Date post: | 29-May-2015 |
Category: |
Economy & Finance |
Upload: | cabotmoney |
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LINING UP FOR ZERO PERCENT!
Presented by:William Larkin, Jr., Portfolio Manager
The United States has $2.637 trillion (US$) in money market mutual funds.
RISK INTOLERANCE, a term used in Behavioral Finance, is defined as ‘market conditions when investors refuse to take risk to earn a return’.
#1 Reason: FEAR!
Standard Deviation – a measurement of variability. Variability is used to measure confidence in statistical conclusions. This is important math for finance where the standard deviation on the rate of return on an investment is a measure of the security’s volatility.
Application:Natural ScienceSocial Science
Bell Shape
Normal Distribution
Central Limit Theorem
Outlier
Mean
Gaussian Distribution
Measures the probability of a random variable taking certain values. The application of this process underpins the discipline of probability and the science of statistics.
A Leaky Faucet A Door that Sticks A Neighbor’s Barking
Dog
Normal Life Experiences
Financial Decision Making
Low Interest Rates Cheap Foreign Imports Inexpensive Fuel
Humans are resilient and learn to live with their changing environment, which can cause critical errors when making financial decisions. Investors tend to anchor their future expectations in their recent past. Seldom do investors think that new developments or changes in economic conditions will create a new course.
Fear – Preserving Capital
Greed – Return Focused
Falling
Rising
The Normalization of Deviance
(a change from normality)
Peak
Trough
Financial System Imbalance
Late Expansion
Early Recession
Late Recession Early Expansion
GREED – Focus on Return
FEAR – Focus on Protection
Natural changes caused by the economic cycle
can be underestimated.
THE FUTURE STRATEGY LIMITATIONS
Effective decision making requires a recognition of change and understanding the complexities involved in forecasting.
New developmentss always emerge as the economy moves from the old business cycle to a new business cycle. The framework or drivers of change are always slightly different and often significantly unique. How should investors deal with such complex amounts of data and the factors that drive change?
Human Comprehension
Vast Complexity
Diversification Strategy
SELECTION STRUCTURE
VALUATION
Developments in a Changing Economic Cycle
Causes Conflict between Simplicity and Reality
Weak Economy
Low Growth Economy
Moderate Growth Economy Robust Growth Economy Money Market Investments Ultra-Short Bonds Short-Term Bonds Variable Rate
Long-Term Bonds High Credit Quality
Intermediate-Term Bonds Medium Grade
High Yield Short-term Corporate
Bonds Mortgage-Backed Security Floating-Rate Securities
Scenario Building – Weak, Moderate or Strong?
5 Simple Fixed-Income Principles
1) Think outside of the box!2) Use every investment
option. 3) Avoid negative real
returns.4) Diversification can
weaken uncertainty.5) Strategy shifts should be
gradual, not reactionary.
QUESTIONS?