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Investing 101 Archive

  • Wall Street gospel says that investors seeking outsized investment returns need to take on more risk. Nearly all modern portfolio strategy is based on this simple, clean, intuitive idea. According to Larry Swedroe of Buckingham Asset Management the only problem with the accepted relationship between risk and reward is that it's just not true.

    Using beta as a proxy for risk, Swedroe says lower beta stocks perform just as well and, over some time periods, much better than a basket of high-risk plays. Even better, they do so without exposing investors to as many of the terrifying highs and lows that have made investing in the new millennium such a harrowing prospect.

    In this edition of Investing 101, Swedroe joined Breakout to share his beta insights and help us understand what they mean.

    What is Beta?

    Beta is kind of like volatility. It's simply a trailing measure of how a stock or portfolio moves in relation to stocks as a whole. "Beta is just a measure of the risk of a stock or your portfolio or a fund relative to the risk of the overall market."

    For instance if the market gains 1%, a high-beta equity would be expected to rise more. The opposite is true for a down day, with high-beta stocks suffering more than their steady counterparts during down periods.

    Don't Investors Willing to Endure Higher Beta Get Larger Gains?

    Fortune may favor the brave, but Swedroe says brave investors don't increase their odds of making a fortune. "Data shows that stocks with low beta have actually had the same returns as stocks with a high beta."

    Participants in equity markets may seek the thrills of wild fluctuations, but for those sane enough to invest for the purpose of building wealth, there's little to nothing in past data to suggest that emotional stress has any financial payoff.

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  • With an endless stream of economic data, earnings results, analyst reports, and technical trends to follow, it's easy to see why so many investors are at a loss to figure out where the market is going at any given time.

    But beyond all of those numbers and readings, there exists a bevy of time-tested events and occurrences which have proven to possess a profound influence over the markets.

    In this installment of Investing 101, we dive into the elusive science of "market cycles," a trading phenomena that Jeffrey Hirsch, author of The Little Book of Stock Market Cycles describes as "regularly occurring, has a reason to repeat, and is driven by a real event."

    War and Peace

    While investors track dozens and dozens of different cycles, Hirsch says none is more influential than the effects of war and peace. "Once peace prevails and the troops come home and the bills come due, inflation rises up," Hirsch says in the attached video. He adds that, "Once that inflation levels off, you see the market catch up with that inflation; you see that sort of 45-degree angle, big super bull market, those 500% booms."

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  • The Ivy League consists of eight schools that are widely regarded as being some of the finest in the United States. Where the SEC is synonymous with football and the PAC-12 is known for the stereotypical "Left Coast" lifestyle, the Ivies are known for both their rigorous athletics and inflated self-esteem.

    Some of the reputation is bluster, but when it comes to their endowments, the Ivies are everything they're cracked up to be. Five of the top 10 largest university endowments in the U.S. belong to Ivy League schools — Harvard topping the list at $32 billion, Yale in second at $19 billion, and Princeton third, with a fund of $17.5 billion as of October 2011.

    Larry Swedroe, director of research for Buckingham Asset Management and author of Investment Mistakes Even Smart Investors Make, joined Breakout to walk us through the endowment investment process.

    Why do schools have endowments?

    Generally consisting of money from donations, endowments are typically put to work funding construction, scholarships, and other operational needs not fully covered by school tuition.

    Money sitting idle or parked in Treasuries earning next to nothing does no one any good. The greater the return, the larger the endowment, and the bigger the buffer between the schools and poverty. Essentially, schools have endowments for the same reason people have savings.

    What strategies do they use?

    Schools with larger endowments have more than they need for annual operations. That excess gives them an investing time frame of as as long as the school may exist. (Harvard was founded in 1636 and has no plans to close up shop.) "Eternity" is longer than even the staunchest buy-and-hold investor, but that doesn't mean there aren't lessons to be learned.

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ABOUT INVESTING 101

Breakout’s Investing 101 is a new way to gain insight on money management and trading. Whether you’re managing your own retirement account, just beginning, or an advanced investor in need of a good refresher, Investing 101 will help you learn, grow, and keep you informed of the basic steps to effectively manage your money. Expect investing tips that focus on trading strategies, asset allocation, and portfolio management.





Investing 101

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