Active versus Passive Investing: The “Alpha” Bet
What is “Alpha”?
In investment terminology, “alpha” refers to the level of outperformance of a portfolio relative to an appropriate benchmark. Of course, everyone would like to achieve returns in excess of their benchmark. But you’re advised to have a good grasp of the cost and chance of achieving alpha before you decide to chase it.
There are two broad approaches to investment management: active and passive. An active approach seeks to add value, or alpha, by over weighting exposure to securities that are believed to be undervalued and under weighting those believed to be overvalued. The obvious aim is to perform better than a strategy that simply holds all securities according to their market weight (i.e. benchmark portfolio).
Do You Really Want Your Investments To Increase In Value?
It depends on your wealth accumulation “stage”
Nearly everyone who purchases an investment, be it shares or property, wants to see it immediately rise in value. And the more the better. It justifies the investment decision and makes the investor feel wealthier.
However, while it might make you feel good, it may not be in your best interests for investment markets to rise strongly. What you want to happen depends heavily on your wealth accumulation “stage”. This is assessed by comparing how much you expect to be able to commit to investment markets in the future (i.e. your projected surplus or future capital) with your current net investment wealth (your net worth less your lifestyle assets).
If most of your wealth accumulation is ahead of you, then rising investment markets mean that you will be buying into those markets at increasingly higher prices. Your money does not go as far.
The Mechanics of Managed Funds: Tips and Traps
Managed funds: a time tested financial innovation
Managed funds (or their U.S. mutual fund counterparts) are the primary vehicle for the majority of individuals’ investments in share and fixed interest markets and, to a lesser extent, property markets. By pooling the funds of many investors, they offer a number of potential benefits (compared with an individual investing directly in the relevant asset class).
These include:
* Diversification across a broad range of individual investments;
* Economies of scale and reduced transactions costs; and
* Access to professional fund managers.
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Are You A Speculator Or An Investor?
The difference between speculation and investment
What are the key differences in behaviour that help define the distinction between speculators and investors? What do your behaviours say about you?
Speculation has been defined as the assumption of risk in anticipation of gain. Compared to investing, it tends to be associated with higher risks and achieving quicker and larger gains. It generally involves a “bottom up” approach that treats each risk as separate and distinct. It includes elements of stock selection, market timing and forecasting.
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Don’t fall in love with your employer
Surely, I’m better off investing in my employer’s shares
Many employees hold shares (and/or rights to buy shares) in their share market listed company employer. The interest may have been acquired as part of their remuneration package or as compensation for sale of a business to the employer. Or, perhaps, the employee was optimistic about the prospects for the employer and bought its shares as an investment.
Often, there are restrictions imposed on dealing in the shares, at least for a specified period after acquisition, so the employee has no alternative but to retain the position. However, even when there are no restrictions, many employees continue to hold and, over time, build substantial (but minority) interests in their employer.
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Have you protected your most valuable asset?
You insure your car, don’t you?
Most people insure their motor vehicles, their homes and their home contents. These are valuable assets that, in the event of various catastrophes, they want to be able to replace or repair without significant financial loss.
But when it comes to what is many people’s most valuable asset – their ability to earn future income – they are woefully positioned to cope financially with catastrophe. Research completed in 2006 indicated that only 55% of Australian families had any life insurance, with an even lower 31% having income protection.
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Borrowing to Invest or Super?
I don’t want to lock my money into super
Two alternative strategies that many investors consider are:
• borrowing to invest (i.e. entering into a gearing strategy), outside super; and
• increasing pre-tax contributions to super and investing in the superannuation environment.
Which is best? The comparison is not straightforward, but is often hijacked by raising the issue that your money is “locked away” in super. For those some years away from being able to access their super, this is often a compelling point in favour of gearing.
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Wealth Management: a risky business
Share and property investments are risky …
Most people understand that the returns of growth investments (i.e. shares and property) fluctuate considerably. If they didn’t prior to the Global Financial Crisis, they most certainly have a better grasp of that now.
But most don’t really have a good understanding of the potential range of variation of returns, without anything particularly unusual happening. And nor do they appreciate how dramatically the pattern of returns can affect long term wealth outcomes.
We use the Australian share market experience of the 25 years to December 2009 to shed some light.
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Is your Investment Strategy personalised?
Knowledge of investments isn’t everything
The availability of investment news and information has been increasing over time. This has led to an improvement in most people’s understanding of general investment concepts. It has created the opportunity for many to choose to manage their own financial affairs.
Knowing “where” to invest your money is an important part of the financial management equation. However, by itself, it’s far from comprehensive in terms of an investment strategy.
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Is residential property a good investment?
The arguments in favour of residential property investment appear overwhelming
Housing prices remained reasonably firm through the worst of the “Global Financial Crisis” and have risen steadily over recent months. Many do-it-yourself investors, badly bruised by the battering taken by domestic and international sharemarkets, are seeing investment in residential property as a “safe” investment alternative.
The arguments in favour of residential property investment appear overwhelming and include:
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