Focus on Market Returns!

Most investors have failed by a long shot to achieve market rates of return. Based on the Dalbar Study, the average investor has failed significantly to achieve market returns. While the S&P 500 has earned 7.68%

the last 20 years ending 2016  the average mutual fund investor has earned 4.79% during this same period.

 

This is a stunning failure. Research shows the average actively managed mutual fund underperforms the market by two to three percent per year. Accepting this fact, the investor’s job of allocating assets is greatly simplified.

 

The investor only needs to allocate his/her assets into various asset categories to achieve market returns and remain disciplined over long periods of time.

 

This is easier said than done and most often requires the aid of a coach. By focusing on market returns, there is no stock picking at all. No forecast, no prediction. There is no gambling on beating the market. You just own every single stock in that asset category. That’s what we talk about when we refer to market rates of return.

 

Remember it’s not about picking the “best funds” rather it’s about maintaining a disciplined approach.

 

Investing success requires owning

equities….globally diversify…..rebalance.

 

The Wall Street bullies continue to lure investors with the ‘hot’ managers sterling performance. These investors then buy and in most cases are disappointed with the results.

 

We investors have been convinced that someone out there can beat the market. They have been convinced that someone can help them avoid losses and only participate in the gains.

 

These investors are looking for stock market returns with Treasury bill risk. What the Dalbar study shows us is that they end up with Treasury bill returns and stock market risk.

 

Stop the madness. Although it has been proven people are more motivated by the pain of losing than they are with the pleasure of gains. We need to focus on market returns and avoid listening to short term noise. Without downturns there would be no or lower returns.

 

The markets reward the taking of risk. Accept this and allow your investor coach to guide you through the turbulence.

 

Always remember the markets are random and unpredictable.

Predicting The Future Is Hard!

There has never been a shortage of predictions in any field. Let alone the financial markets. If you google investments. There are approximately 382,000,000 results.

There is no shortage of Wall Street bullies offering their prediction of the future. Unfortunately, most, if not all of these predictions do not come true. Mostly because predicting the future is really, really, hard.

No individual, committee, or money management company can ever hope to know “everything” about investing.

All the facts, data, statistics and information about stocks and the market are infinite.  They are also ever changing.  The free market system itself is the only mechanism known to effectively incorporate this into a pricing system.

The good news is, if you know the guiding principles of successful investing and work with a coach, you don’t have to know everything just the right things.

One of those things is be successful in investing you need to own equities….globally diversify…rebalance.

As investors we need to ignore all the ‘noise’ the bullies try to sell us. We need to realize these predictions are nothing more than enticements for us to move our money. They will enrich themselves and not you.

Yes, your best interests are secondary to their goals.

Of course, if you wish to speculate then listen away. But investors need a prudent process and discipline.

This is best accomplished with the assistance of an investor coach/fiduciary adviser.

 

If It Bleeds It Leads!!

Watching the NFL, as many of us do.  Go Pack Go!! There is continued attention to the players “protests”. The media has been focused on the “protesters”.  Not on the people who continue to support the U.S.. Like all of us when we see an accident we have to look.

When I personally see an accident, I am looking but also focused on traffic.

The nightly news, daily stock market shows, and cable news focus on variability to get your attention.  They bombard you with the equivalent of “noise”. Short-run data and statistics that are useless.

Keep in mind, with regards to the media. “If it bleeds it leads.”

Paying attention to the short-term market fluctuations and newspaper headlines will completely disintegrate your peace of mind and ultimately your portfolio.

The reason many prefer investing in real estate is there are no noticeable short-term fluctuations in price.  You cannot look up the value of your real estate property on a daily basis. You treat it like a long-term investment, which it is.

In reality, real estate prices are correlated or just as volatile as small cap value stocks, over the long-term.

Unfortunately, for investors, we live in a digital world. Information is readily available. You can look up the value of your stock portfolio at any time during the day.  This ability only adds to our daily anxiety and stress levels.

The stock market should be treated much like real estate, by ignoring short term volatility and the daily news reports.

By following a prudent process and strategy with your investments you will succeed in the long run. Stop trying to control something you cannot control.

To succeed in investing for the long run you must own equities….globally diversify…..rebalance.

Investors Think Long Term….Speculators Think Short Term!!

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

There are an increasingly amount of ‘experts’ extolling the underperformance of international and small equities for the near future. These ‘experts’ have an obvious conflict of interest as they recommend their own solution.

These ‘experts’ are using 2014-2016 and into 2017 as a sales gimmick. You will hear ‘look I would not have as much small stocks’ or ‘international stocks will underperform for some time to come’. Or both.

Many of us have short memories. In the late 1990’s U.S. Large Cap Growth  stocks including tech stocks were out performing nearly all other assets classes. Like Large Value, small stocks, international stocks.

Most ‘investors’ or should I say speculators had portfolios concentrated in U.S. large cap growth stocks. Specifically, tech stocks or ‘dot’ com stocks.

It was said that it was a new paradigm. Things had changed, permanently, they said. Small stocks, value stocks and international stocks were no longer relevant, they said. Fed chairman Ben Bernanke had the famous quote ‘irrational exuberance’. This only slowed the market for a short time.

Then in 2000 the tech bubble burst. U.S. Large cap growth stocks were crushed.

Warren Buffet who had lagged the tech stock market badly during the 1990’s was back.

A globally diversified portfolio saved many investors. While the speculators were left picking up the pieces.

Investors think long term while speculators think month to month.

True investors are much better served using a free market 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.

When we control risk in our portfolio we can look to our future with confidence. The ‘all-in’ attitude will lead to disappointment over the long term.

To be successful, investors, no matter how large, would be far better off using a free market 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.

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

Is Anything Free??

The Wall Street bullies continue their assault on investors. They say you can trade with us for free. Or use our robo advisor and save money.

We have seen the commercials of the past during sporting events, as well as other highly viewed shows the baby that picks his own investments.

Obviously these commercials are trying to convey the idea that you can trade your own account and make money for a low trading fee.

Even a baby can do it. These commercials play on your emotions.

There are commercials that show how much money you can save by doing it yourself.

Do you bargain shop for medical care? If not, then why would you bargain shop for your financial future? Low cost does not always get you where you want to go.

Even though you may be trading for free. Brokerage firms know that most people will trade excessively, making the brokerage firm more money. At the same time the investor will lose.

Of course there are examples of some making huge profits. These examples are few and far between.

As an example there are people who win the lottery but for most it is a losing proposition.  Or look at any casino parking lot. It is filled with people looking to strike it rich. Some will but the vast majority will lose.

And the longer you play the greater the risk of loss.

Wire houses and discount on-line brokerage firms WANT you to believe you can manage your own money.  That keeps you speculating and makes them RICH.

Even the most intelligent investor with the best intentions and lots of time is likely to ultimately fail because of emotions, instincts, and propaganda.

These brokerage firms make money on every trade regardless of whether you the investor make money. In fact most lose. If you are investing for a specific long term goal you need to know two numbers.

You need to know the expected return and the expected volatility (risk) of your portfolio. If you do not know these two numbers you are speculating with your money.

The most important component of successful investing is controlling your emotions and most people cannot do this on their own. This is where a good advisor adds value, developing a prudent portfolio for your situation and keeping you disciplined to that strategy.

Remember there will be times when others have a better solution for the short term. Jumping from one strategy to another does not work. Except the brokerage firms win regardless.

To succeed in investing for the long term you must own equities….globally diversify…….rebalance.

Happy Labor Day or Good Bye To Summer!!

Happy Labor Day!! I hope everyone enjoyed a safe and pleasant holiday. Sadly for many this is the last unofficial weekend of summer. The Labor Day holiday, which began in 1887, is to honor all the hard work of Americans.

America has always been known as the land of opportunity. This opportunity will only result in success when combined with hard work and in  taking risks.

There will always be risks, no matter what the path you take. Some of these risks will be apparent and some will be hidden. Even if you work for an employer you take the risk that the employer will no longer need you.

Small business owners take on different and more apparent risks. But there will always be risks. Regardless of the type of risks you decide to take on the path to success, it will require hard work.

There is no short cut to success.

Keep in mind some will get ‘lucky’ and strike it rich quickly but the likelihood that these ‘lucky’ ones will hold on to these riches is slight. To appreciate your wealth, it is best to have earned it through hard work and taking the right kind of risks.

When we acquire our wealth through hard work and risk we should insist on having our money work hard with the right kind of risks.

The Wall Street bullies have convinced us that there is a short cut to investment success.  Why do we work hard and take risks to acquire our wealth and then think we can easily make a very high return? Why do we think that gambling and speculating with our money is the prudent thing to do?

Through research and proven concepts and theories we can make our money work hard for us with the right kind of risks. If you are working with a broker who is stock picking or market timing or using track records to invest you are gambling and speculating with your money not investing

Stop being a victim of the Wall Street bullies.

Seek the assistance of a fiduciary adviser, an investor coach, to help your money work hard with the right kind of risks. The Wall Street bullies understand that you will make emotional decisions with your money. And they know how to take advantage of this. Your investor coach will help you remain disciplined and focused.

Diversification Helps Smooth Things Out!

Many times, when I meet with investors I am asked ‘where is the best place to put my money?’  The financial institutions have taught investors that there is someone who can tell them what to do in every circumstance.

These institutions lead you to believe they know what you need. In fact these institutions sell you ‘product’ to feed your fear in every environment.

A true advisor will often tell you things you do not want to hear. Remember if your advisor only provides the product you ask for they are not an advisor but rather a salesperson or broker.

To succeed in investing being diversified means looking different.

Most investors are narrowly diversified into top performing funds or asset classes of the last five to ten years.  They often feel diversified but aren’t.

Right now, on August 28, 2017, the top performing funds are U.S. Large Growth stocks. So, this is what financial salespeople are selling now.

To be diversified means including asset 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’.

The goal of diversification is to avoid the volatility, both up and down. Right now, U.S. Large Stocks can do no wrong. However, when there is another downturn like 2001 these concentrated portfolios will suffer.

We need to smooth out the volatility. The above graphic illustrates how markets perform. There are ups and downs throughout the cycle. Our goal is to build portfolios that avoid some of the severe ups and downs.

The concentrated portfolio of US Large growth stocks is out-performing the globally diversified portfolio for now. This will change however no one can tell you when.

Of course, we must state that past performance is no indication of future results.

Many will say that ‘times have changed’. They will make a case that U.S. Large stocks will always prevail in the future.

However regular readers will know that no one can predict the future. No one can tell you which asset classes will out-perform into the future.

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

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.