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Risk Management 101 (Part 2)

Key Points

  • Volatility measures the dispersion of returns of a security, which can be estimated by calculating the standard deviation of historical returns.
  • Based upon this standard deviation measure, and an understanding of a stock’s average historical return we can estimate a stock’s range of expected returns.
  • This information can be useful in determining whether a particular stock lies within one’s risk tolerance when making investment decisions.
  • However, there are many assumptions associated with this analysis, which must be taken into consideration. Continue reading → Risk Management 101 (Part 2)
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Risk Management 101 (Part 1)

Key Points

  • Sound investing comes down to focusing on what you can control, while still maintaining a solid understanding the risks associated with what you cannot.
  • Risk Management involves understanding and controlling for the uncertainties related to the financial markets (systematic risk) or a particular company (idiosyncratic risk).
  • Risk-adjusted return can be quantified by the ratio of expected return divided by risk.
  • Volatility is a common, although imperfect measure of risk.

Continue reading → Risk Management 101 (Part 1)

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Behavioral Finance 101 (Part 1)

Key Points

  • Human behavior is subject to pervasive bias that rational observers would consider to be irrational.
  • Such irrational behavior is consistent with how investors often approach the financial markets, which over time can degrade investment returns.
  • Therefore, it behooves investors to better understand common behavioral biases when making investment decisions.
  • As an example, overconfidence can lead investors to overestimate their ability to beat The Street.

Continue reading → Behavioral Finance 101 (Part 1)

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Passive is the New Aggressive (Part 7)

Key Points

  • Research suggests that less than one percent of professional active manages are “skilled” at what they do.
  • Given this, the odds of picking a solid active manager is not just slightly worse than a coin toss; in fact, the chances are closer to slim to none.
  • Therefore, a passive investing strategy may be more sensible over the long run for most investors.

Continue reading → Passive is the New Aggressive (Part 7)

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Passive is the New Aggressive (Part 6)

Key Points

  • Over long periods, a passive investing approach in index funds is more likely to lead to an outcome that falls in line with a given benchmark.
  • With an active investing approach, where mutual fund fees are higher, outcomes are far less certain.
  • As such, the long-term opportunity cost of an active approach can be significant, and perhaps even disastrous.

Continue reading → Passive is the New Aggressive (Part 6)