How To Analyze Complex Investments
Money For the Rest of Us
J. David Stein
4.5 • 1.4K Ratings
🗓️ 11 November 2020
⏱️ 28 minutes
🧾️ Download transcript
Summary
How to determine whether you should invest in a complex investment such as an actively managed ETF that uses option strategies.
Topics covered include:
- A recent investment David made that he shouldn't have
- What is the volatility risk premium and how to invest in it
- Why there have been over 200 new ETFs and ETNs launched in the U.S. in 2020
- Why some ETF sponsors launch lower cost versions of ETFs that compete with their existing offerings.
- What questions to answer as part of analyzing a complex investment
- Why there is always a catch to ETFs such as the Innovators Stacker and Ultra Buffer ETF series that can make them seem too good to be true.
- A simpler way to lower portfolio risk without using complex option-based ETFs.
Thanks to Netsuite and LinkedIn for sponsoring the episode.
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Transcript
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| 0:00.0 | Welcome to Money for the rest of us. This is a personal finance show on Money. How it works, how to invest it and how to live without worrying about it. |
| 0:11.0 | I'm your host, David Stein today's episode 321. It's titled How to |
| 0:16.6 | Analyze Complex Investments. Last November I purchased a small position in the Guggenheim Enhanced Equity Income Fund. |
| 0:28.0 | The ticker is GPM. |
| 0:31.0 | This is a closed-end fund that seeks to harvest what is known as the Volatility Risk |
| 0:36.5 | Premium. |
| 0:37.9 | The Volatility Risk Premium represents the compensation that investors receive for bearing the risk of higher volatility and market losses. |
| 0:47.0 | In other words, investors receive income for being willing to help other investors protect against losses in let's say the stock market. |
| 0:57.1 | This is usually done by selling call or put options. |
| 1:01.2 | It's an example of a carry trade. |
| 1:03.0 | A carry trade is an investment strategy that earns income as long as nothing happens. |
| 1:09.0 | And by nothing changing in the case of this particular close-end fund, the stock market doesn't fall. Anything I could take up the entire episode explaining option strategies and this close-in fund, but that isn't really today's topic. |
| 1:27.0 | It's about the principles of analyzing complex investments, some which employ options. |
| 1:35.0 | When it comes to investing, I have a built-in filter that keeps me from purchasing investments. |
| 1:41.0 | I probably shouldn't. |
| 1:42.0 | And that filter is, I have to explain to over a |
| 1:45.2 | thousand plus members why I made that particular investment and how it works. I |
| 1:49.4 | share my entire portfolio in all my holdings and when I make a trade and so knowing I have |
| 1:54.4 | to explain it sometimes keeps me from purchasing a particular holding, although it didn't |
| 2:00.0 | in this case. |
| 2:02.0 | You can have a similar filter in your investing. I discussed it in my book. |
| 2:06.3 | Money for the rest of us, ten questions to master successful investing. The first question |
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