Markets

Picking Investments is Nothing Like Buying a New Car

Published

2 years ago

November 7, 2016

Jeff Desjardins

As consumers, we are used to researching the many choices we have before making a buying decision.

For most people, the process of buying a new product (such as a car) might look something like this:

Recognize a need
Search for information
Evaluate options
Make a purchase
Evaluate satisfaction with purchase

In other words, we figure out what we need, and then we seek to learn more about our choices. After reviewing relevant articles, product ratings, buyer reviews, and other sources of information, we can make a final and informed decision.

Same Process For Picking Investments?

Does the above process look similar to how you approach investing, particularly in choosing funds?

If so, Vanguard says it might be worth re-framing how you look at things. Here’s why picking investments is different.

Cars vs Investment

Vanguard, which manages over $3.5 trillion in assets, may have a good point.

The past performance of a car model is hugely important to a consumer’s decision. That’s because the next Honda Civic built in the factory is guaranteed to be much like previous Honda Civics before it.

For investments, however, everyone knows that past performance does not predict future results. And even though this advice is ubiquitous in the investing world, it is still commonly ignored by many investors.

Here’s what happens to top performing funds:

Picking investments

Even though top funds did well in previous years, there isn’t much correlation with the future.

In the above case, top-rated funds got an influx of capital, which made it harder to get the same return. Funds rated five stars by Morningstar received $60.7 billion in new inflows, but dropped 147 basis points in annualized returns in their subsequent 36 month periods.

The other reason for this is that fund management is just a relatively level playing field, and it’s hard to stay a top performer over the long-term.

The best funds leading up to 2010 were all over the place for the next five years, and only 16.2% of them continued to be top performers. Meanwhile, an astonishing 24.1% of the top performing funds fell to the bottom performing quintile, while 12.5% of funds were liquidated or merged.

Keeping this all in mind, Vanguard recommends adopting a different process for picking investments:

New Investing Process

We can’t say we disagree for almost any type of portfolio.

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Bitcoin

How Decentralized Finance Could Make Investing More Accessible

Under the current global financial system, billions of people do not have access to quality assets. Here’s how decentralized finance is changing that.

Published

5 days ago

April 17, 2019

Jeff Desjardins

Infographic: How Decentralized Finance Could Make Investing More Accessible

Did you know that a majority of the global population doesn’t have access to quality financial assets?

In advanced economies, we are lucky to have simple options to grow and protect our wealth. Banks are all over the place, markets are robust, and we can invest our money into assets like stocks or bonds at the drop of a hat.

In the United States, roughly 52% of people are invested in the stock market – but in a place like India, for example, this portion drops to a paltry 2%. How can we make it possible for people on the “outside” of the financial system to gain access?

Breaking Down Barriers

Today’s infographic comes to us from Abra, and it shows how decentralized finance could make investing a more universal phenomenon, especially for those that don’t have access to the modern financial system.

It lays out four key obstacles that prevent people in developing markets from investing in quality financial assets in the first place:

The Geographic Lottery
Where you live plays a massive role in determining your ability to build wealth. In advanced Western economies, the average person is much more likely to be invested in financial markets that can help compound wealth.
Financial Literacy and Complexity
Roughly 3.5 billion adults globally lack an understanding of basic financial concepts, which creates an impenetrable barrier to investing.
Local Market Turmoil
Even if a person is mentally prepared to invest, local market turmoil (hyperinflation, political crises, closed borders, etc.) can make it difficult to get access to stable assets.
The Cost of Investing in Foreign Markets
Foreign assets can be pricey. One share of Amazon is $1,800, which is realistically more money than many people around the world can afford.

In other words, there are billions of people globally that can’t take advantage of some of the most effective wealth-building tactics.

This is just one flaw in the current financial system, a paradigm that has created massive amounts of wealth but only for a specific and well-connected group of people.

Enter Decentralized Finance

Could decentralized finance be the alternative to open up access to financial markets?

By combining apps with blockchain technology – specifically through public blockchains such as Bitcoin or Ethereum – decentralized finance makes it possible to get around some of the barriers that are created by more traditional systems.

Here are some of the innovations that are making this possible:

Smart contracts could automate transactions and remove intermediaries, making investing cheaper, faster, and more accessible.

Fractional investing could allow partial or shared ownership of financial assets by using tokenization. This would make expensive stocks like Amazon ($1,800 per share) available to a much wider segment of the population.

Location independent investing is possible through smartphones. This would make it possible for people in remote parts of the developing world to invest, even without access to nearby financial institutions or local markets.

Like the internet with knowledge, decentralized finance could reshape the world by making financial access universal. Who’s ready?

Economy

How Macro Trends Shape the Market’s Future

From climate change to aging populations, macro trends are changing the future. Here’s how to use them to your advantage.

Published

3 weeks ago

April 1, 2019

Jenna Ross

It’s hard to say for certain what the future holds.

Without the luxury of a crystal ball, investors must find opportunities by analyzing the market. There’s just one problem: the 24/7 news cycle is enough to make anyone’s head spin.

Where should an investor focus their attention, when almost every new venture is forecast to be the next big thing?

The Powerful Influence of Macro Trends

Today’s infographic comes to us from U.S. Global Investors, and it highlights how analyzing macro trends can serve as a key investment tool.

U.S. Global Macro Trends

Two Main Investment Approaches

When selecting stocks, many investors fall into one of two camps:

1. Top-down Investing

Analyze macroeconomic trends.
Identify specific sectors and regions.
Choose individual stocks based on company fundamentals.

Considering the aging Chinese population, a top-down investor may choose to invest in Chinese healthcare stocks.

2. Bottom-up Investing

Complete in-depth company analyses.
Select a stock that is outperforming others in its sector.

A bottom-up investor could analyze Home Depot and choose to invest if it had strong performance relative to Lowe’s.

These approaches can be used separately, or even combined together. Zooming out allows investors to identify the big picture opportunities. Then, a bottom-up approach can find the companies that best capitalize on each trend.

What is a Macro Trend?

A macro trend is a long-term directional shift that affects a large population, often on a global scale. For example, climate change is affecting industries in both positive and negative ways. While “green” industries have seen increased support, ski resorts are projected to have 50% shorter winter seasons by 2050.

There are a couple of main ways to identify macro trends:

Government policy
Government policies are a precursor to change, shaping macro trends and creating opportunities. For instance, Obama’s Recovery Act fueled growth in renewable energy with a $90 billion investment.
Economic cycles
The cyclical nature of the economy means that investors can also use history to identify macro trends. Consider fiscal and monetary policy, which is implemented in response to economic data:
- Expanding economy
  The central bank raises rates and the government reduces fiscal stimulus. As a result, inflation is moderated.

Discovering Long-Term Value

Macro trends are a key tool for discovering long-term market opportunities. They are beneficial because they are:

Unbiased and data-driven
Not swayed by daily headlines
Tend to avoid riskier, niche industries
Can be diversified by sectors and regions

There are currently many macro trends at play. For example, Trump’s sweeping tax reform and deregulation boosted the U.S. economy, lifting GDP growth to a 13-year high of over 3% in 2018 Q3.

However, not everyone’s a winner. America’s reduced taxes have made Canada less competitive. It’s estimated that 4.9% of Canada’s GDP is at risk due to ripple effects from U.S. tax reform. What’s more, regulators worry that the bank deregulations might put the financial system at risk.

The proposals under consideration… weaken the buffers that are core to the resilience of our system.

— Lael Brainard, Member of the Board of Governors of the Federal Reserve

So, how do investors distill this wealth of information into a future of wealth?

Spotting the Next Wave

In today’s hyper-connected world, it’s easy to get lost in data overload. Thinking big picture allows investors to focus on trends that:

Have a long-term outlook
Affect a large population
Create a clearer vision of the future

Then, an investor can target the most promising regions and sectors. When used effectively, this approach enables investors to ride the next big wave that will shape markets.