Investment Risk

Half the S&P 500 will be gone within a decade. That sounds like an argument against owning it. It’s the strongest argument for owning it — because the index sells the failures and buys the replacements automatically, and a portfolio of individual stocks doesn’t. Start with why cash isn’t safe # Money in a bank account loses value every day. $1,000 today buys less than $1,000 did ten years ago, and that erosion is guaranteed rather than probable.

A fund’s 16.25% compound annual return is a true number that describes an experience nobody had. The year-by-year column underneath it — +35.24%, +27.64%, −12.69% — is the one that decides whether you’re still holding. One number, three very different years # Take VFV, the Vanguard S&P 500 ETF on the TSX, as a worked example. A $1,000 investment at inception grew to $6,561 by April 2025. That’s a 16.25% compound annual return, and it’s accurate.

Buying at record highs beats waiting for a dip. The research supports it, and it’s worth acting on. It’s also drawn entirely from one index of one country during that country’s most dominant stretch — which changes what you should buy, not whether you should buy. The finding, stated fairly # Three investors: one who refuses to buy at all-time highs and waits for a 10% pullback, one with the worst possible luck who invests annually at the exact peak, and one too nervous to start.

Every asset gets ranked on one line, safest to riskiest. That line is a lie of compression. Risk has four separate dimensions, and the one that wrecks you is always the one you weren’t measuring. The single-line ranking hides more than it shows # You know the ladder. Cash at the bottom. Then government bonds, then investment-grade corporates, then broad index funds, then individual stocks, then options and venture capital at the top. It’s a useful picture and it’s roughly right about ordering.

Every expensive ETF mistake is the same mistake wearing a different hat: you bought the name instead of the fact sheet. Seven versions of it, and each one has a document that would have told you. The label problem, stated once # An ETF’s name is a marketing asset. The fact sheet is the product. Between those two documents sits every error below, and the fix is always the same three-minute action — open the PDF the provider is legally required to publish.

Price-to-book compares a company’s market price to what it owns on paper. The catch is that roughly 92% of what modern companies are worth never appears on paper — so for most of the market, the ratio measures the wrong thing entirely. The mechanics, briefly # P/B = market price per share ÷ book value per share, where book value per share is (total assets − total debts) ÷ shares outstanding.

There are fifteen recognisable investor archetypes and they look like fifteen philosophies. They aren’t. Sort them by how long they hold, and the philosophies collapse into one variable — with the outcomes lined up neatly alongside it. The taxonomy, sorted by the thing that matters # Forget the labels for a second and look at the axis underneath them.

Two companies both “worth” $500 million can cost wildly different amounts to buy. Market cap prices the equity. Enterprise value prices the business — and the gap between them is where the debt is hiding. The number everyone quotes measures one thing # Market capitalisation is share price times shares outstanding. Ten million shares at $50 gives you a $500 million market cap. It’s fast, it’s public, and it’s the basis for how index funds like the S&P 500 weight their holdings — bigger companies, bigger influence.

Every ETF fact sheet buries one number that predicts your outcome better than the return figures do: the worst three-month period in the fund’s history. It’s the only number on the page that tests you rather than the fund. The five-factor check, and which factor actually binds # There’s a standard checklist for evaluating an ETF, and it’s a good one. Risk and volatility. Track record. What it holds. Costs. Sector allocation.

Enterprise value below market cap means a company holds more cash than debt. Everyone reads that as strength. Sometimes it is. Sometimes it’s a business that has run out of things worth funding, and the balance sheet is telling you so. The formula, and the signal it produces # Enterprise value is market cap plus total debt minus cash — what it would genuinely cost to acquire the business, since a buyer inherits the debt and receives the cash.

Go through your portfolio line by line and ask one question of each holding: is this here because the numbers say so, or because of how it makes me feel? Most portfolios are mostly fine. The damage sits in two or three positions bought for comfort. Dividend funds are a tax bracket, not a personality # The single most common feelings-holding in a young portfolio is a dividend ETF. SCHD is the usual suspect, with a following that treats it as a permanent fixture.

One committee sets the price of borrowing money overnight, and every other price in finance arranges itself around it. Understand that single number and most market commentary stops sounding like weather reporting. An interest rate is a price # Strip the mystique: borrow $100, repay $105, and the $5 is the price you paid for having the money early. That’s all a rate is. Banks, companies and governments all pay a version of it, and the Federal Reserve sets the one at the bottom of the stack — the rate banks charge each other for overnight loans.