You’ve heard the sage advice “Don’t put all your eggs in one basket.” That’s diversification. The S&P 500 is an index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. It is far more likely that one of those companies will go bankrupt in any given …
Investing Blog
Financial Concept: Diversification
Financial Concept: Inflation
Another important factor to consider in the context of your investments is the role of inflation. In June 1975, when Steve Jobs and Steve Wozniak invented the Apple computer, actual apples cost around $0.34/lb. In September 2015, apples cost approximately $1.30/lb. – a 382% increase. That’s a fairly typical example of inflation, which, over the …
Financial Concept: Opportunity Cost
Opportunity Cost is a calculation of gain forgone when funds are used for alternate purposes. For example, the “opportunity cost” of attending business school is not only the expense of tuition, but also the salary not earned during that two-year period. Later, when we talk about conducting a “Portfolio MRI” to evaluate how well your …
How to Look at Performance Gains and Losses
When the market value of investments declines, it’s natural to fear of falling short of your goals. Understanding Loss, Relative Loss, and Relative Gains can help alleviate such fears. ● Loss: Performance Loss occurs when a portfolio’s value decreases due to changing market conditions or a fall in a company’s earnings. There are, however, more …
Choose Your Investment Advisor as Carefully as You Choose Your Doctor
If you want a mechanic to be able to fix what’s wrong with your car, you must let him know about any peculiar sounds you hear (even if it requires admitting you shifted into reverse from third gear). Going to see your doctor requires similar honesty about things you don’t always want to reveal, such …
Financial Concept: Risk vs. Return
No discussion of investments can take place without an understanding of the fundamental concept of Risk. Investments that are high risk can provide a high reward . . . or may end up losing much of their value. An aggressive, risk-loving investor who doesn’t need the money in the near term may invest in riskier, …
Dispelling Investment Myths: Playing it Safe
The Myth: We can accumulate enough for retirement by saving cash and buying cash equivalents. The Truth: Inflation robs cash, CDs and T-Bills of their purchasing power. In 2014, a savings account typically paid 0.1% in interest. CD’s paid 0.7%. Inflation (see Financial Concept: Inflation) was a “modest” 1.7%. The money in a typical savings …
Dispelling Investment Myths: Superior Performance Justifies Higher Fees
The Myth: High costs are offset by superior performance. The Truth: A lot of buying and selling happens in the mutual fund investment process, incurring hidden costs that reduce your gains. Theoretically, a fund could provide such superior returns that you’d benefit even if it charged more in fees. Lots of funds (and firms) would …
Dispelling Investment Myths: Chasing Last Year’s Winners
The Myth: Working with funds or financial managers that did well in the past is a good method of indicating which funds or managers will do well in the future. The Truth: Past performance is no guarantee of future success. One of the first things most people do before investing is look at a fund’s …
Financial Concept: Efficient Markets
The Efficient Market Hypothesis states that it is impossible for anyone (without inside information) to predict outcomes in the market, because share prices always reflect all known information. Although analysts who follow different industries and companies are paid to have the most up-to-date information and insight into the unique circumstances affecting the companies they follow, …