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Managing the Market’s Risky Business

Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law.

In last month's blog post, "The Full-Meal Deal of Diversification," we described how effective diversification means more than just holding a large number of accounts or securities. It means having efficient, low-cost exposure to a variety of capital markets around the globe. Today, we'll expand on the benefits of diversification, beginning with its ability to help you better manage investment risks.

Most of us learn about risk even before we have the words to describe it. Our lessons start when we, say, tumble into the coffee table, or reach for that pretty cat's tail. Investment risks, alas, are a little more complex. They come in two broadly different varieties: avoidable, concentrated risks and unavoidable market risks.

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The Full-Meal Deal of Diversification

Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law.

In our last few blogs, we have explored the formidable odds that both amateur and professional investors face in trying to outsmart the market, with its lightning-fast price-setting efficiencies.

Today we turn our attention to the many ways you can harness the power of the markets to work for you. Among your most important tools in this regard is diversification. No other single action can match it in helping you to simultaneously lower investment risks and potentially improve your returns.

While they may seem almost magical, the powers of diversification have been well documented and widely explained by academic research spanning some 60 years.

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Financial Gurus and Other Unicorns

Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law.

In our last blog, "Ignoring the Siren Song of Daily Market Pricing," we examined how price- setting occurs in capital markets, and why investors should avoid reacting to breaking news. Now let's look at why using a professional "pinch hitter" to try to beat the market is also ill-advised. In the words of Morningstar strategist Samuel Lee, managers who have persistently outperformed their benchmarks are "rarer than rare."

As we explained in "Jelly Beans and Investing Wisdom," independently thinking groups (such as capital markets) are better at arriving at accurate answers than even the smartest individuals in the group. Thus, even experts in analyzing business, economic, geopolitical or any other market-related information face the same challenges you do in predicting market behavior. For these experts, beating the collective group intelligence remains a prohibitively tall hurdle, especially when their fees are factored in.

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Ignoring the Siren Song of Daily Market Pricing

In last month's blog, "Jelly Beans and Investing Wisdom," we explained how group intelligence leads to relatively efficient markets. Now let's look at how prices are set moving forward. Understanding this will help us see how to work with the market rather than fighting it.

What causes market prices to change? The answer begins with the never-ending stream of good, bad and ugly news. For example, when there are reports that a fungicide is attacking Florida trees, orange juice futures may soar, as the market anticipates shrinking supply.

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Jelly Beans and Investing Wisdom

Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law.

It's every investor's dream: To outsmart the rest of the investing herd by consistently buying low and selling high. Unfortunately, many an investor has learned that this is easier said than done.

The truth is that the market—that collection of countless investors trading in stocks, bonds, commodities and more—is more skilled as a whole than are its individual participants. And that fact provides a key insight into how to invest successfully.

The collective market is a vast realm where opposing players compete against one another daily to buy low and sell high. In doing so, they help to set fair prices for everything from stocks to real estate.