INDEX
401(k) plans, 29, 127, 135–141, 209
403(b) plans, 209
Absolute return hedge funds, 124
Accredited investors, 158, 209
Active investments, 29, 114–115, 123, 209
Advice on investments, tune it out recommendation on, 71–72
in deadly temptations, 73–190
Advisor Perspectives, 42
Age
and asset allocation, 127–128, 130
at death, planning for, 59
at retirement, 53
and risk reduction, 72, 127–128
at start of saving and investing, 51, 60–63
AIG Financial Products division, 40–41
Alpha value of portfolio, 182, 187, 188, 209
Alternative Investment Management Association, 159
Alternative investments, 45–47
Annual percentage rate on loans, 187
deferred income, 39–40
equity-linked, 39
risk of, 40–42
single-premium income, 10, 30, 38–42
variable, 39
Asset, definition of, 209
Asset allocation, 105–118, 209
capital asset pricing model on, 183, 210–211
in constant-mix strategies, 130–132
in diversification myth, 123–124
fees for, 5, 107, 115–117, 121
glide path in, 128–129
of institutional investors, 167, 168–169
Markowitz theory on, 108–112, 115, 117
100 minus your age formula for, 128, 130
rebalancing of, 71, 141–147, 153
services of financial firms for, 113–114, 115–117
style in. See Style allocation target-date funds in, 128
tuning out noise on, 71
and variability of investment performance, 105–107
Asset classes, 29, 72, 107, 112
diversification of, 123–124
Asset-liability models, 209
Asymmetric fees, 162, 209, 216
Australia, historical performance of stocks in, 18
Back-end bias, 160
Backtest, 210
Bakija, Jon, 196
Bank Administration Institute, 100
Barras, Laurent, 80
Basis point, 210
Beating the market temptation, 71, 75–94
in active management, 114–115, 123
anecdotal history of star performers on, 81–84
in day trading, 90–91
in dollar-cost averaging, 147–151
in institutional investments, 169
in long-short equities, 124–125, 158
monitoring of investment performance in, 93–94
in quantitative investment strategies, 172
in random nature of stock market changes, 75–80
statistical analysis of performance in, 87
A. G. Becker & Co., 86
Behavioral economics, 210
Behavioral finance, 210
Bernstein, William, 20
A. M. Best rating, 41
Beta strategies, 174
Beta value of portfolio, 182, 210
Bias, 210
back-end, 160
selection, 160
The Big Investment Lie (Edesess), 77, 83, 86, 164
Bodie, Zvi, 53
Bogle, John, 82–83
corporate. See Corporate bonds
in exchange-traded funds, 38, 43–44
expected rate of return on, 13–14, 14t, 16–17
individually purchased, 30, 37–38
international, 30
laddering of, 38, 61–63, 67–68
percentage in portfolio, 106, 107, 141–147. See also Asset allocation
and rebalancing portfolio, 141–147
in two-asset portfolio, 61–63, 67–68
yield of, 16
and market-to-book value ratio, 117
Brealey, Richard A., 75
Brokerage, 210
directed, 212
Brokers
discount, 212
full-service, 214
Buffet, Warren, 56
Buy-and-hold strategy, 79, 115, 210
compared to rebalancing, 145–146
California Public Employees’ Retirement System, 169
Call option, 210
Canada, historical performance of stocks in, 18
Capital asset pricing model, 183, 210–211
Capitalization weighting, 175–176, 177, 178–180, 211
Carhart, Mark M., 80
Cash equivalents in asset allocation, 106, 107
Cash flow
with insurance products, 38–40
laddering of bonds for, 38, 61–63, 67–68
in retirement. See Retirement income
Cass Business School study, 179–180
Catastrophe bonds, 46
Charting, 87–91
China, historical performance of stocks in, 53
City University London Cass Business School, 179–180
Closet index portfolio, 122, 123, 133
Coin toss results, 83, 88, 204n18
Cole, Adam, 196
Collateralized debt obligations, 40–41, 199
Commissions, 211
Computer models in quantitative investment strategies, 172–174
Concentration of investments
compared to diversification, 65–66
in corporate bonds, 38
Constant-mix strategy, 127
compared to target-date funds, 127, 130–132, 131t, 133
Consultants, 211
to institutional investors, 166–169
Continuously compounded rate of return, 188, 189
Contracts
equity-linked, 213
rate of return specified in, 15–16
Cootner, Paul, 78
Corporate bonds, 37
concentration of investment in, 38
expected rate of return, 14t, 17
Correlation, 211
of securities in Markowitz theory, 108–112
Covariance, 211
Cowles, Alfred, 77
Cowles Report, 77–78
Credit default swaps, 40–41, 199
Credit intermediation, 1
DALBAR reports, 97–103
Data
mining of, 211
overfitting of, 80
Da Vinci, Leonardo, 9
Deadly temptations in investing, 73–190
Debt, 211–212
and collateralized debt obligations, 40–41, 199
and equity ratio, 212
Deferred-income annuities, 39–40
Defined-benefit pension plan, 136, 212
Defined-contribution pension plan, 136, 212
Derivatives, 163
“Determinants of Portfolio
Performance” (Brinson, Hood, and Beebower), 105–106
Directed brokerage, 212
Direct investments, 46
Discount brokers, 212
Discount rate, 212
Diversification, 43, 119–126, 212
alternative investments in, 45–47
compared to concentration, 65–66
fund of funds in, 164
individually purchased stocks and bonds in, 37–38
maximum, 115
modern portfolio theory of, 119–121
rate of return in, 43–44
risk in, 43–44, 108, 111, 119–120
in style or asset class, 123–124
tuning out noise on, 71
world stock index funds in, 33–34
Dividends, 212
taxes on, 60
Dollar-cost averaging, 147–151, 148f, 153, 212
compared to lump-sum investing, 149–151, 150t
Dollar-weighted rate of return, 212
compared to time-weighted rate, 100–102, 101f, 102f
Domestic bonds, 30
Domestic equity index funds, 9–10, 29
in combination with world stock index funds, 34–35, 36, 58
expense ratios in, 34–35
Domhoff, G. William, 193–194
Don’t Count on It (Bogle), 83
Dow Jones Industrial Average, 79, 213
Down and Out in Beverly Hills (movie), 156
Earnings, 213
Econometrica journal, 77
Economic downturn (2007-2009), 21, 129, 189, 191, 198–199
Edesess, Michael, 77, 81, 85–87, 156, 164
Efficient frontier, 108–110, 109f, 111, 112, 113, 118, 120, 213
Efficient markets, 76, 79, 185, 213
Endowment funds, 213
management of, 166–168
Equal weighting, 176, 179, 213
capitalization of, 175–176, 211
and debt/equity ratio, 212
in domestic equity index funds, 9–10, 29, 34–35, 36, 58
individually purchased, 30, 36–37
percentage in portfolio, 106, 107, 141–147. See also Asset allocation
random movements in price changes, 75–80
rate of return on, 14, 14t, 17–20
and rebalancing portfolio, 141–147
risk premium for, 18
value stocks, 175, 177, 183–185, 219
in world stock index funds. See World stock index funds
Equity-linked contracts, 213
Erb, Claude B., 152
E*TRADE, 34
Europe, historical performance of stocks in, 18
EVestment Alliance LLC, 186
Exchange-traded funds, 30, 213
compared to mutual funds, 35–36, 213
expense ratios in, 34–35
international, 10, 29–30, 33–36, 115. See also World stock index funds
number of products available, 27
risk and rate of return, 43–44, 56
of 401(k) plans, 140
of individually purchased stocks, 37
of mutual funds, 35, 36, 45, 79, 122
of socially responsible investments, 45
of star performers, 82
of Fama and French, 180, 183–185
of Goldman Sachs, 185–186
regression analysis of, 180–185
False Discovery Rate test, 80
Fama, Eugene, 180
Fama and French factor model, 180, 183–185
Federal income taxes. See Taxes
Federal Reserve, 163
Fees
for asset allocation advice, 5, 107, 115–117, 121
commissions in, 211
of consultants to institutional investors, 166
cumulative cost of, 95–96
in day trading and at-home trading, 91
of exchange-traded funds, 35–36
and expense ratios, 34–35. See also Expense ratios
in 401(k) plans, 139–141
in funds-of-funds, 164
in hedge funds, 126, 133, 159, 161, 162–163, 164
in individually purchased stocks, 37
for institutional investors, 166, 169
in insurance products, 39
load, 215
of mutual funds, 35–36, 78–79, 122, 193
performance incentive, 209, 216
as predictive of performance, 80, 86, 155
and profits in financial industry, 2–6, 191–200
in target-date funds, 127
and transaction costs, 219
in world stock index funds, 34–35
Fidelity Capital Fund, 83
asset allocation services of, 5, 107, 113–114, 115–117
cumulative cost of fees paid to, 95–96
DALBAR reports on investment performance of, 97–103
tuning out noise about, 72
Financial Analysts Journal, 105, 117, 118
Financial crisis (2007-2009), 21, 129, 189, 191, 198–199
Financial industry, 1–9, 191–200
increasing complexity of products and services in, 198–199
invisible squeeze on, 191–200
misinformation and deception in, 8
political influence of, 191, 193
product and price confusion in, 3–5, 8, 28, 192–193
rise of superrich in, 193–198
silo effect in, 6–7
systemic risk in, 20–21, 191, 193, 198–199
use of term, 1–2
Financial planners, 214. See also Financial advisors
Financial Times, 147, 159, 160
Finland, historical performance of stocks in, 18
Fitch rating, 41
Forbes, 82
Foundation funds, management of, 166–168
401(k) plans, 29, 127, 135–141, 153, 209
expense ratios of, 140
fees in, 139–141
problems with maximum funding of, 135–141
risk in, 136–137
and target-date funds, 127
tax deductions for contributions to, 137–138, 139
403(b) plans, 209
France
government inflation-protected securities in, 33
historical performance of stocks in, 18
French, Ken, 180
Full-service brokers, 214
Fundamental indexing, 176–177, 180, 214
fees in, 164
performance of, 165
Future performance of investment
expected rates of return in, 13–20, 14t
and look only forward rule, 49–69
prediction of. See Prediction of future performance
Gains (capital gains), 60, 211
Germany, historical performance of stocks in, 18
“Getting by” investors, 10, 11–12
one-asset portfolio for, 57–58
Global Alpha hedge fund, 165
Global financial crisis (2007-2009), 21, 129, 189, 191, 198–199
Global government inflation-protected securities, 32–33
Global stock index funds. See World stock index funds
Gold, investing in, 71, 151–153
Goldberg, Rube, 166–167
“The Golden Dilemma” (Erb), 152
factor model of, 185–186
Government inflation-protected securities (GIPS), 9, 29, 30–33, 43
global diversification in, 32–33
safety of, 50
Treasury inflation-protected securities as. See Treasury Inflation-Protected Securities
in two-asset portfolio for well-off investor, 53–57, 59–68
Greenwich Associates, 172
“The Growth of Modern Finance” (Greenwood and Scharfstein), 1
Growth stocks, 214
Hamilton, William Peter, 78
Harvard University, 161
Harvey, Campbell R., 152
The Hedge Fund Mirage (Lack), 159
Hedge funds, 45–46, 157–165, 170, 214
absolute return, 124
biases and errors in reports on, 160
in diversification myth, 124–126, 133
fees in, 126, 133, 159, 161, 162–163, 164
in fund-of funds, 163–165
long-short equity, 124–126
number of products available, 27, 157
performance of, 159–160, 161, 165
Hedging, 214
Heim, Bradley, 196
Historical performance, 14t, 15, 18, 49–50
charting of, 87–91
of dollar-cost averaging, compared to lump-sum investing, 150t, 150–151
of hedge funds, 159–160
lack of correlation to future performance, 49–50, 84–87, 177
of mutual funds, 78–79, 80, 84–85, 125–126
random movements of price changes in, 75–80
in rebalancing, 145–146
SEC on predictive value of, 85
of small stocks, 179–180, 186–189
of Standard & Poor’s 500 index, 103, 103f
of star performers, 81–84
in TIPS/global stock index combination, 54t, 55–56
of world stock index funds, 14t, 18, 53, 55–56
Holding period return, 188, 189
Incentive fees, 216
Income
and categories of investors, 10–12
in finance industry, 193–198
in retirement. See Retirement income
single-premium income annuities, 10, 30, 38–42
taxes on. See Taxes
based on specialized indexes, 174–180
capitalization-weighted, 175–176, 177, 178–180, 211
domestic, 9–10, 29, 34–35, 36, 58
exchange-traded, 35–36
in fundamental indexing, 176–177
of institutional investors, 169
international stocks in. See World stock index funds
mutual funds in, 35–36
performance of, 178
style, 116
total market, 116, 118, 120–121, 123
Indirect investments, 28–29
Individual Development Accounts, 13
Individually purchased stocks and bonds, 30, 36–38
Inflation
calculating rate of, 32, 202n2
gold investment as hedge against, 71, 151–153
government inflation-protected securities, 9, 29, 30–33. See also Government inflation-protected securities
rate of return adjusted for, 13, 14t. See also Real rate of return
Insider trading, 89
Institutional investors, 10–11, 158, 170
alternative investments of, 46
consulting to, 166–169
definition of, 215
hedge fund investments of, 158, 163–164
index funds of, 174
Insurance industry, 1
rating of companies in, 41–42
Insurance products, 38–42
guarantee limits in, 42
risk of, 40–42
single-premium income annuities, 10, 30, 38–42
term life insurance, 10, 30, 38–42
Interest payments, taxes due on, 60
International bonds, 30
International government inflation-protected securities, 32–33
International stock index funds. See World stock index funds
Investment advisors, 215
Investment managers, 215
of pension, endowment, or foundation funds, 166–169
selection of, 167–168
of value stocks, 175
Investment performance, 215. See also Performance of investment
Investors
average, DALBAR report on returns of, 98–99
categories of, 10–12
“getting by,” 10, 11–12, 57–58
institutional, 10–11, 215. See also Institutional investors
reasonably well-off, 10, 11, 51–57, 59–68
superrich, 10–11, 21. See also Wealthy investors
iShares, 34
Italy, historical performance of stocks in, 18
Japan, historical performance of stocks in, 18, 53
Jensen, Michael C., 79
Jones, Alfred Winslow, 124, 158
Journal of Finance, 108
Journal of Financial Economics, 186–187
Journal of Portfolio Management, 142
Kitces, Michael, 99
Laddering of bonds, 38
in two-asset portfolio, 61–63, 67–68
Large value funds, 116
Least-squares fit, 181, 181f, 182f, 215
Leverage, 215
Life and Health Guaranty Association, 42
Life insurance
risk of, 40–42
Liquidity, 215
Load, 215
and no-load mutual funds, 35
Long-short equities, 124–126, 158, 215
Long-Term Capital Management hedge fund, 163
Look only forward rule, 49–69
Low income population
federal incentives for saving and investing, 13
as struggling investors, 12
Lump-sum investing, compared to dollar-cost averaging, 149–151, 150t
MacKillop, Scott, 187
Malkiel, Burton, 77
Managers of institutional funds, 166–169
selection of, 167–168
Market average, 215–216
Market-to-book value ratio, 117
Market weighting (capitalization weighting), 175–176, 177, 178–180, 211
Markowitz, Harry, 108
on asset allocation, 108–112, 115, 117
on diversification, 119–120
on risk and rate of return, 109–110, 120
laddering in, 38, 61–63, 67–68
Mean-variance optimization, 216
Metropolitan Life, 41
Miller, Bill, 81–82
Miller, Gary, 187
Miller, Merton, 79
Modern portfolio theory, 65–66, 119–121, 216
capital asset pricing model in, 183
risk-adjusted performance in, 146
Modern scientific financial theories, 171–190. See also Scientific financial theories
Money managers. See Investment managers
Monitoring of investment performance, 72, 93–94
Moody’s, 41
Morningstar Inc., 122, 173, 186
Mortgage securities
overvaluation of, 165
Multi-factor models, 180–186, 214
compared to exchange-traded funds, 35–36, 213
in diversification, 121–123, 133
expense ratios of, 35, 36, 45, 79, 122
fees of, 35–36, 78–79, 122, 193
historical performance of, 78–79, 80, 84–85, 125–126
no-load, 35
number of products available, 27
risk of, 43–44
socially responsible, 45
star performers in, 82–83
target-date, 218
time-weighted and dollar-weighted measures of performance, 100–102
Mutual of Omaha, 41
Myers, Stewart C., 75
National Bureau for Economic Research, 195
National Organization of Life and Health Guaranty Associations, 42
New York Times, 80
New Zealand, historical performance of stocks in, 18
Nixon, Richard, 152
Nobel Prize in economics, 78, 108
No-load mutual funds, 35
Nominal dollars, 13
in income annuities, 38–42
Nominal rate of return, 13, 14t
in two-asset portfolio for well-to-do investor, 54t, 54–55
Norway, historical performance of stocks in, 18
One-asset portfolio, 57–58, 68
Opinions on investments, tune it out recommendation on, 71–72
in deadly temptations in investing, 73–190
of institutional investments, 167
mean-variance, 216
tuning out noise on, 71
call option, 210
Osborne, M. F. M., 78
Overfitting of data, 80
Passive investment, 28–29, 114–115, 216
Past performance. See Historical performance
Paulson, John, 164–165
Pellegrini, Paolo, 165
Pension funds, 136, 166–169, 216
in defined-benefit plan, 136, 212
in defined-contribution plan, 136, 212
fund-of-funds investments of, 165
hedge fund investments of, 157–158, 165
management of, 166–169
Performance incentive fees, 216
Performance of investment, 215
in absolute return funds, 124
asset allocation affecting variability in, 105–107
beating the market in, 75–94. See also Beating the market temptation
in buy-and-hold policy, 79
charting of, 87–91
DALBAR reports on, 97–103
in day trading, 90–91
in dollar-cost averaging, 147–151
Fama and French studies of, 183–185
fees as indicator of, 80, 86, 155
in fund-of-funds, 165
in Goldman Sachs funds, 186
in hedge funds, 159–160, 161, 165
historical. See Historical performance
in index funds, 178
in long-short equities, 124–126
and look only forward rule, 49–69
in Markowitz theory, 108–112, 120
momentum effect in, 92–93, 184
prediction of. See Prediction of future performance
in quantitative investment strategies, 172–174
rate of return in. See Rate of return
on investment in rebalancing, 145–147
reversion to the mean in, 92–93
in small stocks, 179–180, 183–189
in Standard & Poor’s 500 index, 103, 103f
of star performers, 81–84
time-weighted and dollar-weighted measures of, 100–102, 212, 218
in value stocks, 183–185
Philippon, Thomas, 195, 196, 197
Piketty, Thomas, 196
Portfolio
alpha value of, 182, 187, 188, 209
asset allocation in, 105–118. See also Asset allocation
avoiding temptations in advice on, 73–190
core investment products in, 9–10, 27–47
diversification of. See Diversification
efficient frontier of, 108–110, 111, 112, 113, 118, 120, 213
for “getting by” investor, 57–58
index or closet index, 122, 123, 133
of institutional investors, 167, 168–169
looking forward to future performance of, 49–69
modern portfolio theory of. See Modern portfolio theory
optimization of. See Optimization
precise calibration of, 105–118
in quantitative investment strategies, 172–174
rebalancing of, 71, 141–147, 153
risk and return of. See Risk and rate of return
risk of whole portfolio, 108
simplifying options in, 27–49
style allocation in. See Style allocation
tuning out noise about, 71–72
variability in performance, 105–112, 120
for well-off investor, 51–57, 59–68
“Portfolio Selection” (Markowitz), 108
Portfolio X-Ray program, 122
Prediction of future performance, 75–94
beating the market in, 75–94
charting in, 87
in day trading, 90–91
fees as factor in, 80, 86, 155
limitations of historical performance in, 49–50, 84–87, 177
in long-short equities, 124–126
in Markowitz theory, 108–112
momentum effect in, 92–93
Price confusion, 3–4, 5, 8, 28, 192–193
with insurance products, 39
Price/earnings ratio, 217
Principal Financial Group, 41
Principles of Corporate Finance (Brealey and Myers), 75
Product confusion, 4–5, 28, 192–193
with insurance products, 39
Profits in financial industry, 2–6, 191–200
in product and price confusion, 3–5, 8, 192–193
and rise of superrich, 193–198
Prudential Insurance Company, 41
Quadratic programming, 110
Quantitative Analysis of Investor Behavior, DALBAR report on, 87–93
Quantitative investment strategies, 172–174
RAND Corporation, 110
The Random Character of Stock Market Prices (Cootner), 78
A Random Walk Down Wall Street (Malkiel), 77
Rate of return on investment, 12–20, 217
in absolute return funds, 124
asset allocation affecting, 105–107
beating the market in, 75–94. See also Beating the market temptation
in concentration of investments, 65–66
continuously compounded, 188, 189
contract information on, 15–16
DALBAR reports on, 97–103
in dollar-cost averaging, 147–151
in fund-of-funds, 165
in Goldman Sachs funds, 186
in hedge funds, 159–160, 161, 165
historical. See Historical performance
holding period return in, 188, 189
inflation-adjusted, 13, 14t. See also Real rate of return
in long-short equities, 124–126
in Markowitz theory, 108–112, 120
methods in calculation of, 187–189
nominal, 13, 14t. See also Nominal rate of return
prediction of. See Prediction of future performance
rebalancing affecting, 145–147
and risk. See Risk and rate of return
in small stocks, 186–189
for star performers, 81–84
in Treasury Inflation-Protected Securities, 16–17, 33, 54–55, 56
in world stock index funds, 14t, 18–20, 33, 54–56, 64–65
Rationality, 217
Real dollars, 13
in income annuities, 38–42
Real estate investment trusts, 30, 44, 217
historical average, 15
in two-asset portfolio for well-to-do investor, 54t, 54–55
Reasonably well-off investors, 10, 11
two-asset portfolio for, 51–57, 59–68
compared to buy-and-hold strategy, 145–146
rate of return in, 145–147
tuning out noise on, 71
Regression analysis, 180–189, 217
in Fama and French studies, 183–185
least-squares fit in, 181, 181f, 182f
of small stock performance, 187, 188–189
Regression toward the means, 217
Retirement income
in constant-mix strategy, 130–132
401(k) plans for, 135–141
for “getting by” investors, 11–12, 57–58, 68
hedge funds for, 157–158
pension funds for, 136, 166–169. See also Pension funds
rebalancing affecting, 143–144
target-date funds for, 126–132
taxes on, 59–60
two-asset portfolio for, 54–57, 60, 61, 66–68
for well-off investors, 11, 53, 54, 60, 61, 63, 66–68
Return. See Rate of return on investment
Reversion to the mean, 92–93
Risk, 119–133
assessment of, 217
and asset allocation, 105
in concentration of investments, 65–66
diversification of, 43–44, 108, 111, 119–120
of equities, 17–18
in 401(k) plans, 136–137
in gold investments, 152
of insurance products, 40–42
and rate of return. See Risk and rate of return
systemic, in global financial system, 20–21, 191, 193, 198–199
in target-date funds, 129, 132, 133
of TIPS, 31–32
of whole portfolio, 108
Risk-adjusted performance, 68, 146
alpha value in, 182, 187, 188, 209
definition of, 217
of small stocks, 187
Risk and rate of return, 43–44, 50–51, 217
adjustment of. See Risk-adjusted performance
factor analysis of, 183–184
individual preferences for, 63–65, 66, 67
in Markowitz theory, 109–110, 120
in two-asset portfolio for well-off investor, 53–57
Robertson, Julian, 82
Rules of investing, 23–72
look only forward, 49–69
simplify your options, 27–49
tune out noise, 71–72
Russia, historical performance of stocks in, 53
Saez, Emmanuel, 196
Samuelson, Paul, 76
Scaillet, Olivier, 80
Schwab Corporation, 34
Schwert, G. William, 79–80
Scientific financial theories, 171–190
factor models in, 180–186
index funds in, 174–180
quantitative investment strategies in, 172–174
regression analysis in, 180–189
tuning out noise on, 72
Securities, definition of, 218
Securities and Exchange Commission, 49, 85
Securities industry, 1. See also Financial industry
Seeding of hedge funds, 159, 161–162
Selection bias, 160
Seo, John, 45–46
Sharpe, William F., 78, 115, 120, 183
Short sales, and long-short equities, 124–126, 158
Silo effect, 6–7
Simplify Wall Street portfolio, 9–21, 193, 200
with two assets, 54
Simplify your options, 27–49
benefits of, 24
core investment products in, 9–10, 27–47
Single-premium income annuities, 10, 30, 38–42
Small stocks, performance of, 179–180, 183–189
Fama and French studies on, 183–185
Socially responsible investments, 44–45, 218
Society for Human Resource Management, 140–141
scientific financial theories as, 173, 177, 178, 185, 189, 190
of wealthy investors, 72, 155–170
Soros, George, 82
South Africa, historical performance of stocks in, 18
SPDRs, 34
Spurgeon, Charles Haddon, 73
Standard deviation, 218
Standard & Poor rating of insurance companies, 41
Standard & Poor’s 500 index, 150, 218
average investor compared to, 103, 103f
as capitalization-weighted, 176
star performers compared to, 81–82
State Street SPDRs, 34
Statistical analysis of investment performance, 87
on rate of return, 187–188
regression analysis in, 180–189, 217. See also Regression analysis
Stock market, 218
random changes in prices on, 75–80
star performers on, 81–84
Stocks. See Equities
dollar-cost averaging strategy for, 147
Style allocation, 116, 117, 120–121
definition of, 218
in diversification myth, 123–124
of institutional investors, 167, 168–169
Subprime mortgage securities, 11, 21, 198
Superrich in financial industry, 193–198
Superrich investors. See Wealthy investors
Sweden, historical performance of stocks in, 18
Switzerland, historical performance of stocks in, 18
Target-date funds, 126–132, 133, 218
compared to constant-mix strategy, 127, 130–132, 131t, 133
fees in, 127
Taxes, 59–60
on capital gains, 60
and credits for investments, 13
deduction for 401(k) contributions in, 137–138, 139
TD Ameritrade, 34
Temptations in investing, 73–190
controlling risk, 119–133
precisely calibrating portfolio, 105–118
trusting professional expertise, 95–104
using modern scientific financial theory, 171–190
using strategies of wealthy and sophisticated investors, 72, 155–170
using strategies that always work, 135–153
Term life insurance, 10, 30, 38–42
Time-weighted rate of return, 218
compared to dollar-weighted return, 100–102, 101f, 102f
Timing of investments
company news as basis of, 89–90
and dollar-weighted rate of return, 100–103
TIPS. See Treasury Inflation-Protected Securities
Tobin, James, 115
Tomlinson, Joe, 42
Total market index funds, 116, 118, 120–121, 122, 123
Tracking error in asset allocation, 142, 168
Trading volume, 219
Transaction cost, 219
Treasury bonds, 143
expected rate of return on, 14t, 16–17
Treasury Inflation-Protected Securities (TIPS), 9, 29, 31–32, 33
definition of, 218–219
percentage in portfolio, 54t, 54–55, 56, 64
rate of return on, 16–17, 33, 54–55, 56
taxes on, 60
in two-asset portfolio for well-off investor, 53–57, 59–68
Trusting expertise of others temptation, 95–104
Tsai, Gerald, 83
Tune out noise, 71–72
of deadly temptations in investing, 73–190
Turnover, 219
Two-asset portfolio, 51–57, 59–68
percentage of assets in, 54t, 54–55, 56, 64
risk and return preferences in, 63–65, 66, 67
taxes on, 59–60
United Kingdom
government inflation-protected securities in, 32–33
historical performance of stocks in, 18
United States
domestic bonds in, 30
domestic equity index funds in, 9–10, 29, 34–35, 36, 58
government assistance to AIG, 41
historical performance of stocks in, 18
tax policies in. See Taxes
Treasury bonds in, 14t, 16–17, 143
Treasury Inflation-Protected Securities in. See Treasury Inflation-Protected Securities
United States Securities Act (1933), 158
Fama and French studies on performance of, 183–185
Variance, 219
Volatility, 219
Wall Street, 1
Wall Street Journal, 78, 129, 132, 173
Wealth in finance industry, 193–198
Wealthy investors, 10–11, 21, 194
hedge funds of, 157–163, 163–164
sophisticated investment strategies of, 72, 155–170
two-asset portfolio for, 51–57, 59–68
Wermers, Russ, 80
Why I Left Goldman Sachs: A Wall Street Story (Smith), 4–5
Working, Holbrook, 78
World stock index funds, 10, 29–30, 33–38, 43, 115
in combination with domestic equity index funds, 34–35, 36, 58
in combination with TIPS, 53–57, 59–68
expense ratios in, 34–35
for “getting by” investor, 57–58
historical performance of, 14t, 18, 53, 55–56
in one-asset portfolio, 57–58, 68
percentage in portfolio, 54–55, 56
rate of return, 14t, 18–20, 33, 54–56, 64–65
taxes on, 60
in two-asset portfolio for well-off investor, 53–57, 59–68
utility function of, 64
Yield of bonds, 16