The Link between Price and Perceived Worth
Top 5 of the Week of April 24
Collaborative Fund partner, Morgan Housel, heads up our Top 5 this week with his perspective on the nature of risk. The Irrelevant Investor Michael Batnick uncovers the S&P 500’s streak of tranquillity. And James Picerno, writing for The Capital Spectator, examines benchmarking for portfolio analysis.
Dr. Daniel Crosby of Nocturne Capital walks us through the psychology of value investing. And Ben Carlson, from A Wealth of Common Sense, writes of the dependability of cycles…
Take a Risk Assessment
- When trying to decide where to invest money, the level of risk profile you’re prepared to deal with is an important factor
- Many investing strategies run the same level of risk but over very different time periods, and high risk in short time frames is paid for in increased stress and anxiety
- Make a risk assessment based not just on the volatility you’re prepared to run the gamut of, but also how long you can deal with the emotions that they’ll result in to see it through
The S&P 500’s Streak of Tranquility
- The last incredible streak in the stock market happened over nine years from 1989 to 1998; where the S&P 500 did not fall below 5% in a single week
- That’s 462 weeks, compounding nearly 17% a year, for a whopping 290% total return before ending “with a bang” and heading into instability
- The last “bad week” we had was in January 2016, and it’s worth remembering that bad weeks put fear in the heart of investors which can affect your portfolio—don’t react to this fearmongering
Picking the Right Benchmark
- It’s difficult to select the right benchmark for your portfolio, because choosing the wrong one can be worse than not picking one at all
- The standard approach to benchmarking is to compare risk and return against the S&P 500
- However, using a benchmark created from randomly selected but related portfolios offers you a superior way to analyze your risk and return
How do you approach benchmarking? Share your comments in the section below
The Link between Price and Perceived Worth
- Items that are rare and come with higher market value have a higher percieved worth by customers
- The very same items, if made easily accessible and cheaper, will be deemed less ‘worthy’—demonstrating that price is our foremost measure of percieved ‘quality’
- When it comes to investing, investors must recognise this attribute and correct this behavior; disconnect any preconcieved link between the price of a product and its value
The Dependable Aspect of Markets
- Depending on how you interpret and present financial data you can show almost anything you want, but what will always come out is the cyclical nature of markets
- Our lifecycles don’t always match up with market cycles though, and the ups and downs of the market can hugely impact our investments—both positively and negatively
- And as investors struggle to deal with the inconsistency of stock returns, this is where we turn to diversification for help
Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form—and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.
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