So A Computer Walks Into a Bar...

AI is the future. Everything we read says it is so. AI will soon be ubiquitous, from our refrigerators, to cars, to the most complex machines. One naturally wonders, what can AI not do – at least, not yet?

Computers have difficulty with humor, and similar language aspects that require one to “know about the world”, as this excellent WSJ Review article puts it. It is difficult to program a computer to understand sarcasm, as much of sarcasm comes from tone and understanding the context of a situation. It seems like computers will get there some day, but they’re not there yet. In order to do so, researchers used the most sarcastic website on the internet – Reddit – to feed examples of sarcasm to computers, to train them.

I look forward to a few years from now, when the Alexa in my kitchen will be more witty – maybe even in several languages!

Man Versus Machine - Will Passive Indexing Impact the Market?

As investors continue to pull money out of active funds and into passive funds, it is worthwhile to think about what the effect is on the markets. Without active investing, the market would not exist, as there would be nothing for indexed funds to follow. So, active investing will be around to some degree forever - but where is the breaking point? 

As larger companies grow larger and buy smaller companies, the number of publicly traded companies shrinks, as companies are going public more slowly than public companies are being bought. This will make active investing more difficult, as there are fewer choices to invest in. This Barron's article discusses the impact that passive investing has had on the market so far, and the expected continuing effects. 

Firm governance has changed significantly as passive investing has become more popular. Firms such as Vanguard and State Street own a significant percentage of companies through their passively-managed funds, and generally tend to vote with management. Although this is not always the case, it makes it more difficult for shareholders to have their voices heard on important issues. Vanguard owns over 6% of the S&P market cap. 

I believe in both passive and active management. I believe in passive indexing for efficient markets, such as US and developed large-cap markets. I believe in an active approach for those markets that are less efficient, such as fixed income and alternatives. I tend to invest in the companies that I know - which is definitely a biased approach - but it has worked so far. An avid TJ-Maxx shopper, I understand how their business model is so successful, because I want those deals. As a bi-monthly Costco shopper, I understand why the parking lot is packed before the doors have even opened on Sunday morning. So, I enjoy investing in those companies that I understand, too. 

Overall, the most important thing is to have a diversified portfolio, and to at least put cash to work in this market that never seems to go down. 

What is the real significance of market anomalies?

A recent study has come out that postulated that most market anomalies, ie, small-cap stocks outperforming large-cap stocks, are either too small to matter, or have already been exploited and so are no longer valid. The existence of market anomalies does not make sense, in theory, for efficient markets, because the price of a security is likely to be close to its intrinsic value. This is a reason why it is so difficult for active managers to outperform on a long-term basis, both before and after fees. If the anomaly exists, it is likely that multiple algorithms will detect it, and the anomaly will quickly be exploited and cease to exist. Read on to determine what the impact of some so-called anomalies is for smart-beta ETFs.

The Business-School Boondoggle

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WSJ April 21, 2017

This weekend amidst studying for the Level III CFA Exam, I had a rare moment to peruse the Review section of the Wall Street Journal. I came upon this article regarding MBA programs - although it used the example of Harvard, and HBS (Harvard Business School) has undoubtedly had a great impact on Wall Street and the world, the implications the article conveyed are applicable to any business school program.

I was drawn to this article because I will begin my MBA at the University of Chicago Booth School of business this September, and was curious to learn what this book, "The Golden Passport," could teach me.

Essentially, the author argues that business schools try and fail to teach good values to their students. They pretend to teach ethics and to imbibe goodwill into their students, to do what they are passionate about, such as working for a non-profit or using their newfound knowledge for help others, but in the end, people go to business school for one reason - to earn more money afterward. Therefore, they are not interested in working in fields that are low-paying. 

"As the economic system veers toward destabilizing levels of inequality, [Mr. McDonald, the author] observes, the high priests of Harvard serve up reckless platitudes about the impeccable justice of the marketplace. Their sacred spreadsheets have all the answers and yet nothing to say when powerful business interests, for instance, promote deregulation schemes that privatize profits and socialize losses."

Learning to love intelligent machines

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Wall Street Journal - 4/14/17

I thought this article about getting to love machines was right on point. I know so many people who are slow to adapt to technology, who say, "I wish I could go back to the old way!" - but that won't work. Think about all of the things that machines can do for us now - especially in healthcare. Without the advances of technology, we would be in an uncivilized society, dependent upon the civilization with the most advanced technology to grow and learn. 

Funds that take into account irrational investors

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Barron's 4/8/17

A portion of the third Chartered Financial Analyst exam is dedicated to the study of behavioral economics. Behavioral economics attempts to explain how investors actually think and make investment decisions, instead of how a rational person with perfect information makes decisions (the traditional finance approach). 

I love when I can connect the dots to what I am studying to something relevant in the real world, and this is such a situation. This Barron's article discusses funds that make investment decisions based on investor's inherent biases! There really is a fund for everything now. 

One of the biases discussed in the article is anchoring. Anchoring occurs when an analyst or investor becomes anchored to an initial viewpoint, and does not sufficiently update this viewpoint when given new information. It is an example of a cognitive bias - one that is based in faulty reasoning or insufficient information. The other type of bias is an emotional one - for example, endowment bias, which occurs when an investor believes that a security is special simply because it is owned. (For example, "Oh, I could never sell that stock - I inherited it from my mother!)

Read this article to discover how several managers are attempting to exploit the biases we know exist.

Barron's List of Best Online Brokers for 2016

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Each year, Barron's publishes its ranking of the best online brokers. Barron's uses many criteria, such as quality of research, commissions, and customer service. It even ranks brokers based on how often one trades - which, for most people, is not very often. It also ranks brokers based on if one uses options or not. 

I have used Charles Schwab as my broker for several years, and while their commissions are some of the highest, their customer service is excellent, so I don't mind paying the extra dollar or two for my semi-annual trades. 

Fidelity won this year, and I especially like this part of the article: "Fidelity has made a concerted effort to go after the millennial market, including repackaging educational content onto its mobile site. There are 12 programs available now, with more being added monthly. The Planning and Guidance center is designed to allow customers to focus on the future, planning for any kind of goal from college tuition to retirement to taking a long vacation. Fidelity Go, the firm’s robo-advisory service, is clearly aimed at the younger set." 

Whether you are looking for a broker for the first time or looking to make a change, check out the latest rankings - Barron's knows its brokers!

How the Market Grew Passive

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An interesting synopsis on which fund managers are/were the largest actively managed and which ones have the most passively managed funds. Food for thought, if you are either an active or passive investor! 

A Follow Up to my Tirade Against Target Date Funds

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As a follow-up to my recent article on Target Date funds, here is an article from last weeks WSJ that asks the important question - if you do have target-date funds, what should you do with them after you retire? 

A very important quote from the article: "...Studies have shown that the standard practice of withdrawing 4% a year from retirement accounts succeeds for a long retirement only if the account is at least 75% stocks when withdrawals start, making many target-date funds too conservative." There are probably very few, if any, target-date funds that are invested 75% in stocks upon the target-date.

Additionally, when an investor does choose to make a distribution from the 401k or IRA, the investor must liquidate shares of the entire fund. This is a poor choice, if for example, the market is reaching a peak - then it makes sense to draw from equities - or if the market is in the basement - then it makes sense to draw from fixed income. But this is not possible with target-date funds.

Need I say more?

Save Your Retirement! - By Knowing Your Weakness

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How well do you know yourself? Do you know that you have trouble saving money? Will you initially put savings in the bank, only to tap into them in a few years? 

If so, read this Wall Street Journal article that explains what some smart people have done: knowing that it is difficult for them to save, they purposely choose, either in real life or in the study, to allocate funds to retirement accounts that are challenging or impossible to tap into before getting to retirement age. 

All someone needs is the willpower to know how weak they are - and then ensure that they have enough for retirement by allocating their funds to accounts that do not allow early withdrawals.

Target Date Funds - I never liked them!

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I never thought that target-date funds made much sense for an investor who wanted to put even a little bit of thought behind his or her investments. Target-date funds are a one-size-fits-all approach to investing, beginning with a somewhat aggressive equity to bond ratio, and moving towards a more conservative ratio as the investor gets older. But, who said that because someone is 60 years old that he or she should have 60% of his or her portfolio in equities, and 40% in bonds? If the investor is solely relying on his or her 401k plan (the most common place target-date funds are found), then it is possible the investor should have a more conservative mix than a an average target-date fund would have. Or, if the investor has IRAs, taxable accounts, and 401k plans in addition to his or her 401k plan with target date funds, the investor could be significantly more aggressive than the target-date fund. Read this WSJ article for the official insights on target-date funds.

Save Now - Or Pay Later

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This article from an earlier Wall Street Journal shows why it's important to start saving for retirement as early as possible! Don't wait to save! Instead of purchasing a coffee every day, make it at home or at work. Instead of going out to eat every week, try cooking at home. Most importantly, don't think you failed because you did go out or buy a coffee - just keep trying, and you will meet your retirement goal! 

Increase your savings with new phone apps

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Apps continue to take on the world, and a few mentioned in this Wall Street Journal article will help you to save automatically. This is exactly what people who have a hard time saving need - a way to save without having to think about it. I think these apps are especially useful because they force the user to save using tiny amounts of money - rounding up your purchase from your credit card to the nearest dollar then automatically investing those extra cents. 

Is that 'Buy' Rating Really a Buy?

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This article from the Wall Street Journal on Friday, January 20th, discusses several reasons why analyst Buy rating may not be truly legitimate. Firms often do not allow analysts who have rated their stock "Sell" access to their events. It is disgraceful that "Just 6% of the roughly 11,000 recommendations on stocks in the S&P 500 index are sell or equivalent ratings, according to research firm FactSet." With market valuations where they are, certainly a greater percentage of equities deserve to be rated 'sell' now. 

Mentoring

Wildcat of the Week - Alexandra Pollack '13

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Alice Zhu ’19 and Alexandra Pollack ’13

Check out this article about me by Amanda Look at the Northwestern Alumni Association. I firmly believe in mentoring, and am grateful that Northwestern gives its students and alumni the chance to volunteer in this regard. I hope to one day have a mentor of my own. 

Barron's Best Income Ideas for 2017

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Stock valuations remain high, and investors continue to search for ideas as to what investments possibly have room to grow in 2017. The question may not be what will appreciate in 2017, but in fact, what asset classes will lend the greatest total return? By focusing on securities generating solid income, investors can mitigate some appreciation risk. Barron's recommends several ideas that I solidly agree with, such as U.S. equities. In particular, while performing some personal equity research this morning, I found that consumer staples stocks may be a good investment, due to their decline since the election. I tend to be more of a value investor - however, I also bought AMZN at it's high this morning. 

Despite the high valuation of U.S. equities, it is difficult to find an asset class that has a greater return potential. International developed equities have some room to run, however, the U.S. economy looks more solid, especially with an incoming pro-America president. Bond yields will continue to decline over the next few years as the Fed slowly raises rates, so prices will decline. As an almost 26-year old, I am not too interested in fixed income, anyway. The caveat to that is high yield. With its equity-like characteristics, I may purchase some HYG over the next few months, depending on the business agenda post-inauguration. 

Family Foundations: Millennials Take Charge

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Some people believe that millennials are the entitled generation, the generation in which everyone gets a trophy and everyone is a winner. Although I think one should be cautious with generalizations, the millennials mentioned in this article are certainly 'winners,' in the sense that they get to be involved with decision-making in their family foundations. Sounds like a dream job to me!

Millennials, according to the Barron's article Family Foundations: Millennials Take Charge (December 12, 2016), are willing to think outside the box when it comes to foundation planning. Additionally, they are willing to fund philanthropic activities with extremely specific investments that target those activities, such as program-related investments (PRIs) and mission-related investments (MRIs). According to the article, "These vehicles, which can be used for a variety of purposes, including loans and seed-capital development,allow foundations to look beyond the limited lens of traditional grants." So, not only is it important to be philanthropic, but also to ensure the funds used to fund grants are themselves aligned with philanthropic activities. Makes sense to me, and I am pleased to discover than those of my generation are willing to devote their lives to investing in things that matter, such as clean-energy upgrades and helping women in Uganda to bring in their own incomes. 

The biggest financial mistakes in your life

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Charlie Wells of the Wall Street Journal describes the various money mistakes people of all ages make, and how those mistakes change over time. The most important one, especially for my friends in their 20's, is to put off saving for retirement, and too invest too conservatively. Your 20's are the time to be as aggressive as you can be - you have a whole lifetime of appreciation waiting! I found this article fascinating, especially how people of different ages invest their assets differently.

Which Robo Advisor is the One For You?

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Barron's, May 23, 2015, "Robo Advisors Take On Wall Street"

Several of my friends have recently asked me how to allocate their 401k and brokerage accounts. I have really enjoyed helping them to understand the basics of a well-allocated portfolio. Before making an asset allocation, however, one has to determine what advisor is right for you? Because my friends are in their mid-twenties, robo-advisors are perfect. This article, published over a year ago in Barron's, has a great comparison of four top robo-advisor platforms. I use Charles Schwab, personally, but all of these look like great platforms with which to start one's investments. Read on to find out more!