Are You An Investor or a Speculator?

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. Any are predicting an imminent recessionary period. 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 e 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.

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.

Are You Investing or Gambling-Speculating?

Recently I have heard someone say to me “I hope you are doing well in the market because I am’.  I did not respond to his proclamation nor will I in the future. This self-proclaimed trader obviously has made some good buys and sells.

This individual does not realize that he is gambling and speculating with his money. They can justify each trade with some signal or trend change or some other indicator. They can even make a logical case for their stock pick or market timing trade.

Unfortunately for this trader their short-term success will be met with long term failure. Successful investing is NOT gambling and speculating. Successful investing involves following a prudent process and remaining disciplined to that process.

There will be periods when the gamblers will outperform a prudent portfolio. However, over the long term the prudent portfolio will outperform.

OK I am going to say this with the risk of repeating myself. There are three simple rules to successful investing:

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

Each of these rules sound very simple and should be very easy to follow. Until one of your friends or someone you know tells you something that scares you into panicking and selling. Or even convinces you that the next hot stock or asset class will make you rich.

Successful investing is just that investing which means long term.

One of the reasons the equity markets provide an excellent return long term is the volatility both up and down. We need to live with the downturns in order to experience the upturns.

Stock picking and market timing may be more fun to talk about because it is exciting, especially when you win. But like a gambler market timers and stock pickers get a high off their trading.

It’s ok to gamble and speculate with fun money but not money designated for a long term goal, like retirement. If you really want to gamble and speculate go to Las Vegas, at least you will have more fun when you lose.

To successfully investor you need to fire your broker/agent and hire an investor coach/fiduciary adviser.

When Times Are Bad We Believe They Will Always Be Bad!..NOT!

As investors we know or should know that the reason stocks have historically returned more than fixed income over the long-term is because stock holders endure the volatility of the market. Without the volatility that goes hand-in-hand with stock ownership, the risk premiums associated with stocks would diminish, and so would the attendant wealth. Mark Matson

I wrote this message in the first quarter of 2018. And I believe it remains relevant. Please take time and read it now.

We enjoyed a great return year in 2017, in fact January 2018 looked pretty great.  Many of us now believed that the markets will continue going up. Of course, there are always those predicting impending doom.

As an investor coach now is the time that I really earn my fees. Each week I discuss building a prudent portfolio at a risk level that YOU are comfortable with. We discuss that we need to know the expected return and the expected volatility. This information will give us the tools to build the right balance of return and risk.

However, I also mention the most difficult task of an investor coach is keeping clients from making emotional decisions. The task sounds easy, remain disciplined. However, when we are bombarded with dire predictions of doom many cannot resist panicking and selling when markets correct.

This in fact is a great opportunity to buy at a discount price. I believe Warren Buffet said it best when he told of his investment philosophy ‘when they’re crying I’m buying when they’re yelling I’m selling.’

Some historical statistics might help with this. Since 1928 the S&P 500 has returned 9.8% on average. During this time there has been 89 drops of 10% or more compared to 23 drops of 20% or more.

Since 1946 it has taken the market 111 days on average to rise to its pre-crash levels. Of course, we must add that past performance is no indication of future results. However, I believe that since we have over six decades and more, of data we can assume that after all market downturns, regardless of how severe, the markets recover and go on to greater heights.

Now is not the time to panic and sell and seek safety, now is the time to implement one of our three simple rules which is rebalance.

At the end of 2017 when the equity markets flourished and fixed income lagged, we sold equities back to our original allocation and bought fixed income to our goal allocation.  We repeat this at the beginning of 2019. Buy low and sell high. We will again rebalance at the scheduled time.

If the down turn continues, we will sell fixed income and buy equities. Again, buy low and sell high. When we have a prudent process and the discipline to follow it we will succeed long term.

This is where the services of an investor coach become invaluable. Because with the right process and discipline you will reach your long-term financial goals.

Which Way Will It Go?

You will hear many ‘guesses’ and they are guesses. No matter what their credentials are or what their track record. Any predictions are simple guesses.

As we begin 2019 there are many questions about the future. The future of the equity markets, the future of the political arena and many other questions. Questions that cannot be answered with any degree of certainty.

I have so far heard we will be a recession within, a year, the markets be choppy for the entire year, the equity markets will soar with the S&P500 advancing 15% (Remember the 1990s when 15% would be scoffed at)

With this wide array of predictions someone will be right. The problem is for the investor there is no way of knowing who will be right.

As to investors predictions are abundant but accountability is rare.

John Bogle, inventor of the index fund and past chairman of Vanguard Investments was speaking at an advisor conference. Now 80 years young, Mr. Bogle, shared the best investing advice he ever got while a young man working as a runner for a brokerage firm, a fellow runner, about the same age as Bogle is now told him the secret ‘Nobody knows anything’.

During his interview Mr. Bogle warned attendees that “we give too much credence to past returns; past is not prologue,” saying instead “it’s the source of the returns” that is more important. He then quoted Samuel Taylor Coleridge that history is like “a lantern on the stern, which shines only on the waves behind us.”

Discussing investing opportunities, Bogle pooh-poohed private equity, saying that there are “a lot of sellers, but not many buyers.” He still believes that “performance chasing” is one of the most deadly of investing sins, that “I grow more concerned about target-date funds every day,” is skeptical about 130/30 funds–“it’s not that easy”–and on exchange traded funds, “my skepticism is increasing,” saying that his reading of the data shows that “ETF investors do badly relative to mutual fund investors.” The problem is not the product but the investor. They need a coach to guide them through the maze of financial media and hype.

Basically what Mr. Bogle is saying is that stock picking, market timing and performance chasing do not work.

Developing a customized portfolio, with regard to your comfortable risk level. Using a scientific approach and remaining disciplined will maximize your opportunity for a successful outcome. My clients understand this and will succeed in the long run.

We must remain diligent and stay focused. Own equities…… diversify…..rebalance.

You Need An Investor ‘Coach’!!!

Each week I talk with investors about their investments and how to reach their investment goals. The conversations nearly always focus around three things:

  • Stock picking…What are the best stocks for right now? What stocks should be sold right now?
  • Market timing…Is now a good time to invest in equities?  Or better yet is this the BEST time to invest in equities? What asset classes/sectors/countries are good or bad for investing right now?
  • Track record investing…This investment manager had a superior return over the last month, year or five years. Should we concentrate our investments with this manager?

Unfortunately, each one of these is a sign that the investor is gambling and speculating with their investment money. We are emotional beings and we are easily swayed by the Wall Street bullies continual media blitz. This blitz is make sure that we continue gambling and speculating with our investment dollars.

Right now, investors are looking for someone who will market time for them. “If the market is going down shouldn’t we get out of the market?” Is a popular question right now. This is market timing and will result in disappointing results over the long term.

Below is a quote by Mark Matson which I believe best describes the dilemma investors face every day.

“What an investor must eventually come to, before they’re willing to accept the free market, is this realization: I am spiritually, intellectually, and emotionally incapable of managing my own behavior and my portfolio. This is a big pill for many people to swallow. Most people realize that, if left to their own devices, they eventually slip back into speculating and gambling with their portfolios. Ironically, by admitting our own humanity and frailty, we can gain new-found strength and accept a better investing solution.” – Mark Matson’s Main Street Money ‪#‎MSMmonday

Many investors want to be in ‘control’ of their investments. Unfortunately, this ‘control’ means using the three signs of gambling and speculating described above. This can be very destructive to your portfolio as well as your confidence in the equity markets.

Sadly, most investors are looking for the ‘holy grail’ of investing which does not exist. The Wall Street bullies continue to send the message that they can predict the future. Despite the bullies very poor track record on predicting the future, investors continue to seek their predictions.

Investors continue to seek stock market returns with Treasury bill risk and what they receive is Treasury bill returns and stock market risk.

Stop empowering the Wall Street bullies and find an investor coach/fiduciary adviser. Your coach will help you build a prudent portfolio based on your risk level. Once this portfolio is built your coach will educate you and keep you disciplined to your plan.

As my friend Brad Nagel says ‘You manage your life and let your adviser manage your portfolio.’

Your adviser should protect the future you from the current you.

Diversification Helps Smooth Things Out!

Many times, when I meet with investors I am asked ‘where is the best place to put my money?’  The financial institutions have taught investors that there is someone who can tell them what to do in every circumstance. These institutions lead you to believe they know what you need. In fact these institutions sell you ‘product’ to feed your fear in every environment. A true advisor will often tell you things you do not want to hear. Remember if your advisor only provides the product you ask for they are not an advisor but rather a salesperson or broker. To succeed in investing being diversified means looking different. Most investors are narrowly diversified into top performing funds or asset classes of the last five to ten years.  They often feel diversified but aren’t. Right now, on August 28, 2017, the top performing funds are U.S. Large Growth stocks. So, this is what financial salespeople are selling now. To be diversified means including asset 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’. The goal of diversification is to avoid the volatility, both up and down. Right now, U.S. Large Stocks can do no wrong. However, when there is another downturn like 2001 these concentrated portfolios will suffer. We need to smooth out the volatility. The above graphic illustrates how markets perform. There are ups and downs throughout the cycle. Our goal is to build portfolios that avoid some of the severe ups and downs. The concentrated portfolio of US Large growth stocks is out-performing the globally diversified portfolio for now. This will change however no one can tell you when. Of course, we must state that past performance is no indication of future results. Many will say that ‘times have changed’. They will make a case that U.S. Large stocks will always prevail in the future. However regular readers will know that no one can predict the future. No one can tell you which asset classes will out-perform into the future. To succeed in investing you must own equities….globally diverisify …rebalance.

Beat The Market??

When dealing with investors I have heard a number of questions.  The most frequently asked is; what will the market do next?

Every one of them believes someone knows what will happen next. Investors are in constant search of the ‘expert’ that will give them the answers and ‘beat’ the market.

Unfortunately, there are no answers to the question; what will happen next? While investors are searching for the right answer they lose money unnecessarily.

The markets and random and unpredictable. Therefore, predicting the future is a futile journey.

This is evidenced by the Dalbar research study which looks at individual investor performance over a 30 year period. The latest study revealed that the 30 years ending December 31, 2016 average annual performance S&P500 earned 10.16% while the individual investor earned 3.98%.

Why the difference? It can partially be explained by the investors search for the ‘best’ manager. This is called track record investing and it doesn’t work.

The invisible hand of the market sets prices more efficiently than any other process known to man.  Is it perfect?  Indeed, No.  There is no perfect price; only what a willing buyer and seller negotiate.

The market instantly incorporates the collective mind of every market participants.  Markets work.  Unfortunately, most investors never tap their real power.

In fact, Gene Fama Sr won the Nobel Prize in Economics in 2013. His theory Efficient Market Hypothesis was written in 1965. It nearly five decades to prove his theory valid.

The theory states that all knowable information is already in the price of securities. Of course, there is more to the theory but I will refrain from becoming too detailed.

Needless to say you need to stop trying to beat the market and let the market forces work for you. This will be accomplished by owning equities….globally diversify….rebalance.  These 3 simple rules will lead to a successful investing experience.

On Wisconsin….

Like everyone else or at least most, I filled my bracket for the College Men’s basketball tournament. Every year I try to determine the ‘upsets’ some big some small.

I do not believe anyone has ever picked the perfect bracket. That is, pick the winners of all 64 games. In fact, Warren Buffet promised to give $1 billion to anyone that does. It is a safe bet. You have a much better chance winning the lottery.

Well it is Friday and I already have a miss. Oh well, there goes a $1 billion…..

But what does this have to do with investing. Well every day I am asked by people about the next great stock or strategy. The one that will make them rich overnight.  Of course, this needs to be done with little or no risk, they say.

Often, they will say well this guy did it, why not me?

Let’s look at managers that try to pick stocks they believe will outperform the market. They are no better than those that ‘seed’ the NCAA tournament. Who will win? Like stock pickers these pickers have no idea what the future will bring.

If they could pick the winners all four regions would No. 1 vs No. 4 and No. 2 vs No. 3. Then No. 1 vs No. 2. Then all four No. 1s would go the final four.  And the overall No.1 would win. Confusing, right?

The odds of some manager picking the right stocks is far greater than picking all 64 games right. But the odds remain quite low.

Besides, most people confuse gambling and speculating with investing.

Gambling and speculating involves being right in the short term. This means instant gratification. Perhaps, this is why casinos and Las Vegas are so popular. The lure of getting rich quick is compelling. There is no waiting. You know very quickly whether you won or not. Even though everyone knows most lose. And nearly all lose long term.

Investing is a long term, life long process.

If you need to invest for growth or just keep up with inflation you need a prudent strategy. One tested by time. A strategy based on scientific research and academia.

Investors that rely on this strategy do not worry about short term volatility. Markets go up and markets go down. But the long term trend is up. Since 1926 the S&P 500 has had an average return of nearly 10% per year. During this time there were downturns of 10% of more 89 times.

WOW. If you want to earn a great return you need to deal with downturns. In some instances, the downturns can be severe. However, over the long term you will succeed.

Find a fiduciary adviser/investor coach to help you through this process. Long term you will succeed.

Regardless of this I will continue to fill out an NCAA men’s basketball. Because it doesn’t cost anything AND you never know….