Recognize Financial Trickery
Top 5 of the Week of April 30
A Wealth of Common Sense’s Ben Carlson kicks off our Top 5 this week commenting on the recent regression to “lumpy returns.” Morgan Housel, partner at Collaborative Fund, proposes that financial advisors adjust the way they talk to people about money. From Of Dollars and Data, Nick Maggiulli teaches us how to recognize and prevent financial trickery.
And Nicolas Rabener from Factor Research examines the concerns behind smart products. And Gary Antonacci, for Dual Momentum, clears up some common misconceptions surrounding momentum…
“Long-Term Returns Encompass Both Good and Bad Markets”
- The recent bull market has been powerful enough to adjust the annualized average return of S&P 500 to 15.1% from 9.6%
- While market averages are not set in stone, neither of these figures is particularly sustainable long-term
- The worst case future scenario might not damage your returns entirely, but it’s always worth remembering how lumpy stock market performance can be
Have you been experiencing ‘lumpy’ returns? Share your comments in the section below
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Financial Advice Tailored for the Individual
- A finanical advisor’s role in the investment industry is seen rather single-mindedly to facilitate numbers going up
- This investment philosophy has the same tendancy to steamroller over individuality in a way that has nothing to do with acknowledging differences in risk tolerances
- Just as medical textbooks don’t account for individual circumstances and decisions, neither do financial ones—financial advice is not one size fits all and shouldn’t be given as such
Recognize Financial Trickery
- There are 6 simple tricks that can be used to influence the way we think which are especially prevalent in the financial world
- The use of authority, the commitment and consistency bias which makes you say “Yes” repeatedly, and the social proof of everyone else buying into an asset class or strategy are the first 3 to watch for
- Avoid falling for the most difficult trick; the reciprocity bias (this for that), as well as doing business with someone just because you like them and/or scarcity pressure
Rising Smart-Beta Concerns
- In spite of their popularity (investors have invested billions in long-short factor products), there remain some concerns about smart-beta products and their usage
- There is not much, if any, empirical evidence to demonstrate that smart-beta ETF allocations show positive excess returns
- Predominantly, they are useful though because these smart-beta products are influencing active fund managers to address their fees and ultimately, cost plays a pivotal part of returns
- As much of the early research about momentum was linked to stocks, the connection stuck, but there is evidence to show that indices work better
- Similarly, there seems to be a preference for relative momentum despite the data that demonstrates absolute momentum would be more favorable
- Though there are arguments that momentum is not as dependable as diversification, the two are one and the same thing; momentum “diversifies by time as well as by asset class”
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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