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Crowdfunder Wants to Bring Alternative Investing to the Masses

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Milind Mehere keeps plenty of copies of Hillbilly Elegy, J.D. Vance’s best-selling memoir about poverty in the Rust Belt, on hand for visitors to his Midtown Manhattan office. Mehere talks about how ordinary people are shut out of opportunities to build wealth. “If we don’t change fundamentally how we save, invest, and actually make money as a society, there will be anarchy in 20 or 30 years,” he says.

The implicit pitch? That YieldStreet Inc., his online investment company, can…

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For young investors, a 100-per-cent allocation to stocks can yield high returns – The Globe and Mail

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Question from Fahd Pasha from our Globe Money Facebook group: As a 27-year old, with enough cash in the bank for emergency funds, is it acceptable to put 90 per cent my investments in products that are 100-per-cent equity-based? Keep in mind I have a huge tolerance to risk, and don’t plan on pulling funds until I am well into retirement years. Thoughts?

Benjamin Felix is an associate portfolio manager with PWL Capital in Ottawa.

Answer from Ben: The optimal mix between stocks and bonds is not something that can be determined without the benefit of hindsight. There are lots of rules of thumb out there, such as investing in the percentage in stocks equal to 100 minus your age, but they are probably not prudent rules to live by. Each individual has unique circumstances, knowledge, and perceptions that are not captured in a general rule. Some of the most sensible literature on asset allocation has been written by Larry Swedroe, who approaches asset allocation based on the ability, need, and willingness to take risk.

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Before we jump into these three elements of risk, we have to define what exactly risk is. How we measure risk varies according to individual circumstances, but the ultimate definition is the probability of failing to achieve your goals.

I think that the most common definition of risk in people’s heads when they think about investing is the risk of losing all of their money. Losing all of your money is a material risk if you are investing in individual stocks. One company, or even 10 companies, could go bust. If you only owned those 10 companies you would lose all of your money. That is called company-specific risk. It is relatively easy avoid most of this risk by diversifying through low-cost index funds.

In a diversified portfolio of low-cost index funds, the main risk is the risk of the overall market. The market will certainly go up and down over time, which is called market volatility, but it is unlikely that the whole market will go to zero. If the whole market does go to zero, and stays there, capitalism, by definition, has failed, and the value of your portfolio is irrelevant.

Someone who is relying on their portfolio for income may well define risk as volatility, which is the traditional definition of risk used to talk about financial markets. If you are 65, retired, and fully reliant on your portfolio for income, then volatility has the potential to cause you to run out of money earlier than you would hope to. This is simply because you need to sell pieces of your portfolio over time to fund your lifestyle. In a market crash, you are forced to sell your assets when they have fallen in price. A riskier portfolio consisting of more stocks will fall more in a crash, exacerbating the problem.

However, a younger investor with stable income should not just completely ignore volatility, they should get excited about it, as it is an opportunity to buy cheap stocks. Volatility is probably not a sensible definition of risk for this younger investor. A more accurate definition might be the risk of having expected returns too low to meet their goals. For example, the lower your expected returns are, the more of your income you need to save, or the longer you need to work, to fund your lifestyle in retirement.

Whether we define risk as company-specific, volatility, or the risk of a shortfall in expected returns, there is another definition that might be more important. At any stage of life there is a substantial emotional risk to investing in risky assets. This risk may materialize as stress. In a worst-case scenario it could materialize as fear that leads to selling at the bottom of a market crash, and not getting back in for the recovery. This is an important consideration for any investor. An argument could be made that the younger investor with stable income should have more emotional capacity for drops in the market. However, this will not hold true for everyone, and may not be a realistic expectation.

Back to Swedroe’s elements of risk: The ability to take risk depends on both your investment time horizon (how long before you need the money) and your human capital (how stable is your ability to generate income?) If you have many years of work ahead of you, and you are confident that you will be able to maintain sufficient income from employment through a market crash, then you have the ability to take on lots of volatility in your portfolio.

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The need to take risk speaks to your current financial position. If you have recently sold your start-up for $10 million, or know that you will receive a large inheritance, you may not need much risk in your portfolio to meet your goals. On the other hand, if you are starting from scratch and saving 20 per cent of your income, you need risk in your portfolio if you want to retire at a reasonable age with a reasonable amount of income.

Finally, even if you have the ability to take risk, the biggest constraint is often your willingness. Keeping in mind that volatility is not a real risk to a long-term investor, you still need to be comfortable with significant drops. To get a feel for this we can look at a set of portfolios consisting of the CRSP 1-10 index (U.S. total stock market) and 1-month U.S. Treasury bills to see the total drop over the worst 12 months going back to 1926.

Portfolio Mix (Stocks/Bonds) Lowest 1-Year Return: July 1931 to June 1932 (%)
40/60 -32.01
50/50 -38.83
60/40 -45.11
70/30 -50.88
80/20 -56.17
90/10 -61
100/0 -65.42

Source: CRSP, Dimensional Returns Web

These are extreme outcomes, but the point stands that to be a 100-per-cent equity investor you need to have the stomach to handle substantial drops. At the same time, there has been a meaningful long-term benefit for allocating more to riskier stocks. We can observe this benefit again using the CRSP 1-10 and Treasury bills, keeping in mind that the U.S. stock market has historically outperformed every other market. It goes without saying that history will not necessarily repeat itself. In any case, we can draw some insight from the relationship between risk and long-term wealth. I have looked at the trailing 30-year period ending Sept. 20, 2018.

Portfolio Mix (Stocks/Bonds) Growth of $100,000 from Oct.1988 to Sept. 2018
40/60 $618,000
50/50 $771,000
60/40 $956,000
70/30 $1,176,000
80/20 $1,439,000
90/10 $1,749,000
100/0 $2,112,000

Source: CRSP, Dimensional Returns Web

The results are meaningful. After 30 years of accumulation, if we assume a 30-year retirement period with a 3.5 per cent withdrawal rate, the 100-per-cent equity accumulator would have a sustainable income from their portfolio of nearly $74,000, while the more conservative 60/40 accumulator would have about $33,000 to spend.

For young investors with a stable income and an ability to either ignore the market or stomach large drops, I see no problem with a 100-per-cent allocation to stocks; that is where your expected returns are highest.

To answer you question, Fahd, if you are comfortable with the potential for large drops, I see no reasons that you would not allocate 90 per cent or more of your long-term assets to stocks.

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Are you a millennial with a question for our adviser? Send it to us.

You can also join the Gen Y Money Facebook group.

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DIY investing is not everybody’s cup of tea: View – Economic Times

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By Pattabiraman M.

Personal finance is more ‘personal’ than ‘finance’. An average person should be able to understand his or her financial requirements and seek suitable money management solutions. Unfortunately, few individuals can pull this off. So, it is important that one asks: “Do I need a financial adviser, or can I do without one?” In fact, the sooner you ask that question, the better it is.

Just because almost anybody can invest on their own—technology has made investing easy— does not mean that everybody should. The basic requirements to qualify for Do-It-Yourself (DIY) investing are:

  • Ability to list all present, near-term and long-term money requirements of one’s family— holidays, car purchase, college fees, retirement, etc. This may seem simple, but several people are in such a hurry to invest that they often do not make it goal-based.
  • Ability to understand the differences between each requirement, and plan accordingly for each of them.
  • Search and process information with a clear focus.
  • Have the courage to take decisions, and the conviction to stick to the chosen plan.
  • Ability to plan for the worst—death, hospitalisation, unexpected emergencies, etc.

DIY investors need not be financial experts, but they should expertly understand their unique situations. They should also keep their emotions in check. DIY investors can easily learn the technical aspects of investing as long as they know what to look for. The problem is that they may also overlook important aspects of investing, as they may not be aware of them.

Also Read:
Who needs money advice most: Rich, poor, young?

I recently asked members of a popular social media personal finance community about the problems that DIY investors face. The key problems were: difficulty in controlling emotions, trouble in handling available information, and decision making—choosing products and reviewing them without bias and second-guessing decisions.

It is perfectly fine to doubt decisions, but not to the extent of sabotaging a thought-out plan. This is where financial advisers can help–providing dispassionate suggestions. I am not suggesting that everyone requires a financial adviser.

People with a plan and determination to see it through do not need one. Those in their twenties and early thirties do not need one as long as they refrain from buying every financial product they see, do not burden their portfolio with illiquid assets like real estate, or take on debt.

Today, there are plenty of free tools available online to plan for financial goals. Young earners can use these to invest in minimalist portfolios—EPF plus one equity index fund or a stock portfolio—and then gradually learn the basic risk management techniques such as rebalancing and changing equity allocation with age.

A financial adviser is unnecessary for such people to handhold them through all stages of investing. But even experienced DIY investors sometimes feel the need for a financial adviser to review their plan to see if they are on the right course.

Also Read:
5 reasons why money remains idle in bank account

However, if you look at an average 40-plus individual today, there is too little equity, too much real estate, not much of the cash inflow is allocated for investments and they often start too late for their children’s education and their retirement planning. Their financial life is a mess. A financial adviser is necessary for such people to tidy up the mess and discuss ground realities–can they afford to pay for their children’s education? Can they retire in time? Do they need to sell their third property?

Even if you take the help of a financial adviser, you need some DIY skills, especially decision-making skills, to pick the right adviser. While we now have Sebi-registered investment advisers (RIA), you will have to make sure they do not get commissions from any product-seller directly or indirectly. Also, they shouldn’t be charging a percentage of a person’s assets as fee.

By seeking RIAs who charge a flat fee for services, you eliminate a potential conflict of interest between an adviser’s income and the advice he offers. The next step involves understanding the services the advisers offer by going through their personal websites, through correspondence over email or phone. Once you have ascertained the utility of the adviser, you can take their services to plan your finances.

Ask yourself: do I have the basic requirements to be a DIY investor? Will I benefit from third-party advice? If the answer is yes, do your research and find an adviser. If the answer is no, then happy DIY investing.

(The author is associate professor, IIT Madras)

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Global coalition of scientists investing up to $8.4-million on vaccine technology for epidemics – The Globe and Mail

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A global coalition set up to fight disease epidemics is investing up to $8.4-million to develop a synthetic vaccine system that could be tailor-made to fight multiple pathogens such as flu, Ebola, Marburg and Rabies.

The deal, between the Coalition for Epidemic Preparedness Innovations (CEPI) and a team of scientists at Britain’s Imperial College London is aimed at progressing a “vaccine platform” which uses synthetic self-amplifying RNA (saRNA).

A vaccine platform is a system that uses the same basic components as a backbone or framework, and can be adapted to immunize against different diseases by inserting new genetic sequences from, for example, the flu or Marburg or rabies virus.

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“It could be very transformative. It would change the way people view how to make vaccines,” said Robin Shattock, a specialist in Mucosal Infection and Immunity who leads the Imperial team developing the system, known as RapidVac.

He said there are several years of research and testing ahead, but hopes the technology could one day lead to rapid production of “single shot” vaccines against an emerging epidemic, or of “cocktail” vaccines against several different infectious diseases.

The thinking behind the saRNA approach is to harness the body’s own cell machinery to make an antigen – in other words a foreign substance that induces an immune response – rather than injecting the antigen itself directly into the body.

“The other advantage is that it’s very rapid to manufacture because it’s a synthetic process,” Shattock said in a telephone interview.

Infectious disease epidemics such as Ebola outbreaks in Africa or Zika spreading from Brazil, are sporadic, unpredictable and fast-moving. Yet developing vaccines to combat them can currently take up to 10 years or more.

CEPI, which was set up at the start of 2017, aims to dramatically speed up the development of vaccines against new and unknown diseases – collectively known as Disease X

“We cannot predict where or when Disease X will strike, but by developing these kinds of innovative vaccine technologies we can be ready for it,” said Richard Hatchett, CEPI’s chief executive and a specialist in medical countermeasures.

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Under this agreement deal, Shattock’s team will work with German firm BioNTech RNA Pharmaceuticals and use the RapidVac platform to produce vaccines against a flu virus, the Rabies virus, and Marburg virus.

They aim to start safety trials in animal models in the lab early in 2019 and move to early stage clinical trials in humans within two years.

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