Long Term Strategy and Discipline Wins!

There continues to be more and more media attention that the ‘buy and hold’ strategy is dead. That Modern Portfolio Theory no longer works. I just read an article stating that Modern Portfolio Theory has many flaws. This is another attempt by the Wall Street bullies to keep your money on the move.

The ‘experts’ proclaimed that market timing was the answer. Well guess what there is no perfect system. Resist the temptation to follow the hot system.

During my analysis of many portfolios.   I have found many advisers misusing Modern Portfolio Theory. At least on the fixed income side. Many include high risk fixed income, like high yield bonds or long term corporate bonds. This just adds risk to the portfolio. If you want more risk increase the equity allocation.

Properly used, Modern Portfolio Theory uses fixed income to control risk. This is accomplished by using high quality, short term fixed income.

In addition, true investors are much better served using a passive management strategy and utilizing Modern Portfolio Theory and ‘buy and hold’. This strategy, over the long term will lead to success.

It should be emphasized that ‘buy and hold’ should really be ‘buy and rebalance’.  ‘Buy and hold’ might signify set and forget and we must rebalance back to our target allocation periodically. This entails buying low and selling high, automatically.

When we rebalance we sell asset classes that have done well and buy asset classes that have done poorly, short term. Buy low, sell high. This is done periodically and eliminates the need to forecast the future.

In his 1993 letter to shareholders of Berkshire Hathaway, Warren Buffet counseled; “By periodically investing in a ‘passive’ fund….the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.” He repeated the advice 10 years later in the 2003 letter.

Mr. Buffet, in my opinion, was saying that trying to stock pick, market time and track record investing was ‘dumb’.

To be successful, investors, no matter how large, would be far better off using a passive strategy with Modern Portfolio Theory as part of the process. Modern Portfolio Theory is actually part of a larger strategy called Free Market Portfolio Theory.

Remember no strategy always looks like the right thing to do. We must continue to believe the free markets do work.  Most importantly we must believe in our strategy and remain disciplined.

Jumping from one hot asset class to another, or another hot money manager to another will lead to poor results. Along with a tremendous amount of anxiety. In many cases it will lead to avoiding equities all together.

We must own equities….. globally diversify ……. rebalance.

What Are You Doing?

Each week I discuss the dangers of speculating and gambling with your investment dollars. Many people I talk with believe that there is someone out there who can beat the market and earn superior even gaudy returns.

At the same time, these investors believe someone can tell them when to get into and out of the equity markets.

I personally was following an analyst who had a great track record. At least that’s what his literature said. He gave examples of all his great trades. He bought the right stocks and timed the market perfectly.

Given this data I believed I found the right analyst who had the magic touch. Well, apparently, this success was short lived because the trades were a disaster.

After some painful experiences, I began to realize that no one could consistently beat the market.

What I learned in college and graduate school finance classes proved that stock picking and market timing DO NOT work consistently.

The Wall Street bullies taught me that the academic research did not apply in the real world. This was huge mistake for me to believe.

Why not take advantage of over fifty years of academic research and earn great returns without the need to correctly predict the future. No matter what the past success of any analyst, it is a matter of luck and not skill.

There is no repeatable method to beat the market.

All investors should treat their investment money with the care of a fiduciary. Some examples of fiduciaries are trustees…managers of pension funds and others responsible for managing other people’s money.

Keep in mind there will be times when your globally diversified portfolio will lag behind the U.S. equity market. However, over the long term your portfolio will earn you the great market returns. Remember controlling risk is one of our goals.

Of course, there are examples of fiduciaries that violated their duties and invested the money imprudently.  There has been fraud committed, Bernie Madoff comes to mind.

Here is a guy with all the inside connections and theoretically inside information. With this help, even Bernie could not consistently beat the market.

What makes you think you can? Or that there is some guru who can?

Find an investor coach/fiduciary adviser who will help you develop a prudent portfolio and keep you disciplined.

Your coach will help you with three simple rules of investing:

  • Own equities and fixed income
  • Globally diversify
  • Rebalance

With the help of your coach you can reach your long-term goals with less anxiety and with the knowledge that you are invested correctly for your situation.

We Have Something In Common..

There is only one thing 300+ million Americans have in common. Do you know what that one thing is?

The latest I have read. Is that tax rates must go up. For various reasons. Major deficits…massive amount of people on the government rolls, like disability, food stamps, housing assistance…etc…etc. This the reasoning goes this will only be fixed by raising tax rates.

These predictors want you to use their vision of the future and buy life insurance, annuities or whatever.

What they neglect to tell you is that it has been proven. When you raise tax rates, tax revenues do down. And when you lower tax rates, tax revenues go up.

This has proven to be the case time after time.

Many predictions have an ulterior motive. ‘This will happen so you must buy this other thing.’

In the case of brokerage firms. They want you trading from one hot thing to the next. Keep in mind these firms make money every time you trade.

It is the fact that no one can consistently predict the future.

Some may get lucky every once in a while. But no one can consistently predict what will happen next.

As people we all want to know what will happen in the future so we can prepare. The financial institutions rely on this and market it.

When one of a banks or brokerage firm analysts’ recommend the right stocks or pick the top or bottom of the stock market. Or an insurance company says get out of the market all together at the right time.

The financial institution will market that fact. This is why they have hundreds of analysts on staff. They know or hope one or two will get hot.

Unfortunately for investors there is no way to predict who will be the next ‘hot’ analyst or fund manager.

I know that free markets work and the stock market will recover…ok..ok it sounds like a prediction. However I do not know which sectors will do well or when there is a top or bottom.

To succeed in reaching your long term goals you must own equities….globally diversify….rebalance.

Beat The Market??

When dealing with investors I have heard a number of questions.  The most frequently asked is; what will the market do next?

Every one of them believes someone knows what will happen next. Investors are in constant search of the ‘expert’ that will give them the answers and ‘beat’ the market.

Unfortunately, there are no answers to the question; what will happen next? While investors are searching for the right answer they lose money unnecessarily.

The markets and random and unpredictable. Therefore, predicting the future is a futile journey.

This is evidenced by the Dalbar research study which looks at individual investor performance over a 30 year period. The latest study revealed that the 30 years ending December 31, 2016 average annual performance S&P500 earned 10.16% while the individual investor earned 3.98%.

Why the difference? It can partially be explained by the investors search for the ‘best’ manager. This is called track record investing and it doesn’t work.

The invisible hand of the market sets prices more efficiently than any other process known to man.  Is it perfect?  Indeed, No.  There is no perfect price; only what a willing buyer and seller negotiate.

The market instantly incorporates the collective mind of every market participants.  Markets work.  Unfortunately, most investors never tap their real power.

In fact, Gene Fama Sr won the Nobel Prize in Economics in 2013. His theory Efficient Market Hypothesis was written in 1965. It nearly five decades to prove his theory valid.

The theory states that all knowable information is already in the price of securities. Of course, there is more to the theory but I will refrain from becoming too detailed.

Needless to say you need to stop trying to beat the market and let the market forces work for you. This will be accomplished by owning equities….globally diversify….rebalance.  These 3 simple rules will lead to a successful investing experience.

Summertime Reruns..

Summer time is the time for reruns on TV. Especially here in Wisconsin because many of us Wisconsinites are outside enjoying the summer weather.

Given this, below is a ‘rerun’ of a subject I run cross often when talking with investors.

OK many of you will say most of my weekly posts are ‘reruns’. Well you’re right. My topic does not change I just tell it in a different way. I have been told repetition will result in change. The change I am  looking for is to stop relying on the Wall Street bullies for your financial future.

When investing many people hear their friends or colleagues talking about their investing successes. In many cases this involves investing in high risk ‘penny’ stocks or startups.  The lure of the high return is compelling to most of us. Some may even have early successes.

We must remember that this is speculating and gambling with your money. When these investments do work out it is the result of luck and not skill. Over the long term, using this strategy, the investor will be lucky to match the returns of the overall market.

Psychologists Kahneman and Tversky showed that more people would prefer to make $70,000 per year when others were making $60,000 than to make $80,000, when others were making $90,000. There will always be “others” with more assets, money, or larger portfolios. We are doomed to disappointment because comparison destroys the joy of having and using what we already have. Most people would agree to make or have less as long as others were even poorer. Resist the impulse to compare yourself to your “neighbors”.

This includes comparing your portfolio or 401(k) account balance to your colleagues. In some instances you may be better in others worse. The goal of your investments is to attain your long term goal. This would include a strategy and savings discipline.

Developing a prudent strategy and remaining disciplined to it are very difficult, however in the long term will lead to success. No one can predict what asset class or sector will outperform in the future.

Warren Buffet has one strategy which he remain disciplined to. This is the primary reason for his success.

You are speculating if you stock pick, market time or base your investing decisions on track record performance.  Keep in mind speculating is ok, but not with your retirement funds.

To succeed in investing you should
own equities…globally diversify….rebalance.

Independence Day!!

This week we celebrate Independence Day, ‘the 4th of July”.

Many of us do not realize or forgot what this day represents. It is our Declaration of Independence from the oppression of the British government. Our day of independence from ‘taxation without representation’.

Those who signed this Declaration of Independence essentially signed their own ‘death’ warrant. Without these brave men America might not have become the great free nation that it is.

Freedom was the center post of this day.

We had been relying on the British to protect us and paid dearly for this protection. We realized that we could protect ourselves and realize our own dreams.

As an ironic twist. Last year the citizens of Great Britain voted to declare their independence from the European Union. This vote rattled the equity markets around the globe. As of today much of that decline has been recovered.

One has to wonder whether Great Britain will celebrate Independence Day on June 24, like we celebrate Independence Day on July 4th. Hopefully, the British can repeat our success over the last 241 years.

Currently, we as a nation are again relying on others to secure our future. We rely on the federal government to feed us, provide medical care and other essentials. We rely on the Wall Street bullies, including life insurance companies, to tell us what to do with our hard earned money.

Perhaps this week we should seek our own independence from these bullies. You do not have to risk your life like our fore fathers, but you can become more accountable for your own financial future.

You can protect the future you from the current you.

We continually rely on the federal government, our union leaders, the Wall Street bullies, life insurance companies, the media and on and on. Yes, you may have to experience some short term pain when equities decline. The long term benefits, however, far outweigh these painful times.

Fortunately for us, our 1776 ancestors did not shy away from risk.

Stop being a victim and hire an investor coach to help you achieve your own independence.

Do Your Emotions Make Your Investment Decisions?

When you read a daily financial publication like the Wall Street Journal you find an enormous amount of facts. These facts can lead to vastly different conclusions. I wager that each day, with the exception of 2008-9, I can find 5 reasons the market will go up and 5 reasons it will go down. All of these facts occur in the same day.

You can justify almost any imprudent investment decision with “facts.”  Information is filtered by our emotions to create “fact” that support our decisions or beliefs. Without outside guidance, it is impossible to tell when and how this happens. Truth is the field of investing is elusive.

Remember the Wall Street bullies make money when we, the public, move money from one investment to another. Your broker has a vested interest in moving your money. They make more commission each time you move. The banking system loves to feed the fear.

If you are really interested in earning a good return on your investment dollars stop empowering the Wall Street bullies. Develop a sound, prudent portfolio, based on YOUR risk tolerance level and remain disciplined to that strategy. Jumping from one investment to another will cost you money and make tons of money for Wall Street.

As I have mentioned a number of times, NO ONE can predict the future. When you ask your broker what is the best stock for now? Or, when should I get in and out of the market? Or, who is the best fund manager(s)?  You are essentially asking them to predict the future.

A globally diversified portfolio eliminates the need to predict and allows you to relax and be assured you are properly invested to reach your long term goals. One of the main attributes investors need as well as advisers is discipline.

Equities are one of the greatest wealth creation tools available, if properly used. To reach you long term financial goals own equities…..globally diversify….rebalance.

Remember, if there is no risk there is no return or a very low return. Our goal is to grow at least to maintain our purchasing power. That means keeping, at least even with inflation.

With risk comes downturns. These downturns are inevitable and must be endured to realize the great returns the equity markets have to offer.

Since 1926 there have been 89 downturns of 10% or more. During this time, the S&P 500 has had an average annual return of nearly 9%.

For most if not all investors, dealing with the downturns requires hiring an investor coach/fiduciary adviser.

More Predictions…What Are They Good For?

The ‘experts’ are coming out of the wood work with new predictions.

  • What will the future bring?
  • Where will the markets go in 2017 and beyond?
  • Where is the best place for my investments?
  • How can I earn stock market returns with Treasury bill risk?

There has been a number of ‘experts’ predicting the worst market decline in our life time within three years. WOW!!  If you looked at the track record of these supposed ‘experts’ you would be alarmed. Because their track record is horrible. Why then does the financial media interview these ‘experts’? I have no idea. And do people/investors listen to them? Again..no idea.

No one can predict the future with any consistency. However, we as humans continue to search. Many of us read our astrology message each day. Hoping we can learn what will happen to us each day. Even here there are times when these readings appear right but again there is no consistency. When these readings are right it is a matter coincidence rather than some psychic ability of the writer.

Investors continually look to someone on Wall Street or anywhere for that matter to tell them how and where to invest. This search continues regardless of the poor track record of these predictors. For example the prestigious magazine ‘The Economist’ made the following prediction at the beginning of 2013. The magazine noted that while investors were optimistic, the coming year was unlikely to be one to remember.

Another magazine ‘The Financial News’ stated “the political storm clouds loom over the global economy. From Washington to Beijing, the financial markets are in thrall seismic political events.” Obviously neither of these predictions proved accurate.

As 2013 came to a close the equity markets have had a stellar year.

Regardless of these and other inaccurate predictions, investors continue to search for answers and continue to read and absorb these and other publications. Many investors tell me that the stock market is too risky for them. This is true when your strategy is to listen to the ‘expert’ forecasts and basing you investment allocation of those predictions. When you base your investment strategy based on a forecast of the future you are gambling and speculating with your money.

The real problem is when one of these ‘forecaster’ is right, which is statistically inevitable. These predictors will market this fact extensively.  What investors don’t seem to realize is that there is no correlation between past performance and future results. Like I said some of these forecasters will be right but there is no reliable way to know which one(s) will be right going forward.

Dr. Eugene Fama of the University of Chicago won the Nobel Prize in Economics in 2013

for his work on efficient markets. Dr. Fama essentially proved that all knowable information is already in the price of the security. There is no reliable way to predict how the markets will perform going forward.

Throughout my career in financial services I have also continued to search for the ‘answer’ with some success followed by poor results. I finally remembered by finance courses in both college and graduate school. In my studies I learned that there is an academic and scientific method to investing that has proven to be successful in the long term. The issue is that these methods do not eliminate risk but rather work to control it.

Investors would be more successful with less anxiety if they worked with an investor coach. An investor coach will teach you among other things where returns really come from. HINT: it does not come from the hot stock picker or market timer or the manager with the best track record.

Trying to adjust your strategy based on current conditions will result in poor and disappointing results.

When you have a prudent process and the discipline which an investor coach will provide, success will be yours WITHOUT the need for an accurate forecast.

Markets are Random …..Get Over It!!

I just read an article that many Americans are afraid of stocks. They are afraid they will lose all their money. Many expect to earn stock market returns with treasury bill risk.

Many investors I talk with each day have different reasons for not investing in the equity markets. Including ‘the market is at an all-time high of 21,000 that is too high’.  Or ‘I am about to retire and I cannot afford to take a loss in the equity markets’.

These investors believe equity risk is their greatest risk. In fact, it is inflation risk that is their relentless enemy. They need to at least maintain the purchasing power of their money. This is best accomplished with equities.

Then there are those that believe there is someone out there who can and does know when to get in and out of the market to maximize return and avoid all losses.

After two decades of research I can tell you this person does not exist.  You will find someone who makes a correct prediction. The problem is there is no evidence that their predictions will be correct going forward.

For example, the market crashed when there was a terrorist attack just three years ago. Over the last two months there has been terrorist attacks in the United Kingdom and the markets barely moved.

Like I said random and unpredictable.

You cannot consistently predict market movements based on past events. There rarely is any cause and effect that repeats.

If you invest in stock markets no one can predict “save” you from the down periods—NO ONE.  If markets were not random and unpredictable, they wouldn’t offer higher expected returns.

Markets randomly and unpredictably go up and down.

Perhaps we should have faith in the free markets and allow them to work. And worry about something fun like ‘will it rain this weekend?’ Or ‘Will my boat start?’ Or ‘ how will I clean up the huge tree that this weekend storm took down? Or ‘Why can’t the Brewers win a close game?’

As we age our situation gradually changes from growing our money to taking an income stream that keeps up with inflation. To succeed in this, we must reduce the level of risk in our portfolio as we grow older.

We will succeed in our investing when we own equities, globally diversify and rebalance.

That if we fire our broker/agent and hire an investor coach/fiduciary adviser.

As Always..”Diversification Is Your Buddy!”

Given the recent outstanding returns for U.S. large stocks, many investors are considering moving all their money into this hot asset class. Thereby avoiding U.S. small stocks, international stocks and emerging market stocks, including fixed income.


Since no one can predict the future, this is a huge mistake.


You must decide if you are a gambler/speculator or an investor. Gamblers believe they can out guess the market and avoid all losses. The gamblers have proven numerous times to be wrong in the long run.


Casinos were not built because the public ‘wins’. There were built because the owners know gamblers lose long term.


Part of the issue is that gamblers need to brag to their friends about how well they did. They naturally forget the losses.


In markets like these diversification is your buddy.


Proper diversification spreads risk across various asset classes with varying return characteristics or dissimilar price movement.


Simply said: they don’t do the same thing at the same time. Most investors are narrowly diversified into top performing funds or classes of the last five to ten years.


They often feel diversified but aren’t. To be diversified means including classes or types of funds in your portfolio that did poorly over the last five to ten years. If you do this, your portfolio will look and perform very differently from your neighbors’ or friends’.


Those of you which are my clients, own portfolios which are professionally diversified and rebalanced much like some large pension funds.


Since most investors will be retired a long time. They need to invest for the long term which can be 20 to 30 to 40 to even 50 years. Many investors have a hard time thinking is such long terms.

Even if you look at a 10 year period a diversified portfolio will in most cases prevail.


Over time these portfolios will help you successfully accomplish your investment and retirement goals.


To succeed in investing you must own equities….globally diversify…..rebalance.


Please email or message any questions or comments and I will personally respond appropriately.