Guide to Investment Strategy : How to Understand Markets, Risk, Rewards and Behaviour

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ISBN: 9781576603420 | 1576603423
Cover: Hardcover
Copyright: 1/6/2010

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The first edition ofThe Economist Guide to Investment Strategyexplained the fundamentals of investment risk, how to put together "keep-it-simple" investment strategies, and the need to guard against our own behavior leading to dreadful investment mistakes. The global crisis that erupted in 2008 exposed the flaws in many more complicated investment strategies.The second edition starts with a new section on financial fraud and how investors can help to protect themselves against this "hearty perennial". It also includes a new section on risk profiling and discusses the role of risk tolerance questionnaires. In Chapter 3 data are provided pointing to underperformance of equities between 1978 and 2008. Against this background, there is a new Chapter 4-"Which should we do: buy-and-hold or time markets?" Chapter 5, which discusses the design of short-term and long-term strategies, includes a new section-"How safe is cash?"-and the discussion of bond ladders is extended to reflect issues of bond selection in the light of corporate credit risk and the financial difficulties of some US municipal authorities.Part 2 has been updated extensively to reflect developments in the past four years and the impact of the financial crisis on credit instruments, hedge funds, private equity, and real estate.The book concludes with a new chapter on investing in art and collectibles. It explores the argument that art prices "float aimlessly", discusses financial investment in art, and provides some reasons for expecting that a portfolio of art might perform well in the future.

The big picture
Setting the scene
Financial fraud: "a hardy perennial"	p. 3
Other catastrophic risk-taking	p. 4
Think about risk before it hits you	p. 7
How much risk can you tolerate?	p. 8
Know your niche	p. 10
War chests and umbrellas	p. 12
Box Base currency	p. 12
Understand your behaviour
Insights from behavioural finance	p. 14
Investor biases	p. 16
Investor preferences	p. 19
Loss aversion	p. 19
Mental accounting and behavioural portfolio theory	p. 20
Investment strategy and behavioural finance	p. 22
Parameter uncertainty and behavioural finance	p. 23
Traditional finance, behavioural finance and evolution	p. 24
Market investment returns: will the markets make me rich?
Sources of investment performance	p. 26
Safe havens that provide different kinds of shelter	p. 28
Which government bonds will perform best?	p. 29
Box Is the break-even inflation rate the market's forecast?	p. 30
What premium return should bond investors expect?	p. 33
The equity risk premium	p. 35
Equity risk: don't bank on time diversifying risk	p. 40
Which should we do: buy-and-hold or time markets?
Model investment strategies	p. 45
Strongly held market views and the safe haven	p. 48
Box Stockmarket bubbles	p. 49
An appropriate role for strategy models	p. 52
The time horizon and the shape of strategy: keep it simple
Short-term investment strategies	p. 54
How safe is cash?	p. 54
No all-seasons short-term strategy	p. 55
Box Do bonds provide insurance for short-term investors?	p. 56
Are you in it for the long term?	p. 58
Time horizon for private and institutional wealth	p. 58
Long-term investors	p. 60
Financial planning and the time horizon	p. 61
"Safe havens", benchmarking, risk-taking and long-term strategies	p. 62
The danger of keeping things too simple	p. 64
Good and bad volatility	p. 64
Box Unexpected inflation: yet again the party pooper	p. 66
"Keep-it-simple" long-term asset allocation models	p. 67
Should long-term investors hold more equities?	p. 69
Inflation, again	p. 70
Laddered government bonds: a useful safety-first portfolio	p. 70
Bond ladders, tax and creditworthiness: the case of US municipal Bonds	p. 72
Box The Orange County saga: what is a good-quality municipal bond?	p. 76
What's the catch in following a long-term strategy?	p. 77
Long-term pension savings and risk tolerance	p. 78
Long-term strategy: "imperfect information changes everything"	p. 79
Market timing: an unavoidable risk	p. 80
Some "keep-it-simple" concluding messages	p. 82
Box The chance of a bad outcome may be higher than you think	p. 83
Implementing more complicated strategies
Setting the scene
A health warning: liquidity risk	p. 91
Behavioural finance, market efficiency and arbitrage opportunities	p. 93
Barriers to arbitrage	p. 94
Fundamental risk and arbitrage	p. 95
Herd behaviour and arbitrage	p. 96
Implementation costs, market evolution and arbitrage	p. 98
Institutional wealth and private wealth: taxation	p. 99
Equities
Concentrated stock positions in private portfolios	p. 104
Corporate executive remuneration programmes	p. 105
The restless shape of the equity market	p. 106
Stockmarket anomalies and the fundamental insight of the capital asset pricing model	p. 106
"Small cap" and "large cap"	p. 109
Don't get carried away by your "style"	p. 112
Box Value and growth managers	p. 114
Should cautious investors overweight value stocks?	p. 115
Equity dividends and cautious investors	p. 117
Home bias: how much international?	p. 118
To hedge or not to hedge international equities	p. 123
International equities and liquidity risk	p. 127
Credit
Credit quality and the role of credit-rating agencies	p. 129
Portfolio diversification and credit risk	p. 134
Box Local currency emerging-market debt	p. 136
Securitisation, modern ways to invest in bond markets and the credit crunch	p. 137
Mortgage-backed securities	p. 138
Box The role of mortgage-backed securities in meeting investment objectives	p. 139
Asset-backed securities and collateralised debt obligations	p. 142
International bonds and currency hedging	p. 145
What does it achieve?	p. 145
What does it cost?	p. 147
How easy is foreign exchange forecasting?	p. 149
Hedge funds
What are hedge funds?	p. 151
Alternative sources of systematic return and risk	p. 152
"Do hedge funds hedge? "	p. 152
The quality of hedge fund performance data	p. 154
What motivates hedge fund managers?	p. 156
Are hedge fund fees too high?	p. 156
The importance of skill in hedge fund returns	p. 157
Types of hedge fund strategy	p. 160
The size of the hedge fund market	p. 161
Directional Strategies	p. l62
Global/macro Equity hedge, equity long/short and equity market neutral	p. 163
Short-selling or short-biased managers	p. 164
Long-only equity hedge funds	p. 164
Emerging-market hedge funds	p. 166
Fixed-income hedge funds: distressed debt	p. 166
Arbitrage strategies	p. 167
Fixed-income arbitrage	p. 168
Merger arbitrage	p. 168
Convertible arbitrage	p. 167
Statistical arbitrage	p. 167
Multi-strategy funds	p. 170
Commodity trading advisers (or managed futures funds)	p. 170
Hedge fund risk	p. 172
Madoff, hedge fund due diligence and regulation	p. 172
Operational risks	p. 173
Illiquid hedge fund investments and long notice periods	p. 173
Lies, damn lies, and some hedge fund risk statistics	p. 174
"Perfect storms" and hedge fund risk	p. 176
Managing investor risk: the role of hedge funds of funds	p. 177
How much should you allocate to hedge funds?	p. 178
Questions to ask	p. 180
Your hedge fund manager	p. 180
Your hedge fund adviser	p. 183
Your hedge fund of funds manager	p. 184
Private equity: information-based1 investment returns
What is private equity?	p. 185
Private equity market risk	p. 187
Listed private equity	p. 190
Private equity portfolios	p. 193
Private equity returns	p. 193
Box Private investments, successful transactions and biases in appraisal valuations	p. 195
Real estate
What is real estate investing?	p. 198
Box Using derivatives to gain real estate market exposure	p. 199
What are the attractions of investing in real estate?	p. 201
Diversification	p. 201
Box Modern real estate indices and assessing the diversifying role of real estate	p. 201
Income yield	p. 206
Inflation hedge	p. 207
Styles of real estate investing and opportunities for active management	p. 207
What is a property worth and how much return should you expect?	p. 208
Rental income	p. 208
Government bond yields as the benchmark for real investing	p. 210
Tenant credit risk	p. 211
Property obsolescence	p. 211
Private and public markets for real estate	p. 212
International diversification of real estate investment	p. 213
Currency risk and international real estate investing	p. 213
Art and collectibles
Drivers of art market prices	p. 216
Box Art market indices	p. 218
Investing in art	p. 220
Other investments of passion	p. 223
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Guide to Investment Strategy : How to Understand Markets, Risk, Rewards and Behaviour

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