Personal Finance →
- 23 Jun 2008
- Research & Ideas
Innovative Ways to Encourage Personal Savings
Saving money doesn't need to be so difficult. According to HBS professor Peter Tufano, "The most interesting ideas—indeed the oldest—try to make savings a fun or satisfying experience." As Tufano describes in this Q&A, different solutions appeal to different people. Here's what government policy, the private sector, and nonprofits can do. Key concepts include: A variety of levers can be used to support people who want to save (not to force someone to save who doesn't want to). Some levers are simple changes that make the process of savings easier. Other levers involve providing various incentives, be they financial or sociological. The oldest and most interesting ideas try to make savings a fun or satisfying experience. Closed for comment; 0 Comments.
- 26 Feb 2008
- Working Paper Summaries
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. Key concepts include: Small and value stocks earn low returns, and long-term bonds do poorly when the future consumption growth of stockholders is low. The high average returns observed for small and value stocks and long-maturity bonds may therefore reflect the premium stockholders require to bear long-run consumption risk. Closed for comment; 0 Comments.
- 22 Feb 2008
- Working Paper Summaries
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. Key concepts include: PLS products are promising, despite formidable barriers to success in the United States. The low income population that was studied expressed substantial interest in a savings product that provides prizes as part of its return. This product appeals to non-savers, who do not save with traditional products. The product appeals to heavy lottery players, and by virtue of this fact, has the potential of turning their gambling activities into demand for savings. PLS products might face an uphill battle in the United States due significantly to well-established gambling and lottery industries that might oppose PLS, and the roadblocks due to legal uncertainty and prohibitions around this new product. Businesses or state treasurers might be reluctant to innovate around a product that must compete against heavily marketed alternatives. Closed for comment; 0 Comments.
- 23 Jan 2008
- Op-Ed
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. Closed for comment; 0 Comments.
- 12 Sep 2007
- Op-Ed
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. Closed for comment; 0 Comments.
- 05 Sep 2007
- Working Paper Summaries
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. Key concepts include: It is striking that the U.S. dollar, Swiss franc, and euro are widely used as reserve currencies by central banks, and more generally as stores of value by corporations and individuals around the world. Interestingly, the euro, the Swiss franc, and a long-short position in the U.S. dollar and the Canadian dollar are negatively correlated with world equity markets. By contrast, other currencies such as the Australian dollar, the Canadian dollar, the Japanese yen, and the British pound are either uncorrelated or positively correlated with world stock markets. These patterns imply that international equity investors can minimize their equity risk by taking short positions in the Australian and Canadian dollars, Japanese yen, and British pound, and long positions in the U.S. dollar, euro, and Swiss franc. For U.S. investors, currency exposures of international equity portfolios should be at least fully hedged, and probably overhedged. Exceptions are the euro and Swiss franc, which should be at most partially hedged. Risk management demands for currencies by bond investors are small or zero, regardless of the home country of these investors, and regardless of whether these investors hold only domestic bonds or an international bond portfolio. Closed for comment; 0 Comments.
- 12 Mar 2007
- Research & Ideas
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. Closed for comment; 0 Comments.
- 15 Feb 2007
- Research & Ideas
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. Closed for comment; 0 Comments.
- 07 Sep 2006
- Working Paper Summaries
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. Key concepts include: The solution can be readily implemented for investment opportunity sets with any number of assets and state variables. On average, equity-only investors with short horizons optimally choose portfolios that are heavily tilted toward value and away from growth, regardless of the investor's risk aversion. Aggressive short-term investors find it best to tilt their portfolios toward value because of their higher average return. Conservative equity-oriented investors optimally tilt their portfolios toward value stocks because of their small return volatility and high correlation with growth. However, for investors with longer horizons, the optimal allocation to value decreases dramatically as the optimal allocation to growth increases. Value stocks appear to be riskier than growth stocks at long horizons because they tend to be more highly correlated with permanent shocks to the value of the aggregate stock market, while growth stocks appear to be more highly correlated with transitory shocks. In the presence of time varying risk premia, interest rates, and expected inflation, it is optimal for most investors to dynamically rebalance their portfolios in response to changes in investment opportunities. The paper finds that for long-horizon investors who can invest in equities, bond, and cash, welfare losses from adopting investment policies with infrequent reevaluation of portfolio weights are large, regardless of the investor's risk aversion. Closed for comment; 0 Comments.
- 05 Jul 2006
- Research & Ideas
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. Key concepts include: Encourage savings by offering the option to invest tax refunds in U.S. savings bonds. Closed for comment; 0 Comments.
- 05 Jul 2006
- Working Paper Summaries
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. Key concepts include: When the level of analyst disagreement about future earnings is high, the average forecast tends to be overly optimistic. The "marginal investor," on average, fails to interpret analysts' earnings forecasts with an eye to inherent biases. Sophisticated investors have a beneficial effect on market efficiency. Closed for comment; 0 Comments.
- 05 Jul 2006
- Working Paper Summaries
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. Key concepts include: Allow taxpayers to purchase bonds with Federal tax refunds. Help low- and moderate-income families redeem their bonds before twelve months. Enlist private sector social marketing for savings bonds. Find a role for savings bonds in the life cycles of low- and moderate-income families. Make the process of buying savings bonds more user friendly. Closed for comment; 0 Comments.
- 06 Sep 2005
- Research & Ideas
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. Closed for comment; 0 Comments.
- 10 Jan 2005
- What Do You Think?
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; 0 Comments.
- 10 Jan 2005
- Research & Ideas
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. Closed for comment; 0 Comments.
- 18 Oct 2004
- Research & Ideas
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? Closed for comment; 0 Comments.
- 23 Aug 2004
- Research & Ideas
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." Closed for comment; 0 Comments.
- 01 Dec 2003
- What Do You Think?
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; 0 Comments.
- 06 Oct 2003
- Research & Ideas
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. Closed for comment; 0 Comments.
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. Key concepts include: Defined contribution plans currently offered by the majority of employers place an undue burden on workers who don't have the interest, time, or expertise to manage their finances. A new pension program focuses on an inflation-protected annuity rather than an endpoint with a lump sum of accumulated wealth. The program requires few interactions from users: "set it and forget it." Closed for comment; 0 Comments.