Mr. Market has been in a volatile mood since we last analyzed his mood swings and offered a potential solution based on Fundamental Momentum. Indeed, his volatility ruled the first quarter of 2018. The Fundamental Momentum indicator anticipated this well and provided warning signs as early as mid-February 2018. But what can we do about Mr. Market’s split personality? Some sectors are stable and calm while others are jumpy and nervous. The reasons may be fundamental in nature, or they may be due to singular events. The recent Facebook debacle is a prime example. One company’s tribulations affected the whole sector. Even advocates of fundamental analysis must admit that the governing fundamentals for each sector can vary considerably. Read the article on the CFA Institute website : CFA Institute
Over the last decade, the Smart Beta ETF industry has become one of the most exciting investment trends. With more than 1000 ETFs, managing above $800B in the US alone, new tools must be constantly developed to improve performance, reduce volatility and control risk. We, at Alpha Vee, have been leading the development and refining unique dynamic strategies using fundamental global indicators. These indicators have been proven and have provided significant advantages for smart beta ETFs. The indicators, based on a large body of historical data, provide grading for the market as a whole as well as for individual sectors. When added to a solid multi-sector-multi-factor (MSMF) strategy, the result is compelling. In this paper we will review such an index and dissect its performance over the last 3 years, through various market up and down events.
As Graham saw it, whenever you invest in the stock market, you partner with the moody Mr. Market. Each day he offers you a choice: sell to him, buy from him, or do nothing. His daily mood determines the price that he is willing to offer or accept, and it is up to you alone to decide what to do. Read the article on the CFA Institute website : CFA Institute
Stock Selection risk can be defined as the probability that the return of a portfolio composed of individual stocks will be worse from an expected benchmark. Historically, this type of risk has been the one most commonly considered by investors. Modern investment tools, such as ETFs that follow the benchmark index, can now neuter this risk and let the investor concentrate on sector and market risks only (discussed in previous articles in this series).
Sector allocation as a risk is often ignored by the novice investor. The lack of adequate tools in the past has caused many investors to look at the market as a whole or to pick and choose individual stocks. What was often neglected is the tendency of stocks within the same sector to move in unison. Overweighting a declining sector or underweighting the one on the rise (done implicitly by choosing specific stocks) can adversely affect the portfolio. The alternative of using sector funds carries the risk of owning the wrong fund at the wrong time, adds trading and tax costs and may hinder the performance as well.
Market risk is undoubtedly the most significant risk component for the equity investor. When the market falls, almost everything dives with it. When it rises, it pulls up some bad apples as well. The savvy investor should recognize this reality and act according to the famous quote by Warren Buffett: “look at market fluctuations as your friend rather than your enemy”. Naturally, this is easier said than done, but with recently introduced data driven tools, this daunting task can become more manageable and disciplined.
Risk is an inherent part of our life. In the immortal words of President Theodore Roosevelt: “Risk is like fire: if controlled it will help you; if uncontrolled it will rise up and destroy you.” In the world of investments, taking risks is a prerequisite for achieving returns, and controlling the risk is the key for a successful investment.