What Kind of Risk Are You Taking?

Investors are always looking for answers. How do I earn stock market returns with Treasury bill risk?

There
is a saying the greater the risk the greater the return. There is of course a
point of diminishing returns. In that, at some point adding risk will not
increase return. This has been proven by Nobel prize winning research.  

The
Wall Street bullies have continually come up with exotic strategies to avoid
risk and increase return. NOT!!

In
fact, Modern Portfolio Theory tells us at a specific level of risk there is an
appropriate mix of assets. That is proper diversification will lead, long-term,
to your desired return.

One of today’s leading financial thinkers, Bruce I. Jacobs, examined recent financial crises ….including the 1987 stock market crash, the 1998 collapse of the hedge fund Long-Term Capital Management, the 2007-2008 credit crisis, and the European debt crisis….and reveals the common threads that explain these market disruptions. In each case, investors in search of safety were drawn to novel strategies that were intended to reduce risk but actually magnified it…. And blew it up.  Until we manage risk in responsible ways, major crises will always be just around the bend.

So, believing you can earn a great return with little or no risk will lead to disaster, in the long-term.

There is a way to responsibly manage risk and therefore return.

Modern Portfolio Theory and Efficiency hypothesis have both won the Nobel prize in economics. While the three-factor model was written by a Nobel Prize winner.

When we combine all three, we develop a portfolio that will earn market rates of return, while responsibly managing risk…over the long-term.

The implementation is the easy part. Remaining disciplined during market extremes is the hard part. This will require the guidance of an investor coach/fiduciary advisor.

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.

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.

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.

Absolutely Nothing!!

It seems everywhere we look there are predictions of the future. Many are the top experts in their field. Many have been right in the past. Some just keep trying to convince us that this time they are right because…… Despite the dismal record of these ‘expert predictions’ we continue to seek out answers regarding their future. I’m sure why? But we do. Myself, included.

As to investments here are some of the predictions I have recently read:

  • ‘The bull market is 10 years old and due for a correction’
  • ‘Five reasons the market will go down’
  • ‘Five reasons the market will continue going up’
  • ‘The economy is showing signs of weakness’
  • ‘The economy is stronger than ever’
  • ‘these 10 stocks are ready to advance strongly’
  • These 10 stocks should be avoided’

Well guess what. One or more of these will be true. The problem we have is we have no idea who it will be.

We will see the headline prediction and if it is in line with our thinking, we will read it. We do this to reinforce our beliefs.  But what good is it? Absolutely nothing.

These predictions are made for gamblers and speculators. These individuals are interested in short term movement. They want to avoid all downturns and participate in only the upturns. The seek stock market returns with treasury bill risk. What they end up with is treasury bill returns and stock market risk.

Well if you want stock market returns you need to deal with stock market risk. You cannot have one without the other. And you need stock market returns to grow your money and keep up with inflation.

To reach your financial goals you need a plan or process and discipline. We are unable to accomplish this on our own due to our emotions. As I said we are bombarded with daily predictions from multiple sources.

So in order to successful invest for the future, we need to fire our broker/agent and hire an investor coach/fiduciary adviser.

Treasury Bill Risk with Stock Market Returns!!

Investors are continually asking what is the main determinant of investment success? 

Wall Street and the financial media would like you to believe that.

  • Timing when to get in and out of the market
  • Picking the right stocks and bonds to own.
  • Using track record investing to find the next hot manager, will help you succeed in investing.

This is wrong! All the above factors actually negatively impact your portfolio in the long run. Any time you spend on the above activities is time wasted. 

Allocating your assets based on your acceptable level of risk is the main determinant of investing success.

More importantly time spend with your family and friends is much more valuable than time spent trying to beat the market.

It seems odd that crashes of the past are seen as buying opportunities. While current and future crashes are seen as risk.

In most cases the reason we look to beat the market is our emotions. When the market has down turns, we become nervous and scared. When there are markets upturns we become greedy and jealous.

During prolonged up markets Warren Buffet said it best FOMO. Fear of missing out.

We believe that when the market is going down it will always go down. Conversely, when the market is going up, we believe it will always go up.

The real problem is most investors are looking for stock market returns and Treasury bill risk. What they end up with is Treasury bill returns, (if they are lucky) and stock market risk.

Most investors miss out on market returns because they lack discipline. This is the main determinant of long-term investment success.

This recently became evident when a large number of investors got out of the market around Christmas time. And subsequently missed the January and first half of February rally.

This is where a true adviser can help. If your adviser allows you to panic during downturns or concentrate in the latest hot market. Any price you pay them is too much.

Fire your broker/agent and hire an investor coach/fiduciary adviser.

To be successful in reaching your long term goals you must own equities…globally diversify…..rebalance.

Actively Trade Your Portfolio to Nowhere…

Through many discussions with investors I have learned that when things go against them they want to take control.

Stock pickers and day-traders who are actively trading their investments have perceived control over their portfolio. Similarly, people who jump in or out of the market during up or down swings also mistake their activity for control.

In reality, the more activity and trading you generate in a portfolio, the more out of control the portfolio becomes. When an investor trades in their portfolio trying to time the market or find the “best” investment they are doing nothing but add costs and decrease return.

Actively trading your account by picking individual stocks or market timing or picking funds based on past performance is exactly what the Wall Street bullies want you to do.

Stop empowering Wall Street.

 Remember, no one can predict the future, no matter how convincing someone is in the media they are only guessing.  In most cases the predictions are never broadcast by the same ‘experts’.

The “best” strategy is to have a prudent process and discipline in place   Stop trying to study the market to find bargains, statistics prove that it cannot be consistently done. You might get lucky in the short term but long term your results will suffer.

With the case of market timing, getting in and out of the market at the right time requires being right when you get out of the market AND be right when you re-enter the market. This again will result in lower returns.

To succeed long term and reach your financial goals you should
own equities…globally diversify …rebalance.

There Will Always Be Uncertainty In The Equity Markets!!

We are experiencing, among other things, some very tense and violent situations around the world right now. The situation in Ukraine, including the downed airliner, the Israel and Gaza battle. As well as our own battles within our country. 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.

the True Enemy of Every Investor…

This subject remains an investor problem. Despite repeating the same message over and over. 

 

Successful investing is not, per se, a portfolio problem, but rather a people problem. No matter how well designed and engineered a portfolio is, it can easily be destroyed by imprudent investor behavior. 

 

Unfortunately, the true enemy of every investor lies within. 

 

The instincts, emotions, and even biochemical makeup of human beings drives them to gamble and speculate with their money, even when they don’t mean to.  

 

This problem is multiplied exponentially by financial institutions that profit from this self-destructive cycle. You will see that this cycle is hard wired into every human being in the world. No one is exempt. 

 

After studying the collective behavior of thousands of real world investors over the past decade, several truths have made themselves clear. It is my belief that many, if not most financial product sponsors are aware of this dilemma, 

 

but either don’t care that the investor is harmed by it, 

 

or are ignorant of the damage that they unknowingly perpetrate on the American investor.  

 

Most, if not all of us, need help and guidance during times of market stress. These stressful times are inevitable and need to be dealt with without panic. 

 

This guidance is best found with an investor coach/fiduciary adviser. Your coach will help you protect the future you from the current you. 

 

As individuals, investors have a tendency to believe that when times are good, they will always be good. And when times are bad, they will always be bad.  

 

To take full advantage of the great returns available from the equity markets we deal with the negative volatility. Many believe there is someone who can avoid the negative times and only participate in the good times. This is unsustainable consistently. 

 

I call this market timing and it is gambling and speculating. Which, as I mentioned, we need to avoid. 

 

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

He Who Trades Less…..Wins!

Prior to the new fiduciary rule. The Wall Street bully brokerage firm would use their payout structure to their brokers to generate more trading. They would pay a higher fee for the stock portion of a clients portfolio. For example, pay 1% on the stock portion and 0.50% on the fixed income portion.

This would result in their brokers using higher risk portfolios for their clients. Naturally they get paid more for a riskier portfolio. When there was a downturn in the market their clients realized more volatility than was right for their situation.

This issue may have been corrected with the fiduciary standard. However, right now, there is debate about ‘watering’ down the fiduciary standard

Not sure where the fiduciary standard is going within our industry. But I believe the Wall Street bully brokerage firms will find ways to generate more fees by trading more stocks within their clients’ portfolios.

A broker’s “job” is to get you to buy and sell as much as possible.  That is the primary way he or she gets paid.  This is a huge conflict of interest because what is good for you is bad for the broker.

The Wall Street bully brokerage firms do not make money buying the right stocks at the right time. This is a great misperception by the investing public. They believe the brokerage firms have the right information to ‘beat’ the market.

This is wrong. Because, like you, they cannot predict the future.

These brokerage firms make money when you trade stocks. There is a spread that they earn on every trade plus a commission. For example the bid is the amount someone is willing to pay, say $10 and the ask the amount someone is willing to sell, say $12. When the trade is completed the brokerage firm earns the $2 difference plus commission.

Therefore being an active trader in the long run will cause you to lose money.

By employing a scientifically designed strategy and remaining disciplined to that strategy, over the long term you will win.  Remember you portfolio is like a bar of soap, the more you touch it the smaller it gets.

Own equities….globally diversify…….rebalance.