Diversification Is Still Your Buddy!

It seems like every day someone wants to market time, that is, get out of the market until after the 2020 election. There are some that are so insistent that they close their accounts. Given that 2020 has been a year many of us would like to forget. I can understand their anxiety about the future.

There is no shortage of ‘experts’ giving advice on market timing. That is getting out at the right time and getting back in at the right time.

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.

What Should I Do Now?

This message bears repeating now. Many of us are making emotional decisions based on our ‘facts’.

We all believe that we make important decisions based on fact. Our research, typically, is quite limited. We ask our friends, neighbors, co-workers, family or a trusted adviser their opinion. If it aligns with what we believe our decision is made.

Many times, we make decisions based on current events. These short-term based decisions are very emotional and are not evidence based.

Right now, there is great concern about the upcoming presidential election. Who will win? Should I wait to invest? Should I get out of the market? When should I get back into the market?

You can never overcome your own humanity. As much as we would prefer to think that we make investment decisions based purely on logic, advertiser and journalists are well aware that emotion ultimately drives most investment decisions.

As a quick demonstration, consider the statements below. See if you can match each statement with the emotion being expressed. (Answers listed in the key below.)

greed regret trust loyalty envy

  1. “It doesn’t matter how sophisticated his charts are     or how much sense he makes, I just don’t feel comfortable letting him handle my money.”

2. “I’m not sure I should have put my money in that fund. It lost 15% already. Maybe I’ll sell some of it tomorrow.”

3. “My boss got 25% on his money. I only made 8%! I wish I got 25%.”

4. “I’d wish I’d known that stock was going up, I would have bought more shares.”

5. “My dad worked in that company all of his life and he left his shares to me in his will. It would be wrong to sell it just to diversify my portfolio.”

Answer key: 1. Trust 2. Regret 3. Envy 4. greed 5. Loyalty

We as people are naturally predisposed toward or against specific investing tactics. What is interesting is that no matter what our emotional tendency maybe, we can almost always find what looks like purely factual data to support our view.

It is easy to overweight information that validates our perspective while minimizing any information that goes against what we inherently believe.

The Good News: Simple awareness of your emotions when it comes to financial and investing matters can make the difference between good and bad investment decisions.

The recent up and now down markets and then up again have many investors on edge, asking….should I get out of the market for good? This is really, what the financial institutions want…they make money when money moves.

Because we make emotional decisions with our investments. We need the help and guidance of an investor coach/fiduciary adviser.

Together you and your coach will develop a customized plan for YOU. Then going forward your coach will keep you disciplined to your plan.

This is where a true adviser really, earns their fees.

As an investor you must remain disciplined to your strategy…you must own equities…globally diversify…..rebalance.

Picking The Winners….

Prior to the Sunday night NFL game between San Francisco 49ers and the Philadelphia Eagles the ‘experts’ gave their predictions on the outcome. Keep in mind both teams have significant injuries to key players.

Every ‘expert’ picked San Francisco to win. Each had their own reasons, strong team, last week’s performance, this player is better, that player is not playing well…….

Well guess what? Philadelphia won.

This proves that predicting the future is really, really hard. Each week the ‘experts’ make predictions and sometimes they get it right.

This is much like the investment field. There are predictors and forecasters, some get it right and some wrong.

The real problem is when one of these ‘forecaster’ is right, which is statistically inevitable. These predictors will market this fact extensively.  What investors don’t seem to realize is that there is no correlation between past performance and future results. Like I said some of these forecasters will be right but there is no reliable way to know which one(s) will be right going forward.

Dr. Eugene Fama of the University of Chicago won the Nobel Prize in Economics in 2013

for his work on efficient markets. Dr. Fama essentially proved that all knowable information is already in the price of the security. There is no reliable way to predict how the markets will perform going forward.

Throughout my career in financial services I have also continued to search for the ‘answer’ with some success followed by poor results. I finally remembered by finance courses in both college and graduate school. In my studies I learned that there is an academic and scientific method to investing that has proven to be successful in the long term. The issue is that these methods do not eliminate risk but rather work to control it.

Investors would be more successful with less anxiety if they worked with an investor coach. An investor coach will teach you among other things where returns really come from. HINT: it does not come from the hot stock picker or market timer or the manager with the best track record.

Trying to adjust your strategy based on current conditions will result in poor and disappointing results.

When you have a prudent process and the discipline which an investor coach will provide, success will be yours WITHOUT the need for an accurate forecast.

The True Enemy of The Investor…

Each week I try to put a different spin on the same problem. Investor/people behavior during times of crisis as well as the good times.

Over the years I have learned that everyone if unique when dealing with adversity. The most efficient way is to have a prudent process and remain disciplined to it.

Recently I met with an investor and he said money should only go into large U.S. stocks. International, small and value stocks should be avoided because of poor performance. This is a great example of market timing. Market timing has been proven to result in poor outcomes over the long term.

That said, 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.

In recent conversations with investors these tendencies to gamble and speculate are becoming evident. It sounds something like ‘if this asset class is doing well and this one is not why not transfer all of our money into the better performing asset class?’ This is a classic case of market timing. Getting into and out of the market/asset class at the right time.

We are emotional beings and when our friends/relatives tell us how they are making ‘tons’ of money investing a certain way. We become envious and wonder why we can’t get a ‘piece of the action’?

Just because the ‘hot’ asset class is doing well does not mean this trend will continue. It may for a while but eventually the ‘hot’ trend will end. Leaving the investor with a sick feeling and even more skeptical of the markets.

The markets are not the problem you are. This is where an investor coach/fiduciary adviser can help. Your fiduciary adviser will help you build a prudent, globally diversified portfolio with the right amount of equities and fixed income for you. Most importantly your coach will keep you disciplined when your emotions tell you to invest the ‘hot’ way.

To succeed in investing for the long term you must  

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

Here We Go Again….

We are experiencing a great equity market up turn with virtually no end in sight. Many in the financial field are predicting an overdue downturn. There is no doubt that there will be a downturn. However, no one can tell you when.

(I wrote this in 2018…so here we go again) We experienced a good up turn and lately we are realizing some negative volatility.

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. Even though most brokerage now offer zero-dollar commission. These brokerage firms make money on the bid/ask spread. Please call if you would like this explained.

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.

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, at least not consistently. 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.

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.

Of course, you will be tempted to concentrate on the hot strategy or asset class. But remember the large successful pension plans focus on controlling risk. They know that controlling risk will lead to success 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.

Should Your Investment Research be Based on Academia or the Wall Street Bullies?

There were numerous predictions depending on the outcome of the presidential election. Will it matter for stocks if Trump or Biden wins?  No one really knows. This election has been one of the most contentious if not the most contentious election in our history.

So far, the stock market has had a very positive response to his election. Will this continue? I really have no idea. And no one knows with any degree of certainty.

More than at any time in our history….we need strong leadership.

That said, we must stop listening to the Wall Street bullies regarding what to do with our portfolio. Should we sell? Should we buy? What should we buy? What should we sell? The Wall Street bullies don’t really care. All they care about is that you trade. Most investors don’t know what to do.

As an example, one of the predictions about what to do and when. Jim Cramer says buy. But his track record is very poor. Maybe we just do the opposite of anything Jim Cramer recommends. Then again Jim Cramer might get lucky this time and be right. No one knows for sure, not even Jim Cramer.

Remember the main reason for his TV success is his entertainment value. Following his investment advice will lead to poor results.

All that you know for sure is what the brokerage community or financial press wants you to know. They have trained you to accept their version of reality – over the span of your entire life.

There is a complete body of investing knowledge developed in the halls of academia.

Most people do not even know that it exists. This is the real wisdom you need to create wealth and abundance.

Rather than looking for the next great trade or asset class, invest in a portfolio based on Nobel Prize winning research. Instead of researching investments, your time will be much more efficiently spent on improving your job skills, or learn a new skill set leading to a new career, or even better, spending time with the important people in your life.

Perhaps you should look at your investments with a goal in mind rather than short term performance results.

Taking a long term view of your portfolio will reduce and perhaps even eliminate your anxiety.  Remember a disciplined saving strategy will outperform all trading strategies, long term.

Take control of your investments don’t empower the Wall Street bullies.

Successful investing requires discipline along with following three simple rules, own equities…..globally diversify…..rebalance.

Best August in 3o Years…Buy or Sell??

As August comes to a close and summer begins to disappear. The equity markets have had their best August in over 30 years. There are those that believe that after the markets will go make new highs, we should expect some down markets.

To go along with this, we are dealing with a pandemic and social unrest. The social unrest has become extremely violent.

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.

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.

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

You Can’t Avoid Risk!!!

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.

2020 is the year of the health and safety 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.

Remember the inflation published by our government excludes food and fuel. With the possibility of excluding health care costs in the future.

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.

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

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.