Diversification Is Your Buddy!!

Given the good 2020 returns for U.S. large stocks, many investors are considering moving all their money into this hot asset class. Thereby avoiding U.S. small stocks, international stocks and emerging market stocks, including fixed income.

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. Part of the issue is that gamblers need to brag to their friends about how well they did. They naturally forget the losses.

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 some large pension funds.

Since most investors will be retired a long time. They need to invest for the long term which can be 20 to 30 to 40 to even 50 years. Many investors have a hard time thinking is such long terms. Even if you look at a 10-year period a diversified portfolio will in most cases prevail. Although this has not been the case recently.

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

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

Please email any questions or comments and I will personally respond appropriately.

What Makes The Equity Markets Move?

When I tell people, I am a financial advisor many will ask what made the market go up or down that particular day.  Of course, there are those that when I tell them I am a financial advisor, they run.

People love stories. And they need/want to know why something happened. The media is great at giving them what they want. This is their job.

Let’s say a journalist calls up a prominent advisor or trader or financial executive on a day the market is down 2% or up 2%.. The answer might be ‘the market is down due to unrest with the 2020 U.S. elections’. Sounds reasonable right?

But is this the real reason for the down market? Perhaps it was due to any number of different ‘reasons’. Often far too complex for a journalist to write about.

I believe that most trading days that you can go to the Wall Street Journal and find five reasons why the markets/sectors/individual stocks should go up and five reasons it should go down.  Every day.

Like I mentioned in the beginning people are looking for a story to validate a decision to buy or to sell. And every day they can find a reason to do both.

Let’s say you are watching CNBC or reading about some expert and you learn that the Fed will make a change in monetary policy and the market goes down 2.2%. You will then conclude that any time the Fed makes a change to monetary policy that you should sell your stocks. Only the next time when the Fed changes monetary policy the market goes up 3%. Ooop!

Remember the markets are extremely complex. There are thousands of variables affecting investments around the world. Any time an advisor/broker tells you a story about why a particular asset class/sector/individual stock will be a good investment going forward, be wary. Their story is a sales pitch. Because no one can predict the future.

The markets are, although not perfectly efficient, far too efficient to take advantage by anyone on a consistent basis.

Successful investing needs to be long term focused. Any short term noise is meaningless. Any predictions about market/individual stock direction are meaningless.

If your advisor/broker truly has a long term focus, they will show you your investment policy statement (IPS). The IPS is your guide, it tells you the plan going forward. It tells you what to do when the market is down and when the market is up. Consistency leads to success.

The need for stories leads many investors to believe that if they study the markets and watch CNBC and scour the internet for answers they can beat the market. This requires a lot of agonizing work and a great amount of time. Many believe that there is a broker/advisor who will do this for them or they do it themselves. In nearly all cases this assumption leads to disappointing results.

A much more efficient approach is to build a globally diversified portfolio around the dimensions of higher expected returns and applying them consistently. These dimensions are derived from data over long periods of time and across different countries and multiple markets.

To succeed in investing for the long term you need to maintain a long term focus. Avoid the short term noise and STORIES.

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

Deja Vu All Over Again!

In the immortal words of Yogi Berra..”Déjà Vu all over again”.

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. Although there are signs this may be changing. 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’s The Best Strategy?

Well it appears the election has been decided??? And the coronavirus vaccine is on the way. If asked will you get the vaccine? I’m still debating.

In the meantime, Wall Street continues to come up with new predictions.

The Wall Street bullies are continuously promoting stock picking, market timing and trading. We have all seen the talking heads on the business channels, using the brokers’ tools, picking stocks and making great returns.

People like Jim Cramer want you to believe it is easy.

These commercials/shows make us believe that it is an easy task to predict market movement or pick the next ‘hot’ stock. The latest is options trading made easy.

The bullies know we are looking for a get rich scheme to make our lives easy.

Hit it right, they contend, and you will be on easy street.

When you bet on a long shot in gambling or assume excessive risk by trying to pick the “big winner”, your brain releases Dopamine.

During the current NFL season there has been a record number of comeback wins from 10 or more points. There was plenty of fans releasing Dopamine.

The casinos in our area count on the excitement of winning a large sum of money with little risk. Just a small wager will result in huge returns. They count on the release of Dopamine.

This chemical produces a euphoric feeling and is closely related to the high that cocaine and morphine produce.

For stock pickers, even thinking about placing an order for a stock they hope will bring them huge returns can produce this chemical.

All the while stock pickers ignore the real risks and likely losses in the speculative venture.

Like the comeback wins which are considered unlikely and is not a recommended recipe for success on a consistent basis.

There will always be investors who get lucky and make unbelievable returns. We must realize that this is a matter of ‘luck’ and not ‘skill. These lucky investors will very seldom repeat in the future. Many believe that if you find the right Chartered Financial Analyst CFA you can win.

Do you recall the Bernie Sanders scandal? Many of his clients said if you were not a client of Bernie you were a loser. How did that turnout?

Successful investors have a long-term plan when allocating their assets. They know there is an academic and scientific method available when building a prudent portfolio. Their strategy includes understanding the expected return and expected volatility of their portfolio.

Many investors believe that looking at past performance is a good indicator of future results.

This is exactly what the Wall Street bullies want you to believe.

As investors we must realize that if something happened in the past does not mean it will repeat in the future. Thousands of variables must be exactly the same for these situations to repeat.

During a meeting in Chicago I met with an active trader and his quote has stuck with me.

“Trading strategies work until they don’t.”

The problem for us investors we will never know when these strategies will stop working.

Develop a prudent strategy and remain disciplined. Find an investor coach/fiduciary adviser who shares your beliefs and go confidently into the future.

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

Refuse To Be A Victim!!

Every day we hear more news, usually bad.  The media has a belief that if “it bleeds it leads”. Somehow people enjoy hearing bad things happening to other people.

How many times have you heard, “I’m glad that I do not have to deal with this generation”? “They are lazy, with no work ethic, no ambition, entitled…….”

I believe everything generation does not approve of the next generation. think about it, what did your parents’ generation say about you and your generation?

What we have to accept is that every generation is different, thankfully. We must believe that the free markets work, and the next generation will figure it out.

Unfortunately, the free markets do not guarantee anything. Some will win and some will lose. However, losing is not the end. It only determines what does not work for you.

No matter how much we believe that the free markets work and how much faith we have in the underlying system there will be stress in our lives about the future. 

We must refuse to be a victim.

In his book former General Electric CEO, Jack Welch points out that feeling sorry for ourselves in one of the most destructive and energy sapping behaviors you can engage in. yes, it’s unfair that the markets are insane and some people are unreasonable. 

We must accept this for the reality that it is and move on.

Every minute engaged in self-pity is one too many.  In the words of Jack Welch, “Refuse to be a victim”.  Develop a scientific strategy for investing and we believe that the “bad times” will not last forever.  Believe it or not we must also remember that “good times” will not last forever.

Remember the only thing that does not change is that things change.

For all of us this will involve keeping our emotions in check. This proves impossible for most investors. The solution is to work with an investor coach/fiduciary adviser.

It is during down markets as well as extreme up markets that your coach will earn their fees. Allow them to earn these fees by being ‘coachable’

To succeed in investing for the long term we must own equities…..globally diversify …rebalance!

Predictions, What Are They Good For?

Well the election appears to be over. However there appears to be a court battle looming.  For those of you who remember the 2000 election, Al Gore fought the results for 37 days and that was for one state, Florida. Remember the hanging shard.

In the end George Bush was inaugurated, I really expect the same result.

In the meantime, today it was announced that there was been very promising result in the Pfizer in a 90% effective coronavirus vaccine. The equity markets have reacted extremely positively. This is probably overdone, but I’ll take it.

I recall many predictions, depending on the election results. I wonder how many got this one right. I doubt there were many. I had many clients asking to get out of the market until things ‘settle down”.

As many of you know I do not believe in market timing. In that an investor can get out of the market at the right time AND get back in at the right time.

This has been proven to result in poor outcomes.

I also do not believe in stock picking or track record investing. There are examples of good stock pickers, Peter Lynch of Fidelity Magellan Fund averaged 29% per year for 13 years. Even with this stellar performance, Mr Lynch state3d he believed most investors of hos fund lost money.

Why? Because they bought at a high and then sold during the inevitable down turns.

There are of course, other examples of successful stock picking. But the average investor will not beat the market over the long term.

Which leads me to track record investing. This is using past performance to predict future results. NOT! Is possible? Yes. But not very likely. There is very little evidence that past performance predicts future results. This is why there is a disclaimer on all financial literature.  Past performance is no indication of future results.

To receive the best long term results you should

  • Own equities with the correct amount of high quality, low duration fixed income for you.
  • Globally diversify
  • Rebalance

This with the help of a fiduciary/investor coach will help you succeed, lomg term

Election Day 2020!

Well today is election day. A long waited and anticipated election. Controversy seems like an understatement. Regardless of which side you favor. You have to be happy its almost over. At least I hope its almost over!

I received many calls telling me that they want out of the market if this guy wins. They believe the markets will crash. Well let me tell you a little secret. The market does not care who wins. There may be short term volatility. But in short order we will get back to normal.

OK this year nothing is normal. COVID has everyone gripped in fear. No one likes the unknown.

But we must be reminded, the equity markets are random and unpredictable.

If you have a properly diversified portfolio at the correct level of risk you have nothing to fear. The markets will go down on occasion, but they always recover.

What we cannot do is predict what sectors will over perform and which sectors will underperform.

The days ahead may be quite volatile. But have comfort in the fact you are invested for a long-term goal. And a properly diversified portfolio is your friend.

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.