William F Sharpe

Top 10 Investment Guidelines

Posted on 24/02/2015. Filed under: academic approach to investing, Active v Passive, arithmetic of active management, asset allocation, cfp. chartered financial planner, Cheshire, chris wicks, chris wicks cfp, ChrisWicksCFP, Dimensional, Efficient Markets, Evidence Based Investment, Factors of investment, financial planning, hidden costs of investment, Index Investing, ineffectiveness of active fund management, investment, lack of predictability, Lessons from past financial crises, Market timing, passive investment, Sale, Sources of financial advice, TER, UK investor compensation, William F Sharpe |

The media would have you believe that a successful investment experience comes from picking stocks, timing your entry and exit points, making accurate predictions and outguessing the market. Is there a better way?

It’s true that some people do get lucky by making bets on certain stocks and sectors or getting in or out at the right time or correctly guessing movements in interest rates or currencies. But depending on luck is simply not a sustainable strategy.

The alternative approach to investment may not sound as exciting, but is also a lot less work. It essentially means reducing as far as possible the influence of fortune, taking a long-term view and starting with your own needs and risk appetite.

Of course, risk can never be completely eliminated and there are no guarantees about anything in life. But you can increase your chances of a successful investment experience if you keep these 10 guidelines in mind:

Let the market work for you. Prices of securities in competitive financial markets represent the collective judgment of millions of investors based on current information. So, instead of second guessing the market, work with it.

Investment is not speculation. What is promoted in the media as investment is often just speculation. It’s about making short-term and concentrated bets. Few people succeed this way, particularly after you take fees into account.

Take a long-term view. Over time, capital markets provide a positive rate of return. As an investor risking your capital, you have a right to the share of that wealth. But keep in mind, the return is not there every day, month or year.

Consider the drivers of returns. Differences in returns are explained by certain dimensions identified by academic research as pervasive, persistent and robust. So it makes sense to build portfolios around these.

Practise smart diversification. A sound portfolio doesn’t just capture reliable sources of expected return. It reduces unnecessary risks like holding too few stocks, sectors or countries. Diversification helps to overcome that.

Avoid market timing. You never know which markets will be the best performers from year to year. Being well diversified means you’re positioned to capture the returns whenever and wherever they appear.

Manage your emotions. People who let their emotions dictate their decisions can end up buying at the top when greed is dominant and selling at the bottom when fear takes over. The alternative is to remain realistic.

Look beyond the headlines. The media is by necessity focused on the short term. This can give you a distorted impression of the market. Keep up with the news by all means, but you don’t have to act on it.

Keep costs low. Day to day moves in the market are temporary, but costs are permanent. Over time, they can put a real dent in your wealth plans. That’s why it makes sense to be mindful of fees and expenses.

Focus on what you can control. You have no control over the markets, but in consultation with advisor acting in your interests you can create a low-cost, diversified portfolio that matches your needs and risk tolerance.

That’s the whole story in a nutshell. Investment is really not that complicated. In fact, the more complicated that people make it sound the more you should be sceptical.

The truth is markets are so competitive that you can save yourself much time, trouble and expense by letting them work for you. That means structuring a portfolio across the broad dimensions of return, being mindful of cost and focusing on your own needs and circumstances, not what the media is trying to sell you.

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Who would predict the price of oil?

Posted on 06/12/2014. Filed under: A step by step approach to producing a financial plan, academic approach to investing, Active v Passive, Altrincham, arithmetic of active management, asset allocation, cfp. chartered financial planner, Cheshire, chris wicks, chris wicks cfp, ChrisWicksCFP, Dimensional, Efficient Markets, Evidence Based Investment, Factors of investment, financial planning, hidden costs of investment, Increased ISA Allowances, Index Investing, ineffectiveness of active fund management, investment, lack of predictability, Lessons from past financial crises, Market timing, passive investment, Professor Kenneth French, PTR, Retirement Options, retirement planning, Sources of financial advice, William F Sharpe | Tags: , , , , , , , , , , , , , , , |

The price of crude oil has fallen around 40 per cent since a recent peak in June this year. This has a profound effect on economies and markets around the world as the cost of manufacturing and transporting goods falls along with oil producers’ income and the currencies of oil-rich countries.
The theory goes that consumer spending will rise because people have more disposable income; that inflation will fall as the price of goods eases; and that companies with high energy bills will become more profitable. If lower prices hold, the effect might become political and environmental as the balance of world power shifts from oil exporters to oil importers, and the impetus to develop cheaper clean energy wanes. Oil seeps so deep into the global economy you might think that to be a successful investor you need to have an accurate view on its price and its impact on asset prices. But you would be wrong.

No-one with an opinion about oil knows whether their view is right or wrong, and only the changing price will confirm which they are. Market prices are a fair reflection of the balance of opinion because they are created by many buyers and sellers agreeing on individual transactions. As an investor you can take a view of whether that balance – that price – is right but, like all other people with an opinion, you have no way of knowing whether you are right or wrong until the price moves.

Knowing this, it seems irrational to take a view (or a risk) on something so random as the direction of the oil price. In fact, why would one take a view on anything related to the changing price of oil; the US economy, for example; or the price of Shell; or Deutsche Post; or anything else?
The rational approach is to let capital markets run their course and to have a sufficiently diversified portfolio that allows you to relax in the knowledge that, over time, you will benefit from the wealth-generating power of your investments as a whole; without risking your wealth on a prediction that might go one way or the other.

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Beware of the hidden risks of low-risk investing

Posted on 22/10/2014. Filed under: A step by step approach to producing a financial plan, academic approach to investing, Active v Passive, arithmetic of active management, asset allocation, cash flow based modelling, cfp. chartered financial planner, Cheshire, chris wicks, chris wicks cfp, ChrisWicksCFP, Evidence Based Investment, investment, Lessons from past financial crises, passive investment, retirement planning, Sale, Sources of financial advice, Uncategorized, William F Sharpe |

Beware of the hidden risks of low-risk investing.

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Beware of the hidden risks of low-risk investing

Posted on 22/10/2014. Filed under: A step by step approach to producing a financial plan, academic approach to investing, Active v Passive, asset allocation, cash flow based modelling, Cheshire, chris wicks, chris wicks cfp, ChrisWicksCFP, Evidence Based Investment, financial planning, Index Investing, ineffectiveness of active fund management, investment, lack of predictability, Lessons from past financial crises, passive investment, Sale, Sources of financial advice, TER, William F Sharpe |

Most investors recognize and understand the risks involved when investing. However, during times of extreme market decline, even the toughest investors’ risk tolerance is tested. Such dramatic downturns can force many to limit their risk exposure. But, regardless of market highs and lows, investors really need to maintain perspective and proper risk to pursue their long-term financial goals.

“Low risk” investments help protect one from a decline in the overall stock market, but might leave one exposed to other risks not seen on the surface.

Risk #1: Inflation cutting your real return
After subtracting taxes and inflation, the return one receives from a low-risk investment may not be enough to remain ahead of inflation.

Risk #2: Limiting your portfolio’s growth potential
Beware, some portfolios with low-risk investments may be riskier than one realizes due to the limited growth potential of these investments.

Risk #3: Your income can drop when interest rates drop
If interest rates have dropped by the time a low-risk investment becomes due, one might have to reinvest at a lower rate of return, resulting in a lower yield each month.

A properly constructed portfolio with the correct balance between risk and return will mitigate the risks of market volatility. When deciding on how to invest, it is important for investors to take into account their personal attitude to risk and capacity for loss but also to understand the performance characteristics of different blends of equities and bonds and in particular, how their own portfolio might behave. This will ensure that when markets perform in a particular way, investors will appreciate that this is within the range of possible outcomes for their portfolio.

This is where an independent financial adviser can help by guiding investors to the correct choice of portfolio, which has the best chance of helping them achieve their goals. They can also help educate investors so that they better understand what to expect and encourage them to adopt a disciplined approach.

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The Arithmetic of Active Management

Posted on 07/03/2009. Filed under: academic approach to investing, arithmetic of active management, William F Sharpe |

In the video featured below, Professor Kenneth French mentioned the paper written by Nobel Laureate Economist William F Sharpe. Well here it is.

This type of information needs to be seen in a completely different light to what those of us who are more enlightened call financial porn because it is the informed view of a very highly rated and acclaimed academic. Unlike fund management companies who pump out marketing material designed to entice unwitting investors to part from their money William F Sharpe and others like him have spent decades trying to get to the truth. They have no axe to grind.

The question you have to ask your self is, Do you want to be one of the (as William F Sharpe puts it) “individual investors … foolish enough to pay the added costs of the institutions’ active management via inferior performance“. Of course there is also the famous Dirty Harry saying “What you want to ask yourself is … Are You Feeling Lucky?

For more information on William F Sharpe see this

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