John Wasik

Curing the curse of the bandwagon effect before the next crisis

Jan 25, 2013 18:08 UTC

CHICAGO, Jan 25 (Reuters) – During a market crisis, when
everyone wants to jump off the ship in the same leaky lifeboats,
that doesn’t bode well for most individual investors, who simply
want to preserve capital.

The safeguard is to move against what behavioral finance
experts call the “bandwagon effect” — when so many investors
follow the same path that they disrupt the traditional
correlation of assets.

This is what has happened when Modern Portfolio Theory (MPT)
– a bedrock of investing that advocates diversifying your
portfolio to temper risk and boost returns — met big
institutional investors who employed the idea on steroids,
plowing money into alternative investments from leveraged hedge
funds to timber.

In his new ebook “Skating Where the Puck Was: The
Correlation Game in a Flat World,” William Bernstein, a money
manager and neurologist, credits the surge of going big with MPT
to David Swensen, the legendary manager of the Yale University
Endowment. His strategy of deploying more than half of the
college’s portfolio in alternative assets such as timber, hedge
funds, private equity and commodities produced a 15.6 percent
annualized return between July 1987 and June 2007, besting the
benchmark S&P 500 by nearly 5 percentage points.

At the time, Swensen’s success upended the ossified standard
practice of 60 percent stocks, 40 percent bond mixes. Seeing
that they could do better, money managers with significant
resources parroted Swensen’s allocations. By the mid-2000s, more
than 800 large endowments and pension funds were mimicking

Disclosure won’t help money fund investors

Jan 22, 2013 18:30 UTC

CHICAGO (Reuters) – The $2.7 trillion money market funds market is in line for new regulations as the Securities and Exchange Commission ponders new rule changes that would give investors a better idea of how much risk they’re taking.

But no matter what happens, the funds will still be relatively safe baskets for short-term cash, though afflicted by paltry yields for the near term.

The biggest change that might come about is increased transparency. The SEC tabled a proposal late last year on a set of rules and now the matter is being reconsidered, although it may not be acted upon until a new, permanent chairman is appointed and one of the empty commissioner’s seats is filled. Another proposal before the Financial Stability Oversight Council may require that managers set aside capital against losses or price funds at the actual net asset value.

Five red flags for municipal bond investors: Wasik

Jan 18, 2013 16:43 UTC

CHICAGO (Reuters) – There is a bubble forming in the municipal bond market, and millions of investors could be impacted if it bursts.

In the coming months, as Congress and the White House wrestle over the next budget, debt ceiling and new sources of revenue, volatility is likely to roil the muni market. Skittish investors had triggered a minor sell-off in December. Yet despite a 1.2-percent loss in the last month, the Barclays Municipal Bond Index gained 6.8 percent overall in 2012.

Munis avoided the chopping block in the last round of fiscal cliff negotiations, but that does not mean they are in the clear. They are still vulnerable in the debt-ceiling negotiations since Washington is looking for new sources of revenue to reduce the federal deficit. No matter how Congress acts, you still need to be cautious. Any uptick in interest rates, or market hiccups, could trigger losses, too.

Mid-cap stocks worth a close look

Jan 14, 2013 17:56 UTC

CHICAGO (Reuters) – Like the middle children they are, mid-cap stocks are often outshined by their mega-cap brethren. The largest two constituents of the S&P 400 Mid-cap Index are Regeneron Pharmaceuticals Inc and Equinix Inc, an information technology firm. Not exactly Apple Inc or Johnson & Johnson.

Yet inattention from the investing world often misses that fact that mid-caps often outperform large companies and are worthy additions to any portfolio. These are generally companies with a market value of from $1 billion to $4 billion but with an outer range of about $13 billion,

Take Ametek Inc, a $9 billion company, which produces electronic instruments for the aerospace industry. It rarely makes headlines, but the company hit a 52-week high on January 4. Overall, the S&P mid-cap index was up almost 4 percent year-to-date through January 11, compared to 3.2-percent return for the large-cap S&P 500 Index over the same period.

The Soul of the S&P 500: Durable stocks over time

Jan 11, 2013 13:03 UTC

CHICAGO (Reuters) – It takes a lot of gumption to buy mongrel stocks at the beginning of the year.

Generally, if you’re looking for stocks with upside potential, picking a beaten-up sector is a good way to find turnaround stories.

Last year’s comeback kid was the housing industry, which has been limping along since the 2008 meltdown. One of the biggest winners was the PulteGroup, the homebuilder that posted negative returns in four out of the past five years through 2011. The company has soared about 169 percent on the rebounding housing market for the past 12 months through January 9 as the market is continuing to favor the sector in 2013.

Three smart money moves for 2013

Jan 7, 2013 16:50 UTC

CHICAGO, Jan 7 (Reuters) – Using the non-courageous power of
hindsight, it’s easy to look back on the previous year and see
where the “smart” and “dumb” money flowed.

The direction of money last year tells a well-worn tale:
When fear dominates, money moves into safer vehicles such as
bonds and money-market funds.

After 2008, you can hardly blame anyone for still wanting to
avoid volatility. But those who retreated mostly to fixed-income
have missed the better part of a bull market that’s been running
since 2009.

Hedging “cliff” volatility might not get you too far

Jan 4, 2013 16:57 UTC

CHICAGO (Reuters) – Once again, “fiscal cliff” mayhem has given investors a furtive look into the unsettling world of market volatility, which will not end with Tuesday’s deal. We will likely see more Tilt-A-Whirl politics in the coming two months as Congress deals with the debt ceiling and budget cuts.

Volatility has long been the enemy of the mainstream investor. It is easy enough to measure and hedge, but short-term gauges and volatility products such as exchange-traded notes can get you into trouble. They do not work effectively for buy-and-hold investors and have to be timed precisely for traders.

The skittish mass psychology of 2011 set the stage nicely for exchange-traded products that track or blunt volatility. After a rough summer of debt-ceiling and euro zone gyrations, the S&P 500 barely eked out a gain.

Playing the wild cards in 2013

Dec 31, 2012 18:05 UTC

CHICAGO, Dec 31 (Reuters) – At this point, most investors
are peering over the fiscal cliff and feeling like Jimmy Stewart
in the classic Hitchcock film “Vertigo.” But if you look beyond
the precipice, there is some solid ground.

For one thing, the U.S. housing market will be better than
most people expect, which bodes well for patient investors
holding onto consumer-sector stocks. Most economists are not
predicting any startling jump in home sales or prices next year,
and they largely have not forecast how a housing rebound will
spill over into the wealth effect of increasing consumer
spending and job creation.

Home foreclosures in November hit their lowest rate in six
years, a trend that is likely to continue, according to
RealtyTrac, an online marketplace of foreclosure properties.

Six ways to optimize your retirement portfolio in 2013

Dec 28, 2012 16:31 UTC

CHICAGO (Reuters) – You may be waiting to optimize your retirement portfolio, thinking that you should know what’s going on in Washington and Europe before you act.

However, there are some changes you can set in motion right now that could make a big difference down the road regardless of what happens with the fiscal cliff, tax changes and Wall Street:

1. Boost your contribution rate

The longer you wait to contribute, the greater return you will need to achieve your goals. Thanks to the compounding effect, the more your contribute, the more you can accumulate when dividends and appreciation are added.

Why you need to gauge your human capital

Dec 21, 2012 15:37 UTC

CHICAGO (Reuters) – The end of the year is a good time to illuminate your personal financial situation in a different way. Instead of focusing exclusively on financial capital – how much money you have accumulated – look at your human capital.

This calculus of human capital, which economists wonkily define as “the net present value of your lifetime earnings,” matters as much to your lifelong financial situation as the size of your nest egg.

When some people gauge their human capital, they find that they are not making enough money and decide to make some changes. That could mean starting a second or third career.