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The Real Insider Information
by   Mark Wade  

If you want to get advice on how to run your finances, there's no shortage of it down on the financial shelves at the Barnes & Noble, in the racks at the newsstand, or on any number of Internet sites, including ones that expect you to pay for the privilege. There are myriad amateurs, well-meaning and enthusiastic, who think they know what tactics are guaranteed to bring you wealth.

But there's really no substitute for the kind of hard-core research that doesn't seem to end up in the fluffy fiscal-planning guides. There are professional scientists out there doing real peer-reviewed research into investing strategies and personal-finance issues--that's the stuff that's the real deal. That's what you need to know.

Of course, no one expects you to leaf through the latest issue of the Journal of Financial Planning to see what the professors have dug up. That's what we're here for. Here is some of the research that came out in the past year that you might want to know about:


  • For a long time, dollar-cost averaging was seen as an obviously optimal strategy on a par with "buy low, sell high." The idea was that you invest the same amount of money into a fund or stock every month, buying more of it when the share price is lower and less when the price is higher. But studies have now shown that dollar-cost averaging works best only when the markets are in decline. When the markets are improving, you're better off with lump-sum investing. And the markets improve more often than they decline.
  • Asset allocation has long been a key tool for investment strategists, with some going so far as to claim that asset allocation is the key determinant of returns. This was then juiced up into something called dynamic asset allocation, which moves your money among your assets, based on such variables as expected returns and opportunities in the capital markets. This past year, a study revealed that dynamic asset allocation can only improve on regular asset allocation if the investment manager is able to predict the returns of each asset class. But if investment managers could do that, they wouldn't have to worry about dynamic asset allocation.
  • Price/earning ratios have been used for decades by technical investors to help determine where a stock is heading. A report in the Journal of Portfolio Management looked at all the stocks in the S&P 500 and three major global indexes and found that P/E ratios had at best a small effect on subsequent share price movements and that they're irrelevant to those stocks' yields.
  • Mutual fund ads always point out that "past performance does not indicate future results." But one study found that performance records do tend to persist--at least in the short term, such as for a period of one year. Over the longer term, those effects wash out, and the fund ads are indeed correct.


Now we don't expect our clients to have to keep up with that kind of research. We don't even expect them to understand all of it. The point is that if you're paying a highly skilled wealth manager to oversee your finances, he or she should be reading the financial journals so you don't have to.



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