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‍Understanding how to build and balance your investment portfolio is key to long-term financial success. The "Equity Rate" is a crucial metric in this equation, especially for anyone looking to optimize their investment strategy. Defined as the ratio of your equity investments to your total personal cash and investments, the Equity Rate helps gauge the weight of equities within your broader financial portfolio. Arena Investor Advisors, simplify the concept of Equity Rate, explaining its significance and how it can be managed effectively.

What is Equity Rate?

Equity Rate measures the proportion of your investment portfolio that is invested in equities (stocks and ETFs) relative to your total financial assets, including cash and other investments. This ratio provides a snapshot of how exposed you are to the stock market's potential risks and rewards compared to more conservative investments like cash or bonds.

Importance of Understanding Your Equity Rate

1. Risk Management: Your Equity Rate is a direct indicator of your exposure to the volatility of the stock market. A higher Equity Rate generally means higher potential returns, but also higher risk, especially in short-term market fluctuations.

2. Investment Diversification: Understanding this rate helps in assessing whether you are overly concentrated in equities or if you need to increase your equity holdings to achieve potentially higher growth.

3. Financial Planning Alignment: Your Equity Rate should align with your financial goals, risk tolerance, and investment time horizon. It guides strategic adjustments to ensure your portfolio supports your overall financial objectives, such as buying a home, funding education, retirement, and so on.

How to Calculate Your Equity Rate

Calculate your Equity Rate by dividing the total value of your equity investments by the sum of all your personal cash and investments. For example, if you have $50,000 in equity investments and a total of $100,000 in personal cash and investments, your Equity Rate is 50%. This tells you that half of your total financial assets are invested in equities.

How an Arena Investor Advisor Can Help

1. Personalized Financial Assessment: An Arena Investor Advisor will start with a thorough review of your financial situation, including calculating your Equity Rate to understand your current investment exposure.

2. Customized Investment Strategies: Based on your Equity Rate and personal financial goals, your Arena Investor Advisor can develop strategies to optimize your investment portfolio. This might involve adjusting your equity investments to either increase your potential for growth or decrease your risk exposure.

3. Ongoing Portfolio Management: Investment needs change over time with shifts in market conditions, financial goals, and personal circumstances. Regularly reviewing and adjusting your Equity Rate with your Arena Investor Advisor ensures your investment strategy remains appropriate.

4. Risk Tolerance Alignment: Your advisor will help you understand your risk tolerance and how it relates to your Equity Rate. They can guide you in making informed decisions that balance potential returns with acceptable levels of risk.

5. Educational Support: Arena Investor provides continuous education on investment principles, helping you understand complex concepts like Equity Rate and their impact on your financial well-being. This education empowers you to make more informed financial decisions.

All In All

Your Equity Rate is more than just a number—it’s a reflection of your investment philosophy, risk tolerance, and financial health. Understanding and managing this rate is crucial for maintaining a balanced and effective investment portfolio. Ensure that your Equity Rate aligns with your financial goals, providing peace of mind and a solid foundation for achieving your long-term objectives. This strategic approach to personal finance not only secures your current financial needs but also paves the way for future prosperity.

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

You’re the Hero.
    We’re the Guide.

We are thrilled to announce that Arena Investor is expanding our service offerings with a cutting-edge integration into our tech stack: Elements (getElements.com). This addition is set to transform the way we serve our clients in financial planning, investment management, and through our unique "Financial Health Monitoring and Alerts" service.

‍Why Elements?

Elements is a leading financial monitoring and planning tool designed to simplify the complexities of managing wealth. It provides a streamlined and user-friendly experience, enabling clients to see the bigger picture of their financial health at a glance. With Elements, you gain a comprehensive view of your financial status, making it easier to make informed decisions and track progress toward your financial goals.

‍Value for Financial Planning Clients

For our financial planning clients, Elements offers a robust platform to track your progress in real-time. Whether you're focused on building wealth, planning for retirement, or managing day-to-day finances, Elements helps you stay on top of your financial goals. The tool allows you to monitor key financial indicators, such as liquidity, net worth, and debt levels, ensuring that you always know where you stand. By leveraging Elements, Arena Investor can provide more personalized and proactive advice, helping you navigate life's financial milestones with confidence.

‍Enhancing Investment Management

For our investment management clients, Elements provides an additional layer of insight into how your investments align with your overall financial health. The integration allows us to seamlessly connect your investment portfolio with other aspects of your financial life, ensuring that your investment strategy is aligned with your broader financial goals. With Elements, we can more effectively manage risk, optimize your asset allocation, and keep you on track toward achieving long-term growth.

‍Financial Health Monitoring and Alerts

One of the most innovative features of Elements is its ability to deliver timely and actionable insights through our "Financial Health Monitoring and Alerts" service. This integration enables us to keep a close eye on your financial health, alerting you to potential issues before they become problems. Whether it's identifying opportunities to optimize your cash flow or providing early warnings about financial risks, Elements empowers you to take control of your financial future.

‍Looking Ahead

At Arena Investor, our mission is to provide you with the best tools and advice to achieve financial success. The integration of Elements into our tech stack is a significant step forward in fulfilling this mission. We believe that by combining the power of Elements with our expert financial planning and investment management services, we can offer an unparalleled client experience that supports your financial journey every step of the way.

We are excited about the enhanced value this integration will bring to your financial planning and investment management needs. If you have any questions or would like to learn more about how Elements can benefit you, please don’t hesitate to reach out to us.

Thank you for your continued trust in Arena Investor.

Truly,
The Arena Investor Team

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

You’re the Hero.
    We’re the Guide.

Overview

This gem by Greg Ip is by far our favorite book about economics. Ip has an awesome sense of humor that really speaks to a lot of people because it keeps you engaged. His style is fun, easy to read, and easy to understand. He uses a lot of great examples to make his point, which drastically improves retention. I can walk around and talk about economics, or hear it discussed in the news and know what is meant after reading this book. You really don’t need another economics book, although more good ones are indeed out there. If you read just one economics book, this is it.

Note: Students, read this book first, then read your assigned books – give yourself a head start, an advantage.

Let’s dive in

First and foremost, we noticed that Greg Ip puts a healthy check on the government. He definitely supports the government's role in economics though. “This is not a book for PhD Economists, but for the citizens – the investors on Main Street,” he opens. And he sticks to that. It describes how China was economically at the top of the world pre-Industrial Revolution, but squashed private enterprise. In turn, its people were poorer in 1952 than in 1820. He wisely points out that one overcomes the law of diminishing returns with ideas, and he calls for “better recipes, not more cooking.” In this way, China let itself down. 

He points out that GDP comes down to population and productivity. The business cycle suffers from viruses that make it sick, but we can inoculate ourselves and keep GDP growing. But the trouble is that viruses mutate, so responses need to keep adapting. He feels that post-war economic expansions, however, were all “murdered” by the Federal Reserve (the Fed), not natural causes. He specifically calls out Reg Q here. He also calls out how the Fed raised rates before inflation broke out and slashed them before growth crumbled. In this way the Fed tried to create “soft landings.” Something it still does today. Something I am personally in favor of. 

Ip describes recessions too, and how defining them is an art for some and a science for others. The NBER (National Bureau of Economic Research) for instance declares recessions after the fact, so “it’s about as useful as an autopsy report is for an EMT.” Funny guy. He notes that data-wise, business cycles (here) average 5 years. Short ones are about 2 years, long ones are about 11 years (1990-2001). And they typically end when an industry boom busts and brings the rest of the economy down with it.

The 4 Engines of GDP

He describes well 4 engines of GDP: consumer spending, business investment, government spending, and exports. He notes that two-thirds of GDP is consumer spending, which acts as a ballast and steadies the economy – except for housing which is volatile and 5% of GDP. It’s no surprise that after 9/11 President Bush reassured people to keep living and spending. 

For business investment, inventories are the biggest quarterly variable, but buying, leasing, or building buildings and equipment also drives GDP. He points out that for investors the biggest driver within business is the sales outlook from analysts. If sales are down or projected to be down, then business investment’s contribution to GDP slows. 

Government spending accounts for 20% of GDP per Ip. (A quick search shows it currently at 30%, but spending is up recently so his data passes a simple sanity check.) He cites things such as “tanks and teachers” as being major players in government spending’s upward push of GDP. Funny guy. 

Lastly, exports. Export data comes mainly from the BEA (Bureau of Economic Analysis), the US Census, the Bureau of Labor Statistics, and some Fed data. He points out that since 1982 the number of Americans that want to work grew 42%! To me that’s amazing, but also fits the “latch-key kids” narrative we grew up with (when kids would let themselves inside their house after school because no parent was home since both parents began working). He also notes that jobs since 1982 have grown 47%, and that the two statistics move together. 

He points out that “the income ladder has grown much taller but the distance between rungs has grown bigger too.” Data-wise the high earners correspond with education and skill levels, but the top 1% is not education-based. And that the top 1% represents 24% of all income, which is the highest rate since 1928. This is both good and bad in our opinion. It is the result of new age robber barons, who create jobs… and shows that we have been down this road before. But there are economic problems with stretching out incomes, economic problems with re-compressing it too quickly or forcefully, and economic problems with ignoring it. All in all, timely and appropriate action is key to creating soft landings, instead of hard landings.

Inflation and money supply

Ip goes into detail about inflation and money supply too. He points out that printing doesn’t equate to inflation, which most people think. To make the point he says that $1-trillion dollars printed and put under your mattress doesn’t create inflation. As unlikely as it is for 100% of printed money to be held and not circulated, he makes a good economic point. 

We’d add that this is part of the concern with China holding massive amounts of US dollars; the US government operates with the money in circulation, but what if massive amounts were quickly released? Ip continues and explains how “voters hate inflation” more than unemployment. He gives examples of how the former gets people voted out of office but the latter less so. Also of note, he points out that a bit of inflation is stabilizing, but too much is destabilizing.

Deflation is covered too, and Ip describes it as destructive. In the US, inflation wasn’t a problem during The Great Depression, but unemployment and deflation were.

Ip writes really well about imports and exports. He discusses comparative advantage and its role in international trade. He points out that since 1950 global trade has outpaced world GDP by 50%, or 6% versus 4%, and even US exports moved from 5% to 11% of GDP in that time. We are exporting more and it’s a larger percent of our GDP than it was in 1950. But we import more too now. 

It’s the relationship between importing and exporting nowadays that concerns people. When giving an example of comparative advantage, Ip points out how households import a nanny’s services from abroad (aka outside the household) so that they can go to work. So the import of the child-watching service enables more production because it is cheaper than doing it yourself (cheaper than not working).

Ip describes imports and exports as one of the few economic topics that is straightforward. Yet it remains controversial, nonetheless. He estimates that 25% of our jobs could be done offshores, and that this idea terrifies people. Astutely, he then points out the importance of our infrastructure and legal system. They are critical because they make it worth keeping jobs inside the US. You may be able to do a job overseas at a lower cost, but how risky and complicated is it at that point? Companies tend to overdo or underdo their overseas endeavors. 

For whatever reason it is tough for them to keep properly balanced, likely because the more abroad you go the more dynamic things get, which creates vulnerabilities in supply chains, management, diplomacy, and so on.

He points out how trade can reward the top and erode the middle class. For instance, Apple is rich, but the jobs needed to make their products are lost to the US middle class. So it ends up as a net plus, but if the middle class evaporates then that effect is worse than the gain because it alters our fiber and complicates our economics. Interestingly, no one company really feels at fault for the erosion of the middle class, similar to how no one contributor of the GFC (Great Financial Crisis) felt guilty and few were held accountable. 

Everyone was just playing their part in a very big thing. We see how an industry bubble can form, pop, and pull the entire economy down. Ip finishes this section by saying that voters don’t like imports en masse because the negatives are obvious and the positives aren’t. So you have obvious negatives competing with obscured, nuanced, or second-order positives. 

There are actually a lot of examples of how a gross net positive does not work for individuals because it is not a positive for them personally. A government (economy) is not a household, as the saying goes.

Currencies

Greg Ip describes current accounting deficits (aka financing deficits) well too. He explains that current accounting deficits means one must borrow or sell assets, but that action enables investment opportunities that exceed the value or usefulness of saving.

He describes how driving down one’s own currency value boosts exports, and that China used to have excess savings (from a governmental, macroeconomic point of view) but eventually boosted its exports by buying US Treasuries, which strengthened the US dollar by “retiring it” and therefore weaken Chinese currency relative to the US dollar. That buying also spent the “excess” Chinese savings, drove down the value of the Chinese currency (Yuan) and therefore improved exports (as the value of your currency means either imports or exports are more attractive). You have to decide which game you want to be in. China chooses exports and therefore devalues its currency, while the US chooses imports (remember comparative advantage) and therefore boosts its currency’s value. 

Why doesn’t everyone use comparative advantage? 

Because not every household, or government, is rich enough to spend on X (nanny) in order to earn more Y (income). What if there were very few high-income jobs? Would you have one? If not, you aren’t playing this “import” game. Interestingly, in countries with few high income jobs it is actually a social expectation that you hire nannies and “import” similar jobs because you are a job creator, and therefore a socio-economic enabler. 

Back to currencies though. 

Ip states that the USD (US dollar) is like a boring mutual fund for an ordinary household, and is therefore the world currency. And since countries like to take USD, we finance things easily. This is just one way in which money makes money and having the reserve currency of the world is critical to the US economy. And the US staying stable is, in turn, critical to the world economy. You want the world currency to be under the tutelage of a stable nation, not a flash in the pan or a gamble.

The Fed

Ip describes several mistakes the Fed has made, which we will not go into here. He describes them well, and it is important for us to understand (and the Fed too) so we can avoid them. By and large, the Fed does learn well. But there are always new mistakes to be made. By studying the past mistakes, Ip shows us how it is possible to distill fundamental economic truths. At that point, there’s no excuse for violating one of those truths. If the Fed is to make mistakes moving forward, it should only be in new, unexplored circumstances – not fundamental errors like during The Great Depression. The Fed has power; FOMC meetings move the market for a reason ("Investors, don't fight the Fed" as the saying goes.

Hawk and dove bankers are described pretty well by Ip. He shares that in the banking world “Only hawk bankers go to central banker heaven.” Funny guy. That’s the feeling in that circle at least. Hawkish bankers are tight with their actions, more likely to dissent, and care far more about inflation than unemployment. Doves are the opposite. It’s not just war that has hawks and doves, but economics too.

Overall, the Fed tries to target 1.7-2% inflation by measuring growth, unemployment, and inflation. Ip points out how Ben Bernanke did well overall in that regard, and describes Bernanke as a Great Depression buff, like there are Civil War buffs. Ip says Bernanke disliked the Fed’s excessive orthodoxy during The Great Depression, felt more action (and more liberal action) was needed sooner, but disliked FDR’s New Deal. Simply put, Bernanke felt the Fed missed and then the president missed in response, which exacerbated and prolonged The Great Depression.

Ip describes the Federal Funds Rate, the Fed as a lender of last resort, and discretionary spending versus entitlement spending. Each of these is covered well, easy to read, and easy to understand. Merely his poignant description of how US government borrowing is like an elephant pushing up long-term interest rates and crowding-out private investing is worth the price of the book. 

There are pros and cons to government borrowing, but they have major impacts that are important to understand as an investor. Basically, the US government borrowing abroad is far better for everyone in the US because they aren’t crowded-out, and Uncle Sam gets his borrowing complete. 

Another very poignant point Ip makes is that if the US borrowing is mainly abroad then inflation is mainly the rest of the world’s problem. A full two-thirds of inflation is at the expense of the rest of the world (when two-thirds of government borrowing is outside the US). Obviously this is both good and bad depending on how you look at it. But it's important to know as an investor. It gives you insight into the health of the US and world economic health.

Oh the leverage!

Lastly, we'll mention Ip’s coverage of leverage. He describes leverage this way: “Leverage is like speed in a crash, and as a crisis hits the more leverage involved the more damage.” See, he paints pictures. He's easy to read, and easy to remember. There are amazing advantages of leverage (labor, money, technology, media are all leveraged to great benefit) but when a household, business, industry, sector, or an entire economy begins to wobble… measure their leverage and decide how far away you need to get as an investor from an upcoming crash!

“The Little Book of Economics: How the Economy Works in the Real World” was fantastic, and we hope you can tell how much we loved it.

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

You’re the Hero.
    We’re the Guide.