Media reports that the first half of 2022 was the worst start to a year for the stock market in …
So you’ve done the hard work and saved up some money for your retirement – now what? The foundation of any …
First Quarter 2021 Investment Commentary Keeping a balanced approach is always wise – that’s why looking to the past and …
Are you talking to your kids about investing? Heard of Gamestop? Bitcoin? Dogecoin? You may have heard of these investments. …
As we face increased uncertainty about our lives, work and the markets, it can be easy to become anxious and …
Our Brains, Mind Games and Investing Hosted by Kay Dee Cole, CFP®, RLP®, CeFT® and Kim Hall, CFP®, RLP®, GFP® …
It is amazing how predictably irrational we humans can be! Our brains are subconsciously seeking certainty, especially as things become …
New or old, Clarity Wealth Development clients all have something in common: They have adopted smart, disciplined investing habits. Practicing …
What is impact investing? Think of it as “Values Investing” or “Socially Responsible investing”. Or when it comes down to it, investing in companies that think as you do.
1. First, define what you mean by impact investing, what does it mean to you? Are you concerned about social issues, environmental or religious issues? Are you interested in medical or pharmaceutical companies? Do you support firearms? No matter what your interests are, there are stocks or mutual funds to fit your values.
2. Second, find an advisor that will listen to what interests you. If the first words out of their mouths are, “You can’t make money doing that!” Find someone who says, “I think we can find something to align with your values.” There are plenty of choices, and they are getting better all the time. Costs have come down and many are actively participating in the companies they hold as activist shareholders.
3. Third, after defining what you mean and finding the right advisor then start paying attention to the annual shareholder materials and proxy voting. The more active you are in learning about the funds you hold the more aware you can be about what you are supporting. Too many people invest in a fund thinking it is socially responsible, only to find out later it wasn’t what they thought it to be. An educated and open-minded advisor can help you before you invest.
Nothing is perfect, but you can feel good about the choices you are making and still invest wisely. It takes a little time and devotion but can be rewarding as well.
Investors who are concerned about market volatility should examine their investment choices from all angles when constructing a portfolio – evaluating not only return, but risk too.
There are a variety of risk measures that may come in handy. Of course, numbers don’t tell the whole story, but they may help you determine whether owning a particular investment is consistent with your personal risk tolerance. You and your financial advisor may want to review the following risk measures:
1. Alpha is a measure of investment performance that factors in the risk associated with the specific security or portfolio, rather than the overall market (or correlated benchmark). It is a way of calculating so-called “excess return” – that portion of investment performance that exceeds the expectations set by the market as well as the security’s/portfolio’s inherent price sensitivity to the market. Alpha is a common way to assess an active manager’s performance as it measures portfolio return in excess of a benchmark index. In this regard, a portfolio manager’s added value is his/her ability to generate “alpha.”
2. Beta is the statistical measure of the relative volatility of a security (such as a stock or mutual fund) compared to the market as a whole. The beta for the market (usually represented by the S&P 500) is 1.00. A security with a beta above 1.0 is considered to be more volatile (or risky) than the market. One with a beta of less than 1.0 is considered to be less volatile.
3. R-squared (R2) quantifies how much of a fund’s performance can be attributed to the performance of a benchmark index. The value of R2 ranges between 0 and 1 and measures the proportion of a fund’s variation that is due to variation in the benchmark. For example, for a fund with an R2 of 0.70, 70% of the fund’s variation can be attributed to variation in the benchmark.
4. The Sharpe ratio is a tool for measuring how well the return of an investment rewards the investor given the amount of risk taken. For example, a Sharpe ratio of 1 indicates one unit of return per unit of risk, 2 indicates two units of return per unit of risk, and so on. A negative value indicates loss or that a disproportionate amount of risk was taken to generate a positive return. The Sharpe ratio is useful in examining risk and return, because although an investment may earn higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The higher a portfolio’s Sharpe ratio, the better its risk-adjusted performance has been.
5. Standard deviation is a measure of investment risk that looks at how much an investment’s return has fluctuated from its own longer-term average. Higher standard deviation typically indicates greater volatility, but not necessarily greater risk. That is because standard deviation quantifies the variance of returns, it does not differentiate between gains and losses. Consistency of returns is what matters most. For instance, if an investment declined 2% a month for a series of months, it would earn a low (positive) standard deviation. But if an investment earned 8% one month and 12% the next, it would have a much higher standard deviation, even though by most accounts it would be the preferred investment.
Using a variety of risk measures may give you a more complete picture than any single gauge. Your financial advisor can help you decide which ones will serve your needs and assess the risks and potential rewards associated with your portfolio.
Financial Planning Association
Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2013 S&P Capital IQ Financial Communications. All rights reserved.
- Page 1 of 2