Jessica Alba and the Sharpe Ratio

retirement1
A boiler-plate image of a happy retired couple looking into the sunset at a beach. Sunset images are less popular among financial advisors than ones with greenery and dogs. Advertising executives are of the view that green leaves convey a subliminal message of green dollar money. And the bounding dogs imply vitality – i.e. you will still be alive by the time your investments have matured to the point that you can afford to play with your dog in a park in the middle of the week.

The investing public in America has been relentlessly carpet-bombed with the stock investing mantra. Most financial advisors will repeat it for you: “Thou shalt heed that stocks are the best hedge against inflation, they may earneth thee 10% a year. Buy them ye must!”. And just like the Mormon Church, this is followed up with colorful marketing paper containing smiling pictures of financially secure people and their jubilant dogs.

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Buy and Hold on … (to your Amygdala)

The purpose of any financial investment is to grow your money, pure and simple. But there is a bit more to what “making money” really means. Suppose you invested $10,000 ten years ago and today that investment is worth $12,000. That sounds like a good thing. But what if all the stuff you could buy for $10,000 back then now costs $14,000? No longer sounds like a good thing. Inflation is the hot sun that keeps melting away the ice-cream of your investments.

How do we know how much inflation there is? The Federal Government, helpful as always, has been publishing the inflation rate since 1947 through the Bureau of Labor Statistics (BLS). The number they provide is known as the Consumer Price Index (CPI). How they get to this figure is rather involved : they first make an educated guess as to what the average American family consumes and then measure how the price of this stuff is changing every month. If you want to know what the Government thinks your household budget looks like, take a peek at the graphic below:

cpi2015

The big one is housing of course, taking a 43% bite out of the family budget.

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What is Risk?

There are few things in the world of investing that are as often misunderstood as the matter of risk. In my career, time and again, I have found it an uphill battle to impress upon investors that they must figure out their risk appetite before anything else. It doesn’t help of course that various billionaire legends regularly pour cold water on the very notion of risk. “Where is the risk?” they ask. If you know what you are doing, there is no risk, right? And after all, who doesn’t know what they are doing?

Warren-Buffett
A popular internet meme reminding investors of Mr. Warren Buffets wisdom.

Plenty of people as it turns out.

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