“Diversification Is Your Buddy!” Part 2

The U.S equity markets are making new all-time highs. Of course at one time the Dow Jones Industrial 30 had an all-time high of 200 then 1000 then 2000 then …….18,000.


Some investors are considering moving their money out of the stock market. Because the markets are at all-time highs. The market has to go down because it is at an all-time high.

Since no one can predict the future, this is a huge mistake.

You must decide if you are a gambler/speculator or an investor. Gamblers believe they can out guess the market and avoid all losses. The gamblers have proven numerous times to be wrong, in the long run. One may get ‘lucky’ but no one can consistently market time.

In markets like these diversification is your buddy.

Proper diversification spreads risk across various asset classes with varying return characteristics or dissimilar price movement. Simply said: they don’t do the same thing at the same time.

Most investors are narrowly diversified into top performing funds or classes of the last five to ten years. They often feel diversified but aren’t.

To be diversified means including classes or types of funds in your portfolio that did poorly over the last five to ten years. If you do this, your portfolio will look and perform very differently from your neighbors’ or friends’.

There will always be something in a truly diversified portfolio that you will not like. This will be true every year.

It seems every day I am asked what will the market do today or this week or this year?  Or what stock will do best? Or can you beat the market? Or is now a good time to buy into the market? Or is now a good time to sell?

Those of you which are my clients own portfolios which are professionally diversified and rebalanced much like the large pension funds.

Over time these portfolios will help you successfully accomplish your investment goals.


There will always be someone touting a ‘new’ strategy that will protect or insulate you from the current risks. These Wall Street bullies want you to believe they can predict the future and earn you stock market returns with Treasury bill risk. What you end up with is Treasury bill returns and stock market risk.

Find an investor coach/fiduciary adviser who will help you build a prudent portfolio designed for you. And more importantly keep you disciplined during both up and down markets.

Process and discipline will lead to a successful outcome.

To succeed in investing you must own equities….globally diversify…..rebalance.

Success Requires Great Coaches!!

This last week I attended the Matson Money investor coaching conference in San Antonio. As usual it was a great conference. I was even able to fulfill an item on my ‘bucket list’ I visited the Alamo. A visit I recommend to anyone watched the old TV shows such as Davey Crockett. The RiverWalk area is fun as well.

Lou Holtz in July 2007. Cropped version of Ima...
Lou Holtz in July 2007. Cropped version of Image:Lou Holtz.jpg. (Photo credit: Wikipedia)

Each week I mention the Wall Street bullies and the need of an investor coach/fiduciary adviser for all investors. Well Mark Matson is my coach. I found Mark after an unfulfilling stint as a stock broker. His message is the same message I learned in financial classes in college and graduate school as well as my studies for the Certified Financial Planner® designation.

The message is:

  • The Free Markets work (Efficient Market Hypothesis)
  • Modern Portfolio Theory
  • Three Factor Model

work. I always found it curious that no one in the industry taught these academic concepts to new brokers. When I questioned this, the answer was those concepts only work in theory and do not work in the real world of investing. They were wrong…dead wrong.

The real reason the Wall Street bullies do not use these academic concepts is that it does not generate enough fees for the bullies. It doesn’t matter to the bullies if the investor is hurt and often severely hurt.

As I mentioned the conference was a great one. I also was able to hear the great Coach Lou Holtz speak, which I also highly recommend.

Essentially his message is the same as I have been writing about. To be a successful investor you need a prudent process and discipline. No one or no group can be successful without both process and discipline. This requires the guidance and vision of a good (great) coach.

I make an attempt to attend these conferences each year because I am reinforced that my beliefs are valid. Each event I attend Mark Matson’s message remains consistent. Follow the academic research provided us and remain disciplined.

We/I can be swayed by the media or public opinion or everyday life. Without the reinforcement of great coaches like Mark Matson we can easily begin to:

  • Stock Pick
  • Market Time
  • Track Record Invest

This in turn is nothing more than gambling and speculating with our investment money. If you are interested in attaining or re-attaining the American Dream gambling and speculating are NOT the answer.

Getting rich overnight, although possible, is highly unlikely. Working hard, saving and prudently investing our savings will lead to your long term goals.  The American Dream is still possible however, there are no short cuts.

So, I will commit to attending the Matson Money conferences (at least) annually to maintain my strong beliefs in the free markets. It is up to you to find an investor coach to guide you to your American Dream.

Stop allowing the Wall Street bullies ruin your future NOW!!

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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.

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What Helps Explains Variability in a Portfolio?

Last week we discussed the Free Markets and the Efficient Market Theory. We learned that:

  • Stock Picking
  • Market timing.
  • Track Record Investing.

were signs that you were speculating and gambling with your money.

English: Markowitz-Portfolio Theory, Investmen...
English: Markowitz-Portfolio Theory, Investment Portfolio Management (Photo credit: Wikipedia)

The equity markets are far too efficient to be able to consistently ‘beat’ the market. Because the equity markets are efficient they are random and unpredictable. We will now explore the next component of a successful investment portfolio. That component is Modern Portfolio Theory.

Modern Portfolio Theory won the Nobel Prize in Economics for Dr. Harry Markowitz. The main component of Modern Portfolio Theory is that diversification works. In fact asset allocation explains more than 90% of a portfolio’s variability.

When we combine asset classes with low correlation we can reduce risk and increase return. Without becoming too technical this means that if you combine low correlated assets in a portfolio, when one is down another has a good chance of being up.

This is best illustrated with the Markowitz Efficient Frontier. Which essentially shows what the expected return is for an expected level of volatility(risk). If you want to earn more return you must assume more risk. So, for example, a young person has a much longer time horizon and therefore would assume more risk to earn a higher return. Conversely, a retired person would assume less risk because their time horizon is much smaller and wishes to take income from their portfolio while keeping up with inflation.

Modern Portfolio Theory has recently been criticized by the Wall Street bullies. During the 2008 crisis all portfolios declined. Critics say that this is proof that Modern Portfolio Theory does not work. They say ‘look all of your low correlated assets are down and Modern Portfolio Theory did not protect you’. Modern Portfolio Theory was never intended to eliminate risk but rather to control risk. The 2008 crisis was an exceptional time nearly unprecedented. I believe that if you build a portfolio to protect against what happened in 2008 you will be disappointed in your return, long term.

As I have mentioned in the past and it bears repeating, from 1926 thru 2012 the S&P 500 earned 9.73% per year. During this time there were 22,040 trading days. Of these trading days 48% were down or approximately 10,579 days down and 11,461 days up. Many of you realize that this is one of my favorite statistics so be prepared to read this again.

Please keep in mind that the Wall Street bullies use financial pornography to sell product. These bullies use fear AND greed to keep investors trading.

If you have a process you believe in and stick with it you will succeed long term. There is no one perfect answer. You will experience down markets and some will be very emotional. You will experience up markets and some will be very emotional. Right now we are experiencing one of those emotional moments with the government shutdown and potential default.

With the guidance of an investor coach you can realize a successful outcome to your financial strategy. On your own in most if not all cases you will allow your emotions to decide how to invest. This can be very destructive to your financial future.

Your investor coach will protect the future you from the current you.

So far we have discussed two of the technical components of a successful portfolio. Next time we will discuss the final component The Three Factor Model. Stay tuned.

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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.

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401(k) Fee Disclosures May Fall Short

Even if plan participants read the vast amount of details plan providers have published on fees they will continue to be underserved. Most plans provide a high number of fund choices with little direction and guidance. 401(k) plans need to be designed to look more like a pension plan to be effective in reaching their goal fo a successful retirement.

English: Graph showing amounts of pension capi...
English: Graph showing amounts of pension capital (investments of pension funds + investment by insurance companies on behalf of pension schemes) in a number of European countries. Graph shows amount of money a a percentage of GDP. Source: De Nederlandsche Bank NV, Kwartaalbericht juni 2008 p. 34/Dutch Central bank, Quarterly Bulletin June 2008, page 34. If you would like to have this graph with a caption in another language, please let me know. Used on Pensioenfonds. (Photo credit: Wikipedia)

Arranging the right mix of investments in the right amount and adjusting for your personal risk tolerance requires basic knowledge of modern portfolio theory — a set of market maxims and principles that must be carefully applied. And to get the best results, the investments that you buy as a result must be carefully monitored and tweaked, or fundamentally shifted, as you go along.Ask the advisor about the calculation for your retirement resources. Basically, here’s how that works: If you invest x amount a year for x number of years and receive an average return of x and inflation is x, then as of x date you’ll likely have about x dollars a year that you can take out of your investment accounts.

How much money you’ll have and need henceforth depends on a number of market and personal factors, including how long you’ll live. Look at your current plan contributions to see whether you’re on track. Chances are, you’re not. This calculation is no easy business, but with the right advice, you can make a stab at it.

Plan sponsors need to require their plan adviser to educate their employees individually or in groups. The 401(k) plan must become more of a pension fund like plan in order for employees to succeed in reaching their retirement goals.

Please comment or call to discuss how this affects you and your 401(k) plan.

Posted via email from Curated 401k Plan Content

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Long Term Strategy and Discipline Wins!

There continues to be more and more media attention that the ‘buy and hold’ strategy is dead. That Modern Portfolio Theory no longer works. This is another attempt by the Wall Street bullies to keep your money on the move.

There are an increasingly amount of ‘experts’ extolling the underperformance of equities for the near future. These ‘experts’ have an obvious conflict of interest as they recommend their own solution.

True investors are much better served using a passive management strategy and utilizing Modern Portfolio Theory and ‘buy and hold’. This strategy, over the long term will lead to success. It should be emphasized that ‘buy and hold’ should really be ‘buy and rebalance’.  ‘Buy and hold’ might signify set and forget and we must rebalance back to our target allocation periodically. This entails buying low and selling high, automatically.

When we rebalance we sell asset classes that have done well and buy asset classes that have done poorly, short term. Buy low, sell high. This is done periodically and eliminates the need to forecast the future.

In his 1993 letter to shareholders of Berkshire Hathaway, Warren Buffet counseled; “By periodically investing in a ‘passive’ fund….the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.” He repeated the advice 10 years later in the 2003 letter. Mr. Buffet, in my opinion, was saying that trying to stock pick, market time and track record investing was ‘dumb’.

To be successful, investors, no matter how large, would be far better off using a passive strategy with Modern Portfolio Theory as part of the process. Modern Portfolio Theory is actually part of a larger strategy called Free Market Portfolio Theory.

Remember no strategy always looks like the right thing to do. We must continue to believe the free markets do work.  Most importantly we must believe in our strategy and remain disciplined.

We must own equities….. globally diversify ……. rebalance.

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

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