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The Chestnut

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  • Passive Investors: Stop Worrying About Bonds! [View article]
    Thanks for the clarification Jon. We're in complete agreement.

    PS: Chestnut's need for the Mr.

    Mar 26 07:30 PM | Likes Like |Link to Comment
  • Passive Investors: Stop Worrying About Bonds! [View article]
    Thanks for the comment Jon. I believe 1x (rather than 1.35x) is actually the most-agreed upon multiplier. In any event, I agree that it's critical to know the average duration of the fund, to understand how exposed the fund is to interest rate risk. Total bond funds, such as AGG or BND, tend to have intermediate durations (i.e. 5-6 years). As a result, they boast significantly less interest rate risk than, say, Vanguard's Long-Term Bond Fund.

    Thanks for the insights, and good luck on your next article.
    Mar 26 06:35 PM | Likes Like |Link to Comment
  • Passive Investors: Stop Worrying About Bonds! [View article]
    Thanks for the comment, satan2liberals. You're right that there's no such thing as a truly risk-free asset--including T-Bonds. All T-Bonds are subject to some interest rate risk, for example, and even some credit risk. In reality, the 'risk-free' quality of T-Bonds is relative--it's the relative credit risk of T-Bonds versus other bonds. Specifically, it's more likely that a corporation may default on its payment obligation, before the U.S. Government defaults. Whether or not you believe this, keep in mind that in the event that the U.S. Government defaults on its payment obligation, we'll all have a lot more to worry about than the mere relative performance of stocks or bonds. In that event, all U.S. markets should crash--both bonds and equities--and both stockholders and bondholders should commence panicking.

    Thanks for the reminder that passive investors shouldn't become complacent. It's a good point and a good reminder.
    Mar 26 01:26 PM | 1 Like Like |Link to Comment
  • MLPs - A Reality Check ? [View article]
    Excellent article.
    Mar 26 12:12 PM | Likes Like |Link to Comment
  • Passive Investors: Stop Worrying About Bonds! [View article]
    Thanks Tom & wkbird -- all great points!
    Mar 26 12:00 PM | Likes Like |Link to Comment
  • Passive Investors: Stop Worrying About Bonds! [View article]
    Thanks NervousCat!!
    Mar 25 06:30 PM | Likes Like |Link to Comment
  • Why You Shouldn't Worry About Recapture With REITs [View article]
    Hey mgordon10! You're almost there. Remember that in both cases, depreciation reduces the basis. The gain that is due to the depreciation deductions having lowered the basis is called "Section 1250 Gain." The key difference between Recaptured Section 1250 Gain and Unrecaptured Section 1250 Gain is which portion of the allowable/taken depreciation each applies to. Specifically, Recaptured Section 1250 Gain applies to the so-called "additional depreciation" in Section 1250(a)(1)--the depreciation that is in excess of straight line-depreciation (assuming the property's held for >1 year). Unrecaptured Section 1250 Gain applies to the remaining portion of the depreciation. When you think about it, in both cases "more depreciation was taken than actually occurred." In most cases, the reason a gain exists is because the fair-market value of the building is worth more than the reduced cost basis. If the buyer really bought the building for fair-market value, and the depreciation deductions really tracked the loss in value exactly over the ensuing years, then he should theoretically have no gain or loss when he sells the building (all else equal).

    I hope this makes more sense! Let me know if this clarifies it for you. Section 1250 can be pretty confusing!

    Mar 20 06:08 PM | 1 Like Like |Link to Comment
  • Why You Shouldn't Worry About Recapture With REITs [View article]
    Thanks 199129!!
    Mar 20 10:26 AM | Likes Like |Link to Comment
  • Why Cyprus Is Not Really A Negative For The Euro [View article]
    Thanks for the reply, Paulo. Even it's cheaper to produce internally, there's less of a demand for the exports. For countries that have a weaker currency vis-a-vis the EU, it's more expensive to import from the EU (as opposed to either producing internally and/or importing from other countries). The only time deflation wouldn't necessarily have a negative impact on exports would be if there were some goods that could only be found in the EU.

    Mar 18 03:31 PM | 1 Like Like |Link to Comment
  • ETFs Vs. Active Managers [View article]
    Interesting research! The higher fees associated with actively managed funds and the higher turnover rates (on average) are two other huge costs, when compared to passive funds. Looking at the expected returns, and discounting it by the fees and taxes incurred (especially if fund turnover is high), make indexing look much more attractive.
    Mar 18 03:04 PM | Likes Like |Link to Comment
  • Why Cyprus Is Not Really A Negative For The Euro [View article]
    Paul. Thanks for the article. I have a few issues, though, with your analysis. Even assuming that taking losses rather than printing money is a boon, that's not the reason Cyprus' precident endangers the Euro. Rather, it's HOW those losses are being taken here. Instead of a bond restructuring, the "bail-in" is a levy on individual depositors--it's snatching money out of bank accounts in Cyprus. This risks causing bank runs in Portugal and Spain and other troubled countries. What will prevent the EU from imposing another such bail-in in those countries? If I lived in those countries, I would certainly transfer my deposits elsewhere.

    Per your second point, I'm a bit confused as to how austerity and the ensuing deflation is a plus. Deflation leads to a trade deficit--because imports become cheaper than exports--which robs the country of a key source of GDP growth. The sag in Germany's exports and GDP numbers echo this trend. Partly for this reason, Keynseian economics stresses spending more and pursuing inflationary measures to pull a country out of a recession--not the opposite. The cheaper debt and cheaper currency that results--while increasing debt in the short run--should increase GDP and decrease the debt in the long run. If the experience of France and Greece will stand for anything, they'll stand for this principle: austerity is a poor, ill-fitted means of rescuing a struggling economy.
    Mar 18 02:53 PM | 1 Like Like |Link to Comment
  • Is Stock Picking A Losing Game? [View article]
    Honestly, I think a large part of the poor returns that individual stock-picking investors face stem from behavioral biases--such as anchoring or recency bias--which passive investing helps to combat. Individual stock picking is not objectively inferior. Disciplined trading, with strict limits on entry and exits and a smart use of options, can certainly produce nice returns and keep behavioral biases in check. It just takes substantially more time and research.
    Mar 17 01:51 PM | 3 Likes Like |Link to Comment
  • Just How 'Core' Is iShares' 'Core' Series Of ETFs? [View article]
    All I have to say is, it's about time. Fidelity's collection of commission free iShare ETFs was embarassing.
    Mar 17 01:43 PM | 2 Likes Like |Link to Comment
  • How To Make Money In Stocks With A Stagnant Economy [View article]
    Nice article Alan! You allude to this in your introduction, but I'm not sure how sound the assumption is that the current state of the economy affects the stock market and, therefore, should inform asset allocation decisions. In fact, it might be the opposite--a rising or declining stock market could influence GDP through a wealth effect, for instance. In any case, I feel like the relationship between the two is much less pronounced than logic would suggest. Given this, the question, "How have stocks recovered in such a weak economy?" becomes less puzzling (and less important). Stocks have recovered because the economy says little about the direction of the stock market at all.
    Mar 17 01:39 PM | 1 Like Like |Link to Comment
  • Tax Bomb: Mortgage REITs Triggering UBIT [View article]
    Thanks for the great comment, Dominick. You're absolutely right--the REMIC rules, IRC 860E, Notice, and UBTI rules never explicitly mention IRAs. The IRS, however, treats IRAs and other tax-advantaged accounts as "organizations" that fall subject to the UBTI rules--and so, by implication, fall under other rules that describe how UBTI is generated (such as REMIC/860E). Take a look at IRS publication 598 (, which states:

    "The tax on unrelated business income applies to most organizations exempt from tax under section 501(a). These organizations include charitable, religious, scientific, and other organizations described in section 501(c), as well as employees’ trusts forming part of pension, profit-sharing, and stock bonus plans described in section 401(a). In addition, the following are subject to the tax on unrelated business income: Individual retirement arrangements (IRAs), including traditional IRAs, Roth IRAs, Coverdell IRAs, simplified employee pensions (SEP-IRAs), and savings incentive match plans for employees (SIMPLE IRAs)..."

    Take a look at that publication; it provides some useful background information. I would quote more of it, but the formatting makes it super annoying to quote from (I end up highlighting multiple columns when I try to pull text from it).

    Thanks for the fantastic question, though, and great research.

    Mar 16 05:48 PM | Likes Like |Link to Comment