As featured in The Wall Street Journal, Money Magazine, and more!

February 2012

In Finland, all young men are required to spend some time in the military. Finland also has a wealth tax, requiring citizens to report their investments to the government. As a result, researchers from the University of California, Los Angeles, Aalto University, and the University of Chicago have discovered data worth studying. Because all military personal are required to submit to intelligence evaluations, researchers looked at I.Q. scores to determine whether there was any correlation between these numbers and investing success.

The study uncovered interesting investment patterns.

  • People with a higher I.Q. were more likely to diversify their investments more.
  • With a higher I.Q., investors were more likely to invest in small-cap stocks.
  • Higher I.Q. correlates with heavier involvement in the stock market.

From the New York Times article discussing the study:

The authors didn’t claim that people with high scores had some kind of monopoly on stock-picking genius. What they did contend was that these people tended to follow basic rules of successful investing.

In some ways, it’s a puzzle why I.Q. scores would matter in this regard. After all, the view that people should diversify their investments, to avoid putting all their eggs in one basket, is widely accepted. It’s not hard to diversify a portfolio or to have someone do it for you.

BrainAccording to the paper, the study was controlled for external factors like wealth, income, age, and occupation. This is an important distinction to note because there is some controversy surrounding I.Q. tests. The typical I.Q. test may be biased in favor of people from families with a higher income or from a higher socio-economic status background.

I don’t know my I.Q. score, and I expect most readers don’t know theirs, either. It would be difficult to have an opinion on the results of this study without I.Q. tests being widespread. Sometimes, though, success in the stock market seems to rely on other factors: good research, good timing, and good planning.

While the habits above may be correlated to high I.Q. scores, what this study didn’t seem to measure is outright financial success in the stock market. We can assume that diversified investments, a focus on small-cap stocks, and more money invested lead to better results. That’s likely true over the long-term, but short-term success might depend on other factors. Those other factors might not be correlated to I.Q., or if they are, were not considered in this research.

Do you believe there is a link between intelligence (whether measured by I.Q. score or not) and stock market success?

Photo: dierk schaefer
The Journal of Finance, New York Times


If you’re interested in theater and have money you don’t mind losing, you may consider expanding your horizons by investing in a Broadway or off-Broadway show. Be prepared to lose money, though, because according to a variety of producers, only one show in five breaks even.

When a play or musical is in the planning stages, producers seek out investors to cover the costs of getting the show to opening night. After the show opens, income from the box office should pay for operating expenses. Any positive cash flow after expenses is distributed back to investors until their initial investments are paid back in full. Any profits after investors are repaid their initial investment are distributed back to the investors and producers, 50 percent to each (in the United States). Some shows never make a profit, but if you’ve backed a hit, you could see healthy returns, comfortably beating the stock market.

Broadway showFor the most part, individuals who wish to invest in theater, due to the risky nature of the business, must be accredited. The investor’s household must have a net worth of $1 million or more, excluding primary residence, or income of at least $200,000 ($300,000 for a married couple) for the past two years. There are ways to invest as a non-accredited investor, but the competition is higher for these opportunities because producers are limited in the number of non-accredited investors they can accept.

While the average investment from an individual is $20,000 to $25,000, you can often invest with $10,000, and sometimes with as little as $5,000. This minimum investment is lower than some mutual funds. The bigger the show and the higher probability of its success, the harder it would be to find an opportunity to invest at these lower amounts.

Ken Davenport, a Broadway producer with experience working closely with investors, took this concept of attracting smaller investors even further. When producing Godspell, Ken took to the streets, accepting investors with as little as $1,000 as a minimum investment. Investors received billing outside the theater and the chance to profit. With the play opening late last year and with the show not exactly being the hottest ticket in town, some investors in ken Davenport’s group, “The People of Godspell,” have reported that they’ve received checks towards paying back their initial investment, though the show seems to be far away from profiting for these investors.

The pioneers of attracting smaller investors to Broadway are Richard Frankel, Marc Routh, Thomas Viertel, and Steven Baruch. This team has produced seventy-five shows, and if an investor had invested $10,000 in each opportunity since 1985 through 2009, he or she would have received an annual rate of return of 27%, compared with the 7.29% of the S&P 500.

If you are not interested in Broadway or the dramatic arts, you may want to avoid investing due to risk. While financial reward is what all investors are seeking, investors in theater often look for intangible or invaluable returns. Producers will often offer investors a chance to be a part of the show, like attending opening night performances and after-show parties with the cast and creative staff, access to house seats, and in the case of Godspell and it’s pool of smaller investors, your name on a poster. For some, these benefits make investing worthwhile despite the risk.

If these benefits are not appealing to you, you may be only focused on the return of an investment, and stand to be disappointed if the show you back is like four out of five shows that never turn a profit.

Similarities to investing in the stock market. Just like a mutual fund, the best returns are reserved for investors who make the best decisions. Assuming you’re familiar with theater in the first place, you may want to become familiar with the production team’s track record before handing over any money to a show. While investors in the stock market may diversify across a variety of investments in an attempt to smooth out the peaks and valleys of investing over time, diversifying among a number of shows could be difficult. There may be only one show a season you find worth your investment, so your diversification must cover a long stretch of time.

Differences to investing in the stock market. When you invest in the stock market, you can do your research from your bedroom. You can read financial statements in the comfort of your own home, transferring money electronically to your bank account to your investment when you’re ready to purchase a stock or fund. All the information you need is available without leaving your house.

Investing in theater is more like investing in a company directly with a major financial commitment or receiving a substantial share of ownership. Before you make a major investment, giving you a substantial stake in a company, you’ll want to meet the executive team, analyze the financial documents, and handle more of the due diligence in person. When investing in a Broadway show, much of the information you need is not available online. You can use the Theatrical Index to look at every active production’s gross receipts and you can use the Internet Broadway Database to verify information about producers and productions, but it’s best to meet the producers in person, learn about the production, and determine whether you believe the show has the potential to succeed.

Early investors in Rent made a fortune; investors in Spider-Man: Turn Off The Dark probably won’t receive their initial investment back until the show has been running for four years, if it survives that long. Despite it being the most expensive Broadway show ever put into production, Spider-Man seemed like a safer bet, with a big name producer and a widely-recognized brand.

If you’re interested in getting started, here are a few suggestions.

  • Ken Davenport’s introduction is a good place to start.
  • Consider signing up for the Theatrical Index newsletter (linked above) to have access to financial information.
  • Find producers you’d like to work with, and send them introductory letters via email. Even if the particular producers you’re interested in are not currently looking for investors, you will be on their list to be the first to know when they’re seeking investors for their next projects.
  • Meet the producers in person and get to know the show in its early stages by attending table-reads and rehearsals.
  • Don’t set your expectations too high.

Would you consider investing in a Broadway show?

Photo: kevin dooley
BroadwayWorld, CNBC, New York Times


Last week, the White House released a Consumer Privacy Bill of Rights. This isn’t a law or regulation, but a set of guidelines that could possibly underscore future actions by Congress and enforcement by the Federal Trade Commission. Private, personal information should be private and personal, but when consumers enroll for any type of service, the terms of use of those services often require signing away the rights to this information.

If, for example, you’d like to use Facebook to share photographs with your friends and see what they’ve been doing lately, you must agree to the service’s policies which include the service’s ability to keep your personal data on file and use it to deliver targeted ads and to track the other, non-Facebook websites you visit.

FacebookThe Consumer Privacy Bill of Rights aims to give consumers more control of their personal information. Some of the guidelines are common sense, and many companies already follow these guidelines or come close. Codifying these principles is a positive step towards making consumers aware of expectations for the companies they interact with every day, like social media websites, banks and other financial institutions, and retailers.

Here are the main points:

Consumers have a right to exercise control over what personal data companies collect from them and how they use it.

  • Companies should give consumers choices about how companies collect, use, and share personal data.
  • The ability to make these choices should be easy to use and easily accessible.
  • The ability to change these choices after initially selecting them should be just as easy to use and accessible.

Consumers have a right to easily understandable and accessible information about privacy and security practices.

  • Companies should clearly explain how personal information is collected and used internally and with third-parties.
  • Companies should clearly define the policy for deleting private customer data.

Consumers have a right to expect that companies will collect, use, and disclose personal data in ways that are consistent with the context in which consumers provide the data.

  • Companies should not provide consumers’ personal information to third parties who will use that information for a different than it was intended. For example, if I, as a Facebook user, “like” the band Pink Floyd, I shouldn’t begin receiving emails from advertising Pink Floyd albums.
  • Companies have a right to ask whether any particular customer would consent to this type of information sharing.

Consumers have a right to secure and responsible handling of personal data.

  • From the text of the Privacy Bill of Rights: “Companies should assess the privacy and security risks associated with their personal data practices and maintain reasonable safeguards to control risks such as loss; unauthorized access, use, destruction, or modification; and improper disclosure.”

Consumers have a right to access and correct personal data in usable formats, in a manner that is appropriate to the sensitivity of the data and the risk of adverse consequences to consumers if the data is inaccurate.

  • Companies should ensure the data they collect is accurate and current.
  • Consumers should be able to review and correct stored information.
  • Consumers should be able to request stored information be deleted.

Consumers have a right to reasonable limits on the personal data that companies collect and retain.

  • Companies shouldn’t collect more information than necessary.
  • Companies should securely dispose of information when no longer needed.

Consumers have a right to have personal data handled by companies with appropriate measures in place to assure they adhere to the Consumer Privacy Bill of Rights.

  • Consumers should expect companies to follow these guidelines.
  • Both companies and consumers should expect the employees of companies collecting users’ personal information to follow these guidelines.

Time, CNN


This is a guest article by Jacob, creator of the personal finance blog, My Personal Finance Journey. In the article, Jacob analyzes the Permanent Portfolio, a theory presented by Harry Browne, to determine whether investing along the theory’s guidelines can help investors beat the stock market.

Investors in general always seem to be on the lookout for a sure-fire strategy that they can use to outperform the market. Unfortunately, the reality is that these strategies are difficult-to-impossible to find. For this reason, I personally invest in a portfolio of passively managed low-cost index mutual funds from various asset classes and rebalance back to my asset allocation targets periodically.

Since my investing strategy does not take up too much time to maintain each month (in fact, individual stock investors might even call it “boring”), I am constantly interested in learning about new investing techniques and analyzing them to see if they have any merit.

One of these techniques/strategies I’ve learned about and analyzed over the past few months is The Permanent Portfolio created by Harry Browne in his book, Fail-Safe Investing: Lifelong Financial Security in 30 Minutes.

What is the Permanent Portfolio?

The goal of The Permanent Portfolio is to provide safety and stability in any economic climate to the money you cannot afford to lose. This is accomplished by selecting various investment components in such a way that at least one asset class is favored in any economic climate. The Portfolio components are as follows, each carrying equal weight for as long as you hold the Portfolio, employing annual re-balancing:

  • 25% in stocks, which do well in times of prosperity.
  • 25% in gold, which does well in times of inflation.
  • 25% in bonds, which increase in price during times of deflation.
  • 25% in cash, which does well in times of tight money/recession.

Existing studies on the Permanent Portfolio

There have been many studies that have looked at this type of investing over the past 5 years. Overall, the conclusions and opinions from these existing studies are mixed. Craig from Crawling Road saw enough evidence from his study of the efficacy of The Permanent Portfolio, and he appears to have adopted it successfully to his investing strategy.

On the other hand, William Bernstein and Geoff Considine feel that while The Permanent Portfolio strategy itself has merit, individual investors who flock to this strategy are most likely “chasing returns” and probably lack the discipline to stick to the allocation dictated over the long-term, causing failure/loss of money to occur. This is due to the fact that the portfolio could be essentially flat-lined while the overall stock market is increasing 20%! An investor must have the discipline to stick to the strategy in these sorts of times.

I was not ready to automatically execute The Permanent Portfolio strategy for my own investing after reading the existing studies above for the following reasons:

  1. The use of raw index prices in existing studies is not ideal. I would want to still see good performance and risk trends when common investment vehicles (ETFs or index funds) are used exclusively to construct the portfolio.
  2. Use of physical gold metal holdings in existing studies is not ideal. Since the studies discussed above used gold market prices, I’d want to perform my own analysis using an index fund or ETF to see how performance held up without the use of physical metal.
  3. Permanent Portfolio performance comparison against a more aggressive stock asset allocation. In the existing studies, the most aggressive asset allocation that was compared against The Permanent Portfolio was a 60% equity, 40% bond asset mix. However, for a younger person such as me who can take on more risk, I would be curious to see how the performance compares to a more aggressive equity asset allocation, such as 75% equity, 25% fixed income.
  4. Use of yearly rebalancing in existing studies is not ideal. I currently employ monthly portfolio analysis (and rebalancing if needed), and as such, I’d be interested to find out how The Permanent Portfolio fairs using monthly rebalancing analysis.

Refined Permanent Portfolio performance analysis

In order to address the four considerations in the previous section, I set about defining the financial instruments that would construct The “Refined” Permanent Portfolio, a hypothetical portfolio consisting of a $10,000 starting value. The components I selected are shown below.

  • 25% in stocks – Vanguard S&P 500 Index Fund (ticker symbol: VFINX).
  • 25% in gold. Vanguard Precious Metals and Mining Fund (ticker symbol: VGPMX).
  • 25% in bonds. Vanguard Long-Term Treasury Fund (ticker symbol: VUSTX).
  • 25% in cash. Vanguard Short-Term Federal Fund (ticker symbol: VSGBX).

The table below summarizes the performance of the Refined Permanent Portfolio described above over the last 20 years (ending the beginning of October 2011) compared to a 100% stock and a 75% stock, 25% bond portfolio. The historical prices data source is Yahoo Finance. Monthly rebalancing is performed to maintain the appropriate asset allocation targets.

Permanent Portfolio Performance Table

Examining the table above, it can be seen that the Refined Permanent Portfolio does indeed outperform both the 100% stock and the stock/bond portfolios by a significant margin, as evidenced by nearly a 60% improvement in return on your original investment (20-year overall ROI), along with exhibiting 30-70% lower risk (lower standard deviation of annual returns).

Essentially, The Permanent Portfolio resulted in overall greater returns because it is insulated against the big decreases in price stemming from the often-volatile stock market. This phenomenon is best illustrated by the graph below, which shows the investment value growth of a $10,000 starting investment in the Refined Permanent Portfolio (blue plot) vs. a 100% stock portfolio (red plot).

The enhanced stability of the Permanent Portfolio was especially apparent in the 1997-2002 time frame (see black square in graph below), when the 100% stock portfolio first increased by more than 100%, only to then decrease nearly 50% in one to two years. The Permanent Portfolio was protected from this huge swing in prices, effectively preserving investor capital.

Permanent Portfolio Graph

Should investors incorporate the Permanent Portfolio?

Because of the consistency of the Permanent Portfolio over the past 50 years in either being competitive with or exceeding the long-term returns obtained using traditional stock/fixed income portfolios, I am convinced that The Permanent Portfolio will continue to perform well over the long-term.

However, I believe that investors should only adopt the strategy in full if the following conditions are true.

  • They will truly stick with it over the 20 years needed to obtain results competitive with or beating stocks, or
  • If they are merely looking for a conservative (not market-beating) strategy to preserve capital and stay ahead of inflation (which coincidentally, is the true goal for The Permanent Portfolio).

However, honestly, I feel that few investors (myself included) will have the resolve to stick with the strategy for the long-term, for the reasons mentioned below.

  • The majority of investors that are interested in The Permanent Portfolio at the current time are simply looking at it as a possible way to “beat the market,” and not as a method to preserve capital, as it is truly intended.
  • The Permanent Portfolio strategy’s returns have a low correlation with the returns of the stock market (a correlation coefficient of 0.58), meaning that if you employ this strategy, you’ll only enjoy any gains happening in the stock market about half the time. (Tthink about completely being excluded from the euphoria of the increase in the stock market in the late 1990’s. Would you be OK with that?) In my opinion, the low correlation of The Permanent Portfolio with the stock market makes it nearly impossible for investors looking to aggressively grow their money to stay with The Permanent Portfolio strategy.

Instead, most investors would be better served by sticking with an investing strategy using and a more “traditional” asset allocation that has a slightly higher correlation with the overall market.

Do you think that the Permanent Portfolio will continue to perform well in the next 20 years? Do you feel you’d have the discipline to stick with the strategy, even if it meant underperforming the rest of the market for long periods of time?

The complete set of calculations of the historical performance of the “Refined” Permanent Portfolio, correlation coefficients matrices, and price history of the proposed index mutual fund Permanent Portfolio is included in this Google Docs Spreadsheet.


Podcast 149: Trends in Financial Planning

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Today on the Consumerism Commentary Podcast, Bryan J Busch talks with Flexo and Michael Kitces, Director of Research for Pinnacle Advisory Group. They discuss how online money management tools compare to personalized financial planning and other trends in the changing field of financial advice. Consumerism Commentary Podcast Trends in Financial Planning: S06E19 / 149 Download […]

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Three Credit Card Benefits You’re Paying For

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Buying a House With Cold, Hard Cash

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When I write about the unbanked, the vast majority of this category of consumer avoids the financial industry due to lack of trust in the industry or a belief that living paycheck to paycheck doesn’t necessitate the fees and hassles of including a third party in financial transactions. Cash, in some respects, keeps you off […]

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Cashier checkout at Walmart

Retailers, represented by the National Retail Foundation, promised that consumers would benefit when retailers, particularly small businesses, were to benefit from regulated interchange (swipe) fees charged by Visa and MasterCard. The regulation, commonly called the “Durbin Amendment to the Dodd-Frank Act,” would lower the cost for businesses who were subject to an effective duopoly between […]

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Small businesses often require a substantial line of credit early on to survive the start-up stage. In a perfect world, everyone would have the cash to fund their start-up but it’s not always that easy. These days, finding a bank that can lend to small businesses is extremely difficult, so one of the alternatives is […]

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Improve Your Finances By Modifying Your Behavior

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Improving your financial situation requires more than just trying harder. People who write financial websites offering advice often think or imply that the reason for financial misfortune is ignorance of the basics. Recently, there was one website that claimed that the only thing people need to know was spend less than you earn, as if […]

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