The Dangers of Following the Herd We’ve heard it a thousand times before: “Well, I just picked that fund in my 401(k) because my co-workers did too”, or, “Everyone is buying weed stocks. I’m thinking of buying some too”. And the worst of them all: “The market is tanking. I want to sell”. It’s called “herding”. Like most of our innate behaviors, it has helped our species, and others, survive throughout the generations. When faced with a lack of information, we turn to the crowd to see what they’re doing, hoping to find some direction. It’s why penguins line …
Well, That Didn’t Work Out
A Cautionary Tale of “Chasing Returns” Just over five years ago, the New York Times published an article in which the author made the argument – successfully – that professional mutual fund managers cannot beat the market with any consistency or predictability. Old news, right? Yes, if you’ve been reading these blogs. But the article, which took into account the previous five years (March 2009-March 2014), pointed out that two funds had produced consistent, high-level returns during that timeframe, with both funds placing in the top quartile of returns each year. Of 2862 funds, no other funds accomplished that. …
Frequently “Oaked” Questions
You Asked, So We’ll Answer FOQ: They say the “yield curve inverted”? What does that mean? Short: Short-term bonds had higher interest rates than long-term bonds. Long: In particular, last Wednesday morning, the interest rate of the 2-year Treasury note very briefly exceeded the rate of the 10-year note. Think of these notes as CDs at the bank. You’d surely expect to get a higher interest rate from a 10-year CD than a 2-year CD, since you’re locking the money up for so much longer. But for a hot minute, that was not the case. FOQ: Does it matter …
Randomness: Why We Diversify
Can you guess what this represents? This table illustrates 20 years of annual equity returns for developed markets. Each color represents a different country. Each column is sorted top down, from the highest-performing country to the lowest. Here’s how the colors match to the countries: Why is this important? Pick a color in the first column and follow it through to the right. Does any country seem to follow a pattern that gives clues about its future performance? Not at all. But that won’t stop us from trying to find one. It’s in our blood. Psychologists call it the “Gambler’s …