Understanding Risk

Looking Ahead

As the Fed’s asset purchase program ends, the price of oil plunges, global growth stalls, and the stock market recovers from its fall jitters, this seems like a good time to take a long view of where we are in the post-apocalypse recovery. The best guide to any such assessment remains Reinhart and Rogoff’s brilliant survey of financial crises, This Time Is Different, published in 2009. In their preface, they write: “If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by governments, banks, […]

Volatility Low & Risk High: What Does This Mean?

As the U.S. stock market hits new highs, and bond yields continue baffle everyone who “knew” that interest rates were bound to rise this year, the most dramatic data point of all might be volatility, which keeps plumbing remarkable lows. And this isn’t just stock-market volatility (as measured by the VIX index), the intermarket volatility index, which averages expected volatility of stocks, bonds, currencies, oil and gold is at its second lowest reading in 20 years. What does this mean? Not sure–mixed signals. One the one hand, low volatility means that prices aren’t moving much either way, which means that […]

Mutual Fund Investing–The Video!

The link with this post will take you to a YouTube video that dramatizes the perils of investing in a handful of actively managed mutual funds. For those who prefer words to film, here’s the same story in prose. When you invest in stocks or bonds, you can do so either through passive index funds that simply own (or replicate) all or part of the total stock or bond market, or through “active” managers that attempt to outperform the market return and charge relatively high fees. If you hire the latter, you are incurring “active risk”: the risk that your […]