ETFs don’t save (and indeed increase) costs in long term

Apologists of the passive investment claim: stock ETFs save the costs. Indeed they saved costs as broker fees were high. But now they don't, in fact they increase them! Of course sometimes there is no alternative to an ETF/ETC/ETN, e.g. if you want to invest in commodity market. But if you can buy stocks with low broker fees, you should do it directly.
ETF Apologeten behapten: die Aktien-ETF sparen Kosten. Tatsache ist: die sparten die Kosten, als Brokergebühren noch hoch waren. Aktuell ist es nicht mehr der Fall, langfristig sind die Kosten bei den Aktien-ETF sogar höher als beim Direktkauf. Continue reading "ETFs don’t save (and indeed increase) costs in long term"

Numeracy for Traders – Lesson 3 – Ode to Deferred Withholding Tax

Many investment funds and financial services that want your money argue with a deferred capital yield tax. For instance, in Germany if you trade by yourself, you immediately pay the capital returns tax [Kapitalertragsteuer]  (unless the net result of your previous trades is negative). But if you invest in a fund, you don't pay the tax on returns until you sell your share (you still pay a tax on dividends).
We show that though, in general, an investor profits from tax deferral, one should not exaggerate its effect. Moreover, due to annual tax-exempt amounts [Jahresfreibetrag], an immediate taxation can be better than a deferred one. 

Continue reading "Numeracy for Traders – Lesson 3 – Ode to Deferred Withholding Tax"

Perfect diversification means no asset can be dropped from (rather than added to) a portfolio

A common belief: adding extra asset to a portfolio will automatically reduce the portfolio risk. We provide a counter-example resorting only to the simplest algebra and explain why this erroneous belief is so common. 

Continue reading "Perfect diversification means no asset can be dropped from (rather than added to) a portfolio"

Numeracy for Traders – Lesson 2 – Exponentiation, polynomials, logarithms and the power of compound returns

Native Americans could have bought Manhattan back if invested 30 dollars by 6% CAGRAfter this lesson you will understand how to compute the compound return, discount factors and the CAGR (compound annual growth rate: nominal and inflation adjusted). You will also learn about the continuously compounded (exponential) interest and logarithmic returns. Finally, you will be able to calculate the effective rate of interest of a credit or of a savings scheme.

Continue reading "Numeracy for Traders – Lesson 2 – Exponentiation, polynomials, logarithms and the power of compound returns"

The Maximum Drawdown succinctly explained in 3 minutes

The maximum drawdown (MDD) is likely the most important measure of risk in practice. We explain how to calculate it and why you should keep it under control.  Remember, if the MMD reaches -50% the portfolio have to grow +100% in order just to compensate the previous loss!


  Continue reading "The Maximum Drawdown succinctly explained in 3 minutes"

Numeracy for Traders- Lesson 1 – Fractions

Fractions is a topic from elementary mathematics but surprisingly even some Ph.Ds in math have problems with them. After this lesson you will be able to read pie diagrams, calculate portfolio weights and weighted average returns. This lesson does not substitute systematic learning but helps you to recall fractions and demonstrates their usage in trading context.

Continue reading "Numeracy for Traders- Lesson 1 – Fractions"