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Investing Terms: From Alpha to Zeta (Part 2)

Nominal vs Real Interest Rate:  When you hear someone mention an “interest rate”, they are most often referring to the current market, or nominal interest rate.  Real interest rates are inflation-adjusted rates used in time-value of money calculations such as annuity or retirement calculations. Rule of 72:  The rule of 72 is a shortcut to estimate the number of years required to double your money at a given annual rate of return. The rule states that you divide the rate, expressed as a percentage, into 72.  Years required to double investment = 72 ÷ compound annual interest rate Sharpe Ratio:  named after William Sharpe, winner of the 1990 Nobel Memorial Prize in Economic Sciences. Sharpe was one of the originators of the capital asset pricing model. He created the Sharpe ratio for risk-adjusted investment performance analysis, and he contributed to the development of the binomial method for the valuation of options, the gradient method for asset allocation optimization, and returns-based style analysis for evaluating the...
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Asset Classes and Their Characteristics

Investments are financial assets because their payoff or return is in money.  However, tangible assets such as real estate or collectibles such as art are non-financial assets because their return is in their utility or enjoyment rather than money. Asset classes are the category of investment to which you are providing your money with the expectation of a financial return on the amount you provided to the other party for use.  An asset class includes groups of investments with similar characteristics, that behave in a similar manner.  Each asset class reflects different risk and return investment characteristics, and is expected to perform differently in any given market environment. Investors interested in maximizing return often do so by reducing portfolio risk through asset class diversification (investing in multiple asset classes.) Investment strategies can be based on income, growth, value, or a variety of other factors that help to identify and categorize investment...
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Routine and Discipline

School started last week for my youngest and this week for my oldest.  Although my husband and I both work outside the home and we still had a schedule, routine and discipline were definitely lost as popsicles became more of a staple than a treat and bedtime became coming in from the outdoors at dark.  We enjoy summer as there is more time with family, friends and neighbors, more time for adventure, the sunlight feels so good and allows us to easily get outdoors, and there is no talk of homework.  I would say a good term for the feeling is a “summertime lullaby.”  I recently read this term “summertime lullaby” when describing the market euphoria that has become much discussed during the summer of 2017.  Last week, the DOW hit an all-time high and posted its eighth straight record close.  US equity indices have been on a tear lately and...
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Investing Terms: From Alpha to Zeta (Part 1)

If you watch CNBC or read the Wall Street Journal, you may hear or see terms and acronyms mentioned by market analysts, investment professionals and the financial press. What do these terms mean?  Although there are many, many terms you may encounter, let’s explain a few of the terms you may need to understand or could be interested in. Alpha:  Alpha is the abnormal rate of return on a security or portfolio in excess of what would be predicted by an equilibrium model like the capital asset pricing model (CAPM).  Alpha could be generated by investors selecting specific holdings and/or weightings based on investment analysis.   Beta:  Alpha and beta are two of the five standard technical risk calculations, the other three being the standard deviation, R-squared, and Sharpe ratio.  Beta represents the overall volatility of an investment relative to the market, which has a beta of 1.0.  If an investment has a Beta of 1.2, it would be...
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Hope And Luck Are Not Successful Investment Approaches

We get it; when markets are turbulent, particularly when stocks fall unexpectedly, resisting the urge to start looking for reasons to bail out of the market can be a tall order. Yet the future is inherently uncertain; there are no guarantees in life or when it comes to investing. Anything can happen.   If you have a sound investment process though, these are the times when you really need to stick with it, remaining disciplined and consistent in executing it. Otherwise, you will be at the whim of both your emotions and the market’s random moves. It’s possible to get lucky once or twice by exiting the market right before a big drop or jumping in just before an extended rally. But hope and luck are neither sustainable nor successful investment approaches.   One of the few truisms about investing is that stocks will go up and they will go down....
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