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Many Happy Returns

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by Jim Parker
Monday, December 23, 2013

It’s that time of the year when the talking heads of television and the prognosticators of print issue their sage outlooks for the coming 12 months. While this crystal ball gazing is always entertaining, it becomes even more so a year later. In journalism, this is ...Read More

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  • Weston Wellington Talks Nobel Laureates

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    by Mark Hebner — Monday, December 23, 2013

    IFA.tv Show 17-Weston Wellington Talks Nobel Laureates MH: Hi, I am Mark Hebner, President of Index fund Advisors and welcome to IFA.tv! Today I am here with Weston Wellington-Vice President over at Dimensional Fund Advisors…and Weston has been making several appearances ...Read More

  • Merton Miller

    Two Contrasting Views of Stock Markets

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    by Merton H. Miller and Charles W. Upton — Friday, December 20, 2013

    The casino view sees the stock market as largely a place where investors place bets on the near future prices of stocks rather than on the numbers on a roulette wheel or the spots on a pack of ...Read More

  • Reality Show for Investors: "Survivor"

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    by Weston Wellington — Friday, December 20, 2013

    Anyone studying the long-run history of American business cannot help but observe how many of the prominent firms of one era fail to make it to the next. Free-market economies are characterized not only by intense competition but also by disruptive change. Sometimes a ...Read More

  • The Net Investment Income Tax of the Affordable Care Act

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    by Mark Hebner and IFA Contributors — Thursday, December 19, 2013

    At the beginning of 2013, the 3.8% Net Investment Income Tax of Obamacare went into effect. It applies to individuals, estates and trusts that have investment income above certain threshold amounts shown in the table below. Filing Status Threshold Amount (Modified Adjusted Gross ...Read More

  • PIMCO: Just How Consistent is Consistent?

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    by Mark Hebner and IFA Contributors — Wednesday, December 18, 2013

    In Bill Gross’s December 2013 Investment Outlook letter, he joined the ranks of Warren Buffett and Peter Lynch in giving a solid endorsement to indexing while reminiscing about his younger days when Jack Bogle introduced the first index fund available to retail investors: ...Read More

  • Roth IRA Conversions

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    by Mark Hebner and IFA Contributors — Wednesday, December 18, 2013

    For younger investors who expect to be in a higher tax bracket in their retirement years, a Roth IRA can be a very attractive proposition for their retirement savings because the growth is not just tax-deferred but tax-free. In a recent article, we examined the differences ...Read More

  • Harry Markowitz Reflects on Eugene Fama's Nobel Prize

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    by Harry M. Markowitz — Wednesday, December 18, 2013

    After Scholes and Merton won the Nobel Prize in Economics for their and Fisher Black’s work on option pricing, whenever I was asked who among financial economists I thought would get the Prize next, Gene Fama topped my list of probable recipients.  Gene is especially ...Read More

  • Fiduciary Duty

    Who is Your Fiduciary?

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    by Mark Hebner — Sunday, December 15, 2013

    From Wikipedia, the free encyclopedia A fiduciary (from Latin fiduciarius, meaning "[holding] in trust"; from fides, meaning "faith", and fiducia, meaning "trust") is a legal or ethical relationship of trust between two or more parties. Typically, a fiduciary prudently takes ...Read More

  • The History of Finance in Four Minutes [VIDEO]

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    by Mark Hebner and IFA Contributors — Wednesday, December 11, 2013

    Anyone who has paid attention to us at IFA is fully aware of how excited we are about Eugene Fama being awarded the 2013 Nobel Prize in Economic Sciences.  Yesterday, the event reached its culmination in the award ceremony followed by the Nobel Banquet attended by the ...Read More

  • Beating the Market—What's Luck Got to Do with It?

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    by Mark Hebner and IFA Contributors — Tuesday, December 10, 2013

    The answer to that question is quite a bit actually, at least according to Nobel Laureate Eugene Fama1 and Ken French. Contrary to the protestations of Robert Olstein as featured in this New York Times article, Fama and French demonstrated that luck plays a very large role in ...Read More

  • Eugene Fama's Nobel Prize Lecture [VIDEO]

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    by Mark Hebner and IFA Contributors — Monday, December 9, 2013

    This past Sunday (December 8th), Eugene Fama (along with Robert Shiller and Lars Peter Hansen) delivered his Nobel Prize lecture titled “Two Pillars of Asset Pricing.” This lecture should not to be confused with his acceptance speech which will occur on December ...Read More

  • Interest Rate Expectations

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    by Jim Parker — Thursday, December 5, 2013

    Interest rates around the world are at historic lows. They can only go in one direction from here, right? And aren’t rising interest rates bad for bond investors? The truth might surprise you. Central banks in developed economies have injected extraordinary stimulus into ...Read More

  • One Man's Trash—Another Man's Treasure

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    by Mary Brunson and IFA Contributors — Tuesday, December 3, 2013

    Lost: An $8 Million Thumb Drive Just how easy is it to lose $8 Million? Easier than you might think if your war chest consists of virtual currency stored on a thumb drive. Just ask James Howells of the UK. You see, Mr. Howells was one of the tech ...Read More

  • Bad Benchmarking and the Creation of False Manager Alpha

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    by Mark Hebner and IFA Contributors — Monday, December 2, 2013

    You don’t have to dig too deeply into IFA’s Website to realize that in our opinion, the pursuit of alpha is a fool’s errand that suckers investors into paying the high costs of active management while potentially causing them to miss out on the real source of ...Read More

  • Mark Hebner

    Calculations for t-Statistics

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    by Mark Hebner — Monday, December 2, 2013

    In calculating the t-stat, the first step is to determine the excess returns the manager earned above an appropriate ...Read More

  • A New Way of Thinking about Your 401(k)

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    by Mark Hebner and IFA Contributors — Monday, December 2, 2013

    Matt Schifrin of Forbes was absolutely correct when he described the retirement crisis as a gigantic socioeconomic problem that should be weighing heavily on policymakers. Schifrin cites Federal Reserve data showing that only 52% of Americans have saved anything for retirement, ...Read More

  • Cash Withdrawal Considerations

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    by Mark Hebner — Monday, December 2, 2013

    IFA is often in the position of accommodating regular cash withdrawal by its clients. The question is how to best generate cash for ...Read More

  • A Banner Month for CRSP

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    by Mark Hebner and IFA Contributors — Wednesday, November 27, 2013

    As we have discussed in many articles such as this one, the Center for Research in Security Prices (CRSP) is the gold standard of historical financial data and is the foundation upon which modern finance is built. This past October saw several well-deserved milestones for CRSP. ...Read More

  • Using Options for Downside Protection and Additional Income

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    by Mark Hebner and IFA Contributors — Monday, November 25, 2013

    Question: If I am concerned about a potential drop in the market, should I buy a put option to protect myself? Also, would it make sense to fund the cost of the put option by selling a call option? Answer: A put option allows you to sell shares at ...Read More

  • Quantitative Easing and Interest Rates

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    by Mark Hebner and IFA Contributors — Monday, November 25, 2013

    Question: Should I be concerned about the recent news about the Fed reducing bond buys soon and its effects on my portfolio? Answer: Lately, it seems that a day does not go by without a story like this one which talks about the eventual tapering of the Federal Reserve’s ...Read More

  • Hedging Against Inflation Risk and Speculating About the Fed

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    by Mark Hebner and IFA Contributors — Monday, November 25, 2013

    Over the last few years, one of the most consistent questions we have received from both prospects and clients is, “How can I protect myself from high inflation?” Please note that since 1991, there has only been one calendar year (2007) where the rate of inflation ...Read More

  • The Persistent Myth of Active Funds in Bear Markets

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    by Mark Hebner and IFA Contributors — Friday, November 22, 2013

    All too often, we hear the refrain that yes, index funds are great for bull markets, but when the next bear market rears its ugly head, you will want to be in active funds because the manager can anticipate the downturn and move at least some of the fund’s ...Read More

  • Vanguard Debunks a Widespread Myth about the Market

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    by Mark Hebner and IFA Contributors — Tuesday, November 19, 2013

    For at least the past two decades, we have been hearing about an approaching day of reckoning for the stock market prompted by retiring baby boomers selling their equities to fund their retirement needs. Recall that the baby boomers are defined as those born between 1946 and ...Read More

  • A Second Look at the Mutual Fund Landscape

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    by Mark Hebner and IFA Contributors — Tuesday, November 19, 2013

    A few months ago, we published “The Mutual Fund Landscape—Not a Pretty Picture” in which we presented the results of research by Dimensional Fund Advisors (DFA). To summarize, they found that over the ten year period ending 12/31/2012, less than 20% of actively ...Read More

  • A Time to Remember—especially if you are a market timer

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    by Mary Brunson — Monday, November 18, 2013

    Do you ever have those moments when a flashback occurs, and you recoil from a shiver sent down your spine? I had that moment today when I looked briefly at the 5-year chart of the S&P 500, shown below:   What caused that visceral shiver was not the impressive ...Read More

  • A New Type of Treasury

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    by Mark Hebner and IFA Contributors — Friday, November 15, 2013

    The upcoming Treasury auction in January of 2014 will be different from past auctions in that it will mark the debut of a new category of Treasury security, Floating Rate Notes (FRNs). The last time that Treasury introduced a new security was in 1997 with the Treasury Inflation ...Read More

  • Differing Types of Retirement Annuity Payouts

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    by Mark Hebner and IFA Contributors — Friday, November 15, 2013

    At Index Fund Advisors, we have assisted many clients in making the crucial decision of how to take a payout at retirement—as an annuity or a lump sum. Of course, every client is different, and there is no right or wrong answer. For many investors, taking (or buying) an ...Read More

  • A Summary of the Risks Facing Retirees

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    by Mark Hebner and IFA Contributors — Thursday, November 14, 2013

    1)      Inflation Risk—the loss of purchasing power over time. As Moshe Milevsky points out, every person has his or her own unique inflation rate that is determined by the basket of goods and services they purchase. For senior citizens, this ...Read More

  • Chuck Talks to Us about Retirement Planning

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    by Mark Hebner and IFA Contributors — Tuesday, November 12, 2013

    OK, so maybe it wasn’t Charles Schwab himself, but Walter Bettinger is the President and CEO of Charles Schwab, and he certainly has the authority to speak to us on Chuck’s behalf. On November 11th, 2013, Mr. Bettinger gave a speech to the National Press Club in ...Read More

  • The Tax Man Cometh

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    by Mark Hebner and IFA Contributors — Monday, November 11, 2013

    As fiduciaries for wealth, we at Index Fund Advisors are obligated to do everything we can to maximize our client’s after-tax returns. Please note that this is not always the same thing as minimizing taxes, but with the 2013 increase in tax rates (including the new 3.8% ...Read More

  • The Value of a Second Opinion

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    by Mark Hebner and IFA Contributors — Friday, November 8, 2013

    When it comes to our physical health, most of us believe that is our right (and perhaps duty) to get a second opinion when diagnosed with a catastrophic illness, as discussed in this article on WebMD.com. Of course, with the new health care law going into effect, this may ...Read More

  • A Guilty Plea and a Record Fine for SAC Capital

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    by Mark Hebner and IFA Contributors — Tuesday, November 5, 2013

    Three months ago, we wrote about the unprecedented indictment of SAC Capital, and a few months before that, we wrote about SAC’s record-setting $616 million settlement for insider trading. Today’s guilty plea combined with an additional $1.2 billion of fines was ...Read More

  • The Active Voice is Alive and Well

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    by Mark Hebner and IFA Contributors — Tuesday, November 5, 2013

    Recently, we have seen many articles such as this one stating that the passive vs. active debate is over not because passive won but because the indexing advocates have drowned out the proponents of active investing. While there may be times when we wish we had the power to ...Read More

  • If You Can't Beat 'Em, Join 'Em

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    by Mary Brunson and Mark Hebner — Monday, November 4, 2013

    "The current understanding of asset prices relies in part on rational investors and their concerns about risk and in part on psychology and behavioral finance." 2013 Nobel Prize Committee Announcement, October 14, 2013   “This year’s Prize in Economic Sciences ...Read More

  • When As Good As It Gets Isn't Good Enough

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    by Mark Hebner and IFA Contributors — Friday, November 1, 2013

    One of the accusations constantly levied against 2013 Nobel Laureate Eugene Fama is that he uses his Efficient Market Hypothesis as a justification to denigrate all forms of financial regulation, including regulations governing trading by company insiders. A good example of such ...Read More

  • IRS releases 2014 limits for Retirement Plans and IRAs

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    by Jeff Cohen — Friday, November 1, 2013

    The IRS announced that the contribution limits for retirement plans and individual retirement account will remain the same as last year’s limits. There was a small increase to the maximum annual contribution limit to defined contribution plans from $51,000 to $52,000. ...Read More

  • Understanding Your IFA Index Portfolio Return

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    by Mark Hebner and IFA Contributors — Friday, November 1, 2013

    If you are a client of Index Fund Advisors, you may have recently received a quarterly performance report. The intent of this article is to help you better understand the numbers on that report. The first thing that you may notice is that we report two separate performance ...Read More

  • Eugene Fama's Contributions to Our Understanding of Fixed Income Investing

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    by Mark Hebner and IFA Contributors — Wednesday, October 30, 2013

    Introduction All too often, when we hear discussions of the intellectual contributions of Eugene Fama, a 2013 Nobel Laureate in economics, they are limited to the realm of stock prices. For example, in explaining market efficiency, the most commonly brought example is how the ...Read More

  • No Logical Reason for Active Management

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    by Mark Hebner and IFA Contributors — Monday, October 28, 2013

    “The conclusion is inescapable: Active managers as a group, simply don’t add value…In short, there is truly no reason for a self-directed investor to own actively managed funds over index funds. Just as someone who stays at the roulette wheel long enough will ...Read More

  • When It Comes to Investing, Are You Smarter than a Lab Rat?

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    by IFA Contributors — Friday, October 25, 2013

    Please don’t be too quick to answer that question in the affirmative. Imagine that you are the subject of the following experiment. You are standing in a room with two doors—door #1 and door #2. In each trial, you choose a door, and either there will be a $20 ...Read More

  • There Are Indexes, and There Are Indexes

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    by Mark Hebner and IFA Contributors — Tuesday, October 22, 2013

    Last Thursday (10/17/2013), we saw something that we don’t see very often—The S&P 500 Index gained 0.7% while the Dow Jones Industrial Average (the Dow) remained essentially flat. As its name implies, the S&P 500 consists of 500 large companies that are ...Read More

  • Fama’s Win: Made Sweeter Through Time

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    by Mark Hebner — Tuesday, October 22, 2013

    Eugene F. Fama was interviewed on CNBC's "Squawk Box" this past Friday about the recent financial crisis and financial regulatory reform.   Q. Are u ever surprised that certain things in the past we thought were settled are currently not settled...I guess I am referencing ...Read More

  • What Do Brokerage Clients and Mushrooms Have in Common?

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    by Mark Hebner and IFA Contributors — Tuesday, October 22, 2013

    In the interest of decorum, we will only mention the first part of the punch line of this old joke—that they are both kept in the dark, although we certainly think that the second part (what they are both fed) is relevant as well, but we will leave that ...Read More

  • Active vs. Passive—The View from Up North

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    by Mark Hebner and IFA Contributors — Thursday, October 17, 2013

    A few weeks ago, we published our semi-annual summary of the Standard and Poor’s Index Versus Active (SPIVA®) Scorecard. There were no surprises. Over the last five years, passive beat active in the four major asset classes of domestic equities, foreign equities, real ...Read More

  • IFA’s Perspective on the 2013 Nobel Prize in Economics

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    by Mark Hebner and IFA Contributors — Thursday, October 17, 2013

                   Since we already devoted a full article to Eugene Fama, the first winner of the prize that we will discuss in this article is Robert J. Shiller of Yale University who had previously garnered a ...Read More

  • Much Ado about Nothing

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    by Mark Hebner and IFA Contributors — Wednesday, October 16, 2013

    As we noted in our review of the third quarter, the market essentially shrugged off the government shutdown that began on midnight of September 30th. The far bigger issue appeared to be the looming October 17th deadline for raising the debt ceiling limit. There were a lot of ...Read More

  • SBBI: The Almanac of Returns Data

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    by Ian Liew — Wednesday, October 16, 2013

    Stocks, Bonds, Bills, and Inflation (SBBI) is often characterized as the Almanac of returns data. This magisterial work originally produced by Roger Ibbotson and Rex Sinquefield is considered the go to place when information is needed on the expected returns and risks of a ...Read More

  • Interesting Times in the Mutual Fund World

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    by Mark Hebner and IFA Contributors — Monday, October 14, 2013

    Morningstar, Inc. just released its reported estimated U.S. mutual fund asset flows for September 2013. The results are summarized in this press release. Below, we will explain why we found it more interesting than prior reports. First, among all the mutual fund families, ...Read More

  • Eugene Fama Wins the 2013 Nobel Prize in Economics

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    by Mark Hebner and IFA Contributors — Monday, October 14, 2013

    At Index Fund Advisors, we were absolutely thrilled to hear the announcement by the Royal Swedish Academy of Sciences that the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2013 is being awarded to Eugene F. Fama (University of Chicago), Lars Peter ...Read More

  • Time Diversification: A Bizarre Discovery? Not to Us!

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    by Mark Hebner and IFA Contributors — Thursday, October 10, 2013

    Time diversification of risk refers to the idea of a risky portfolio becoming less risky when held over a long investment period. For example, for IFA's Index Portfolio 100 on glide path, the range of rolling 12-month returns over the last 50 years spans from -49.4% to ...Read More

  • The Endowment Model: Beating a Dead Horse

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    by Mark Hebner and IFA Contributors — Wednesday, October 9, 2013

    “Those institutions [state pension plans and endowments of state universities] are placing risky bets on private equity and similar funds, to some degree at the taxpayer’s expense. They are relying on consultants who, on average, add no value and no prospect of ...Read More

  • The Active vs. Passive Debate Plays Out in the L.A. Times

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    by Mark Hebner and IFA Contributors — Wednesday, October 9, 2013

    Over the weekend, this article by Tom Petruno caught our attention. Overall, we commend him for penning a good summary of the current status of the ongoing battle between active and passive for the minds (and wallets) of investors, but there are a few points with which we take ...Read More

  • Winning the Loser's Game: Timeless Strategies for Successful Investing

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    by Mark Hebner and IFA Contributors — Wednesday, October 9, 2013

    Now in its sixth edition, this book by Charles D. Ellis is undoubtedly one of the true classics in the genre of sensible investing. It is right up there with Burton Malkiel’s A Random Walk Down Wall Street and William Bernstein’s The Four Pillars of Investing. The ...Read More

  • 3Q/2013: The Quarter in Review

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    by Mark Hebner and IFA Contributors — Monday, October 7, 2013

    In the third quarter of 2013, risk was nicely rewarded for all classes of equities except REITs, and fixed income staged a small comeback from a difficult second quarter. Once again, there was a lot of discussion surrounding future Fed policy, particularly as it relates to the ...Read More

  • You Can't Take It with You—So Why Not Make Life Easier for Your Heirs?

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    by Mark Hebner and IFA Contributors — Friday, October 4, 2013

    Among the many arguments in favor of indexing, we recently encountered one that we have not yet put into writing, although IFA’s advisors discuss it frequently with their clients and prospects. To put it simply, if someone is following a complex strategy of stock picking, ...Read More