Sometimes Diversification Hurts!!

This is my message from 2015. It continues to hold true. Except now the international markets are lagging right now.

My goal is to keep you focused on the long term. You will need your investments to last your life time and beyond. Depending on your goals.

Together we can keep those goals as our focus and ignore short term volatility.

Every week I discuss the advantages of following the three simple rules of investing:

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

Very simple indeed until being globally diversified results in performance less than the U.S. Large cap asset class. Because we see large cap stocks every night on the news we compare our results to the DOW and the S&P 500.

As humans we avoid pain and are drawn to pleasure. It is a natural thing. When we see the U.S. large cap earning a great return while small, international and emerging markets are lagging. We wonder why not invest all my money into U.S. Large Cap.

Keep in mind the financial media focuses on the Dow and S&P 500.

On the flip side when small, international or emerging markets are out performing we think nothing of it because we don’t know. Consider this since 2000 the S&P500 has been the best performing asset class three years. And the worst performing asset class for five years. The rest somewhere in between.

Perhaps another small history lesson will help you realize the value of a globally diversified portfolio.

From 1996-2000 the S&P 500 earned a cumulative 132% while Emerging market small value stocks lost -49%.

Naturally at the end of 2000 investors would want to invest all their money into the S&P500 Large Cap stocks(Pleasure) and avoid emerging market small value(Pain).  The next five years, included the tech bubble bursting. As I mention often no one can consistently predict the future.

Let’s see how that worked out for investors. From 2001-2005 the S&P 500 earned a cumulative 3% while Emerging market small value stocks earned cumulative 162%. That didn’t work out well at all.

Naturally, I cannot predict that this will happen again because past performance is no indication of future results.

The point is no one can predict which asset class will outperform and for how long. When someone does make an accurate prediction it is a matter of luck and not skill. When you consider all the analysts on Wall Street all making their own predictions. In any given year someone will be right. The problem is we never know which one is right in advance.

On another point I find it fascinating that investors see crashes of the past as buying opportunities and current or future crashes as risk. It is interesting how the human mind works. OK now I’m rambling.

It is times like these that investors really need an investor coach the most. A coach will help you control your emotions. Right now the emotion is greed. Even though allocating all your investments to U.S. large cap might sound logical it is not.

Your coach along with your investment policy statement should guide you through all market conditions.

Don’t empower the Wall Street bullies and hire an investor coach/fiduciary adviser.

As always I welcome any questions or comments

The Unpredictable NFL!!!

Last night I was at Lambeau watching the Green Bay Packers rally from down 17 to beat their arch rivals the Chicago Bears. The Packers Bears game has proven to be a fierce battle in the NFL’s oldest rivalry.

Regardless of records this game is hard hitting and never s sure thing for either team.

Last night proved to be a game for the ages. An injured Aaron Rodgers broke the hearts of the Chicago Bears, yet again.

After finding my seat I realized I was surrounded by Bears fans. Needless to say it was great fun for them in the first half and much of the 3rd quarter. (I was not enjoying the play of the Packers.)

However, that is when the fun stopped for the Bears fans and Rodgers threw three fourth quarter touchdowns to win by a single point.

Much like the equity markets NFL games are unpredictable and random. No one can consistently tell you which team will win and by how much.

I personally am looking forward to an exciting NFL season. Culminating in a Packer Super Bowl championship, I HOPE!!

Part of that excitement is the unpredictability. If it always went your way would you continue to watch the games? The reward is watching your team overcome all obstacles to win. The challenge is watching your team lose when they shouldn’t have. Or watching your team go thru a losing season.

The equity markets reward us with great returns over time. This should be done without stock picking, market timing or using past records to invest. The challenges are times when the equity markets have a losing period, perhaps even a losing year.

As the games of the NFL the equity markets are random and unpredictable. But if you can deal with the challenges the results can be very rewarding.

An example is watching any pre-game predictions by the ‘experts’. Even if all the ‘experts’ pick one particular team to win there is no assurance that they will in fact win.

Why? Because the games of the NFL are random and unpredictable. No one can predict if a superstar player will have a good game or a bad game.

No one can predict if any superstar player will get hurt and unable to play.

No matter how great a player is they can and do still make mistakes. It’s all part of being human.

This is the real reason investors should stop relying on Wall Street experts to predict which stocks are best or how to get into and out of the market at the right time. Or even look at a money manager’s past record of beating the market and assuming they will continue. These are really forms of speculating and gambling with your money.

In the NFL to build a consistent winner you must pick the right personnel both players and coaches. You have to accept that there will be losses and perhaps even losing seasons.

A system and process must be put into place that you believe in as well as all your personnel. Once in place you must have the discipline to keep your eye on the long term. Setbacks are part of the allure of the NFL. This is why we watch.

The same goes for investing in the equity markets we need to believe in the prudent process. Because there is a scientific, evidence based way to invest. Once you have your prudent process you need a coach to keep you disciplined to your process.

Like the NFL, losses happen and losing seasons happen. Without the risk of loss there is little chance for a rewarding experience long term.

As the great Vince Lombardi said “Perfection is unattainable but its pursuit will lead to excellence.”

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

Happy Labor day…2018!!

Happy Labor Day!! I hope everyone enjoyed a safe and pleasant holiday. Sadly for many this is the last unofficial weekend of summer. The Labor Day holiday, which began in 1887, is to honor all the hard work of Americans.

America has always been known as the land of opportunity. This opportunity will only result in success when combined with hard work and in  taking risks. There will always be risks, no matter what the path you take. Some of these risks will be apparent and some will be hidden. Even if you work for an employer you take the risk that the employer will no longer need you. Small business owners take on different and more apparent risks. But there will always be risks. Regardless of the type of risks you decide to take on the path to success, it will require hard work.

There is no short cut to success.

Keep in mind some will get ‘lucky’ and strike it rich quickly but the likelihood that these ‘lucky’ ones will hold on to these riches is slight. To appreciate your wealth it is best to have earned it through hard work and taking the right kind of risks.

When we acquire our wealth through hard work and risk we should insist on having our money work hard with the right kind of risks.

The Wall Street bullies have convinced us that there is a short cut to investment success.  Why do we work hard and take risks to acquire our wealth and then think we can easily make a very high return? Why do we think that gambling and speculating with our money is the prudent thing to do?

Through research and proven concepts and theories we can make our money work hard for us with the right kind of risks. If you are working with a broker who is stock picking or market timing or using track records to invest you are gambling and speculating with your money not investing

Stop being a victim of the Wall Street bullies.

Seek the assistance of a fiduciary adviser, an investor coach, to help your money work hard with the right kind of risks. The Wall Street bullies understand that you will make emotional decisions with your money. And they know how to take advantage of this. Your investor coach will help you remain disciplined and focused.

Market Returns!

Most investors have failed by a long shot to achieve market rates of return. Based on the Dalbar Study for calendar year 2017, the average investor has failed significantly to achieve market returns. While the S&P 500 has earned 7.20% over the last 20 years the average mutual fund investor has earned 5.29% with inflation of 2.15%..

 

This is a stunning failure. Research shows the average actively managed mutual fund underperforms the market by over two percent per year on average. Accepting this fact, the investor’s job of allocating assets is greatly simplified.

 

This poor performance is not only the result of active managers but also the investor attempting to market time. That is, getting out of the market at the right and then finding the right time to get back in.

 

When you consider the amount of information put out by the financial media. It is no wonder that many investors panic at the wrong time. Of course, there is no right time to panic.

 

The investor only needs to allocate his/her assets into various asset categories to achieve market returns and remain disciplined over long periods of time.

 

This is easier said than done and most often requires the aid of a coach. By focusing on market returns, there is no stock picking at all. No forecast, no prediction. There is no gambling on beating the market. You just own every single stock in that asset category. That’s what we talk about when we refer to market rates of return.

 

Remember it’s not about picking the “best funds” nor getting out of and back in the market at the right time rather it’s about maintaining a disciplined approach.

 

Investing success requires owning equities….globally diversify…..rebalance.

Proper Expectations.

Proper expectations are the key to investing with peace of mind.  Do not expect to predict or forecast stock prices and movements.

Many investors confuse gambling and speculating with investing. Investing does not require an accurate prediction of the future. Gambling and speculating does require this accurate prediction of the future.

Please keep in mind that the equity markets are random and unpredictable. Accurately predicting the future is a matter of luck and not skill.

Lately I have heard potential ‘investors’ discussing speculation in bitcoin or marijuana stocks or free energy stocks or hot real estate deals guaranteeing very high returns. This list is endless and is nothing more than gambling and speculating.

Most of these gamblers are looking for a short cut to riches. They feel if they find the perfect investment they will become filthy rich and quit working. Their goal is to live the life of leisure with no responsibilities and accountable to no one.

They want to substitute gambling for a savings program and a prudent portfolio.

Most will be very disappointed and end up with a shortfall in their retirement savings plan.

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.

To reach your long term goals you must own equities….globally diversify….rebalance.

“Diversification Is Your Buddy!”

I continue to believe that many investors have not gotten over the 2008 housing crisis. They want to avoid the stock market at all costs. Many rationalize that the market has been going up for a long time. And now is the time to get out.

 

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.

 

We must ask ourselves why are crashes of the past seen as buying opportunities and crashes of the future are seen as risk?

 

Keep in mind since 1926 the U.S. equity markets have earned nearly 10% during which time there have been downturns of 10% or more 89 times. And the average recovery since 1946 has been 111 days.

 

In markets like these and all markets 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.

 

A truly diversified portfolio will under perform a strong US large stock market. This was the case in the late 1990’s only to experience the tech bubble crash. The globally diversified portfolio continued to earn a return. Of course, past performance is no indication of future results.

 

Right now many 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.

 

Remember the equity markets provide the greatest wealth creation tool on the planet. If the portfolios are properly constructed and maintained.

 

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

Nothing To Fear But Fear Itself!!

When I tell people that I am an investor coach/fiduciary adviser. The typically response is to try and hide from me or simply walk away. These responses are the result of the stock market volatility during the last few of years. The stock markets around the world have been extremely volatile.

Huge moves down followed by moves up followed by moves down again and then up again. This volatility has investors on edge and looking for safety. And who can blame them. In most cases we are talking about their life savings.

These ‘investors’ are focused on short term results without regard to the long term potential.  All investors need to keep in mind that they will hopefully be retired for a long time. Therefore the short term volatility is really meaningless to them. Or at least it should be.

This is where the guidance of an investor coach/fiduciary brings the most benefit to investors.

By coaching their clients about how the equity markets actually work. For example there is solid evidence that over the long term equity markets are one of the greatest wealth creation tools on the planet.

With this knowledge and the discipline to stay the course investors can realize these great returns.

“DISCIPLINE is the soul of an army. It makes small numbers formidable; procures SUCCESS to the weak, and esteem to all.” -George Washington

You don’t have to know everything about the equity markets but you do need to know the right things.

Although I don’t agree with most of Warren Buffet’s methods. That is he believes in picking stocks.

What I do agree with is that he has a process and discipline.

Most if not all investors do not have the emotional strength to remain disciplined during equity market extremes. Both up and down.

There is also a quote by the same Warren Buffet that might help some here. When everyone is crying I’m buying and when everyone is yelling I’m selling. Apparently this only hold true for his buy side. Because he also says his holding period is ‘forever’.

This sounds like market timing, which I do not believe works. That is getting in and out of the market at the right time.

I believe Mr. Buffet’s real point is do not listen to short term volatility. Stay focused on the long term.

If you can find an investor coach/fiduciary adviser to help you. You can stop fearing the markets. You can realize the great long term results. The results that can lead to your successful retirement. Both up to and after your leaving the workforce.

Your coach will among other things teach you the three simple rules of successful investing.

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

These three rules may seem simple but they are very difficult to follow without an investor coach/fiduciary adviser. Especially when the media is ‘scaring’ the hell out of you.

If You Follow the Herd, You Will Get Slaughtered.

During the turbulent times we have and are experiencing there will be ‘experts’ telling you what is the best place for your money.  It could be gold, annuities, real estate or even a pyramid scheme……..

Whenever there is fear in the air someone has the answer for your investments.  This is a very dangerous time to be speculating.

If an investment strategy is on the cover of every magazine, and all of your friends and associates are doing it, it’s reckless to follow suit.  Only hot, sexy, and speculative techniques make the cover.  Don’t follow your friends!

Recently there was hype concerning the bitcoin craze. Many ‘experts’ stated that bitcoin was the wave of the future. For a while it was doing great. Huge amounts of profits were showing up. Then the ’bubble’ burst and down it came. Will it come back? I do not know.

This is really an example of speculating and not investing.

The point is there will always be a ‘hot’ asset class or stock or a new way of doing business.

But the most successful businesses have one strategy and they stick to it. Such as McDonald’s, if you visit a McDonald’s anywhere in the country they are all set up the same. They know there may be a better way to run a restaurant but their systems works.

Warren Buffet is another example, he has one way of investing and it has made him the most successful investor of our time. There are times when he losses more money than most but over the long term he wins. He does not fall for the latest fad. (However, Mr. Buffet himself said most investors should implement a passive investment strategy.)

As an investor you may be tempted to change your investment mix to accommodate current events. This is called market timing and it has been proven not to work. You may get lucky in the short term but you will eventually fail.

To succeed in investing for the long term you should own equities….globally diversify….rebalance.  The key is to remain disciplined to this strategy.

Markets are Random …..Get Over It!!

I recently read an article that many Americans continue to be afraid of stocks. They are afraid they will lose all their money.

Many expect to earn stock market returns with treasury bill risk.

Just heard a new prediction. On August 1 of this year the market will crash. The reason is a little unclear.  Regardless, these predictions are baseless and of no real value to investors.

Many believe there is someone out there who can and does know when to get in and out of the market to maximize return and avoid all losses.  After two decades of research I can tell you this person does not exist.

Occasionally, you will find someone who makes a correct prediction. The problem is there is no evidence that their predictions will be correct going forward.

When you invest in stock markets no one can predict “save” you from the down periods—NO ONE.  If markets were not random and unpredictable, they wouldn’t offer higher expected returns.  Markets randomly and unpredictably go up and down.

As we age our situation gradually changes from growing our money to taking an income stream that keeps up with inflation.

To succeed in this we must reduce the level of risk in our portfolio as we grow older.

We must focus on the long term.  Our research is based on long term performance data. Making decisions based on short term results will lead to disappointment.

We will succeed in our investing when we own equities, globally diversify and rebalance.

Long Term Thinking and Discipline Wins!

There continues to be more and more media attention that the ‘buy and hold’ strategy is dead. That Modern Portfolio Theory no longer works. This is another attempt by the Wall Street bullies to keep your money on the move.

There 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. (As well as the solutions.)

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.

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. 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.