In this clip Dean of University of Chicago Booth School of Business Edward Snyder and Professor Eugene Fama discuss common questions on the efficient markets hypothesis, the credit crisis, and the business of business schools.
The topics discussed are core to our understanding of how the markets work and therefore the way in which we construct portfolios. The clips lasts just under an hour but it is time well spent for anyone interested in hearing an academic rather than a marketing hype view of how the markets work.
Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you
Sunday 14 June 2009
Thursday 11 June 2009
Wednesday 10 June 2009
Active Fund Management is a Zero Sum Game
In this video, Professor Kenneth French explains about why active fund management is always doomed to under-perform the market.
Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you
Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you
Tuesday 9 June 2009
A step by step approach to producing a financial plan
Financial planning is the process of meeting your life goals through the proper management of your finances. Life goals can include buying a home, saving for your child's education, planning for retirement or estate planning. The financial planning process consists of six steps that help you take a "big picture" look at where you are financially. Using these six steps, you can work out where you are now, what you may need in the future and what you must do to reach your goals.
The Benefits of Financial Planning
Financial planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. For example, buying a particular investment product might help you pay off your mortgage faster or it might delay your retirement significantly. By viewing each financial decision as part of a whole, you can consider its short and long -term effects on your life goals. You can also adapt more easily to life changes and feel more secure that your goals are on track.
Can You Do Your Own Financial Planning?
The simple answer is yes. Some personal finance software packages, magazines or self-help books can help you do your own financial planning. However, you may decide to seek help from a professional financial planner if:
• you need expertise you don't possess in certain areas of your finances. For example, a planner can help you evaluate the level of risk in your investment portfolio, adjust your retirement plan due to changing family circumstances or provide tax advice that will contribute to the planning process.
• You want to get a professional opinion about the financial plan you developed for yourself
• You don't feel you have the time to spare to do your own financial planning.
• You have an immediate need or unexpected life event such as a birth, inheritance or major illness.
• You feel that a professional adviser could help you improve on how you are currently managing your finances.
• You know that you need to improve your current financial situation but don't know where to start.
How To Make Financial Planning Work For You
You are the focus of the financial planning process. As such, the results you get from working with a financial planner are as much your responsibility as they are those of the planner. To achieve the best results from your financial planning arrangement, you will need to be prepared to avoid some of the common mistakes by considering the following advice:
Set measurable goals.
Set specific targets of what you want to achieve and when you want to achieve results. For example, instead of saying you want to be "comfortable" when you retire or that you want your children to attend "good" schools, you need to quantify what "comfortable" and "good" mean so that you'll know when you've reached your goals.
Understand the effect of each financial decision.
Each financial decision you make can affect several other areas of your life. For example, an investment decision may have tax consequences that are harmful to your estate plans. A decision about your child's education may affect when and how you meet your retirement goals. Remember that all of your financial decisions are interrelated.
Re-evaluate your financial situation periodically.
Financial planning is a dynamic process. Your financial goals may change over the years due to changes in your lifestyle or circumstances, such as an inheritance, marriage, birth, house purchase or change of job status. Revisit and revise your financial plan as time goes by to reflect these changes so that you stay on track with your short and long-term goals.
Start planning as soon as you can.
Don't delay your financial planning. People who save or invest small amounts of money early and often, tend to do better than those who wait until later in life. Similarly, by developing good financial planning habits such as saving, budgeting, investing and regularly reviewing our finances early in life, you will be better prepared to meet life changes and handle emergencies.
Be realistic in your expectations.
Financial planning is a common sense approach to managing your finances to reach your life goals. It cannot change your situation overnight; it is a lifelong process. Remember that events beyond your control such as inflation or changes in the stock market or interest rates will affect your financial planning results.
Realise that you are in charge.
If you're working with a financial planner, be sure you understand the financial planning process and what the planner should be doing. Provide the planner with all of the relevant information on your financial situation. Ask questions about the recommendations offered to you and play an active role in decision-making.
Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you
The Benefits of Financial Planning
Financial planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. For example, buying a particular investment product might help you pay off your mortgage faster or it might delay your retirement significantly. By viewing each financial decision as part of a whole, you can consider its short and long -term effects on your life goals. You can also adapt more easily to life changes and feel more secure that your goals are on track.
Can You Do Your Own Financial Planning?
The simple answer is yes. Some personal finance software packages, magazines or self-help books can help you do your own financial planning. However, you may decide to seek help from a professional financial planner if:
• you need expertise you don't possess in certain areas of your finances. For example, a planner can help you evaluate the level of risk in your investment portfolio, adjust your retirement plan due to changing family circumstances or provide tax advice that will contribute to the planning process.
• You want to get a professional opinion about the financial plan you developed for yourself
• You don't feel you have the time to spare to do your own financial planning.
• You have an immediate need or unexpected life event such as a birth, inheritance or major illness.
• You feel that a professional adviser could help you improve on how you are currently managing your finances.
• You know that you need to improve your current financial situation but don't know where to start.
How To Make Financial Planning Work For You
You are the focus of the financial planning process. As such, the results you get from working with a financial planner are as much your responsibility as they are those of the planner. To achieve the best results from your financial planning arrangement, you will need to be prepared to avoid some of the common mistakes by considering the following advice:
Set measurable goals.
Set specific targets of what you want to achieve and when you want to achieve results. For example, instead of saying you want to be "comfortable" when you retire or that you want your children to attend "good" schools, you need to quantify what "comfortable" and "good" mean so that you'll know when you've reached your goals.
Understand the effect of each financial decision.
Each financial decision you make can affect several other areas of your life. For example, an investment decision may have tax consequences that are harmful to your estate plans. A decision about your child's education may affect when and how you meet your retirement goals. Remember that all of your financial decisions are interrelated.
Re-evaluate your financial situation periodically.
Financial planning is a dynamic process. Your financial goals may change over the years due to changes in your lifestyle or circumstances, such as an inheritance, marriage, birth, house purchase or change of job status. Revisit and revise your financial plan as time goes by to reflect these changes so that you stay on track with your short and long-term goals.
Start planning as soon as you can.
Don't delay your financial planning. People who save or invest small amounts of money early and often, tend to do better than those who wait until later in life. Similarly, by developing good financial planning habits such as saving, budgeting, investing and regularly reviewing our finances early in life, you will be better prepared to meet life changes and handle emergencies.
Be realistic in your expectations.
Financial planning is a common sense approach to managing your finances to reach your life goals. It cannot change your situation overnight; it is a lifelong process. Remember that events beyond your control such as inflation or changes in the stock market or interest rates will affect your financial planning results.
Realise that you are in charge.
If you're working with a financial planner, be sure you understand the financial planning process and what the planner should be doing. Provide the planner with all of the relevant information on your financial situation. Ask questions about the recommendations offered to you and play an active role in decision-making.
Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you
Monday 8 June 2009
Keydata goes into administration
Saturday 6 June 2009
Why Active Investing is a Negative Sum Game
In this article well known academics Eugene Fama and Kenneth French reflect on Nobel Laureate William F Sharpe's 1991 article on the arithmetic of active fund management. This has already been discussed on this blog and you can see a copy of that article here
Cutting through the slightly complex jargon that is used by Fama and French,the essence of what they are saying is that the combined portfolios all active investors have the same weighting in shares as the market as a whole. This means that the combined portfolios can only perform the same as the market, less their costs. It also means that the only way in which an active investor can outperform the market is to do so at the expense of other active investors.
In contrast, passive investors also all hold the same weighting in shares as the market as a whole. This means that their portfolios should perform the same as the market, less their costs. However, as their costs are less than those of active investors, passive investors as a group must outperform active investors.
This article does not seek to deny that some active investors do outperform the market. It is just that their gains have been made at the expense of other equally clever active investors. Other research has shown that winners tend not to repeat and that on the whole, they do not tend to remain winners for very long.
When considering whether to invest actively or passively you have to answer the question 'Are you feeling lucky?' For active investors the answer must be 'Yes' - in the face of the evidence. For passive investors the answer is 'No - but at least I will be assured of returns that essentially replicate the market less my costs which are substantially less than for active portfolios'.
From a financial planning point of view, investing should not be seen as a game. Investments are not an end in themselves. Instead they are the means by which individuals fund for the serious financial goals, which they need to achieve in order to lead the future lifestyles that they desire. Speculation on which fund manager is likely to provide better returns than another, in the face of evidence that this is likely to be an unsuccessful strategy, has no place in this process.
Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you
Cutting through the slightly complex jargon that is used by Fama and French,the essence of what they are saying is that the combined portfolios all active investors have the same weighting in shares as the market as a whole. This means that the combined portfolios can only perform the same as the market, less their costs. It also means that the only way in which an active investor can outperform the market is to do so at the expense of other active investors.
In contrast, passive investors also all hold the same weighting in shares as the market as a whole. This means that their portfolios should perform the same as the market, less their costs. However, as their costs are less than those of active investors, passive investors as a group must outperform active investors.
This article does not seek to deny that some active investors do outperform the market. It is just that their gains have been made at the expense of other equally clever active investors. Other research has shown that winners tend not to repeat and that on the whole, they do not tend to remain winners for very long.
When considering whether to invest actively or passively you have to answer the question 'Are you feeling lucky?' For active investors the answer must be 'Yes' - in the face of the evidence. For passive investors the answer is 'No - but at least I will be assured of returns that essentially replicate the market less my costs which are substantially less than for active portfolios'.
From a financial planning point of view, investing should not be seen as a game. Investments are not an end in themselves. Instead they are the means by which individuals fund for the serious financial goals, which they need to achieve in order to lead the future lifestyles that they desire. Speculation on which fund manager is likely to provide better returns than another, in the face of evidence that this is likely to be an unsuccessful strategy, has no place in this process.
Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you
Monday 1 June 2009
Importance of Costs
In this article Morningstar have coommented on the importance of costs on fund performance. This is a subject about which I have made a number of posts (see: Hidden Cost of Investment posted here in March 2008.
Investors should be wary of excessive costs. Not just the TER (which is the total published expenses of the fund) but also the effect of portfolio turnover as this is not disclosed in a way that is easy for most investors to understand and can act as a significant break on performance.
Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you
Investors should be wary of excessive costs. Not just the TER (which is the total published expenses of the fund) but also the effect of portfolio turnover as this is not disclosed in a way that is easy for most investors to understand and can act as a significant break on performance.
Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you
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