A Terrible Year… Except for Investors

Investors will be the victims of the Wall Street bullies if they let them. NO ONE can predict the future as these bullies want you to believe. The market rate of return is there for the taking. All you need to do it take advantage, build a prudent portfolio and remain disciplined. This will require the help of an investor coach. This coach will keep you focused on the long term and ignore short term volatility. You will also be coached to ignore the financial pornography that lures you into get rich schemes.

The Bombay Stock Exchange, in Mumbai, is Asia'...
The Bombay Stock Exchange, in Mumbai, is Asia’s oldest and India’s largest stock exchange (Photo credit: Wikipedia)

While index-based investors had a lot to smile about in 2012, investors relying on some stock market gurus were disappointed. John Paulson was hailed as the next “master of the universe” for his hugely profitable bet against mortgages in 2008. Investors flocked to his Paulson Advantage Plus Fund, hoping the magic would last. It didn’t. In 2011 the fund lost 52.5 percent of its value. The fund “recovered” somewhat in 2012, losing only a reported 19 percent!Paulson was not the only hedge fund manager who performed poorly in 2012. The HFRX Global Hedge Fund Index returned a measly 3.5 percent in 2012.

As you consider your investing strategy, you should reflect on this data. Remember that markets don’t always react to bad news the way you might think it will. The predictions of stock market pundits are wrong as often as they are right. Even if they are right, their insights might not help you predict the reaction of the market. Be wary of stock market gurus who claim to have the skill to “beat the market.” Their past success is more likely attributable to luck and is unlikely to persist.

You will find academically based information about investing in my books and those written by Bill Bernstein, John Bogle, Allan Roth, Burton Malkiel and my colleagues Larry Swedroe and Carl Richards. An investment of time and money educating yourself about responsible investing can make the difference between meeting your financial goals and running out of money when you are most vulnerable.

Market timers can lose even if they are right. Predicting the market direction is the action of fools or gamblers. Either way you are better off with a globally diversified portfolio and discipline.

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

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2012: Another Dismal Year for Active Managers and Market Predictors

The marketing machine of the Wall Street bullies relies on the short memories of the investing public. Each year the bullies make new predictions and each year the public follow these predictions to make investment decisions. Each year they fail in achieving market returns. If investors would develop a prudent portfolio and remain disciplined they would succeed long term. Stop listening to bullies with short term success. Fire your broker and hire an investor coach.

Hedge Fund Managers - Lynching Party Needed
Hedge Fund Managers – Lynching Party Needed (Photo credit: smallislander)

Regarding the performance of active managers in 2012, the data is starting to come in, and the picture is not a pretty one. The Bloomberg Global Aggregate Hedge Fund Index showed a paltry 1.6% gain through November 30th. However, this dismal performance does not seem to have deterred the trustees of the Nobel Prize Endowment who now plan to incorporate hedge funds because, according to Director Lars Heikenstein, “We see that we can get more return with less risk by doing that.”  While we wish him the best in this ill-fated attempt to defy one of the most basic tenets of finance, we suggest that perhaps he should try dropping his mother’s favorite vase off a high building to see if Newton’s law of gravity could be suspended for him as well. Among the better known hedge fund managers is John Paulson who killed it during the 2008 financial crisis, as documented in The Greatest Trade Ever.  He made the unfortunate prediction that European Sovereign bonds would tank in a similar fashion to mortgage-backed collateralized debt obligations. As in 2011 when his fund loss half of its value, his bets on European credit default swaps got his shareholders clobbered to the tune of 17%, as reported on December 5th in Business Insider.  Some of them are probably feeling like the greatest mopes ever. Like so many other fallen angels before him, perhaps he should have quit while he was ahead. Returning to the more mundane world of mutual funds, Bloomberg found that more than 65% of mutual funds benchmarked to the S&P 500 fell short of it, which is par for the course, according to the Standard and Poors Index Versus Active Scorecard. We look forward to seeing this report fully updated for 2012.William Buiter of Citigroup was among the many pundits who predicted the beginning of the dissolution of the European Union, starting with the exit of Greece. As we now know, these dire events did not unfold, and the MSCI European Index rallied with a healthy gain of 19.1%. While we could easily continue with many other predictions that did not pan out, we think you get the point, and perhaps it’s a little unfair of us to cherry-pick the ill-fated predictions while ignoring the accurate ones. The problem is that there are so many of the former and so few of the latter. If you were suffering from a prediction addiction, we hope you are now cured.

The Wall Street bullies have to find the next guru because they know past gurus do not repeat their performance for long. Predictions have value only for the predictor as a marketing tool. These predictions will only hurt your investment results.

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

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