Finance: Personal Investing

32 Results

 

X-CAPM: An Extrapolative Capital Asset Pricing Model

Many investors assume that stock prices will continue rising after they have previously risen, and will continue falling after they have previous fallen. This evidence, however, does not mesh with the predictions of many of the models used to account for other facts about aggregate stock market prices. Indeed, in most traditional models, expected returns are low when stock prices are high: in these models, stock prices are high when investors are less risk averse or perceive less risk. In this paper, the authors present a new model of aggregate stock market prices which attempts to both incorporate expectations held by a significant subset of investors, and address the evidence that other models have sought to explain. The authors' model captures many features of actual returns and prices. Importantly, however, it is also consistent with survey evidence on investor expectations. This suggests that the survey evidence is consistent with the facts about prices and returns and may be the key to understanding them. Read More

Want People to Save More? Send a Text

What's the most effective way to encourage people to save their money? The answer lies in a combination of peer pressure and text messages, according to new research by Assistant Professor Dina D. Pomeranz. Open for comment; 6 Comments posted.

A Brief Postwar History of US Consumer Finance

The growth of the consumer finance sector after World War II provided a bevy of new financial options for Americans. These options led to a "do-it-yourself" approach to consumer finance, and an increase in household risk taking. In this paper, Harvard Business School professors Gunnar Trumbull and Peter Tufano, along with former HBS research associate Andrea Ryan, discuss the major themes that dominated the expansive postwar sector, including some of the factors that set the stage for the recent subprime mortgage crisis. Read More

Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge

In August 2010, the Security and Exchange Commission announced a highly anticipated rule that would make it easier for investors to nominate new board members and get rid of existing ones. It allowed shareholders to have their board candidates included in the company's proxy materials--if those shareholders had owned at least 3 percent of the firm's shares for at least the prior three years. On October 4, the SEC unexpectedly and indefinitely postponed the implementation of that rule, pending the outcome of a lawsuit aimed at overturning it. This paper gauges the significance of the proxy access rule by measuring whether certain firms gained or lost market value on news of the delay. Research was conducted by Harvard Business School professors Bo Becker, Daniel Bergstresser, and Guhan Subramanian. Read More

Can a Continuously-Liquidating Tontine (or Mutual Inheritance Fund) Succeed where Immediate Annuities Have Floundered?

The changeover from defined benefit to defined contributions retirement plans in the United States has created a vast group of individuals that faces (or will face) the difficult problem of using a lump sum of assets to provide consumption for a relatively long but uncertain number of years. Up to this point, however, consumers appear not to have embraced annuitization. HBS professor Julio J. Rotemberg suggests an alternative instrument that, like immediate annuities, provides longevity insurance and postpones income until old age. In the proposed Mutual Inheritance Fund (MIF), a pool is formed by having individuals of a particular age buy shares in a mutual fund. The income from the underlying assets in the mutual fund is reinvested in the fund so that the value of the shares in an individual's name (and possibly also the number of these shares) grows over time. The basic idea behind the MIF is that the shares of pool members who die are liquidated, and the proceeds are then distributed in cash to the remaining members in proportion to the number of mutual fund shares that are currently in their name. Read More

Female Empowerment: Impact of a Commitment Savings Product in the Philippines

Does access to personal savings increase female decision-making power in the household? The answer could be important for policymakers looking to increase female empowerment. HBS professor Nava Ashraf and colleagues developed a commitment savings product called a SEED (Save, Earn, Enjoy Deposits) account with a small, rural bank in the Philippines. The SEED account requires that clients commit not to withdraw funds that are in the account until they reach a goal date or amount, but it does not explicitly commit the client to continue depositing funds after opening the account. This working paper examines the impact of the commitment savings product on both self-reported decision-making processes within the household and the subsequent household allocation of resources. Read More

Smart Money: The Effect of Education, Cognitive Ability, and Financial Literacy on Financial Market Participation

(Previously titled "If You Are So Smart, Why Aren't You Rich? The Effects of Education, Financial Literacy and Cognitive Ability on Financial Market Participation.") Individuals face an increasingly complex menu of financial product choices. The shift from defined benefit to defined contribution pension plans, and the growing importance of private retirement accounts, require individuals to choose the amount they save, as well as the mix of assets in which they invest. Yet, participation in financial markets is far from universal in the United States. Moreover, researchers have only a limited understanding of what factors cause participation. Cole and Shastry use a very large dataset new to the literature in order to study the important determinants of financial market participation. They find that higher levels of education and cognitive ability cause increased participation—however, financial literacy education does not. Read More

Rethinking Retirement Planning

Many of us are relying on defined contribution plans to help fund retirement. But Harvard Business School professor Robert C. Merton believes today's plans are not sustainable. So what's next? A new way to look at the problem. Read More

Long-Run Stockholder Consumption Risk and Asset Returns

The long-run consumption risk of households that hold financial assets is particularly relevant for asset pricing. The fact that stockholders are more sensitive to aggregate consumption movements helps explain why the consumption risk of stockholders delivers lower risk aversion estimates. Understanding further why consumption growth, particularly that of stockholders, responds slowly to news in asset returns will improve finance scholars' understanding of what drives these long-run relations. HBS professor Malloy and his coauthors examine more disaggregated measures of long-run consumption risks across stockholders and non-stockholders, and provide new evidence on the long-run properties of consumption growth and its importance for asset pricing. Read More

Consumer Demand for Prize-Linked Savings: A Preliminary Analysis

Prize-linked savings (PLS) products are savings vehicles that may appeal to people with little savings and little interest in traditional savings products. PLS products offer savers a return in the form of the chance to earn large prizes, rather than in more traditional forms of interest or dividend income or capital appreciation. The probability of winning is typically determined by account balances, and the aggregate prize pool can be set to deliver market returns to all savers. Prize-linked assets are offered in over twenty countries around the world—including the U.K., Sweden, South Africa, and many Latin American and Middle Eastern countries—but are not available in the United States, where state laws and federal regulations make the offering of prize-linked programs problematic. This working paper provides a first look into demand for a PLS product in the United States. Read More

A House Divided: Investment or Shelter?

For decades Americans viewed their homes as a safe harbor, a place to put down roots. But the last decade saw the rise of housing as an investment opportunity. What comes next? asks Harvard Business School professor Nicolas P. Retsinas, director of Harvard's Joint Center for Housing Studies. Read More

Building Sandcastles: The Subprime Adventure

The early days of the subprime industry seemed to fulfill a market need—and millions of renters became homeowners as a result. But rapidly escalating home prices masked cracks in the subprime foundation. HBS professor Nicolas P. Retsinas, who is also director of Harvard University's Joint Center for Housing Studies, lays out what went wrong and why. Read More

Global Currency Hedging

This article is forthcoming in the Journal of Finance. How much should investors hedge the currency exposure implicit in their international portfolios? Using a long sample of foreign exchange rates, stock returns, and bond returns that spans the period between 1975 and 2005, this paper studies the correlation of currency excess returns with stock returns and bond returns. These correlations suggest the existence of a typology of currencies. First, the euro, the Swiss franc, and a portfolio simultaneously long U.S. dollars and short Canadian dollars are negatively correlated with world equity markets and in this sense are "safe" or "reserve" currencies. Second, the Japanese yen and the British pound appear to be only mildly correlated with global equity markets. Third, the currencies of commodity producing countries such as Australia and Canada are positively correlated with world equity markets. These results suggest that investors can minimize their equity risk by not hedging their exposure to reserve currencies, and by hedging or overhedging their exposure to all other currencies. The paper shows that such a currency hedging policy dominates other popular hedging policies such as no hedging, full hedging, or partial, uniform hedging across all currencies. All currencies are uncorrelated or only mildly correlated with bonds, suggesting that international bond investors should fully hedge their currency exposures. Read More

The New Real Estate

Real estate continues to defy revert-to-the-mean gravity to deliver handsome returns to investors. Professor Arthur I. Segel looks at the latest developments in the field and also considers several warning clouds that could darken the picture. Read More

Helping Low-Income Families Save More

Marketers are quite efficient at targeting potential customers when they have money—that is, at tax-refund time. Professor Peter Tufano thinks tax time could also be perfect for helping low-income families save more. Read More

Optimal Value and Growth Tilts in Long-Horizon Portfolios

Long-term investors look for portfolio strategies that optimally trade off risk and reward, not in the immediate future, but over the long term. It is unrealistic to expect long-term investors to adopt an "invest and forget" strategy, but creating a portfolio strategy that adjusts asset allocations in response to changing risk premia, interest rates, and expected inflation remains a challenge in finance. Jurek and Viceira have devised a solution method that aims at a practical implementation of dynamic portfolio choice models with realistically complex investment opportunity sets. They have applied their method to study the role of value stocks and growth stocks in the portfolios of long-term investors, and have found that long-term investors might want to tilt their portfolios away from value stocks despite the fact that the average return on value stocks is larger than the average return on growth stocks (the so-called "value premium"). Their findings provide support for the idea that the superior performance of value stocks might reflect simply that they are riskier than growth stocks at long horizons. Read More

Reinventing the Dowdy Savings Bond

Families with low and moderate incomes have difficulty saving money—many can't even open bank accounts. To help these families plan for the future, professor Peter Tufano proposes minor changes to the U.S. savings bonds program. Read More

The Best Place for Retirement Funds

Turns out location, location, location isn’t just about real estate. Professor Daniel Bergstresser discusses his research on optimal asset location strategies. Read More

Reinventing Savings Bonds

At one point in American history, savings bonds were an important tool families used to build assets and get ahead. While times have changed, this function of savings bonds may be even more important now, especially for the 41 million low- and moderate-income American households. Tufano and Schneider lay out a case for why savings bonds should be reimagined to help millions of Americans build assets now. Read More

Public Pension Reform: Does Mexico Have the Answer?

Mexico may have found a formula for avoiding most of the misfortunes that could arise when individuals invest their own funds. What's the right way to support an aging workforce? And why is it that a concept—life-long security—that should bring comfort to all of us is so distasteful to address in public? Closed for comment; 10 Comments posted.

Professors Introduce Valuation Software

HBS professors Krishna Palepu and Paul Healy have developed a business analysis and valuation software program, which is being sold to the public. Here is why investors and executives should take a look. Read More

The Bias of Wall Street Analysts

Historically, stock analysts’ recommendations have been swayed by business relationships between the analyst’s employer and the target company, says Professor Mark Bradshaw. Have recent SEC reforms helped? Read More

Real Estate: The Most Imperfect Asset

Real estate is the largest asset class in the world—and also the most imperfect, says Harvard Business School professor Arthur Segel. He discusses trends toward institutionalization, environmentalism, and globalization. Read More

New Challenges for Long-Term Investors

Risk-reward. Rising interest rates. Stocks or bonds. The long-term investor has lots to ponder when setting asset allocation strategy, says HBS professor Luis M. Viceira. And the answers might not come with "conventional wisdom." Read More

Analyst Disagreement, Forecast Bias and Stock Returns

It is well documented that financial analysts' opinions are reflected in stock prices. The problem: Analysts often operate under incentives that are inconsistent with telling the truth. Retail investors, who tend to be less sophisticated, may fail to make proper adjustments for the more nuanced of the resulting biases, some of which might be reflected in market prices. To study the scope of market efficiency, Scherbina studied analysts' incentives, resulting forecast biases, and their potential impact on market prices. Read More

Is This the Twilight Era for the Managed Mutual Fund?

Once a "safe bet," mutual funds are facing a rocky future as investment managers come under fire for such mismanagement as arbitrage trading. These alleged double dealings will end up costing investors a bundle in the long run. Are we witnessing mutual funds' swan song? Closed for comment; 11 Comments posted.

The Problem with Hedge Funds

Hedge funds are the New Big Thing—and that’s bad for the average investor, says professor D. Quinn Mills. An excerpt from Wheel, Deal, and Steal. Read More

Rating Fund Managers by the Company They Keep

A new method for rating the performance of mutual fund managers looks less at past performance, and more at where smart managers are investing. A Q&A with Harvard Business School professor Randolph B. Cohen. Read More

‘Let the Buyer Beware’ Doesn’t Protect Investors

"Let the buyer beware" is a poor warning for investors, says HBS professor D. Quinn Mills. In this excerpt from his new book, Buy, Lie, and Sell High: How Investors Lost Out on Enron and the Internet Bubble, he offers a way to shape up the system. Plus: Author Q&A. Read More

Profits and Prophets: The Role of Values in Investment

What are the tradeoffs of socially responsible investing? In a lively debate, social fund manager Amy Domini and a Harvard investment scholar, Samuel L. Hayes, explore the margins of moral versus amoral investing. Read More

Where Main Street Meets Wall Street

Its phenomenal growth, based on its near-perfect fit with consumer needs and aspirations, has made the mutual fund one of this century's big success stories. How is it adapting to the age of the Internet and 21st century change? HBS Professors Jay O. Light and Peter Tufano and three alumni take a look at the state of the mutual fund industry 75 years after its beginnings in Boston's financial district. Read More