When considering the value of a specific asset, appraisers typically look to one point in time at which to anchor their value conclusion.  Typically, that point in time is today.  What's the asset worth today?  When one applies for a loan on her home, the lender wants to know the collateral value of the home today.  

Investors want to know value at two points in time: 1) today ("Point A"), and 2) at a future point in time ("Point B"). Estimating today's value is tricky enough, but now try to estimate what something will be worth in the future.  Lots of assumptions are involved, and seldom, if ever, does the future work out exactly as predicted. Yet, most would conclude that if Point B is greater than Point A, the investment enjoyed a positive return.

But we in the finance world are hesitant to draw that conclusion until we have evaluated the journey from A to B. The volatility of the trip from A to B qualifies the success of the trip. In other words, the bumpiness of the trip matters.

Let's assume two investments travel from the exact same Point A (say, $1,000) to the exact same Point B (say, $1,200) over the exact same time period.  It is very possible that one of these investments provides a positive risk-adjusted return to its investor, while the other investment provides a negative, risk-adjusted return to its investor.  The key words are "risk-adjusted", which essentially means bumpiness of the investment trip. The positive return investment might be a bond fund, while the negative return investment might be a venture capital fund. They have the same absolute dollar returns, but one investment is positive, and one investment is negative, once adjusted for risk. 

Each year, I sit in several investment committee meetings or situations of similar context and listen to the members laud the returns of particular investments, for which the risk adjusted returns stink like a polecat. Bottom line: bumpiness matters!

Ka-ching!

The past several weeks have been quite windy.  Typically, we would find a day or two, here and there, when the wind would fade and the air would seemingly hang in space. This has not been the case this year. I typically wouldn't care about wind, but this year is different. I have been deliberately trying to kayak four or five times a week. As I head to the west end of the lake, it has been torture fighting the wind. During today's battle, I reckoned that I was like the U.S. economy.

The U.S. economy is paddling against the European financial crisis wind, and it is going to keep blowing noticeably for some time. Any U.S. growth will be muted at best. More likely, Europe will push the U.S. a bit backwards in the near term. Maybe it can paddle hard enough to experience progress down the road a bit. There just doesn't seem to be any way around the European impact.

I keep thinking the wind will subside and kayaking will take on a more realistic expression of core exercise delight. If not, I will just keep paddling...hope the U.S. economy can do the same.

The real, risk-free rate of return is  currently negative.  Amazing! There is no reward for saving or postponing spending. In fact, if you wait, your spending power will be less tomorrow than it is today, in risk-free, real (i.e., inflation adjusted) terms. 

It seems perverse, but, yes, on a risk adjusted basis, it does not pay to save your money.  You should spend it all today to get the most consumption bang for your buck.

Ka-ching!