Our #1 ETF of 2021!Jul 29, 2021
Overview: Today we will be covering a new type of investment vehicle that we’ve never covered before. This type of investment factors in all of the conditions of the market and responds in real time to the overall sentiment. This type of investment is unlike anything we’ve ever covered before and we’re extremely excited to break down one of the coolest strategies we’ve ever come across.
Pre-Read Context: While everyone is always asking us, “Moby, what investments have the highest upside and what should I invest in?” - we always respond with two answers. They are 1) what type of upside are you seeking and 2) How much risk are you willing to tolerate as part of achieving that upside? While many of you reading this realize that more risk = more potential reward, you need to realize that the inverse often happens as well.
Let’s take an example of a speculative investment like crypto. Over the years bitcoin has seen a tidal wave of pricing. Rewind to late 2017 and the price was hitting close to $18,000 and investors were thrilled. Fast forward to mid-2020 and the prices were slumping under $10,000 per coin. As 2020 progressed into mid-2021 (the time this analysis was written), we’ve seen the price climb to over $60,000 a coin to now around $35,000 a coin. A quick example like this shows the reward some people have claimed while taking on significant risk.
Some people can stomach this volatility while others cannot. And one of the key criteria of choosing a certain investment like this is measured in relation to your expected returns and overall risk for those returns. In other words investors should be trying to maximize those returns measured in every incremental level of risk that you take for each return. If an investment is expected to have a return of 20% but a risk of 10 (often measured in standard deviations) while another is offering 18% returns with a risk of 2, rational investors should be choosing the latter as the 2% incremental return is clearly not worth the added risk. Quantifying this into a number is known as the Sharpe Ratio! This is the gold standard for many fund managers and portfolio managers across the globe and is often calculated at the portfolio level rather than the individual level.