Downside Protection
What Is Downside Protection?
No one wants to lose money on their investments, right?
After all, the whole purpose of investing is to build wealth in order to reach your financial goals – an early retirement, a college fund for your children, etc.
Achieving those goals is made a lot tougher with a substantial loss. For example, you would need a return of 100% in order to recoup a loss of 50%.
That’s why both individual and professional investors use various strategies to protect against losses.
All of these strategies can be called by the broad term ‘downside protection’ and may include the use of stop-loss orders, options contracts, or the buying of other assets that will hedge the risk of the underlying asset already owned.
Diversifying your portfolio is another, very broad-based way to provide downside protection on your total portfolio. As is lowering the percentage in your portfolio of volatile assets.
Why Is Downside Protection Important?
The pandemic-induced stock market selloff in March 2020 was just the latest example of why downside protection is important.
As with any insurance policy, a downside protection strategy is one of those things investors’ may not need… until they do. The whole point is to have the strategy in place before the unexpected happens, before the potentially catastrophic event occurs.
In other words, goal-oriented investors should place more emphasis on playing defense and minimizing drawdowns to their portfolio.
Let’s go back to the Great Recession. The S&P 500 fell 57.7% from its high in October 2007 before bottoming out in March 2009. The decline was the largest drop in the S&P index since World War II.
That type of decline would take a gain of about 125% just to get back to breakeven. That would be difficult if you are in or near retirement.
Examples of Downside Protection Strategies
Here are some examples of downside protection strategies:
Hedging is the most straightforward type of downside protection. Imagine you own 100 shares of XYZ company stock, which is trading for $33 per share. You can hedge your investment by purchasing one put option for 100 shares of the stock. Put options are contracts giving you the right to sell the stock at a guaranteed “strike price” for a limited period of time. Let’s say you bought a put option to protect your XYZ stock with a strike price of $30 per share. If the market price drops below $30, you can still sell your shares for $30 until the day the put option contract expires. If the price goes up, you let the option expire and all you lose is the premium you paid to buy the put option.
Another strategy for investing with downside protection is to write a covered call option. This means you write, or sell, a call option contract with a strike price that’s higher than the current market price. The purchaser of the call contract has the right to buy the shares from you at the strike price. If the price declines or does not go up to the strike price before the option expires, you keep the premium the purchaser paid. The premium provides some downside protection by offsetting part of any drop in the stock price. One negative feature of covered calls as downside protection is that you give up the possibility of making more money if the stock price goes above the strike price – you will lose the stock to the buyer of the call.
If you do not wish to use options, here are some other possibilities to consider:
- Traditional diversification – Treasury bonds and notes, real estate investment trusts (REITs) funds, precious metals.
- Riskier Hedges – managed futures, alternative assets
How Can You Manage Risk?
Each individual is different, with widely varying risk tolerance and views on what is risk. So it is a challenge to select the “right” approach to downside protection.
This challenge has been significantly more difficult in bullish market environments, as there is a temptation for investors to ignore downside risk in favor of capturing the seemingly endless upside for stocks. However, prudent investors are always prepared for the inevitable bear market.
There are several ETFs and mutual funds that aim to provide downside protection strategies. A simple search on Magnifi indicates numerous ways for investors to access these funds with low fees.
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The information and data are as of the December 22, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Quality Investments
What Is a Quality Investing?
Quality investing is an investment strategy based on a set of fundamental characteristics, such as a strong balance sheet, that is used to find the highest quality companies.
Warren Buffett’s mentor – Benjamin Graham – is considered to be the father of value investing. But he was also interested in quality investing.
Graham placed great emphasis on finding quality value stocks. His studies found that the biggest danger when buying value stocks was settling for low quality companies that were unable to compete.
Graham argued that finding quality stocks was the key to successful value investing. In other words, investors in general – but especially traditional value investors – leave money on the table when they ignore the quality dimension of value investing.
The characteristics of a quality company include: strong balance sheet (low debt levels), credible management, earnings stability, payment of dividends and operating efficiency. These companies have high profitability. High rates of return – particularly return on equity, cash flow generation and the profit margins of the business (which measure the ability of the company to generate profits from its assets) are found in quality companies.
There are also other two traits: the company has what Buffett described as an “economic moat,” giving it a competitive advantage over its rivals and a long enterprise life cycle, which means a company is investing in new technologies and products.
Why Is Quality Investing Important?
Quality investing is important simply from the fact that backtesting has shown that “boring” dividend-paying, stable companies have outperformed more risky investments for long periods of time.
Overall, quality stocks have outperformed both value and growth stocks since MSCI began tracking it in global markets in 2001.
An analysis done by the UK’s SN Financial Services comparing the MSCI World Quality index versus the MSCI World Value index was quite illuminating.
It found that from December 31, 1998 to December 1, 2020 quality outperformed value over the long term, +515.77% to +254.87%. Most of the outperformance came mainly from 2008 onwards (post-Financial Crisis).
This makes sense since a quality company is one that generates a lot of cash and reinvests it wisely so that it can defend and grow its competitive advantage.
What’s the Difference Between Quality Investing and Value Investing?
Many retail investors still confuse quality investing with value investing. But they shouldn’t.
Buying high quality assets without paying premium prices is just as much ‘value investing’ as is buying average quality assets at discount prices.
Quality companies have a high return on equity, low debt, and very stable earnings. And they are often among the most familiar names to investors.
These companies generate a return premium in excess of the market over time with lower risk. This return is accentuated when risk aversion is high or rising. Historically, many of these periods have often been associated with value strategies underperforming.
In addition, quality companies are able to sustain elevated profitability levels relative to the wider market for protracted periods. In contrast, investors actually tend to overpay for “growth”, getting sucked into glamour trades.
This leads directly to the outperformance of the “slow and steady” companies where strong fundamentals are not fully priced.
Quality investing also leads to a portfolio with lower volatility than the market.
Meanwhile, value stocks are simply perceived as being undervalued and investors buy a value stock for what they think to be less than its true worth.
However, value stocks are often cheap for very good reasons, such as poor management and a lack of innovation in a low-growth industry.
That’s why – as shown earlier – quality investing outperforms value investing over longer periods of time.
How to Participate in Quality Investing?
It is rather easy for you to be able to participate in quality investing.
Of course, you could buy individual stocks – the familiar names we all know. Many of them are members of the Dividend Aristocrats, which are S&P 500 companies that have paid and increased their dividend payments for at least 25 consecutive years.
However, an easier and more diversified approach is to invest in ETFs and mutual funds that focus on quality investing strategies. A simple search on Magnifi indicates numerous ways for investors to access these funds with low fees.
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The information and data are as of the December 22, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Hedged Equity
What Is a Hedge?
In simple terms, a hedge is an investment that is made with the intention of reducing the risk of a large and adverse price movement in an asset.
Hedging is similar to taking out an insurance policy. And like insurance, there is a cost to hedging. While it reduces potential risk, it also reduces potential gains, since the hedge is usually taken in the opposite direction as the asset being protected.
In the investment world, the most common way to hedge is through derivatives. These are securities that move in correspondence to one or more underlying assets. Derivatives can include options, swaps, futures and forward contracts.
There are many kinds of options and futures contracts that investors are able to hedge against almost any investment, including stocks, fixed income, interest rates, currencies, commodities, and more.
The effectiveness of a derivative hedge is expressed in terms of delta or “hedge ratio.” Delta is the amount the price of a derivative moves per $1 movement in the price of the underlying asset.
The specific hedging strategy, as well as the pricing of hedging instruments, likely depends on the downside risk of the underlying security against which the investor would like to hedge. Generally, the greater the downside risk, the greater the cost of the hedge. Downside risk tends to increase with higher levels of volatility and over time.
For example, if you want to hedge your position in a highly-volatile tech stock, an option which expires after a longer time period and which is linked to this stock will be more expensive than say a short-term option on a consumer staple stock.
Note that funds designed for downside protection do not necessarily increase the likelihood of positive returns during market downturns.
Why Is Hedging Important?
Used wisely, hedging your portfolio can become part of your long-term investment strategy. Hedges can be applied and removed as needed, without disturbing your core strategy or long-term goals.
Most importantly, hedging can help provide short-term shelter from adverse market events. This provides you with an alternative to selling in a down market, being forced to take an investment loss and perhaps incurring redemption fees, transaction costs and tax consequences.
In essence, hedging is recognizing the dangers that come with every investment and choosing to be protected from any untoward event that can impact one’s finances.
As stated previously, hedging strategies have unique risks, costs and consequences of their own (management fees, taxable events, etc.). It is important that you fully understand the strategy you plan to use and read the prospectuses for any investments you intend to use as a hedge.
Examples of Hedging Strategies
There are several common hedging strategies investors use to help mitigate portfolio risk: short selling, buying put options, selling futures contracts (often on a stock index like the S&P 500), trading volatility, and using inverse ETFs.
Inverse ETFs rise in price when the market goes down. Retail investors often use these ETFs because they are less burdensome than the other hedging strategies. No margin, options or futures is needed to buy an inverse ETF.
Another common strategy involves the use of options. An option is an agreement that lets the investor buy or sell a stock at an agreed price (called the strike price) within a specific period of time.
Let’s say you own a stock. If you purchase a put option, and the stock falls in price, the put option will go up in price – offsetting at least some of the loss in the stock price.
How to Participate in Hedging Strategies
You’re already using hedges in your everyday life. The aforementioned insurance policies you buy are a hedge against future scenarios. While hedging will not prevent an incident from occurring, it can protect you if something bad happens.
So it makes sense to do the same in your financial life.
There are several ETFs and mutual funds that use hedging strategies that are designed to reduce risk. A simple search on Magnifi indicates numerous ways for investors to access these funds with low fees.
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The information and data are as of the November 18, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Sustainability
What Is Sustainable Investing?
Sustainability – a company’s ability to create positive environmental and societal impact – is rapidly reshaping the corporate landscape. It is reshaping whole industries and generating new waves of growth.
The staggering scale of the disruption (and opportunities) that will play out over the next few decades are why many company executives right now are strategizing as to how to position their companies for the future in the face of ongoing megatrends, such as climate change.
More and more governments, as well as corporations, are pledging to back a United Nations campaign aiming for net-zero greenhouse gas emissions. This will affect how nearly every company operates.
Just the push to limit global temperature increases to under 2°C—the number one sustainability challenge of our time—will drive a massive transformation of the global economy. It will require investments totaling an estimated $100 trillion to $150 trillion by 2050.
Tomorrow’s best companies will be those that can operate outside of their comfort zone. Why? At its core, sustainability has a lot to do with resiliency.
Companies must build the capacity to adapt and innovate amid worldwide disruptions. In effect, sustainability requires “unlearning” how industrial society has operated for 150 years, and charting a new route to reach the same goal of delivering shareholder value.
Going forward, C-suite executives and boards must treat social responsibility and environmental stewardship not as separate functions largely disconnected from strategy, but rather as integral to corporate and business strategy.
Differences Between Sustainable Investing, Socially Responsible Investing, & ESG Investing
Sustainable Investing, Socially Responsible Investing (SRI), and ESG Investing are often used interchangeably. However, these investment approaches are each different.
Sustainability has become a catch-all term for a company’s efforts to “do better” or “do good.” This investment approach has three basic pillars: economic growth, environmental protection, and social progress. At times, this is referred to as “people, planet, and profits.” In a nutshell, sustainable investing directs capital to companies fighting climate risk and environmental destruction, while also promoting corporate responsibility.
In general, SRI investors encourage corporate practices that are morally grounded and promote environmental stewardship, consumer protection, human rights, and racial/gender diversity. Essentially, for socially responsible investors, morality trumps the bottom line.
ESG investing also focuses on three pillars. Environmental issues, which can include pollution, climate change, extreme weather, carbon management, and use of scarce resources. Social issues, which can include product safety, human rights, worker safety, customer data protection, and diversity and inclusion. Governance issues, which can include factors such as accounting standards compliance, anti-competitive behavior, and a strong ESG management process.
ESG data and metrics are used to gain insights into the success and value of a company’s performance and policies in order to mitigate risk and identify superior risk-adjusted returns. Essentially, the focus of ESG investing is on increasing the bottom line through investments in responsible companies that are being well managed.
Why Choose Sustainable Investing?
This type of investing has become Wall Street’s hottest growth area.
According to data supplied by The Forum for Sustainable and Responsible Investing, there are nearly $13 trillion invested into some form of socially responsible investing. And according to research conducted by Morgan Stanley in 2019, 85% of individual investors and 95% of millennial investors are interested in sustainable investing.
Sustainable investing makes a lot of sense, even if your only concern is the return on the money you are investing.
Like the tortoise in the fabled race with the hare, long-term investors are seeing growing evidence that this type of investing can beat traditional methods. For example, in the past few years, companies with higher ESG ratings had higher average return on invested capital, compared to companies with lower ratings, according to MSCI.
The reason for this outperformance is straightforward and obvious… ESG pushes companies to look beyond the next quarter or even the next three- to five-year business cycle in evaluating risk.
Even the results from the tough first half of 2020 were good. Morningstar said, “an impressive 72% of sustainable equity funds rank in the top halves of their Morningstar categories and all 26 ESG (environmental, social, and governance) index funds have outperformed their conventional index-fund counterparts.”
How to Participate in Sustainable Investing
With the large number of companies touting their sustainability credentials, you would need a ‘scorecard’ to keep track. A much easier route would be to purchase ETFs or mutual funds that invest in companies with specific sustainability goals. A simple search on Magnifi indicates numerous ways for investors to access sustainable funds with low fees.
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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as of the November 8, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Inflation
Inflation measures how much more expensive a set of goods and services has become over a certain period of time. In effect, inflation is the decline in purchasing power of a given currency (such as the U.S. dollar). Inflation is a major concern for investors because of the effects it may have on their investments.
Currently, most central banks – including the U.S. Federal Reserve – consider a 2% inflation to be “healthy”. Anything significantly above or below that level can have an adverse effect on the economy. Very high rates of inflation mean that unless income increases at the same rate, people are worse off, and this can lead to lower levels of consumer spending and a fall in sales for businesses. Very low inflation usually signals demand for goods and services is beneath where it should be, and this tends to slow economic growth and depress wages.
Inflation and Your Investments
Inflation can distort purchasing power over time for recipients and payers of fixed interest rates. For example, take a pensioner who receives a fixed 3% yearly increase to their pension. If inflation is higher than 3%, a pensioner’s purchasing power falls.
If inflation rises 3% every year, a retiree who has enough saved today to spend $50,000 a year would need just over $67,000 a year in 10 years and more than $90,000 per year in 20 years to fund the exact same lifestyle
On the other hand, a borrower who pays a fixed-rate mortgage of 3% would benefit from 3% inflation, because the real interest rate (the nominal rate minus the inflation rate) would be zero. And servicing this debt would be even easier if inflation were higher, as long as the borrower’s income keeps up with inflation. The lender’s real income, of course, suffers. To the extent that inflation is not factored into nominal interest rates, it creates winners and losers when it comes to purchasing power.
How to Protect Your Portfolio in Times of High Inflation
There are certain investments that are more inflation-tolerant than others or rise together with inflation. Having a well-diversified portfolio can help enhance investment returns and reduce risk during times of high inflation. Diversification is a risk management strategy in which investors spread their investments across asset classes.
Stocks
The stock market’s average annual gain of 10% has outpaced inflation over the long run. However, historically, when inflation spikes (defined as when the CPI suffers one-month increases of 0.5% or more for at least three months in a row) it has been a major headwind for stocks. In five of the previous seven such spikes since 1973, the S&P 500 index declined, suffering a median drop of 7.8%.
The ideal stocks to own in an inflationary environment are companies that can pass along higher costs to their customers because of strong demand for their products. An example of this are consumer staples stocks because they offer “necessities” like food to consumers. Also, companies that have a habit of raising their dividends regularly may allow you to outpace inflation.
Diversify Internationally
Buying international stocks can help to hedge your portfolio against a weaker US dollar. That’s because there are many major economies around the world that do not fluctuate in tandem with the US markets. In addition, rising inflation in the US can actually be advantageous for American investors in international companies whose foreign-currency profits get converted into US dollars.
Real Assets
Real assets are physical assets that have an inherent value due to their physical attributes. Real assets help diversify investment portfolios as they have a relatively low correlation with financial assets, such as stocks and bonds. Examples of real assets are real estate and commodities.
Property prices and rents charged by landlords typically go up during inflationary periods, making real estate a popular investment if you want to outrun inflation. Over the past 30 years, an index of U.S. real estate investment trusts (REITs) posted larger gains than the S&P 500 in five of the six years when inflation was 3% or higher.
Also, commodities, such as precious metals, often prosper in inflationary times as well. That’s because as the price of goods and services rise, so too does the price of the commodities used to produce those goods and services.
TIPS
Investing in bonds may seem a counterintuitive way to beat inflation. However, investors can purchase inflation-indexed bonds. In the United States, Treasury Inflation-Protected Securities (TIPS) are a popular option because it is pegged to the government’s Consumer Price Index.
When the Consumer Price Index (CPI) rises, so does the value of a TIPS investment. Not only does the base value increase but, since the interest paid is based on the base value, the amount of the interest payments rises with the base value increase. TIPS can be accessed in a variety of ways. Direct investment can be made through the U.S. Treasury or via a brokerage account. TIPS are also held in some exchange-traded funds (ETFs) and mutual funds.
Investors can gain exposure to domestic and international stocks, REITs, commodities, and TIPS through ETFs and mutual funds. A simple search on Magnifi indicates numerous ways for investors to access an array of funds with low fees.
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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as of the October 14, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Value Investing
What Is Value Investing?
Value investing is a strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively search for companies they think the stock market is underestimating. They believe the market overreacts to both good and bad news, resulting in stock prices that often do not correspond to a company’s long-term fundamentals.
This market overreaction offers an opportunity to profit by buying stocks at discounted prices.
Warren Buffett is probably the best-known value investor today, but there are many others, such as Jim Rogers. Rogers once said the following: “I just wait until there is money lying in the corner [ignored by Wall Street], and all I have to do is go over there and pick it up.”
Value investors hope, as seasoned market observer Jim Grant said, “…have people agree with you… later.”
Value investors use a number of various metrics to try to find the intrinsic value of a stock. Intrinsic value is a combination of using financial analysis such as studying a company’s financial performance, revenue, earnings, cash flow, and profit as well as fundamental factors, including the company’s brand, business model, target market, and competitive advantage.
Some metrics used to value a company’s stock include: price-to-earnings, ratio, price-to-book ratio and free cash flow.
The Difference Between Value and Growth Investing
Value investing involves searching for stocks trading below their actual value. Quite often, these involve mature ex-growth industries, such as utilities and banks, as well as cyclical industries such as banking, energy and mining stocks.
Growth investing is all about finding companies that show above-average revenue and earnings growth potential, such as technology stocks.
In effect, growth investors are looking for a company at $100 a share and that will go to $200, relatively quickly. Meanwhile, value investors are looking for a company trading at $50 a share that will go to $100 within a few years as the market recognizes its true worth.
Growth investors, unlike value investors, have little interest in current income from their portfolio. Also, growth investors do not mind highly volatile stock prices because they do not need the money until well into the future.
These two investing strategies have waxed and waned in popularity historically.
In 1997, Nobel laureate Eugene Fama pointed out that value stocks had beaten growth stocks over the long term. This “discovery” was followed by the bursting of the tech bubble in 2000, and value stock prices outperformed growth by 16% over the next five years.
However, by 2005 value stocks became overpriced. And as an issue of the Journal of Banking and Finance pointed out – value investing stopped ‘working’ in most developed markets in the last 15 years.
In simple terms, when the markets are greedy, growth investors win and when they are fearful, value investors win.
Why Choose Value Investing?
For long-term investors, it is this very waxing and waning that means value stocks should be part of your portfolio.
Data from 1927 through 2020 showed that small value stocks had a return of 14.3% annually, and large value stocks had a return of 11.8% annually. During the same period, large growth stocks had a return of 10%, and small growth stocks had a return of 9.3%.
From 1927 through 2019, according to the data compiled by Nobel Prize laureate Eugene Fama and Dartmouth professor Kenneth French – over rolling 15-year time periods – value stocks have outperformed growth stocks 93% of the time. However, when looking at year-by-year performance, value outperformed growth just 62% of the time.
Currently, in a rising interest rate and inflationary environment and with growth stocks outperforming in the decade from 2010 to 2020 – value stocks are poised for a period of outperformance over growth again.
The old debate of growth investing vs. value investing will go on and on. However, history tells us that value stocks outperform over time, even if growth stocks steal the daily headlines.
So if you’re buying individual stocks, stick to fundamental investing principles of Warren Buffett. Or consider buying a broad-based value index fund that takes a lot of the risk out of stocks over the long term. A simple search on Magnifi indicates numerous ways for investors to access value funds with low fees.
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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as of the November 8, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Quantitative Investments
Do you know that Quantitative Investment Strategies have significantly outperformed the S&P 500 in bull and bear markets over the past 20 years?
In a world where technology has changed nearly every facet of our everyday life, fund managers and investment banks have aimed to get a leg up on their peers, employing quantitative analysts (“quants”) to build superior trading strategies. The work that these quants perform is called quantitative analysis. It involves building complex computer models to parse through massive data banks to build trading strategies. These strategies can search for specific trading patterns to predict the direction of securities, and or specific ratios or combinations of ratios like Price-To-Earnings (P/E), and Debt-To-Equity to spot inefficiencies in the market before others do.
The ultimate goal of these proprietary models is to generate superior returns while maintaining rigid risk control. There are more than 65 quant ETFs to choose from, as well as a large number of quant mutual funds.
Why use Quantitative Investment Strategies?
Given that computers can analyze large groups of investments simultaneously and implement screening processes to rank them, they clearly have a significant advantage over the average individual investor or research team. Not only can they crunch enormous volumes of data at a rapid pace, but they can rank this data objectively. This is a massive benefit, as the results derived from the models are void of confirmation bias. Of course, the benefit of consistency and objectivity is only as good as the quants running the strategy.
The other major advantage is discipline, with quant trading strategies not subject to emotion when executing trades. Allowing human emotion to seep into a given strategy can weigh significantly on investment returns and is often the downfall of the average individual investor. There is clear evidence of this outperformance in historical returns, with the average quant fund returning more than 15% annualized over the past twenty years, well above the returns of the S&P-500 (7%). The best quant funds have returned closer to 19% annualized over the past 20 years, and have also outperformed since the secular bear market bottom of 2009.
While there are clear benefits to quantitative strategies, there are risks, with the major one being the shortcomings of relying on historical data. As we saw in 2020, the humans beat the quants with the top-10 performing hedge funds dominated by stock-pickers with returns ranging from 30% to 74%. This shouldn’t be overly surprising as there’s no way to model a once-in-a-century event like a global pandemic.
Quantitative vs. Qualitative
Quantitative analysis focuses on information about quantities, and therefore numbers.Quantitative Investment Strategies are governed by sets of rules and are typically rigid, aiming to deliver higher returns by uncovering inefficiencies in the market. Many of these models typically involve analyzing balance sheets, cash flow statements, and ranking stocks based on relative attractiveness to build portfolios. Other Quantitative Investment Strategies use patterns to predict market direction, or combining dozens of inputs together. These strategies can include mean reversion and momentum, relying mostly on technical signals for their inputs.
Qualitative analysis focuses on data that is descriptive, which can be observed but not measured. Qualitative Investment Strategies focus on the qualitative characteristics of both stocks and assets, and this analysis is much more subjective. This could involve personal views on a currency or global market related to a projected shift in monetary policy or taxation, or views on a stock’s eventual profitability based on its new product, or the hiring of a new Chief Executive Officer or Chief Operating Officer.
While quantitative funds have outperformed many non-quantitative funds over the past 20 years, the importance of qualitative analysis should not be minimized. This is because even if a company has a superior product or service, it could fail miserably without the right management team, the right management style, entry into the wrong market, or adverse upcoming changes in government regulation/taxation. Given the ever-changing landscape and disruption to many industries, qualitative analysis can often spot potential value traps much better than a quantitative strategy that dispassionately focuses solely on financial statements, and not the big picture.
How to Invest Using Quantitative Investment Strategies
The massive benefits of quantitative investment strategies cannot be understated, with the average quant fund easily outperforming the S&P-500 over the past 20 years, with a (+) 15% annualized return. Some of the major pros and cons worth considering are as follows:
PROS
- Less scope for human error, with mathematical models taking care of stock selection, and risk control.
- Dispassionate decision making, with investors not missing out on opportunities due to their inherent biases or the biases of their fund managers.
- Systematic transaction timing, with quant strategies being able to navigate volatile markets without being exposed to fear or greed, which plagues most individual investors, and even some of the best fund managers occasionally.
CONS:
- Quant funds are only as good as the humans that run them, so quant fund managers should be vetted just as much as the strategy.
- Quant funds might be able to decipher the past 50 years better than any group of humans, but they struggle to predict the next 10 years, and lack the creative abilities of typical fund managers.
- Quant funds are less likely to pay attention to important qualitative aspects like company culture, leadership quality, and the regulatory, environmental landscape, which cannot be ignored in an increasing ESG-focused market landscape.
Given that there are dozens of different quantitative investment strategies out there, and tens of thousands of different variations, knowing which quant strategy to employ is not easy. The solution for those looking to profit from quantitative investment strategies is investing in quant ETF and mutual funds with proven track records and decades of data, which have uncovered the superior blend of strategies to fit most market cycles. A simple search on Magnifi indicates numerous ways for investors to access Quantitative Investment Strategies with low fees.
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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as of the October 27, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Space
A new space age is upon us. For the first time in human history, tech startups and private companies, spearheaded by some of the wealthiest entrepreneurs in the world, are sending humans into space.
The investing opportunities the space industry offers are massive. From space tourism to satellite broadband, mining to national security, in the coming decades an entire space economy will be created.
What is the Space Industry?
The space industry is composed of companies that manufacture components that will go into the Earth’s orbit and beyond, as well as the services associated with space travel. There are three major categories in the space industry: spacecrafts, ground support equipment, and the launch industry.
Spacecrafts are vehicles, manned and unmanned, used in space. These vehicles support a variety of applications, such as exploration, communications, navigation, and transportation. The industry includes satellites, space probes, cargo transporters, rovers, and software.
Ground support refers to the equipment used to service spacecraft. It includes manufacturing of control stations, mobile terminals, VSATs, gateways, and specialized equipment manufacturers.
The launch industry focuses on the process by which spacecraft are launched from our planet into space. It includes equipment, machinery, and launching vehicles, as well as the services that go along with it.
Why Invest in the Space Industry?
The space industry is growing rapidly. Morgan Stanley estimates that the global space industry could generate revenue of more than $1 trillion or more in 2040, up from $350 billion, currently. Bank of America’s forecasts are even more ambitious, estimating a $1.4 trillion-dollar market by 2030.
These impressive growth estimates are a direct result of the changes in the economics of space travel. According to NASA, launch costs that had held steady over the 30 year period between 1970 and 2000 have fallen by a factor of seven. It now costs just $432 to send one pound into low earth orbit in 2020, compared to an estimated $38,734 in the early 1980s.
Costs have plummeted due to the creation of equipment and vehicles that are more reliable, adaptable, and efficient. Many of the rockets that are launched today are reusable and the size of satellites have shrunk dramatically.
The rapid decline in the cost of satellites will soon bring a surge in the number of orbiters collecting data. That data can then be used by businesses for everything from predicting the weather to facilitating insurance claims.
Another potential opportunity is mining in space. NASA recently awarded contracts to four companies to extract tiny amounts of lunar regolith (loose unconsolidated rock and dust) by 2024. This could open up the potential for both moon mining, and asteroid mining, with work already being conducted on NASA’s Psyche Spacecraft to study an asteroid with an estimated mineral value measured in the quadrillions of dollars.
As a result, commercial space ventures are drawing record levels of funding as investors rush to tap into the market. Total venture capital investment in the space industry increased by 95% to $8.7 billion from 2020 to 2021. This increase of investment is an indication that private capital markets understand the potential of the space industry.
How to Invest in the Space Industry
Selecting individual stocks in the space industry can be challenging. That’s because most of the public names offering exposure to the industry have limited exposure as a percentage of future revenue, and those laser-focused on conquering the industry are private. This is why the best solution is gaining exposure to the sector through space-focused ETFs. A simple search on Magnifi indicates numerous ways for investors to access these funds with low fees.
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The information and data are as of the October 14, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Technology
Why should you invest in Technology?
The history of technology is the story of humankind. It covers the expanse of
humanity’s efforts to control its environment for its benefit by creating tools.
Tools/technology are things constructed to aid humans to solve problems and improve their lives.
One of the earliest applications of technology was the invention of the wheel. This basic, simple tool revolutionized the lives of humans, making it easier to go from one place to the other.
Fast forward to today and technology (which is simply applied science) of all sorts has infiltrated every aspect of our lives and is the major force for economic growth.
What Is the Technology Sector?
The technology (tech) sector includes companies involved with the research, development and distribution of technologically-based goods and services. The technology industry today is incredibly broad, covering all sorts of scientific disciplines.
The tech sector is categorized into three major industry groups: software and services, technology hardware and equipment, and semiconductors and semiconductor equipment. These three industry groups are further divided into industries and sub-industries.
Another way investors categorize the tech sector is by determining who the intended user of the product or service being offered is: consumer or a business? Consumer goods could mean anything from mobile devices, wearable technology, household appliances and electronics. While businesses rely heavily on technology to create enterprise software, streamline their systems, host their databases, store their information, etc. Modern businesses could not exist without technology.
Why Invest in Technology?
The world has undergone a technology revolution every 40 to 60 years since the industrial revolution began in 1760, from steam power and railways, to steel and electricity to cars, roads and aviation.
Each of these technological advancements brought sweeping economic change. They spawned new business models and created waves of new entrepreneurs. They also displaced old industries, triggered speculative financial bubbles and sometimes even brought social and political upheaval.
Today, the impact of the information and communications technology revolution is arguably the greatest ever. That has led to one undeniable truth: technology bears a far greater influence on our daily lives and investment portfolios than it ever has.
It’s near impossible to design a well-balanced investment portfolio without including tech stocks, as it is by far the largest sector of the U.S. stock market. But there is no reason to avoid it. There is no sector of the modern American economy that technology does not touch and that does not rely upon the tech sector to improve its quality, productivity, and profitability.
Many tech stocks have higher valuations than companies in other sectors. But for good reason. More than anything else, tech companies are associated with innovation and invention. Investors expect big money to be spent on research and development and they also expect to be rewarded by a steady stream of growth, fueled by a pipeline of innovative new products, services, and features.
Of course, there are risks. The tech sector is highly competitive, so any tech firm is at risk of having its product or service replaced by one from a competitor that is better.
However, tech stocks also promise significantly higher than average growth when compared to other equities.
This has been the prevailing trend for decades now. Throughout much of this century’s historic bull market, tech stocks have been leading the way, with the biggest tech stocks outperforming the S&P 500 index over the past 10 years.
How to Participate in Tech Investing
First, invest in what you like. Technology is an intriguing topic to many people, which makes investing in tech stocks interesting. Successful investing involves detailed research. When you enjoy the topic of your research, you’re more likely to do the legwork required to make educated investing decisions.
Second, keep in mind that the tech sector is massive and broad. It covers a wide range of companies in different stages of development. So there is plenty of room for diversification within the tech sector (you can read our articles on AdTech, Biotech, Fintech, Nanotechnology, or Insurance Technology).
If you’re a novice investor or you simply don’t have the time to do the research it takes to pick stocks individually, you may want to look toward technology-focused index funds, exchange-traded funds (ETFs), and mutual funds. A simple search on Magnifi indicates numerous ways for investors to access tech funds with low fees.
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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as of the October 13, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Fixed Income Investments
What Is Fixed Income Investing?
Fixed income investing is a strategy that focuses on capital preservation and consistent income. This income may come in the form of interest payments or dividends.
Fixed income investments typically include: certificates of deposit (CDs), government and corporate bonds, money market funds and fixed-rate annuities. Bonds can be bought individually or through exchange traded funds and mutual funds.
These investments are among the safest. Therefore, their return is relatively low. However, many people – such as those in retirement – use a fixed income investment strategy as a way to preserve their capital over the long-term.
Assets, like bonds, have reliable payouts on a fixed schedule. So you can count on them to serve as an extra income source.
What Are the Differences Between Fixed Income and Equity Investing?
Equity (stock) and fixed income investing each have their respective risk-and-return profiles. Many investors will often choose an optimal mix of both strategies in order to achieve the desired risk-and-return combination for their portfolios. The classic portfolio is a 60/40 portfolio, with 60% allocated to stocks and 40% to bonds.
Equity investing offers higher returns than fixed income investing and appeals to people looking to grow their portfolio. However, higher returns are accompanied by higher risks. Risk takes shape in two forms: systematic and idiosyncratic risk.
Systematic risk refers to market volatility in various economic conditions. Systematic risk cannot be avoided through diversification.
Idiosyncratic risk refers to the risks that depend on the operations of an individual company. Idiosyncratic risk can be minimized through diversification of your portfolio.
Fixed-income investing typically has lower risks than equity investing and appeals to people looking to preserve their capital, while making income. Of course, like any investment, there are pros and cons to a fixed income strategy:
Pros to fixed income investing
- Capital preservation is all about ensuring you don’t lose the money you invest (known as the principal). In other words, if you invest $10,000 into a bond, you will still have $10,000 when the bond matures, plus interest.
- Fixed income investing provides a reliable additional source of income. With interest rates on these investments somewhat higher than the majority of standard savings accounts, you get more ‘bang for your buck.’
- With fixed income investing, there are less worries about all the many factors that may affect a stock. Just sit back and enjoy the arranged schedule of fixed income coming in.
Cons to fixed income investing
- Inflation Risk: if your bond pays 2% interest and the inflation rate is 3%, your money is losing purchasing power.
- Interest rates may rise. Bond prices do move in the opposite direction of interest rates because of the effect the new rates have on old bonds. So, if you are forced to sell your bonds before maturity, you could end up losing money because bonds with lower yields than current market rates are less attractive to investors.
- Default Risk. Individual bonds are always at risk of default, especially those from corporations. It can happen if the company faces financial problems and can’t repay its debts. That’s why bond funds, owning hundreds of different types of bonds, are a way to mitigate this risk.
Why Choose Fixed Income Investing
Fixed income investments are popular because they offer a certainty that investors don’t get with stocks. Investors know that they’ll receive regular interest payments at a set rate and over a set period of time while their capital is preserved.
By comparison, stock investors get no such guarantee of a pay-out but can make a higher rate of return which is why many investors saving for retirement create a 60/40 portfolio, consisting of 60% equities and 40% bonds. The strategy behind the 60/40 portfolio is to provide growth through equities while reducing volatility on the fixed income side.
How to Invest in Fixed Income
Individual investors can buy a single bond or other fixed income security. However, doing so does not offer diversification. Also, sometimes there are high minimum investment requirements, high transaction costs, and a lack of liquidity in the bond market make it tough to follow this path. Which is why it is recommended that fixed income investors use exchange traded funds (ETFs) and mutual funds. A simple search on Magnifi indicates numerous ways for investors to access fixed income funds with low fees.
Unlock a World of Investing
with a Magnifi Account
Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as of the October 13, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.