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

Book description

The first edition of The Economist Guide to Investment Strategy explained 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.

Table of contents

  1. Cover
  2. Contents
  3. Title
  4. Copyright
  5. Dedication
  6. Foreword
  7. Part 1: The Big Picture
    1. Chapter 1: Setting the scene
      1. Financial fraud: “a hardy perennial”
      2. Other catastrophic risk-taking
      3. Think about risk before it hits you
      4. How much risk can you tolerate?
      5. Know your niche
    2. Chapter 2: Understand your behaviour
      1. Insights from behavioural finance
      2. Investor biases
      3. Investor preferences
      4. Investment strategy and behavioural finance
      5. Parameter uncertainty and behavioural finance
      6. Traditional finance, behavioural finance and evolution
    3. Chapter 3: Market investment returns: will the markets make me rich?
      1. Sources of investment performance
      2. Safe havens that provide different kinds of shelter
      3. Which government bonds will perform best?
      4. What premium return should bond investors expect?
      5. The equity risk premium
      6. Equity risk: don’t bank on time diversifying risk
    4. Chapter 4: Which should we do: buy-and-hold or time markets?
      1. Model investment strategies
      2. Strongly held market views and the safe haven
      3. An appropriate role for strategy models
    5. Chapter 5: The time horizon and the shape of strategy: keep it simple
      1. Short-term investment strategies
      2. Are you in it for the long term?
      3. Long-term investors
      4. “Safe havens”, benchmarking, risk-taking and long-term strategies
      5. Long-term pension savings and risk tolerance
      6. Long-term strategy: “imperfect information changes everything”
      7. Market timing: an unavoidable risk
      8. Some “keep-it-simple” concluding messages
  8. Part 2: Implementing More Complicated Strategies
    1. Chapter 6: Setting the scene
      1. A health warning: liquidity risk
      2. Behavioural finance, market efficiency and arbitrage opportunities
      3. Barriers to arbitrage
      4. Institutional wealth and private wealth: taxation
    2. Chapter 7: Equities
      1. Concentrated stock positions in private portfolios
      2. The restless shape of the equity market
      3. Stockmarket anomalies and the fundamental insight of the capital asset pricing model
      4. “Small cap” and “large cap”
      5. Don’t get carried away by your “style”
      6. Should cautious investors overweight value stocks?
      7. Equity dividends and cautious investors
      8. Home bias: how much international?
      9. To hedge or not to hedge international equities
      10. International equities and liquidity risk
    3. Chapter 8: Credit
      1. Credit quality and the role of credit-rating agencies
      2. Portfolio diversification and credit risk
      3. Securitisation, modern ways to invest in bond markets and the credit crunch
      4. Asset-backed securities and collateralised debt obligations
      5. International bonds and currency hedging
    4. Chapter 9: Hedge funds
      1. What are hedge funds?
      2. Alternative sources of systematic return and risk
      3. “Do hedge funds hedge?”
      4. The quality of hedge fund performance data
      5. What motivates hedge fund managers?
      6. Are hedge fund fees too high?
      7. The importance of skill in hedge fund returns
      8. Types of hedge fund strategy
      9. Hedge fund risk
      10. How much should you allocate to hedge funds?
      11. Questions to ask
    5. Chapter 10: Private equity: information-based investment returns
      1. What is private equity?
      2. Private equity market risk
      3. Listed private equity
      4. Private equity portfolios
      5. Private equity returns
    6. Chapter 11: Real estate
      1. What is real estate investing?
      2. What are the attractions of investing in real estate?
      3. Styles of real estate investing and opportunities for active management
      4. What is a property worth and how much return should you expect?
      5. Private and public markets for real estate
      6. International diversification of real estate investment
    7. Chapter 12: Art and collectibles
      1. Drivers of art market prices
      2. Investing in art
      3. Other investments of passion
  9. Appendix 1: Glossary
  10. Appendix 2: Essential management information for investors
  11. Appendix 3: Trusting your adviser
  12. Appendix 4: Sources and recommended reading
  13. Index

Product information

  • Title: Guide to Investment Strategy: How to Understand Markets, Risk, Rewards and Behaviour
  • Author(s): Peter Stanyer
  • Release date: January 2010
  • Publisher(s): Bloomberg Press
  • ISBN: 9781576603420