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Using Logic To Examine Risk
Old 09-16-2006, 01:24 PM   #1
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Using Logic To Examine Risk

I think that this article a a pretty good summary regarding the risks in the equity markets. In the end, managed funds seldom outperform passively managed funds in the long run.

One of the prices we pay as a result of our natural risk aversion is an insurance premium. Equities work in much the same way by offering a risk premium to compensate investors for the higher risk they carry compared to lower risk investments such as cash or government bonds.


For example, many people buy into mutual funds believing they are managed actively and that the conscientious and experienced experts who run them will move fast to minimize losses. However, what many people fail to realize is that mutual funds generally are obliged to remain invested almost fully in the market and, as a result, tend to go up and down roughly in line with a market's index.

The problem here is that people make the very understandable mistake of thinking that fund managers lower risk by managing things really well. This is indeed possible, but in reality, it is generally not the case. In fact, according to information released by Standard and Poor's in July of 2006, actively managed mutual funds have, on average, underperformed their relative Standard & Poor's benchmarks for the past five years. (For more insight, read The Lowdown On Index Funds and Wrap It Up: The Vocabulary And Benefits Of Managed Money.)
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