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The Index Bogeyman

Over the last several years, index funds have received increased attention from investors and the financial media. Some have even made claims that the increased usage of index funds may be distorting market prices. For many, this argument hinges on the premise that indexing reduces the efficacy of price discovery. If index funds are becoming increasingly popular and investors are “blindly” buying an index’s underlying holdings, sufficient price discovery may not be happening in the market. But should the rise
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Discipline: A Necessary Condition for Successful Investing Part 3 of 3

(Continued from Discipline: A Necessary Condition for Successful Investing Part 2 of 3) There’s another way to reduce the risk of investment depression. Myopic Loss Aversion and the Pain Ratio Nobel Prize winner in economics Richard Thaler, author of the book Misbehaving, has found that we tend to feel the pain of a loss twice as much as we feel joy from an equal­-sized gain. This tendency leads to the behavior known as “myopic loss aversion,” creating a problem for
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Discipline: A Necessary Condition for Successful Investing Part 2 of 3

(Continued from Discipline: A Necessary Condition for Successful Investing Part 1 of 3) Perhaps the greatest anomaly in finance is that while investors idolize Warren Buffett, they not only fail to follow his advice but often do exactly the opposite of what he recommends. Buffett’s Advice Warren Buffett, probably the most highly regarded investor of our era, has offered the following advice over the years. Listen carefully to his statements regarding efforts to time the market. “Inactivity strikes us as intelligent
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Discipline: A Necessary Condition for Successful Investing Part 1 of 3

A good friend, Sherman Doll, related the following story. Sherman has been a two­ line sport kite flier for years. While not a pro, he has learned a few tricks from observing the flying behavior of these kites. He told me that one of the most difficult skills for beginners to master is what to do when their kite starts to plunge earthward. The natural, panicky impulse is to yank backward on the lines. However, this only accelerates the kite’s
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Invest for the Long Term

Over the last nine decades, the U.S. experienced 9 bear markets and 15 recessions or depressions, World War II and Vietnam, and any number of crises big and small. Yet $1 invested in 1927 could have grown to more than $6,229 by the end of 2017.1 Markets have shown a remarkable ability to reward patient, long-term investors for staying invested. This is important, since most of us are investing for the long term. For a 65-year-old couple, there is a
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Déjà Vu All Over Again

Investment fads are nothing new. When selecting strategies for their portfolios, investors are often tempted to seek out the latest and greatest investment opportunities. Over the years, these approaches have sought to capitalize on developments such as the perceived relative strength of particular geographic regions, technological changes in the economy, or the popularity of different natural resources. But long-term investors should be aware that letting short- term trends influence their investment approach may be counterproductive. As Nobel laureate Eugene Fama
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Investing Strategically, Not Emotionally

While many of us understand that our emotions can compromise our long-term financial goals, it isn’t always easy to ignore media hype. But letting emotions guide our investment decisions can have a real impact on our portfolios. Sometimes what seems like a reasonable investment strategy is actually emotions in disguise. We believe these emotional strategies can be particularly harmful, because at first glance they may seem like good, even rational, ideas. Emotional strategy: Waiting for the “right time” to invest. Timing the market is
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The Tao of Wealth Management

The path to success in many areas of life is paved with continual hard work, intense activity, and a day-to-day focus on results. However, for many investors who adopt this approach to managing their wealth, that can be turned upside down. The Chinese philosophy of Taoism has a phrase for this: “wei wu-wei.” In English, this translates as “do without doing.” It means that in some areas of life, such as investing, greater activity does not necessarily translate into better results. In
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What You Pay, What You Get: Connecting Price and Expected Returns

It has been more than 50 years since the idea of stock prices containing all relevant information was put forth. Information might come in the form of data from a company’s financial statements, news about a new product, a change in the regulatory environment, or simply a shift of investors’ tastes and preferences toward owning different investments. Information is incorporated into security prices through the buying and selling process. While fair prices may not depend on a certain level of
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The Impact of Inflation

In many cases, the reason for saving today is to support future spending. Therefore, keeping pace with inflation is a crucial goal for many investors. When the prices of goods and services increase over time, consumers can buy fewer of them with every dollar they have saved. This erosion of the real purchasing power of wealth is called inflation. Inflation is an important element of investing. In many cases, the reason for saving today is to support future spending. Therefore,
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