Market capitalization

It seems like every day an investor will ask me about my prediction for the stock market. Well anyone who works with me knows I do not believe anyone can predict the future movement of stocks with any consistency.

I believe no one can tell you whether the next 20% move will be up or down. But the next 100% will be up.

Each day the media focuses on a new prediction. Their audience is continually searching for new predictions. What will happen next? What is the new hot asset class? Where is the best place to put my money?

This is why people continue to watch the talking heads on the business channels. And why shows like Jim Cramer are so popular.

Everyone wants to have the best investments, only making money and avoiding all losses. This futile exercise will only add anxiety to your life.

To repeat…..No one can consistently predict the future.

When someone is right on a prediction it is a matter of luck and not skill or knowledge. Free markets are random and unpredictable.

Free markets left to their own devices set prices better than any individual or committee. They incorporate all of the knowable and predictable information in the present, as well as knowable information about the future.

Only unknowable future news and information can change prices going forward.

Rather than attempting to predict the future use your time and resources to improve your skills, either career or life.

Your investments are best allocated by owning equities, globally diversify and rebalance.

Follow these three simple rules and you will succeed in reaching your long term goals.

The problem really is when a stock picker or broker gets hot. People pour money into them to join the ‘party’. Problem really arises when the hot picker or broker cools off and lose money.

As an example Bill and Hillary Clinton’s son-in-law started a hedge fund less than 2 years ago and has since closed it. Why? Because the fund lost 90%. Hot then Not.

I call this musical brokers.

If you are serious about making your money last and grow with a certain degree of consistency. You need to fire your broker/agent and hire an investor coach/fiduciary advisor.

Your fiduciary advisor will help find the level of risk you are comfortable with and that helps reach your goals.

Your portfolio will be globally diversified. In my case the portfolios also have a small cap and value cap tilt. Regardless of this, a globally diversified portfolio will underperform at times.

This is where many investors stray off course. They then believe the globally diversified portfolio is no longer working. Or some broker shows them an outperforming strategy.

There is no strategy that will always outperform. But switching from one strategy to another will lead to poor results in the long term.

To remain disciplined during underperforming periods work with an investor coach/fiduciary advisor.

Process, consistency and discipline work. Free Markets Work.

How Much Do Fees Affect Active Vs. Passive Investing

Active managers need to convince you that they will beat the market going forward because they cannot prove they beat it in the past.

Active managers were quick to explain their underperformance. Mark Lamkin, the CEO and “chief investment strategist” at Lamkin Wealth Management, blamed his underperformance on “headline risk,” noting: “Nine of the last 11 years my active strategies have beaten the market, and I’m underperforming this market. It’s all headline risk.””Headline risk” is the possibility that a negative news story will adversely affect the price of a stock.

I tried to verify Mr. Lamkin’s claim that his active strategies have “beaten the market” in nine of the last eleven years and was unable to do so. His firm does not publish the results of its portfolios on its web page. I called his office and asked for additional information but received no response.

Analyzing the significance of claims that a fund manager or advisor “beat the markets” is not uncomplicated. You need to understand how much risk the manager took and whether the benchmark used for comparison is an appropriate benchmark, comprised of a proportionately weighted mix of stocks and bonds.

Mr. Lamkin’s lament about “headline risk” is troublesome. Unexpected news is a reason for under performance by active managers, but it is not an excuse that active managers should use to explain their inability to “beat the markets.” Tomorrow’s news drives stock prices. Active managers don’t know tomorrow’s news. They can’t anticipate what they don’t know. “Headline risk” is one of many reasons why active managers historically have underperformed the markets and are likely to continue to do so in the future.

According to a mid-year 2011 study by Standard and Poors, Over the past three years, 63.96% of actively managed large-cap funds were outperformed by the S&P 500, 75.07% of mid-cap funds were outperformed by the S&P MidCap 400 and 63.08% of the small-cap funds were outperformed by the S&P SmallCap 600. Passive management trumped actively managed in nearly all major domestic and international stock categories.

via huffingtonpost.com

Finding an active manager who beats the market is a matter of luck. You have no idea if the active manager presented will beat the market going forward.

Please comment or call to discuss.