Observer has an interesting profile of respected investor Howard Marks, excerpted from the book The Great Minds of Investing (found via Abnormal Returns).

I enjoy the writings of Howard Marks because his observations are logical and rational, and he doesn’t mind putting out stuff that is boring and hard to do. It is much more popular to write about exciting things that are easy to do like “sell all your bonds!” or “buy oil stocks now!”. This quote from the profile is a good example. (Bolding is mine.)

“You can’t control the environment,” Mr. Marks adds. So the key is to recognize how it’s changing, accept it, and respond as wisely as possible. “The screwiest thing you can do is to think you’re a Master of the Universe. We’re all just little cogs, and the universe will go on without us. We have to fit into it and adapt to it.” For example, at the time of our interview in late 2014, he sees scant investment opportunity and excessive complacency: “What bigger mistake could there be than to think you can safely get high returns in a low-return world?” Investors should adjust by assuming less risk and lowering their expectations. He cites a favorite quote from Peter Bernstein: “The market’s not a very accommodating machine; it won’t provide high returns just because you need them.”

Assume less risk. Lower your expectations. I’ve been reading a lot of Dr. Seuss recently, and I think he would say “you may yawn and boo, but that is what you should do.”

For some reason, this book is out-of-stock at Amazon, unavailable at my library, and third-party copies are $70?! I believe this is because it contains high-quality photographs of the people profiled. Not to worry, Oaktree Capital has all of Marks’ famous memos online for free, or you can read a distillation of them in his book The Most Important Thing Illuminated (my review).

EconompicData has a nice, relatively brief post about the relationship between US Treasury bonds, TIPS, and inflation. I would hold either Treasuries or TIPS (or both) because they have the highest credit quality available, and that is a big part of why you should own bonds in the first place. Read the whole thing, but the conclusion below pretty much sums up why I prefer to have TIPS in my investment portfolio.

In normal market environments when inflation is relatively stable, long-term returns tend to be similar for both Treasuries and TIPS. However, TIPS materially outperform in an inflationary environment, while Treasury outperformance is capped by a rate roughly equal to the break-even inflation rate in a deflationary environment. Thus, assuming a view that an inflationary and deflationary scenario are equally likely, the unlimited potential outperformance of TIPS vs. Treasuries in an inflationary environment and limited upside of Treasuries vs. TIPS in a deflation environment would sway an investor towards TIPS.

When it comes to constructing an investment portfolio for yourself, there are many things you could tweak and maximize. Obviously, you can look back at historical data and maximum past annual returns while minimizing volatility. For some, this means more stocks and less bonds. Or buying small companies over huge companies. Or buying “value” stocks with low price-to-book ratios over those with high price-to-book ratios. Or buying stocks with high dividend yields. Or buying asset classes with momentum. Or often, a big mishmash of all of the above.

But really, do most folks invest in these “optimized” portfolios really understand them? What if we worked to maximize something else instead?

From Patrick O’Shaughnessy of Investor Field Guide:

I believe the most pertinent question to ask about any systematic/quantitative strategy is not “how hard would this be to replicate” but rather “how hard would this be to stick with.”

From Tadas Viskanta of Abnormal Returns:

The best thing investors can do is put their time, effort and energies in finding a strategy they can stick with. The same goes for those who provide financial advice to a broad audience. This may not sell as well but at least it has some grounding in reality.

If you don’t understand why you’re buying something, then it may be better just to stay away until you do. For example, I don’t understand commodities futures or oil prices. I don’t understand gold at all. If their prices fall, I have no idea if, when, or why they will rebound. (But you might.) In contrast, if buy all the US companies weighted by their market value, then I feel confident that eventually those companies as a group will work things out and come back. (But you might not.) I also hold a big slug of government and municipal bonds as I think they have very low credit risk. (You might disagree.)

This need for understanding can be either a positive or negative when making the case for financial advisors. A good financial advisor will explain things in a manner you understand, and keep you on track during times of stress. A bad financial advisor will simply sell you an “advanced” portfolio vetted by super-skilled geniuses, leaving you even more scared during a market crisis (“if even the smart guys didn’t see this coming, then is the sky falling?!?”).

Bottom line: Think carefully about how likely are you to stick with your portfolio during both boom times and panic. 

Catching up on articles, I saw that Financial Times has an intriguing profile of Vanguard. If you’re not a hardcore Boglehead, you will likely discover some new bits about this company started by Jack Bogle and pioneered index fund investing. (I’d like to eat in their “galley” one day.) Everyone seems to be commenting on Vanguard’s growing popularity, and this chart supports the idea that lower fees have led to greater assets under management.

I wanted to highlight a portion that aligns with my own investment philosophy (yup, confirmation bias):

Vanguard stresses it is not solely an index fund shop. It runs actively managed bond funds, too, and equity funds whose stockpicking it outsources to a roster of sub-managers such as Wellington Management Company. These active managers are charged with delivering “alpha”, returns in excess of the market.

“We’re not an indexing shop or an active shop, we’re a low-cost shop,” says Mr Buckley. “We believe that there is alpha, just that it is fragile and if you have high expenses you will destroy it.”

Costs matter, especially management fees and taxes. Beating the market (alpha) is possible but probably much harder than you think. Vanguard’s low-cost funds, both active and passive, have won the money of investors.

Will Vanguard’s dominance grow to include low-cost portfolio management? While I am definitely tracking all the new start-ups like Betterment and Wealthfront, you could technically say that Vanguard’s Target Retirement 20XX Funds were the first low-cost “robo-advisor” solution with no additional markup over the underlying fund expenses. With the official launch of the Vanguard Personal Advisor Services product, you can now have a human advisor to talk to for just 0.30% annually.

The best part of any low-cost portfolio management service is that you can focus on your savings rate, which is really more important than Betterment vs. Vanguard vs. iShares vs. whatever.