Size Doesn’t (Always) Matter
Top 5 of the Week of January 22
Heading up our Top 5 this week, Peter Lazaroff in his self-titled blog discusses the critical nature of asset allocation. Roger Nusbaum, writing for The Maven, dives into the impact of sequence of returns. And the author of the Pragmatic Capitalism blog, Cullen Roche, advises caution and not haste with cryptocurrencies.
Joshua Brown, The Reformed Broker, reveals when size is not important. And Ben Carlson from A Wealth of Common Sense examines what to expect from investing in the year ahead…
Your Most Important Investing Decision
- Asset allocation is quite possibly the most significant decision you’ll make in investing—as well as being one of the few things you can control
- 88% of your returns and the volatility you experience is all down to the mix of stocks, bonds, and cash in your portfolio
- While objectively assessing your own risk profile is challenging to achieve on your own, it’s worth the effort, as good asset allocation hits the right amount of diversification and helps you leverage your portfolio’s advantages against the rest of the market
How have you balanced your asset allocation out? Share your comments in the section below
“How Getting This Wrong Can Ruin Your Retirement”
- When it comes to the concept of sequence of returns (the string of earnings you gain over a time period), it’s pretty much luck of the draw as to how it will affect your retirement
- If you look back long-term, you could make an appropriate assessment of when you should have started drawing out of your portfolio based on the average annual market returns
- Unfortunately, given that you only gain 20/20 vision looking in hindsight, it’s difficult to work out what the lucky sequence will be in the future
“The Early Bird Gets the Worm, but the Second Mouse Gets the Cheese”
- With the heady mania of cryptocurrencies and Bitcoin still thriving, it is easy to be ignorant of the serious risk ahead
- The very real risk of the price of an asset disconnecting from its true utility—price compression—as part of a market bubble, all due to a lack of knowledge about the underlying asset
- The secret to note here is that as bubbles rise up around new tech, like Bitcoin, it’s not necessary to be in the early money chaser group, instead, be patient and wait for the second mover advantage
Size Doesn’t (Always) Matter
- When comparing the effectiveness of investor’s market opinions, it makes sense heuristically to trust one over another based on the size of their funds
- But tagging one investor as better than another—because they have more money—doesn’t take into account other factors like the state of the market they’ve each been investing in
- It is impossible to make consistent market calls; influence, therefore, should not be assigned based on fund size alones—size doesn’t (always) matter
To an Uncertain Future!
- The recency bias we will all be undergoing post-2017 will affect the way we invest this year, given that recent experience forms the baseline for our future expectations
- When stocks begin to fall, it will be all too easy to believe they’ll carry on falling significantly further and crash
- We have no control over our politics, market returns, tax policies, economic growth, and other investor’s behavior, so invest in the one thing you can control; your savings rate
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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