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The effect of the Covid-19 on the stock markets around the world was widespread. Most major equity markets around the world witnessed a steep decline in the stock prices. However, the degree of the stock market correction and recovery was different from one country to another. How did various stock markets around the world weather the Covid-19 pandemic? 

The Covid-19 originated in Wuhan, China. By being the ground zero, you may expect the Chinese stock market to suffer the most from the Covid-19 pandemic. Surprisingly, the Chinese stock market declined the least among major world stock markets. iShares MSCI China ETF (MCHI) was down only -19.17% during Feb 19-March 23rd, 2020. Also, the Chinese stock market is the best performing market year-to-date. The Chinese stock market was up 12.13% year-to-date based on iShares MSCI China ETF (MCHI) (see Chart 1). All year-to-date numbers in this paper are calculated for the time period from January 1, 2020 through September 25th, 2020. The stock market correction period is assumed to be between Feb 19th through March 23rd, 2020. The stock market recovery period is from March 23, 2020 through September 25th, 2020. 

The US stock market was the second-best performing stock market year-to-date. After the initial sharp sell-off by 33.9% the US stock market saw a V-shaped recovery. The US stock market was up almost 50% after the bear market selloff. For the year-to-date, the US stock market was up 3.59% based on the iShares Core S&P 500 ETF (IVV) (see Chart 1).  

The Japanese stock market was the third best performing stock market year-to-date.  The Japanese stock market was initially down -22.34% based on iShares MSCI Japan ETF (EWJ). However, it has also experienced a steep recovery and covered all its loses year-to-date.

On another hand, the three worse performing stock markets year-to-date were the United Kingdom, Russia, and France. The UK Stock market failed to recover its massive, more than 40%, initial losses during the Covid-19 pandemic. The UK stock market is still down -25% year-to-date based on the iShares MSCI United Kingdom ETF (EWU). The Russian stock market experienced the decline of 39.41% during the Covid-19 selloff and failed to recover. The Russian stock market is still down -23.63% year-to-date based on iShares MSCI Russia ETF (ERUS). The French stock market was down -36.84% during the Covid-19 selloff and remains -15.37% year-to-date based on iShares MSCI France ETF (EWQ).

The effect of the Covid-19 on the stock markets around the world was widespread and sharply negative. However, some stock markets saw a V-shaped recovery whereas others failed to recover and remain far in the red still. The three best performing markets year-to-date were the Chinese, the US and the Japanese stock markets. These three stock markets managed to recover all initial losses and enter a positive territory year-to-date. On another hand, some countries were not as lucky. The UK, Russian and French stock markets were still down more than double digits year-to-date. 

Data:

Yahoo! Finance. Data was retrieved from http://finance.yahoo.com

Disclosures: 

The assumptions of the countries’ stock market performance were based on selected iShares Exchange Traded Funds performance. These ETFs were used as a proxy to represent each country’s stock market performance. There are many other different sectors and indexes available that you may consider. The results may vary based on what index you select.  

The analysis is based on historical data and future expectations that may not be correct. This paper was written as an opinion only. The data is not guaranteed to be accurate or complete. Please consult with your financial advisor before making an investment decision. Neither ECNFIN.COM nor its author are responsible for any damages or losses arising from any use of this information.

ECNFIN.com and its podcast are not associated with nor do they necessarily represent the opinion or advice of Epiqwest Culver Wealth Advisors LLC.  Past performance doesn’t guarantee future results.

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Mortgage interest rates have been declining for the last 2 years. There is indirect relationship between the interest rate and home affordability. As rates decrease, the among of money one can borrow increases. With a significant decline in rates, home buyers can borrow more while keeping the monthly payments the same. 

Mortgage rates have been in decline since October 2018 until September 2020. On October 11, 2018, the 30-year fixed mortgage rate was 4.9% on average in the United States, according to the Federal Reserve Bank of St. Louis data. As of September 10, 2020, this rate has declined to 2.86%, according to the Fed data. This represents a decline by more than 41% in just 2 years.   

For home buyers lower interest rates increase home affordability. As rates decline, the amount of money one can borrow increases while the monthly payments stay the same. Now, let’s analyze how much more home the buyer can afford due to the decline in interest rates.  

I have four hypothetical home buyers with monthly budgets of $1,000; $2,000; $3,000 and $4,000 that will go towards paying for 30-year fixed rate mortgage. These monthly payments are principal and interest on the 30-year fixed mortgage. Homeowners may be required to pay additional property tax and HOA expenses that I do not include in my calculations as they are very exclusive to each property and location. How much more money can one borrow due to the decline in rates from 4.9% in October 2018 to 2.86% in September 2020? 

The first buyer has $1000 monthly budget towards the mortgage payments. He or she was able to borrow $188,421 in October 2018 when interest rate was 4.9%. However, with the decline in rates from 4.9% to 2.86%, the same home buyer can now borrow $241,493. In other words, the home buyer with $1000 monthly budget can now borrow an additional $53,072 due to the decline in interest rates (see Chart 1). The monthly payments will remain the same at $1000 per month but the amount available to borrow increased significantly by more than $53,000 in just two years. 

The second home buyer has the budget of $2,000 per month to spend on the 30-year fixed mortgage. This home buyer was able to borrow $376,842 for a home in October 2018 when the interest rate was 4.9%. With the decline in the interest rates from 4.9% to 2.86%, he/she can now borrow $482,985 and pay the same $2,000 per month. This translates into the increase of $106,143 in purchasing power (see Chart 2). 

The third home buyer with the budget of $3,000 per month was able to borrow $565,263 in October 2018. However, as rates declined from 4.9% to 2.86% the amount available to borrow increased by $159,215 in just two years (see Chart 3). This home buyer can now borrow $724,478 and pay the same $3,000 per month. 

The fourth home buyer had the biggest nominal gain from the decline in rates. With the monthly budget of $4,000, the fourth home buyer was able to borrow $753,684 in October 2018 when the interest rate was 4.9%. Due to decline in rates from 4.9% to 2.86%, this home buyer can now borrow an extra $212,287 (see Chart 4). The fourth home buyer can now borrow a staggering $965,971 with the same $4,000 a month budget. 

In percentage terms, each home buyer was able to borrow an extra 28% in September 2020 and keep monthly payments the same vs. two years ago. Lower interest rates allow home buyers to borrow more keeping monthly payments the same. This improves home affordability. 

Who else might benefit from lower mortgage rates? 

• For existing home buyers, low interest rates may provide opportunity to refinance and lower monthly payments. Lower interest rates can reduce home expenses for both home buyers and homeowners. Mortgage payments are significant part of many Americans monthly budget. Lower mortgage rate can provide opportunity to refinance for existing homeowners. Homeowners can reduce monthly mortgage payments and generate extra savings each month. 
• Home builders are also beneficiary of lower interest rates. As home buyers can now afford to borrow more, home builders will be able to sell more expensive homes. Also, first time home buyers can now afford to borrow more due to lower rates. With increased borrowing power, new home buyers will be able to afford a more expensive new home.   
• Lower interest rates create demand for mortgage refinancing as well as home purchases. Finance companies that service mortgages, mortgage brokers that create and sell mortgages, real estate agents who work with home buyers will also benefit from the increased demand for houses. 
• A healthy housing market will also spill its benefits on furniture stores, home improvement stores, and landscaping companies.
• Local governments will also benefit from a strong housing market. Each new home built and sold provides tax revenues for local governments.  

Data: 

Federal Reserve Bank of St. Louis. Data accessed on September 19, 2020 https://fred.stlouisfed.org/graph/?g=NUh

Disclosures: 

The available mortgage interest rate is based on individual credit history, debt to income ratio and other factors that are very custom to each person. The analysis in this paper is based on 30-Year Fixed Rate Mortgage Average in the United States, Percent, Weekly, Not Seasonally Adjusted. The interest rate available to you maybe lower or higher based on where you live and on your personal financial situation. 

The analysis is based on historical data and future expectations that may not be correct. This paper was written as an opinion only. The data is not guaranteed to be accurate or complete. Please consult with your financial advisor and real estate agent, before making an investment decision. Neither ECNFIN.COM nor its author are responsible for any damages or losses arising from any use of this information.

ECNFIN.com and its podcast are not associated with nor do they necessarily represent the opinion or advice of Epiqwest Culver Wealth Advisors LLC.  Past performance doesn’t guarantee future results. 

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Unit #2991
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The stock market in 2020 can be described as unexpected and highly volatile. With a sharp sell off in February-March to an equally impressive V-shaped recovery. High volatility increases anxiety and can force investors to make poor decisions about investments. Investors may not be able to control their emotions, but they can control how they invest. For risk averse investors, selecting a model with lower volatility is a prudent decision. A risk averse investor is more likely to tolerate small losses and stay invested long-term with lower volatility portfolio. 

Recessions and the stock market corrections give pain1 to many investors. After the financial crisis of 2007-2008, I researched the investment strategy that could withstand such pain1 and provide enough protection. This strategy is called the simple 50/50 asset allocation model referred to as the model in this paper. For the original and more detailed research, you can visit my earlier post located here: https://ecnfin.com/2012/10/07/simple-5050-asset-allocation-model-proven-to-withstand-the-financial-crisis-of-2008/

The simple 50/50 asset allocation model is based on 50% of the money being invested in the US Equity Market Index and another 50% in the long-term US Treasury bonds. In this article, I will use iShares Core S&P 500 ETF ticker (IVV) to gain exposure to the stock market, and iShares 20+ Year Treasury Bond ETF ticker (TLT) to gain exposure to the US Treasury bond market. I assume 50% of the money is invested in IVV and 50%  in TLT. Now let’s review how this simple 50/50 model have done to withstand the Covid-19 pandemic in 2020.  

The simple 50/50 model protected on the downside and provided upside returns during the Covid-19 stock market v-shaped recovery. The simple 50/50 asset allocation model earned 18.12% with daily rebalancing and 16.35% with monthly rebalancing from January 1, 2020 – August 28, 2020. While S&P 500 Index earned about 10.03% (see Table 1).

Besides better returns, the simple 50/50 asset allocation model has lower volatility than the market (see chart 1). Looking at the monthly returns from January through August 2020, the biggest losses were in March when the model lost -1.44% with daily rebalancing or -2.88% with monthly rebalancing. In comparison, the S&P 500 Index was down -12.13% in March 2020 (see table 2 and chart 2).  For a risk averse investor by being down more than -12% in one month will inflict great amount of pain1. Such investor may decide to sell when the losses are great trying to avoid the pain. 

When the risk averse investor sells during the stock market correction, he or she will not participate in the future potential stock market recovery. For example, the next month after the sell off, the S&P 500 Index was up by more than 12% (see table 2 and chart 2). It was a V-shaped recovery with a high volatility and great amount of pain initially, followed by a steep recovery. 

The simple 50/50 asset allocation model can be more suitable to risk averse investors. It can provide lower volatility which translates into less pain1. With less pain, investors maybe more willing to stay invested long-term. The model tends to have equity like returns as well. Investor will participate in the stock market. The model was successful at hedging downside risk during the financial crisis of 2007-2008 and the Covid-19 selloff. 

1 Pain – Loss aversion is a cognitive bias. For individuals, the pain of losing is psychologically twice as powerful as the pleasure of gaining. The loss felt from money, or any other valuable object, can feel worse than gaining that same thing (Kahneman, D., & Tversky, A. (1977). Prospect Theory. An Analysis of Decision Making Under Risk.)

Data:

Yahoo! Finance. S&P 500 Price, TLT and IVV Data was retrieved from http://finance.yahoo.com

Disclosures: 

The simple 50/50 asset allocation model is one of the tools that investor may consider, but it may not work for everybody. There is no one magic formula for all market conditions. The future performance of the model will vary greatly based on the stage of the business cycle. The model may underperform the stock market in the future. iShares 20+ Year Treasury Bond ETF (TLT) has long duration and high interest rate risk. When rates increase, the price of TLT will decline. With significant and unexpected increase in interest rates, both fixed income and equity markets may decline.

The analysis is based on historical data and future expectations that may not be correct. This paper was written as an opinion only. The data is not guaranteed to be accurate or complete. Please consult with your financial advisor before making an investment decision. Neither ECNFIN.COM nor its author are responsible for any damages or losses arising from any use of this information.

ECNFIN.com and its podcast are not associated with nor do they necessarily represent the opinion or advice of Epiqwest Culver Wealth Advisors LLC.  Past performance doesn’t guarantee future results.

Subscribe wherever you enjoy podcasts:

Our Mailing Address:

ECNFIN
1288 Kapiolani Blvd Apt 4003, Honolulu, HI 96814

Our Phone:

+1 720-593-1135

Our Fax:

+1 720-790-7606

Our Mailing Address:

ECNFIN
1312 17th Street
Unit #2991
Denver, CO 80202

Wage stagnation is not a new phenomenon but a structural change in the US economy. Looking over the last 34 years, real income remained almost unchanged. Because of the wage stagnation economic growth in the US grew moderately. As disposable income remains relatively unchanged, people have little room to increase spending. Because of low spending growth, there is a limited upside potential for the economy to grow. At the same time, any disruptions to personal income can cause abrupt decline in consumer spending. Since consumer spending explains 70% of Gross Domestic Product (GDP) in the US, the decline in spending can cause economic slowdown and a recession.

Historically, the real income did not change much, consumers’ purchasing power remained roughly the same (see Chart 1). In 1983, the real median income was $20,885. When I adjust for inflation, the real medial income in 2016 was only $24,820 in 1983 dollars (see table 1).

Since 70% of the economy is based on consumer spending, without the increase in disposable income, the economic growth is destined to remain low. During the last 34 years, salary grew at a very low rate. From 1983 till 2016, the real annual income fluctuated between +4.6% and -3.77% (see chart 2).

At the same time, the real salary increased by 0.51% per year. To calculate the annual increase in salary, I used the following numbers:

Present Value = $20,885 (real salary in 1983 in current dollars)

Future Value = $24,820 (real salary in 2016 adjusted for inflation in 1983 dollars)

Time = 34 years

Compute for Interest Rate = 0.51%

Also, if I take a simple average, I will get 0.55% increase in real wages during 1983-2016 time period.

The median US consumer who relies on wages as a single source of income experienced the wage stagnation for the last 34 years. This consumer had increase in disposable income of 0.51% per year. As disposable income remained subdued, the consumer was not able to increase spending by much. If the history is any indicator, the real growth in wages is going to be very low in the future as well.

Having a structural wage stagnation, deflation can improve the wellbeing of consumers. Consumers are better off when prices decline and worse off when prices increase.  Consumer can afford very little increase in real spending, about 0.5% per year. If inflation rises by more than wages increase, consumers will not be able to afford some goods and services. Consumers will start cutting on spending and become selective buyers.

Before, the US advocated for free trade and globalization. Free trade policies lowered the price on goods and services and kept inflation low. As the result, the increase in salaries was greater than the increase in inflation. Since the wage stagnation is a structural element of the US economy, having lower prices on goods and services was the best way to increase consumers’ wellbeing without increasing wages.

Now, the US is moving away from the free trade and implementing protectionist fiscal policies. The US is imposing sanctions and tariffs on other countries. The trade war between the US and the rest of the world will cause prices on goods and services to increase. Since wages will likely to remain stagnant, the US consumer will have little extra income to absorb the increase in prices. As prices rise, consumer will spend less on discretionary goods and services. Consumer spending is responsible for about 70% of GDP. Due to a potential increase in inflation and stagnant salaries, discretionary spending will decline. The decrease in spending will slow down the GDP growth.

On one side, fiscal protectionism is rising prices and slowing down the economy. On the other side, monetary policies are lifting interest rates and make borrowing more expensive. In June 2018, the Fed raised its short-term interest rate to 2%. The Fed is expected to have two additional interest rate hikes by the end of the year which will result in 2.5% interest rate. The first interest rate hike after the 2008 financial crisis was on December 16, 2015 when the Fed raised its target interest rate from 0.25% to 0.50%. The increase in federal funds rate can make floating rate and short-term debt more expensive. This will increase the cost of debt to consumers with the credit card debt, Home Equity Line of Credits, and any other short-term debt. Since consumers will not afford to borrow in order to spend more, and their salary will remain unchanged, the increase in prices will cause a decrease in spending.

In support of wage stagnation and risk of economic recession, the long-term treasury yields did not increase as much as short-term yields did. In opposite, the yield curve became flatter (see chart 3). For example, 10 Year US Treasury yields increased from 2.58% on December 15, 2015 to only 2.86% on July 17, 2018 (Yahoo! Finance). Markets believe that the risk of economic recession is much greater than the risk of inflation. The prices may rise in the short term, but the decline in consumer spending will cause economic growth to decline.

The US economy has a structural wage stagnation. For the last 34 years, wages have been growing at the effective real annual rate of 0.51%. Consumers who rely on salary alone, cannot increase discretionary spending too much. As fiscal policies become more protectionist and monetary policies more restrictive, consumers will not be able to afford increase in spending. As discretionary spending declines, economic growth will slow down. This creates a risk for the next economic recession.

Disclosures:

Forecast of future economic growth and stock market performance is based on historical data and future expectations that may not be correct. This paper was written as an opinion only. The data is not guaranteed to be accurate or complete. Please consult with your financial advisor before making an investment decision.

ECNFIN.com is not associated with nor does it necessarily represent the opinion or advice of Culver Investment Company LLC.  Past performance doesn’t guarantee future results.

Data:

Bureau of Labor Statistics data accessed on July 10, 2018 https://www.bls.gov/data/

United States Census Bureau data access on July 12, 2018

https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-households.html

U.S. Department of the Treasury data accessed on July 17, 2018 https://www.treasury.gov

Yahoo! Finance data accessed on July 17, 2018 https://finance.yahoo.com

The structure of financial markets has changed with the rapid growth and popularity of passively managed funds. Passively managed funds can have a similar effect on the economy as systemically important financial institutions. Trading in passively managed funds may directly affect thousands of securities and have an additional indirect effect across different asset classes. Recently, the correlation among different asset classes has increased making it difficult for investors to diversify. It is fair to say that due to a greater popularity of passively managed funds their influence to move markets is significant.

Passively managed funds are effective tools to move markets, but they are not the direct cause of increased volatility. The behavior of financial markets is partially driven by heuristic and biases. Heuristic helps investors to make quick decisions based on mental shortcuts and turns passively managed funds into effective vehicles for short-term bets. Investors should recognize the bandwagon effect and heuristic biases: such as, loss aversion and representativeness. Together with popularity of passively managed funds heuristic biases may significantly increase volatility of financial markets. As a result, today’s financial markets are more volatile and react quickly on new information. This new behavior and new structure of financial markets create challenges and opportunities. At the end of the article, you will find six principles of investing suitable for current market conditions.

The popularity and growth of passively managed funds is attributable to their many benefits. Passively managed funds have low cost due to a simple replication strategy which does not require as much resources and skills as active management. Fidelity Spartan 500 Index Institutional share class has an expense ratio of 0.04%. By paying 0.04% a year, investors can diversify among 500 companies and earn similar return to S&P 500 Index. Investors may also trade many passively managed funds commission free. This reduces the cost drag on performance to small investors. Also, there is no active risk exposure since the main purpose of passively managed funds is to provide a similar performance to their benchmark index. There is no surprise why a simple, inexpensive and easy to understand product became so popular.

The amount of money invested in passively managed mutual funds has surpassed the assets in the actively managed mutual funds, and trading volume of ETFs is equal to one-third of all trading (Sullivan and Xiong 2011). The popularity of passively managed mutual funds made Vanguard Total Stock Market Fund the world’s largest mutual fund. As of April 23, 2014, the total assets of Vanguard Total Stock Market Fund were worth 323 billion US Dollars according to Morningstar.

Due to recent structural changes in financial markets, the traditional diversification benefits from owning different asset classes are not as high as they used to be. Betas for all four different asset classes (small, large, growth, or value) have increased in recent years weakening diversification benefits between different asset classes (Sullivan and Xiong 2011). For example, during the recent financial crisis of 2008, the performance of four different asset classes became positively correlated, reducing any diversification benefit so important during a recession (see table 1).

(Table 1. Data provided by Yahoo! Finance)

With great weight comes great influence. Sullivan and Xiong (2011) showed how the increase in popularity of passively managed funds may create a systemic risk to financial markets due to increasing correlation of returns between different asset classes and “basket trading” which effects hundreds or even thousands of stocks with just one trade. Since each passively managed fund is a basket of hundreds or even thousands of securities, one buy order causes a widespread effect on all securities within a passively managed fund. Today’s stock market returns likely to have a distribution curve with fat tails indicating greater number of observations away from the mean. This shape of distributions is called leptokurtic and is displayed in green color on the illustration below (see Figure 1).

(Figure 1. Leptokurtic distribution of today’s stock market returns)

Passively managed funds are fast and effective ways for investors to alter their exposure to different asset classes. Heuristic biases can turn passively managed funds into short-term trading products that increase volatility. Investors are subject to loss aversion and are likely to sell positions when prices are down in order to limit their losses. Loss aversion expresses the intuition that a loss of $X is more aversive than a gain of $X is attractive (Daniel Kahneman and Amos Tversky, 1984) For example, an individual investor who decides to invest $80,000 of savings into the stock market will experience greater pain from losing 20% or $16,000 the next day than an alternative satisfaction he/she will receive from earning $16,000. In today’s market, loss aversion can cause a sell-off in under-performing passively managed funds that will have a widespread effect on a broad market.

Representativeness heuristic explains how investors base their predictions on descriptions and recent data instead of personal beliefs and fundamental analysis. For example, a favorable description of strong quarterly earnings by media together with a recent increase in stock prices may incline investors to issue a buy recommendation. If investors predict solely in terms of the favorableness of the description, their predictions will be insensitive to the reliability of the evidence and the expected accuracy of the prediction (Amos Tversky and Daniel Kahneman 1974). Representativeness may cause bubbles in financial markets.

Another explanation of why stock market bubbles occur is given by the phrase “jump on the bandwagon.” It means to follow a popular opinion regardless of personal beliefs. When stock prices increase, more people want to participate in the rally and “jump on the bandwagon.” Since such investment decisions are based more on historical price movements rather then on investors’ opinion or fundamental values, bandwagon effect may explain why some stock market bubbles occur.

Because of the loss aversion, representativeness, and “jump on the bandwagon,” investors are inclined to make quick decisions without using their personal opinion and fundamental analysis. If such investors turn to passively managed funds to place trades, their decisions have a widespread effect on the overall financial market. Self-fulfilling prophecy takes effect when many investors follow a popular opinion and move a broad stock market in a common direction. At some point in the future, the stock prices will return to their true value. Such behavior creates volatility.

Popularity of passively managed funds is based on many benefits they provide: low cost, liquidity, diversification, and returns similar to their benchmark index. These benefits come at the cost of increased correlation and volatility. To manage the challenges of today’s market and to exploit opportunities created by passively managed funds, investors should remember the following principles:

a) Determine appropriate asset allocation based on risk tolerance and long-term time horizon. Original asset allocation should have comfortable risk exposure. Today’s markets are more volatile in nature which can be perceived as risky by some investors and prevent them from market participation. Such risk averse investors may not be able to grow their savings and will likely experience a real decline in their purchasing power and wealth over time. Instead of avoiding the financial markets, long-term investment strategy that provides comfortable short-term volatility should return investors’ interest to financial markets.

b) With increase in correlation between different asset classes, their diversification benefit has declined. Investors should understand potential large short-term downside risk to their portfolio and keep focus on the long-term horizon. Those investors who are uncomfortable with short-term volatility would be wise to invest in a more conservative asset allocation strategy.

c) Since today’s market volatility has increased, investors are more likely to become victims of loss aversion bias – sell when the market is low. These investors will not participate in a future stock market recovery. Instead of selling when the market is down, investors should rebalance their portfolios to the target allocation. Sell offs should be seen as buying opportunities rather than panic episodes to investors who do their homework and research stocks.

d) With increased volatility, more strict rebalancing rules are prudent to implement. Rebalancing will capture the benefit of increased volatility and will keep the overall asset allocation close to the target.

e) The size of the portfolio matters, the smaller the portfolio, the less risk it can usually afford to take. The larger the portfolio, the more risk it can take, holding everything else constant.

f) Popularity of passively managed funds may also slowdown the speed of price discovery. Passively managed funds do not differentiate between underpriced and overpriced securities but invest in the entire basket of securities. Active managers will have more opportunities to find good values but will also require longer time to generate positive alpha.

These are few observations that may help investors to meet today’s challenges and take advantage of benefits that passively managed funds and heuristic biases have created.

Disclosures

This paper was written as an opinion only. The data is not guaranteed to be accurate or complete. Please consult with your financial advisor before making an investment decision. Any investment decision that results in losses or gains made based on any information on this website is not the responsibility of ECNFIN.COM or authors of articles published on this website.

ECNFIN.com is not associated with nor does it necessarily represent the opinion or advice of Culver Investment Company LLC.  Past performance doesn’t guarantee future results.

References

Sullivan and Xiong 2011. “How Index Trading Increases Market Vulnerability” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1908227

Daniel Kahneman and Amos Tversky. “Choices, Values, and Frames.” American Psychologist. Vol. 39, No. 4, p. 341-350. April 1984.

Daniel Kahneman and Amos Tversky. “Judgment under Uncertainty: Heuristics and Biases.” Science. New Series, Vol. 185, No. 4157, pp. 1124-1131. September 27, 1974.

Data

Yahoo! Finance. http://finance.yahoo.com

Morningstar Inc. http://morningstar.com