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What Will Happen Next?

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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 from January 1984 thru December 2013. The study revealed that during this period the S&P500 earned 11.10% while the average individual investor earned 3.69%. Keep in mind that during this period inflation averaged 2.80% so the average investor barely kept up with inflation.

Why the difference? It can be explained by the investors search for the ‘best’ manager. This is called track record investing and it doesn’t work. It also is the result of market timing. That is getting in and out of the equity markets at the right time. This has also proven not to work, long term.

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.  Free 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.

This along with the guidance of an investor coach/fiduciary adviser will improve your long term results as well as reduce your anxiety. When investors really understand how the markets work they can invest confidently. Because they know that free markets work.

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Why Do Investors Under Perform The Equity Markets?

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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. The media makes sure you continue to believe that these ‘experts’ exist.

Investors
Investors (Photo credit: LendingMemo)

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 20 year period. The latest study revealed that the 20 years ending December 31, 2012 average annual performance S&P500 earned 8.21% while the individual investor earned 4.25%.

Why the difference? It can partially be explained by the investors search for the best entry and exit point. This is called market timing and it doesn’t work.

These investors are looking for stock market returns with Treasury bill risk and what they end up with is Treasury bill return with stock market risk.

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.  Free markets work.  Unfortunately, most investors never tap their real power.

Many prefer the apparent stability of real estate investing. They conclude that there is much less or no volatility in real estate investing. What these investors don’t realize is that equities remain the greatest wealth creation tool on the planet. That’s right equities are the greatest wealth creation tool on the planet IF they are used properly.

What investors also don’t realize is that one of the advantages of equities is actually why investors prefer asset classes like real estate. That advantage is liquidity. Equity owners have access to their investments nearly immediately. That means they can look up the price at any moment that the markets are open.

This opens these investors up to sometimes large short term down swings. These swings result in some emotional decisions, like panicking and selling during a downturn. It can also result in buying at a high when there is frenzied buying. Real estate investors do not have this ‘luxury’. Basically real estate investors believe….. If I don’t see it, it can’t hurt me.

Stop trying to beat the market and let the market forces work for you. Treat your portfolio like you would a real estate investment. Be patient. This will be accomplished by

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

These 3 simple rules will lead to a successful investing experience.

In most if not all cases this will require the help of an investor coach/fiduciary adviser. Your coach will help build the right portfolio for you and most importantly keep you disciplined.

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You Probably Are Not as Risk Tolerant as You Think You Are….

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NEW YORK, NY - DECEMBER 17: Irving Picard, Se...
NEW YORK, NY - DECEMBER 17: Irving Picard, Securities Investor Protection Act Trustee, speaks as Preet Bharara, U.S. Attorney for the Southern District of New York, looks on at a news conference announcing the recovery of $7.2 billion in the Bernard Madoff Ponzi scheme December 17, 2010 in New York City. The widow of Florida philanthropist Jeffry Picower agreed to return the entire $7.2 billion Picower received from investing with Madoff. The funds will be distributed to the victims of the fraud. (Image credit: Getty Images via @daylife)

Many times, particularly prior to 2008, investors would look at the performance numbers of a more aggressive portfolio and choose it. Apparently their focus is on the positive performance and neglected the potential loss. I call this performance bias. Investors only envision the positive performance happening to them.  They can retire early, save less, become rich.

When asked if they could stand a 25% drop in their portfolios enthusiastically answer, “Yes, absolutely!”  When they actually lose this amount and see real dollars melt away in their portfolios, they are gripped with fear and panic. Inevitably, this leads to the inappropriate behavior of selling at market lows. Beware of false bravado. Recognize your tolerance for losing real money when building your portfolio.

Dalbar Inc. is an independent research firm that studies investor behavior. Each year they look back 20 years to determine how well investors are doing. On criteria is the investor must have at least $100,000 invested. This years’ study ending December 31, 2011 resulted in the following

  • S & P 500                               7.83%
  • Average Equity Investor       3.49%

This poor performance is primarily caused by the investor selling in a panic when the market goes down. It could be the European crisis or the Tsunami in Japan, or Bernie Madoff and on and on. No one can predict, including myself, when the European crisis will end, but it will end. No one can predict when the next crisis will occur.

Successful investors will use down markets as an opportunity to rebalance their portfolio. Sell the better performing components and buying the buying the poorer performers. Buy low, sell high. What a concept.  This requires working with a fiduciary advisor or investor coach if you will.

If your current advisor/broker/agent allows you to sell in a panic, watch out. These are called facilitators or simply salespeople. They make money when you move from one product to another. They at times will feed your fear.

A true advisor will help you determine your goals and develop a portfolio with the proper risk level.  You should be properly educated to understand that risk happens. If you develop a prudent portfolio and remain disciplined to that strategy you will succeed over the long term.

You should own equities….globally diversify….rebalance.

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

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Can You Beat The Market?….NO!!

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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?

Investor-Relations-auf-FacebookEvery 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 20 year period. The latest study revealed that the 20 years ending December 31, 2010 average annual performance S&P500 earned 8.20% while the individual investor earned 4.34%.

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 owning equities….globally diversify….rebalance.  These 3 simple rules will lead to a successful investing experience.

Related articles
  • Why Investors Lag the Market (money.usnews.com)
  • The True Enemy of Every Investor. (401kplanadvisors.com)
  • Diverisification Is Your Buddy (401kplanadvisors.com)
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