Should You Get Out of the Equity Markets? Continued..

I essentially wrote this exact article twice over the last 7 years. The message bears repeating now.

During conversations with investors I continue to hear apprehension when the subject of stocks is discussed. This apprehension or fear is completely understandable.

We hear nothing but bad news from the media, the continuing battle in Washington, the International crisis, terrorism at our front door, the socialist tone of some current members of Congress like it or not, our own budget deficit and ballooning debt, finally the trade war with China.

Will there be down markets in the future? Absolutely, there is no doubt. We are experiencing a bad market right now.  However, no one can tell you when and which countries and/or sectors will be involved. And no one can tell you when the markets will recover.

The equity markets around the
world are random and unpredictable.

This is undeniable. However, the equity markets remain the greatest wealth creator in the world, if properly used. This does NOT mean picking the right stocks or market timing, getting in and out of the market at the right time. Neither of these activities promoted by the Wall Street bullies are in your best interest. These activities benefit the Wall Street bullies and will not improve your returns.

The market returns are there for the taking, they are waiting for you to take advantage.

Listening and taking the advice of the Wall Street bullies is not in your best interest. 

Even worse taking stock picking advice from the likes of Jim Cramer.

Your time can be much better spent than worrying about the
direction of the equity markets. If you have developed a prudent portfolio and
remain disciplined you will succeed long term. This will require the help of an
investor coach who will keep you from letting your emotions take control.

Remember the Equity Markets are forward looking:

  • Expectations about the future are in today’s price.
  • Market returns are not strongly correlated with macroeconomic variables such as GDP
  • Markets can provide positive returns even during periods of poor economic performance.
  • Timing markets is difficult.

A study was done looking a past recessions and stock returns. The conclusion there is no correlation between recessions and stock returns.

To succeed in reaching your long term financial goals you need to own equities, as scary as this may seem, globally diversify, no one can tell you which countries and/or sectors will outperform and rebalance, buy low sell high.

If you these simple rules you will stop gambling and speculating with your investments and improve your results with less anxiety about the future. If you are younger growth must be your goal, a retiree your goal is to keep pace with inflation. Owning equities in your portfolio is a great solution to accomplish both.

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. 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 equities for the near future. These ‘experts’ have an obvious conflict of interest as they recommend their own solution.

I even heard of a late-night show comedian saying that there is a recession coming. Unbelievable, Now, there may be a recession coming but no one can predict when and how long, not even a celebrity.

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.

There is some confusion as to, what is an investor? Many believe that a successful investor makes more than their peers all the time. This they believe is measured on a short-term basis.

A true investor will make comparisons of 10-year performance and perhaps longer. It might be ok to compare 5-year performance. But investing is a long-term disciplined process. When you compare performance on a short-term basis. Like monthly or worse daily, you are really a speculator not an investor.

Now its ok to be a speculator, but if you have a long-term goals like retirement planning. Being a speculator will lead to disappointing long-term results.

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.

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

Do The Free Markets Work?

I believe it is important to revisit this concept often. Because investors have very short memories. They believe again and again that someone can tell them what will happen next to the equity markets.

This is one question most investors never think about. Primarily because the Wall Street bullies want you to believe that free markets DO NOT work. The bullies will continue to supply you with forecasts on what will happen to your finances.

First let’s look at the assumptions if Free Markets Fail:

  • The market fails to price goods and services appropriately.
  • It is possible for some individuals to identify in advance which prices are inaccurate.
  • Underpriced or overvalued markets can be forecasted or predicted.
  • By taking advantage of these miss-pricings, either in stocks or market sectors, it is possible to both increase returns and avoid losses in investments.
  • People with this view would utilize traditional investment myths and speculate with their assets.

However if Free Markets Work.

  • Based on supply and demand the free market is the best determinant of market prices.
  • 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.

It is vitally important that you decide whether free markets work or free markets fail. This will determine how you will invest for your future.

If you believe free markets fail you should continue to invest in the traditional investment strategies of stock picking, market timing and track record investing. This would require that you stay connected to ALL sources of financial information. By following this strategy you will, in my opinion, be gambling and speculating with you investment money.

Ask yourself one question, do you really want to constantly stay connected to the equity markets?

If on the other hand, you believe that free markets work. You would concentrate on capturing market returns. Build a globally diversified portfolio. Identify YOUR risk tolerance. Eliminate the traditional investment strategies.

And finally, work with an investor coach who shares this belief.

The Wall Street bullies want you to believe that there is someone on Wall Street that can predict the future. This message is constantly bombarding the investing public thru the media and marketing campaigns. They need you to believe that someone can earn you above market returns AND avoid all large losses.

After many years of watching Wall Street I can tell you no one can consistently ‘beat’ the market.

You will never have peace of mind with your investment dollars if you continue to seek the ‘hot fund manager’ or the next ‘hot stock’.

Any investment that requires an accurate forecast of the future is destined for failure because the equity markets are random and unpredictable.

To determine if your portfolio is built to take advantage of the free markets or built on the assumption that free markets fail view Portfolio MRI . You will learn what is required to take advantage of the free markets.

Keep in mind there will always be examples of those who beat the market however it is extremely unlikely that they can repeat.

To succeed in investing for a lifetime you need to follow three simple rules:

  • Own equities
  • Globally diversify
  • Rebalance

Your investor coach can help you stay disciplined throughout your life. As you age your coach will help you adjust your risk to assure you reach your financial goals.

Downturn or Crash?

We are experiencing some very turbulent times AGAIN in the global economic environment. And we also are experiencing a sharp downturn  Although this downturn, as of today, is less than 6%. So far, this downturn does not qualify a correction. Corrections are technically 10% to 20%. While bear markets are considered downturns of 20% or more.

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’.  

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.

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 ou 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.

Discipline Wins!!

While I do not agree with Warren Buffet’s approach to investing for most investors. He is a stock picker. However, what I do believe in is his discipline. He has a process and he sticks to it regardless of short term market noise.

Most investors would not be able to endure the volatility of a Warren Buffet portfolio.

This quote will help many investors realize extraordinary results.

It’s not necessary to do extraordinary things to get extraordinary results. Warren Buffet

Everyday there are new financial products generated by the Wall Street bullies. These products are designed to take advantage of the current situation on Wall Street. The short-term market noise should be ignored by successful investors.

Wall Street needs investors to continue moving money. From one product to another. Without regard to what is in the clients’ best interest.

Every day I read about the next great manager or next great strategy. These ‘greats’ are all the result of taking advantage of the current short-term noise in the equity markets.

As an example, during the mid to late 1990s the equity markets were realizing great returns, averaging nearly 39%. In fact, in 1999 they earned nearly 35% and at the same time Mr. Buffet’s fund lost 15%. Mr. Buffet believed in his philosophy and remained disciplined. Many said his time was over he had become irrelevant.

Unfortunately for investors their great returns were followed by the bursting of the ‘tech bubble’. Many lost 80% because they were concentrated in tech stocks. At the same time Mr. Buffet’s had a solid positive return. The reason? Mr. Buffet remained disciplined to his philosophy and flourished.

Most investors need a process to follow, a game plan so to speak. Something to follow during both ups and downs in the markets.

But most importantly they need discipline. The discipline to follow their plan regardless. Many times, it will not look like the thing. However, over the long-term it will serve them well.

This is where a fiduciary adviser/investor coach adds value, or earns their fees if you will. During market extremes, both up and down, provides discipline to help avoid any major mistakes.

To succeed long-term own equities…globally diversify…rebalance.

What Do You Expect From Your Portfolio?

Many investors believe that there is someone, some advisor, some investment manager, or some brokerage firm that will have the ‘answer’ to beat the market. Finding the ‘answer’ will allow them to save less and earn more to achieve their long term financial goals.

The sad truth is there is no substitute for a sound savings strategy combined with building a prudent portfolio which is aligned with you goals and tolerances. There is no substitute for designing this prudent portfolio and remaining disciplined to that strategy.

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.

Remember there will be another ‘crash’ or ‘bear market’ but no one can tell you when and how much.

Also, when building a prudent portfolio. There will be times when your portfolio underperforms and perhaps for extensive periods of time. In 1999 the stock market was averaged over 25% return for the 4 previous years. But then came 2000 and 2001, the market crashed, and investors lost big time.

The reason? Investors were overloaded with the hot asset class or the hot stocks.

Investors with prudent portfolios fared quite well. And over the long term out performed.

Remember the Wall Street bullies want you to continue to search for the ‘answer’. These bullies make money on every trade whether you do or not.

The stock market is the greatest wealth creating tool ever created, IF properly used. The main ingredient is that it does require discipline.

To reach your long term goals you must own equities….globally diversify….rebalance.

Celebrate Uncertainty!!!

Many investors lament the downs of the market.  They feel that the randomness is cause for complaint and pain.

Everyone wants to know now what the future holds. What will happen? What is the best investment when the predictions come true? How can I avoid any losses?

After all, Warren Buffet’s number one rule is ‘never lose money’ and rule number two is ‘see rule number one’. To expand on this Mr. Buffet would not sell during downturns because that would mean losing money.

How can I do this if I don’t know the future?  The Wall Street bullies are counting on investors desire to ‘beat the market’ and avoid all losses.

Many of these experts try to convince investors that they can ‘beat the market’. That they will guide them to success without the risk of loss.

In reality, the unpredictable ups and downs of the market are part and parcel of its superior long-term rate of return.  Volatility is the only reason the market offers a risk premium. 

Celebrate the uncertainty.  It contains the seeds of growth and wealth creation.

To reach your long term goals you must own equities….globally diversify….rebalance.

What Is A Crash? Part II

In discussions with clients and prospects I hear talk of another eminent crash. This is typically the result of listening to an insurance salesperson selling their product of the day. Their pitch goes something like this. Quoting some Wall Street prognosticator, the market is at an all time high and it is ready for a crash. These Wall Street bullies will tell you to move your money to an annuity so it will be safe from the inevitable crash. They will tell you that you need to act now…before midnight. 

Another approach by these bullies might be to exit the market and wait for the crash then buy at the low or on the way up. This is another example of playing on your emotions. These bullies know that investors are fearful that another crash like the 2008 crisis is right around the corner. This is market timing and been proven to be unsuccessful in nearly all cases. Past performance or track records have zero correlation with future results.

In other words, no analyst(s) is (are) able to consistently predict the future market direction.

One suggestion is to ask this advisor for an audited performance record using the Global Investment Performance Standard (GIPS).

This of course does not stop the Wall Street bullies from marketing their past successes.

Remember there are two groups of people predicting equity market directions,

those who don’t know where the market is going and those who don’t know they don’t know where the market is going.

This brings back the original question …What is a crash or a down market or a bear market? Investors continue to fear the unknown. With the 2008 crash fresh on our minds, is another crash around the corner? No one can answer this question with any certainty. But this does not prevent the bullies from making predictions. At some point another crash will occur.

Unfortunately, no one can predict when it will occur.

The definition of a crash depends on you the individual it might be 10% down or 20% down or 40% down like 2008.  Remember the first quarter 2009 the S&P 500 was down an additional 24% yet the year end performance was a positive 23%.

The 2008 crisis has been seen as the worst market performance since the 1929 crash although some might say that the 1973-74 crash was just as bad.

The point is there have been bad markets in the past and there will be bad markets in the future. If you are properly diversified at YOUR level of risk your recovery could be quicker than most might think.

There is a trait of human beings that says when times are good they will always be good and when times are bad they will always be bad.

Of course, past performance is no indication of future results. But I believe if you follow the three simple rules of investing:

  • Own equities and fixed income
  • Globally diversify
  • Rebalance

You can be confident that your portfolio will perform well in all market conditions. This will require the assistance of an investor coach to not only develop the proper portfolio for you but keep you disciplined in both up AND down markets.

Diversification Is Your Buddy!!!

The new financial media has convinced investors that there is someone out there that can predict the future.

They have convinced investors that there is someone who can get out of the market at the right time. And then get back in at the right time. There are occasions when someone gets it right. But there is no one to predict who that someone will be in advance.

They also have convinced investors that there is someone who can consistently pick the right stocks for gains. What investors don’t realize is that this is a matter of luck and not skill.

They want to avoid the stock market losses at all costs.

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.

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 the stock market crash? When should I get out to avoid losses?

Should I buy gold and when?

Will inflation take hold? Or is deflation around the corner?

And the list goes on and on…

The talking heads on television need these predictions to keep viewers watching, which in turn increases advertising revenues.

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. In the long-term stock picking will lose.

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.