Diversification: Not Just for Stocks

About a month ago, a rather unusual event occurred: in a single day, S&P slashed its ratings on two sets of AAA bonds backed by residential mortgage securities to CCC+ and CCC, instantly changing their status from top quality to pure junk.Despite the rarity of such an event, financial markets constantly make fools of [...]

Read Full Post »

Warren Buffett: Statistically Insignificant

How much of an investment manager’s performance is related to manager skill?The question is critically important because luck isn’t worth paying for.Unfortunately, answering the question is, in most cases, impossible due to a concept called statistical significance. In every statistical study, one of several tests is used to determine if the outcome of the [...]

Read Full Post »

Beware of Equity-Indexed Annuities

There is a particular variety of annuity called an Equity-Indexed annuity (EIA) that is being pitched to many investors, particularly the elderly and the risk-averse.The pitch typically promises no downside risk while giving you the upside of the stock market.I recently shared my thoughts on the subject with Aaron Pressman of BusinessWeek:

Equity-Indexed Annuities are very [...]

Read Full Post »

Correlation: Are You Really Diversified?

cor·re·la·tion n.1. A causal, complementary, parallel, or reciprocal relationship, especially a structural, functional, or qualitative correspondence between two comparable entities.In the world of investments, correlation refers to the degree and the direction in which two investments move in relation to one another.Conceptually, two investments that behave identically to each other in every conceivable economic [...]

Read Full Post »

What’s in an Average?

In the financial world, everybody loves to talk about averages. Many online retirement calculators ask you to input averages such as investment return and inflation before they crank out their (often erroneous) calculations. Individual investors also love to talk about how their investments have averaged a certain percentage over time.Averages, however, can [...]

Read Full Post »

Individual Stocks Equal Unrewarded Risk

I’m amazed at how many investors own individual stocks. There seem to be several motivations: some like the thrill and excitement of watching a stock, hoping that it will be the lottery ticket with the big payoff.
Others believe that they know something that no one else does and that they can profit from [...]

Read Full Post »