 2009 through 2017, while international equities earned 9.9 percent. Such periods inevitably lead some investors to question whether international diversification makes sense. This skepticism is reinforced by the fact that U.S. equities have outperformed international equities over an even longer period. The S&P 500 Index has outperformed the MSCI EAFE Index — its international equity equivalent — since the MSCI EAFE’s inception back in 1970. It’s easy to understand why an investor would believe that such a long period of outperformance must surely mean that U.S. investors should avoid international equities. This is all without mention of the current global equity environment thus far in 2018, where the U.S. equity market has trounced the equity performance of the international developed and emerging markets year-to-date.
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Know Your Risk Inclinations and Investor Personality

In my book, “The Only Guide You’ll Ever Need for the Right Financial Plan,” there’s a detailed discussion on how investors can choose the right asset allocation for them, with the focus being on determining one’s ability (capacity), willingness (tolerance) and need (the rate of return required to achieve a goal) to take risk. To help with issues surrounding the willingness to take risk, risk tolerance questionnaires have become a very popular. Unfortunately, as Joachim Klement showed in his article, “Investor Risk Profiling: An Overview,” published in the June 2018 CFA Institute Research Foundation brief “Risk Profiling and Tolerance: Insights for the Private Wealth Manager,” the “current standard process of risk profiling through questionnaires is found to be highly unreliable and typically explains less than 15% of the variation in risky assets between investors. The cause is primarily the design of the questionnaires, which focus on socioeconomic variables and hypothetical scenarios to elicit the investor’s behavior.”
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Rising Interest Rates and Their Effect on Stock Prices

With a strong economy, investors are becoming even more worried about rising interest rates and the effect they could have on equity (and bond) valuations. So what, if anything, should investors do with their equity portfolios in response to rising rate risk? As always, to answer that question, Larry Swedroe turns to academic evidence and financial theory, rather than some guru’s opinions.
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