What Is The Best Investment For ‘Right Now’?

During discussions with potential clients. I have learned most people have a very short time horizon. Most people are looking at short term results. They want to know what the best strategy is for right now.

In fact many advisers are guilty of this same thing. They are constantly marketing the latest ‘hot’ strategy or ‘hot’ investment class. These ‘advisers’ are actually investment salespeople. Constantly looking to market what people want right now.

True advisers show you what is right for you over the long term. While investment salespeople show you what is hot ‘right now’.

This is the result of everyone’s short term thinking. We base our decisions on short term emotions. We believe the truly successful investors are always in the investments that are always profitable ‘right now’.

This is far from the truth. Successful investors find a strategy that they believe in and stick with it. There will be times that their strategy will underperform others or even underperform the market in general.

A great example of this is Warren Buffet. Mr. Buffet has a strategy that he has stuck with throughout his very successful career.

During the late 90’s the tech stocks were earning extraordinary returns. In 1999 many funds were earning 80, 90% I even recall one fund earning 200% in 1999. At this same time Mr. Buffet stuck with his strategy and earned a negative 15%. That’s right while everyone else was doubling their money. Mr. Buffet’s fund LOST money.

As an investor with short term thinking. You would avoid his fund like the plague. Subsequently, the tech bubble burst and investors were devastated losing substantial amounts of money. Mr. Buffet on the other hand flourished.

Long term Mr. Buffet was proven correct.

Part of what I believe is a successful investment strategy includes the Three Factor Model developed by Doctors Eugene Fama of the University of Chicago and Kenneth French of Yale.

To make it short the Three Factor Model states that over the long term

  1. Equities have a premium over fixed income
  2. Small stocks have a premium over large stocks
  3. Value stocks have a premium over growth stocks.

Remember this is over the long term which is how investors should be thinking. Short term investing is really speculating and not investing.

‘Right now’ the small and value premiums are not being realized. This is a short term situation. Because over the long term, in my opinion, these premiums are real.  As true investors we must remain disciplined to our strategy and not seek out what is working for ‘right now’.

Ultimately you have to decide whether you are an investor or a speculator.

Because finding the strategy or investment class that is good for ‘right now’ will result in short term gain and long term pain.

To be a success investor, Long Term, you must own equities along with high quality short term fixed income…globally diversify….rebalance.

Is Now A Good Time To Invest?

Predictions…What Are They Good For?

Absolutely nothing.

Each day I hear new predictions on what to expect next.

English: Eugene Fama receiving the inaugural M...
English: Eugene Fama receiving the inaugural Morgan Stanley-American Finance Association Award from Rick Green (Photo credit: Wikipedia)
  • The Dow will reach 60,000 within 10 years
  • The Dow will reach 28,000 within 5 years
  • The Dow will crash to 5,000
  • The tech sector is overvalued EXCEPT for these ‘x’ stocks.
  • And on and on….

These predictions like all the others are good for absolutely nothing. Expect perhaps for the predictor to sell you their ‘timely’ newsletter(s) to unsuspecting gamblers. These Wall Street bullies do not trade on their own predictions. These bullies make money solely on selling worthless newsletters.

Investors are constantly looking for predictions because they want stock market returns with Treasury bill risk. What they get is Treasury bill return with stock market risk. We are all looking to avoid pain and seek pleasure.

Personally, I work out regularly. It keeps me in shape and focused. There is one saying that sticks with me, ‘No pain….no gain’. Well for investors that allow their emotions to guide their investment decisions and avoid risk during down turns I have a similar saying…

‘Short term gain ….long term pain’.

If you allow the Wall Street bullies to guide your investment decisions you may experience the short term gains like the avoidance of a downturn or the exhilaration of a hot stock or asset class. In the long term you will suffer because your portfolio lacked diversification AND discipline.

Like everything in life someone will get lucky and make a correct prediction.

And of course, past performance is no indication of future results.

Unfortunately, we as investors have no idea whose prediction will be right. The efficient market hypothesis says all the knowable information about a particular investment is already in the price right now.

This is due to the fact that the markets are random and unpredictable.

An added note Dr. Eugene Fama of the University of Chicago wrote the efficient market hypothesis in 1965 and won the Nobel Prize in Economics in 2013. It has stood the test of time.

Many of you may be saying…’Tony you say the same thing week after week and year after year’. Well you would be right, because no matter how many times the same pattern repeats investors make the same mistakes over and over. So my message will be repeated over and over. This is what coaches do.

Coaches work with you to develop a ‘game’ plan or in technical terms the Investment Policy Statement. As with all plans it is a meaningless exercise if you develop your plan and never implement it. Or follow the plan for a while and then when things change for the worse abandon the plans.

This is where your investor coach really exhibits their value to you and your financial future.

With a solid game plan in place your coach will keep you focused on the long term and remain disciplined.

The opposing team may come up with a ‘trick’ play and score and perhaps win the game. This is due to luck and not skill.  However, with a solid game plan and discipline you will win in the long term.

Stop being a victim of the Wall Street bullies. Stop looking for predictions. Do find an investor coach to guide you to a successful plan.

Predictions…What Are They Good For?

At this time of year experts are predicting what the equity markets will do for the coming year. We are continually looking for answers.

  • What will the future bring?
  • Where will the markets go in 2014?
  • Where is the best place for my investments?
  • How can I earn stock market returns with Treasury bill risk?
    Predictions of New Media ala 1974
    Predictions of New Media ala 1974 (Photo credit: Dan Zen)

These are really all unanswerable questions. No one can predict the future with any consistency. However, we as humans continue to search. Many of us read our astrology message each day. Hoping we can learn what will happen to us each day. Even here there are times when these readings appear right but again there is no consistency. When these readings are right it is a matter coincidence rather than some psychic ability of the writer.

Investors continually look to someone on Wall Street or anywhere for that matter to tell them how and where to invest. This search continues regardless of the poor track record of these predictors. For example the prestigious magazine ‘The Economist’ made the following prediction at the beginning of 2013. The magazine noted that while investors were optimistic, the coming year was unlikely to be one to remember.

Another magazine ‘The Financial News’ stated “the political storm clouds loom over the global economy. From Washington to Beijing, the financial markets are in thrall seismic political events.” Obviously neither of these predictions proved accurate.

As 2013 comes to a close the equity markets have had a stellar year.

Regardless of these and other inaccurate predictions, investors continue to search for answers and continue to read and absorb these and other publications. Many investors tell me that the stock market is too risky for them. This is true when your strategy is to listen to the ‘expert’ forecasts and basing you investment allocation of those predictions. When you base your investment strategy based on a forecast of the future you are gambling and speculating with your money.

The real problem is when one of these ‘forecaster’ is right, which is statistically inevitable. These predictors will market this fact extensively.  What investors don’t seem to realize is that there is no correlation between past performance and future results. Like I said some of these forecasters will be right but there is no reliable way to know which one(s) will be right going forward.

Dr. Eugene Fama of the University of Chicago won the Nobel Prize in Economics in 2013

for his work on efficient markets. Dr. Fama essentially proved that all knowable information is already in the price of the security. There is no reliable way to predict how the markets will perform going forward.

Throughout my career in financial services I have also continued to search for the ‘answer’ with some success followed by poor results. I finally remembered by finance courses in both college and graduate school. In my studies I learned that there is an academic and scientific method to investing that has proven to be successful in the long term. The issue is that these methods do not eliminate risk but rather work to control it.

Investors would be more successful with less anxiety if they worked with an investor coach. An investor coach will teach you among other things where returns really come from. HINT: it does not come from the hot stock picker or market timer or the manager with the best track record.

Trying to adjust your strategy based on current conditions will result in poor and disappointing results.

When you have a prudent process and the discipline which an investor coach will provide, success will be yours WITHOUT the need for an accurate forecast.

Enhanced by Zemanta

“Those Who Plan – Profit”

Steve Van Remortel president of SM Advisors a Green Bay based expert strategist has a tagline for his firm of “Those Who Plan  –  Profit”. It means exactly what it says you will earn a better profit if you develop and follow a plan. Steve has used this process to help a large number of businesses become successful and earn a profit.

English: Eugene Fama receiving the inaugural M...
English: Eugene Fama receiving the inaugural Morgan Stanley-American Finance Association Award from Rick Green (Photo credit: Wikipedia)

This process works very well with investing as well. When you develop a plan and remain disciplined to your plan you will profit over the long term. In most cases like SM Advisors it requires a coach to keep you disciplined. In this case it requires an investor coach.

Since becoming involved in the financial services business in 1992 I have learned that the Wall Street bullies would prefer that you do not have a plan. These bullies would prefer that you invest based on your emotions. They would have you listen to the financial media and trade…trade…trade..

These bullies want nothing more than to have you gamble and speculate with your investment money. A sure sign that you are gambling and speculating would include:

  • Stock picking.
  • Market timing (getting into and out of the market at the right time based on some murky predictions).
  • Track record investing (investing with the ‘hot’ manager or the latest ‘hot’ trend).

In 2013 Dr. Eugene Fama won the Nobel Prize in Economics based on his Efficient Market Hypothesis. In his award winning hypothesis Dr. Fama states

“In [a free] market at any point in time the actual price of a security will be a good estimate of its intrinsic value”.

Another way of saying this is that free markets work and if you believe that

  • Based on supply and demand the free market is the best determinant of market prices.
  • All available information is factored into the current price.
  • Only new and unknowable information and events change pricing.
  • The randomness of the market makes it impossible for any individual or entity to consistently predict market movements and capture additional returns unrelated to risk.

You will invest using free market investment strategies. Dr. Fama’s Efficient Market Hypothesis needs to be included as one component of that strategy or PLAN.

You can continue to plod along hoping you can increase your return by trading in and out or you can develop a solid plan.

Remember any trade(s) that require an accurate prediction of the future will eventually fail.

A great first step is to determine your current expected return and expected volatility(risk).

With this vital information you can begin to plan for a successful long term financial goal, such as retirement.

Because  as Steve Van Remortel states “Those Who Plan  –  Profit’.

Enhanced by Zemanta

Efficient Markets Rock!!!

Every week I look for a subject to discuss what I have heard from clients/prospects. Some are questions, some are comments. This week I am going to discuss ‘The Efficient Market Hypothesis’ written by Dr. Eugene Fama in his Phd. Dissertation. Partly because Dr. Fama has won the Nobel Prize in Economics  for 2013 and partly because I continue to hear questions on market timing, when to get into and out of the market. I actually had someone ask for the current hot stock(s). YIKES!!

Investment Conference
Investment Conference (Photo credit: Salmaan Taseer)

I have mentioned ‘The Efficient Market Hypothesis’ , now Nobel prize winning, many times before. It has also been referred to as Free Markets Work. Dr Fama’s definition of the efficient market is as follows:

“In [a free] market at any point in time the actual price of a security will be a good estimate of its intrinsic value”.

This is just a brief definition because I do not wish to bore you with the entire dissertation. What he is saying is that price of a stock today represents its true value today. It does not represent a forecast of the future, because we all know no one can predict the future. Therefore all the knowable information is already in the price of the stock (security).

Any future movement of that stock is random and unpredictable.

Given this information we know that if you are trying to use

  • Stock picking
  • Market timing
  • Track record investing

You are gambling and speculating with your money. Anyone who recommends you use these tactics with your investment money should be considered a Wall Street bully.

When my financial services career began in 1992 I found it very curious why not one firm that I worked for recommended using ‘The Efficient Market Hypothesis’ or any other academic study I learned in finance classes in both college and graduate school. The research I learned proved these concepts work and making predictions does not.

What I concluded was the Wall Street bullies need you to continue to gamble and speculate with your money because this generates the most fees for these firms.

It has been proven numerous times that there is zero correlation between a stock pickers/market timers ability to pick the right stocks or correctly time the market in the past and their ability to do so in the future. This means that just because any adviser/agent has a good track record in ‘beating’ the market there is no evidence that they will repeat. It is not impossible but highly unlikely.

If this is true then why do investors continually seek out the ‘best’ investments for right now?

Why do these same investors look for someone to beat the market?

The markets offer great returns long term why not concentrate your investment money on capturing market returns?

Most of these questions can be answered by the fact that the Wall Street bullies continue to market gambling and speculating.

There will always be someone making predictions about where investments are going.

Stop being a victim of the Wall Street bullies. Learn about the most recent Nobel Prize winning concept along with other academic concepts to engineer a prudent portfolio. Designed for you.

Enhanced by Zemanta

When Should You Get Out of the Equity Markets?

Well the government is open again….for now. The equity markets have now changed focus from the government to corporate results with favorable outcomes. Many investors were in a panic about a possible default of the U.S. government debt .This debate will continue and again come to a head in January. What will happen is anyone’s guess.

Finance (Photo credits: www.myhardhatstickers.com)

No matter what the current events, investors will be ill-advised to attempt any market timing. That is getting out of the market when the financial media tries to forecast the future. It is very difficult if not impossible to determine when to get out and then determine get back in. Even when someone is able to successfully do this once it is a matter of luck and not skill.  There is no evidence that anyone can consistently time the market.

This however does not stop the Wall Street bullies from marketing the few analysts that got it right. They try to convince the investing public that these same analysts have a special gift and will repeat their incredible performance. If it were true why would the Wall Street bullies have hundreds if not thousands of analysts on staff? These bullies know that in any given year a few of their analysts will get lucky and ‘beat’ the market.

Unfortunately for investors there is no way for them to determine which analysts will be the lucky ones in the future.

As I have said  many times in the past you are gambling and speculating with your money if you:

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

If your investment portfolio is needed to last your lifetime, gambling and speculating will lead to disappointing results. Of course some will get lucky and hit it big but there is a high likelihood that they will continue gambling until they lose.

Investors who need their money to last a lifetime need to build a prudent portfolio at the appropriate risk level. There are three simple rules of investing:

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

If you follow these simple rules you will be able to take a prudent income with adjustments for inflation.

And inflation will be your main challenge in retirement.

For example, if you have $1,000,000 today and inflation averages just 4% per year. In ten years you will need more than $1,400,000 to have the same purchasing power.

Equities are the greatest wealth creation tool on the planet.

You need to ask yourself if the stock market goes down and stays down will the financial system survive? What will your money be worth? There are many unanswered questions and these questions are unanswerable.  No matter what happens to the financial system people will continue to demand products and services.

To reach your long term financial goals you will need the assistance of an investor coach. Your coach will help you build YOUR portfolio at the appropriate level of risk. When this is accomplished your coach will keep you focused on your long term goals. They will help you resist the hot asset classes or hot stocks. As well as keep you from panicking and selling when the equity market declines.

Finally at the risk of being a name dropper I like the quote of Dr. Eugene Fama winner of the Nobel Prize in Economics for 2013.

“Diversification is your buddy.”

Enhanced by Zemanta

What Does A Prudent Portfolio Look Like or Is Now the Time To Panic?

So far we have discussed the Efficient Market Hypothesis also called Free Markets Work. We learned that all the knowable information is already in the price of securities. This led us to the fact that you are gambling and speculating with your money when you:

English: Eugene Fama receiving the inaugural M...
English: Eugene Fama receiving the inaugural Morgan Stanley-American Finance Association Award from Rick Green (Photo credit: Wikipedia)
  • Stock Picking.
  • Market Timing.
  • Track Record Investing.

Next we learned about Nobel Prize winning Dr. Harry Markowitz and Modern Portfolio Theory. This allows us to allocate our assets efficiently and to systematically rebalance.

Now let’s discuss the Three Factor Model. This model was discovered by Kenneth French of Yale and Eugene Fama of the University of Chicago. Without becoming too technical the three factors are:

  • Equities have a return premium over fixed income.
  • Small stocks have a return premium over the S&P 500.
  • Value or distressed stocks have a return premium over the S&P 500.

All these premiums are valid over the long term. Therefore there will be times when these premiums will not be apparent. However, investors will be rewarded by including these factors in their portfolio over the long term.

This brings up a great point, many times utilizing these concepts or any other concept will underperform. Like anything else when you have a proven process and remain disciplined to that process success will be yours. Any attempt to change strategies based on a forecast will lead to disappointing results. I believe this is true not only in investing but in any goal we set for ourselves.

Many brokers/agents will use current circumstances to sell the current popular product.

These brokers/agents will say this is the right solution for now. Whenever you hear ‘for now’ you are market timing which has been proven does not consistently work.  These brokers/agents are using your emotions to sell you more product.

This is the main reason having an investor coach will help you reach your long term financial goals. Your investor coach will help you control your emotions during volatile times.

In summary when we combine the following

  • Free Markets Work
  • Modern Portfolio Theory
  • Three Factor Model

we can build a prudent portfolio designed for us. A portfolio that will fight inflation

When we use these concepts we can be confident that our investments are efficiently working for us.

We can be confident that equities are the greatest wealth creation tool on the planet.

During our current budget crisis many investors will sell out of their equity positions because their emotions are guiding their investment decisions. With the help of an investor coach you will follow your investment policy statement and stay the course. In the long run you will succeed.

The Wall Street bullies want you to believe that they can tell you what investments work best at any particular time.

Stop being a victim to these bullies.

As a side note Eugene Fama PhD authored two of our concepts Efficient Market Hypothesis and the Three Factor Model. Dr Fama and two other economists have won the Nobel Prize in Economics for 2013. Their award winning work was  “for their empirical analysis on asset prices.”

There is a scientific approach to investing that works.

Enhanced by Zemanta

What the Wall Street Bullies Don’t Want You to Know.

During my academic career both undergraduate and graduate I learned what works in investing and what doesn’t. Some of what works has actually won the Nobel Prize in economics. What I learned works is the Efficient Market Hypothesis, Modern Portfolio Theory and The Three Factor Model.

English: Wall Street sign on Wall Street
English: Wall Street sign on Wall Street (Photo credit: Wikipedia)

After a career in corporate financial analysis I started my career in financial services. I received what I was told was the best training in the industry. After completion of this training I realized that it was all about sales and nothing about academic research. ‘Sell what and how we tell you and you will succeed’.

When I asked why none of what we sold had anything to do with the academic research that worked. I was told that the academic research did not apply in the real world. The brokerage firm(s) know what was best and just follow their lead to success.

After years of frustratingly disappointing results I finally realized that the brokerage and insurance firms were wrong.

This message will focus on the Efficient Market Theory or that the Free Markets work. “In [a free] at any point in time the actual price of a security will be a good estimate of its intrinsic value.” Eugene Fama. What this essentially is saying is that all the knowable and predictable information is already in the price of the asset.

Therefore if you believe that the free markets work and the markets are efficient you must not follow the advice of the Wall Street bullies. These bullies want you to believe that they can predict the future and sell you the investments which will outperform the markets. These bullies also want you to believe that they can tell you when to get out of an asset class/individual stock to avoid any losses. WRONG.

The markets are random and unpredictable.

Although the markets are not perfectly efficient they are efficient enough not to allow anyone to consistently take advantages of these inefficiencies and ‘beat’ the market.

With this knowledge we can stop being a victim of the Wall Street bullies. If we want to stop being a victim we must not work with advisers who use:

  • Stock picking.
  • Market timing.
  • Track record investing.

If you are really interested in earning market returns you need to follow a process and remain disciplined to that process. Remember earning market returns will lead to success over the long term. Of course no one can guarantee anything.

In future messages we will discuss the other academic research concepts notably Modern Portfolio Theory and The Three Factor Model. We will learn that if we combine all these concepts in YOUR portfolio, success will be yours over the long term.

Keep in mind none of these concepts, alone or in combination, involves eliminating risk but rather controlling how much risk is in  your portfolio.

Finally, equities are the greatest wealth creation tool on the planet if we have a prudent process and maintain discipline. This is only possible in most if not all cases if you work with an investor coach.

Given the continued threat of a government shutdown many are forecasting a downturn in the market. This is where an investor coach would keep you on track and prevent you from panicking. Panicking or selling at the wrong time and for the wrong reasons is a top reason investors earn poor returns.

These same investors will blame the markets rather their own poor emotional decisions.

Enhanced by Zemanta

The Massive Hypocrisy of the ‘Seeking Alpha’ Conference

Everyone one of us has visions of finding the next ‘YAHOO’ or Microsoft and turning a little into alot. This is not much different than winning the lottery. ‘Alpha’ is essentially your ability to beat the market. This can be done however there is no way to determine who will in the future.

Image representing Seeking Alpha as depicted i...
Image via CrunchBase

I reviewed all of their proprietary funds with data over a 1 year, 3 year, 5 year, 10 year and 15 year period. The percentage of these funds (in the aggregate) which failedto beat the returns of their Morningstar assigned benchmark ranged from a low of 67.57% to a high of 75.57%. Over the longest period measured (15 years), 66.05% of the 324 proprietary funds of these firms failed to outperform their benchmark.This is legitimate news, but you would not have heard about it from the financial media covering this event.

The pursuit of “alpha” has decimated the returns of millions of investors and enriched the securities industry, which claims an expertise that does not exist. By glorifying this elusive goal, the financial media perpetuates this myth, causing incalculable harm to investors.

As an alternative to “seeking alpha”, next year let’s have our own conference. We’ll call it: “Capture Market Returns and Secure Your Financial Future.” My wish list of speakers includes Eugene F. Fama, Kenneth R. French, Robert C. Merton, John Bogle, Roger G. Ibbotson, William F. Sharpe and Myron Scholes. These distinguished Professors of Finance, Nobel Laureates and authors can support their views with solid, peer reviewed data. It would be a refreshing contrast to the massive hypocrisy of the “Seeking Alpha” conference.

The Wall Street bullies have a vested interest in keeping you trading stocks. We are looking to get rich over night, while the best way is to get rich slowly.

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

Posted via email from Curated 401k Plan Content

Enhanced by Zemanta

401(k) Participants Pay Dearly for the Crime of Underperformance

Day 236: K'nex
Day 236: K'nex (Photo credit: -Snugg-)

Most 401(k) plan providers use performance as a selling point. These sales people will list of top performing, actively managed funds and sell, sell, sell. What they will not do is sign on as an ERISA 3(38) investment manager and take responsibility for their choices. They will simply replace the poor performers with the new top performers. And the cycle continues on and on. Stop this damaging cycle. Stop empowering the Wall Street bullies.

It is my view that a 401(k) plan that has anyactively managed funds as investment options reflects negligence by both those advising the plan and the plan sponsors who blindly accept this flawed advice. Ellis notes the daunting odds of beating the benchmark. Over a ten year period, only 30 percent of actively managed funds outperform. That percentage falls to 20 percent over a 20 year period.Even those numbers are deceptive. In their seminal analysis of luck versus skill in mutual fund returns, Eugene F. Fama and Kenneth R. French evaluated 819 actively managed funds over 22 years and found that 97 percent could not be expected to beat a risk-appropriate benchmark.

It’s bad enough that only 3 percent of active fund managers demonstrate evidence of investment skill. It’s worse that no one has figured out a way to identify these outperforming fund managers prospectively. And here’s the nail in the active fund managers’ coffin: Even if you could miraculously look into a crystal ball and determine the next outperforming fund manager with investment skill, there’s no payoff. According to Fama and French: “… going forward we expect that a portfolio of low cost index funds will perform about as well as a portfolio of the top three percentiles of past active winners, and better than the rest of the active fund universe.”

Ellis views the charade of relying on advisors to pick outperforming actively managed funds as part of what he calls “the crime of underperformance”. He allocates blame to investment committees, investment managers, investment consultants and fund executives, noting: “No one suspect is guilty; they are all guilty.”

This is also true of investors outside their 401(k) plan. No one can consistently predict the future, so finding top performers is a matter of luck and not skill.

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

Posted via email from Curated 401k Plan Content

Enhanced by Zemanta