Learning that drives better investment decisions

The Gray Area of Stock Market Exposure

Top 5 of the Week of October 30

Daniel Egan opens up our Top 5 this week with a look at risk, return, and time on his self-named blog. Writer of the Pragmatic Capitalism blog, Cullen Roche, reveals how we don’t have to be black or white about our stock market exposure. And Zat Rana, writing on Medium, uncovers the kind of high-level thinking Warren Buffett might use for decision-making.

A Teachable Moment’s Anthony Isola teaches us how to avoid financial predators. And Robin Powell, The Evidence Investor, makes a plea for active managers to be more inactive…


The Problem with Risk

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  • Returns are something investors understand, but risk is much harder; it involves comprehending the likelihood of multiple possible outcomes
  • Our perception tends to be that we should be chasing the highest possible returns portfolio regardless of the risk involved
  • High-risk investments only prevail over low-risk ones over long periods of time though—short-term, this approach is just going to improve your odds of losing money

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The Gray Area of Stock Market Exposure

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  • Investing legend Jack Bogle fully supports reducing your stock market exposure to diminish your vulnerability to high level of risk
  • The alternative black or white view of needing to be either “all in” or “all out” is a gambling approach to investing—especially when the baseline probability of gambling is “negative total return”
  • Being in the market successfully, while not being overexposed to risk, is all about asset allocation and having a shrewd knowledge of your risk profile and behavior

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High-Level Decision-Making

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  • We make decisions on a daily basis in the face of a variety of options and conflicting information—making it hard to remain rational and unbiased
  • It’s also tough to overcome hardwired instincts to go with our short-term impulses; we may have evolved to make it needless to act like this, but it still requires conscious effort
  • To conquer this, use the 10/10/10 method to consider how you will feel about decisions in 10 minutes, 10 months, and 10 years—a high-level thinking approach to problem-solving

What high-level thinking methods do you employ for decision-making about your investments? Share your comments in the section below

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“Investor Self-Defense”

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  • One of the many difficulties new investors encounter is being preyed on by financial predators—this is especially true among our older generation
  • To improve the self-defense of your friends and family, encourage them to do their homework on their money managers and ensure they are a fiduciary
  • Charge them to question how much they pay for investment advice and money management, and to work out exactly what the fees they are paying go towards—improved awareness = improved investor self-defense

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Active Managers: Hold Your Fire!

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  • Evidence suggests that the fewer trades carried out by a fund, the better the returns—so, active managers would be better being more inactive
  • This is not even necessarily due to their level of skills at stock picking or market timing, but due to the costs involved with trading that eat away at returns
  • The biggest driver fuelling excessive trading by active managers is the need to be seen to be earning their money—far better, if they stick to their picks and avoid trading in and out of those stocks

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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.