Don’t Ask: “Is It Different This Time?”

Since the equity markets are random and unpredictable there is no logical reason to exit or delay entering. Investing must be for the long term to take advantage of the market returns. Build a prudent portfolio and remain disciplined to that strategy. To help control your emotions hire an investor coach. Most investors need this assistance to keep them focused on the long term.

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

The most common question I get from readers of my books is: “I want to implement your index portfolios, but I have to consider the uncertainty in the financial world. When is the best time to invest?”My answer is it is always the right time to invest in a suitable asset allocation, using a globally diversified portfolio of low management fee stocks and bond index funds (or a laddered bond portfolio, if that is suitable for you). This doesn’t mean I have any special insight into whether the market will continue its upward trajectory or tank in the short term. I don’t, and neither does anyone else.

The reality is that millions of traders all over the world have considered the same issues troubling you. They have accounted for those factors in the current price of stocks and bonds. What will drive prices is tomorrow’s news and not news already in the public domain.

Instead of fretting about the future, you should be focusing on your asset allocation (the division of your portfolio between stocks and bonds). If you want higher expected return, you should consider taking more risk by allocating a greater portion of your investments to stocks, assuming you can handle the volatility. This approach is far superior to listening to those who claim to be able to predict the future.

The stock market has a long history of market cycles. Weston Wellington, a Vice President of Dimensional Fund Advisors, looked at how many years it took the market to recover from losses after a market crash. He found that, excluding the Great Depression, it took anywhere from 1.3 years to 4.4 years for the market to achieve a new high in terminal wealth after a major crash, based on month-end values of the S&P 500 Index with reinvested dividends. After the Great Depression, investors had to wait 15.4 years for a recovery to pre-crash market highs.

The current market cycle is illustrative. The S&P 500 peaked in October 2007. It bottomed out in February 2009 with a loss of 50.9 percent. It took 4.4 years (until March 2012) for the S&P 500 to recover.

Don’t ask: “Is it different this time?” Instead, the real issue is whether you have the stomach to weather the next inevitable market crash, and the patience and financial resources to hold on for the likely recovery.

There are three simple rules of successful investing, own equities, globally diversify and rebalance. Following these rules will reduce your anxiety and improve results.

Please comment or call to discuss how this affect you and your family.

Posted via email from Curated 401k Plan Content

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Dirty Tricks Brokers Use to Get Your Business

There really is no great secret on successful investing for long

The New York Stock Exchange, the world's large...
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term goals. You do not have to know everything about investing to succeed, but you do need to know the right things. There is an academic method to developing a diversified portfolio, custom fit to each individuals situation. This goes against the Wall Street model that strives to keep investors in fear that they need Wall Street to guide them in ever changing directions.

Misleading tiltThere is significant research supporting the value of tilting the stock portion of a portfolio towards small and value stocks. Tilting towards these riskier asset classes can increase expected returns, albeit with increased risk. However, there are periods of time when large and growth stocks outperform small and value. For example, in 2011, large cap stocks outperformed small cap stocks.

By tilting the stock portion of a portfolio towards the asset class that outperformed in the past year or two, advisers can make it appear they have the ability to increase returns in the future. Don’t be fooled. If your adviser is recommending a tilt towards any asset class, ask to see long term data supporting this recommendation.

Using long term and lower quality bonds

By using long term (maturity dates more than 5 years) bonds, and bonds with ratings below investment grade, brokers and advisers can make it appear they are generating higher returns. Many investors don’t understand these returns come with higher risk. Historically, according to research done by Dimensional Fund Advisors, long term bonds are more volatile than shorter term bonds, but have not provided consistently greater returns. The same research indicated that bonds lower in credit quality have earned higher returns, but there is a greater risk of default.

You would be better advised to limit your bond holdings to maturities of five years or less and to insist that all of these holdings be rated investment grade or higher. You can increase your expected return (and your risk) by allocating a greater portion of your portfolio to stocks, assuming that would be suitable for you.

Using short term returns

Short term data can be extremely misleading. Some brokers and advisers cherry pick funds for inclusion in a recommended portfolio that have impressive three year returns. The implied message is that these funds are likely to outperform in the future. You can find a discussion of the benefit of longer term data here.

You should insist on seeing at least a 10-year history of returns and preferably longer.

There’s an old Chinese Proverb that says: “If you must play, decide upon three things at the start: the rules of the game, the stakes, and the quitting time.”

You now know some of the rules of the game.

This is how most brokers compete and it does not involve the truth.

Please comment or call to discuss.

  • Their Confidence Is Killing Your Returns II (
  • Diverisification Is Your Buddy (
  • Asset Allocation Basics (
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Flawed Investing is Depleting Pension Assets

Bogle on the cover of Common Sense on Mutual Funds
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There is little to no evidence that past performance is any indication of future success. A globally diversified portfolio would improve results for most if not all participants.

One of the criteria used to select these managers was their past performance. Three years before hiring they beat their benchmarks by an impressive 2.91 percentper year. For the three years post-hiring, these investment stars underperformed their benchmark by an average of 0.47 percent per year.[See 7 Signs of a Good 401(k) Plan.]

The hiring and firing cycle continued. Underperformers were fired. But here’s the twist. After being fired, the excess returns of the fired managers on average were better than their replacements. The lesson is clear: Past performance is not predictive of future performance. Here’s a simpler way to put big bucks in the pockets of pension plan beneficiaries:

  • Fire all plan consultants who try to pick funds that will beat the markets.
  • Eliminate all actively managed funds (where the fund manager attempts to beat a designated benchmark), hedge funds, and private equity funds from pension plan portfolios.
  • Limit investments to a globally diversified portfolio with an allocation of approximately 60 percent stocks and REITS and 40 percent bonds, using only passively managed funds from firms like Dimensional Fund Advisors and Vanguard.

Picking mutual funds based on performance is a huge mistake by many plan sponsors. Essentially, this method tries to find funds which beat the market. The results in most, if not all, cases are very disappointing.

Please comment or call to discuss how this can affect you and your employees.

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