For any young professional, networking is of the upmost importance. From business to academics, your connections will forever offer you widespread knowledge and allow you many "real world" opportunities. However, tracking and maintaining your connections is by no means simple. In fact, if you network correctly, it can be timely and exhausting. Luckily, we have LinkedIn (LNKD) to help us with such a process.
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The Investor Balancing Act
This week I’ll shift away from the cognitive biases and irrational behavior that affect our decision-making, and instead shift my focus towards one of the most important aspects of investing: portfolio theory. Modern portfolio theory (MPT) focuses on building a portfolio of assets that maximizes the risk-adjusted return—that is, maximizes the expected return of an investment portfolio while minimizing its risk (learn more about how to avoid risk here).
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The Voice Of Reason
Despite being one of the most basic ideas of microeconomics, “sunk costs” are deceptively easy to understand; yet, they lead even the most rational people to make irrational decisions. The basic idea of a sunk cost is quite simple: once a cost has been incurred, it should have no bearing on future decisions (it is “sunk”). The classic example of this phenomenon is the advance purchase of a movie ticket for which one cannot receive a refund.
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The Importance Of Rationality
“Economics,” as I was told early in my undergraduate career, “is really just common sense, codified.” This seems true enough. Economics is fundamentally concerned with scarcity and opportunity costs—the intuitively obvious, yet often overlooked ideas that that there is no such thing as a free lunch, and that if you spend your money on one thing, you can’t spend it on something else. It gives us the tools to understand and measure these concepts in the world around us.
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Make The Right Bets
As I reflect on my three years of investment experience, I realize that I've done many things correctly. However, I also understand I've made my share of mistakes. I'm not at all upset with the errors of my past, as they've provided me invaluable insight into how the game is played, and are part of the learning curve associated with the stock market. Although I encourage people to push their limits when learning a new activity, investing is different.
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Beating The Odds
In my previous article, Getting Back To Basics, I explained why long-term investing is a viable strategy for new investors and provided numerous examples of basic investment fundamentals. This week, I aim to build upon those fundamentals by introducing two more investment concepts, diversification and index investing, while also describing how exchange traded funds (ETFs) help investors mitigate risk.
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Getting Back To Basics
Last Friday concluded one of the worst weeks for the stock market in recent memory. The Nasdaq took the largest hit, losing 3.1% for the week (its biggest single week loss since 2001). The S&P 500 finished down 2.6%, while the Dow Jones Industrial Average slumped 2.3%. Inspired by this sharp turn in the market, panicked investors went on a selling spree, specifically towards the end of the week.
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