It’s easy to overlook the fact that, in thinking about investment risk, we are implicitly making a choice about the benchmark against which risk is measured.
If you put $100,000 of your savings into Bitcoin at the end of 2020 and are still holding those coins today, you’d be down 20% on your investment. But, if you'd used that $100,000 to short Bitcoin, you’d have suffered a loss too. How is this possible?
If finance could be distilled into one idea, it likely would be that there should be a tradeoff between risk and reward: an investment with low risk should have a low expected return, while one that could make you rich should also be one that could lose you a lot of money. The Overnight Effect flies in the face of this core tenet.
The year 2022 sure has felt like a pretty bad one so far: interest rates and consumer prices have spiked up, and stock prices are sharply down. But, in terms of what really matters, many investors are better off than they were at the end of 2021–almost 5% better off for an investor in a diversified balanced portfolio.
What are we to make of the near-total wipeout of the stablecoin Terra and its companion coin Luna, in which around $50B in value vaporized in less than a week?
Yale Professor Robert Shiller’s Cyclically Adjusted Price-to-Earnings ratio (CAPE) is a respectable predictor of the future real return of the stock market, but it underwhelms when used on its own to set stock exposure. We examine a better way of using CAPE, with much better results.
In general, the more optimistic we are on the prospects of an investment, the more of it we’ll want to own. However, at extreme levels of bullishness, the normal relationship can be turned on its head and it can make sense to own less of an asset the more we like it.
We provide a practical definition of the ideal personalized risk-free asset, and then we’ll discuss how to construct an efficient portfolio when that ideal asset doesn’t exist in investable form.
The top ten stocks in the S&P500 add up to 27% of the index. Is that a problem?
Is it better to jump in all at once, to average-in over time or to wait for a market correction?