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Effort ≠ Returns

Top 5 of the Week of July 30

Heading up our Top 5 this week, The Financial Samurai Sam Dogen discusses age and risk tolerance. From Pension Partners, Charlie Bilello examines the Dow’s recent 7th longest streak in history. And Gary Antonacci, for Dual Momentum, walks us through the evolution of investing.

Mark Rzepczynski, on his blog, breaks down the “work ethic” fallacy in active management. And writing for Fortune Financial Advisors, Lawrence Hamtil advises us to swap our focus to risk rather than reward…


Ask Yourself, “Is It Worth It?”

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  • When it comes to getting older, we all want to remove as much stress as possible from life, and financial loss is rife with stress
  • Reevaluating our risk levels should happen continuously as we mature—yes, you may earn more in the way of returns if you remain aggressively invested in risk-assets
  • But you may not necessarily be happier—avoid inviting unnecessary stress by being an excessive risk taker where you can—it’s not logical past a certain point

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Are the Halcyon Days in Markets Behind Us?

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  • At the end of June, the Dow broke its 7th longest streak and closed below its 200-day moving average for the first time in 2 years
  • At 501 days, it was the longest run since 1987, and historically since 1896, the Dow has only closed below this threshold 35% of the time
  • Given that data shows “higher volatility, lower average returns, and a higher probability of tail risk” below this 200-day moving average boundary, should we all be concerned about what the future holds next?

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A Retrospective View of Investing

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  • In the dark ages of investing, the roots for modern portfolio theory began with Markowitz’s work in the 1950s
  • Researchers clarified Markowitz’s approach with the CAPM in the 1960s, and the 1970s saw the launch of “Bogle’s Folly”
  • The 80s and 90s saw more academic ideas and better recognition of modern portfolio theory before investor attitudes changed drastically in the 2000s
  • In the 2010s, indexing was in but it still paled next to active management, a view which is now beginning to change completely…

What do you think the future holds? Share your comments in the section below

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Effort ≠ Returns

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  • The “work ethic” fallacy idealizes that while we want to believe hard work generates more returns, it’s just not necessarily true
  • Investors tend to use “feeling as information” to judge how effective an active manager will be and there are many theories on the persistence of funds despite underperformance
  • We shouldn’t “confuse hard work with results” and when it comes to active management, forgo the effort sympathy and watch the data

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Adjust Your Focus

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  • Risk and reward do not go hand-in-hand, despite many investors assumption that this approach works
  • Data from past experience in equity markets and in fixed income shows us the opposite is much more the norm if anything
  • Even outside of investing, we only have to look at events in history like the naval arms race between Great Britain and Imperial Germany running up to WW1 to show that a defensive mindset will outdo an aggressive one

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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.


 

Anything you would like to discuss about this week’s top 5? Do you have another favorite that isn’t mentioned here? Feel free to add it below. Let’s start a discussion in the comments section!

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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article. The Become a Better Investor Team doesn’t necessarily endorse any stocks or shares mentioned in the articles or the author of such articles linked to and summarized in Top 5 of the Week and cannot guarantee the accuracy of its information.