Learning that drives better investment decisions

Risky Business? Or Risk Averse?

Top 5 of the Week of April 9

Daniel Blais, CFA, of Enterprising Investor discusses the new metric for identifying skillful asset managers. Factor Research’s Nicolas Rabener analyzes index turnover. And from ETF.com, Larry Swedroe explains “why financial trends persist.”

For Newfound Research, Corey Hoffstein reminds us of the positive aspects of risk aversion. And from Research Affiliates, Jonathan Treussard, Ph.D., argues the correct way to do performance measurement…


Is a New Metric the Answer?

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  • Selecting an outperforming active manager before they actually outperform is one of the hardest things to do in investment management
  • But there’s a new metric available—the Skill Ratio—to seek out those managers who can achieve returns by skill and those, who you want to avoid, who achieve results by luck alone
  • What may actually be harder is how to identify if underperformance is persistent or simply the result of a bad spell—let’s hope it doesn’t take too long to differentiate one from the other

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Index Turnover and Impact

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  • The claim that passive index funds beat actively managed ones is well-known, and mostly due to low turnover and low transaction costs
  • Though this is somewhat true, indices like the S&P 500 “have a relatively high turnover”—an average of 8% per year—suggesting that 50% of current index members will go in the next decade
  • This doesn’t exactly fit the long-term buy and hold strategy of ETF investors—this turnover could be decreased by rebalancing frequency, but this will also impact risk-return ratios

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When to Trend-Follow? That’s the Question

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  • When it comes to ‘new’ investment strategies, there are tests to take to improve our faith in them
  • Test whether it works in other asset classes as well—this will greatly reduce the chance of data mining—and check its strength to various definitions
  • When it comes to trend-following, strategies perform well historically due to investor behavioral biases, such as anchoring and herding
  • So, putting a moderate allocation towards trend-following strategies is worth consideration, but no more than that

How much do you allocate towards financial trends? Share your comments in the section below
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Thrill Seeker? Or Risk Averse?

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  • Hindsight can be misleading to our brains when it comes to risk (having bought insurance even though we’ve never had to make a claim)
  • But a single, large loss can completely throw our whole world off balance—for that matter, even a run of small losses can compound to push our path of course significantly
  • So, while risk aversion can seem foolish if we don’t actually encounter risk, it’s worth managing risk strategically to amplify long-term returns

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If You Gotta Do It, Do PerFormance Measurement Like This

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  • Performance measurement is often done to death sometimes thanks to the technology we have available to help us—and it can seem worthwhile to check clients are on the right track
  • Reacting to performance measurement with short-term actions though may have a negative long-term impact on our portfolio
  • If it must be done, concentrate on assessing a strategy’s “tracking error of returns relative to its benchmark”

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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.


 

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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.