Search results for: home country bias

Home State Investing Bias May Be Skewing Your Portfolio

Most investors are (or at least should be) familiar with the concept of “Home Country Bias” — the natural tendency to be more familiar and comfortable with public companies in your home country.

Investors everywhere consistently display this trait, which is in direct conflict with the basic principles of international diversification.

2014 report by Vanguard found that “Equities not domiciled in the United States accounted for 51 percent of the global equity market as of Dec. 31, 2013.” U.S. equities accounted for the rest. Despite the size of non-U.S. markets, U.S. mutual funds engaged in classic home country bias, holding “only 27 percent of their total equity allocation in non-U.S.-domiciled assets.”

In other words, investors were about 50 percent underweight when it came to equities outside their country. This bias increases the risk and volatility of portfolios, and is a drag on performance.

In the U.S., the impact is partially muted, given the dominant size of U.S. equity capitalization (49 percent) relative to the rest of the world. Nonetheless, the Vanguard study shows that U.S. investors’s holdings of U.S. stocks significantly exceeded the country’s share of the global market.

Now consider the typical domestic portfolio in Canada, which accounts for 4 percent of global equity capitalization. According to a recent survey from the International Monetary Fund, Canadian investors allocate a mere 40 percent of their total equity investments outside Canada. Their local allocation to Canada is about 10 times what it should be. The numbers are similar for the U.K. The considerably smaller size of these markets means that these home country biases create a significant over-exposure to home country companies. Radically reduced diversification is the net result.

The local economy affects not only an investor’s portfolio, but their employment and incomes. Hence, there is significant risk tied to the performance of the local economy. The obvious solution is a more global allocation that is closer in relative proportion to global market capitalizations.

And there is another bias that comes into play. For those of us in the U.S., there is an apparent regional and state preference. The part of the nation where you reside will influence your portfolio holdings in subtle but significant ways.

That is the finding of OpenFolio, a site that allows investors to see how their portfolios compare to those of other people on the site.

Take a look at the map below. It shows how the regional bias manifests itself relative to your area in the U.S. If we break the nation into four areas — North, South, East and West — we can identify a variation of home country bias, aligned to the dominant industry within each region.

Source: Open Folio

If you live on the West Coast, near the technology hubs of Silicon Valley, you are very likely to be overweighted in technology by 9.5 percent or so. Live in the Northeast, and you are overexposed to finance by 9 percent. Investors in the industrial Midwest are likely to have 11.8 percent more industrial companies in their portfolio than the rest of the country. The greatest overexposure is in the South, where energy holdings are 13.7 percent above the average.

Some of this overweight might be due to employee stock option plans. After all, Google’s founders, and most of its employees, live in or around Mountain View, California. Their portfolios are likely to be filled with Google shares and/or options. The same is true for JPMorgan and Goldman Sachs in New York and Boston, Exxon Mobil in Texas, and 3M in Minnesota. Without access to the full data, there’s no way of telling.

Still, some of this variation could be due to a regional version of home country bias. The odds are that even nonemployees know people who work in the dominant industries in their areas. Is it possible to live in San Francisco and not know tech workers? Can anyone in New York not know people who work in finance?

What matters most to investors is at least having some awareness of the factors that may be biasing their behavior. That insight gives them a fighting chance to prevent irrelevant considerations from shaping their portfolios


Originally published as: Your Local Investing Bias Could Cost You



Paul Farrell: Beware of Predictions, Optimism Bias

The following assortment of quotes comes from Paul Farrell


2007-2008 bank credit meltdown — the top nine happy-talking gurus

False predictions made before the 2008 subprime credit meltdown:

‘Mad Money’ Jim Cramer: “Bye-bye bear market, say hello to the bull.”

Ken Fisher: “This year will end in the plus column … so keep buying.”

Ben Bernanke: No “serious failures among large internationally active banks.”

Goldman Sachs: “Fear priced into stocks is likely to abate as recession fears fade.”

Barney Frank: “Freddie Mac and Fannie Mae are fundamentally sound.”

Barron’s: “Home prices about to bottom.”

Worth magazine: “Emerging markets are the global investors’ safe haven.”

Bernie Madoff: “It’s virtually impossible to violate the rules.”

Kiplinger’s: “Stock investors should beat the rush to the banks.”


2000-2003 dot-com crash, a long recession — more happy-talking gurus

From Bull! 144 Statements from the Market’s Fallen Prophets, a few notable gurus spreading happy-talk:

James Glassman, author ‘Dow 36,000’: “What is dangerous is for Americans not to be in the market. We’re going to reach a point where stocks are correctly priced … not a bubble. … market is undervalued.” (October 1999)

Larry Kudlow, CNBC host “This correction will run its course until the middle of the year. … not even Greenspan can stop the Internet economy.” (February 2000)

Cramer: “SUNW probably has the best near-term outlook of any company I know.” (September 2000)

Lehman’s Jeffrey Applegate: “The bulk of the correction is behind us, so now is the time to be offensive, not defensive.” (December 2000)

Alan Greenspan: “The 3- to 5-year earnings projections of more than a thousand analysts … have generally held firm. Such expectations, should they persist, bode well for continued capital deepening and sustained growth.” (December 2000)

Suze Orman: “The QQQ, they’re a buy. They may go down, but if you dollar-cost average, where you put money every single month into them … in the long run, it’s the way to play the Nasdaq.” (January 2001)

CNBC reporter Maria Bartiromo: “The individual out there is actually not throwing money at things that they do not understand, and is actually using the news and using the information out there to make smart decisions.” (March 2001)

Goldman Sachs’s Abby Joseph Cohen: “The time to be nervous was a year ago. The S&P then was overvalued, it’s now undervalued.” (April 2001)

Lou Dobbs, CNN: “Let me make it very clear. I’m a bull, on the market, on the economy. And let me repeat, I am a bull.” (August 2001)

Kudlow: “The shock therapy of a decisive war will elevate the stock market by a couple thousand points,” with Dow 35,000 by 2010. (June 2002)

Lots of hype, very little facts, just about all of it wrong.


1929 Crash and 1930’s Depression — seven early happy-talking gurus

Go back to the Crash of ’29 and the Great Depression. Same pattern: Optimism at the top, despair at the lows.

Listen to what investors trusted around the 1929 Crash:

Irving Fisher, Yale Ph.D. in economics: “Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels … I expect to see the stock market a good deal higher within a few months.” (Oct. 17, 1929, just days before the Crash)

Goodbody market-letter in New York Times: “We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices.” (Oct. 25, 1929)

BusinessWeek: “The Wall Street crash doesn’t mean that there will be any general or serious business depression … For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game… Now that irrelevant, alien and hazardous adventure is over. Business has come home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before.” (Nov. 2, 1929)

Harvard Economic Society: “A serious depression seems improbable … recovery of business next spring, with further improvement in the fall.” (Nov. 10, 1929)

Treasury Secretary Andrew W. Mellon: “I see nothing in the present situation that is either menacing or warrants pessimism … I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress.” (Dec. 31, 1929)

Wall Street Journal: As the Dow fell from 298 to Dow 41:“Chase National Bank says the current conditions of very easy credit and poor business have always been a buying opportunity in the past. Absolutely confident that any list of good stocks will have good gains by end of 1931 and probably show a profit by end of 1930.” (June 1930)

President Herbert Hoover: “The depression is over.” (June 1930)



Why optimism is your worst investing enemy
Paul B. Farrell
MarketWatch July 6, 2013

Existing Home Sales, Prices Fall

Existing Home Sales and Prices continue to fall, according to the latest release from the National Association of Realtors. Existing Homes Sales fell in 38 states, led by steep declines in Arizona, Florida and California, as once-booming housing market showed further signs of a steep

The WSJ noted that "the declines were the largest in once-booming areas of
the country. Sales fell by 36% in Arizona; 34.2% in Florida and 28.6%
in California. In all, nine states had sales declines in the summer of
20% or more compared to the third quarter of 2005."

The NAR also noted weakness in sales in metropolitan areas. According to a separate
survey by the Realtors group  in 148 metropolitan areas, price surveys
showed that the median — or midpoint — price for an existing home
sold in the third quarter dipped to $224,900, down 1.2% from a year

In my experience, the reported median sale drop of 1.2% simply does not accurately reflect reality; I suspect it is being biased upwards by "trophy" property prices prices and other adjustments.

Warning: Anecdotal story to follow

Last summer (’05), we looked at an out-of-our-price-range 7 figure plus property. "Its for comparison purposes only" said the Real Estate Agent.

Of course, Mrs. Big Picture fell in love with it. Sunken living room, gorgeous kithcen, fireplace in the Master BR, huge piece of property, just a 5 minute walk to the L.I. Sound. We heard thru the grapevine that a deal was had, fairly close to the asking price. Comparables on the same street had gone in the nines and better.

But the deal fell apart,  and the house went back on the market. We watched it over the next 14 months on line at MLSLI, as the sellers chased the market down: $50k off, then another $40k then another $60, and then another and another. The price eventually fell 20% from original asking price.

I asked the agent what the repsonse would be if I offered yet another $50k less than the re-reduced price. She said: "They would jump on it." We would then have to figure out how to sell my more modest home between Thanksgiving and Xmas. (yeah, good luck with that).

In speaking with other agents and watching the online listing of prices drop, its apparent that this was not a unique situation. Prices continue to drop, and a whole lot more than the 1.2% the NAR is revealing. Prices are falling rapidly due to what can be euphemistically described as "motivated" sellers. Maybe this helps explain some of the reason why: Foreclosures spiked up 42% in October (year over year).

Perhaps the usually hallucinogenic David Lereah, the Realtors’ chief economist, got it is right this time: "With the market
in full transition, buyers now have choices
[read: more inventory] and sellers are more
willing to negotiate
[read: desperate]. Under these circumstances, it’s no
surprise that overall home prices are slightly below a year ago."

As the admittedly anecdotal example shows, "slightly" is a slight exaggeration . . .


Total state existing-home sales$FILE/STATES.pdf

Third-quarter metro area single-family home prices$FILE/MSAPRICESF.pdf

Foreclosures spike in October, Up 42% over a year ago; Colorado, Nevada and Georgia lead.
Les Christie,
CNNMoney, November 17 2006: 9:12 AM EST

Leading Economic Indicators Inched Higher in October
November 20, 2006 10:49 a.m.

How to Use Behavioral Finance in Asset Management, Part II

Yesterday, I laid out the ways we think about and use Behavioral Finance at RWM in the practice of running a wealth management firm. That discussion was about what we do to manage our own cognitive and behavioral issues.

Today, I want to focus more broadly — on how we have built a firm to use what we know from behavioral economics in the work we do with clients.  What follows is an eclectic, incomplete list of examples from our practice. Nothing here is a secret — all of us have discussed these publicly. Collectively, they add up to better behavior from clients, with the highest likelihood of meeting financial goals.

RWM’s clients experience a broad variety of these, ranging from modest nudges, gently shifting people towards better behavior, to others more robust and explicit behavioral controls. The goal of these are to prevent all of our natural instincts from interfering with our portfolios. Its not that people are stupid — our clients happen to be a very smart collection of accomplished and successful people. But the key word is people, and all of us are subject to the same hard-wired traits that while great at making humans the dominant species on the planet, interfere with our success in the capital markets.

What follows are just a few of the ways we work to outsmart our own wetware:

1. Asset Allocation/Diversification: Let’s start with the big one. We use an evidence based approach based on academic research and data. That means we are not alpha-chasing stock-pickers, as we know this is a poor probabilistic risk. Instead, our portfolios are broadly diversified, global, low cost, mostly indexed holdings. We have modest tilts within the portfolios and our international exposure mitigates home country bias.

2. Portfolios Names: A modest nudge with an outsized impact. The traditional naming of accounts (Conservative, Moderate, Aggressive) rubs some people the wrong way (Aggressive? or “I am not a Conservative”). So instead, we named them based on how far various NASA missions travel: Mariner (inner solar system: Mars, Venus and Mercury), Pioneer (Jupiter), Voyager (Saturn, Uranus and Neptune, and beyond our solar system).

3. Milestone Rewards: The average holding period of a mutual fund is 3.3 years. Rather than let this “3-year itch” cause undue turnover, taxes, etc., at the 3 year mark we lower clients’ fees by 15 percent. To qualify, they must have shown good behavior (e.g., no day-trading their accounts, or selling their EM because they heard something bad about Turkey).

4. Financial Literacy Limitations: Research shows financial literacy has a short shelf life. After about 6 months, it fades. So we constantly keep our clients informed about the things we know that matter — and those things we know do not — for the markets, the economy and their portfolios. We put together a quarterly conference call for all clients  where I delve into those topics in (painful) detail. They get regular emailed updates with just our best commentary (including our podcasts and favorite other voices). All of our client facing advisors follow the 12/4/2 rule of regularly speaking updating clients, reviewing life changes, and performing a full revisit of their financial plans. Speaking of which:

5. Financial Planning: We build into our practice the idea that every client’s financial plan is central to their long term success. Even before a prospect becomes a client, we are focusing on a few planning concepts: that money is a tool that can be used to accomplish specific goals; that the purpose of investing is part of a broader plan to achieve those specific goals; and lastly, that good investing is supposed to be boring, and this is not a competition or for entertainment purposes.

6. Communication/Debunking: We spend a lot of time responding to client requests for information about things they read/heard/saw elsewhere. Many of our columns and blog posts, and much of our quarterly conference call comes directly from these client requests. We have examined the Hindenburg OmenNYSE margineconomic conspiracy theoriesbuybackssentimentsingle-factor indicators and so many others as the result of their questions. Helping people properly understand reality (to paraphrase Ray Dalio) is one of the most important aspects of our jobs.

7. Goaltender: There are plenty of tactical portfolios out there, trying to capture alpha. Not ours. Instead, we have created a portfolio designed to be an emotional release valve. Based on published quantitative research, was designed to: a) let investors leave their main pool of investment capital alone during periods of volatility and larger drawdowns; and b) allow cash withdrawals to occur from bonds that are (usually) rallying versus stocks that are (usually) selling at distressed prices.


I do not think I am giving away any secrets when I share these things – even if we opened our kimonos completely and revealed all of our “secret” stack of technology, philosophy and portfolios.

Our real secret sauce? The combination of our culture + hardcore commitment to the philosophy we espouse — thats an unbeatable pairing for any firm to enjoy.



Coming tomorrow: How Behavioral Finance helps when we interact with the public


Transcript: David Hunt, PGIM



The transcript from this week’s MIB: David Hunt, PGIM CEO is below.

You can stream/download the full conversation, including the podcast extras on iTunesBloombergOvercast, and Stitcher. Our earlier podcasts can all be found at iTunesStitcherOvercast, and Bloomberg.


This Is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST MASTERS IN BUSINESS: This week on Masters in Business, I have an extra special guest. His name is David Hunt and he is President and CEO of PGIM, which could be the largest asset manager that you are unfamiliar with they manage $1.2 trillion and they are the 10th largest asset manager in the world. PGIM has a really fascinating business model, they are a variety of different groups that have a very, very long history in the world of asset-management.

They been around over 100 years, their quantitative group dates back to 1975, it could be the oldest quant group that’s out there. PGIM is somewhat unique not just in their institutional focus, but they are a very interesting mix of fixed income, real estate, and real estate financing that makes for a really, really fascinating combination of asset classes.

They — David is as knowledgeable as anybody on these various subjects. If you’re at all interested in private credit, real estate investing, fixed income investing, as well as traditional public markets, you are going to find this to be absolutely fascinating. So with no further ado, my conversation with PGIM’s David Hunt.

I’m Barry Ritholtz, you are listening to Masters in Business on Bloomberg Radio. My extra special guest this week is David Hunt he is president and CEO of PGIM, this is the investment arm of Prudential, the insurance and asset management giant. You might not be familiar with PGIM, but they manage $1.2 trillion in assets, they may be one of the largest top 10 asset managers you might not have heard of.

David comes to us with the bachelors degree in engineering and he spent about 22 years at McKinsey, that’s a really unusual background to go into the asset management business. Tell us a little bit about how you found your way to PGIM?

DAHID HUNT, PRESIDENT CEO, PGIM: Well, to be honest, it’s not that unusual. Actually the asset-management world has quite a few people who have you know, management consulting background and part of it, I think is that we are fundamentally wired to be client oriented and I think one of the aspects of a great asset manager is the fiduciary part of that culture, and I think you get that in spades when you’re working in a firm like McKinsey and I really appreciated that set of values from the very beginning.

RITHOLTZ: So you mentioned being client oriented. Who are the clients of PGIM?

HUNT: So PGIM as you were nice enough to point out, is the 10th largest asset manager in the world, we serve most of the world’s largest pension plans and other large sovereign wealth fund, central banks, so we are predominately an institutional manager. We do I have a retail business here in the United States which has been growing quite the quite rapidly but we’re better known in the institutional market. We serve I would say the world’s most sophisticated client base with a broad range of products.

So we offer obviously public equities and public fixed income but maybe less known is that we’re the third largest real estate manager in the world and we do a lot of other alternatives including things like private credit which have obviously been very hot in that in recent years.

So we have both a public and a private business.

RITHOLTZ: And when I was working my way through the various websites of PGIM, not only are you one of the largest real estate managers, but you’re also a fairly substantial real estate financier. Did I read that correctly?

HUNT: No, you’re absolutely right. I mean for many, many years and this really does go back to the history as an insurance company, obviously we financed a lot of office buildings, Prudential, at one point, was the largest direct owner of real estate in the United States.


HUNT: But we also have been lending into the real estate business for many, many years, so those are old insurance businesses and what we’ve done is we have taken them and essentially make them available to third-party investors.

So at this point, PGIM, although it started out with an insurance heritage, only about 20 percent of my fees come from Prudential, 80 percent of it actually comes from my third-party clients.

RITHOLTZ: So when you’re dealing with sovereign wealth funds in central banks and pension funds, how is that different than the traditional base of insurance clients?

HUNT: It is quite different. I mean insurers need their money managed in very specific ways.

RITHOLTZ: They have real specific liabilities at set future dates based on actuarial tables…

HUNT: And in general they want to manage their money so that they effectively match those liabilities with the cash flow of their assets. And so done well, there’s actually not that much investment risk that is inherent in those books.

Third parties tend to want a more active approach, they have less specific liabilities that they are matching and they will often want a more active and a higher active share style of management than an insurance company will.

RITHOLTZ: That’s quite fascinating. So you spent 22 years at McKinsey, how did that prepare you for running what is now the 10th largest investment manager in the world?

HUNT: Well, I think maybe in two ways. One is that I ran the asset-management practice at McKinsey so the people actually served asset managers, so I’ve spent a lot of the last years working with the leading CEOs in the asset-management stream, and so I think my pattern recognition of what worked and what hasn’t is reasonably good over that period of time.

And the second one is that I do think that the managing and leading in a professional services context is a lot has a lot of parallels with the investment world. Investors are people with strong convictions, they don’t need a lot of management, they might need a little inspiration and leadership, they are people have who have deep convictions which are only good if they are contrarian, there is no point in having the same view as the rest of the market.

And so by nature, they are very independent thinkers, and I would say the same thing as is true of good consultants.

And so having a style where you’re able to inspire and lead but not manage is a style that works very well in the investment world.

RITHOLTZ: What about the engineering background undergrad? You went to Princeton, did you plan on going into finance or was the engineering background something more…

HUNT: So I think the engineering is a little bit of a misnomer in the sense that effectively the econometrics program at Princeton is in the engineering school and so I actually — I actually really majored in econometrics and I my senior thesis was on the emerging markets debt crisis of the of the early 80s, you may remember, that Citi and many others got themselves in an enormous amount of trouble and I built a model of how that worked out in order to help predict some of the future trouble spots.

But — so it was effectively an econometric which led me obviously very easily into finance.


Transcript: Fuller & Thaler’s Raife Giovinazzo



The transcript from this week’s MIB: Raife Giovinazzo of Fuller & Thaler is below.

You can stream/download the full conversation, including the podcast extras on iTunes, Bloomberg, Overcast, and Stitcher. Our earlier podcasts can all be found on iTunesStitcherOvercast, and Bloomberg.


UNIDENTIFIED FEMALE: Masters in Business is sponsored by Harvard Business School Executive Education offering four comprehensive leadership programs that transform rising executives into competent business leaders. To learn more, visit, that’s

UNIDENTIFIED MALE: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast I have an extra special guest. I’m going to bet you haven’t heard of this money manager but you should.

His name is Dr. Raife Giovinazzo. He runs the very interesting behavioral small-cap equity strategy at Fuller & Thaler. For the past five years, the fund has compounded at 17 percent and it has beaten 99 percent of all its peers. So, they are doing something right there.

He has a fascinating background and you’ll hear about both his academic background at Princeton and the University of Chicago, working for two of the giants in the world of behavioral economics, Danny Kahneman and Richard Thaler. How’s that for a pair of advisors.

And he spent his entire career working in that space trying to figure out how to apply the knowledge and the wisdom that those gentlemen and others have created in the field of behavioral finance to the world of investing. I think you will find this to be an absolutely fascinating conversation. I know I enjoyed it a great deal.

So, with no further ado, my conversation with Raife Giovinazzo.

I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio. My special guest today is Dr. Raife Giovinazzo. He is responsible for managing the Fuller & Thaler behavioral small-cap equity strategy at the firm Fuller & Thaler. He has a fascinating background.

Previously, he was researcher and co-portfolio manager with BlackRock’s Scientific Active Equity group. He has a B.A. in Sociology from Princeton and an M.B.A. Ph.D. from the Booth School of Business at University of Chicago.

But his advisors were Danny Kahneman at Princeton and Richard Thaler at Chicago. So, I expect this to be a fascinating conversation. Dr. Raife Giovinazzo, welcome to Bloomberg.


RITHOLTZ: So, let’s start with your advisors. That’s pretty elite group of people you worked with in your career. Kahneman is your undergraduate advisor and Thaler is your M.B.A. and Ph.D. advisor, that’s some serious intellectual firepower.

GIOVINAZZO: They are smart folks. I was lucky. You know, I took a class by Kahneman on decision-making. I loved it, asked him to be my thesis advisor. The funny thing is at that point in time, I didn’t understand that he was a giant in his field. I knew he was very smart obviously.

In the course of doing my research, I realized I’m talking to the number one expert in this subject matter and then he actually connected me ultimately with Thaler. He said — I called them up about five years after I’ve been working as a strategy consultant and said, “I want to go back and want to combine study of business with the study of psychology” and he said. “Well, you need to go study under my best friend Dick Thaler at the University of Chicago.

RITHOLTZ: How crazy is that?

GIOVINAZZO: It worked that well.

RITHOLTZ: So, during the time these folks were advising you, you have an appreciation of how unbelievably fortunate you are.

GIOVINAZZO: I did, you know, and that’s a nice thing. You know, it’s a great thing. Let me talk up my Alma Mater, the University of Chicago. There’s so many Nobel Prize winners there.


GIOVINAZZO: You know, I mean, ironically, I don’t know if you knew this fact, on my dissertation committee were both Thaler and Fama which is the only time that’s ever happened and, you know, to my knowledge that those have been on the same committee.

RITHOLTZ: And they’re golfing buddies as well.

GIOVINAZZO: They’re golfing buddies, yes. They get along much, much better than people think they do.

RITHOLTZ: Well, philosophically, they’re completely the opposite sides of the universe and yet.

GIOVINAZZO: I would disagree actually in that they both strongly believe in paying attention to evidence. Let’s look at the data —


GIOVINAZZO: — and that’s actually a big unifying approach as opposed to we’ll just look — we’ll have a theory about what should work —


GIOVINAZZO: — and we don’t actually care if it actually happens in the real world.

RITHOLTZ: So, they start with a data but they end up in very different places.

GIOVINAZZO: They have different interpretations of the data. That’s certainly true.

RITHOLTZ: To say the least. So, the other question that comes to mind is how did you go from Sociology, which is definitely not a money economic/business-oriented coursework, to right in the mix of finance and asset management? What made you decide Sociology leads to M.B.A.?

GIOVINAZZO: So, it happens that at Princeton the most flexible major was Sociology. I actually only took five Sociology classes as a, quote, “Sociology major.” To be honest, I was never very well trained in the discipline of Sociology, but it allowed me to take all sorts of social science classes and I think at that time, I was really searching for this understanding that it’s more than just economics. There is something that matters about how people think, how people behave, what are norms.

And so, I think it was a very natural transition to where I ultimately ended up even at Princeton to really being focused on this decision-making which is an intersection of Psychology and Economics.

RITHOLTZ: So, you come out of Princeton, you spent five years doing some consulting work, you end up going to Chicago, what was that, four years M.B.A. Ph.D.?

GIOVINAZZO: I wish it was only four.

RITHOLTZ: So, the M.B.A. is two years and then it’s another three or four years on top of that?

GIOVINAZZO: You know, what’s ironic is I told my wife when I joined the Ph.D. program, I think I’ll be able to do it in three years.


GIOVINAZZO: It turns out nobody does it in three years and almost nobody does it in four years. And so, I was the norm, I did it in five years. It’s kind of funny that meets the standard planning biases that —

RITHOLTZ: I was about to bring that up.

GIOVINAZZO: That’s exactly the planning biases —

RITHOLTZ: Kahneman talks about that all the time.


RITHOLTZ: When they started working on an economics textbook, he said. “Well, you know, we’re smarter than most of those other guys.” This will only take us and he said, “We were off by a factor of 10X —

GIOVINAZZO: Yes. Exactly.

RITHOLTZ: which is pretty funny.

GIOVINAZZO: I did the same thing. You know, what he says is people use an internal model to forecast. They think about their own personal situation and they down way the external model of forecasting which would be what happened to everybody else.


Hierarchy of Portfolio Success

Ranking What Helps or Hurts Investment Returns
The key is knowing which ones are subject to human intervention.
Bloomberg, June 11. 2018



What drives the returns of any investment portfolio?

Specifically, from the moment someone starts saving for retirement, until the day they begin to take their required minimum distribution at age 70½, what are the factors that determine just how successful that portfolio is in terms of net, inflation-adjusted returns.

This is a more challenging question than you might think. Ask professional investors, and the responses cover a gamut of inputs, ranging from corporate profits, the economy, risk, valuation, taxes, interest rates, sentiment, inflation and more.

An unexpected challenge in performing this exercise is a tendency for some elements to offset others. For example, changes in profits could be offset by widening or contracting price-earnings ratios; sentiment might offset valuation; returns tend to vary inversely with risk. Why does this matter? Because in the real world, one hand giveth while the other taketh away. This concept of cancellation matters a great deal to total portfolio returns.

And so we are left with an intricate and difficult question. This is why complex, multivariate systems are so hard to assess by traditional analysis. What follows is my attempt to identify seven broad elements that typically determine the total return of any portfolio. 1   Note that these elements progress from the least meaningful over a course of a lifetime to the most. Any given latter item can cancel out the effect of earlier ones.

On to the list:

No. 1. Security selection: Stock picking is what many individual investors and much of the media like to focus on. It’s a rich vein to consider, with traditional elements of narrative and storytelling, winners and losers. 2 No doubt, better stock pickers will see commensurate portfolio gains. But that is merely one element of many, and not surprisingly, subject to other factors.

Consider the universe of active stock-picking mutual funds. The range of outcomes due to skill or luck is fairly broad. However, the net gains attributable to selection on average can easily be offset by any of the following.

No. 2. Costs and expenses: The overall cost of a portfolio, compounded over 20 or 30 years, can add up to (or subtract) a substantial amount of the returns. One Vanguard Group study noted that a 110 basis-point expense ratio can cost as much as 25 percent of total returns after 30 years. That does not take into consideration other costs such as trading expenses, capital-gains taxes or account location (i.e., using qualified or tax-deferred accounts).

The rise of indexing during the past decade is a tacit acknowledgment that on average, cost matters more than stock-picking prowess.

No. 3. Asset allocation: What is the optimal ratio of stocks, bonds, real estate investment trusts, alternates and cash in a portfolio? Academic studies have proven (see this, this and this) that allocation is much more important to returns than stock selection. You can imagine all sorts of scenarios where allocation trumps selection. The greatest stock-picker in the world with a 20 percent equity exposure won’t move the needle very much. 3

No. 4. Valuation and year of birth: Valuations will fluctuate over the life cycle of any bull or bear market. However, for the long-term investor, valuations are less about expected returns of pricey stocks, and more about when they a) start investing and b) start to withdraw in retirement.

Much of this is a random and beyond your control. Imagine the market crashing just before your prime saving and investing years; that should have a positive impact on net returns over time. What about someone who retired in 2000, and began withdrawing capital after the market got shellacked? That will also have an impact.

Those people born in 1948 not only managed to have their peak earning and investing years (35-65) coincide with multiple bull markets and interest rates dropping from more than 15 percent to less than 1 percent. They also lucked into a market that tripled in the decade before retirement.

No. 5. Longevity and starting early: Having a long investing horizon is determined by many factors, including your longevity. How long you live is going to be a function of genetics, lifestyle and dumb luck.

But when you begin saving for retirement is not a function of genetics or health. The sooner you begin, the longer compounding can work its magic.

No. 6. Humility and learning: We all begin as novice investors. Everyone makes mistakeseven the greats like Warren Buffet and Jack Bogle. The key question is how quickly you can figure out all of the things you are doing wrong. Self-awareness and ego is a significant thread in this context. The sooner we learn to learn from our mistakes, the better our investment portfolios.

No. 7. Behavior and discipline: Nothing has a bigger impact than the behavior of investors under duress. I stumbled upon this observation early in my career as a trader; everything I have learned since has served to confirm it.

We see this again and again in the data — just look at DALBAR’s Quantitative Analysis of Investor Behavior. Investors continue to be their own worst enemies when it comes to investment performance. On average, their actions lower their returns significantly, but in the worst cases they demolish them. Even worse, behavior is (or at least should be) within their own control.

Bonus: Luck and random chance: There is a lot of random chance in investing. We often cannot tell the difference between skill and luck in stock selection. And the moment when each realize this can also be somewhat random.

This list might help you consider what changes you might wish to make in your portfolio. At the very least, you might recognize the areas you are over- and underemphasizing. Your investment returns will thank you.


1. Feel free to hit me with more examples at or @ritholtz on Twitter.

2. There are going to be a lot of elements referenced in latter items. Consider as an example home country bias –the tendency for any investor to be overweighted in the stocks of the country where they happen to live. This typically can result in greater volatility of any portfolio and could affect returns over time. I would include this in both items 1 and 7.

3. Any discussion of allocation must also include market timing, i.e., moving from equities to cash or bonds. Very people have managed to perform this maneuver successfully.



Originally: Ranking What Helps or Hurts Investment Returns


Global Assets, 1900 – 2017

Via Credit Suisse


Meb Faber’s Idea Farm reminds us that the Credit Suisse Global Investment Returns Yearbook 2018 should be on your regular reading list. It is chock full of wonderful charts and tables and notes.

Two images from it struck me as so very insightful and revealing, they were worth sharing; perhaps because we have been discussing the issue of overseas exposure so much the past few years.

The first chart (Relative sizes of world stock markets, end-1899 versus end-2017, above) shows the relative sizes of world stock markets, from 1900-2017. As you can see, the US was a mere 15% of the global pie at the start of last century; today it is over half (by capitalization). This should cause you to wonder: Are those prior levels of high U.S. returns will be sustainable for the next century.

Second, look at the ebbs and flows in the chart below, (Evolution of equity markets over time from end-1899 to end-2017, below). The USA has seen its global share rise and fall several times. Also noteworthy: how Japan ballooned up during 1990s & 90s; at its peak, it became almost half of the global market cap.

The lesson for investors is three part:

-Be aware of your own home country bias;

-understand how this balance shifts over time;

-hold a globally diversified portfolio.

To make sure you are not over-exposed to the place where you live, review all of your own portfolios (investment, retirement, etc.) X-Ray them, look to see if your holdings significantly overweight US stocks (or where ever your bias lives), consider more exposure to Emerging Markets and Developed Ex-US.

You will likely reduce overall volatility, lower risk, and could actually improve your returns . . .



Is Japan the Greatest Bubble of All-Time?

Ben Carlson is a Chartered Financial Analyst and Director of Institutional Asset Management at Ritholtz Wealth Management. He has spent his career helping institutions invest and manage their portfolios. 


Thinking and acting long-term for the long-term is one of the few edges remaining in the markets. Bring up this idea and there will almost always be someone waiting to take the other side with the ‘what about Japan?’ argument.

Japan’s two-and-half decade economic and market struggles make for some important lessons but most investors seem to have the wrong takeaways.

One of my favorite market history books is Devil Take the Hindmost by Edward Chancellor. The book provides one of the best historical accounts of financial speculation that I’ve read. Some of my favorite anecdotes and stats came from the section on the Japan real estate and stock market bubble from the 1980s:

  • From 1956 to 1986 land prices increased 5000% even though consumer prices only doubled in that time.
  • In the 1980s share prices increased 3x faster than corporate profits for Japanese corporations.
  • By 1990 the total Japanese property market was valued at over 2,000 trillion yen or roughly 4x the real estate value of the entire United States.
  • The grounds on the Imperial Palace were estimated to be worth more than the entire real estate value of California or Canada at the market peak.
  • There were over 20 golf clubs that cost more than $1 million to join.
  • In 1989 the P/E ratio on the Nikkei was 60x trailing 12 month earnings.

Over the next decade the Japanese stock market lost roughly 80% of its value (which is still far below that peak today):


Meb Faber also has a great chart on how truly massive the Japanese bubble was in terms of its CAPE valuation relative the U.S. tech bubble:


As crazy as things got in the tech bubble, those peak valuations were still a little less than half the peak valuations in Japan.

This was a bubble of massive scale in both stocks and real estate.

The returns also tell the story when you break them down by different periods from 1970 through 2015:


A $100,000 investment in Japanese large cap stocks in 1970 would have turned into $5.7 million by 1989. In small cap Japanese stocks that $100,000 would have grown to $18.3 million! Yet from 1990-2015 the same $100,000 would have turned into $90,400 and $149,000, respectively.

You can also see the affect Japanese stocks had on the foreign developed stock market performance by looking at the difference in returns between the EAFE and EAFE ex-Japan. Avoid Japan in the 70s and 80s and you would have been kicking yourself. Include them since then and you would be kicking yourself.

Japan has surely been a cautionary tale since since 1990 but you have to take into account how truly insane the markets went to get to that point.

Here are some of the wrong lessons investors have taken away from Japan’s bubble deflating:

  • Buy and hold doesn’t work. The truth is buy and hold doesn’t always work over every single period. There almost have to be periods where buy and hold doesn’t work, otherwise everyone would do it. If something worked all the time, eventually it wouldn’t work because too many people would join in. This extreme example shows that buy and hold worked mighty well in one time frame but terribly in another. Still, in the overall period it looks like it still “worked.” It really matters how you define your time frame. Both sides could claim victory on this one.
  • The U.S. is the next Japan. We have quite a ways to go to every reach the speculative excesses that had to be worked off in Japan. Not to mention there are enormous differences in demographics, the diversity of the U.S. economy and the immigration policy differences between the two countries.

And the right lessons:

  • Never underestimate how far people can take the markets to the extremes. This works in both directions. The pendulum swings back and forth but always seems to go further than most would assume is possible. Japan offers what I would consider the largest bubble in history, but people have a habit of forgetting about these things and assuming they can’t happen again.
  • Valuations matter. Valuations don’t work as a timing tool. If you tried to use them in Japan you probably would have gotten out of the market a decade before the peak. It’s easy to say this in hindsight, but there were few scenarios where the late-1980s real estate and stock market valuations could have been validated going forward.
  • Certainty rarely helps make good decisions. People were certain that Japan was going to zoom by the U.S. and overtake it as the largest economy in the world. And who could blame them? Very few people predicted the other side of that one.
  • Avoid home country bias. If you live in Japan and had all of your investments in Japanese stocks you’ve not only lived through a few decades of poor investment returns but also a slow growing economy.
  • Avoid investing all of your money in a single asset class. Japanese government bonds returned over 6.1% per year from 1990-2015, far outpacing the stock market in that time.
  • Diversification, as always, is the key to avoiding a blow-up. The entire point of diversification is to avoid having your entire portfolio in a Japan situation. The global stock market has done just fine since 1990 even when you include Japan in the results.

Devil Take the Hindmost: a History of Financial Speculation

Further Reading:
The Timeless Nature of the Herd Mentality



This piece originally appeared on Wealth of Common Sense and has been reproduced in the book, The Best Investment Writing: Selected writing from leading investors and authors.


BW: Where to Invest $10,000 Right Now

I have been participating a quarterly series at BusinessWeek the past year, titled Where to Invest $10,000 Right Now. Its an outstanding collection of 5 investors: Joe Brennan global head of Vanguard’s Equity Index Group, Russ Koesterich Portfolio manager, BlackRock Global Allocation Fund,  Sarah Ketterer Chief executive officer and fund manager, Causeway Capital Management, Richard Bernstein Chief executive officer, chief investment officer, Richard Bernstein Advisors, and myself.

Normally, I am not a fan of blindly providing investment advice in the mass media beyond informing people what is really going on. Readers come from all over the world, have different risk tolerances, live under differing tax regimes, have different incomes and financial goals. No one speaking in public knows what their readers need to retire. Anything any pundit says publicly cannot possibly apply to everyone.

Thus, it is tricky to provide advice that wasn’t self-serving or even irresponsible.

The way I managed around this was to identify several investing themes that were: a) relatively inexpensive; b) under-invested by American readers; c) could see price appreciation as well as be a long term asset allocation hold; d) are all represented in our clients’ asset allocation portfolios.

My first suggestion a year ago was Buy Emerging Markets. They were both cheap, and widely underrepresented in American portfolios. The next quarter were European equities, also cheaper than U.S. stocks and wildly out of favor. And in the process of the two of these, I managed to sneak in small lesson about home country bias.

This go round, I recommended Large Cap US Value:


Go read the entire thing here.

And if you want or need help with your own portfolios, please reach put to us — go to our website, or call us at 212-455-9122 (ask for Erika or Kris), or send an email to Info-at-RitholtzWealth-dot-com.