When Investing for Peace of Mind, Always Consider the Sum of All Outcomes.

During conversations with investors and financial professionals I hear of the hot advisor who beat the market. They made money throughout the ‘great recession’. They are a Chartered Financial Analyst CFA or some other designation that ‘proves’ their ability to beat the market. They have the system to make money in futures, options, gold, real estate and/or other alternative investments.

Recently while talking with another adviser. He told me since we are not affiliated with a broker/dealer we are not tied to institutional money managers. He stated he had developed a stock picking model of his own that average 19%+ over the last 10 years. What I did not tell him was there are a number of actively traded mutual funds that have average 19%+ over the last 10 years.

What he does not realize is that there is no correlation of past performance to future results.

Many times I hear that their friends’ broker beat the market. Therefore, everyone should move their money to this ‘hot’ broker. Unfortunately, when the ‘hot’ streak ends and it will, investors are devastated.

My studies of investing strategies over the last twenty years. I have come to  the conclusion that trading strategies work until they don’t. When they stop working it gets real ugly real fast.

Just because someone else got lucky doesn’t mean you will.  If we offered you a million dollars to play Russian roulette with a gun containing one bullet and five empty chambers, you would be a fool to ignore the chance of blowing your brains out.

Every day in the world of investing, someone takes a foolish gamble, gets lucky, and wins big.  When investing, you must always consider the sum of all probable outcomes, including the bullet in the chamber.

IF you are saving for a long term goal, like retirement or college for your kids or anything that is important to you follow a formal strategy.  You should follow a strategy which is backed by academic research. This research should use at least 60 years or more of data to eliminate any chance of bias.

You cannot substitute a high risk strategy for a prudent portfolio with a disciplined savings plan.

To succeed in reaching your long term financial goals you should, buy equities……globally diversify….rebalance.

Spring Has Sprung…Oh Wait..

This last weekend Northeast Wisconsin was hit with a record snow storm. The measurement last I saw in Green Bay was nearly 24 inches. Second most in recorded history.  It beat a record set in 1889. I also saw that Shawano received 33 inches this weekend. WOW!

I for one, have had enough snow and cold and wind…

This can teach us something about investing. Over the years we can expect the S&P 500 to earn an average of a little less than ten per cent. These facts also say that most of the time the return will vary from -6% and +22%. There are of course exceptions, 2008 saw a -40% loss.

This is comparable to the snow event we experienced this last weekend. They give us average snow falls for Wisconsin. Some years are below and some are above the stated averages. Then there are the exceptional years, like April 2018.

During years of exceptional snow we experience inconvenience, we probably need to stay off the roads, we probably need to wait longer for the roads to be cleared. There is also power outages to deal with. The list goes on for many.

The question becomes should we prepare of these rare events by investing in more snow removal equipment? Or keep more people on staff? Or should everyone invest in personal power generators?

The answer, in my opinion, is no. These rare events are part of life. Soon the roads will be cleared, our lives will go back to normal. Since it is April this snow will soon melt. OK it may not seem like winter will ever end but it will.

Like the economic downturn, we will recover. During 2008 many said this was the end. Our finances would never be the same. Many felt the downturn would never end. They panicked and sold.  But eventually the economy did recover. The pain went away for those that remained disciplined.

Unfortunately those that panicked locked in their losses and lost out on the eventual recovery.

It is April 2018 and we are digging out. There is a light at the end of the tunnel.

Will there be another event such as 2008? I have no idea. However I know if you work with an adviser that builds a prudent portfolio designed for you. You can go ahead with confidence that eventually the bad times will disappear.

Remember you don’t have to know everything about investing but you do need to know the right things.

In most cases this means the adviser you hired needs to keep you disciplined and focused on the long term.

Well Now We Know That Equity Markets Don’t Always Go Up.

As investors we know or should know that the reason stocks have historically returned more than fixed income over the long-term is because stock holders endure the volatility of the market. Without the volatility that goes hand-in-hand with stock ownership, the risk premiums associated with stocks would diminish, and so would the attendant wealth. Mark Matson

We enjoyed a great return year in 2017, in fact January 2018 looked pretty great.  Many of us now believed that the markets will continue going up. Of course there are always those predicting impending doom.

As an investor coach now is the time that I really earn my fees. Each week I discuss building a prudent portfolio at a risk level that YOU are comfortable with. We discuss that we need to know the expected return and the expected volatility. This information will give us the tools to build the right balance of return and risk.

However I also mention the most difficult task of an investor coach is keeping clients from making emotional decisions. The task sounds easy, remain disciplined. However when we are bombarded with dire predictions of doom many cannot resist panicking and selling when markets correct.

This in fact is a great opportunity to buy at a discount price. I believe Warren Buffet said it best when he told of his investment philosophy ‘when they’re crying I’m buying when they’re yelling I’m selling.’

Some historical statistics might help with this. Since 1928 the S&P 500 has returned 9.8% on average. During this time there has been 89 drops of 10% or more compared to 23 drops of 20% or more.

Since 1946 it has taken the market 111 days on average to rise to its pre-crash levels. Of course we must add that past performance is no indication of future results. However, I believe that since we have over six decades and more, of data we can assume that after all market downturns, regardless of how severe, the markets recover and go on to greater heights.

Now is not the time to panic and sell and seek safety, now is the time to implement one of our three simple rules which is rebalance.

At the end of 2017 when the equity markets flourished and fixed income lagged, we sold equities back to our original allocation and bought fixed income to our goal allocation. Buy low and sell high. We will again rebalance at the scheduled time. If the down turn continues we will sell fixed income and buy equities. Again buy low and sell high. When we have a prudent process and the discipline to follow it we will succeed long term.

This is where the services of an investor coach become invaluable. Because with the right process and discipline you will reach your long term financial goals.

Are You Asking The Right Questions?

Every week I talk with investors about how they invest their money. While listening to many I can hear the influence of the Wall Street bullies by the questions they ask.

The Wall Street bullies have an ongoing marketing campaign to convince investors that they have the answer to investing success.

These bullies have trained you to ask the following questions:

  • What stocks or investments do you like? These bullies need you to believe that there is some investment advisor who can consistently and predictably add value to your portfolio by exercising “superior skill” in individual stock selection.
  • Who are the best fund managers? In other words track record investing is finding the funds or managers that did well in the past is a reliable method of indicating which funds will do well in the future.
  • When should I get into and out of the market? Market timing is any attempt to alter or change the mix of assets in a portfolio based on a prediction or forecast about the future.

When investors ask these questions what they are really asking for is a prediction about how our investments will do in the future.

All studies done on the success of these strategies have indicated that they do not work.

You cannot predict the future because the markets are random and unpredictable.

Rather than trying to predict what the markets will do next investors would be better served by developing a prudent portfolio and remain disciplined.

The questions we should ask are something like:

  • What is your portfolio’s expected return?
  • What is your portfolio’s expected volatility?
  • Have you defined your investment philosophy?
  • How do you measure diversification in your portfolio?

An investor coach can help you answer these and other relevant questions.

Remember you are investing to reach a long term financial goal. This goal cannot be achieved if you continuously change strategies. Or try to get in and out of the market at the right time.

These tactics very seldom lead to success in the short term. Over the long term you will not reach your financial goals because they rely on ‘luck’ and not ‘skill’.

Most pension funds are  managed to control risk through proper diversification. Why shouldn’t you?

The fundamentals of successful long term investing involve:

  • Own equities
  • Globally diversify
  • Rebalance

It is more about controlling your emotions during both down AND up markets. Controlling your emotions cannot not be done alone.

When Should I Change My Investment Strategy?

This message is a repeat or redundant. It was relevant then and it is relevant now.

We are experiencing some very turbulent times in the global economic environment. The markets ‘fear’ this time is a possible trade war.

And we also are experiencing a sharp downturn

Wall Street prognosticators are trying to do is strike fear into the investing public. These Wall Street bullies are looking for an increase in trading. These bullies want you to move your money from one asset class to another.

Remember they make money on every transaction, whether you make money or not.

Wall Street has a product for every situation. And they know the investing public is constantly searching for the next big ‘thing’.

Another factor that is contributing to the high volatility. The Do It Yourselfer. These are investors managing their own accounts to save fees. Unfortunately these DIYers actually add to the volatility by reacting to market moves with emotional responses.

In other words they panic and sell during downturns and buy back after the market recovers.

Investors’ real goal is stock market returns with Treasury bill risk.

This is unattainable. Remember, where there is no risk there is no reward. This is true in all other areas of our lives, not just the stock market.

What we must remember is that stock market or equity risk is only part of the problem. Inflation risk is the most destructive to your savings over the long term. It is constant and unrelentingly eating away at your purchasing power.

Owning equities or stocks may be the best way to combat inflation risk.

The most successful investors of all time have one strategy, a strategy that does not always look great, but over time leads to success. These successful investors are not always looking for the next great strategy. At times they will look like they do not know what they are doing.  These successful investors know risk is unavoidable.

It has been proven time and again that market timing DOES NOT work. Not only must you be right getting out of the market, you must also be right about getting back in. Research has proven that this is NOT done consistently.

I find it curious that investors see past ‘crashes’ as buying opportunities while current or future ‘crashes’ are seen as risk.

A fun fact is that since 1925 the S&P 500 has averaged approximately 9.75%. During this time there have downturns of 10% or more 89 times. That’s approximately one per year. (Our current downturn has recently reached the 10% threshold.)

So if you want to keep control of your money and earn good market returns you must live with downturns. Because with downside volatility there is the upside volatility.

There are ways to control your risk while earning good market returns, long term.

Investing for a long term goal such as retirement requires patience, a prudent strategy and discipline. This, in most cases, requires the assistance of a good coach. A good coach will guide you in following these three simple investing rules.

Own equities….globally diversify…..rebalance.

If you panic and sell you are locking in any losses you have. This is a huge mistake.

To succeed in reaching your long term financial goals you don’t need to know everything about investing, but you do need to know the right things.

Is Now The Time To Get Out Of The Market?

There continues to be political unrest here in the U.S. as well as around the globe. Many people are uncertain of the future. Many believe it is time to get out of the market. Many believe it is time to hunker down.

At least until things calm down.

Since there are over six billion people on this planet. There is always conflict somewhere. And there always will.

During these times of crisis we have a tendency to make emotional decisions. Decisions that are NOT in our own best interests.

Ideally, we should all just time the market cycles and only buy when the market is low and sell when the market is high. Unfortunately, few, if any investors are able to do this with any consistency.

We tend to make our investment decisions based on recent past events and how we feel about those events.

If the market has done well lately, we wish, we are comfortable buying stocks. If the market has done poorly, however, we avoid them. Unfortunately, this is the exact opposite of what we should do if our goal is to maximize our long term return.

Once we feel “comfortable” with the market, we have usually already passed up large potential gains. The stock market is forward looking and usually starts trending upwards between 6 to 9 months ahead of the economy actually recovering from a down cycle.

There is an unholy alliance between the media and the large financial institutions to convince the investing public to continue trading by spreading fear and panic.

Many investors mistakenly believe that the big brokerage firms make money by trading in and out of the ‘right’ investments

The large financial institutions make money when YOU trade in and out, making money on every trade.

You should own equities…globally diversify…rebalance and believe that America and the capital markets will recover and prosper. We as a country have been thru much worse and we recovered and became stronger.

The problem is no one can consistently predict what will happen and when.

During times of crisis should we cut and run or should we stand and fight? Historically the fighters are the ones that profit and prosper. Those that cut and run grasp unto their ‘guarantees’ and wonder why they are always behind.

You must ask yourself, am I an investor or a speculator? Speculators are akin to gamblers. Investors focus on the long term and live life with much less anxiety and fear.

To best deal with the inevitable ‘bad’ times fire your broker/agent and hire an investor coach/fiduciary adviser.

Where Will The Stock Market Go Next?

Based on the inherent fear and uncertainty, many investors feel the need to get some kind of prediction about what’s going to happen in the future. After all, if someone could just tell us what is going to happen with inflation, long-term interest rates, share prices, overseas markets, etc., there would be nothing to fear.

Along these lines, it is easy to be convinced that someone else really does have the information, power, and insight to forecast the future. You could become an innocent victim of wish fulfillment. It would be so much easier if someone really had the answers; it is easy to lose sight of the simple fact that is is just not possible to predict the future.

This explains why people are clamoring around investing programs broadcast regularly on CNBC, eagerly subscribing to Money magazine and voraciously perusing the internet in search of the next hot stock tip.

Believing that someone out there, whether it’s you, or the broker, or some money manager who’s on the cover of a magazine, can actually predict and forecast the future and pick all of the best stocks and post massive returns, is not the folly of weak minds. It is most often the folly of the most brilliant minds.

The Greeks called this phenomenon hubris. This is exaggerated pride or self confidence. People who have very high intellect often feel they can beat all kinds of games. They feel they can beat Vegas odds. They feel like they can pick the winner of the Super Bowl. They feel like they can consistently pick the best stocks.

Because man has used his intellect to reveal so much of the universe, and science has accomplished so much, it is easy to believe that if intellect can accomplish all of these things, then surely it should be able to be used to do something as simple as picking the best stocks.

The greatest fallacy in the investing industry is that this superior performance is a factor of skill and not luck.

This is not something that only weal minds or people who aren’t intelligent fall into. It’s easy to fall into these traps when they’re so pervasively put out there by the financial community, the media, and the public at large.

The Good News: You don’t have to have an accurate prediction about the future to be a successful investor.

Own Equities….Globally Diversify….Rebalance

Past Performance Means Little!!

Recently I was discussing the advantages of leaving the brokerage business and starting a registered investment advisor business with a colleague. He said the main advantage was he did not have to use institutional money. He proclaimed he had developed a stock picking model.

This model had earned over the last 10 years an average return of 19%. WOW that is very impressive. Until I asked if this was live or did he have clients that realized these returns.

His answer, was no. This was the return software generated when he used different criteria. In other words, he optimized the portfolio based on past data.

It is very easy to build a portfolio of the best stocks and earn outstanding returns based on past performance. Unfortunately, for him and his clients’ past performance is no indication of future results.  Yesterday’s hot stocks could be tomorrows dogs.

He does not realize that he is gambling and speculating with his clients’ money. He can justify each trade with some signal or trend change or some other indicator.

Unfortunately for this trader his hypothetical success will be met with long term failure. Successful investing is NOT gambling and speculating. Successful investing involves following a prudent process and remaining disciplined to that process.

OK I am going to say this with the risk of repeating myself. There are three simple rules to successful investing:

  • Own equities and fixed income.
  • Globally diversify.
  • Rebalance

Each of these rules sound very simple and should be very easy to follow. Until one of your friends or someone you know tells you something that scares into panicking and selling. Or even convinces you that the next hot stock or asset class will make you rich.

Successful investing is just that investing which means long term. One of the reasons the equity markets provide an excellent return long term is the volatility both up and down. We need to live with the downturns in order to experience the upturns.

Stock picking and market timing may be more fun to talk about because it is exciting, especially when you win. But like a gambler, market timers and stock pickers get a high off their trading.

It’s ok to gamble and speculate with fun money but not money designated for a long term goal, like retirement. If you really want to gamble and speculate go to Las Vegas, at least you will have more fun when you lose.

To successfully investor you need to fire your broker/agent and hire an investor coach/fiduciary adviser.

All In!!

Since I am on vacation this week. Sunny Arizona! I decided to send a message I sent three years ago. As I have mentioned many times my message week after week remains the same. In essence, we nor anyone else can predict the future.  Enjoy!

Every week I discuss the advantages of following the three simple rules of investing:

  • Own equities and high quality short term fixed income.
  • Globally diversify.

Very simple indeed until being globally diversified results in performance less than the U.S. Large cap asset class. Because we see large cap stocks every night on the news we compare our results to the DOW and the S&P 500.

As humans we avoid pain and are drawn to pleasure. It is a natural thing. When we see the U.S. large cap earning a great return while small, international and emerging markets are lagging. We wonder why not invest all my money into U.S. Large Cap.

Keep in mind the financial media focuses on the Dow and S&P 500.

On the flip side when small, international or emerging markets are out performing we think nothing of it because we don’t know. Consider this since 2000 the S&P500 has been the best performing asset class three years. And the worst performing asset class for five years. The rest somewhere in between.

Perhaps another small history lesson will help you realize the value of a globally diversified portfolio.

From 1996-2000 the S&P 500 earned a cumulative 132% while Emerging market small value stocks lost -49%.

Naturally at the end of 2000 investors would want to invest all their money into the S&P500 Large Cap stocks(Pleasure) and avoid emerging market small value(Pain).  The next five years, included the tech bubble bursting. As I mention often no one can consistently predict the future.

Let’s see how that worked out for investors. From 2001-2005 the S&P 500 earned a cumulative 3% while Emerging market small value stocks earned cumulative 162%. That didn’t work out well at all.

Naturally, I cannot predict that this will happen again because past performance is no indication of future results.

The point is no one can predict which asset class will outperform and for how long. When someone does make an accurate prediction it is a matter of luck and not skill.

When you consider all the analysts on Wall Street all making their own predictions. In any given year someone will be right. The problem is we never know which one is right in advance.

On another point I find it fascinating that investors see crashes of the past as buying opportunities and current or future crashes as risk. It is interesting how the human mind works. OK now I’m rambling.

It is times like these that investors really need an investor coach the most. A coach will help you control your emotions. Right now the emotion is greed. Even though allocating all your investments to U.S. large cap might sound logical it is not.

Your coach along with your investment policy statement should guide you through all market conditions.

Don’t empower the Wall Street bullies and hire an investor coach/fiduciary adviser.

As always, I welcome any questions or comments. Although I will not answer until after March 11.

When Harvard Talks People Listen!

Everyone would have to agree that Harvard University is one of the best in the U.S.. Of course, many will argue the point. We must to agree that some of the brightest attend and graduate from Harvard. Again, there are exceptions.

As an investor if someone from Harvard gave you a recommendation. You would gladly accept it and invest your money. Right?

Well you might want to reconsider this strategy. The Harvard Endowment fund released their performance results for 2017. They came in at a “disappointing” 8.1%. Disappointing because the S&P 500 reported a total return over double this amount for 2017.

When you read the explanations, you might become confused. Or as I said HUH???

Those that remember the EF Hutton commercial ‘when EF Hutton talks people listen’. Well when Harvard talks people listen. However, the results will often be disappointing.

In fact, the Harvard alumni have asked the Endowment fund changed to using index funds.

Now I will not recommend everyone put 100% of their investment money in the S&P 500. There is a need to consider risk when developing a portfolio. The S&P 500 on its own can be quite volatile.

However when investors

  • Own equities with high quality short-term fixed income
  • Globally diversify
  • Rebalance

Over the long term they will realize the great returns the equity markets have to offer.

Stop trying to find the holy grail of investing. Unless that means working with an investor coach/fiduciary adviser to develop the right portfolio for you.

Your coach will help you build the right portfolio and keep you disciplined to your strategy.