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Building A Crash Proof Investment Portfolio

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Markets are reaching and maintaining new heights despite decreased involvement and trading volume.

Because of this, investors are understandably apprehensive about what the rest of 2016 – and the foreseeable future – has in store.

This comes as no surprise, considering the plethora of economic and political challenges facing the United States and many other parts of the world.

Investing in such times is a dangerous gamble.

Equally, it is just as frustrating for investors to cash out their investments while there is still potential for the market to soar a few hundred points.

Investors must remain level-headed in such a fluctuating market and arm themselves with the knowledge they need to stay invested while also taking the lowest amount of risk.

In this article, we’ll examine some of the ways investors can maximize returns in a weak market, mainly using the Strategic Volatility Strategy.

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Risk and Volatility

One method of assessing risk when it comes to investing is by using the standard deviation of returns.

The only problem with this approach is that the exact rate of volatility can never be determined for certain; it’s only an estimate.

The sample standard deviation is the best way to estimate asset volatility.

There is, however, an issue with using standard deviation to determine risk.

When it comes to standard deviation, both the upside risk and the downside risk are treated equally.

By investing, you risk watching your investment double, but you also risk seeing it cut in half.

Essentially, standard deviation treats these risks the same, even though investors consider downside risk far more costly.

To combat this, try using semi-deviation.

It is essentially the same process, apart from the fact that semi-deviation only deals with negative returns.

Semi-deviation is what forms the basis for the Sortino Ratio.

Unlike the Sharpe Ratio, the Sortino Ratio utilizes semi-deviation to calculate risk.

If you want to minimize downside risk, apply the Sortino Ratio to your investment portfolio.

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Correlation Risk 

Correlation risk is the likelihood of loss due to a discrepancy between the expected and actual correlation between assets.

Correlation risks are often built-in, and they aren’t usually a problem unless they are unintentional.

 Here are some tips on how to handle problematic correlation risk:

 Identify any unwanted associations in your portfolio.

  • Adjust your holding to help eliminate the risk.
  • Quantify dependencies by using linear regression analysis and the Strategic Volatility Strategy. (See table below.)

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Ideally, this strategy will create consistent, positive returns independent of market changes.

Tail Risk

Tail risk can be measured by using skewness or kurtosis.

Consider the distributions below:

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Traditionally, the left skew would be associated with negative returns.

The right distribution, however, is also “heavy-tailed” – but in this instance, the tail risk deals with positive returns, making it risk investors are willing to take.

Kurtosis is a more efficient means of measuring tail risk.

The following distribution for the Strategic Volatility Strategy has a positive skew and is, therefore, likely to result in positive returns.

better-investment-portfolio-4

Tail risk can also be assessed by observing how the strategy performs during consistently fluctuating or extreme market conditions.

Positive Convexity

Positive convexity is merely financial jargon for what we’ve been discussing all along – maximizing positive returns in spite of changing market conditions.

Of course, this process is not as clear-cut as it may seem.

Reconstructing a portfolio that successfully safeguards against undesirable types of risk is time-consuming.

Striving for positive convexity is futile unless the investor includes leveraged ETFs.

In any case, let’s examine how it works when it comes to the Strategic Volatility Strategy:

better-investment-portfolio-5

The Sortino Ratio is incredibly efficient at higher than seven on average.

Meanwhile, the downside risk remains low at 1.36%.

Critical investors might posit that a 10% CAGR is quite small.

However, this particular investment carries a similar amount of risk as a government bond.

Even so, it yields several times more than a standard bond at the current interest rate.

Also, these results utilize a 2:1 Reg-T leverage.

There is a possibility of doubling the CAGR by boosting the leverage to 4:1.

Investors’ risk thresholds vary; they decide for themselves how much risk they are willing to apply to a certain portfolio.

Strategy leverage can be determined based on that threshold.

Conclusion

The current market is dismal and challenging for investors, but there are a few solutions.

Investors should construct successful portfolios that focus on:

  • achieving high Sortino Ratios
  • making little correlation risk
  • striving for positive skew and convexity

With careful planning and experimentation, investors can build a portfolio that maximizes returns and minimizes risk.

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Economy

The Next Generation of Sin Stocks to Ride Out a Bear Market

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The Next Generation of Sin Stocks to Ride Out a Bear Market

While the recent stock market rally has technically pushed the Dow Jones Industrial Average out of a bear market, many investors aren’t convinced it will last.

They expect that once the euphoria surrounding the $2 trillion stimulus plan wears off, the market will resume its slide downward as the economic impact of the coronavirus takes hold in the next few quarters.

Sin stocks, so named because they are things that we should go without but can’t seem to part ways with, are historically a great investment during downturns.

The added stress and uncertainty means an uptick in business for the companies producing these sinful indulgences.

Things like alcohol, cigarettes, weapons and gambling all fall under the umbrella of sin stocks, so companies like Altria (NYSE:MO), Diageo (NYSE:DEO), Sturm Ruger (NYSE:RGR) and MGM Resorts (NYSE:MGM) are all widely considered to be sin stocks.

And while they can make great investments during times of uncertainty, there’s a new breed of sin stocks that could generate even larger returns over the coming months as Americans turn to their (new) favorite vices.

Here’s a short list of “next gen” sin stocks that we expect to do very well.

Marijuana stocks

While this is by no means a “new” vice, it is only in the last few years that it’s been possible to directly invest in companies that produce and sell marijuana. That wasn’t possible during the 2008 financial crisis, so it will be interesting to see how the major players do during their first economic downturn.

Just like smoking, we expect demand to hold up very well, if not increase, during times of turmoil.

Consider the larger companies like Canopy Growth (NYSE:CGC), GW Pharmaceuticals (Nasdaq:GWPH) and Cronos Group (Nasdaq:CRON).

Video Games

Being a “gamer” is a lifestyle now, with livestreaming on YouTube and Twitch and professional Esports leagues formed around the most popular titles like Call of Duty and Overwatch.

Video games are big money now, and the larger production studios will continue to generate massive revenues as the culture grows in the years ahead.

Look at the big studios with strong franchises like Activision Blizzard (Nasdaq:ATVI) which has the Call of Duty and Overwatch franchises and Electronic Arts (Nasdaq:EA) which has the Madden, Battlefield and FIFA franchises.

Social Media Platforms

If you have a child or grandchild under the age of 30, you are probably very aware of the effort it takes to get their attention away from their phones and all the social media apps or platforms that they are using.

Tik-Tok, Twitter, Facebook, and Instagram are all designed to keep users engaged and spending as much time as possible on their platforms. The publicly traded ones are Twitter (NYSE:TWTR) and Facebook, which also owns Instagram (Nasdaq:FB)

While there are no guarantees when it comes to investing, as the coronavirus causes more people to spend time at home, they’ll be spending more time using the products and services of these next generation sin stocks, and that should translate to more revenues and higher profits for the companies.

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Investing

Bitcoin Collapse Should End Discussion About it Being ‘Digital Gold’

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Bitcoin Collapse Should End Discussion About it Being ‘Digital Gold’

For as long as Bitcoin and other crypto currencies have been in existence, a constant drum beat from its evangelists was the belief that it was “digital gold.”

The claim of course was an effort to throw a halo around cryptocurrencies as a “safe haven” and a “store of value” during times of crisis or economic uncertainty.

Per the Coinbase blog (emphasis theirs):

“Gold, and bitcoin, are safe havens from fiat currency devaluation, which historically tends to be incited by surging government debt. Armed with a myriad of technological advantages, accelerating development, and maturing global market, Bitcoin is a store of value to rival gold in the digital age.”

Not only that, but the same article says that Bitcoin is in fact better than gold (emphasis mine):

“Bitcoin development is accelerating and has already proven a myriad of advantages over precious metal…”

Those advantages are essentially listed as portability, scarcity, divisibility, privacy, low transfer fees and “auditability.” 

Yesterday’s market rout, with the Dow Jones Industrial Average collapsing 2,352 points to have its worst trading day since “Black Monday” in 1987, should have been the day where Bitcoin could finally live up to its promise.

All it had to do was not drop as much as the broad market and perform similar to gold, Bitcoin would have a landmark day.

Instead, it got decimated, plunging 12% to close at $5,700. 

In the past five days alone it has lost more than one-third of its value.

Gold, in case you are wondering, has lost a mere 6% in the last 5 days, and during yesterday’s market rout it only lost 0.74%.

One of those two “rivals” proved to be a safe haven and a store of value during these scary times.

The other proved to be nothing more than a speculative investment, providing absolutely no store of value.

Yesterday alone, the cryptocurrency market lost $62 billion in market cap, according to CoinMarketCap. 

In the past month, roughly 50% of the value of the entire cryptocurrency market has been erased.

Store of value?

Safe haven like gold?

Not even close if you ask Andrew Button at Motley Fool.

“While Bitcoin fans were caught off guard by BTC’s dramatic slide, the truth is that it wasn’t surprising at all. Put simply, apart from the scarcity, Bitcoin has nothing in common with gold. Gold is a physical asset you could trade if global financial institutions shut down; Bitcoin can’t be used without access to a computer. Gold is as old as human civilization; Bitcoin is younger than social media. Gold is used in manufacturing and jewelry; Bitcoin hasn’t seen any practical use case outside of black markets. The two assets simply have nothing in common whatsoever.”

While the siren song of “digital gold” is alluring, it’s time we stop pretending that Bitcoin has what it takes to become a real asset class. In times of uncertainty, it failed to perform as promised.

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drugs

7 Blockbuster Drugs Expected To Be Launched In 2020

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Pills falling out of bottle. (Image via Shutterstock)
By Shanthi Rexaline

Biotech stocks had a fairly decent run in 2019, thanks to record deal flow, several path-breaking innovation in drug research & development and the positive broader market sentiment. New molecular entity approvals totaled 48 in 2019, less than the 59 NME approvals in 2018.

The new year is expected to be risk fraught, as lawmakers are expected to step up their rhetoric on drug pricing. Even as the outlook for drug companies remains not-so-promising, some key drug approvals could still impart some momentum to the sector.

The FDA could expedite the review of some drugs, Evaluate Pharma said, citing some approvals in 2019 that came about well ahead of the scheduled PDUFA date such as Vertex Pharmaceuticals Incorporated’s (NASDAQ: VRTX) Trikafta. Trikafta, a treatment option for cystic fibrosis, was approved five months ahead of the PDUFA date.

The following are the drugs with blockbuster potential that could make their way from lab to the shelves, according to Evaluate Pharma.

Trastuzumab deruxtecan

  • Sponsor: Daiichi Sankyo Company, Limited (OTC: DSNKY) & AstraZeneca plc (NYSE: AZN)
  • Indication: Her2 positive breast cancer
  • Status: BLA accepted with priority review status in October and the PDUFA date has been fixed for second quarter of 2020

Palforzia

  • Sponsor: Aimmune Therapeutics Inc (NASDAQ: AIMT)
  • Indication: Peanut allergy
  • Status: PDUFA date of January; A FDA panel, which met in September, voted 7 to 2 that the efficacy data and 8 to 1 that the safety data in conjunction with additional safeguards are adequate to support the use of Palforzia

Ozanimod

  • Sponsor: Bristol-Myers Squibb Co (NYSE: BMY) (came into the company’s stable through its Celgene buy)
  • Indication: relapsing form of multiple sclerosis
  • Status: The FDA accepted for review the BLA in June and has set a PDUFA date of March 25

Inclisiran

  • Sponsor: Novartis AG (NYSE: NVS)(came into the company’s stable through its Medicines Company buy)
  • Indication: LDL-cholesterol lowering therapy
  • Status: NDA submitted in December for use in secondary prevention patients with atherosclerotic cardiovascular disease and familial hypercholesterolemia

Roxadustat

  • Sponsor: AstraZeneca/FibroGen Inc (NASDAQ: FGEN)
  • Indication: treating anemia associated with chronic kidney disease
  • Status: FibroGen, AstraZeneca’s partner in developing roxadustat, said it has submitted the NDA to the FDA in late December

Sacituzumab Govitecan

  • Sponsor: Immunomedics, Inc. (NASDAQ: IMMU)
  • Indication: treating metastatic triple-negative breast cancer
  • Status: After an initial snub, the company resubmitted the BLA and the FDA accepted the application for review Dec. 26, 2019, fixing a PDUFA action date of June 2

Filgotinib

  • Sponsor: Gilead Sciences, Inc. (NASDAQ: GILD) and GALAPAGOS NV/S ADR (NASDAQ: GLPG)
  • Indication: rheumatoid arthritis
  • Status: The NDA was submitted Dec. 16, 2019, with the review period expected to be expedited due to a priority review voucher submitted along with the application

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