Where Is The Herd Going Now?

We continue to experience civil unrest here in the United States. The intolerances displayed are hateful. During these turbulent times there will be ‘experts’ telling you what is the best place for your money.

It could be gold, annuities, real estate or even a pyramid scheme…….. Whenever there is fear in the air someone has the answer for your investments.  This is a very dangerous time to be speculating.

If an investment strategy is on the cover of every magazine, and all of your friends and associates are doing it, it’s reckless to follow suit.  Only hot, sexy, and speculative techniques make the cover.  Don’t follow your friends!

Remember the most successful businesses have one strategy and they stick to it. Such as McDonald’s, if you visit a McDonald’s anywhere in the country they are all set up the same. They know there may be a better way to run a restaurant but their systems works.

Warren Buffet is another example, he has one way of investing and it has made him the most successful investor of our time. There are times when he losses more money than most but over the long term he wins. He does not fall for the latest fad.

U.S. stocks continue to outperform, well, all other asset classes. The large U.S. stock more specifically is the number one asset class for 2017.

Many clients are looking at their globally diversified portfolios and asking themselves. Why if the U.S. Large stock is doing so well is my portfolio lagging behind? If I just invested all my money in the S&P 500 I would be beating my portfolio.

Why am I paying my adviser/coach to earn a poorer performance than the S&P500?

As investors, we have very short memories. In the late 1990s U.S. Large Cap Growth stocks were outperforming all other asset classes. Four straight years this was the case.

Then the bursting of the tech stock bubble devastated the investors with concentrated portfolios in U.S. Large Cap Growth.

I am not saying this will repeat.

As an investor, you may be tempted to change your investment mix to accommodate current events. This is called market timing and it has been proven not to work. You may get lucky in the short term but you will eventually fail.

To succeed in investing for the long term you should own equities….globally diversify….rebalance.  The key is to remain disciplined to this strategy.

Here We Go Again…

The situation in North Korea has the global markets spooked. Uncertainty rules the day. Of course, with over six billion people on earth there will always be uncertainty.

As of today, the equity markets are rebounding. But will it last? Will the predictions come true?

This inevitable uncertainty allows the Wall Street bullies to predict what will happen next. There are hundreds of new ‘predictions’ every day.

These predictions include …..the President’s actions will cause the markets to crash…you should seek the safety of gold…the financial collapse is near…the U.S. dollar will crash and on and on.

The talking heads on the financial networks are continually selling fear. This includes the talking heads on the conservative talk shows. Have you ever noticed who is advertising on these shows when the host recommends selling stocks and buying gold?

If they really knew what would happen next why would they tell you?

Is this a coincidence? I have my doubts. These talking heads are there to make money for themselves. And the advertisers are paying the bills.

As I have said many times in the past the Wall Street bullies make money when money moves. When money moves from one ‘hot’ product to the next ‘hot’ product.

This movement also includes moving from stocks to annuities or CDs or gold or commodities or whole life insurance, etc. It may also include moving within stocks from on hot sector to the next hot sector. These bullies want you to believe that they have some special ability to know when to move.

This is market timing and studies have shown it to be very ineffective, long term. The following quote by William F Sharpe Nobel prize winning economist. “If one compares a market timer’s return to that of a portfolio of stocks and cash weighted to have the same standard deviation as the market timer’s portfolio, the result is that the market timer must be correct 74% of the time in order to perform better than the passive portfolio of the same risk.”

Meaning, a market timer to be successful must be right in getting out of stocks and getting back into stocks at the right time nearly three quarters of the time.

Keep in mind that market timers results are based on luck and not skill.

Remember returns do not come from the manager, returns come from the market.

So is this the right time to panic and sell your stocks? The short answer is NO. Now is the time to:

  • Own equities and short term, high quality fixed income.
  • Globally diversify.
  • Rebalance on highs and lows.

Because we use emotions to guide us in many decision we need the assistance of an investor coach/fiduciary adviser. Your coach will keep you disciplined to your strategy and help you thru the short term ‘noise’ of the markets.

There have been bad markets in the past and there will be bad markets in the future. We can use bad or down markets to rebalance.

Rebalance to our original asset allocation.

In this way we are buying low and selling high, automatically.  We need to remain disciplined throughout to earn the market premiums.

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.

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.