Rising Interest Rates – Whose Risk is It?

Interest rates have crept up in the last few days. This leads me to a point I have tried to explain to many clients. Banks are supposed to deal with interest rate risk. Don’t let them dump this risk on you.

Many financial prognosticators have been calling for a rise in interest rates for years, and they are quick right to start claiming victory. I certainly wouldn’t say interest rates are sure to march straight upwards from here. ...

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Dangerous Knowledge

When I browse the financial media, it makes me extremely grateful for my experience in the investment industry. It helps me to separate the good information from the bad.

Here is a particularly dangerous article, masquerading as solid wisdom. Without a lot more experience and knowledge it would be easy to read an article like this and take it to be truth.

http://finance.yahoo.com/news/cramer-many-stocks-too-many-222302476.html

The article basically says to hold about 10 “quality” ...

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Unpredictability leads to Unpredictability

Carbon pollution, national security, politics, an earthquake, a tsunami, and a radioactive metal all combine to remind us how unpredictable investments can be.

I am always amazed at how predictable most people think the financial markets should be, especially when these very same people freely admit the unpredictability of other events.

In particular, I think the Uranium trade that went bad on March 11, 2011 is a great example.

First, there were a lot of very reasonable, learned, logical arguments ...

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Don’t Sink the Ship with an Anchoring Bias

Are you anchored to a certain price where you will sell (or buy) an investment? Welcome to the anchoring bias – a good way to torpedo your long term investment returns.

Anchoring bias is a behavioral finance term, much like mental accounting, which I wrote about earlier. It describes a specific type of irrational investor behavior.

How it works

Anchoring bias happens all the time. Here is an example:

You ...

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All that Glitters … Doesn’t

I’ll be blunt.  Many people think gold is a great investment, but it is not the best way to hedge yourself against inflation. You might make money in gold, even a lot.  You might lose money in gold. Either way, it isn’t a smart move if your objective is to protect your money against inflation.

The gold theory

Many financial “experts” are constantly trying to tie gold’s performance to inflation. The argument generally goes that fiat money can be ...

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American Funds Won’t Buy You What?

A sandwich. “American Funds won’t even buy you a sandwich. Ha ha ha ha.”

Back around 2005 I heard these words uttered by a financial products wholesaler. These are guys that go around and try to promote packaged investment products to financial advisors. Their goal is to convince the advisor to then sell these products to their own clients.

A thin sheen of sleaze

It was a lunchtime presentation in a medium size hotel conference room. The sales guy’s fake ...

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How Bad Were the Naughties?

The 2000s (the “naughts,” or “naughties”) were really, really bad for the investor in US stocks (especially large cap stocks).  I mean really bad. Even worse than a lot of people realize.

Breaking down the bad

Kicking off the Great Depression, the stock market began to fall in September 1929. Here are the 10 year returns of the S&P 500 following September 1929.  Let’s compare these returns to those following the tech crash that started in spring of 2000.

Ten years ...

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If We Knew Interest Rates Were Going Up…..

One of the best kernels of investment logic was presented to me in 2004 by Dan Wheeler of Dimensional Fund Advisors (DFA).  It was a statement about interest rates, but it could have applied to any investment.

Low, lower, lowest!

Remember that interest rates were low in 2004, although certainly not as low as they are now. Rates had dropped a lot during the tech crash and stayed low for a while. They slowly crept up before dropping dramatically ...

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Why Margin Isn’t Even Marginal, at Best (Part 2)

Most people simply think of investing on margin as increased risk for the potential of increased return.  But under the surface it is a lot more illogical than a shift in the trade-off between risk and return.

When you buy stocks on margin you are taking over the role of corporate CFO.  Most people don’t think about it this way, but it is true. With a margin purchase, an investor is effectively ...

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