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beating the market, part 2: the right question

In last week’s post, I posited that “how do I beat the market” is the wrong question. “OK, smart guy,” you say. “What’s the right question, then?” Well, I wouldn’t call myself “smart guy”, but I’m glad you asked. Actually, there are two right questions. One is: “Given how much risk I’m willing to take, what investment will give me the best expected return?” The other is: “Given what kind of expected return I need, what investment will give me the least risk?” Of course, “how much risk am I willing to take?” and “what kind of expected return do I need?” are in themselves not necessarily simple questions. Obviously the answers will vary widely depending on whether you’re talking about saving f

beating the market, part 1: mind the gap

Something you should know about me: I loathe the phrase “beat the market.” What does that even mean? Which market are we talking about? Domestic? International? Large-cap? Small-cap? Junk (sorry, “high yield”) bonds? And over what time period? If you want to beat the market, chances are you’re going to have some down years, but your strategy might play out in the long run — so how long a run are you looking at? No one ever talks about that, though. It doesn’t make for good cocktail party stories. No, when it comes to investing, people like to talk about how they’re making money off of derivatives, or how they bought in to a small company before its stock split five times, or how they’ve got

you are not prepared (to invest)!

When people hear the phrase “financial planning”, the first thing they think of is “investing”. In particular, they often think of picking the right stock or mutual fund. The more sophisticated folk might start talking about puts and calls, margin trading, and other exotic-sounding mechanisms for turning your dollars into a lot more dollars. It makes me want to bang my head against a wall. This is a completely backwards approach to financial planning. If making large, risky bets is entertaining for you, go to Vegas. If you are actually looking for financial security, there are several steps you want to take before you even think about putting money into the stock market.* Get rid of your hig

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