Now that we’ve established the importance of minimizing systematic and unsystematic risk, let’s discuss the upside associated with risk: larger payouts over time. First, it bears repeating that you will typically make more money from stocks than bonds. There is “equity risk” in owning stocks, but over long periods of time (e.g., twenty years or …
Investing Blog
The Upside of Risk
The (Scientific) Method Behind Modern Investing
To better understand why Asset Allocation and Diversification are so important, we turn to mountains of research by Nobel prize-winning economists. Modern Portfolio Theory and Diversification In 1990, Harry Markowitz, Ph.D., he was awarded the Nobel Prize in Economics for his research on the optimization of portfolios along what he calls the Efficient Frontier. He …
Definition: Fixed income
Fixed income investments are typically municipal bonds or treasuries) that pay a predictable premium on a regular schedule. They are considered “fixed” because the amount of the premium is known in advance.
Definition: Correlation
A correlation is a connection or relationship between two or more things. Investments that are “positively correlated” will be affected by the same systematic risk, such as a slowdown in manufacturing in Japan. Investments that are “negatively correlated” will not be affected by the same conditions, and their prices won’t respond in the same way.
Definition: 4 Types of Risk
Systemic Risk generally refers to an event that can trigger a collapse in a certain industry or economy. Systematic Risks refers to overall market risk. It is the risk inherent to the entire market or market segment. For example, if you hold only one stock, you run the risk that something will happen to the …
Implementing an Investment Strategy
I’ve alluded to different investment options, such as mutual funds or index funds. There are three options, so let’s consider them here. 1. Buying Individual Stocks You can open a brokerage account and buy your own stocks, but as we know, stocks carry a lot of risks. Relative to options that aggregate many stocks, you …
Your Portfolio During Retirement
At the opposite extreme of investments for young investors is money being saved for retirement. You’re not going to spend all of it 10 years, six–nine years, three–five years, or one–three years; it must last the rest of your life. For this investor, the goal is to generate a stable income for the rest of …
Basic Risk Models
To accommodate the different investors’ levels of risk tolerance, we use four basic risk models: Conservative, Moderate, Growth, and Aggressive. Each refers to the time horizon of the investment. Conservative Portfolio: 1-3 Year Time Horizon With a time horizon of one–three years, it is typically advisable to put up to 25% of your money into …
Determining Your Investment Objectives
We all want the greatest expected return for the lowest level of risk, but all of us have different tolerances for risk. The first steps are to consider when determining your investment objectives are: 1. When you expect to need the money and for what purpose, and 2. What type of risks are you most …
The Benefit of Investing in Funds with Low Turnover Ratios
A fund with a higher turnover ratio purchases and sells more stocks, bonds, and other financial instruments during a given period than a fund with a lower turnover ratio. More transactions mean more fees. Because using speculation, and gambling to manage funds is a poor investment philosophy, it’s wise to be wary of funds with …