Higher Investment Risk and Expected Return

I’m currently reading the book The Most Important Thing: Uncommon Sense for the Thoughtful Investor by Howard Marks. Inside, he talks a lot about risk. Most people seems to grasp the idea that riskier investments offer the prospect of higher returns. Stocks are expected to offer higher returns than stocks. Bonds are considered less risky, and thus return less. However, Marks states that too many people have a simplistic risk/return relationship in their heads:

However, there is no requirement that riskier investments will actually provide those higher returns. It’s only the average expected returns that are higher, but since the uncertainty is also higher. Put another way, the distribution of potential returns is wider. To be more precise, he shares this risk/expected return chart instead:

Source: Table 5.2, The Most Important Thing

When I started investing several years ago, I remember reading several personal finance articles that responded to questions from older investors that had some catching up to do with their nest eggs. The solution was simple – own more stocks! You’ll need the extra return, they reasoned. That’s exactly the wrong way to think. There is no easy shortcut to saving more.

If Warren Is Buying Berkshire (BRK.B) Shares, Should You Too?

Warren Buffett has had a fairly clear view on company buybacks in past decades. In fact, the company has refused seriously looking into the idea for 4 decades. That has suddenly changed and Berkshire has been buying back shares of of his company.

Why Is Buffett Now Reversing Course?

We will speculate here since we cannot ask Mr. Buffett. There are probably two main explanations. Of course, the company has a lot of liquidity and while that is generally a great thing, it also makes it difficult to achieve higher returns in the meantime. However, the main reason is that Warren Buffett is convinced that the stock is undervalued and that buying back shares is doing a service to its shareholders.

If Legendary Investor Warren Buffett Thinks BRK.B Is Undervalued?

You would certainly think that the one person that can be most accurate about the value of Berkshire’s stock would be Warren Buffett wouldn’t you?

Why Now?

Here again, there are many different possibilities but I think a strong one is that in periods of high volatility such as the current one, more investors become irrational which means more mispricings. It is certainly possible that Berkshire is one of those assets that is being priced incorrectly.

Would I Be A Buyer?

I’m rarely tempted by the fact that a company is buying back its own shares. It is also rare that the company is doing this for the first time in 4 decades though and that certainly speaks volumes. So would I be a buyer? I would lean towards yes. How about you? Any thoughts on buying Berkshire?

Best Investments of 2012

Deposit $75,000 or more into a new or existing brokerage account at Charles Schwab and you could be eligible for a new Android smart phone. Move your money to TD Ameritrade and get 60 days of commission-free online trading and a possible bonus of up to $600. Bank of America’s Merrill Edge has up to $500 waiting for anyone opening a new IRA.
At Fidelity and Schwab, clients can get a complimentary investment plan created by a financial adviser. Merrill Edge has a similar offer for clients with less than $250,000 in “investable assets”—stocks, bonds, and mutual funds, for instance. Establishing, transferring, or rolling over $100,000 or more to T. Rowe Price entitles you to a free asset-allocation plan and savings or income analysis prepared by an advisory counsel under the supervision of a certified financial planner. Vanguard offers a free plan by a CFP if you transfer or roll over at least $100,000.
Whether you’re a seasoned investor, a newbie, or someone retesting the waters after a scary loss, financial-services companies want your business. But aside from potential incentives, what will you get for moving your accounts? Is the service up to par? Is even free advice worth your time?

Best Investments of 2012: Variable Annuity (VA)

As you approach and reach the retirement phase of life, the value of insurance becomes ever clearer. While the traditional whole life policy has not been completely wiped out of the marketplace, newer products and theories have gone to the forefront of insurance action items. One new product is the variable annuity, which allows investors to hold what is essentially an insurance policy, with the caveat that cash balances can be invested into stock and bond holdings.
This provides the opportunity for gains on the cash balances above inflation, a key component to keeping the value of your insurance over time. It’s best to be stingy when selecting a variable annuity, however, as fees tend to vary widely. Be sure to understand all the fees you’ll be charged, including annual fees, underlying investment fees and both front- and back-end sales fees. (For more on assessing the benefits of VAs against the costs, read Variable Annuities With Living Benefits: Worth The Fees?)
Most financial planners feel that variable annuities are best suited to people who have some level of concern about themselves or their beneficiaries outliving their money. To buy one you essentially give up some potential investment returns in order to have the added safety of insurance. (Learn some strategies for ensuring your money will last as long as you need it in Managing Income During Retirement.)

Best Investments of 2012: Natural Gas

With a harsh winter knocking on the doors of the central and eastern parts of the country and natural gas on the rebound from 5-year lows, this looks like a good investment for at least the first half of 2010.

Best Investments of 2012: Triple-A Corporate Bonds

There is another way, besides buying stock, for investors to seek the safety of the American companies with the strongest balance sheets. That alternative is to invest in the corporate debt of the last four US firms which still have Aaa ratings of their own–Exxon Mobil (XOM: 80.13, +1.42, +1.80%),
Johnson & Johnson (JNJ: 63.78, +1.25, +2.00%), Microsoft Corp. (MSFT: 27.16, +0.12, +0.44%) and Automatic Data Processing Inc. (ADP: 52.25, +1.09, +2.13%). Economic Data recently made the point that Microsoft’s balance sheet is so solid that its borrowing costs are as good as those of the US government, which means its payout to investors is tiny. The analyst who made the observation wrote, “The company’s $1 billion of 0.875 percent notes due in 2013 and $1.75 billion of 1.625 percent debt maturing in 2015 have the lowest interest rates of more than 3,500 securities in the Barclays
Capital U.S. Corporate Index of investment-grade company debt.” MSFT bonds have low yield, but are remarkably safe.

Best Investments of 2012: Family

Putting money into your family might seem like a good-hearted gesture but an investment with a low monetary return. Considering the rising cost of education and childcare however; and you might want to think again. Putting money into safe investments such as bonds or savings accounts can be a great way to secure an educational future for your children. It might also be worthwhile considering the true costs of a spouse working full time. If they can work even part time from home, it might be worth leaving a low-paying job to save on the soaring costs of childcare, especially if you have more than one child that must attend daycare.

Best Investments of 2012: A Managed Sub-Account With a Registered Investment Advisor

Putting at least a fair portion of your liquid net worth into the hands of a trusted investment professional is the single best choice for most people. There are enough professional certifications within the world of investing to make anybody’s head spin, but a good registered investment advisory (RIA) firm should have both Chartered Financial Analysts (CFA) and/or Certified Financial Planners® (CFP®) in its employ. (Read more in The Alphabet Soup Of Financial Certifications.)
A registered investment advisor earns fees (typically as a percentage of assets) for the service of creating and maintaining a portfolio custom-suited to each investor. They are registered with the Securities and Exchange Commission (SEC) and must adhere to strict reporting and presentation standards to ensure fairness to investors. (Read more in What Is A Registered Investment Advisor?)
The minimum investment required to get started used to be quite high, but RIAs are no longer just for the high-net-worth group. Thanks to cost savings from electronic trading and other recent market efficiencies, RIAs can take on new clients with as little as $100,000 dollars in some cases.
This option provides great tax advantages in that a professional with knowledge of your whole tax situation can be managing your gains and losses for the year. Also, it’s nice to have a seasoned pro watching over your portfolio – someone who can manage financial events that will shape your life in the coming decades. Good advisors will also give advice about your overall picture, including assets not managed by them directly.
Fees will vary, but this competitive field can be accessed for about 1% per year, roughly the same as your average mutual fund. (Read more in Paying Your Investment Advisor – Fees Or Commissions?)