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Investment Traps That Even The Smartest People Fall Into (CFA Institute)
Even the smartest investors often fall into investment traps writes Michael Lipper at the CFA Institute. Here are some of the current investment traps he sees.
1. Value – “There are two traps here. The first is that we can mathematically determine the exact true value of something, including securities. The second is not being concerned with the seller’s motivations.”
2. Successful young investors — “Many of today’s enthusiastic investors have only had the experience of the decline and recovery phases of the last five and 10 years. …Enjoy them, perhaps participate, but don’t count on today’s gainers getting you out ahead of time of their collapse; it will be new to them. In other words, it could be a trap.”
3. The book value trap — Many look at this as a measure of investment value. “People tend to forget that the book value they were taught in college or graduate school… is a teaching device, not a measure of reality.” Tied into this is the tendency to overlook human factors.
4. Predictability of the VIX — This is often used as a gauge of fear and current levels show there isn’t a “great deal of price pessimism.” But a contrarian take would be that “this is exactly when a negative surprise could be its most potent.
5. Failure of stock investors to consider bonds — Bond prices tend to be more sensitive to potential bad news than the stock market. “As a stock investor, I am aware that bond prices can be a useful warning device for me… The current preponderance of downgrades in an economy that is meant to be recovering is a cause for one to be cautious about committing new money to the stock market.”
Advisors Aren’t Making Enough Use Of ETFs (Investment News)
Advisors invest a very small part of their clients assets in ETFs, according to a survey by S&P Capital IQ at the ETF Virtual Summit. 50% of respondents said the invested less than 20% of clients’ assets in ETFs. 12% said they invested 60% of clients’ assets or more, reports Carl O’Donnell at Investment News. This is partly because advisors don’t know a lot and only stick to offerings from well established names like Vanguard.
“The survey was not statistically significant, with a sample size of only 150, but Mr. Rosenbluth pointed out that it was taken at the ETF Virtual Summit, which most likely was attended by advisers who were more involved in ETF investing than the average,” O’Donnell reports.
PIMCO Names Four Deputy CIOs (Bloomberg)
PIMCO, the world’s largest bond manager, has named four deputy chief investment officers. The four new deputy CIOs are 1. Mark Kiesel, global head of the corporate bond management group; 2. Virginie Maisonneuve, global head of equities; 3. Scott Mather, head of global fund management; 4. Mihir Worah, head of the real return group. This comes after Mohamed El-Erian announced his exit from PIMCO. “Going forward there will be more focus on strategy and markets rather than policy and these are the people on the front lines of strategy and alpha,” Gross told Bloomberg’s Alexis Leondis.
Today’s Bond Market Environment Is Not Like The Bond Bear Market Of 1981 (The Alliance Bernstein Blog)
Investors are often concerned with how they should approach bonds in a rising rate environment. They often think were seeing a situation similar to the runaway inflation we saw in 1981, or 1994 when we saw a rapid rise in federal funds rate.
But in terms of inflation, “questions around inflation mostly relate to the lack of it, rather than runaway levels of it,” writes Douglas J. Peebles of Alliance Bernstein. As for the rapid rise in rates, he says that “today, the Fed has taken great care to provide highly transparent communications about catalysts for future rate hikes as well as the likely extent and pace of them — none of which were present in the Fed’s communications leading up to 1994’s initial rate hike.”
Instead he thinks this is closer to what we saw in 2003-2006, when “rates rose meaningfully, but slowly — and in response to improving growth over time.” And this is what investors need to remember as they rebalance their portfolios.
Here’s What You Need To Know About MyRA, Obama’s New Retirement Program (Business Insider)
During his State of the Union address, president Obama announced a new retirement savings program called MyRA. “This would be a program of small Roth IRAs with access to a special, safe investment that pays a little better than Treasury bills,” Business Insider’s Josh Barro explained.
Employees don’t have to run or fund the account. And the accounts would be invested in a “security similar to the “G Fund” available to federal employees participating in the Thrift Savings Plan. This fund has all the advantages of short-term Treasury bills (no credit risk or interest rate risk) but pays an interest rate based on the average of outstanding long-term Treasury bond rates.” If the account went over $US15,000, account holders would have to roll the balance over into a private Roth IRA.
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