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Burton Malkiel

A Terrible Year… Except for Investors

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Investors will be the victims of the Wall Street bullies if they let them. NO ONE can predict the future as these bullies want you to believe. The market rate of return is there for the taking. All you need to do it take advantage, build a prudent portfolio and remain disciplined. This will require the help of an investor coach. This coach will keep you focused on the long term and ignore short term volatility. You will also be coached to ignore the financial pornography that lures you into get rich schemes.

The Bombay Stock Exchange, in Mumbai, is Asia'...
The Bombay Stock Exchange, in Mumbai, is Asia’s oldest and India’s largest stock exchange (Photo credit: Wikipedia)

While index-based investors had a lot to smile about in 2012, investors relying on some stock market gurus were disappointed. John Paulson was hailed as the next “master of the universe” for his hugely profitable bet against mortgages in 2008. Investors flocked to his Paulson Advantage Plus Fund, hoping the magic would last. It didn’t. In 2011 the fund lost 52.5 percent of its value. The fund “recovered” somewhat in 2012, losing only a reported 19 percent!Paulson was not the only hedge fund manager who performed poorly in 2012. The HFRX Global Hedge Fund Index returned a measly 3.5 percent in 2012.

As you consider your investing strategy, you should reflect on this data. Remember that markets don’t always react to bad news the way you might think it will. The predictions of stock market pundits are wrong as often as they are right. Even if they are right, their insights might not help you predict the reaction of the market. Be wary of stock market gurus who claim to have the skill to “beat the market.” Their past success is more likely attributable to luck and is unlikely to persist.

You will find academically based information about investing in my books and those written by Bill Bernstein, John Bogle, Allan Roth, Burton Malkiel and my colleagues Larry Swedroe and Carl Richards. An investment of time and money educating yourself about responsible investing can make the difference between meeting your financial goals and running out of money when you are most vulnerable.

via huffingtonpost.com

Market timers can lose even if they are right. Predicting the market direction is the action of fools or gamblers. Either way you are better off with a globally diversified portfolio and discipline.

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

Posted via email from Curated 401k Plan Content

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The Show Wall Street Doesn’t Want You to See

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English: The corner of Wall Street and Broadwa...
English: The corner of Wall Street and Broadway, showing the limestone facade of One Wall Street in the background. (Photo credit: Wikipedia)

The Wall Street bullies continue to fool the investing public. Many investors continue to believe that someone on Wall Street can predict the future. Unfortunately, there is no one who can consistently forecast the next great investments. Your best strategy is to find a prudent strategy and remain disciplined to that strategy.

The daily grist of these shows consists of commentary by smug, highly confident, financial journalists and their guests, who manage money. They regale us with their views, not just on what is happening in the market, but what is likely to happen. The stock picks of the fund managers have the same possibility of being correct as calling a coin flip. Their real agenda is to convince you to invest your money with them.If the premise of these shows is to get you to trade, by “fleeing to safety” in volatile markets,” and trying to figure out when to return to stocks to capture the next bull market, it is working well for them, but not for you. According to Forbes magazine, a majority of investors “consistently buy high and sell low” — the exact opposite of profitable investing. While you end up holding the bag, Wall Street continues to profit.

You can patiently search the networks and hundreds of cable channels in vain for a responsible financial talk show that is premised on solid, peer-reviewed, academically based, information, geared to assist you in reaping market returns that are yours for the asking.

The information withheld from you is vast. It is set forth in my books, and in books authored by Burton Malkiel, William Bernstein, John Bogle, David Swensen, Jason Zweig, Mark Hebner and many others. Trillions of dollars of really smart money is invested based on the research set forth in these books. If you are like the majority of individual investors, you are clueless. You continue to try to time the market, pick individual stocks or hot fund managers, or purchase variable annuities because you are told they are the “best of both worlds” (protection of capital and participation in upside market potential.).

via huffingtonpost.com

The Wall Street bullies do not want you to know any of this. It is a prudent strategy backed by scientific, academic research. You can reduce the anxiety you feel investing the way Wall Street wants you to invest. Most investors do not even come close to matching the returns the market provides.

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

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The Flawed Premise of 95 Percent of 401(k) Plans

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The financial services industry wants you to believe that there is someone out there who can tell you the best investments for right now. This is how they make the bulk of their money, by convincing you to move your money to the next hot manager. Avoid this and you will succeed in reaching your long term financial goals. There is no evidence that anyone can consistently and predicatbly beat the market.

Cover of "A Random Walk Down Wall Street:...
Cover via Amazon

Let’s put the daunting task of picking fund “winners” in perspective. How hard do you think it is for the most sophisticated fund managers in the world to beat the S&P 500 index, when that is their designated benchmark? It must be harder than it looks because less than 40 percent of these funds do so in any given year according to a studyby Standard and Poors.Presumably, each of the losing fund managers had every expectation of beating their benchmark at the beginning of the year. How likely is it that a broker could predict in advance that the fund manager would fail to meet this goal? Do brokers know something that has eluded these fund managers and their employers?

Many state pension funds retain brokers with this purported expertise to advise their plans. They are understandably eager to reap the extra returns promised by these “experts”. How has that worked out?

Not well. A comprehensive study compared the long term results of state pension plans with index based portfolios of comparable risk. Almost all of the plans underperformed.

The problem is not lack of data. It’s that plan sponsors are not aware of the data and brokers want to keep them in the dark. Burton Malkiel, in his seminal book, A Random Walk Down Wall Street, reviewed the research and concluded that “It does not appear that one can fashion a dependable strategy of generating excess returns based on a belief that long-run mutual fund returns are persistent.” The problem is not that no actively managed funds outperform. Some do. The issue is whether anyone has the expertise to pick them in advance.

via huffingtonpost.com

Trying to pick the best fund managers which will beat the benchmarks is like trying to draft NFL players. You have no idea if their past performance will repeat and most do not.

Please comment or call to discuss.

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Your Fund Manager Probably Has No Investment Skill

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Any effort expended trying to find the next great fund manager is effort wasted. To success in investing for your long term goals you must own equities…globally diversify…rebalance.

Even if you were fortunate enough to locate this needle in the mutual fund haystack, how confident can you be that his stellar performance will persist? Studies of mutual fund performance demonstrate little persistence by those anointed as investment stars based on their past performance. Burton Malkiel noted, in his seminal book, A Random Walk Down Wall Street, “It does not appear that one can fashion a dependable strategy of generating excess returnsbased on a belief that long-run mutual fund returns are persistent.”The next time your broker tells you to buy a mutual fund he is recommending, ask him these questions:

1. Why are you able to identify just a couple of managers who you believe have genuine investment skill out of the thousands out there?

2. If you are basing your recommendation on their past performance, doesn’t the SEC require disclosure that past performance is no guarantee of future results?

3. Did any of your clients actually capture the returns you are touting?

4. How many years of data did you look at before you concluded the fund manager has genuine investment skill?

The answers to these questions will quickly expose the folly of the exercise of trying to identify in advance fund managers with legitimate investment skill.

As noted by Nobel Laureate Paul Samuelson, in Challenge to Judgment, 1974, dismissing those who believe they can find managers with this skill: “They always claim that they know a man, a bank, or a fund that does do better. Alas, anecdotes are not science. And once Wharton School dissertations seek to quantify the performers, these have a tendency to evaporate into thin air–or, at least, into statistically insignificant t-statistics.”

via huffingtonpost.com

There is additional evidence that 60 years of data are required to determine if a fund managers results are a result of sill or luck.

Please comment or call to discuss how this affects you.

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