Daily Research Links for Week #385 (July 24-39, 2917)

The Pursuit of Financial Happiness(TM) Daily Research Links for Week #385 are here.  They are 12 pages long.  All links are in original language and may include audio, video, or long studies.  They are macroeconomic and financial information worth reading and do not imply I agree or endorse them.  You have to be able to consider and apply critical thinking to anything you read.

I am presently working on Week #393.  If you are interested in an eamil subscription to The Pursuit of Financial Happiness(TM) Daily Research Links, no matter where you live in this World, contact me at mjscpa@sbcglobal.net.

As thepursuitoffinancialhappiness.com website is constructed it will archive all past  daily research links (after 4 weeks of existence to non-subscribers) and research topics.    We will also have podcasts again as subjects deserve the attention.


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Daily Research Links for Week #384 (July 18-24, 2017)

Here is another week of daily research links for Week #384 for The Pursuit of Financial Happiness(TM).  I am now working on Week #393.

Week #384 is only 12 pages long.   As I have indicated previously, these links are being provided to not just inform, but to allow readers to determine the value of these economic and financial research links, that I use. 

If you would like to receive them on a daily subscription basis, wherever you live in the world, let me know at mjscpa@sbcglobal.net.

We are in the process of designing thepursuitoffinancialhappiness.com website where we will archive past research topics and weekly links which are at least 4 week old.  We may also put together some past writings and form them cohesively into The Pursuit of Financial Happiness(TM)  e-books on investing, estate planning, and other relevant topics. 


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Fiscal Stimulus and Global Imbalances

 The Federal Reserve 2017 Jackson Hole Symposium had what I found to be two particularly interesting papers.  The Auerback-Gorodnichenko paper "Fiscal Stimulus and Fiscal Sustainability" which finds that fiscal stimulus in a weak economy, even in countries with high debt, can improve fiscal sustainability.  Jason Furman's remarks on the paper with many charts was very good.  For those of us who have long maintained that fiscal stimulus designed to put people to work, improve needed infrastructure, and stimulate growth in the national economy -- not wasteful political favoritism or handouts to large financial institutions and the rich and rentiers --  are necessary to effectively recover from deep economic recessions and depressions, this is a welcome paper.

Menzie Chinn's paper  "The Once and Future Global Imbalances?  Interpreting the Post-Crisis Record" which documents fiscal policy can and has had a noticeable influence on current account balances.  Chinn had additional remarks with graphs.  Maurice Obstfeld, chief economist at the IMF, also provides remarks detailing the differing economic viewpoints on global imbalances and the problems with resolving the debate.

Federal Reserve Chairman Janet Yellen's speech on financial stability was very subdued and reassuring, particularly in her defense of bank regulations, which many have taken as a subtle rebuke of the current Administration's desire to reduce and/or remove regulations on banks, despite the Great Financial Crisis of 2008.

Here are all the papers, speeches, and remarks at the Symposium.

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Do ETFs Negatively Impact Portfolios?

In a recent paper studying ETF investors using data from a large German brokerage,the authors found that ETFs do not improve portfolios with the ETF portion of a portfolio underperforming the non-ETF portion of the portfolio by -1.16% and investors using ETFs used all investment products sub-optimally.  All investors in the study had refused free financial advice and were self-directed investors.  Poor timing in buying and selling accounted for .77% of the underperformance.   When compared to a market portfolio buy and hold strategy, the majority of the underperformance was due to security selection behavior. (See tables VII and VIII in the paper.)  The study found no investor distinct group benefited from, or increased diversification with, ETF use.  When trading costs were included with gross returns, the results were worse.

The authors suggest that it would be better to invest in a buy and hold strategy with a low cost diversified market investment.

This means, in my opinion, that the self-directed investor approaching or in early retirement should look for a low Beta (1.00 or lower) and a high Sharpe Ratio (the higher the better) market investment as well as review cost and performance through the years.  An investor with a long time horizon might include Alpha (the higher the better) in the criteria.  There are several that should pop up on an ETF criteria screen for deeper analysis.  If you have a fiduciary, fee only, financial financial advisor, there might be more portfolio options in a buy and hold strategy which is allowed to slowly grow.

The study concluded: "We find that the portfolio performance of individual users relative to non-users of ETFs slightly worsens after ETF use. The loss comes mostly from buying ETFs at the “wrong” times rather than choosing the ex-ante “wrong” ETFs. Therefore, adopting a buy-and-hold strategy is more important than selecting better ETFs. The benefits from a buy-and-hold strategy are twofold. First, as our analysis reveals, a buy-and-hold strategy would prevent investors from trading ETFs at “wrong” points in time. Second, the positive effects on gross performance are amplified for net performance as trading costs in buy-and-hold strategies are naturally lower.

"Our paper thus points out that the wonderful innovation of passive ETFs, with its enormous potential to act as a low cost and liquid vehicle for diversification, may not help individual investors to enhance their portfolio performance if they actively abuse passive ETFs by buying and selling them at “wrong” times. Ironically, the low cost and high liquidity of these ETFs seem to encourage their trading, and this aggravates an individual’s temptation to engage in some sort of timing. Our finding should make regulators, consumer protection agencies, companies with 401k plans, and financial economists more cautious when recommending ETF use. From a policy perspective, therefore, promoting savings on well-diversified ETFs that simultaneously limit the potential to actively trade in them might be beneficial to individual investors." 

This is the fifth post is a series on ETFs.  The fourth post, which has links to the first three in its first paragraph, on synthetic ETFs can be found here.


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