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 Financial Happenings Blog 
Tuesday, August 11 2009

Professors Fama & French published academic research in 1992 which forms the core of this firm's philosophy towards investing. The details of their paper can be found on our website - The Three Factor Model.
 
Earlier this year, in conjunction with Dimensional Fund Advisors, the professors started an online forum through which they could discuss a range of important and interesting investment topics.
 
Over the past two months they have added to the series of vidoes found at the forum.  They are well worth a look.
 
Dollar Cost Averaging - Does it make sense to dollar cost average? It depends. Standard financial analysis says dollar cost averaging is suboptimal. If you focus on only your investment outcome, investing a lump sum immediately lets you construct the best portfolio you can today; slowing the process with dollar cost averaging just keeps you in something other than your best portfolio until you are done. Behavioral finance provides a different perspective. Because of the difference between the way people react to errors of omission and errors of commission, dollar cost averaging may give investors a better expected investment experience. 
 
Did diversification fail when we needed it most? - Investors may doubt the usefulness of diversification after the recent market decline. Ken French explains that diversification cannot reduce the volatility of the overall market, but it is still important because it reduces the risk associated with individual firms or asset classes. Ken also discusses the perception that correlations between assets rise when market volatility is high.

Should stockholders sit this one out? - The answer depends on why stockholders want to leave the market. During the financial crisis, some investors discovered that their tolerance for risk is lower than they thought, so it might make sense for them to permanently reduce their exposure to equities. Investors who wish to avoid the price impact of the recession, however, are probably too late. Today's stock prices already reflect the anticipated effects of the slowdown, as well as any effects the recession has on expected future returns. 
 
All are well worth a look.  If you would like more information about what we see as the academic research that underpins a sound approach to investing please take a look at our Research Based Approach pages on our site.

Posted by: Scott Keefer AT 03:47 am   |  Permalink   |  Email
 
Scott Francis' articles in the Eureka Report 
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