How To Handle The Investment Trade-Off Between Risk And Return


handshake china


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How Advisors Can Handle The Investment Trade-Off Between Risk And Return (The Wall Street Journal)

Investment is a trade-off between risk and return writes Mark Keating, senior adviser at Willow Creek Wealth Management, in a WSJ column. "Is it better to preserve capital by overweighting portfolios with conservative investments like bonds? Or to emphasize purchasing power with more volatile investments like stocks?" according to Keating.

"Advisers should tailor this conversation about risk around the particular circumstances of a client's life. Are they willing to reduce their standard of living or work longer if their portfolio does not outpace inflation based on their risk aversion?

"Once the risk/return level has been determined, advisers should implement a trading strategy that takes advantage of short-term market volatility. Rebalancing a portfolio to its intended risk/return targets after substantial market movements helps control risk in the short term."


If You Want To Benefit From The Surge In M&As Invest In Banks Doing The Deals (Reuters)

Mergers and acquisitions are up 73% year-over-year. "If you want to get a piece of the action as an investor, you're best off betting on the banks that have a hand in arranging or advising the mergers - or an even larger pool of stocks," writes John Wasik at Reuters.

"The problem with owning a merger/arbitrage fund is that its managers only focus on a handful of companies. What if the companies picked by the managers don't merge? What if the market doesn't bid up the price of the targeted company?"

"…A more profitable strategy is a roundabout way of playing the merger-acquisition game. Instead of picking potential winners, just pick a handful of investment banks doing the most deals when the merger climate is hot. They profit handsomely from setting up these corporate marriages."

This World Map Shows Where Things Have The Highest Chance Of Going Wrong (Business Insider)


Geo-political tensions are back in the headlines as this week brought ground operations by Israeli forces in Gaza, and as a Malaysia Airlines plane was shot down as it flew over Ukraine. Deutsche Bank has a map that highlights the three main areas of geopolitical risk.

DB geo political hotspots

Deutsche Bank

The Biggest Trend In Emerging Markets Now (Vanguard)

The biggest trend in emerging markets now has to do with the size and weight of China in global benchmarks, Jamie Perrett director of index research at FTSE, tells Vanguard. "If you look at emerging markets indexes today, China's allocation is about 20%," Perrett's said.

"We can see that doubling in the future, depending on whether China "A Shares" are included in emerging markets indexes. Many funds do not have an allocation to A Shares at the moment, but China may potentially make up a significant proportion of the funds based on FTSE's indexes. So therefore it is relatively important for advisors to be aware of what's going on with China and the implications of any changes."

These 2 Brilliant Charts Show How Stock Market Returns Become More Predictable Over Time (Alliance Bernstein)


The price-earnings (P/E) ratio is one of the most common ways to measure stock market value. And a P/E ratio of 16x is typically considered expensive for the S&P 500, but that shouldn't be the sole gauge of where the market is going, according to Seth Masters at Alliance Bernstein.

"The left side of the second display ... portrays one-year returns for the S&P 500, arrayed by the price-to-forward earnings at the beginning of each period. When the market has previously been close to its current valuation, there has been a very wide range of returns in the subsequent year. That was also true when valuations were lower or higher. Basically, stocks can be very volatile in the short run, and the market could rise or fall significantly over the next year regardless of its valuation.

"If you extend your time frame, however, the behavior of the market looks much more predictable. The right side of the display shows that with a five-year horizon, the range of market returns has been narrower. Furthermore, valuation has mattered over longer horizons: when the price-to-forward earnings has exceeded 20, the subsequent five-year S&P 500 return has, in most cases, been low or negative."

chart returns

Alliance Bernstein