Monday, December 14, 2009

Now on Twitter

I am now on Twitter. I primarily will be posting links to good business and economic articles.

Tuesday, November 17, 2009

Investment Pyramid: Just Wrong

For many years the personal financial industry has pushed an investment pyramid as a model. This pyramid is very similar to the food pyramid that many investors are familiar except that the sections deal with size of your risk-associated investments rather than healthy eating.

The investment pyramid has primarily served as sales tool for investment firms. One promoter is Edward Jones which wraps the pyramid into a pitch for their products. The common pyramid model has several levels with the most risky at the peak and the least risky at the base. The model is supposed to reflect the size of your investments in these type of assets.

It is becoming more apparent that this standard investment pyramid may be hazardous for your financial health. The pyramid does not take into account investment horizons and objectives very well; nor does it account for significant market draw-downs.

A better model effectively turns the investment pyramid on its right side and uses the bottom axis as time horizon. This places the most risky investments further out in time and least risky up close. However there needs to be more refinement to make this model successful than just tipping the pyramid over. Each slice needs to reflect a time period and a mix of investments; furthermore the size (or height) of the slice is driven by dollar amount of the need in the particular period. This means that the pyramid may possibly no longer get narrower in time depending on an individuals need later time periods may be larger.

Take a look at a typical family living in their first home with a couple of children. Their future needs are focused on buying a larger house in five years, saving for their kids' college education in 12 years, and their retirement in 25 years. Each of these time periods represent a slice, and each should be looked at from a perspective of the worst case draw-down and consequences based on the portfolio.

The down payment for the house in five years is probably a lot smaller than the college education bill. The down payment can not afford a large draw-down without the consequence of wiping out the families ability to move to a larger home. This investment slice may be small in size but needs to be placed in an investment portfolio with minimal risk. While the college investment slice is much larger but can support an allocation with increased risk.

A better name for this new model is Time Slice Investing or the TSI model. Each time slice needs to have a size, objective, separate portfolio, and risk modeling for an investor to be successful in the long term.

Tuesday, September 8, 2009

Even a year later - WaMu failure still in the headlines

Washington Mutual was a bank that desperately deserved to fail. Even a year after its demise, WaMu is still making the headlines. One example is is the CNN Money article below...

WaMu: The Forgotten Bank Failure

The biggest-ever bank collapse didn't lead to chaos, but Americans will pay the price for its unsound lending for years to come.

Washington Mutual is long gone, but its lax lending could haunt us for years.

The Seattle-based institution collapsed in the largest-ever U.S. bank failure last September. WaMu ran out of cash after business customers, unnerved by the implosion of Lehman Brothers, withdrew their uninsured deposits.

After the chaos surrounding Lehman's demise, WaMu was put to rest with little fuss. Regulators seized the nation's sixth-biggest bank on a Thursday night — a departure from the customary Friday — and sold it to JPMorgan Chase for $1.9 billion.

The move wiped out WaMu's 56,000 shareholders of record and left bondholders nursing billions of dollars in losses. But the WaMu deal spared the federal deposit insurance fund and thus was, unlike so many federal actions over the past year, an unalloyed positive for taxpayers. >

Saturday, September 5, 2009

Interesting Commentary from Andrew Lo

The link below goes to a video with Andrew Lo with some interesting commentary about how the current financial crisis altered the underpinnings of investment diversification. Andrew LO is an award winning MIT economist.

Friday, June 19, 2009

A Tale of Two Depressions

Finally, an article complete with charts that compares the economic decline in 1929 to the situation today. After reading the information, it leaves little doubt the the current scenario in terms of industrial output decline and other factors is worse than the 1930s. It only leaves the question if the government policy reponse of massive stimulus and bailouts will actually improve the economic recovery this time around.

A Tale of Two Depressions

Friday, March 20, 2009

Today's must read article

One article showed up in my inbox today which is an excellent read. It has some solid information describing the differences between a Recession and a Depression mixed into the overview. Ray Dalio, founder of Bridgewater Associates and manager of what is now the world's biggest hedge fund, believes we are in the middle of a global depression.... or a 'D-process' as he calls it.

Inside the world's biggest hedge fund

"Most people, says Dalio, think that a depression is simply a really, really bad recession. But in reality, the two are distinct, naturally occurring events. A recession is a contraction in real GDP brought on by a central bank tightening monetary policy, usually to control inflation, and ends when the central bank eases. But a D-process occurs when an economy has an unsustainably high debt burden and monetary policy ceases to be effective, usually because interest rates are close to zero, and the central bank has no way to stimulate the economy. To compensate, the value of debt must be written down (risking deflation) or the central bank must print money (a trigger of inflation), or some combination of both."

Sunday, March 1, 2009

Trillion Dollar Bailout

Come play the game: Trillion Dollar Bailout

"Punish greedy fat cats and save honest peoples! Hand out moneys to homeowners. Put the hurt on dudes in suits! Do it right and save the world!"

Drag the slap symbol to deny a bailout and drag the cash bag to provide assistance to the various characters that pop-up.

Here are some hints - don't give the money to banks & only give to homeowners who are not in foreclosure. Go to the Addicting Games site to play.

Tuesday, February 24, 2009

The Math that Destroyed Wall Street...... and Main Street

Wired magazine recently presented a good article about the underlying math which destroyed Wall Street.

Recipe for Disaster: The Formula That Killed Wall Street

Page 3 actually outlines the basic math of the Copula Function approach which underlies the CDO market.

Friday, January 16, 2009

The Ascent of Money

Earlier this week, PBS ran a special two hour program "The Ascent of Money". The program is an excellent overview of current financial crisis placed in context of other historical events. The show includes some excellent commentary and interview clips.

It can be watched online at: