It’s In The Stars!!

The mutual fund industry, ie, the Wall Street bullies, continues to generate new stock picking stars each year. These stars generate great returns that make the investor cringe in jealousy. ‘Why can’t I find these stars? Why doesn’t my broker find these stars for me?

These ‘investors’ are on an endless journey to find the stars before they become stars. This has been proven to be a fruitless search. Of course, some get lucky. But most end up disappointed.

Keep in mind most big brokerage firms have hundreds if not thousands of analysts picking stocks. Firms like Fidelity will hire a large number of analysts knowing that each year some will succeed. The firm then promotes the stars and entices investors to buy their stars.

In fact, the industry has a ranking system, through Morningstar you can determine the stars of the past. The best performers receive 5 stars the poorest 1 star.

Each year there are new 5 stars and new 1 stars. Unfortunately for investors the 5 stars seldom repeat. And this years’ 1 star could become next years’ 5 star. There is no reliable way to determine which will be the 5 star of the future.

In fact, in a recent Wall Street Journal story it was proved that relying on 5 star funds would result in disappointing performance relative to the overall market. Morningstar of course, tried to defend their system but to no avail. There is no predictive ability in the Morningstar methods.

We must always remember. The equity markets are random and unpredictable. Any attempt to beat the equity markets with predictions will lead to disappointing results. Unless of course, you are one of the lucky ones.

When you are relying on luck and predictions you are actually speculating and not investing.

Speculating is fine, don’t get me wrong. As long as you realize you are speculating. Many believe they do not need to save and prudently invest. They can and will be one of the lucky ones and hit it big.

When you have a long-term goal, like retirement. You should be prudently investing and not speculating. The stakes are far too high. Your future and your families’ future, depends on it.

You must protect the future you from the current you. You need to fire your broker/agent and hire an investor coach/fiduciary adviser.

There is Risk in Everything We Do!

Many saving for retirement or any long term financial goal consider risk a real four letter word right now. More specifically equity risk is to be avoided at all cost. We all want to avoid pain. The last decade has been more volatile than usual. Or has it?

Risk and the chance of experiencing negative returns in a portfolio of equities is a very real likelihood.  In fact, the longer you hold your portfolio, the more likely you are to experience some years of negative returns.  But holding longer also increases the probability that your compound annual returns will be positive.

I don’t know if the next 20% move will be UP or DOWN. What I do know is the next 100% move will be up.

When we invest for the long term we must accept risk. If we try to avoid equity risk, it is replaced with inflation risk or purchasing power risk.

Remember the real return of any investment whether it is equities, bonds, annuities, CDs, money market funds is the total return minus the rate of inflation.

For example, with a money market return of 0.2% minus inflation rate of 3.5% equals a negative return of -3.3%. This means that every year you hold your money in money market funds your purchasing power decreases 3.3%.  Compounding returns work in reverse as well.

To keep pace with inflation you need to be invested in equities. We must learn to live with the risk, we must remain disciplined and do not allow the Wall Street bullies to make us trade and speculate with our money.

There are ways to control the amount of risk you carry in your portfolio. Younger investors will likely take on higher levels of risk during the accumulation phase. While retirees might be more comfortable with reduced risk during the spending phase.

Regardless, it is important to understand the risk you are carrying. You should understand the best-case scenario and the worst-case scenario. The equity markets are random and unpredictable. There will be periods when the equity markets are down. Sometimes dramatically, like 2008.

If you understand the amount of risk in your portfolio. You will not allow short term volatility to cloud your judgement. You will not panic during the inevitable down markets.

You will understand that great returns are the result of discipline and understanding.

This is a process that requires the assistance of a fiduciary adviser/investor coach.

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

Your Philosophy Matters!!

As many of you may know I am a huge Green Bay Packer fan. Well the pack is going thru some tough times. Many of the Packer stars have been injured. Offensive line, cornerback, linebacker, safety, defensive line….But most notably the Packers have lost Aaron Rodgers possibly for the rest of the season.

They will regroup and Coach McCarthy will emphasize getting back to their plan. What makes them a great team needs to be reinforced to the players and staff. It requires discipline in both the good times as well as the bad times.

Many fans are calling for the signing of an emergency quarterback. The names Kaepernick (never), Romo, even Favre have been mentioned. What fans seem to forget is it takes time for any player to learn the current system.

There are different philosophies around the NFL. The Packers administration has their own philosophy. They as a group stick to this philosophy regardless of what the fans and the media say. When they deviate from this philosophy they probably should be replaced.

In my opinion when you change philosophies mid-stream you are giving up on what you believe. When this happens, there is no plan. You are making emotional decisions without a clear goal.

Remember when you believe in nothing you will fall for anything.

A change in philosophy would require a change in administration. That would mean Ted Thomson goes, Mark Murphy goes, followed by Mike McCarthy.

For now, we will follow the current administration and live with their decisions. Like it or not.

Investors have two main philosophies to choose from. One is that free markets work, and the other free markets fail.

If you believe the free market fail:

  • The market fails to price goods and services efficiently.
    It is possible for some individuals to identify in advance which prices are inaccurate.
  • Underpriced or overvalued markets can be forecasted or predicted.
  • Managers seek to increase returns and avoid losses by taking advantage of stock or market mispricing.
  • People with this view use traditional investment approaches.

If you believe the free markets work:

  • Free Market is best determinant of market prices based on Supply and Demand.
  • All available information is factored into the current price.
  • Only new and unknowable information and events change pricing.
  • The randomness of the market makes it impossible for any individual or entity to consistently predict market movements and capture additional returns unrelated to risk.
  • People with this view would utilize free market investment strategies

In my opinion, investors would be better served by following the free markets work philosophy.

Like the Packers we need to ignore the media hype and focus on their long-term goals.

Also like the Packers they need to understand what the process is and believe in it. Remember investors do not have to know everything about investing to succeed but they do need to know the right things.

To succeed long term in investing find an investor coach/fiduciary adviser that you believe in and learn whatever you can.

Then you must own equities…globally diversify…rebalance. And repeat until you die.

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.

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.