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One of the main drivers of real estate prices is the availability and structure of credit. Mortgage loans are the credit used to finance residential real estate purchases. Government policies, economic conditions, and banking regulations significantly influence the availability and cost of mortgages. While owning a home outright is appealing, most homebuyers rely on mortgages…
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The “Time Value of Money” is a foundational principle in finance and economics. It states that money available today is worth more than the same amount in the future due to its potential earning capacity. But why? What does this mean? Why does money have time value? In the prior essay, “What is Money?”, I…
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We all have heard “Time is Money” or the financial professional phrase “Time Value of Money.” “Time is Money” suggests that time is a valuable resource, just like money, and should be used wisely. The proverb is often attributed to Benjamin Franklin, who used it in his essay “Advice to a Young Tradesman” in 1748.…
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“You all can’t beat the average because you are the average.” The financial market is a vast arena where participants buy and sell securities based on their beliefs and financial needs. While some investors prefer active management, which deviates from market weights, others opt for passive management, which mirrors the market weights. The concept of…
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The short answer is no. One of the prime active manager’s pitches against passive investing is that they outperform in bear markets. The argument is that active managers can foresee downturns and position their portfolios accordingly, adding value through better selection into more defensive securities, compared to an index fund manager who must track the…
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In this section and the following, we will explore how the growth in passive management will make the equity markets more efficient and decrease the variance of security pricing. However, we need to elaborate on a few key insights. First, what does it mean for markets to be efficient? Per Investopedia, “Market efficiency is the…
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ETF expense ratios are usually significantly lower than similar mutual fund competitors. That’s not surprising, given ETF providers do not have to perform in-house accounting, budget for marketing costs, and pay enormous fees for asset managers. However, not all ETFs cost the same for issuers to manage because of differences in methodology, liquidity, and composition.…
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Thanks to a Dutch merchant, the open-end mutual fund structure has been around since the 18th century. Mutual funds were introduced to the United States in the 1890s and gained popularity in the 1920s. The modern mutual fund has forgone additional changes to satisfy regulations. Currently, most retail assets are managed in open-end mutual funds.…
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The common perception is that if one invests in ETFs or indices like the S&P 500, one is being “passive.” The media has additionally confused the definition by considering any rule-based or systematic strategy as passive investing. This poor understanding has led many investors astray, creating passive portfolios with poor diversification. Furthermore, it has introduced…
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Participants in financial markets are engaging in a zero-sum game. Someone must underperform for any investor to generate excess returns over the market. Alpha works the same way; for every manager that has produced positive alpha, there must be someone that produced negative alpha. Yet, we know superstar managers who have made their clients rich.…