I HAVE LONG ADMIRED my grandfather, John H. Watson, for chronicling the contributions to criminology made by his close friend, Sherlock Holmes, Esq. Since retiring from my psychiatry practice, I have similarly had the pleasure, if not the duty, to record the efforts of his grandson Sherwood to expose wrongdoing in the financial industry. The more informed among you are no doubt familiar with my latest study, The Disappearance of the Load Fund. This account concerns one Mr. Jack Bogle, who revolutionized the mutual fund business in 1976 by opening the first index fund available to individual investors. Not surprisingly, he was derided and vilified by the mutual fund establishment, which had for more than half-a-century gorged itself on excessive management fees and ancillary charges that maintained massive—and massively inept—research departments. In the face of propaganda from the mutual fund establishment, Bogle’s innovation garnered little acceptance at first. But as the fund began to deliver on its promise of low cost, tax-efficiency and improved performance, the concept of the index fund achieved a pedigree once reserved exclusively for the actively managed no-load fund. For several decades now, assets of index funds have continued to grow exponentially, even as those of traditional active funds have stagnated. For his foresight and tenacity in developing the index fund, Jack Bogle is a market legend. But just yesterday, I received this pugnacious post from an aggrieved investor: Last weekend, I attended a lecture given by your associate, Mr. Sherwood Holmes, esteemed advocate of the index mutual fund and exchange-traded fund (ETF). I must express my profound disappointment with his insufferable airs and ignorance about the last stage of Mr. Bogle’s career. Doesn’t your friend know that Bogle inveighed against the advent of the ETF? That he would have denied retail investors access to one…

In two previous posts (“The Morningstar Experience” and “Your Morningstar Freebee”), we looked at how readers considering investment in a Vanguard fund can consult the helpful information in Morningstar’s esteemed advisory service. We demonstrated how they might consult this resource to monitor their investments and evaluate their performance. Today, we’ll illustrate how to decide whether the holdings of the fund meet the reader’s objective. Once again, the fund examined is Vanguard’s Small-Cap ETF (symbol VB, or VSMAX for the mutual fund alternative).   We begin by searching our target fund—even without the $249 subscription price—and slide over to Portfolio. You can see that the stocks in VB are overwhelmingly domestic, as they should be. I find the map designating Stock Style confusing, so I recommend you drop down to Weight. Here we get a surprise and a big reason to depend on Morningstar. Fully one-third of VB’s holdings are classified as midcap stocks!   What might be going on? Well, Morningstar may set a higher bar for inclusion in the small cap space than VB’s underlying index. And this difference in criterion could exert a significant effect on performance. Readers may recall that VB’s average annual 10-year return was about 1% higher than that of similar funds. Could VB's  portfolio have benefited from the higher long-term performance of midcap stocks?   Quite possibly. The iShares Russell 2000 ETF (IWM), which is curiously more popular than VB despite its higher expenses (.19 vs. .05), is virtually 100% small cap and did not enjoy a midcap edge. Likewise, iShares S&P Mid-Cap ETF advanced yet another percentage point more than VB. You will probably get the superior performance of VB only as long as midcap stocks continue to outperform.   We also see that VB is suitably balanced across the value vs. growth…

I'M A BELIEVER. SURE, I stray every now and then. But after a late start, I’ve now been a devotee of exchange-traded funds for many years—though some of the ETFs I own would be considered actively managed. In his iconic A Random Walk Down Wall Street, Burton Malkiel strongly advocates long-term passive investing as the strategy of choice for individual investors. But he also confesses to having been “smitten with the gambling urge since birth.” Acknowledging that index fund investing can be “boring,” he takes pity on folks like me with “speculative temperaments,” who may need to indulge those instincts with some small portion of their portfolio. Thus absolved for intermittently falling off the wagon, I thought it might be of interest to readers—and useful for me—to sketch out how I’ve invested the bulk of my taxable account. (I plan to write about our household's retirement accounts in a separate article.) I’m a big believer in diversification, perhaps the only free lunch on Wall Street. By that, I mean I pay careful attention to my portfolio’s stock-bond allocation, mix of U.S. and foreign stocks, balance of growth and value, size of companies owned and even sector tilts. I’m a semi-retiree who needs cash to compensate for his overinvestment in illiquid real estate, while also hoping to increase my net worth for my heirs. Toward those two ends, I’ve put together a moderate growth portfolio. It throws off a healthy 6% yield and is structured to participate in about two-thirds of the stock market’s move, whether those moves are up or down. Yes, I shortchange myself in bull markets. But a stubborn anxiety dictates that my ship be seaworthy during the inevitable storms, or there’s a danger I may bail. So, what’s this longwinded guy own? Because each is so diversified,…

"WE GOT A THING going on, we both know that it’s wrong, but it’s much too strong to let it go now” are blues lyrics about a man and his lover. But they might as well be referring to my affair with the January effect. Last year, I wrote about my favorite seasonal anomaly, the tendency for small-cap stocks to outperform large stocks during the first month of the year. In December 2022, I’d set out to see if the phenomenon was still alive. After analyzing market data from December and January, I concluded it was still on the loose, but might not be dependable. At the start of many years, small-cap stocks appear to have the wind at their back. The hypothesis most often advanced: What we’re seeing is year-end tax-loss selling followed by the subsequent purchase of stocks believed to have been driven below their fundamental value. But how strong a force can this be when tax-advantaged accounts are now so large? January’s small-cap performance has also been attributed to window dressing by money managers, who dump poorly performing stocks at year-end, so these holdings don’t appear in their next fund report. But wait a minute. Wouldn’t those large financial institutions be more likely to replace those small-cap shares with safer and more liquid large-cap stocks, thus spurring returns among these larger companies? Many observers have also noted the possible role played by new money. Corporate bonuses need a home, and 401(k)s and IRAs require funding. And, as the new year begins, don’t ignore the potential boost from feelings of good cheer. I imagine all this rigmarole is blasphemy to most HumbleDollar loyalists. Index fund investing is now regarded as the no-brainer choice for independent thinkers looking to build a retirement nest egg. Still, I think we have…

DEPRESSION IS BAD not just for your health, but also for your wealth. In 2001, Prof. Robert Leahy touched on the corrosive influence of a person’s mood on his approach to the financial markets. Although intuitively plausible, his observation has never received the attention I think it deserves. The notion of cognitive bias is a cornerstone of the burgeoning field of behavioral finance. Set in motion by the pioneering research of Daniel Kahneman and Amos Tversky in 1974, the idea that irrational thoughts and beliefs influence our choices can be seen in almost every aspect of our life—including our investment decisions. Once dismissed by some economists as fringe concepts, universal biases like overconfidence and recency have gone mainstream. Consider loss aversion, a reluctance to part with disastrous investments to avoid locking in an ego-deflating defeat. It’s a useful heuristic to grapple with when folks may need to realize capital losses to offset capital gains and thereby trim their tax bill. Exploring the role of personality on investor behavior could, I believe, be the next research frontier. Indeed, in this piece, I’d like to flesh out the relationship between feeling depressed and managing your portfolio. And trust me, I know what I’m talking about. You see, I suffered from clinical depression for many years and—while my investment results were satisfactory—they clearly suffered during this period. What do I mean by clinical depression? It’s when folks experience lethargy, a gloomy mood, pronounced self-criticism and a grim outlook on life for more than a few weeks at a time. It’s not just the mild blues—the aftermath of, say, an emotional trauma like a divorce or the grief over the passing of a loved one. It’s not merely dreaming about a mental health day or being grumpy. In other words, please don’t self-diagnose. Even…

"IS THAT INDIA or something? Where was that picture taken, Richie?" “You’ll never guess, Stevie. Remember 266 Washington Avenue?” “That brown brick, 114-unit apartment building in Brooklyn that Grandpa bought 75 years ago? Mommy said he saved for the down payment with money from the kosher butcher shop he opened after he got here from Poland. But didn’t we sell it in the 1970s? It looks like the Taj Mahal now.” “Yeah, it’s obviously been spectacularly upgraded over the years.” “How did you get the picture?” “Robin and I were in New York last month and went to see it. I’ve never forgotten those days.” “You were so close to Daddy and so involved with the family real estate business.” “No kidding. I went to law school near home, while you drove your Corvette out to Colorado to study Freud and the Rorschach inkblots.” “Ha, ha. But you’re right, Richie, I didn’t have a clue about the business. Let’s face it, you were the good son and I was the renegade.” “That was a crazy time for all of us. Daddy was wheeling and dealing.” “Richie, you know I’ve been writing about the virtues and pitfalls of investing in real estate for HumbleDollar. I’d like to be clearer about what’s made me so conflicted about it. I’m hooked by the potential for large profits, but turned off by how it can stress you out, gobble up your time and pose moral dilemmas. Not a lawyer and given to anxiety, I’ve scrupulously avoided encounters with big-money predators. I’ll bet you’ve seen a lot of confrontations from your time in the trenches. Anything that would give readers a taste of what it was like?” “Sure, let’s start with Washington Avenue because it was a real humdinger.” “Great, but what happened?” Big bungle…