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….

Portfolio Envy..What Is It Good For?

When investing many people hear their friends or colleagues talking about their investing successes. In many cases this involves investing in portfolios with a higher risk than is appropriate for them.  The lure of the higher return is compelling to most of us.

When investors compare their returns to anyone else they ignore the level of risk each is taking. If you are investing rather than speculating or gambling you need to know the expected return and the expected volatility (risk) of your portfolio.

Psychologists Kahneman and Tversky showed that more people would prefer to make $70,000 per year when others were making $60,000 than to make $80,000, when others were making $90,000. There will always be “others” with more assets, money, or larger portfolios. We are doomed to disappointment because comparison destroys the joy of having and using what we already have. Most people would agree to make or have less as long as others were even poorer. Resist the impulse to compare yourself to your “neighbors”.

This includes comparing your retirement portfolio or 401(k) account balance to your colleagues. In some instances you may be better in others worse. The goal of your investments is to attain your long term goal. This would include a strategy and savings discipline.

Developing a prudent strategy and remaining disciplined to it are very difficult, however in the long term will lead to success. No one can predict what asset class or sector will outperform in the future with any degree of certainty.

Warren Buffet has one strategy which he remain disciplined to. This is the primary reason for his success.

As an example of portfolio envy. Imagine that it’s January 2000 and you are looking at your yearend statement. If you were invested in U.S. Large Cap Growth you huge returns. Now imagine that someone introduces you to a famous money manager who lost 15% in this same period.

What would you say about investing with this manager? Of course, your answer would be ‘no’. You would have said are you out of your mind? Your natural instincts would be to load up on U.S. Large Cap stock funds.

Well that money manager was Warren Buffet. During the subsequent ‘tech’ crash the U.S. Large Cap stock funds were devastated and Warren Buffet thrived.

Remember past performance is no indication of future results.

You are speculating if you stock pick, market time or base your investing decisions on track record performance.  Keep in mind speculating is ok, but not with your retirement funds.

To succeed in investing you should

own equities…globally diversify….rebalance.

What does all have to do with your portfolio?  Well before you compare results make sure you’re comparing apples to apples. Be certain you are comparing portfolios with similar levels of risk.

An aggressive portfolio will look great in up markets but in down markets will be devastating. This is ok if you are young and have time on your side.

However, if you are at or near retirement. You need to control risk and limit volatility.

Which Will Win Your Logical Mind or Your Emotional Mind?

Fidelity Investments just revealed that during the recent downturn 401(k) participants have been making a record number of calls, over 4 million. Many of those calls involved selling out of their equity based funds. This is further evidence that do it yourselfers do not have the discipline necessary to become successful investors.

 

As I have said many times in the past there are three simple rules of successful investing. Own equities along with the right amount of high quality short term fixed income for you…globally diversify…rebalance.

 

The problem with this formula is that most people are not emotionally equipped to deal with market turbulence, both up and down.

 

There is a study that states 70% of 401(k) plan participants that work with a retirement adviser are on track for a successful retirement. While just 28% of participants that do not work with an adviser are on track.

 

A good adviser will not allow their client(s) to panic and sell during the inevitable downturns of the equity markets.

 

Below is a great article that helps provide credibility to the statement that discipline wins.

 

Although many people will nod their heads after reading the tips in the article. Most will allow their emotions to take over and sell during down markets.

 

Are you one of the people to panic?

 

Or do you have an investor coach/fiduciary adviser to help you through the turbulent markets?

 

CNBC article by Fred Imbert

Investors thinking of selling amid the current market turmoil should resist the urge, Vanguard Group founder Jack Bogle said Wednesday.

“Just stay the course. Don’t do something, just stand there. This is speculation that we’re seeing out there, and you can’t respond to it,” the investing legend told CNBC’s “Power Lunch.”

Bogle made his remarks in the midst of yet another sell-off in global equities.

The Japanese Nikkei 225 tumbled nearly 4 percent and closed in bear market territory. In Europe, the pan-European STOXX 600 index fell more than 3 percent.

U.S. equities inched closer toward bear market territory, with the Dow Jones industrial average falling more than 450 points Wednesday, while the S&P 500 and Nasdaq composite fell about 3 percent.

At the center of the sell-off was U.S. oil, which plunged nearly 8 percent Wednesday, hitting a fresh 2003 low.

“Each bubble, for lack of a better word, is different from the previous bubble. The dotcom bubble back in 1999 into the beginning of 2000 was a whole lot of ridiculously overpriced new companies, only probably 15 percent of which made it,” Bogle said. “The mortgage bubble was because a lot of people had mortgages, and weren’t able to pay for them.”

The recent fall in stocks and commodities, particularly oil, has raised questions as to whether or not the economy is at risk of entering a recession. Bogle said the long-term relation between the economy and the stock market is very tight.

in the short term, however, Bogle said: “Nothing has changed.”

“In the short run, listen to the economy; don’t listen to the stock market,” he said. “These moves in the market are like a tale told by an idiot: full of sound and fury, signalling nothing.”

What’s The Weather Forecast?

This past weekend the forecast called for 90s and humid. Then Friday night it changed to rain early and continuing to rain throughout the day. Very disappointing for someone who was looking forward to floating on a pontoon boat Saturday afternoon.

As the day progressed the clouds gave way to sun. Before noon it was a beautiful day. I guess this time my grandpa was right when he said ‘rain before seven, sunshine by 11’. Thanks grandpa!! Will I rely on grandpa’s saying in the future? He has been right in the past however there have been times when he was wrong. So, the short answer is no.

By the way we had a great time on the boat, swimming and just hanging out with great friends.

Given the past performance of weather forecasters why does everyone, myself included, continue to watch the forecasts? It seems to me the weather forecasters are wrong more than they are right. Yet every day we watch for that days’ weather forecast.

WHY?? Because we want to plan our day. What we don’t know is that there are thousands of variables that must align for the forecast to become reality.

The same holds true for those that forecast future stock market moves. There are thousands of variables that must perfectly align to repeat past stock market moves.

Yet, investors continue to search for the ‘guru’ who will tell them what to do with their investment dollars. These investors are all caught up in short term volatility. If it’s raining right now we must assume it will continue to rain. And if the sun is shining we must assume it will continue to shine.

If the equity markets only went up there would be no or less reward.

I just read a forecast, ‘Fed may cause a full blown correction’. The key words are ‘may cause’. Many investors see this and react by selling their stocks. These investors are looking for a reason to sell and the big brokerage firms give them the reason.

Don’t forget these huge brokerage firms make money on every trade, whether you make money or not.

Investors would be better served by working with an investor coach/fiduciary adviser. Your coach will help you build a prudent, globally diversified portfolio. Your portfolio will be at the right level of risk for you and your goals.

Any adviser that cannot tell you in numerical terms your expected return and your expected volatility is speculating with your money.

This is followed by periodically rebalancing back to the original allocation.

Most importantly your coach will help you remain disciplined.

Your coach may even show you that downturns are a GOOD thing. If there were no downturns there would be little or no reward.

Patience is rewarded over the long term.

Too Many 401(k) Options Could Hurt You

The Wall Street bullies make money when money moves. Therefore these bullies have a vested interest in keeping you trading. Consequently 401(k) plans have been sold with many options to facilitate trading. By providing a more pension fund like plan employers will reduce employee anxiety and improve results.

Studying...
Studying… (Photo credit: fanz)

Investment Options and 401(k) PlansIyengar found the same phenomenon applies to investing in retirement plans. Many people don’t participate in their company 401(k) plans. She conducted a study and concluded that once variables like age, income and company were controlled, the biggest reason for a decline in 401(k) enrollment was the over-abundance of choices.

When a 401(k) plan offered only two investment options, 75% of employees participated. When 59 investment options were available, however, the participation rate dropped to 61%.

Expanding on this study, Iyengar examined the impact that more investment options had on the 401(k) participants’ asset allocation. For every additional 10 investment options available, the average 401(k) participant’s equity allocation fell by 3.28%. Some neglected equities altogether.

This is significant because stocks usually generate better returns than bonds or cash over long periods. Lower equity allocations can be the difference between a well-funded retirement and a 401(k) plan that comes up short.

How to Combat Choice Overload

One of the easiest ways for companies to combat choice overload is to avoid offering too many different options. Procter & Gamble increased sales of Head & Shoulders shampoo by 10% when it reduced the number varieties available from 26 to 15

The best alternative for employers is to offer a more pension fund like plan to their employees. By providing an age appropriate portfolio you will not only improve participation but also improve results.

Please comment or call to discuss how this affects you and your investments.

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