Predictions…What Are They Good For?

Absolutely nothing.

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

  • 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
  • It’s the end of America because we cannot recover from all this debt
    English: Wall Street sign on Wall Street
    English: Wall Street sign on Wall Street (Photo credit: Wikipedia)
  • And on and on….

These predictions like all the others are good for absolutely nothing. Expect perhaps for the predictor to sell you the perfect product to take advantage of their prediction. The Wall Street bullies have a vested interest in keeping your money on the move. In many cases these bullies will develop the fear to generate additional income.

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.

Many of you may be saying…’Tony you say the same thing week after week’. 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.

Remember the three simple rules of investing…although simple difficult to follow:

  • Own equities
  • Globally diversify
  • Rebalance

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.

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Do You Need an Investor Coach or a Facilitator?

Another NFL season has ended. Sadly the Packers were not crowned champions this year. However, 2013 looks to be a great year for the Pack.

Green Bay Packers Head Coach Mike McCarthy. Ph...
Green Bay Packers Head Coach Mike McCarthy. Photo by Thomas J. Grant, Skaneateles, NY, USA. (Photo credit: Wikipedia)

While watching the playoffs and the Super Bowl I couldn’t help but notice the winners had a total team effort, players, coaches and support staff. Each had a factor in the success of the team. Imagine if the players made all the decisions. Many of these decisions would be emotional, in the heat of the battle. There are many cases where the coaches make emotional decisions based of public opinion.

The coaches who make these emotional decisions most times are unsuccessful and inevitably fired. Some have short term success, but in the long run will fail. To be successful teams need a plan, a process and the discipline to follow their plan.

Recently I have been watching TV commercials with some Wall Street bullies luring investors to do it themselves. These bullies have the tools and trading strategies to lead investors to success. Keep in mind these bullies need investors to trade and trade often. It’s a classic case of bait and switch.

These bullies tell you that you can call an expert for help. Unfortunately for you this help is nothing more than order taking. These experts are what I call investment facilitators.

The investor will call during an emotional time in the markets and want to make some ill-advised trades.

These facilitators will be more than happy to accommodate.

Like all sports we need a coach to help us develop a prudent process and remain disciplined. If you are working with an investment facilitator, STOP.

These facilitators do not have your best interest in mind.

Everyone needs a coach to guide them through the emotional times in the markets. We need a coach to help us develop an investment policy statement and more importantly keep us focused on our long term goals.

If there were no short term down periods in the market, the return premiums would not be realized.

Investors need to avoid listening to the financial pornography of the media and hire a coach. There are three simple rules to successful investing:

  • Own Equities
  • Globally diversify
  • Rebalance

Although simple, investors need to remain disciplined NOT trading.

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  • Should You Get Out of the Equity Markets?
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Do You Need an Investment Policy Statement?

There is a new crisis in Washington is the ‘fiscal cliff or is the concern Europe or the Middle East or???’. Many ‘experts’ predict financial chaos and extremely volatile markets for the foreseeable future. As a long term investor you should not be concerned with these short term fluctuations.

Federal Reserve Bank of NY, 33 Liberty Street
Federal Reserve Bank of NY, 33 Liberty Street (Photo credit: Wikipedia)

No One Can Predict the Future…

Predicting the future cannot be done consistently.  Anyone’s ability to predict what will happen next is short lived and a matter of luck and not skill AND not repeatable.

Just as you would never take a long distance car trip without a map, you should never buy any investment without an Investment policy statement. This is a written document that states the goal of your portfolio, how much risk you will take, and what you will and won’t do when markets become volatile and crash.

By preparing a written IPS, the prudent investor can:

  1. Avoid unnecessary differences of opinion and the resulting conflicts.
  2. Minimize the possibility of missteps due to lack of clear guidelines.
  3. Avoid making predictions of the future..
  4. Invest without anxiety.

Don’t Build a Portfolio Without an Investment Policy Statement.

 

The Wall Street bullies do not want you to have such a guide for your investments. They would prefer you invest your money, the money you are saving for retirement or any long term financial goal, based on emotions.

 

These bullies create and promote financial pornography to keep you gambling and speculating with your money.

 

These are all short term situations and will correct themselves in time.

 

Remember all successful business ventures have a plan and they stick with that plan. This plan is your investment policy statement. To succeed long term design a prudent portfolio and remain disciplined to your plan. The only adjustment should be to reduce risk as you approach retirement or other long term financial goal.

 

The Free Markets Work.

No government can distribute capital as efficiently as the free markets. We must continue to believe this to be true and have faith in people NOT governments.

 

To succeed in reaching your long term financial goals you must own equities….globally diversify…..rebalance.

 

Most importantly have FAITH and seek the help of an Investor Coach.

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The 4 Critical Elements of a Successful 401k Plan Education Program

Without proper knowledge everyone will make emotional and usually imprudent decisions with their money. Investing for retirement requires participants to acquire the right information to develop a prudent strategy. Investors don’t have to know everything about investing but they do need to know the right things.
Investment Conference

  • Consistent and Regular – This means the terminology used in all plan literature is consistent with the terminology used in the education program. If the plan’s education program talks about goals in terms of the modern investment objectives, then the plan’s web-site cannot continue to refer to the traditional investment objectives. (If you’re unfamiliar with the difference between the two, read “401k Plan Sponsors: Is Your Investment Policy Statement Still Using Outdated Language?FiduciaryNews.com, May 17, 2011.) Similarly, an education program should be a regularly event and scheduled at a convenient time for employees.
  • Tied to Investment Policy Statement – An IPS that can’t be understandably articulated to employees through education is not worth its salt. Likewise, a well-drafted IPS that isn’t understandably articulated to employees through education is not worth its salt. The IPS drives the investment philosophy of the plan and should also provide a handy blueprint for a successful education program. (For those interested in learning more, read “How Should a 401k Plan Sponsor Construct an Appropriate Investment Policy Statement?FiduciaryNews.com, June 7, 2011.)
  • Covers both Administration and InvestmentsSure, the quarterback gets to do all the commercials, but he wouldn’t be where he is if it weren’t for his linemen. Similarly, everyone always wants to talk about investments, but the problems 401k plan participants face aren’t due to a lack of good long-term investments, they’re mainly due to inadequate savings. The mechanics of savings begins with understanding the administrative functions of the plan and carries through how participants determine their broad investment strategy.
  • Customized to the Plan’s EmployeesMany investment professionals once thought the need to understand plan demographics disappeared as we migrated from pension and traditional profit sharing plans to participant directed 401k plans. That can’t be farther from the truth. Not only do we need an array of investment options geared to people of different ages and different economic backgrounds, but the plan’s education program needs to address the different learning styles of the different generations.

Retirement plan education may be the key element to a successful plan. When employees are engaged and informed they will be more comfortable with saving and investing. It may be more of a matter of coaching. Providing the right principles and remaining disciplined to a scientific designed strategy.

Please comment or call to discuss how your plan can be improved through a proper education program.

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Reducing Fiduciary Risk

Investment Process Focused on Risk Measurement...
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A prudent process is essential when designing your qualified plan. If you do not have the expertise to properly design a prudent process formally hire an expert.

Fiduciaries and business owners already take on enough risk elsewhere. In an environment that allows government protection by following a series of procedures and practicing due diligence, it makes no sense to place fiduciariesat added risk.Plan sponsors should review their investment-policy statement for a quantitative approach to investment monitoring. A good rule of thumb is: If you can explain to a novice the criteria of “how and when” a fund is placed on a watch list, removed or replaced, your work is done.

The formula should be simple: for example, a scorecard of each investment based on distinct and unique criteria, including peer group comparisons of:

* Fees;

* Risk-adjusted performance;

* Performance consistency; and

* Fund manager value-add.

Every quarter, the figures are formulated and the outcome is clear: A fund passes or fails. The removal of qualitative factors to skew the decision makes the process more meaningful and effective.

The worst investments decisions are based on emotions. Removing emotion from the equation provides added protection from risk for plan fiduciaries, whatever external factors might make the markets swoon.

When you are sponsoring a qualified retirement plan for your employees a prudent process is essential. Following this prudent process will reduce your fiduciary risk as well as provide your employees with the best plan possible for your firm.

Please comment or call to discuss how this affects your company.

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Plan “Symptoms” that it’s time for a Review

Health care systems
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Plan sponsors must begin taking their 401(k) and all qualified plans more seriously or the government will. This may sound like a threat, however if you could go back and do something to prevent the current health carewould you? Now is your chance with retirement plans.blockquote class=”posterous_long_quote”>So while all plans should be reviewed, there are some plans with more glaring problems than others. These plans may have symptoms that the plan isn’t running correctly and should immediately undergo a plan review.

  1. A plan where the third party administrator is not transparent on fees, especially when it comes to indirect payments they receive, such as revenue sharing payments from mutual funds.
  2. A company that has a profit sharing and money purchase plan that covers the same group of employees.
  3. A plan that has consistently failed their discrimination testing, whether it’s the tests for salary deferrals, top heavy, match or 410(b) participation.
  4. A defined benefit plan which is underfunded.
  5. A defined benefit plan for a company that has increased their workforce.
  6. Any plan with no financial advisor.
  7. A money purchase plan that is covering non-collectively bargained employees.
  8. Any 401(k) plan that has not reviewed their contract with their insurance company provider in the last 5 years.
  9. Any plan without an investment policy statement.
  10. Any plan that has not reviewed their choice of investments in the last year.
  11. Any plan that has not seen their financial advisor in the last year.
  12. Any plan without an ERISA bond and/or fiduciary liability insurance.
  13. A 401(k) plan with low participation or low average account balance per participant.
  14. Any plan that has not been updated in the last 2-3 years

This is a good guideline for plan sponsors to follow. Unfortunately many sponsors will delay or ignore this review until it is too late.

Please comment or call to discuss how a review would help your plan.

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Action Can Reduce Fiduciary Risk When Stock Markets Swoon

Investment Process Focused on Risk Measurement...
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Every successful business plan involves the implementation of a strategic process. Your company’s retirement plan should be no different. Discipline and following a credible strategy are essential to meeting your and your employees goal of a successful retirement.

Fiduciaries and business owners already take enough risk elsewhere. In an environment that allows government protection by following a series of procedures and practicing due diligence, it makes no sense to place fiduciariesat added risk.Plan sponsors should review their investment policy statement for a quantitative approach to investment monitoring. A good rule of thumb is: If you can explain to a novice the criteria of “how and when” a fund is placed on a watch list, removed or replaced, your work is done.

The formula should be simple: for example, a scorecard of each investment based on distinct and unique criteria, including peer group comparisons of:

• Fees

Risk-adjusted performance

• Performance consistency

Fund manager value-add

Every quarter, the figures are formulated and the outcome is clear: A fund passes or fails. The removal of qualitative factors to skew the decision makes the process more meaningful and effective.

The worst investments decisions are based on emotions. Removing emotion from the equation provides added protection from risk for plan fiduciaries, whatever external factors might make the markets swoon.

Most plan sponsors believe they can rely on their broker for these fiduciary processes. This can be a mistake because the plan sponsor is responsible not the broker. Implementing a process is vital for fiduciary protection and plan participants success.

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

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ERISA §3(38) Fiduciaries and the Flavor of the Month

Info-gap decision theory
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There are many service providers touting fiduciary warranties and risk management. However, there is only one way to transfer the responsibility and liability to an expert. That is for the service provider to sign an agreement, covering all funds in the plan, specifying they will accept the ERISA 3(38) investment manager duties.

One of the most positive developments in the retirement plan business is the proliferation of independent ERISA §3(38) fiduciaries. While the §3(38) defined investment manager has been in ERISA since the beginning in 1974, there has been a dramatic increase in the number of registered investment advisors offering this option to their clients.The uniqueness of the §3(38) proposition is that the §3(38) fiduciary has discretionary authority, assuming the liability of the fiduciary process from the plan sponsor. It’s a nice proposition because many 401(k) plan sponsors don’t do a job of handling it on their own or with the help of a financial advisor. Development of an investment policy statement (IPS), selection and review of investment options based on that IPS, and offering education to participants for participant directed plans isn’t an easy task. Please note that the hiring of an ERISA §3(38) is a fiduciary function, so plan sponsors may be on the hook if they hire a poor §3(38) fiduciary.

Many retirement plan advisers will profess to be accountable for the fund selection in your plan. However unless the adviser agrees in writing to be the ERISA 3(38) investment manager to the entire plan, there is no relieve for the plan sponsor. The plan sponsor holds all the responsibilities for the fund in their plan.

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

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