Tag Archives: shares

Investing: How to Make Money

The Efficient Frontier
Optimal returns, for a given risk level, are on the efficient frontier – a statistical fact demonstrable by financial engineers. A market portfolio, or the index, is on this frontier,

It has long been known by investment analysts that optimising risk and return (which is their job) is achieved by tracking the market.  Experienced managers, analysts and data all consistently say that, if you want to invest in the stock market buy the index.  And hold it.

Young bucks, and old, would like to beat the market.  Some might do so for a limited time period.  But no one has consistently done so.  Why?  Because to beat the market you have to consistently do better than everyone else.  That is cocky and statistically very unlikely.

The opportunity to make better bets than everyone else has declined in recent years as computerised portfolio management and trading has grown and index investing has become the principal approach of behemoths which control sizeable fraction of global share trading, like BlackRock.

In addition, some data suggests that taking higher risks can in fact lower your expected return, as appeared to happen in the 2000s.  We are now 9 years into a bull market with little regulatory reform, growing political uncertainty and upward pressure on interest rates (which might attract capital from equities to debt).

Absoulte Portfolios Over Time
The return to risk shrunk as the financial bubble of the early 2000s grew.

The people who beat the market are the ones who take fees (from you) for handling money, or have inside information.

There are reasons to choose a narrower portfolio of listed equities. You might want to restrict your investment to a country, region or industry, or avoid places or sectors.  But to try to pick stocks requires a consistent focus and adaptability.  If you are going to do it yourself, fine.  But if you are paying someone else, they generally have an incentive to take risks with your money that they mightn’t with their own.  And of course their fees eat in to your capital.

So, simply, if you wish to diversify your savings beyond property (your home usually) or debt (bank deposits etc) by putting some in the stock market be careful not to be blinded by the attraction of “expected return” ignoring the danger of risk, and the cost of fees.  So buy a low load (i.e. low fees), index (i.e. market tracking) fund.

And remember, most people make money by working, not gambling.  Gambling is more likely to break your fortune than make it.

The following article by The Economist (11 June 2016) offers further insight. Continue reading Investing: How to Make Money

Asset prices down, money chasing security. What’s the problem?

While there has been enthusiasm for a recovering global economy, optimism is being dampened by market movements.

There are some fundamental concerns about projected consumption levels and production costs.

There are a number of geopolitical risks festering around the world:

The strife in Hong Kong is being calmed by force.  That will be re-assuring now, but has shown the inability of Xi to lead a new path and China to manage the inevitable progression to maturity.  Hong Kong is China’s best testing ground for political innovation, which must manifest in China soon otherwise social tension will disrupt economic strength.

The middle east …!  Syria and IS are immediate and top of the list, but they are set to be a decades long drama of death.  Iraq, Afghanistan, Iran., Libya, and more.  Israel/Palestine … so sad.  These are are drain on the consciousness, but are inconsequential as long as the oil flows.  Phew.

Ebola is gaining momentum rather than being contained.  That might change.  But it’s scary to imagine a wierd disease like that becoming a global epidemic.  Managing a cataclysm like that might bring people together.

Everything’s going to be fine, in the short term.  But the underlying systemic risks, economic, social and ethical,  remain.

A holonic prescription for success without growth beckons.  Will our leaders lean in that direction?

BBC: Global shares slide on growth fears

BloombergBusinessWeek:  U.S. Oil Producers May Drill Themselves Into Oblivion

 IMF: World Economic Outlook (WEO) Legacies, Clouds, Uncertainties