Is It Logic or Greed?

Every week I discuss the advantages of following the three simple rules of investing:

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

Very simple indeed until being globally diversified results in performance less than the U.S. Large cap asset class. Because we see large cap stocks every night on the news we compare our results to the DOW and the S&P 500.

As humans we avoid pain and are drawn to pleasure. It is a natural thing. When we see the U.S. large cap earning a great return while small, international and emerging markets are lagging. We wonder why not invest all my money into U.S. Large Cap.

Keep in mind the financial media focuses on the Dow and S&P 500.

On the flip side when small, international or emerging markets are out performing we think nothing of it because we don’t know. Consider this since 2000 the S&P500 has been the best performing asset class three years. And the worst performing asset class for five years. The rest somewhere in between.

Perhaps another small history lesson will help you realize the value of a globally diversified portfolio.

From 1996-2000 the S&P 500 earned a cumulative 132% while Emerging market small value stocks lost -49%.

Naturally at the end of 2000 investors would want to invest all their money into the S&P500 Large Cap stocks(Pleasure) and avoid emerging market small value(Pain).  The next five years, included the tech bubble bursting. As I mention often no one can consistently predict the future.

Let’s see how that worked out for investors. From 2001-2005 the S&P 500 earned a cumulative 3% while Emerging market small value stocks earned cumulative 162%. That didn’t work out well at all.

Naturally, I cannot predict that this will happen again because past performance is no indication of future results.

The point is no one can predict which asset class will outperform and for how long. When someone does make an accurate prediction it is a matter of luck and not skill. When you consider all the analysts on Wall Street all making their own predictions. In any given year someone will be right. The problem is we never know which one is right in advance.

On another point I find it fascinating that investors see crashes of the past as buying opportunities and current or future crashes as risk. It is interesting how the human mind works. OK now I’m rambling.

It is times like these that investors really need an investor coach the most. A coach will help you control your emotions. Right now the emotion is greed. Even though allocating all your investments to U.S. large cap might sound logical it is not.

Your coach along with your investment policy statement should guide you through all market conditions.

Don’t empower the Wall Street bullies and hire an investor coach/fiduciary adviser.

As always I welcome any questions or comments.

You Only Get to See the “Winners”.

Many of us hear our friends bragging about winning at the casino. But we never hear about the visits to the casino that result in losses. After you hear them brag about their winnings do you ask them to gamble for you, thinking they will repeat? Of course not, because you know it was only a matter of luck and in the long run the only ones to win are the casinos.  Investing for your financial future must/should not use the strategy of looking for the hot money managers or hot asset classes expecting them to repeat.

Right now December 2014 we are experiencing another coaching event on my part. No, it is not about a down market but rather it is about an UP market. As of December 3, 2014 the S&P 500 is up over 13% year to date. WOW our portfolios should be doing great. Well not this time. We do not have all our money in the S&P500. We are globally diversified into international stocks, emerging market stocks, U.S. small cap stocks, U.S. small cap value stocks and more.

These other asset classes are not doing nearly as well as the S&P500 in some instances they are down year to date. This causes our portfolio to look like a poor performer. This is exactly what happened in the mid-nineties. Large cap growth stocks were storming ahead, huge gains, while small cap, international and emerging markets were lagging behind badly.

Everyone wanted to have all their money in large cap growth, breaking one of the three simple rules of investing, globally diversify. As many of you remember what followed was devastating to these undiversified investors. The Tech crash took large cap growth stocks down hard. And guess what asset classes flourished, small cap, international, emerging markets, etc.

The globally diversified portfolios weathered the tech crash very well. Of course, not all the years were up years but the performance was much better than the concentrated portfolio. Over the long term, your diversified portfolio will outperform any attempts to

  • Stock pick.
  • Market time.
  • Track record invest.

Also remember that over time small stocks outperform large stocks. This outperformance comes at a cost. That cost is more volatility and therefore more negative performance.

I must mention that past performance is no guarantee of future results.

The media makes us believe that there are some money managers who can determine the best place to invest your money. Unfortunately this is not the case for most.  By letting the market work for you, in the long term you will succeed. Your strategy which includes the use of structured funds are a great way to accomplish your financial goals.

To succeed long term in investing you must follow all three of the simple rules of investing

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

The same media will attempt to play on your emotions. There will be ‘experts’ telling you what to buy and what to sell. There will celebrities telling you how to invest, this one blows my mind. Taking investment advice from an actor/actress. This is another attempt by the Wall Street bullies to get you to move your money. Every time you move your money Wall Street makes money. And you lose.

Don’t allow short term performance guide your long term investment decisions.

To control your emotions during these unsettling times you need the assistance of an investor coach/fiduciary adviser to reach your long term financial goals.