The Online Investing AI Blog

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The trader’s Catch 22 is that high risk can lead to high returns. Oh, and high risk can also lead to devastating losses.

But the great trading dilemma is to figure out  how much return you’ll receive for the risks you take. One way to estimate this risk-reward ratio is by using the Sharpe ratio.

The Sharpe ratio is named after Nobel-prize winning economist William Sharpe.

The  ratio is calculated by subtracting the risk-free rate – such as that of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the returns.

This may sound a little complicated, but compared to other ways of determining risk, the Sharpe Ratio is a snap.

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Pic by Alan Cleaver at Flickr Creative Commons

Mint.com, Wesabe, Bundle.com and other personal finance technology hubs were the first to recognize the democratizing power of technology in the money management sphere.

Online personal finance tools can unleash a team virtual accountants and analysts in your laptop.

You can now run reports and check graphs on everything from creating a budget to monitoring your spending habits to pinpointing your best investment returns.

Now, banks and credit card companies are growing wise to this tech trend and bolstering their own sites and online banking portals with personal finance technology.

Most customers are wondering, “what took you so long.”

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I think it may be an understatement to suggest that there are people who aren’t numbers people.

Fractions, percentages, and equations are just hard to wrap your head around, especially if your a visual person.

Thankfully, technology is making sure that just because you’re not a numbers person, you aren’t shut out of personal finance.

Bundle.com, a site that’s just starting up, is taking the next step in money management technology.

It not only pulls in tons of financial info for you, Bundle presents it in a cool, easy way.

You don’t have to be a numbers person to be a personal finance expert anymore.

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Picture courtesy banspy @ Flickr

Trading and gambling have been metaphorically tied together forever.

Traders talk about making a bet. They say they hit the jackpot, or they left their money on the table.

Trading and gambling, after all, do share commonalities–risk, returns, a certain element of randomness, and position sizing–to name a few.

But the comparisons, or lessons, don’t stop there.

According to a new study from Cornell University, investors and traders can all learn from a slightly contrarian gambling strategy. The study makes the case that online poker players who win more hands, end up losing more money.

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True story.

In the mid-2000’s a minor hedge fund manager named John Paulson noticed the housing price trends in the early 2000s had far out-paced historic trends.

He decided a new trend was coming–a massive drop in home prices. Paulson made an astute bet that the prices would decline. He was right.

Then, he and his wife went on vacation.

During the vacation, Paulson’s wife went to the ATM to check the balance. When she looked at the statement, she was more than a little surprised to see the figure: $45 million.

I don’t know how Paulson became a hedge fund manager and I’m not even sure you’d want to follow a similar path, but  in this three-part series, you can learn that you have access to some of the tools and technology needed to create your own version of a hedge fund.

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As you might have guessed,  Online Investing AI believes that Automated Trading will change the landscape of investing. Automated Trading combines the low-maintenance of investing with the better returns of trading.

As technology becomes more dependable and investment strategies become more predictable, new doors of access will open for investors.

But investing is just one block in your wall of personal finance. You also have to spend and save money wisely.

If computer and online tech can help you invest, it can also help you save. And, it’s true. There are ways you can use the power of automated personal finance to improve your financial well-being. Here are six easy steps to turn boring money management into automated personal finance:

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If you’re like me, you care less what’s in your bank account than what will be in your bank account the day before payday.

Budgets are fluid and PocketSmith is one of the first online personal finance tools that helps watch the ebb and flow of your money situation. It can even predict what your fund level in your bank account will be on any given date, based on past money performance.

And if you’re not happy with the results, you can play around with your financial inputs to better balance your budget. Adjust how much money you’ll spend and when you’ll spend it. Adjust more income, if that’s in the cards.

It has a pretty wide predictive range, too. In case you want to see whether you can splurge for Christmas, PocketSmith can look into the future to generate six-month and a year forecast.

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Making money has got a bad rap.

When most people think about how to make money, they think they have to put on a suit and getting a job. They’ll spend long hours slaving away on a spreadsheet, balancing columns. Then, after years and years, the boss will give them a raise.

Or outsource their job.

But, making money doesn’t have to be ties and spreadsheets. In fact, some people are making money in smart, fun ways. They’re also learning how to save and invest in non-traditional ways.

In this Weekly Wisdom, we’ll link up with some fun ways to make money. (And save money. And invest money.)

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Financial advisers are getting a hard rap from the media. With stories of Bernie Madoff and Allen Stanford revealing just how far some advisers will go to cheat their investors, many are questioning the whole field.

I don’t think that’s fair. I’m sure most financial advisers are honest people and work hard for their clients. However, the problem may be that there’s a false confidence from enlisting the help of a financial adviser.

Hiring an adviser does not mean that you no longer have responsibility for your own economic future. And, if you go the adviser route, your responsibility begins with the criteria you select to hire him or her.

So how do you know if your financial adviser might cheat you?

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Automated Trading systems aren’t for everyone… yet.

But, over time, Automated Trading will become more acceptable, as George writes in this post on why resistance to Automated Trading will disappear.

So, what are some of the reasons that investors and traders would want to use this type of trading vehicle? What would push Automated Trading into the mainstream?

In other words, what forces could tip people in favor of using an Automated Trading as a way to invest and build wealth?

Here are a few reasons:

Save Time

People who choose Automated Trading systems likely have full-time jobs, or are just too busy for the research and market-watching necessary to become a trader. So, an Automated Trading system works well in this case.

Make Money

Trading is a riskier endeavor, but returns are much, much more higher for successful traders than traditional investors who put their money in the hands of a financial adviser or the mutual fund industry. A successful Automated Trading system offers all of this upside potential.

Explore New Markets

Automated Trading systems allow investors to delve into unfamiliar markets. There are so many asset classes available to trade on Automated Trading system markets like Collective 2 and Strategy Exchange that investors can begin exploring immediately.

Hedge Your Portfolio

Automated Trading systems can become a hedge for traders who specialize in certain types of assets or markets, but want to seize other opportunities. These systems also work well as a hedge for an investor’s current activities. For example, an investor who is already maxed in 401K and IRAs may want to experiment with an Automated Trading system that offers assets that he or she is not able to trade, due to SEC and other government rules.

Disgust With The Financial Industry

Investors are now disenchanted with the financial management and the banking industry. This will prompt investors to consider Automated Trading.

All of these trends are moving Automated Trading systems toward broader acceptability. It may only be a matter of time for Automated Trading to hit what Malcolm Gladwell calls a “tipping point.”

As he explains in his book The Tipping Point
:

“The tipping point is that magic moment when an idea, trend, or social behavior crosses a threshold, tips, and spreads like wildfire.”

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