William Reichenstein

Baylor University | BU · Hankamer School of Business

Asset allocation is profoundly influenced by at least two underappreciated concepts. First, tax-deferred accounts-for example, 401(k)s-are like partnerships in which the investor owns (1-t(n)) of the partnership principal and the government owns the remainder, where t(n) is the marginal tax rate when the funds are withdrawn. Second, the government...

A dollar of pretax funds in a tax-deferred account, such as a 401 (k), is less valuable than the same amount of after-tax funds held in a tax-exempt account, such as a Roth IRA. Moreover, the type of account-for example, a taxable account, a 401 (k), or a Roth IRA-in which an asset is held affects the portion of the asset's risk borne by the invest...

Asset allocation is profoundly influenced by at least two underappreciated concepts. First, tax-deferred accounts—for example, 401(k)s—are like partnerships in which the investor owns (1 – tn) of the partnership principal and the government owns the remainder, where tn is the marginal tax rate when the funds are withdrawn. Second, the government sh...

Private wealth management is the investment management specialization focused on high-net-worth individuals and families. Portfolio design and investment solutions in private wealth management are customized to reflect the complexities of the investor’s unique circumstances. This literature review reflects the current best thinking on private wealt...

This study presents returns-based style analysis convertible bond index and 16 convertible bond funds for 1998-2007 and two subperiods. It allows investors to better calculate their asset allocation. For the full period and both subperiods, the average convertible bond fund's returns closely track the returns from a portfolio of 60% stocks, 30% hig...

This study updates prior studies and presents new evidence on the predictability of stock market returns. It examines the ability of two earnings yields to predict one-through 10-year real S&P 500 returns for 1881-2008 and 1953-2008. The upshot is that, as of year-end 2008, stock prospects look better than they have since at least the early 1990s....

The authors assert that a private wealth manager should manage an individual's extended portfolio that contains financial assets like stocks and bonds along with non-financial assets such as human capital and future benefits from Social Security and defined-benefit pension plans. The optimal allocation of an individual's financial portfolio must re...

We present returns-based style analysis of four high-yield (HY) bond indexes and 60 HY bond funds. It is widely accepted that HY bonds are hybrid assets, with returns sensitive to both high-grade bond returns and stock returns. Our findings show they should be viewed as part high-grade bonds, part stocks, and sometimes part cash. Consistent with th...

Several studies have found fundamental flaws in the traditional approach to managing individual investors' portfolios, including a failure to distinguish between $1 of pretax funds in a 401(k) and $1 of after-tax funds in either a taxable account or Roth IRA. This study recommends that an individual's asset values be converted to after-tax values a...

This study first explains why individuals should calculate an after-tax asset allocation. This asset allocation distinguishes between pretax funds in say a 401(k) and the generally after-tax funds in a taxable account. Separately, it performs mean-variance optimizations for individual investors. It concludes that, in general, almost all investors s...

This article examines municipal bond fund returns from 1991 through 2000. Four predictions of the efficient markets hypothesis are supported. First, among similar-style funds, there is a consistent negative relationship between expense ratios and net returns. Second, on average, a 1% higher expense ratio reduces returns by about 1%. Third, load fun...

We examine issues surrounding the value of military retirement income. We then provide estimates of the expected present value of this income stream after taxes for singles, married couples, widows and widowers of military retirees. Finally, we contend that individuals should treat the after-tax present value of military retirement income as a bond...

The author applies a mean-variance optimization approach to examine the asset allocation and location decisions made by individuals. The experiment is limited to two assets—stocks and bonds—which are alternatively held through pension or through taxable accounts. They aim to determine the best combination of asset allocation and asset location, eff...

The authors start with a simple question: what is the value of an individual's assets that can be used to satisfy retirement income needs, focusing more specifically on Social Security benefits? Consistent with an approach introduced in earlier works published in The Journal of Wealth Management, they then ask how these benefits affect the individu...

This is the second of four articles on the interaction of investment and holding structures. The first article by the author appeared in the Winter 1999 issue of this journal. Here the author sets the problem as follows: John and Mary Smith are saving for retirement and must choose a savings vehicle. The major factor in their decision is the expect...

T his article challenges two features of the traditional approach to calculating an individual or family's asset allocation. The traditional approach includes only financial assets in the portfolio and weighs them according to their market value. For example, suppose Mary and John Stone are saving for retirement and have a $300,000 stock fund held...

What are the average rewards to extending bond maturity? The authors examine bond returns, forward rates, and institutional evidence to try to answer this question and others. They conclude that the preferred habitat theory best explains the pattern of average term premiums. The premiums rise with maturity through about three years, become essentia...

Several studies conclude that a long-short term spread, in conjunction with one or more other variables, jointly predict returns on long-term corporate bonds and stocks. We extend these studies by examining the predictive content of intermediate-short term spreads, and by examining regressions of excess returns on 1.5-year to 20-year Treasury bonds...

Two conclusions are reached about how a family should calculate its asset mix. First, if the assets will be used to finance retirement needs, the asset mix should be based on after-tax values, because goods and services are purchased with after-tax dollars. This novel conclusion rejects current practice. The second conclusion concerns which assets...

We study the factors affecting the cross section of net returns of money market mutual funds from 1990 through 1994, and the persistence of relative returns across years. We find that the expense ratio is the most important factor in explaining differences in net returns. Government-only funds produce slightly lower returns than other-taxable funds...

Asset allocation models recommend that individuals and families allocate a portion of their portfolio to cash-e.g., bank checking accounts and money market mutual funds. In this paper, we study the factors affecting the cross section of net returns at money market funds from 1990 through 1994, and the persistence of funds' relative returns across y...

When saving for retirement, investors' most important decision will probably be the choice of savings vehicles, that is, whether the funds are subject to the tax structure facing personal accounts, deferred annuities, or pensions. The pension tax structure has an overwhelming long-run advantage over the other two forms. A bond or stock fund held in...

U.S. savings bonds are complex contracts. Financial planners have traditionally paid little attention to savings bonds, in part because they often offer below-market interest rates. However, they sometimes offer above-market interest rates, especially when one learns how to view and value their option features. All savings bonds contain put options...

Recent research indicates that dividend yield and earnings-price ratio can partially predict long-horizon stock returns. We examine whether individual investors can successfidly construct timing portfolios based on either of these variables or a measure of the expected market risk premium. The out-of-sample tests in this study require that investor...

This article supports the idea that the pension fund affects the value of the firm and can thus be viewed as a strategic business unit. But the author argues that nonfinancial corporations should pursue profit opportunities only in their non-pension business units - that is, by investing in their areas of comparative advantage. Financial assets off...

Prior research has argued that given the well-documented inverse relationship between firm size and market returns, smaller utilities should be allowed to earn higher accounting rates of return than larger utilities. To test the validity of this argument, this study investigated the relationship between firm size and market returns in the electric...

Recent studies conclude that the stock market's dividend yield and earnings/price ratio can predict long-horizon stock returns. The authors advocate a model of the market risk premium as a more consistent predictor of future S&P returns than either dividend yield or earnings/price ratio. They conclude that the market risk premium predicts long-hori...

Each week Value Line highlights one or two timeliness rank 1 stocks. We find a significant 2.65 percent three-day return around this event. However, this effect is temporary and largely reverses over the next several weeks. We also find that the market response to a highlighted stock is stronger when the stock has a lower price/earnings ratio, is s...

I&lis study asks which assets in individual should hold indirectly in a pension in order to maximize total portfolio return, where the totaIportfolio consists of assets held direct& outside of pensions pIus the pro rata share of pension assets. YEShe answer depends upon whether the individual actively or passively manages the nonpension portion of...

Horan and Robinson (2008) and I agree on several issues including how to calculate the after-tax value of assets held in tax-deferred accounts like a 401(k) and tax-exempt accounts like a Roth IRA. We agree that an asset's after-tax value is its after-tax future value when discounted back to the present by dividing by one plus the risk-appropriate...

This study illustrates that the choice of savings vehicles (e.g., taxable account, Roth IRA, or tax-deferred accounts such as a 401(k)) affects the portions of principal effectively owned by, returns received by, and risk borne by individual investors. This study examines the implications of this analysis for (1) the calculation of an individual's...