The securities markets provide an evolving consensus of the risk-adjusted value of particular securities.
By understanding how the markets value securities, individual investors can chose more durable investment strategies
Judging the potential usefulness of different investment strategies requires some understanding of what the public securities markets really do. This article discusses how the markets price financial securities from the standpoints of risk and return. This description generally characterizes the behavior of modern securities markets in industrialized countries around the world.
Securities markets provide a continually adjusting balance of trading order supply and demand, wherein price changes enable this evolving balance. Important observations about securities markets from investment science are that:
- The aggregate market return consists of payouts plus capital gains or losses across all investors. The aggregate market return is the total possible return for publicly traded securities.
- Fundamentally, markets look forward. Participants attempt to peer into the murky and fundamentally unknowable spectrum of possible future events.
- Markets price securities on a risk-adjusted basis. Current securities prices are discounted versus their projected future values to reward certain kinds of risk taking. Prices differ from one security to another, because expected economic returns differ and because investors perceive greater or lesser certainty in the realization of those expected returns.
- Current market prices reflect the current consensus or balance of expected risk and expected return. This valuation consensus reflects the balance across all active participants, including those who are paying attention, but chose not to act.
- Current market prices tend to reflect fully all currently known information associated with a particular security. There may be a wide range in the interpretation of the importance of various information, and asset market values reflect the consensus across all investors.
- New information disseminates widely and rapidly. Investors quickly interpret new information for its potential impact upon both value and risk. Prices rapidly reflect new information, as supply and demand shifts quickly and market prices change accordingly.
- When some investors “win,” others must “lose” relative to the aggregate market return. Whether luck or skill determines who wins or loses and how one can tell the difference are pivotal questions in choosing investment strategies.
By understanding these critical investment subjects and being aware of the associated scientific evidence, investors can adopt investment strategies that are potentially more profitable.
Scientific evidence about which strategies are preferable can reduce confusion and reinforce the confidence needed to ride out market volatility. Market asset value fluctuations and conflicting opinions can challenge anyone to formulate and stick with a set of investment principles. Market fluctuations over time and across business cycles, industries, asset classes, geographies, etc. can raise significant doubts. The maelstrom of media and commentator truth, noise, and rubbish increases investor confusion. This very volatility and conflict of opinion requires investors to strive for an objective basis for choosing their investment strategies.
The Skilled Investor can help individual investors to understand some of the important “whys” of investing. Many investors want to jump immediately to investment tactics and may avoid thinking more deeply about the underlying logic or validity of those tactics. Shooting prior to aiming generally leads to poor results. Given the astonishing amount of erroneous investment information and fallacious theories circulating, tactical action without a scientific anchor can be very hard on your wallet. (See: How can individual investors trust, when so much investment information is rubbish?)
These related articles may also be useful to you:
Securities Valuation:
Returns and Risk Premiums:
Tags:
common stock,
economic returns,
expected return,
expected returns,
financial securities,
future values,
Individual Investors,
investment science,
investment securities,
investment strategies,
public securities markets,
risk adjusted,
risk and return,
risk premium,
securities market,
securities prices,
theskilledinvestor.com
Related Personal Financial Planning Posts
- Commodity Futures in Your Investment Portfolio (
Commodity futures in your investment portfolio - Is there really any future for individual investors?
The Skilled Investor's previous article, "Be wary of the new investment asset classes," voiced skepticism about many supposedly new asset classes. This article delves into the financial science behind this skepticism, as it relates to one of these supposedly new asset [...])
- Summary Table of Traditional IRA and Roth IRA Tax Rules (
Summary Table of Traditional IRA and Roth IRA Tax Rules
For your convenience, The Skilled Investor has provided a detailed table that summarizes 2007 rules for traditional IRAs and Roth IRAs.
Because this table has 13 columns and 20 rows, it is too large to be displayed properly in a blog posting. To view this table and [...])
- How unstable have stock market returns been over time? (
Common stock equity market returns have varied widely in the past. The common stock equity risk premium has averaged about 4.1% from 1872 to 2000.
The equity risk premium is the equity market return less the risk free rate of return. The risk free rate of return includes both the inflation rate and the risk free [...])
- Automated Tool Aligns Your Investment Risk Tolerance and Asset Allocation (
Check out this automated tool for aligning your investment risk tolerance and asset allocation - A Tip from The Skilled Investor
Your tolerance for investment risk is a relative thing. Few people like investment risk, but some can handle it better than others can. The more investment risk you are willing to tolerate, the higher your [...])
- 2006 and 2007 Personal Income Tax Rates for the 50 States and DC (
2006 and 2007 personal income tax rates for the 50 states and D.C.
The Skilled Investor has made available for downloading a spreadsheet that contains graduated personal income tax rates and other personal income tax rate information for the 50 states and the District of Columbia.
If you want to know about specific U.S. state personal graduated [...])
- Part 4 of the Biggest Personal Finance Story of the Past 30 Years ( < <-- Go to Part 3
The Biggest Personal Finance Story of the Past 30 Years - Part 4
What does it mean to individual investors that the financial services industry is now about 21% of S&P 500 market capitalization?
(For a graph of the relative percentage shares of various sectors within the S&P500 index over [...])
- October 4 2007 Edition of the Carnival of Financial Planning (
Carnival of Financial Planning - October 4, 2007 Edition
Welcome to the October 4, 2007 edition of the Carnival of Financial Planning.
The Carnival of Financial Planning takes a long-term view of personal financial planning for individuals and families. We focus on efficient and sustainable personal financial planning practices that can lead to lifetime financial security. This [...])
- Vanguard Total Stock Market Index Fund (VTSMX) achieves a +9 Fund Authority Score (
The diversified investment fund strategy of the Vanguard Total Stock Market Index Fund
According to the Vanguard website, the investment strategy of the Vanguard Total Stock Market Index mutual fund is to use a "passive management—or indexing—investment approach designed to track the performance of the MSCI® US Broad Market Index, which represents 99.5% or more of [...])
.
.
.
If you like
this article, please consider subscribing to our full text RSS feed.
You can also subscribe via email, and new posts
will be sent directly to your inbox.
.
READERS FAVORITES: Our Top 30 Articles for You to Read
The Top 25 Best Low Cost US Money Market FundsDefault under the Citibank Credit Card Contract10 Lower Cost S and P 500 Index Mutual FundsThe Optimal Investment Strategy for Individual InvestorsTraditional IRA and 401k Versus Roth IRA and Roth 401k ContributionsAmerican Funds - The Investment Company of America - Class A Shares (AIVSX) net a +3 Fund Authority ScoreMost Individual Investors Are Poor Personal Portfolio ManagersPersonal Financial Planning and Personal Investment ArticlesPublish your blog news articles on traditional media center and newspaper websitesHow unstable have stock market returns been over time?American Funds - Washington Mutual Investors Fund - Class A Shares (AWSHX) acquire a +2 Fund Authority ScoreFactors Favoring Roth IRA and Roth 401k Plan ContributionsThe Financial Services Industry is Still the Largest S&P 500 Sector - Even after the Collapse of its Stock ValuesRational Mutual Fund and ETF SelectionSummary Table of Traditional IRA and Roth IRA Tax RulesFactors Favoring Roth IRA and Roth 401k Plan Contributions - Part 2American Funds - Income Fund of America - Class A Shares (AMECX) rate a +2 Fund Authority ScoreObjective Personal Finance Answers Are Hard to FindScreening Index Mutual Funds with IndexUniverse.comAvoid High Turnover Mutual Funds and Active ETF TradingAnalyze Multiple Personal Financial Planning Decisions Simultaneously with VeriPlanWhere's Waldo? - The illusion of superior professional mutual fund manager performance.Always Completely Diversify Your Investment PortfolioFee-Only Compensation Aligns the Interests of Clients and their Financial AdvisorsDevelop Your Own Personal Financial Planning Skills - Step 1 of 10 Financial Planning Steps in the Right DirectionFinancial Industry Product Development and Your Best InterestsOwn Investment Mutual Funds and ETFs - Not Individual SecuritiesMutual Fund and ETF Screening RequirementsWhat is a Well-Diversified Investment Portfolio?Rational Mutual Fund and ETF Screening Rules
.
Article comments
NOTICE: YOU MUST AGREE TO THE TERMS OF USE TO USE THIS WEBSITE.
These links will take you to our Terms of Use, our Privacy Policy
and our Copyright Policy.
This site is solely for informational and educational
purposes related to your personal, private, and non-commercial use.
- In no way does this site constitute or provide
investment advice under the laws and regulations of the United States of America and its various States or of any other country in the world.
- This site does not collect any specific information on the investment situation of any reader.
- This site does not render any advice on the basis of any readers' specific investment situation in accordance with the Investment Advisers Act of 1940, as amended.
- In no way does this site constitute a solicitation or offer to sell securities of any kind.
Copyright 2006-2010 - Lawrence Russell and Company, All rights reserved worldwide.
This site is financial publication of general and regular circulation. Except for reading and browsing via the World Wide Web, no part of this document or website
may be reproduced, modified, disseminated, published, adapted in any manner or transferred without permission in writing from Lawrence Russell and Company.
THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, FOR THIS WEBSITE, INCLUDING NO WARRANTY FOR MERCHANTABILITY AND NO WARRANTY FOR FITNESS FOR ANY PARTICULAR PURPOSE.
Unless otherwise stated, there are no business arrangements of any kind between The Skilled Investor and any mutual fund, ETF, or other investment security or any company that may be featured in our articles. We do not accept any payments to influence what we write about or what we say. The Skilled Investor does allow advertisers to post their messages on our site, and it is entirely your choice whether or not to patronize any of these advertisers.
"The Skilled Investor", "Skilled
Investor", "Fund Authority," "Fund Authority Score," "VeriPlan", "Personal Finance Software for Your Lifetime", "Your Personal Financial Lifecycle Planner",
and "Sensible and Scientific Financial and Investment Planning" are some of the trademarks of Lawrence Russell and Company. Other trademarks and service marks are the properties of their respective owners.
Pingbacks & Trackbacks