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Market Timing….Luck or Skill?

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Investors continue to market time. This attempt to get out of the market when it is going down and get back in when it will go up is futile. Dalbar Research is an independent think tank that studies investor behavior.

Dalbar’s annual study of investor behavior shows that self-directed investors work against themselves largely by chasing the market

Barclays Global Investors headquarters on Howa...
Barclays Global Investors headquarters on Howard Street in San Francisco, California. (Photo credit: Wikipedia)

Investors are their own worst enemy, or so is the conclusion of Dalbar’s 22nd annual Quantitative Analysis of Investor Behavior study that compared equity fund returns of directed investments versus the market benchmark. This year’s study found that in 2015, investors returns came in at -2.28% for equity funds while the S&P 500 benchmark had incremental gains of 1.38%, thus the average equity investor underperformed the S&P 500 by 3.66 percentage points. The good news is that’s better than 2014, in which investors left 8.19 percentage points on the table.

The bad behavior wasn’t limited to equity funds, Dalbar found.

For the full article go to
http://www.thinkadvisor.com/2016/05/31/market-timing-costs-investors-big-dalbar?slreturn=1465224055

The selling point of all market timers is that they will get out of the market during down markets and buy on the way up.

This is an admirable goal however the Dalbar study illustrates that no one succeeds in the long term. Even those with illustrious credentials and diligently study the market patterns cannot beat the market rate of return in the long term.

NO ONE can predict the equity markets for the long term.  Those that do pick the market tops and bottoms are the relying on luck and not skill.

After the 2008-9 investors were and still are looking to avoid repeating any pain. These investors are getting out of the equity markets all together, a huge mistake. Volatility and risk are part of the reason the equity markets experience a return premium over the long term. Without this volatility your return would be much lower and you will be unsuccessful in keeping up with inflation. In other words the purchasing power of your money will not be maintained.

This is what I call the invisible loss.

Another group of investors is seeking out those analysts/advisers who avoided the down turn. Thus avoiding pain for the investor. The problem is that these analysts/advisers are unable to repeat their success over the long term as illustrated by the above article.

If investors are seeking to reduce their investing anxiety and improve long term results they need a prudent strategy and discipline. These investors will be unable to do this on their own. Therefore, the need for an investor coach is greater now than ever.

Reaching your long term financial goals cannot be accomplished alone.

Your emotions will not allow it.

Stop looking for the next great investment class or fund manager. Their ability to repeat is near zero. There are three simple rules of successful investing:

Find a coach who will help follow these rules and you will reach your long term financial goals.

When you do find your coach listen to them. It has been said that advising investors not to market time is like advising fish not to school together. It would be against human nature not to market time because ‘this time is different’.

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Uncertain Equity Markets??

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Since the Greece crisis began a number of investors have said the equity markets are too uncertain and there is too much risk. They believe they should avoid the equity markets and use safe investments like annuities until thing ‘calm’ down. The problem with this strategy is that there is always uncertainty and risk in the equity markets around the world.

There is always something going on to disrupt the markets around the world.

Stock market of Brussels
Stock market of Brussels (Photo credit: Wikipedia)

If you only invest in the equity markets when things look rosy you will be sadly disappointed over the long term. To deal with this fear of the future we need to develop a prudent portfolio and remain disciplined. Our prudent portfolio will be at level of risk we are comfortable with. You need to ask what is the worst case scenario for this particular portfolio over a five year span?

This could mean 60% in equities and 40% in high quality short term fixed income. It could mean more equities or more fixed income.

Regardless of how much equities are in our portfolio we must avoid the temptation to market time when things look ‘bad’. It also can mean we must avoid the temptation to market time when things look ‘good’. This means getting out of equities when times look ‘bad’ and buying more equities when times look ‘good’.

To be successful long term we must:

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

This may seem simple but during times of crisis and boom our emotions take over. We make emotional decisions with our investment dollars leading to poor results over the long term. This is where the investor coach/fiduciary adviser adds their value. Remaining disciplined during these times will lead to a successful long term results.

For investors that realize that they nor anyone else can predict the future. This disciplined approach will reduce your anxiety and increase end results.

We must all remember that the equity markets, well, all markets are random and unpredictable.

Working with an investor coach/fiduciary adviser is the first step toward finding a solution best suited for you.

The typical broker/agent will sell you whatever you want. Their main objective is to make the sale.

While the investor coach/fiduciary adviser will recommend what is best for YOU and your long term financial future.

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“Diversification Is Your Buddy!” Part 2

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The U.S equity markets are making new all-time highs. Of course at one time the Dow Jones Industrial 30 had an all-time high of 200 then 1000 then 2000 then …….18,000.

 

Some investors are considering moving their money out of the stock market. Because the markets are at all-time highs. The market has to go down because it is at an all-time high.

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.

In markets like these 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.

Most 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’.

There will always be something in a truly diversified portfolio that you will not like. This will be true every year.

It seems every day I am asked what will the market do today or this week or this year?  Or what stock will do best? Or can you beat the market? Or is now a good time to buy into the market? Or is now a good time to sell?

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.

 

There will always be someone touting a ‘new’ strategy that will protect or insulate you from the current risks. These Wall Street bullies want you to believe they can predict the future and earn you stock market returns with Treasury bill risk. What you end up with is Treasury bill returns and stock market risk.

Find an investor coach/fiduciary adviser who will help you build a prudent portfolio designed for you. And more importantly keep you disciplined during both up and down markets.

Process and discipline will lead to a successful outcome.

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

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What Does ‘Control’ Mean To You?

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Through many discussions with investors I have learned that when things go against them they want to take control.

Stock pickers and day-traders who are actively trading their investments have perceived control over their portfolio. Similarly, people who jump in or out of the market during up or down swings also mistake their activity for control.

In reality, the more activity and trading you generate in a portfolio, the more out of control the portfolio becomes. When an investor trades in their portfolio trying to time the market or find the “best” investment they are doing nothing but add costs and decrease return.

Actively trading your account by picking individual stocks or market timing or picking funds based on past performance is exactly what the Wall Street bullies want you to do.

Stop empowering the Wall Street bullies.

Just because a fund manager or stock picker or market forecaster was right in the past has nothing to do with future performance. Many investors look at past performance as the result of a skillful trader/manager. This has been proven to be incorrect. Because there is no correlation between past performance and future results.

All managers are required to state this somewhere in their literature. Unfortunately for investors it is hidden in the small print or the investor ignores because the salesperson said ‘this time is different’. They might say ‘this is a once in a lifetime opportunity’ or ‘this is a ground floor opportunity’.

Remember, no one can predict the future, no matter how convincing someone is in the media, they are only guessing.  In most cases the predictions are never broadcast by the same ‘experts’. The main reason for this is that the ‘hot’ manager right now got there based on luck and not skill. As we all know luck changes. And so do the ‘hot’ managers we see in the media.

The “best” strategy is to have a prudent process and discipline in place   Stop trying to study the market to find bargains, statistics prove that it cannot be consistently done. You might get lucky in the short term but long term your results will suffer.

With the case of market timing, getting in and out of the market at the right time requires being right when you get out of the market AND be right when you re-enter the market. This again will result in lower returns.

To succeed long term and reach your financial goals you should
own equities…globally diversify …rebalance.

It may seem easy to develop a prudent portfolio and remain disciplined but research has proven otherwise. People are emotional beings and will be swayed by short term volatility and trade out of the poor performers and buy the hot performers. I don’t know about you but buying high and selling low is not a recipe for success.

This tactic will result in poor results and anxiety. Investors need the assistance of an investor coach/fiduciary adviser to keep them disciplined in both up and down markets.

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Investor Coach or DIY?

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Recently the financial media has been extolling the need to cut expenses in your portfolio. Many experts claim if you find low cost investments and do it yourself you will improve results. While this is true most investors as evidenced by the Dalbar study would suggest otherwise.

English: By incorporating sustainability inves...
English: By incorporating sustainability investment and returns into traditional financial reporting, a clearer picture of the bottom-line impact of a company’s actions towards sustainability is made available. In this positive reinforcing loop, greater investor returns and increased movement towards sustainability are generated with every cycle. (Photo credit: Wikipedia)

Dalbar is an independent research organization that studies investor behavior. Each year they update their results. The 2014 results have not been published but I do not expect a substantial changes to the 2013 results. Please note the results are from 1984 thru 2013 average annual.

  • S&P 500 10%
  • Dalbar Average Investor – Equity Funds   69%
  • CPI (representing inflation)   80%

This is evidence that investor left on their own will sell during downturns or lows and buy in upswings or highs. This means they are buying high and selling low. This is not the result of high investments costs but rather the result of investor behavior.

Please do not get me wrong, excessive or unnecessary fees will hurt your overall performance. What I am trying to say is that do it yourselfers will undoubtedly make emotion decisions with their portfolio. These bad decisions will result in returns reflected in the Dalbar study. Without the help of an investor coach/fiduciary adviser investors will receive lower returns over the long term.

There is book I highly recommend for anyone considering retirement ‘The New Retirementaility’ by Mitch Anthony. In the book Mr. Anthony asks a number of questions including:

  1. Do I know everything I need to know about asset allocation and protection, and tax reduction strategies and estate management?
  2. Do I want to invest the time and effort to learn these issues?
  3. Do I want to continue to invest the time it takes to keep up with the markets and remain competent as an investor?

Even if you answer yes to these questions it is not enough to insure a successful long term investing experience. These questions do not address your behavior and your tendency to make emotional decisions with your money.

I like a quote by Warren Buffet “With enough insider information (hot tips) and a million dollars, you can go broke in a year.” While I don’t agree with his investment philosophy for most investors I do admire his discipline.

An investor coach/fiduciary adviser will keep you disciplined to your strategy in both up and down markets. You may find a provider who tells you how cheap you can invest with them. If this provider will allow you to panic in down markets or buy the ‘hot’ asset class in up markets. No matter what this providers charges it is too high and excessive.

Avoiding excessive fees should be your goal as an investor. However cheapest is not always the best solution for all investors.

Find an investor coach/fiduciary adviser who will put you on the right path to a successful long term investing experience. An experience with less anxiety and improved performance, long term.

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Predicting the Future or Investment Advice??

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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.

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, 2013 average annual performance S&P500 earned 11.10% while the individual investor earned 3.69%.

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 participant.  Markets work.  Unfortunately, most investors never tap their real power.

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.

Although these are simple investors have a difficult following them on their own. Remember through it all we are humans and we have emotions. We watch the financial news casts and hear what will happen next in the markets. In most cases these news casts are designed to either instill fear and panic leading to investors selling their holdings or hype a ‘hot’ stock/asset class/manager and buy near the peak.

These Wall Street bullies want you moving your money constantly, not for your benefit but rather to generate fees for the bullies.

As with most endeavors whether it be sports, career or personal life we need a good coach to guide us. Someone to help us determine our goal(s), develop a prudent plan and remain disciplined. Ensuring discipline is where a good coach adds most of their value. I like the saying ‘if you think professional advice is expensive wait until you find out how much free advice costs you’.

Don’t empower the Wall Street bullies, fire your broker/agent and hire an investor coach/fiduciary adviser.

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The True Enemy of Every Investor .

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Successful investing is not, per se, a portfolio problem, but rather a people problem. No matter how well designed and engineered a portfolio is, it can easily be destroyed by imprudent investor behavior.

 

Unfortunately, the true enemy of every investor lies within.

 

The instincts, emotions, and even biochemical makeup of human beings drives them to gamble and speculate with their money, even when they don’t mean to. This problem is multiplied exponentially by financial institutions that profit from this self-destructive cycle. You will see that this cycle is hard wired into every human being in the world. No one is exempt.

 

In recent conversations with investors these tendencies to gamble and speculate are becoming evident. It sounds something like ‘if this asset class is doing well and this one is not why not transfer all of our money into the better performing asset class?’ This is a classic case of market timing. Getting into and out of the market/asset class at the right time.

 

We are emotional beings and when our friends/relatives tell us how they are making ‘tons’ of money investing a certain way. We become envious and wonder why we can’t get a ‘piece of the action’?

 

Just because the ‘hot’ asset class is doing well does not mean this trend will continue. It may for a while but eventually the ‘hot’ trend will end. Leaving the investor with a sick feeling and even more skeptical of the markets.

 

The markets are not the problem you are. This is where an investor coach/fiduciary adviser can help. Your fiduciary adviser will help you build a prudent, globally diversified portfolio with the right amount of equities and fixed income for you. Most importantly your coach will keep you disciplined when your emotions tell you to invest the ‘hot’ way.

 

To succeed in investing for the long term you must

 

  • Own equities and high quality short term fixed income.
  • Globally diversify
  • Rebalance.
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When Is The Best Time To Invest??

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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.

Different risk and return of investment for th...
Different risk and return of investment for the different investors (Photo credit: Wikipedia)

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, 2013 the S&P500 earned 11.10% while the individual investor earned 3.59%.

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.

Stop trying to beat the market and let the market forces work for you. This will be accomplished by following these three simple rules of investing.

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

These 3 simple rules will lead to a successful investing experience. Although these are very simple rules most if not all investors will fail to follow all three. In most cases this failure comes at the worst time possible.

Without the help of an investor coach/fiduciary adviser investors will panic during market downturns and sell. Conversely, they will buy into the media hype when an asset class is soaring. Only to be disappointed and devastated when the ‘bubble’ bursts.

Stop empowering the Wall Street bullies and hire an investor coach/fiduciary adviser and learn how to invest with less anxiety and better long term results.

Is Uncertainty Bad?

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There continues to be volatility in the markets around the world. The fight in Ukraine has good news then bad news then good news…. The fight in Gaza also has its ups and downs. Even the fights we have been experiencing internally have been volatile.

Asset Allocation on Wikibook
Asset Allocation on Wikibook (Photo credit: Wikipedia)

With all this volatile news what should an individual investor do? Go to cash? Buy gold? Buy real estate? What asset class will perform best over the short term? No one can consistently predict what the markets will do.

When analyzing this there are two groups of people, those who don’t where the market is going and those who don’t know they don’t know where the market is going.

No one knows if the next 20% movement will be up or down, but the next 100% movement will be up.

That said, markets fluctuate widely in the short term.  Fortunately, every major crash has a recovery, with stocks regaining all of their losses, given enough time. The average U.S. recovery from a 10% or more down turn since 1946 has been 111 days.

Similarly, while the stock market has seen many 100% gains, it has never suffered a 100% loss.  Arguably, only a global catastrophe such as nuclear war, asteroid collision, or other extinction-level event could cause such as disaster.  In that case, your portfolio would be the least of your worries.

Free markets will prevail.  Capitalism will prevail.  To succeed in investing for the long term you should own equities…..globally diversify…..rebalance.

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For Investors The Enemy Is Within…

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During discussions with people at networking events or social events or just hanging out one question remains constant. What do you do? When I respond, investor coach or investment adviser or fiduciary adviser the reaction is predictable. You can see it in their faces, OMG stocks. Fear, is etched on their faces. This of course is not always the case but it happens often enough to address here.

English: Albert Einstein Français : Portrait d...
English: Albert Einstein Français : Portrait d’Albert Einstein (Photo credit: Wikipedia)

Many of these investors have been through the tech crash of 2000-3 as well as the housing crisis of 2008. These investors during a time of crisis, when acting on their own or even when they have a financial adviser will panic and sell at the bottom. Thereby locking in their losses. This happens at nearly every ‘crisis’. They continue the trend by re-entering the market AFTER the run up. This is just the opposite of what they should do.

If you have a financial adviser who allows you to perform the destructive behavior of selling low and buying high, fire them. If your current adviser allows you to panic during down turns and buy the hot asset class or stock during times of hype, fire them. If you do not follow your adviser’s advice during times of crisis as well as times of hype, fire them.

A true fiduciary adviser provides you with the prudent portfolio at YOUR level of risk and keeps you disciplined during market extremes.

If you haven’t guessed the problem with most investors is not the stock market volatility but rather the problem is the enemy is within YOU. Most of us without the proper guidance or leadership will allow our emotions to guide our decisions. This is true not only of investment decisions but any important decision we need to make in life.

I could discuss all the evidence on why investing in the equity markets is one of the greatest wealth creation tools on the planet. And when I am done you will follow your emotions and listen the Wall Street bullies and your friends and family. Each will give you a number of reasons to panic or buy the hype.

The question becomes WHY? Why do we continue to repeat this destructive behavior? Einstein has a quote that might be relevant here. The definition of insanity is doing the same thing over and over again expecting different results.

A great solution to this problem is to hire an investor coach/fiduciary adviser to help you develop a plan and remain disciplined. This is the true value of any competent adviser. You can take advantage of the great wealth creating opportunity of the equity markets. However, doing it alone will typically lead to poor results and a lot of anxiety.

Fire your broker/agent and hire an investor coach/fiduciary adviser.

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