Recent releases of the Case-Shiller Home Price Indices1 (HPI) seem to indicate that the U.S.housing market is beginning to show signs of recovery. In the second quarter of 2012, the20-city composite index, representing 20 major metropolitan statistical areas or MSAs, hasshown average increases of 1.5%, 2.3%, and 2.5% month-over-month, its strongest consecutive gain since the market collapse in 2006. Chart 1 below exhibits the Case-Shiller HPI since January 2000.
There is no doubt that electronic trading has tremendous value to offer, at times enhancing the smooth functioning of the stock market and increasing competition, thus driving down the spread that the average investor has to pay to buy or sell a stock. HFT has been so successful that it has taken over the stock market, now accounting for between 50% - 70% of equity market volume on any given day. Fortunes have been made, with estimated annual profits exceeding $21 billion2 at its peak, and estimates varying but still in the billions of dollars today.
What we must be concerned with is whether the pendulum has swung too far, and whether the nearly unregulated activities of anywhere from 50%-70% of stock market volume should be permitted to continue down this path. For the proponents of HFT to make the case that the market is functioning well, or that only incremental reforms are needed rather than wholesale changes, they must make the case unequivocally that the market satisfies the aforementioned characteristics of tightening spreads, decreasing volatility and is a more efficient and low-cost mechanism for price discovery and capital formation today than at any time in the past, and that proposed reforms are not even worth trying.
The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.
However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.
*Please note that this article focuses on diversification within a stock portfolio, however the concepts apply to one’s overall portfolio, as well. An investor’s broad portfolio should also diversify among different asset classes (stocks, bonds, real estate, etc.), styles (large-cap, growth, short-term, etc.), and countries. We advise investors to consult a financial professional to develop a customized and detailed asset allocation plan.
The concept of diversification has been around for a very long time, as I’m sure everyone has heard the age-old adage, “don’t put all your eggs into one basket.” But, it wasn’t seriously applied to the investment discipline until the 1950s when Harry Markowitz laid the groundwork for modern portfolio theory. By choosing securities that have minimal or no relationship with each other, he proved that investors could reduce their overall risk.
First, let’s start with the two alternatives: a concentrated portfolio or no portfolio (all in cash – or under the mattress). According to Warren Buffett, “wide diversification is only required when investors do not understand what they are doing.” While it is very possible to outperform the broader market averages over long periods of time holding only a few assets (just look at Mr. Buffett’s lifetime performance record), not everyone has the superior skill set that Mr. Buffett possesses. For the rest of us, diversification seems to be our best strategy.
The Cost Of The Wall Street-Caused Financial Collapse and Ongoing Economic Crisis is More Than $12.8 Trillion
Because of the financial collapse and the subsequent economic crisis, GDP declined significantly beginning in 2007. GDP would have dropped even more without massive spending by the federal government. The sum of actual GDP loss and GDP loss avoided because of emergency spending and actions by the Federal Reserve Board are estimated to total more than $12.8 trillion for the period 2008-2018.
In October 2009, the broadest measure of unemployment (U-6 rate) peaked at 17.5 percent, representing 26.9 million Americans. As of July 2012, the U-6 rate remains very high at 15 percent, representing 23.1 million Americans.
Real household wealth declined from $74 trillion in July 2007 to $55 trillion in January 2009, representing $19 trillion of evaporated wealth. Although household wealth has regained some ground, the decline is still very substantial and has grave distributional effects, including permanent, lifetime losses suffered by many Americans.
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If I were an individual investor, I would do this: Balance your asset mix according to your age. Own more stocks if you are young, but more bonds if you are in your 60s, like myself. If you choose an investment advisor, a mutual fund, or an ETF, make sure that your fees are minimized. After all, if overall returns average 3–4% annually how can you possibly afford to give 100 basis points of it back? You cannot. And be careful. The age of credit expansion which led to double-digit portfolio returns is over. The age of inflation is upon us, which typically provides a headwind, not a tailwind, to securities price – both stocks and bonds.
This is a great summary of the markets' recent performance - Stock and Bond Markets, Benchmark Portfolios.
Evidence increasingly shows that a “crime” of extensive underperformance has been committed in mutual funds, pension funds, and endowments. In a pattern reminiscent of Agatha Christie’s famous novel Murder on the Orient Express, an investigation leads to a surprising, if inevitable, conclusion: The usual suspects—investment managers, fund executives, investment consultants, and investment committees—are all guilty.