Diversification Is Your Buddy!!

Over the last 5 or so years the U.S. stock market has produced far superior results. To be more specific U.S. Large cap growth has produced superior results. Large and small value stocks have lagged behind. International stocks have been even worse,

As a result many investors are focusing their portfolios on U.S. Large cap growth stocks. Remember past performance is no indication of future results…

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

You must decide if you are a gambler/speculator or an investor. Gamblers believe they can out guess the market and avoid all losses. The gamblers have proven numerous times to be wrong in the long run. One may get ‘lucky’ but no one can consistently market time.

In markets like these diversification is your buddy.

Proper diversification spreads risk across various asset classes with varying return characteristics or dissimilar price movement. Simply said: they don’t do the same thing at the same time.

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

To be diversified means including classes or types of funds in your portfolio that did poorly over the last five to ten years. If you do this, your portfolio will look and perform very differently from your neighbors’ or friends’.

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

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

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

Dealing With Crisis….

As we begin month number 5 in the coronavirus crisis and month 3 in the social protests. Many of us are dealing with each crisis differently. Some believe we should be required to wear a mask anytime we are in public. Many believe we should be able to choose if the mask if right for us.

The media shows us the social injustices in America on a daily basis. But ignore the violence and the riots. One politician believes the violence and riots are a myth. We as Americans need to observe what is going on and decide to handle the situation.

It seems everything today is being politicized. What will happen as a result? I have no idea. In the end the coronavirus will be resolved. Whether thru acceptance or a cure.

But what does this have to do with investing? Well, there an abundance of predictions. Some with valid points. Some not so much.

As in the investing, there no shortage of predictions. What the media neglects to inform us is that they have no idea which predictions will be found correct.

The investing world has an abundance of different opinions. The problem for investors is that no one can tell you which ones will be found correct.

OK I do not have a solution for the coronavirus nor the protests. However, I do have a recommendation for proper investing.

Own equities with the correct amount of high-quality fixed income, Globally diversify, Rebalance. To insure success hire an investor coach/fiduciary adviser.

What? Another Crisis and Then Back Again

The year 2020 has become the year of the crisis. First there was the coronavirus which continues. This was followed by the ‘racial equality protests, which continues. The coronavirus appeared to be reversing, until it came roaring back.

Then the protests turned into riots in many major cities. What is happening has been described as a war zone.

Let’s face it, 2020 has become the year to remember and one to forget at the same time.

The rest of this commentary has been repeated it seems far too many times. Going back, I don’t know how far.

There is constantly a crisis somewhere in the world. There will be other events both good and bad that will send shock waves, both up and down, into the stock markets.

That is the point, there is no way to consistently predict market movements over the short term.

Keep in mind that in order to realize the superior long term returns of the equity markets we must control our emotions in both up and down markets. Warren Buffet has a saying I find helpful.

“Be greedy when others are fearful and fearful when others are greedy”.

In other words control your emotions there is no get quick rich scheme. If the ‘experts’ actually could predict the future why would they tell you? Fund managers, hedge funds managers, stock pickers, market timers all need investors to believe that someone can and does beat the stock market.

This is all part of their marketing strategy. When a manager actually does beat the market, (luck will allow some to win), the marketing department goes to work.

Unfortunately for investors there is no evidence that past performance correlates into future success or future losses.

Investing is not a game as they make it appear. To succeed in investing for the long term you should own equities…..globally diversify….rebalance.

Any time or money you spend trying to beat the market is time wasted. Time which you could be spent improving your job skills or developing new job skills or spending time with family and friends.

So turn 2020 into the year you become an investor and not a speculator. Hire an investor coach and reduce your investing anxiety and improve your long term results.

Remember the Occupy Wall Street Protest in 2011?

After following the ‘Occupy Wall Street’ movement I was a bit confused. Were the protesters mad because Wall Street was successful or because they were not.

No system is perfect, however I do not believe any system will succeed long term, if success is punished.

Right now, there are a new group of protests around the country, some very violent. Racial justice is an understandable protest. However, when the protests become riots and property is destroyed, it becomes a national problem.

How does this affect your investments? Well when you combine the protests with the COVID 19 crisis and its effect on our economy as well as the world. The predictions are not good

Initially the COVID 19 crisis caused a historic 6-week crash of over 30%. As of today, we have recovered much of the downturn.

Going forward, the economic impact is really unknown. Because as we all know, consistently predicting the future is really hard.

The power of a free market capitalist system will work things out eventually. Many predictions state that the post-coronavirus world will be different. They are trying to predict which sectors will fail and which will thrive.

If some of you recall the mid to late 1990’s technology bubble. Many tried predicting the ‘right’ sectors, many failed.

The S&P500 and the global equity markets will adjust. Trying to predict specific sectors or markets will lead many to failure. Of course, some will succeed. But that is a gamble and speculation.

There will be downturns in the future, however no one can consistently predict when and how severe.

What you should do is find an investor coach/fiduciary advisor to help you build a prudent portfolio. A portfolio at the right level of risk for you.

Your coach will help you remain disciplined throughout this and all other ‘crisis’ events.

Long Term Thinking & 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. This is another attempt by the Wall Street bullies to keep your money on the move.

There is even more conversations about ‘safe’ investments. ‘Guaranteed’ is often used to describe their ‘solution’.

There are an increasingly amount of ‘experts’ extolling the underperformance of ……………….. for the near future. These ‘experts’ have an obvious conflict of interest as they recommend their own solution.  These ‘experts’ are using recent history as a sales gimmick. You will hear ‘look I would not have as much ………… or ………… will underperform for some time to come’. Or both.  As you can see the underperformers are interchangeable.

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 re-balance 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’.

Over the long term the properly coached investor will outperform the ‘sophisticated’ investor. These ‘sophisticated’ investors believe because of their wealth they will receive special advice. This may work over the short term. However, over the long term the properly coached investor will prevail.

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. Right now these strategies are under performing the U.S. Equity markets. 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.

Happy Independence Day!!!

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.

Currently, we as a nation are protesting racial inequality. We seem to think the federal government is responsible for fixing this. We rely on the federal government to feed us, provide medical care and other essentials.

We rely on the Wall Street bullies, 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, 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.

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

Luck or Skill??

When investors look for actively managed funds they invariably look at past performance and choose the funds with the highest return.  This is typical and the main reason the majority of investors DONOT earn at least the market rate of return.

Several recent studies have proven that the above strategy is flawed.  Actively managed mutual funds with performance greater than the market cannot contend that this performance had anything to do with skill on their part.  No investment skill is evident. 

Have you ever watched a private equity video where the manager is driving a $500,000 car? In most cases this is because the manager makes much more money than their clients. There are numerous examples of private equity managers not beating market returns. And in many cases losing.

The overall evidence suggests that private equity investing is a ‘crapshoot’. 

Of course, there are always examples of private equity firms becoming successful. But in most cases this success is short lived. Primarily because their success is a matter of luck and not skill.

The same can be said for brokers and ‘investment pros’ who claim to be able to time the markets, pick outperforming stocks or select mutual funds that will outperform other mutual funds.  Any prior success can only be attributable to luck not skill.

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

Is It Panic Time….Again??

We are experiencing, among other things, some very tense and violent situations around the world right now. The global coronavirus with the resulting economic crisis. Over the last month, the protests surrounding the George Floyd death. Social injustice has been dominating our conversations rather than the virus. There is uncertainty all around us.

But OMG what should I do with my investments? Or is this a good time to invest? This are typical reactions to a short term down swing in the markets. Many of us forget to keep ourselves focused on the long term. We forget that the stock market does go down. It is the price we must pay for the great returns we realize, long term.

Please remember a fact from Frederick C Taylor.  From 1926 thru 2012 the Standard & Poors 500 has earned a 9.75% average annual return. There have been 22,040 trading days during this time. Only 52% of those days were up days or 11,461 days. That means there were 10,579 down days. The down days are admittedly more painful, but necessary to earn the great market return.

It is also important to remember that

There ain’t no such thing as a free lunch

(alternatively, “There’s no such thing as a free lunch” or other variants) is a popular adage communicating the idea that it is impossible to get something for nothing.

We read or listen to the financial media telling us why a downturn is occurring. I’m not sure what the answer really is. Perhaps, it’s just the market looking for a reason to correct.  Again I do not know the answer.

I do know that downturns are inevitable. They happen.

Dealing with these downturns is part of the reason the long term returns are so attractive.

For long term investors these downturns mean nothing. Anyone who tells you they can predict the market turns are gambling and speculating with your money not investing. In fact you are gambling and speculating with your money if you:

  • Pick stocks
  • Market time
  • Track record invest.

During a downturn in the markets if you become overwhelming uncomfortable. You should talk with your investor coach about reducing the level of risk in your portfolio. If the both of you decide a reduction in risk would be right for you then do it. However, do not expect to increase the risk level when market conditions improve. This would be market timing and therefore imprudent.

Those of you that are already clients know that you are globally diversified with the right amount of risk for YOU. Each of you know the three simple rules of investing:

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

Keep in mind no one can predict the future with any degree of consistency.

My suggestion to all of you is to relax and enjoy the summer weather. Stop watching all the ‘bad’ news. Do not allow the Wall Street bullies to make you do something you will regret long term.

Selling or panicking during a downturn will result in  “Short term gain ….Long term pain’. Stay focused on the long term and with the help of an investor coach/fiduciary adviser your financial goals are attainable.

Proper Expectations!!

There is never a shortage of predictions on where the markets will go next. These predictions are typically based on current events.

Who will win in Washington DC?

What will happen tomorrow….next week….next month…..next year……?

Will inflation take hold? Or is deflation around the corner? With $6trillion dollars in stimulus money, will taxes go up? Or should I say how much will taxes go up?

And the list goes on and on…

The talking heads on television and social media need these predictions to keep viewers watching, which in turn increases advertising revenues.  Unfortunately neither television or social media are accountable for their predictions.

Everyone wants to know what will happen next. In many cases, we make emotional decisions based on the latest short term predictions.  These decisions will in most cases result in very disappointing performance.

If you wish to succeed long term in reaching your financial goals, you need to develop a prudent strategy and remain disciplined to that strategy. Most important you must have realistic expectations.

Proper expectations are the key to investing with Peace of Mind.

Do not expect to predict or forecast stock prices and movements.

Do not expect to pick winning stocks and beat the market.

Do expect to achieve close-to-market returns over time and to see daily, weekly and yearly volatility. Reduce your costs, use diversification, and sit tight. If you expect the impossible you will be frustrated, unhappy and fearful.

All of us would like to get rich quick. However, if this is your strategy, odds are you will be very disappointed. As I mentioned earlier, develop a lifelong game plan and stick to it. The only adjustment you should make is to gradually become more conservative as you get older.

To succeed in reaching your long term financial goals you should:

Own equities….globally diversify….rebalance.

Leave the predicting to the talking heads and if you do watch see it as entertainment, not strategy.

Markets Are Random!!!

First, we have been dealing with the coronavirus for nearly 3 months. Which includes a lockdown and the shutdown of our economy. Now we have riots all around the country. With all this upheaval, the equity markets should be crashing…right?

Well as of right now the markets are holding their own. This could change at any moment.

Many investors exited the market because of all the ‘bad’ news. Including an unprecedented crisis.

When investors are looking for the best place to invest their money, they attempt to avoid the pain, the pain of down markets. Given the high volatility of the stock market many investors are avoiding placing their money in equities. They are looking for guarantees, ie, annuities, cash, CDs, bonds, etc.

Many others are seeking ‘experts’ to tell them when to get in and out of the market, which is market timing. Others are looking for the next hot stock or hot asset class. Still others are looking for the hottest fund manager or track record investing.

What all these people are looking for is someone to predict the future.

All this is the result of us looking to avoid risk or loss of principle. All these efforts are sadly wasted because all markets are random and unpredictable.

There are different risks in all assets classes whether it’s stocks or annuities or CDs or cash or bonds or even gold. No matter where you put your money there is risk involved.

If you invest in the stock market, no one can “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.

If there were no down markets, equities would not produce good returns long term.

The cost of capital results in good returns, over time. The stock market is efficient enough that no one can predict the future. By efficient I mean all the knowable information is already in the price of the security. Only new and unknowable information change prices in the future.

Anyone who tells you what will happen in the future is trying to fool you and perhaps fool themselves. The media Is full of financial pornography trying to sell you their product. Each season there is a new prediction. As an investor you must avoid the temptation to believe these hawkers.

To succeed long term you must develop a prudent strategy with the appropriate risk level and remain disciplined.

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