“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.

The Future Is Unpredictable!

Each day the media focuses on a new prediction. Each day the media develops a new concern for investors. Their audience is continually searching for new predictions. Their audience is continually looking for stories that have a negative impact on their investments and their lives.

What will happen next? What is the new hot asset class? Where is the best place to put my money?

Lately the political arena has been a hot bed of concerns. Who will be the next Supreme court justice? How will we handle immigration? This list seems endless. There will always be pontification from both sides.

The question becomes how will any of this affect you directly? Can you really predict how any of these predictions will affect your/our world?

Everyone wants to believe the side they agree with.

Everyone wants to have the best investments, only making money and avoiding all losses. This futile exercise will only add anxiety to your life. No one can consistently predict the future.

When someone is right on a prediction it is a matter of luck and not skill or knowledge.

Free markets are unpredictable.

Free markets left to their own devices set prices better than any individual or committee. They incorporate all of the knowable and predictable information in the present, as well as knowable information about the future.

Only unknowable future news and information can change prices going forward.

Rather than attempting to predict the future use your time and resources to improve your skills, either career or life.

You can also spend your time with friends and family. Because we can predict the future and we cannot control the future.

 

Your investments are best allocated by owning equities, globally diversify and rebalance. Follow these three simple rules and you will succeed in reaching your long term goals.

Greed Kills…..

Many investors have told me their advisor recommends large cap stocks only because of their stellar return as of late. They were told avoid small stocks because interest rates are going up. This market timing plays to the greed of investors and advisers as well. These advisers will use any ‘trick’ to make investors move their money to them.

As explained below Greed kills. Because right now small stocks are out performing large stocks. When this will change I have no idea.

What needs to be understood is the equity markets are random and unpredictable.

Below is an article by Fred Taylor that helps us understand why Greed Kills your investment returns.

Perhaps the greatest coach of all time in any sport, John Wooden (UCLA Basketball for those unfamiliar), had many simple rules for success not only on the basketball court but life as well. In this regard, one of his rules for success and life was: “be quick but don’t hurry!” This certainly applies to investing where discipline and patience are absolute requirements for long-term success as an investor. Don’t be in a hurry for investment “success.” Follow the advice of one of the greatest investors of all time: John Templeton — “get rich slowly!”

BTW, investment fear ain’t too good either!!

To avoid killing your returns you need to own equities with the correct amount of high quality short term fixed income….remain globally diversified….and rebalance.

Factors That Determine Portfolio Performance..

Many investors ask me how do I choose my investments? Is there a system you follow? How can I improve the performance of my portfolio? What factor or factors do I need to consider to improve my portfolios performance?

All good questions. I will discuss seven broad elements that typically determine the overall performance of your portfolio.

  1. Security selection. Or stock picking. This has proven not to be a good determinant of portfolio success. When you find a manager with great results. There is no reason to believe they will continue. Actually there is zero correlation between past performance and future results.
  2. Costs and expenses. This one is tough. Cheapest is not always best. My grandpa told me don’t buy the cheapest and don’t buy the most expensive. The best value is somewhere in the middle.
  3. Asset allocation. This is probably the most important technical determinant of portfolio success. Modern Portfolio Theory has proven to be a very effective tool in developing a successful portfolio. However, it’s development must be done correctly. And strictly enforced. In that, there needs to be periodic rebalancing.
  4. Valuation and year of birth. This is a determination of risk.
  5. Longevity and starting early. This also a determination of the level of risk you are comfortable with. However, 4 and 5 are just part of the equation. Each individual is different. Therefore, the generalization that these are the only determinates of risk is false.
  6. Humility and learning. If you google investment you will find millions of items to review. The Wall Street bullies have convinced most that someone has the holy grail of investing. They have convinced us that they and they alone can help you pick stocks, get into and out of the market at the right times and can find the best money managers to ‘beat’ the market and make you ‘rich’. Nothing could be further from the truth. The only ones getting rich are these on Wall Street. This is primarily because they make money on every trade you make. It does not matter whether you make money or not.

Remember, you don’t have to know everything about investing to be successful but you do need to know the right things.

 

  1. Behavior and discipline. This is by far the most important determinant of portfolio success. The Wall Street bullies use your emotions against you. They convince you that if you don’t act now you will miss out on ‘the opportunity of a life time’. Most, if not all of us need an investor coach to guide thru the maze of investment choices and keep us disciplined to meet our goals.

He Who Trades Less…..Wins!

Prior to the new fiduciary rule. The Wall Street bully brokerage firm would use their payout structure to their brokers to generate more trading. They would pay a higher fee for the stock portion of a clients portfolio. For example, pay 1% on the stock portion and 0.50% on the fixed income portion.

This would result in their brokers using higher risk portfolios for their clients. Naturally they get paid more for a riskier portfolio. When there was a downturn in the market their clients realized more volatility than was right for their situation.

This issue may have been corrected with the fiduciary standard. However, right now, there is debate about ‘watering’ down the fiduciary standard

Not sure where the fiduciary standard is going within our industry. But I believe the Wall Street bully brokerage firms will find ways to generate more fees by trading more stocks within their clients’ portfolios.

A broker’s “job” is to get you to buy and sell as much as possible.  That is the primary way he or she gets paid.  This is a huge conflict of interest because what is good for you is bad for the broker.

The Wall Street bully brokerage firms do not make money buying the right stocks at the right time. This is a great misperception by the investing public. They believe the brokerage firms have the right information to ‘beat’ the market.

This is wrong. Because, like you, they cannot predict the future.

These brokerage firms make money when you trade stocks. There is a spread that they earn on every trade plus a commission. For example the bid is the amount someone is willing to pay, say $10 and the ask the amount someone is willing to sell, say $12. When the trade is completed the brokerage firm earns the $2 difference plus commission.

Therefore being an active trader in the long run will cause you to lose money.

By employing a scientifically designed strategy and remaining disciplined to that strategy, over the long term you will win.  Remember you portfolio is like a bar of soap, the more you touch it the smaller it gets.

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 lead”. 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.  Losing is only final when you give up.

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.

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