Guide to Invesment Strategy: How to Understand Markets, Risk, Rewards And Behavior

by Stanyer, Peter

• ISBN13: 9781576602379
• ISBN10: 1576602370
• Edition: 1st
• Format: Hardcover
• Copyright: 2006-09-01
• Publisher: John Wiley & Sons Inc

Summary

With detailed analysis supported by data and anecdotes drawn from investment experiences, this practical guide emphasizes the importance of basing recommendations for investment strategy on the principles of traditional finance.

Table of Contents

Foreword	xix
Introduction	xxi
Part 1 The big picture
1 Setting the scene	3	(8)
Think about risk before it hits you	5	(2)
Know your niche	7	(4)
Box Base currency	10	(1)
2 Understand your behaviour	11	(12)
Insights from behavioural finance	11	(2)
Investor biases	13	(2)
Investor preferences	15	(3)
Loss aversion
Mental accounting and behavioural portfolio theory
Investment strategy and behavioural finance	18	(2)
Parameter uncertainty and behavioural finance	20	(1)
Traditional finance, behavioural finance and evolution	21	(2)
3 Market investment returns: will the markets make me rich?	23	(17)
Sources of investment performance	23	(2)
Safe havens that provide different kinds of shelter	25	(1)
Which government bonds will perform best?	25	(4)
Box Is the break-even inflation rate the market's forecast?	27	(2)
What premium return should bond investors expect?	29	(2)
The equity risk premium	31	(4)
Equity risk: don't bank on time diversifying risk	35	(5)
4 The time horizon and the shape of strategy: start with no frills and few thrills	40	(28)
Short-term investment strategies	40	(7)
The chance of a bad outcome may be much higher than you think
No all-seasons short-term strategy
Box Do bonds provide insurance for short-term investors?	45	(2)
Are you in it for the long term?	47	(2)
Time horizon for private and institutional wealth Long-term investors	49	(15)
Financial planning and the time horizon
"Safe havens", benchmarking, risk-taking and long-term strategies
The danger of keeping things too simple
Good and bad volatility
Box Unexpected inflation: yet again the party pooper	55	(7)
"Keep-it-simple" long-term asset allocation models
Inflation, again
Laddered government bonds: a useful safety-first portfolio
Bond ladders, tax and creditworthiness: the case of US municipal bonds
Box Orange County saga: What is a good-quality municipal bond?	62	(2)
What's the catch in following one of these long-term strategies?
Lifestyle investing: income from employment often helps to diversify investment risk	64	(1)
Long-term strategy: "imperfect information changes everything"	65	(1)
Some "keep-it-simple" concluding messages	66	(2)
5 Implementing "keep-it-simple" strategies	68	(11)
Market timing: an unavoidable risk	68	(2)
Strongly held market views and the safe haven: the 1990's equity boom	70	(4)
Box Bubbles	70	(4)
Should long-term investors hold more equities?	74	(5)
Part 2 Implementing more complicated strategies
6 Setting the scene	79	(12)
A health warning: liquidity risk	79	(2)
Behavioural finance, market efficiency and arbitrage opportunities	81	(2)
Barriers to arbitrage	83	(4)
Fundamental risk and arbitrage
Herd behaviour and arbitrage
Implementation costs, market evolution and arbitrage
Institutional wealth and private wealth: taxation	87	(4)
7 Equities	91	(24)
Concentrated stock positions in private portfolios	91	(2)
Corporate executive remuneration programmes
The restless shape of the equity market	93	(1)
Stockmarket anomalies and the fundamental insight of the Capital Asset Pricing Model	94	(2)
"Small cap" and "large cap"	96	(3)
Don't get carried away by your "style"	99	(3)
Box Value and growth managers	100	(2)
Should cautious investors overweight value stocks?	102	(2)
Equity dividends for cautious investors	104	(1)
Home bias: how much international?	105	(5)
To hedge or not to hedge international equities	110	(3)
International equities and liquidity risk	113	(2)
8 Bonds, debt and credit	115	(21)
Credit quality and the role of credit-rating agencies	116	(4)
Portfolio diversification and credit risk	120	(3)
Box Local currency emerging-market debt	122	(1)
Securitisation and modern ways to invest in bond markets	123	(7)
Mortgage-backed securities
Box The role of mortgage-backed securities in meeting investment objectives	125	(5)
Asset-backed securities and collateralised debt obligations
Who should invest in CDOs?
International bonds and currency hedging	130	(6)
What does it achieve?
What does it cost?
How easy is foreign exchange forecasting?
9 Hedge funds: try to keep it simple	136	(34)
What are hedge funds?	136	(1)
What motivates hedge fund managers?	137	(1)
Are hedge fund fees too high?	138	(2)
The importance of skill in hedge fund returns	140	(2)
Alternative sources of systematic return and risk	142	(2)
Does the hedge fund industry face a capacity constraint?	144	(1)
"Do hedge funds hedge?"	144	(2)
The quality of hedge fund performance data	146	(1)
Types of hedge fund strategy	147	(12)
The size of the hedge fund market
Directional strategies
Global/macro
Equity hedge, equity long/short and equity market neutral
Short-selling or short-biased managers
Long-only equity hedge funds
Emerging-market hedge funds
Fixed-income hedge funds: diversified fixed income
Fixed-income hedge funds: distressed debt
Arbitrage strategies
Fixed-income arbitrage
Merger arbitrage
Convertible arbitrage
Statistical arbitrage
Multi-strategy funds
Commodity trading advisers (Managed futures funds)
Hedge fund risk	159	(5)
A little-regulated environment
Operational risks
Illiquid hedge fund investments and long notice periods
Lies, damn lies, and some hedge fund risk statistics
"Perfect storms" and hedge fund risk
Managing investor risk: the role of hedge funds of funds
How much should you allocate to hedge funds?	164	(2)
Questions to ask	166	(4)
Your hedge fund manager
Your hedge fund adviser
Your hedge fund of funds manager
10 Private equity: information-based returns	170	(12)
What is private equity?	170	(2)
Private equity market risk	172	(3)
Private equity portfolios	175	(1)
Private equity returns	176	(4)
Box Private investments, successful transactions and biases in appraisal valuations	178	(1)
11 Real estate	179	(2)
What is real estate investing?	180	(2)
Box Using derivatives to gain real estate market exposure	181	(1)
What are the attractions of investing in real estate?	182	(3)
Diversification
Income yield
Inflation hedge
Styles of real estate investing and opportunities for active management	185	(1)
What is a property worth and how much return should you expect?	186	(4)
Rental income
Government bond yields as the benchmark for real estate investing
Tenant credit risk
Property obsolescence
Private and public markets for real estate	190	(1)
International diversification of real estate investment	191
Currency risk and international real estate investing
Appendices
1 Glossary	194	(1)
2 Essential management information for investors	210	(1)
3 Trusting your adviser	217	(1)
4 Recommended reading	220	(9)
Notes on sources	229	(2)
Index	231