Investment Business Helicopter View

 

At the most basic level, investing/trading is about buying and selling assets for long-term/short-term gains [1,3]. It is all about buying X value of assets worth of intrinsic (fair market) value Y such that Y/X<<1. When you buy high-value companies for half of their value, you can experience quite generous returns. While investments can be profitable, they are also associated with risks. Risk is central to investing because without the more risk you run, the greater your chances will be of losing your investment. On the other hand, a good rule of thumb is that greater returns come with greater volatility.  Therefore, it is important to use stock market risk management strategies that minimize the risk and maximize the gain [1-3]. This guide will support and advise you in order to enable quantitative and bias-free comparison of the risk profiles of various banks and investment companies. As an individual investor without prior knowledge of stocks and finance,  you will be able to verify their in-house risk meters/calculators [4,5] while choosing your own risk profile and product portfolio in accordance with best industry practices (2% rule risk threshold, 80-20 Pareto Principle, rule of 72/114/144, Min 10% Investment, 100-Age, 4% Withdrawal, etc.) [1].

The most common evaluation of an individual's willingness and ability to take risks is highly dependent upon his/her personal situation (age, investment goals, duration, reward expectations, investment options, attitude toward volatility, etc.). Each risk profile has a risk meter, with the indicators showing the level of risk on a scale of 1 to 7 (Very Defensive, Defensive, Conservative, Moderate, Moderately Aggressive, Aggressive, Very Aggressive). The scale goes from left to right, from low risk to high risk. The risk profile’s bandwidth is defined by the minimum and maximum risk you are willing and able to run. Subsequently, the Investment Adviser (IA) applies the SWOT analysis to put together a suitable investment portfolio for you. There are at least six drawbacks of this analysis: (1) a good IA will charge you a high commission fee; (2) every IA has his/her own area of expertise; (3) key IA cognitive biases can lead to poor decisions [6]; (4) risk of over/under diversification; (5) exit failure at times of market crash; (6) the use of historical data may lead to faulty forecasting [7]. The present guide will help you start investing with 0% commissioning. Always. Watch. Fees. You will learn a simple data-driven workflow that enables in less biased decisions while maximizing returns and avoiding huge risks. You will focus solely on minimizing the Risk-to-Return Ratio (RRR<<1) representing the common goal of all investors regardless their age, education and budget.

The ultimate end product of the above workflow is an Investment Plan (IP) that works for you [1,9]. Because the more you invest, the more you can lose. The balanced IP should answer the most important question: How do you reach financial goals while taking the least possible amount of risk that fit my investing time frame and risk tolerance, to help me reach your financial goals sooner? Instead of a general guidance based on rather vague risk profiles (ranging from so-called conservative to very aggressive), you just need to know the specific RRR-constrained workflow with a few data analytics metrics/ratios, form an IP, and be ready to stick to it. If you ever get stuck, I’ll help you out.    

Here are a few common steps that investors can follow to create a successful IP [1,3]:

(1) create an investment goal by considering steady growth and security (~5-7 years);

(2) take inventory of your current assets, and decide what stays and what needs to change;

(3) evaluate the risk (safer investments are slow-growing but can provide long-term security);

(4) research and brain-storm your investment options by considering everything that is out there;

(5) select your portfolio by deciding on your risk factor, excluding red flags and risky options;

(6) focus on diversification that shares the risk, rather than putting all your eggs in one basket (minimize the unsystematic risk);

 (7) monitor your portfolio by keeping an eye on rapid market changes, major drops and move your assets efficiently if deemed appropriate (minimize the systematic risk).  

These steps will be carefully adapted to the proposed 1-week IP journey, with the addition of important financial metrics and key performance indicators (KPIs) to monitor the business’s health at a specific point in time [14].    

Finally, who regulates the Financial Markets? Regulatory bodies are established by governments or other organizations to oversee the functioning and fairness of financial markets and the firms that engage in financial activity [1]. US financial markets get regulatory oversight from two government bodies: the Securities and Exchange Commission (SEC) [9] and the Commodity Futures Trading Commission (CFTC).  The Financial Industry Regulatory Authority  (FINRA) is the independent regulator of every broker or brokerage firm associated with the securities markets in the US. The US stock market has many self-regulatory organizations (SROs) that enforce the regulations set by the SEC.  SROs are usually the primary regulators of broker-dealers. All stock exchanges and FINRA are SROs. Several different regulatory bodies exist which monitor brokers and stock exchanges: the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), and the Commodity Futures Trading Commission (CFTC).  State bank regulators operate similarly to the OCC, but at the state level for state-chartered banks. Their oversight works in conjunction with the FRB and the FDIC.

The European Securities and Markets Authority (ESMA) is an "EU-wide financial markets watchdog" that works in the field of securities legislation and regulation to improve the functioning of financial markets in Europe [10]. The Federation of European Securities Exchanges (FESE) is an industry association that represents operators of European exchanges and other market segments. The European Capital Markets Institute (ECMI) is an independent think-tank, within the Centre for European Policy Studies (CEPS). The Dutch Authority for the Financial Markets (AFM) is  responsible for supervising the operation of the Dutch financial markets.

The Financial Conduct Authority (FCA) regulates London Stock Exchange, as a Recognised Investment Exchange [11]. The Australian Securities and Investments Commi

ssion (ASIC) is responsible for the supervision of real-time trading on Australia's domestic markets [12]. The Canadian Securities Administrators (CSA) is the umbrella organization of Canada's provincial and territorial securities regulators whose objective is to improve, coordinate and harmonize regulation of the Canadian capital markets [13].

Although these regulatory bodies attempt to enforce a certain degree of investor rights, you should thoroughly research corporate governance policies of a company. In addition, you need to know the basics to (online) broker regulation worldwide because the broker adheres to all the rules and regulations put in place and receives a license to operate.

The Bottom Line: knowing your rights is an essential part of risk management because well-informed investors who fully understand their rights are less susceptible to risks.