Economics Archives

Investing Basics: Understanding Asset Diversification

What is asset diversification? What is the purpose of diversifying your investment portfolio? Asset diversification refers to the diversity of your investments within each asset class in invest in (e.g. stocks, bonds, etc). Diversification protects your investments in case one type of stock or bond doesn’t perform well in a given time period. So, for example, if you’re in your twenties and have 90% of your money invested in stocks and the other 10% invested in bonds, you have a solid asset allocation—but if all that money is invested in just large-cap stocks and government bonds, your portfolio isn’t diversified.

Basic Knowledge of Stock the Market: 5 Truths to Know

What exactly is the stock market? What are some things you should know about before buying your first stock? The stock market is made up of all publicly traded companies that issue stock—when you buy stock in a company, you own a piece of that business. To invest successfully, you must have some basic knowledge of the stock market. In his book The Simple Path to Wealth, blogger and financial expert J. L. Collins lays out the following truths about the stock market that every beginner stock investor must accept and understand.

Bond Investment: The Risks and the Benefits

Are bonds a high-risk investment? What are the key risks associated with bond investing? When you buy bonds, you are loaning your money to a company or government entity. Although bond investing is generally viewed as safer than stock investing, it has several risks. In this article, we’ll take a quick look at the major bond investment risks you should know about.

Tax-Advantaged Accounts: What You Need to Know

What are tax-advantaged accounts? What kind of financial assets should you use a tax-advantaged account for? Tax-advantaged accounts are tax-deferred or tax-exempt. You should use these accounts, such as IRAs and 401(k)s, for holding tax-inefficient assets (e.g. bond funds that generate taxable interest, actively managed stock funds, CDs, and REITs). They pay interest and non-qualified dividends and produce capital gains distributions. Below, we’ll take a look at the basic types of tax-advantaged accounts and their key characteristics.

Beta Risk: How Systemic Risk Yields High Returns

What is a beta risk? What is the difference between systematic vs unsystematic risk? Does this particular kind of risk involve higher premiums? The key characteristic of systematic risk, better known as “beta risk” is that it cannot be diversified away by having a diverse portfolio. And researchers found that because it can’t be diversified away, beta risk is the only kind of risk that pays a “risk premium”—that is, a higher return for the higher risk. Keep reading for more about beta risk, and whether it actually leads to a higher premium.

The 4 Investing Mistakes Beginners Should Avoid

Are you considering getting into investing? What are the most common investing mistakes beginner investors tend to make? In his book The Simple Path to Wealth, blogger and financial expert J. L. Collins warns new investors of four pitfalls they should know about before investing their hard-earned money. These include financial advisors, winning stocks, dollar-cost averaging, and common investment cons/scams. In this article, we’ll look at four pitfalls investors should beware of, starting with financial advisors.

Firm-Foundation Theory vs Castle-in-the-Air Theory

What is firm-foundation theory? How is it different from castle-in-the-air theory? How do they differ and which is the best stock valuation method? There are two primary stock valuation methods. Firm-foundation theory states that assets have an “intrinsic value” based on the value of current dividends and estimated potential in the future. The idea here is that the stock will always regress to the intrinsic value. The castle-in-the-air theory has a different approach, stating that a stock is worth what people are prepared to pay for it. Keep reading for an in-depth look at firm-foundation theory and castle-in-the-air theory.

Fundamental Analysis and Investing: Does It Work?

What does a fundamental analysis of investing options involve? Does this method of stock valuation work? Fundamental analysis is a method of stock valuation that uses in in-depth study to determine a stock’s value. Fundamental analysis of investing options takes into account a number of factors in addition to past price movement, including revenues, growth rate, and management skills. Find out more about fundamental analysis and investing below.

Calculate Bond Return With This Easy Method

What is the best way to calculate bond return? What simple method can help you do this? Determining returns on bonds held to maturity is an easier task than calculating returns for stocks. Use this simple method to calculate return on bonds, bearing in mind the potential effects of inflation. Find out how to calculate bond return below.

The Smart Beta Strategy For Investing: Does It Work?

What is the smart beta strategy? Will this approach help you make better investment decisions? The smart beta strategy is one of the most influential methods of portfolio construction. Building on previous investment theories, the relatively modern smart beta strategy promises to yield greater returns than the market without an increase in risk. Keep reading for more about the smart beta strategy.