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September 2009



Do you know how much you're giving away by actively trading?

September 25, 2009 – Comments (24)

Active trading has become extremely popular over the last ten years with individual investors. Much of it I think is that it has only recently become feasible with online, low cost brokerages. Give people the means, and they will participate. I think everyone is aware of all the research out there that shows active trading generally underperforms the overall market, and yet this does not seem to deter them. Certainly we have quite a few here on CAPS who try to catch every top and bottom. While I've always been a believer in long term investing, I've recently been wondering; Just how much are active traders giving away? Is it possible that it is a small enough amount to be easily overcome if you have some talent? To answer this, I performed a crude exercise as follows:  [more]



While You're Making All This Money, Don't Forget About Risk

September 17, 2009 – Comments (4)

I am no great investor, and I will never pretend to be. I like to think I can spot an undervalued company, maybe I can once in a while, but I am no Buffett or Graham. What I do know is risk. I find Fools to generally have quite a high risk tolerance, which is probably not surprising on a do it yourself investment site. I do worry sometimes however that they are not quite aware of just how much risk they are taking on. Leveraged ETFs, short selling, use of margin, lack of diversification, and penny stock trading are a few of the things we see regularly here at the Fool, and I'm not sure people realize quite how much risk they are taking on. We've heard of people going heavily short, never a good idea. Lots of people seem to hold leveraged ETFs hoping to make money, rather than use them as a hedge as they were intended. There's even this ridiculous post popping up every day that promises 50% annual returns, and somehow has generated an astonishing 77 Recs. How? A cursory examination of the portfolio shows very large (as high as 50%) bets in individual, and recently distressed companies, as well as buying on margin. Sure, you might make 50% a year doing that, right up until the year you lose your shirt. Investing is not just about returns. It would be great if we could buy every bottom, and short every top, but alas, such is not possible (despite what some may think). Fortunately, risk appetite is entirely individual so everyone is best off making decisions for themselves, but only with an adequate understanding.  [more]

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