| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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The Confusion Around Investment Risk |
Forbes.com - May 19, 2011 - posted by ALAN ZAFRAN
Should I be worried about Inflation? Or Deflation?
Should I be worried about U.S. Dollar debasement? Or a Chinese “bubble” about to burst leading to the debasement of all emerging market currencies and a strengthening of the U.S. Dollar?
Should I be worried about the pending default of Greece’s debt? After all, Iceland and Ireland and Portugal have all defaulted (OOPS, “restructured”) already, and nothing bad seemed to happen. Does my European “Get Out of Jail Free” card extend to Spain and Italy as well?
Unrest in Egypt, Algeria, Yemen, Jordan, Syria, Libya and Bahrain (and I’m sure I’ve missed several other MENA countries) sure seems scary. You can certainly imagine the pain that my pocketbook feels every time I fill up my gas tank (which is less often than it used to be!) Will these discouragingly high gas prices put a nail in the economic recovery’s coffin?
Meredith Whitney keeps reminding me that my state and local governments’ financial stress will soon come unglued. What happened to the good old days of buying AAA-rated municipal bonds and leaving risk to the stock jockeys? Should I be dumping my municipal bonds just like every other retail investor since I can plainly see that bond funds have experienced 26 consecutive weeks of net sales!
Did I forget to mention that Uncle Sam’s fiscal house is in need of a serious makeover? Timothy Geithner told me yesterday that the U.S. has already hit its debt ceiling. Is it possible that even the “risk-free” U.S. Treasury Bills where I want to hide my cash aren’t so risk-free?
WOW! Risk seems to be everywhere. What am I to do? The answer lies in how you choose to define risk.
Your financial advisor will impress you with his definition of risk as being the “standard deviation” around the “mean” of your investment portfolio. That is, your investment portfolio has a projected annual rate of return, which is likely determined by multiplying the percentage weighting of each asset class you own (cash, bond or stock) by its long-term average annual rate of return. Add up the weightings and you’ll get your projected annual mean (average) return over time for your investment portfolio.
The risk, or in this case standard deviation, would aim to measure how wide an array of outcomes might be in any given year from that mean return. The higher the standard deviation, the wider degree of deviation from the average rate of return for any given year, and hence a higher degree of “risk.”
So if your portfolio has an annual projected rate of return of 6%, with a standard deviation of 8%, then roughly two-thirds of the time your return can be expected to fall in a range of (6% plus or minus 8%), meaning anywhere from -2% to 14%. Moreover, 95% of the time, your return can be expected to fall in a range of (6% plus or minus (2 times 8%)), meaning anywhere from -10% to 22%.
What exactly happens during the other 5% of the time? That’s called “tail risk,” which in theory we might see once every twenty years. Of course, there’s theory, and then there’s reality. Investors in 1994, 1997, 1998, 2000-2002, and 2007-2008 have had to “watch their tail” enough times to question the standard deviation measure of risk and whether these unfathomable events occur with much greater frequency than your financial advisor would lead you to believe.
Notable value investors such as Steve Romick at First Pacific Advisors and Charles DeVaulx at International Value Advisers would not define risk as standard deviation, or a measure of volatility, per se. In fact, they embrace volatility as it periodically provides them with enough of a “cushion of safety” to selectively purchase stocks or bonds at a significant discount to the securities’ intrinsic value.
For Steve and Charles, risk is defined as a permanent loss of capital. By focusing on absolute rates of return over a full market cycle, they are willing to tolerate near-term price declines if their fundamental research leads them to conclude that the earnings growth of a stock, or the balance sheet strength of a bond, will eventually lead to a positive and attractive rate of return on their investment.
For the complete article.
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