Posts Tagged ‘risk’

Addicted to Risk

Thursday, June 9th, 2011

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(photo credit: jeroen_bennink)

When you have a lot to lose, how likely are you to engage in risky behavior?

Apparently people with a lot of money to lose – people known as “the wealthy” – are pretty likely to take those risks. But not simply because they can afford to lose here and there. Many of them are just hard-wired that way.

At least, according to this study by Barclays Wealth. We definitely don’t endorse trying to make money by taking excessive risk or doing things like trying to time the markets. But, interestingly, neither do the millionaire risk-takers themselves. Most of those who reported trading more often than they should also reported feeling guilty about it – and slightly out of control.

Surprising, right?

What’s your risk tolerance? Find out by taking our Risk Assessment Quiz!

Even if Mom is still doing your laundry, you can always make graphs

Tuesday, February 22nd, 2011

Even if the graphs are, oh, maybe just a little misleading. Take this one, for example. It appears to say that the reason certain European countries are in worse financial shape than others is because more of their men want to stay at home playing videogames.

See? Italy, Greece, Spain, and Portugal are over there on the right, with more of their menfolk living with the parents. And, conveniently, those same countries rank high on the riskiness (a.k.a. sovereign risk) of their government bonds (a.k.a. sovereign debt).

If he lives with his parents, you might want to think twice. About buying his government’s debt. (via The Economist)

But in case your statistics teacher hasn’t drilled this into your heads yet, correlation is not causation. This is a real-world example of that. Just because you can make a chart with a nice line on it doesn’t necessarily mean that one factor causes the other. Think about this:

  • The % of men living with their parents may be another way of describing the % of men who are unemployed (or underemployed). That would certainly be a factor in a country’s financial health.
  • Adult kids living with their folks might be due to a really expensive housing market, which is another factor in a country’s financial situation.
  • The countries with the highest % of men living with their parents all have cultural traditions that encourage kids to stay with their parents until they marry, or sometimes even after.
  • Ireland doesn’t have this culture of stay-at-home-til-you’re-40, but their bonds are still considered risky investments. If you just focus on the red line, you might miss this important point.

In conclusion:

  1. Correlation is not causation
  2. Think before you reblog
  3. If you can’t do either of those things, at least read the comments

Bank Bargains? Bank Share Prices Sooooo 2009 While Other Industries Soar

Monday, January 24th, 2011

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credit: Toni Birrer

Stock market investors have been enjoying the biggest rally in five years – except for investors in banks. Bank stock prices – already stuck at 2009 levels – took hits as reported earnings from last year for big banks like Citi and Goldman Sachs failed to wow.

  • Each quarter, publicly-traded companies are required to report their earnings to investors. This is the time of year when we get an inside look at how different companies, industries, and economies are really doing.
  • Though banks reported big profit increases, it wasn’t enough to wow (or woo) investors.
  • While some investors see an opportunity, others are waiting-and-seeing.

Facts & Figures

  • The last time investors could buy bank stocks at these prices was March 2009
  • Back then the economy had been in a recession for about 14 months, and the S&P 500 was at a 12-year low
  • But all that has changed: the 500 companies tracked by the S&P500 index gained an average of 30% in 2010

Best Quote

“What everyone is waiting for is a sign that the companies are really back, that they’re really on their feet again and can survive without continued government support and subsidy.” – John Carey, Money Manager at Pioneer Investments

What do you think?

Do these low prices make you want to invest in a bank right now? What would you need to find out before deciding? Answering these questions can help you figure out your risk tolerance, which is essential for any young investor. This will help, too.

Investors Run For Cover In Low-Yield Investments

Monday, June 7th, 2010

What should you do when the stock market gets unpredictable? You can hold on for dear life or you can hide your head in the government sand...

  • There’s been a lot of ruckus in the stock market lately; between recession repercussions and the European debt crisis, investors are avoiding higher-risk, higher-return instruments in the stock market.
  • Instead, people are funneling money into significantly lower-risk instruments that are also lower-yield, like money market funds and Treasury (government) bonds.
  • The stock market is expected to improve in the future, but because of potential problems in Europe and a damaged financial infrastructure here in the U.S., investors are likely to stick to safe investments (like bonds) for now.

Facts & Figures

  • The only mutual funds that outperformed the Treasury mutual funds in May were “bear market funds” – mutual funds that earn money only when the market goes down.
  • Bear market funds returned an average of 8% on investment in May
  • The going rate of return on a 30-year Treasury bond is 3.2%

Best Quote

“It’s still awfully close to zero. The amazing thing is that even at these rates, when you’re getting virtually no return on your money at all, people are still moving cash into money market funds. It’s sobering.” – Peter G. Crane, President of Crane Data

Structured Finance is…

Friday, August 21st, 2009

Structured finance is a term used to describe the trading of debt between banks. Basically it is the transferring of risk from one bank to another bank.

Unsystematic Risk is…

Wednesday, August 5th, 2009

Unsystematic risk is a risk that is specific to a particular asset. For example, the risk Company A has of becoming bankrupt carries over to all of Company A’s stock, but it doesn’t affect any other stocks in the same industry as Company A.

Risk is…

Wednesday, August 5th, 2009

Risk is the possibility of financial loss for a particular investment. Rating agencies rate the risk level of certain companies for investors, who should expect higher returns for riskier investments to compensate for the chance they might lose some or all of their money. Lower-risk investments tend to have lower returns, but it’s far less likely that you’ll lose your money.

A Speculative Bond is…

Thursday, July 30th, 2009

A speculative bond is a direct investment in a company that’s considered risky by a credit rating agency like Standard & Poor’s or Moody’s. You might end up getting higher returns from a speculative or “junk” bond than a better rated one, but you also have a better chance of not getting anything at all.

Systemic Risk is…

Tuesday, June 30th, 2009

Systemic risk is the likelihood that a whole financial system will fail if something goes wrong in one of its many, small, connected parts. Just like a single tree falling on a power-line can take out an entire grid, the failure of a single financial sector can have wide-reaching effects across the economy.