Long Term Will You Earn The Great Market Returns?

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 May 20, 2019 the top performing funds are U.S. Large Growth stocks.

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 capture the great returns the other asset classes provide, over the long term. The goal of our portfolios to earn the great market returns. With less volatility. That means over the long term you should capture the great market returns with essentially less risk.

Typically, investors want to concentrate in the ‘hot’ asset classes. If these investors are lucky they will match the great returns the market provides. In most cases they will not.

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. Because of the trade wars or whatever…

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 diversify …rebalance.

Trade Wars…Now What??

There has been a never ending, stream of financial news regarding the, trade war with China. First, we raise tariffs because we believe it makes for fair trade. Then China reciprocates and raise tariffs on the goods we buy from them.

What should we do, going forward, with regard to our investments? Should sell everything and go to cash or buy gold? This would be a mistake.

During times like these there are a large number of ‘experts’ making predictions about the future.  These predictions are for the most part worthless. Of course, one or two will be right. The problem you have is you have no idea which ones are right, this time.

These ‘experts’ want you to believe they have the skill to predict the future. Unfortunately, for investors this is a matter of luck and not skill.

The free markets are more powerful than any political agenda. These free markets will find a way stabilize and begin to grow.

There is a method to help us get through these difficult times. Just as you would never take a long-distance car trip without a map or GPS, you should never buy any investment without an Investment Policy Statement.

My GPS includes Modern Portfolio Theory, the three-factor model and the Efficient Market Hypothesis. Two of which have won the Nobel Prize for economics. The third was written by a Nobel Laurette.

This is a written document that states the goal of your portfolio, how much risk you will take, and what you will and won’t do when markets become volatile and crash.

I find it curious that crashes of the past are seen as buying opportunities. And current and future crashes are seen as risk.

Remember downturns happen. However, they are unpredictable and random. Attempting to time the market will lead to very disappointing results.

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

Comparison Envy!

Many investors are continually searching for better returns. They hear their friends talking about their great adviser. I have even heard one investor say they had the best adviser in the country. Not sure how that is determined. Of course, the best adviser in the country must be able to predict the future.

This comparison of one adviser to another is a dangerous strategy. Because one adviser may be hot today or even for a year. But that streak will invariably end. Followed by the next hot adviser.

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 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.

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

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.

The NFL Draft is Complete…Who Wins?

As I write this the 2019 NFL draft is complete. Here in Green Bay everyone is talking about the number one pick defensive edge rusher Rashad Gary as well as other fine players. The ‘experts’ are saying why he is a good pick and some are saying why he is a bad pick.

In the past, I watched these ‘experts’ for a while until I realized that they have no idea who is the best pick or player. Until the player performs on the field, they have no idea who will be a star.

There was a lot of hype on the overall number one pick QB Kyler Murray from Oklahoma. He is said to be a, can’t miss player.

Well if you look at history since the draft began a long time ago only 13 overall number one picks have gone on to the Hall of Fame.

There is a lot of hype every year regarding the NFL draft. The experts keep predicting, the public keeps watching. Except for one thing the draft is nothing more than a guessing game.

Our own Brett Favre was drafted in 1989 by Atlanta in the second round as the 33rd player chosen. That means 32 players were seen by the ‘experts’ as better choices. Thankfully in February 1992 Atlanta traded him to Green Bay. Oops! OK I’m biased but Brett did pretty well in Green Bay and will be in the Hall of Fame someday.

Current Packers quarterback Aaron Rodgers, considered by many as the best in the game was drafted in the first round by the Packers. He was the 25th player selected. That means 24 players were chosen before him.

Tom Brady will be in the Hall of Fame someday as well. He was drafted in 2000 in the 6th round. That means that the ‘experts’ believed there were over 160 players better than him. Another oops!

The Packers chose Tony Mandarich as a, can’t miss offensive tackle in 1989. He was chosen before the great running back Barry Sanders in the same draft. The ‘experts’ missed again.

Looking back many variables may have changed history. Would Brett Favre have been as great without Steve Mariucci coaching him? Or would Tom Brady be as great as he was/is without Bill Belichick? No one can answer this with any degree of certainty.

Great players have great coaches. In the right setting at the right time, greatness happens.

While talking with investors I am amazed at how often they rely on ‘experts’. To pick the right stocks.  Or help them get into and out of the equity markets at the right time. Or even do their own homework and do it themselves. Without proper coaching these investors are likely to realize disappointing results. It is possible that some will succeed but this will be the result of luck and not skill.

Coaching provides proper strategy and most importantly DISCIPLINE. There will be times when a good coach will have you doing something that they do not want to do. Like buying equities in a down turn. As part of the process, scheduled rebalancing requires selling the good performers and buying the poor performers.

Players/investors become emotional during times of crisis and hype. Without good coaching these ‘players’ will make emotional decisions that go against their overall strategy/plan.

If you are working with an adviser whether human or robo and they allow you to do whatever you want. The fees you are paying are too high no matter how cheap they appear.

Coaching matters over the long term.

Stop empowering the Wall Street bullies. Fire your broker/agent and hire an investor coach/fiduciary adviser.

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……..

Sometimes it means concentrating your portfolio in on one or a small amount of hot performing asset classes. It could be all U.S. stocks or all U.S. large stocks or all emerging market stocks or all international stocks or……

Right now, the U.S. stock is in its longest bull market in history. Does this mean U.S. stocks will slide in to a bear market? I have no idea.

However, 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!

Remember 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.

As an investor you may be tempted to change your investment mix to accommodate current events. This is call 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.

Should You Get Out of the Equity Markets?

During conversations with investors I continue to hear apprehension when the subject of stocks is discussed. This apprehension or fear is completely understandable. We hear nothing but bad news from the media, the continuing battle in Washington, the liberal tone of the current political environment, like it or not, our own budget deficit and ballooning debt, the list goes on and on.

Will there be down markets in the future? Absolutely, there is no doubt. However, no one can tell you when and which countries and/or sectors will be involved.

The equity markets around the world are random and unpredictable.

This is undeniable. However, the equity markets remain the greatest wealth creator in the world, if properly used. This does NOT mean picking the right stocks or market timing, getting in and out of the market at the right time. Neither of these activities promoted by the Wall Street bullies are in your best interest. These activities benefit the Wall Street bullies and will not improve your returns.

The market returns are there for the taking, they are waiting for you to take advantage.

There will be periods when a globally diversified portfolio will underperform. For example, these portfolios underperformed during the 1990s. Because .com companies were the rage. Then the bubble burst and fortunes were lost. Except for the globally diversified portfolios. They continued to earn positive returns. With the exception of 2003, -3%.

Your time can be much better spent than worrying about the direction of the equity markets. If you have developed a prudent portfolio and remain disciplined you will succeed long term. This will require the help of an investor coach who will keep you from letting your emotions take control.

Remember the Equity Markets are forward looking:

  • Expectations about the future are in today’s price.
  • Market returns are not strongly correlated with macroeconomic variables such as GDP
  • Markets can provide positive returns even during periods of poor economic performance.
  • Timing markets is difficult.

A study was done looking a past recessions and stock returns. The conclusion there is no correlation between recessions and stock returns.

To succeed in reaching your long-term financial goals you need to own equities, as scary as this may seem, globally diversify, no one can tell you which countries and/or sectors will outperform and rebalance, buy low sell high.

If you these simple rules you will stop gambling and speculating with your investments and improve your results with less anxiety about the future. If you are younger growth must be your goal, a retiree your goal is to keep pace with inflation. Owning equities in your portfolio is a great solution to accomplish both.

Imprudent Action Requires a Necessary Lie!

We all believe we can beat the market and avoid the sacrifices. Those sacrifices include saving enough and foregoing unnecessary purchases.

We ask ourselves ‘why should I not have that boat or snowmobile or motorcycle or whatever everyone else has?’

Sometimes we have to tell ourselves ‘we shouldn’t buy stuff we don’t need with money we don’t have to impress people we don’t know’.

Of course, there are times when we should indulge but try not to make a practice of it.

 In order to pay for our unnecessary purchases, we forego saving for our future. Then we feel we must speculate to catch up. We look for predictions that will make us wealthy overnight.

There are circumstances where speculating is ok. But for most of us speculating and gambling will lead to disappointing results.

All of us have said, ‘But it’s different this time’ ….’This Time This Expert is Right for Sure’……’I’m due’…..

A necessary lie is a rationalization to justify self-destructive behavior. Some additional examples:

  • I will start my diet tomorrow…..so I will pig out today.
  • I’ll just gamble until I get even…..so I will let it ride.
  • This time I really do know what the market is going to do….
    so it’s all right to speculate with my money.

Remember f you do not know two numbers you are speculating with your money. They are expected return and expected volatility (risk).

That means we must have a prudent process and remain disciplined. In most cases this will require the assistance of an investor coach/fiduciary adviser.

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

Make Them Prove It!!!

This week I am struggling to find something to write about.

I don’t want to talk about politics, OMG I don’t want to talk politics. Because your investment are not affected by politics over the long term.  Over the short-term politics can cause significant volatility.

I don’t want to talk about the markets. Because the equity markets are random and unpredictable.

What I have decided on is how ‘advisors’ lure clients away from their current advisers. And you guessed it has to do with fund performance. Imagine that.

Many advisers will put together a portfolio of top performing funds over the last 5 or 10 years. Present to the client as the best way to increase their wealth with little or no risk. And neglect to tell them that they have not been using these funds until today.

Investors should as these ‘advisers’ How many of your current clients have been in this exact portfolio over the last 5 years?  Ask them to show you redacted statements showing this exact portfolio.

Believe most will not be able to answer these questions.

It is easy to find the 5 -star top performing funds of the past. It is a completely different thing to predict which funds will be top performing in the future.

The leading fund rating firm, Morningstar has stated that their star ratings have no predictive abilities.

So, what should investors do?

Look for an investor coach/fiduciary adviser to help build an evidence-based portfolio. One that includes structured funds rather than actively managed.

To be clear actively managed means stock picking and market timing. In other words, trying to predict the future. Which is really hard.

Stop using the art of investing and start using the scientific side and then stick to it.

If the adviser will not provide evidence that their strategy has worked in the past. Look for a new adviser.

You can even go one step further and ask the adviser for their Global Investment Performance Standard (GIPSÒ). This is an audited account of their past performance. You will have a difficult finding and adviser using this standard.

To succeed in investing you need to own equities along with high quality short term fixed income….Globally diversify…..Rebalance!

Long Term Means Life Long.

Some of you may notice that on occasion there are repeated messages.  Think of them more as reminders to success.  Repeating the same important message will help you internalize the message.  That said.

Most investors think that long term is five to ten years.  For the day trader it could mean ten minutes.  In reality a well thought out strategy may take a lifetime of patience, wisdom and discipline to work effectively. 

Think in terms of holding most of your investments over the remainder of your life.

You will change the risk level as you get older. However, you will continue to own a globally diversified portfolio with the right amount of high quality short term fixed income.

Remember the Wall Street bullies make most of their money when you trade. Their ability to predict the future is no better than yours.

The real problem is that there is always some money manager who makes the right call at the right time. The Wall Street bullies then advertise this manager’s success. Touting their ability to predict the future.

When you look back at their successful money managers’ ability to repeat you will be very disappointed.

Or I have heard of advisors luring new clients with the promise of successful market timing. These advisors claim they can get you into and out of the market at the right times. Again investors will be very disappointed in their long term results.

The secret to successful investing is not picking which stock or asset class will outperform, Nor is it trying to market time the market. this has been proven time and again not to work.  The secret to successful investing is choosing a proven strategy and sticking with it.

To succeed find a prudent process with evidence to back it up.

Remember own equities with the right amount of high quality short term fixed income…..globally diversify…..rebalance.

Fear of the Future!!

It all begins with the fear of the unknown. Fear of the Future. It is one of our most basic instincts, to fear the unknowable. This attribute keeps us alert for changes in the environment that could threaten our safety and well being.

It is the drive that keeps us plugged into the evening news and makes us ask many unanswerable questions, such as, “Will there be enough money to maintain my standard of living? What is the economy going to do next? Will I be able to keep my job?” or “What is the market going to do next?”

The news media often preys on this fear by showing clips of tragic events and doom and gloom predictions about the future. The newsroom motto is….If it bleeds it leads. Disaster sells.

It is not uncommon for this pervasive fear to cause stress, anxiety, and even sleepless nights. It is a chronic affliction in our modern age. 

Many of us see downturns of the past as buying opportunities, yet we see downturns of the future as risk. Why is this? Is it our innate fear of the future?

Since 1926 the S&P 500 has realized a nearly 10% return. During this time there have been downturns of 10% or more 90 times. So to earn the great long term return you need to deal with the downturns.

There is really no need to fear the future. Because we fear the unknown. If it’s unknown why try to predict it?

To successfully invest for our future, we must ignore the media hype and stay the course.  Traders seldom succeed in the long run, investors will prevail if they remain disciplined.

Do not fear the future… own equities….globally diversify …rebalance.