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Embrace Low-Frequency Trading
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Embrace Low-Frequency Trading

Apr 12 2014, 9:46am CDT | by

I love Michael Lewis’ writing, but I have some surprisingly good news to share about the high-frequency trading scandal revealed in his new book: High-frequency trading is not likely to hurt...

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15 weeks ago

Embrace Low-Frequency Trading

Apr 12 2014, 9:46am CDT | by

I love Michael Lewis’ writing, but I have some surprisingly good news to share about the high-frequency trading scandal revealed in his new book:

High-frequency trading is not likely to hurt disciplined, long-term, low-frequency-trading investors. In fact, it might even help.

Yes, it is almost impressive that Wall Street has managed to produce yet another scandal, even under the ever more watchful eye of regulators and the media since the financial industry imploded in 2008.

And no, I don’t favor high-frequency trading or especially its less-sophisticated cousin, day trading. I thought former hedge fund manager James Altucher put it best when answering the question, “Should I day trade?”

“Only if you are also willing to take all of your money, rip it into tiny pieces, make cupcakes with one piece of money inside each cupcake and then eat all of the cupcakes.”

However, high-frequency trading, this scandal du jour, seems to actually push trading costs and bid/ask spreads (effectively, the net cost of purchasing a security) down for investors. High-frequency traders aren’t doing it out of the kindness of their heart, mind you, but it’s the large number of medium-frequency active managers who are losing out, not disciplined low-frequency investors. Wall Street’s movement toward high-frequency trading is only making a stronger case for passive asset class management—a major component of which is low-frequency trading.

The primary benefits of low-frequency trading are the reduction of trading costs, the minimization of taxable events and, especially, the avoidance of falling prey to what financial writer and artist Carl Richards calls “the behavior gap”—the difference between what the average investment returned and what the average investor earned. Sadly, investors have earned meaningfully less than the investments they buy simply because they don’t hold them.

I’m not talking about pure indexing, although you could do much worse than establishing a diversified portfolio with Vanguard index funds and/or exchange-traded funds.

I’m also not talking about pure white-knuckle passivity.

I’m talking about combining the art and science of investing in the form of evidence-based investing—creating a portfolio that is broadly diversified, combining the asset classes that have historically given you the most return for your risk with the asset classes that have tempered portfolio volatility enough to stick with your plan.

Evidence-Based Investing: 101

null

The primary objective of investing in stocks, however, is to make money. The point of investing in bonds, then, is to help you stay invested in stocks when the waters get choppy. The net effect should be adding value to your life, in accordance with your values and working toward your goals.

Evidence-based investing forces us to submit all of our opinions and informed guesses to actual peer-reviewed evidence. The evidence shows, after all, that it is nearly impossible to “beat the market.”

There is adequate evidence, however, that certain asset classes—slices of the market—have outperformed others. For example, you already know that stocks have historically outperformed bonds. Additionally, small-cap stocks have outperformed large-cap stocks and value stocks have historically outperformed growth stocks.

Of course, those asset classes that have historically produced outsized returns have also required an iron stomach at times in order to reap your reward. Their highs are higher, but their lows are also lower.

The objective, then, is to orchestrate a portfolio that accepts the risk you can withstand, and then blend that risk with the proper stabilizing agents to lessen the volatility, helping ensure that you stick with the plan.

Can You Expect More Return With Less Risk?

In short—yes, because null . There are two ways to reduce overall portfolio volatility:

1)   Own less volatile asset classes.

2)   Own less correlated asset classes.

The foremost portfolio stabilizing agent is fixed income, and since the primary reason we hold fixed income is to stabilize, it only makes sense to hold the most stable of the stable—FDIC-insured CDs, Treasuries, agencies and, only if you’re in a high tax bracket, AAA-rated municipal bonds.

Yes, I omitted corporate bonds from that list as well as high-yield “junk” bonds, because these varietals tend to exhibit more equity-like risk characteristics. If you’re going to take risk, you may as well do it in an asset class that rewards you better—stocks.

But as Larry Swedroe, author of Think, Act, and Invest Like Warren Buffett, shows, null .

He compares the traditional 60/40 portfolio—60% S&P 500 (stocks) and 40% five-year Treasury notes (fixed income)—to a flip-flopped portfolio with 60% in Treasuries, but a vastly more diversified 40% in equities, skewed in the small, value and international directions (and away from the broader market).  The results?

In short, the 40/60 portfolio with diversified equity holdings outperformed the 60/40 portfolio with substantially less risk. (By the way, I’m not recommending that you should have a 40/60 portfolio—I’m simply demonstrating the benefits of thoughtful diversification.)

The only way this works is if you join the low-frequency trading club. Don’t set it and forget it. Set it, calibrate it when necessary through rebalancing, and only make more meaningful changes when your ability, willingness or need to take risk changes.

If you enjoyed this post, please let me know on Twitter, @TimMaurer.

 
Update
10

7 weeks ago

RM47mil KWSG contributions still unclaimed

Jun 9 2014 7:54am CDT | Source: Business Times Malaysia

KUALA LUMPUR: About RM47 million of contributions in the Teachers Provident Fund (KWSG) still remain unclaimed, the Dewan Raky ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
9

7 weeks ago

Gold shop lost almost RM1mil

Jun 9 2014 3:50am CDT | Source: Business Times Malaysia

KANGAR: A gold shop owner lost almost RM1 million after after the safe on in his shop was broken into by ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
8

7 weeks ago

Motion to debate MAS losses in Dewan Rakyat rejected

Jun 9 2014 3:39am CDT | Source: Business Times Malaysia

KUALA LUMPUR: AN emergency motion to debate the losses incurred by Malaysia Airlines last year, amounting to RM1.2 billion was rejected by the Dewan Rakyat toda ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
7

7 weeks ago

MH370 Tragedy: Hisham: RM27.6 mil spent on 1st phase of SAR

Jun 9 2014 2:11am CDT | Source: Business Times Malaysia

KUALA LUMPUR: Malaysia spent some RM27.6 million in its first phase of the search operations for missing Malaysia Airline flight MH370, said Acting Transport Minister, Datuk Seri Hish ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
6

7 weeks ago

9.1m litres of diesel seized in a month

Jun 8 2014 1:11am CDT | Source: Business Times Malaysia

PUTRAJAYA: The Domestic Trade, Cooperatives, and Consumerism ministry has seized some 9.1 million litres of diesel and property worth RM58 million since mounting ‘Operasi Diesel Selatan’ in the southern states last month ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
5

8 weeks ago

Girl, 9, awarded RM2.78m compensation for medical negligence

Jun 6 2014 4:56am CDT | Source: Business Times Malaysia

KUALA LUMPUR: A nine-year-old girl who suffered brain damage during her birth at a government hospital was awarded over RM2.78 million in compensati ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
4

8 weeks ago

Malaysia's total trade in April up 12pc

Jun 5 2014 11:52pm CDT | Source: Business Times Malaysia

KUALA LUMPUR: Malaysia's total trade in April 2014 rose by 12 per cent from a year ago to RM123.86 billion due to growing trading activities, International Trade and Industry Minister Datuk Ser ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
3

8 weeks ago

Works Ministry to spend RM20m for upgrading works at 50 accident black spots

Jun 4 2014 11:35pm CDT | Source: Business Times Malaysia

JOHOR BARU: The Works Ministry will implement upgrading works at 50 accident prone locations in the country that have been identified this year involving an allocatio ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
2

8 weeks ago

Najib launches loan scheme for Ramadan traders

Jun 4 2014 10:24pm CDT | Source: Business Times Malaysia

PUTRAJAYA: Prime Minister Datuk Seri Najib Razak today launches RM45 million Ramadan Bazaar Scheme 2014. ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
1

8 weeks ago

Residents bring up objection against Kidex to Suhakam

Jun 4 2014 4:49am CDT | Source: Business Times Malaysia

PETALING JAYA: A group of 20 Petaling Jaya residents held a meeting with the Human Rights Commission of Malaysia (Suhakam) over their objection against the proposed RM2.2 billion Kinrara Damans ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 

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