Fixed Income (or debt) represents your ownership over the repayment of a debt. Usually considered bonds, they are contracts promising the repayment of loaned money. Other forms of debt arrangements include Mortgage-Backed Securities, liens, loans, and CDs. Fixed income is
The term Equity represents any ownership rights over an asset’s cash flow generation potential. As an asset class, there is no guarantee of a return on your investment, it is the most speculative of assets classes and is the only
Asset Allocation is how we discuss the percent of assets in one of the four main asset classes. It is the balance of risk and reward and is the most reliable leading indicator of the intermediate and long term trajectory
Framing effect is the use of language to frame a question in a positive or negative way. Stating the same question with the right spin allows the inquirer to impart some direction on the inquired. A great example of this:
It’s no secret that investors tend to chase investment performance, in fact most mutual funds and investment companies count on it. Flows into mutual funds are highly correlated to the funds performance in the prior four quarters. Thus, investors piling
Illusion of Control is the deeply held belief that we can control the otherwise uncontrollable. It is the same behavior that a person shooting dice might exhibit. They will throw it harder, blow on the dice, hand them to a
Mental accounting occurs when a person views various sources of money as being different from others. This looks different for different people, but a few examples are money earned at a job may be viewed differently than money from an
Hindsight bias is reading beneficial past events obviously predictable, and bad events as not predictable and without cause (called black swans). In the decade between 1999 and 2009, we have many explanations for poor investment performance. Brokers and talking heads
The bandwagon effect, or groupthink, describes gaining comfort in something because many other people do the same. After all, “there is safety in numbers” correct? This is a falsehood. But let’s separate bandwagon-ing, from conventional wisdom. There is value that
Information bias is the tendency to evaluate useless or the wrong information when determining value. It’s the belief that certain commonly held data points are helpful in understanding the value of an investment, when they may not be. The key
Confirmation bias is the natural human tendency to seek specific supportive sources, or overemphasize information confirming our decisions. People will often come to a conclusion, then seek information confirming the decision. Think about buying a car, once you bought the
This is the belief that you own a “winner” and you will keep that winner for reasons that aren’t justified by the return. Owning companies is fun, and investors like to celebrate their victory over the market by stashing great
