Predicting the Future or Investment Advice??

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 over a 30 year period. The latest study revealed that the 30 years ending December 31, 2013 average annual performance S&P500 earned 11.10% while the individual investor earned 3.69%.

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 participant.  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.

Although these are simple investors have a difficult following them on their own. Remember through it all we are humans and we have emotions. We watch the financial news casts and hear what will happen next in the markets. In most cases these news casts are designed to either instill fear and panic leading to investors selling their holdings or hype a ‘hot’ stock/asset class/manager and buy near the peak.

These Wall Street bullies want you moving your money constantly, not for your benefit but rather to generate fees for the bullies.

As with most endeavors whether it be sports, career or personal life we need a good coach to guide us. Someone to help us determine our goal(s), develop a prudent plan and remain disciplined. Ensuring discipline is where a good coach adds most of their value. I like the saying ‘if you think professional advice is expensive wait until you find out how much free advice costs you’.

Don’t empower the Wall Street bullies, fire your broker/agent and hire an investor coach/fiduciary adviser.

Are Your Investment Decisions Prudent?

Every day we hear on the radio or see on the television or print media reasons to make emotional decisions with our money. Every day there are reasons for any asset class to go up OR down. Every day there is new information that will affect us in a positive or negative way. The variables that can affect investments are never the same as there are hundreds if not thousands of such variables.

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You can justify almost any imprudent investment decision with “facts.”  Information is filtered by our emotions to create “facts” that support our decisions or beliefs.  Without outside guidance, it is impossible to tell when and how this happens.  Truth in the field of investing is elusive. It may not be lies but rather that no one knows what will happen next. You may find someone who makes a correct “prediction” however there is no evidence that this same person or institution will be right going forward.

Remember investing with hindsight is very dangerous. Back in my stock picking days I picked a semiconductor company. It went from $2.50 per share to $110.00 per share in only four years. That’s a 4400.00% return. Wow, if only I had invested all money then…..  Just because I picked this stock does not mean I would do it again. It was a matter of luck and NOT skill.

I think a great analogy is if you know someone who won a lot of money in the lottery. Would you go to this person to ‘pick’ your winning numbers? Of course not. You know it was a matter of pure luck. The same goes for money managers. There is no correlation between past performance and future results.

To truly succeed in investing (not speculating and gambling) for the long term, you must own equities…..globally diversify…..rebalance.

Every Imprudent Action Requires a Necessary Lie.

All of us have said, ‘But it’s different this time’ ….’This Time This Expert is Right for Sure’……’I’m due’…..

A necessary lie is a rationalization to justify self-destructive behavior. Some additional examples:

  • I will start my diet tomorrow…..
    so I will pig out today.
  • I’ll just gamble until I get even…..
    so I will let it ride.
  • This time I really do know what the market is going to do….
    so it’s all right to speculate with my money.

Many of us believe that the ‘experts’ at the large wire house firms like Merrill Lynch, Morgan Stanley, Edward Jones, LPL, or even the large insurance companies can tell them what will happen next in the market. These Wall Street bullies use their large marketing and public relations budgets to convince investors that they have the answers. One only has to look at the 2008 crisis to realize that these bullies do not have the answers.

For example in 2008 some of the well-known and trusted investment firms went bankrupt and some needed the assistance of others to avoid bankruptcy.  These bullies could not even manage their own investments. What chance do you have of succeeding with them?

The capital markets are random and unpredictable. There are thousands of variables that are constantly changing. This moving target makes it nearly impossible to predict the future. If some ‘expert’ does get it right it is a matter of luck and not skill.

Remember if you do not know two numbers you are speculating with your money. They are expected return and expected volatility (risk).

One important question you need to ask when you are deciding which adviser to work with. That is….will you agree to be a fiduciary to me?

Many times I analyze an investor’s portfolio and do not find an investment policy statement. This statement is your roadmap going forward. A fiduciary adviser will have that roadmap and work with you to remain disciplined to that roadmap. It is your blueprint to investment success.

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

Beat The Market…..Really????

Over the weekend I was talking with a friend and an investor, not my client. He was telling me that he is invested in gold and silver. His reasoning is that the Fed is pumping too much money into the financial system and eventually the financial system will collapse. I believe he has been listening to the financial media, ie, financial pornography. These ‘news’ portals continue to use fear to sell their hot commodity/product. They will explain why the collapse is imminent and what to do about it. Which entails buying their ‘stuff’’.

Wise Investments Holiday Card
Wise Investments Holiday Card (Photo credit: pjchmiel)

It seems as though every week I discuss the Wall Street bullies. We have been trained from our youth to believe that someone knows what will happen and when. If the bully talking has impressive credentials, like an Ivy League degree, or Stanford or any prestigious university we give them additional attention and credibility. What these bullies don’t tell you is how they know what to do. How do they determine what will happen next? Many of the scenarios are developed using a method called ‘data mining’.  This entails determining what they want to happen or appear to happen and then finding a period of time in history that proves their ‘prediction’.

What these bullies don’t tell or perhaps they don’t know is that in order for an event to repeat. All the thousands of variables/unknowns have to perfectly align. This is virtually impossible but it is possible. These bullies know that investors make their decisions based on emotions and not logic or cognitive reasoning. The bullies continue to sell fear, right now, and hype when a hot asset class is making a huge move.

The proper method to do research is to look at all the data available and base your portfolio based on this research. In our case this involves data going back to 1926 for the U.S. equity markets. This data reveals market premiums in the equity markets that will reward investors over the long term.

Remember you need to avoid the three signs of gambling and speculating with your investment money. Avoid these signs and you will improve your results with less anxiety. They are

  • Stock Picking.
  • Market Timing (getting into and out of the market and then back in at the right time)
  • Track Record Investing (basing investment choices on a recent track record)

 

Unless, of course, you enjoy watching the financial news and reading all the financial articles/predictions. Looking at GNP, money supply, unemployment, trade deficit and list goes on and on. This can prove difficult because there are endless supplies of different predictions. The information you will receive will have countless contradictions.

In my opinion there is a much better approach. One that involves basing your prudent portfolio on academic, Nobel Prize winning research. With the guidance of an investor coach/fiduciary you can develop your portfolio/plan and learn to develop the discipline to maintain your strategy. This is equally important for both strong up markets and the inevitable down markets.

Einstein’s definition of insanity is ‘doing the same thing over and over again and expecting a different result’.  Stop following the lead of the Wall Street bullies and learn how to empower your own financial future.

The equity markets remain one of the greatest wealth creation tools on the planet, if properly used.

The free markets work use that information daily.

What Does Move The Equity Markets?

When I am out in public many times I am asked about the market and what made the market go up or down that particular day. People love stories. And they need/want to know why something happened. The media is great at giving them what they want. This is their job. Answer a question for a particular event going on right now.

Wise Investments Holiday Card
Wise Investments Holiday Card (Photo credit: pjchmiel)

Let’s say a journalist calls up a prominent advisor or trader or financial executive on a day the market is down 2%. The answer might be ‘the market is down due to unrest in Ukraine’. Sounds reasonable right? But is this the real reason for the down market? Perhaps it was due to any number of different ‘reasons’. Often far too complex for a journalist to write about.

I believe that most trading days that you can go to the Wall Street Journal and find five reasons why the markets/sectors/individual stocks should go up and five reasons it should go down.  Every day.

Like I mentioned in the beginning people are looking for a story to validate a decision to buy or to sell. And every day they can find a reason to do both.

Let’s say you are watching CNBC or reading about some expert and you learn that the Fed will make a change in monetary policy and the market goes down 2.2%. You will then conclude that any time the Fed makes a change to monetary policy that you should sell your stocks. Only the next time when the Fed changes monetary policy the market goes up 3%. Ooop!

Remember the markets are extremely complex. There are thousands of variables affecting investments around the world. Any time an advisor/broker tells you a story about why a particular asset class/sector/individual stock will be a good investment going forward, be wary. Their story is a sales pitch. Because no one can predict the future.

The markets are, although not perfectly efficient, far too efficient to take advantage by anyone on a consistent basis.

Successful investing needs to be long term focused. Any short term noise is meaningless. Any predictions about market/individual stock direction are meaningless.

If your advisor/broker truly has a long term focus, they will show you your investment policy statement (IPS). The IPS is your guide, it tells you the plan going forward. It tells you what to do when the market is down and when the market is up. Consistency leads to success.

The need for stories leads many investors to believe that if they study the markets and watch CNBC and scour the internet for answers they can beat the market. This requires a lot of agonizing work and a great amount of time. Many believe that there is a broker/advisor who will do this for them or they do it themselves. In nearly all cases this assumption leads to disappointing results.

A much more efficient approach is to build a globally diversified portfolio around the dimensions of higher expected returns and applying them consistently. These dimensions are derived from data over long periods of time and across different countries and multiple markets.

To succeed in investing for the long term you need to maintain a long term focus. Avoid the short term noise and STORIES.

Fire your broker/agent and hire an investor coach/fiduciary adviser.

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You Can Rationalize Any Investment/Decision!

After many conversations with all kinds of investors. From aggressive to very conservative. I have found that everyone has a different way of looking at things going on around us. We are not wired correctly to be disciplined investors, but rather continue to search for reason s to invest in different ways.

English: Crowd gathering on Wall Street after ...
English: Crowd gathering on Wall Street after the stock market crash of October 1929. (Photo credit: Wikipedia)

I just read an article by Jim Parker called “Seven Ways to Fool Yourself”. I thought I would share. Only you can tell which are relevant to you.

  1. “Everyone could see that market crash coming” Have you noticed how people become experts after the fact? But if “everyone” could see a correction coming, why wasn’t “everyone” profiting from it? You don’t need forecasts.
  2. “I only invest in ‘blue-chip’ companies. People often gravitate to the familiar and to shares they see as solid. But a company’s profile and whether or not it is a good investment are not necessarily correlated. Better to diversify.
  3. “I’m waiting for more certainty.” The emotions triggered by volatility are understandable, but acting on those emotions can be counterproductive. Uncertainty goes with investing. Historically, long-term discipline has been rewarded.
  4. “I know about this industry so I’m going to buy the stock.” People often assume that success in investment requires a specialist’s knowledge of a sector. But that information is usually already in the price. Trust the market instead.
  5. “It was still a good call, but no one saw it coming.” Isn’t that the point? You can rationalize a stock-specific bet as much as you like, but events or external influences can conspire against you. Spread your risk instead.
  6. “I’m going to restrict my portfolio to the strongest economies.” If an economy performs strongly, that will no doubt be reflected in stock prices. What moves prices is news. And news relates to the unexpected. So work with the market.
  7. “OK, it was a bad idea, but I don’t want to sell at a loss.” We can put too much faith in individual stocks, and holding onto a losing bet can mean missing opportunities elsewhere. Portfolio structure affects performance.

All seven points reflect the thoughts of many different investors. Which are relevant to you?

I believe the answer to all seven, to be a successful investor…Long term is to follow these three simple rules:

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

This seems easy but very difficult to do because we allow one or all seven of the above points to sway our decisions, short term. To reach our long term financial goals we will need the assistance of an investor coach/fiduciary adviser.

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When Is It Gambling And Not Investing??

Recently I asked a portfolio manager that managed a large institutional portfolio what the expected return was for a specific risk adjusted portfolio. The answer I received was typical of a conventional Wall Street bully. He stated we expect this portfolio to earn 4% above the Treasury bill rate (risk free rate). This is a pure guess and does not reflect academic research on the asset classes held within the portfolio. Their ‘guess’ was what they predicted the market would do over the short term. This was their ‘bet’ on a forecast with what seems like convincing ‘evidence’.

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

This is typical of a Wall Street bully trying to convince investors that their special knowledge will lead to superior returns.

If you do not have an expected return and expected volatility (risk) for any portfolio you are about to invest in you are gambling and speculating with your money.  NOT Investing.

Prudent portfolios should be designed with the use of research, data and statistics. The academic principles available to all investors, uses data that is statistically significant. This means that the data goes back far enough to make the analysis relevant and should help investors over the LONG term. This research tells us to ignore any short term ‘noise’ or downturns like we are experiencing right now. The academic research tells us that over the long term equities are the greatest wealth creation tool on the planet.

Our research also tells us that to control risk we must add high quality short term fixed income. As we age our tolerance for risk will/may often decrease. Therefore as we age we will/may add more fixed income described above. This means a 35 year old might have a portfolio with 75 to 85% equities with the balance in fixed income. While a retiree might opt for a more conservative 50% equity portfolio. As you might guess the portfolios with higher levels of equities will earn more but will experience more losses during down markets.

This means that long term does not mean the same thing to a 35 year old as it does for a retiree.

The higher the level of equities in a portfolio the greater amount of time it will take to recover from a substantial downturn. This is where the process of rebalancing will benefit investors. At specific intervals we will rebalance back to your original portfolio mix. If equities are down we will sell fixed income and buy equities. If equities are up we will sell equities and buy fixed income. This allows us to automatically buy low and sell high. Over the long term this proves to be very effective in smoothing out our returns. Of course, past performance is no guarantee of future results. I believe if investors stick with these academic principles their results will grow their wealth over the long term.

In addition, it takes the ‘guess work’ out of investing thereby improving results and at the same time reducing anxiety (fear).

For most if not all investors following these principles will require the help of an investor coach/fiduciary adviser. Remember as I stated in past messages investors are people and people will often allow their emotions to make their decisions. This is one of the main reasons do it yourself investors end up with very disappointing results.

So…fire your broker/agent and hire an investor coach/fiduciary adviser.

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Why Do Investors Under Perform The Equity Markets?

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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If You Follow the Herd, You Will Get Slaughtered.

During the turbulent times we have had and are experiencing there will be ‘experts’ telling you what is the best place for your money.  It could be gold, annuities, real estate or even a pyramid scheme…….. Whenever there is fear in the air someone has the answer for your investments.

Wall Street: Money Never Sleeps
Wall Street: Money Never Sleeps (Photo credit: Wikipedia)

This gives the Wall Street bullies their opportunity to sell you their ‘solution’.

Right now many Wall Street bullies are selling safety. It might be annuities or life insurance or bank sponsored CDs or on and on. These safe money products may look appealing and allow you to sleep at night for right now. However in the long run you will lose. You will lose purchasing power in the future.

That means your principal might be intact, however your cost of living exceeds your income.

Imagine yourself 10 or 20 or even 30 years from now and your cost of living has increased every year. But because you have invested in a safe money product your income is no longer able to support you and your family. Will you be able to go back to work? Do you want to go back to work? Do you trust the government to take care of you? Perhaps you believe your kids will help support you. Is this what you want?

The greatest wealth creation tool on the planet for the long term, remains…..you guessed it….equities.

However you need to work with a professional that understands the academic concepts that lead to successful investing over the long term.

Remember the most successful businesses have one strategy and they stick to it. Such as McDonald’s, if you visit a McDonald’s anywhere in the country they are all set up the same. They know there may be a better way to run a restaurant but their systems works.

Warren Buffet is another example, he has one way of investing and it has made him the most successful investor of our time. There are times when he losses more money than most but over the long term he wins. He does not fall for the latest fad nor fall for the fear messages.

As an investor you may be tempted to change your investment mix to accommodate current events. This is called market timing and it has been proven not to work. You may get lucky in the short term but you will eventually fail.

To succeed in investing for the long term you should

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

The key is to remain disciplined to this strategy.

The ability to build your prudent portfolio and remain disciplined will require the help of an investor coach/fiduciary adviser. Because the Wall Street bullies will remain relentless in their quest to control your money and more importantly control your mind.

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Move More…Eat Less…Simple Right?

If I were to ask you how do you lose weight? Most often the answer would be ‘eat less and move more. Seems pretty simple ….right? All we have to do is move more and eat less. Well if it so simple why do many of us struggle with losing weight? Our logical mind tells us to move more and eat less. We know this is true and yet we cannot bring ourselves to do it consistently. Our logical mind is often over ridden by how we behave and feel.

Investors
Investors (Photo credit: LendingMemo)

Many if not most financial advisers do not understand the relevant academic principles connected with successful investing. To make a long story short there are three simple rules to successful investing. They are

  • Own equities and the right amount of high quality short term fixed income
  • Globally diversify.
  • Rebalance on the highs and lows.

Again these are very simple rules that most investors fail to follow even if they are backed by data, statistics and facts. This is because they allow their instincts….perceptions….and emotions to guide their decision making. To become a successful investor we must allow the logical, cognitive part of our brain to be greater than our instincts…perceptions…emotions.

Just like people looking to lose weight, investors are subjected to outside forces to make decisions. When, to be successful they must follow the three simple rules of investing own equities and fixed income…globally diversify…rebalance.

Not unlike those of us looking to lose weight and become healthier, investors need assistance. They need the help of a coach. Someone to keep you focused on your long term goals whether it be weight loss/healthier lifestyle or long term financial goals.

An investor coach will help you build the prudent portfolio designed for you and your goals. Most investors and in most cases financial advisers do not understand the academic principles necessary to accomplish this goal.

A true investor coach will keep you informed on the things you need to know. Because to become successful in investing you do not need to know everything about investing but you do need to know the right things.

Finally your coach will keep you disciplined to your plan. Therefore to succeed with investing you must fire your broker/agent and hire an investor coach.

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