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The Basics: Creating a Stock Portfolio

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The Basics: Creating a Stock Portfolio

The Basics: Creating a Stock Portfolio

In a market with surging big boards, high volatility, $85 oil, low commodity prices, and slowing China growth, there is no telling where things will go. That’s why it’s useful in these types of circumstances to take a look back to the basics. With a well-rounded portfolio, it makes it easier to sail through turbulence in the market and come out on top.

Portfolios work because they spread risk. The two types are specific risk and systematic risk. Specific risk relates to risks that may affect a very small group of companies. This is also known as diversifiable risk – meaning that it is possible to reduce it by diversifying into other securities in a portfolio. Benjamin Graham, in The Intelligent Investor, argued that 10 to 30 smartly selected stocks could diversify a portfolio through this type of risk. However, if choosing stocks at random, more may be needed to adequately diversify.

Systematic risk is the type of uncertainty that relates to the entire market or a big segment (such as commodities). Systematic risk cannot be avoided, but it can be hedged against. For example, owning gold or other precious metals can be a hedge against things such as inflation and currency risks.

Original graphic from: Timothy Sykes

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Visualizing the Biggest Risks to the Global Economy in 2020

The Global Risk Report 2020 paints an unprecedented risk landscape for 2020—one dominated by climate change and other environmental concerns.

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Top Risks in 2020: Dominated by Environmental Factors

Environmental concerns are a frequent talking point drawn upon by politicians and scientists alike, and for good reason. Irrespective of economic or social status, climate change has the potential to affect us all.

While public urgency surrounding climate action has been growing, it can be difficult to comprehend the potential extent of economic disruption that environmental risks pose.

Front and Center

Today’s chart uses data from the World Economic Forum’s annual Global Risks Report, which surveyed 800 leaders from business, government, and non-profits to showcase the most prominent economic risks the world faces.

According to the data in the report, here are the top five risks to the global economy, in terms of their likelihood and potential impact:

Top Global Risks (by "Likelihood") Top Global Risks (by "Impact")
#1Extreme weather#1Climate action failure
#2Climate action failure#2Weapons of mass destruction
#3Natural disasters#3Biodiversity loss
#4Biodiversity loss#4Extreme weather
#5Humanmade environmental disasters#5Water crises

With more emphasis being placed on environmental risks, how much do we need to worry?

According to the World Economic Forum, more than we can imagine. The report asserts that, among many other things, natural disasters are becoming more intense and more frequent.

While it can be difficult to extrapolate precisely how environmental risks could cascade into trouble for the global economy and financial system, here are some interesting examples of how they are already affecting institutional investors and the insurance industry.

The Stranded Assets Dilemma

If the world is to stick to its 2°C global warming threshold, as outlined in the Paris Agreement, a significant amount of oil, gas, and coal reserves would need to be left untouched. These assets would become “stranded”, forfeiting roughly $1-4 trillion from the world economy.

Growing awareness of this risk has led to a change in sentiment. Many institutional investors have become wary of their portfolio exposures, and in some cases, have begun divesting from the sector entirely.

The financial case for fossil fuel divestment is strong. Fossil fuel companies once led the economy and world stock markets. They now lag.

– Institute for Energy Economics and Financial Analysis

The last couple of years have been a game-changer for the industry’s future prospects. For example, 2018 was a milestone year in fossil fuel divestment:

  • Nearly 1,000 institutional investors representing $6.24 trillion in assets have pledged to divest from fossil fuels, up from just $52 billion four years ago;
  • Ireland became the first country to commit to fossil fuel divestment. At the time of announcement, its sovereign development fund had $10.4 billion in assets;
  • New York City became the largest (but not the first) city to commit to fossil fuel divestment. Its pension funds, totaling $189 billion at the time of announcement, aim to divest over a 5-year period.

A Tough Road Ahead

In a recent survey, actuaries ranked climate change as their top risk for 2019, ahead of damages from cyberattacks, financial instability, and terrorism—drawing strong parallels with the results of this year’s Global Risk Report.

These growing concerns are well-founded. 2017 was the costliest year on record for natural disasters, with $344 billion in global economic losses. This daunting figure translated to a record year for insured losses, totalling $140 billion.

Although insured losses over 2019 have fallen back in line with the average over the past 10 years, Munich RE believes that long-term environmental effects are already being felt:

  • Recent studies have shown that over the long term, the environmental conditions for bushfires in Australia have become more favorable;
  • Despite a decrease in U.S. wildfire losses compared to previous years, there is a rising long-term trend for forest area burned in the U.S.;
  • An increase in hailstorms, as a result of climate change, has been shown to contribute to growing losses across the globe.

The Ball Is In Our Court

It’s clear that the environmental issues we face are beginning to have a larger real impact. Despite growing awareness and preliminary actions such as fossil fuel divestment, the Global Risk Report stresses that there is much more work to be done to mitigate risks.

How companies and governments choose to respond over the next decade will be a focal point of many discussions to come.

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All of the World’s Wealth in One Visualization

There is $360.6 trillion of wealth globally. This graphic shows how it breaks down by country, to show who owns all of the world’s wealth.

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All of the World’s Wealth in One Visualization

The financial concept of wealth is broad, and it can take many forms.

While your wealth is most likely driven by the dollars in your bank account and the value of your stock portfolio and house, wealth also includes a number of smaller things as well, such as the old furniture in your garage or a painting on the wall.

From the macro perspective of a country, wealth is even more all-encompassing — it’s not just about the assets held by private households or businesses, but also those owned by the public. What is the value of a new toll bridge, or an aging nuclear power plant?

Today’s visualization comes to us from HowMuch.net, and it shows all of the world’s wealth in one place, sorted by country.

Total Wealth by Region

In 2019, total world wealth grew by $9.1 trillion to $360.6 trillion, which amounts to a 2.6% increase over the previous year.

Here’s how that divvies up between major global regions:

RegionTotal Wealth ($B, 2019)% Global Share
World$360,603100.0%
North America$114,60731.8%
Europe$90,75225.2%
Asia-Pacific$64,77818.0%
China$63,82717.7%
India$12,6143.5%
Latin America$9,9062.7%
Africa$4,1191.1%

Last year, growth in global wealth exceeded that of the population, incrementally increasing wealth per adult to $70,850, a 1.2% bump and an all-time high.

That said, it’s worth mentioning that Credit Suisse, the authors of the Global Wealth Report 2019 and the source of all this data, notes that the 1.2% increase has not been adjusted for inflation.

Ranking Countries by Total Wealth

Which countries are the richest?

Let’s take a look at the 15 countries that hold the most wealth, according to Credit Suisse:

RankCountryRegionTotal Wealth ($B, 2019)% Global Share
Global Total$360,603100.0%
#1🇺🇸 United StatesNorth America$105,99029.4%
#2🇨🇳 ChinaChina$63,82717.7%
#3🇯🇵 JapanAsia-Pacific$24,9926.9%
#4🇩🇪 GermanyEurope$14,6604.1%
#5🇬🇧 United KingdomEurope$14,3414.0%
#6🇫🇷 FranceEurope$13,7293.8%
#7🇮🇳 IndiaIndia$12,6143.5%
#8🇮🇹 ItalyEurope$11,3583.1%
#9🇨🇦 CanadaNorth America$8,5732.4%
#10🇪🇸 SpainEurope$7,7722.2%
#11🇰🇷 South KoreaAsia-Pacific$7,3022.0%
#12🇦🇺 AustraliaAsia-Pacific$7,2022.0%
#13🇹🇼 TaiwanAsia-Pacific$4,0621.1%
#14🇨🇭 SwitzerlandEurope$3,8771.1%
#15🇳🇱 NetherlandsEurope$3,7191.0%
All Other Countries$56,58515.7%

The 15 wealthiest nations combine for 84.3% of global wealth.

Leading the pack is the United States, which holds $106.0 trillion of the world’s wealth — equal to a 29.4% share of the global total. Interestingly, the United States economy makes up 23.9% of the size of the world economy in comparison.

Behind the U.S. is China, the only other country with a double-digit share of global wealth, equal to 17.7% of wealth or $63.8 trillion. As the country continues to build out its middle class, one estimate sees Chinese private wealth increasing by 119.5% over the next decade.

Impressively, the combined wealth of the U.S. and China is more than the next 13 countries in aggregate — and almost equal to half of the global wealth total.

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