Investing Research Articles

Has Modern Portfolio Theory failed to deliver over the past decade because users employ long-term averages for expected returns, volatilities and correlations that do not respond to changing market environments? Do short-term estimates of these key inputs work better? In their May 2012 paper entitled “Adaptive Asset Allocation: A Primer”, Adam Butler, Michael Philbrick and Rodrigo Gordillo backtest… Keep Reading

Does the aggregate trading of retail investors usefully predict future stock market returns? Each month, TD Ameritrade samples the equity market exposures of retail clients and publishes the Investor Movement Index (IMX) as a summary statistic. They calculate IMX via a proprietary methodology as the median bullishness/bearishness score for an equally treated monthly sample of retail… Keep Reading

Do recent reactions of gold price to interest rate-related U.S. economic announcements (rising on rate-suppressing news) mean that gold acts like a bond? In their September 2013 paper entitled “What if Gold is a Bond?”, Claude Erb and Campbell Harvey re-examine the relationship between gold price and interest rates as proxied by U.S. government bond… Keep Reading

Does the conventional wisdom of a declining allocation to stocks throughout retirement really work best? In their September 2013 paper entitled “Reducing Retirement Risk with a Rising Equity Glidepath”, Wade Pfau and Michael Kitces explore alternative stocks-bonds allocations during retirement. They consider retirees planning for annual withdrawals of an inflation-adjusted 4% or 5% of retirement date… Keep Reading

A reader suggested a review of the stock market commentary of Mark Hulbert, editor of the Hulbert Financial Digest, which tracks the recommendations of a wide range of investing newsletters. He is also a regular columnist at MarketWatch. Because Mark Hulbert uses his Hulbert Stock Newsletter Sentiment Index (HSNSI) as a principal quantitative tool in… Keep Reading

Investors typically employ backtests to estimate future performance of investment strategies. Two approaches to assess in-sample optimization bias in such backtests are: Reserve (hold out) some of the historical data for out-of-sample testing. However, surreptitious direct use or indirect use (as in strategy construction based on the work of others) of hold-out data may contaminate its independence…. Keep Reading

Should investors worry that investment strategies available in the marketplace may derive from optimization via intensive backtesting? In the September 2013 update of their paper entitled “Backtest Overfitting and Out-of-Sample Performance”, David Bailey, Jonathan Borwein, Marcos Lopez de Prado and Qiji Zhu examine the implications of overfitting investment strategies via multiple backtest trials. Using Sharpe ratio as… Keep Reading

Which individual stock pickers beat the market? In their September 2013 paper entitled “The Information Content of Investors’ Expectations for Risk and Return”, Thomas Berry and Keith Jacks Gamble examine the performance of the most recent stock picks of members of the American Association of Individual Investors (AAII) who participated in an online survey. They… Keep Reading

Do low-risk bonds, like low-risk stocks, tend to outperform their high-risk counterparts? In their September 2013 paper entitled “Low-Risk Anomalies in Global Fixed Income: Evidence from Major Broad Markets”, Raul Leote de Carvalho, Patrick Dugnolle, Xiao Lu and Pierre Moulin investigate whether low-risk beats high-risk for different measures of risk and different bond segments. They… Keep Reading

How does wine perform as a long-term investment? In the September 2013 version of their paper entitled “The Price of Wine”, Elroy Dimson, Peter Rousseau and Christophe Spaenjers examine the performance of wine as a long-term investment, with focus on the impact of aging. They employ long price histories for five long-established Bordeaux wines constructed… Keep Reading