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Poinciana is committed to staying up to date with the latest financial trends and academic research. We have strategic relationships with some of the most preeminent individuals in academia and leverage our relationships to provided best-in-class institutional research for our clients

TIPS versus Nominal Bonds

by PAG on
I’ve been getting lots of questions lately about the merits of owning Treasury Inflation-Protected Securities (TIPS) versus nominal bonds. With that in mind, today I’ll discuss how to determine which is the more appropriate strategy. To begin, we need to recognize there are two ways one can hold TIPS and nominal bonds: purchase the bonds individually or invest in mutual funds/ETFs. When investing through taxable accounts and IRAs, one can do either. However, in corporate retirement plans, such as a 401(k), one is limited to funds.
Earlier this week, I discussed why it’s so hard to be a disciplined investor, which generally is a prerequisite for being a successful one. Building on this theme, the “Factor Views” section of J.P. Morgan Asset Management’s third-quarter 2018 review provides another example of why successful investing is simple, but not easy.
In a June 1999 interview with Businessweek, Warren Buffett is quoted as saying, “Success in investing doesn’t correlate with IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people in trouble investing.”
Since the financial crisis of 2008, U.S. equities have earned substantially higher returns than international equities. Ken French’s data shows that the U.S. equity market has earned annualized returns of 15.6 percent per year from 2009 through 2017, while international equities earned 9.9 percent. Such periods inevitably lead some investors to question whether international diversification makes sense. This skepticism is reinforced by the fact that U.S. equities have outperformed international equities over an even longer period. The S&P 500 Index has outperformed the MSCI EAFE Index — its international equity equivalent — since the MSCI EAFE’s inception back in 1970. It’s easy to understand why an investor would believe that such a long period of outperformance must surely mean that U.S. investors should avoid international equities. This is all without mention of the current global equity environment thus far in 2018, where the U.S. equity market has trounced the equity performance of the international developed and emerging markets year-to-date.
Women continue to fight unique financial and life headwinds in planning for a secure retirement. Larry Swedroe and Wealth Advisor Katie Keary explore the impact of 12 specific challenges that women face, and offer financially empowering solutions to them.
The day has come. Your little baby has grown up and is now ready to leave the nest. He or she has graduated high school and the next big step is awaiting. Whether it’s college, a gap year, a year abroad or any other life adventure lies ahead, this time can be filled with much emotion for you and your child. As departure day gets closer, you’re probably focusing on last-minute shopping lists and feeling overwhelmed with trying to get everything done in time. Of course, you have already visited Walmart, Target and IKEA for the dorm room basics, purchased the new computer (yes, that is a 529 College Savings Plan qualified expense), figured out the move-in logistics, and coordinated with the roommate about who will bring what. Congratulations, you are well on your way. However, you might not be finished just yet. The following are six important tasks you may have overlooked.
In my book, “The Only Guide You’ll Ever Need for the Right Financial Plan,” there’s a detailed discussion on how investors can choose the right asset allocation for them, with the focus being on determining one’s ability (capacity), willingness (tolerance) and need (the rate of return required to achieve a goal) to take risk. To help with issues surrounding the willingness to take risk, risk tolerance questionnaires have become a very popular. Unfortunately, as Joachim Klement showed in his article, “Investor Risk Profiling: An Overview,” published in the June 2018 CFA Institute Research Foundation brief “Risk Profiling and Tolerance: Insights for the Private Wealth Manager,” the “current standard process of risk profiling through questionnaires is found to be highly unreliable and typically explains less than 15% of the variation in risky assets between investors. The cause is primarily the design of the questionnaires, which focus on socioeconomic variables and hypothetical scenarios to elicit the investor’s behavior.”
Is that you? Are you fortunate enough to be in the tiny minority of people who don’t have a financial care in the world? If not, I’ll bet you know that person who, to the best of your knowledge, lacks nothing. You probably even have a picture of them in your mind right now. They’re financially independent. They have all the material possessions they could want, take all the vacations they want, dine wherever they want. They live where they want, in the house that they want, with all the upgrades they want. And they certainly drive the car they want. All earthly goals … CHECK!

Rediscovering the Size Effect

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The first major anomaly to the first formal asset-pricing model, the capital asset pricing model (CAPM), was the size effect. The size effect is the phenomenon that small-cap stocks on average outperform large-cap stocks over time. The size premium is the average annual return achieved by being long small-cap stocks and short large-cap ones.
With a strong economy, investors are becoming even more worried about rising interest rates and the effect they could have on equity (and bond) valuations. So what, if anything, should investors do with their equity portfolios in response to rising rate risk? As always, to answer that question, Larry Swedroe turns to academic evidence and financial theory, rather than some guru’s opinions.
Households that build up more net wealth may be better able to smooth consumption in retirement, and financial literacy enhances the likelihood people will contribute to their retirement savings. Compounding the problem of lower savings is evidence that less financially literate households experience lower risk-adjusted returns.

Tax Planning Basics

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For years it was assumed that tax planning was reserved for the wealthy. While wealthy individuals will see the most benefit from tax planning, with big changes looming for the 2018 tax year, even middle-income earners can reap the benefits of tax planning.  

Basic tax planning starts with your AGI...