How Smart Beta Could Help in a Frothy Market?
Justin Kuepper
|
Let’s take a closer look at smart beta funds, strategies for frothy markets...
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The very fact that investors have experienced such large losses leads them to price stocks with a large risk premium attached. For instance, in the period from 1927 through 2014, the S&P 500 Index provided an annual average risk premium over one-month Treasury bills of 8.2%. An indicator of how risky stocks can be is that the annual standard deviation of the equity risk premium was 20.2%, or 2.5 times as great as the premium itself.
We can extend this logic to the risks involved with investing in small-cap and value stocks.
Further evidence of the risk associated with investing in small-cap stocks is that, while the small-cap risk premium has been 2.9%, the annual standard deviation of the premium over this period has been 12.6%, 4.3 times the premium.
Just as with the size premium, the value premium is volatile. The annual standard deviation of the value premium, at 12.6%, historically has been roughly 2.6 times the size of the premium.
Unfortunately, we neither know when, or for how long, these periods of relative underperformance will last, nor how severe they will be. Therefore, having the discipline to adhere to your investment plan becomes a necessary ingredient for investment success. Ignore the noise of the market and the emotions (fear and envy in bull markets and greed and panic in bear markets) fueled by it.
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Justin Kuepper
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Let’s take a closer look at smart beta funds, strategies for frothy markets...
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Find out why $30 trillon is invested in mutual funds.
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Find out why $30 trillon is invested in mutual funds.
Download our free report
Find out why $30 trillon is invested in mutual funds.
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The very fact that investors have experienced such large losses leads them to price stocks with a large risk premium attached. For instance, in the period from 1927 through 2014, the S&P 500 Index provided an annual average risk premium over one-month Treasury bills of 8.2%. An indicator of how risky stocks can be is that the annual standard deviation of the equity risk premium was 20.2%, or 2.5 times as great as the premium itself.
We can extend this logic to the risks involved with investing in small-cap and value stocks.
Further evidence of the risk associated with investing in small-cap stocks is that, while the small-cap risk premium has been 2.9%, the annual standard deviation of the premium over this period has been 12.6%, 4.3 times the premium.
Just as with the size premium, the value premium is volatile. The annual standard deviation of the value premium, at 12.6%, historically has been roughly 2.6 times the size of the premium.
Unfortunately, we neither know when, or for how long, these periods of relative underperformance will last, nor how severe they will be. Therefore, having the discipline to adhere to your investment plan becomes a necessary ingredient for investment success. Ignore the noise of the market and the emotions (fear and envy in bull markets and greed and panic in bear markets) fueled by it.
Receive email updates about best performers, news, CE accredited webcasts and more.
Justin Kuepper
|
Let’s take a closer look at smart beta funds, strategies for frothy markets...
News
Iuri Struta
|
Check out our latest edition of mutual funds scorecard.
Kristan Wojnar, RCC™
|
This week we are diving into the subjects of infographics, words that can...
Find out why $30 trillon is invested in mutual funds.
Download our free report
Find out why $30 trillon is invested in mutual funds.
Download our free report
Find out why $30 trillon is invested in mutual funds.
Mutual Fund Education
Justin Kuepper
|
Let's take a closer look at how ESG investments have outperformed during the...
Mutual Fund Education
Daniel Cross
|
While CITs and mutual funds share many similarities, there are some key differences...
Mutual Fund Education
Sam Bourgi
|
The phrase ‘bear market’ has been thrown around a lot lately, but it...