What Questions Do You Ask Your Investment Adviser?

Every week I talk with investors about how they invest their money. While listening to many I can hear the influence of the Wall Street bullies by the questions they ask. The Wall Street bullies have an ongoing marketing campaign to convince investors that they have the answer to investing success.

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

These bullies have trained you to ask the following questions:

  • What stocks or investments do you like?  These bullies need you to believe that there is some investment advisor who can consistently and predictably add value to your portfolio by exercising “superior skill” in individual stock selection.
  • Who are the best fund managers? In other words track record investing is finding the funds or managers that did well in the past is a reliable method of indicating which funds will do well in the future.
  • When should I get into and out of the market?  Market timing is any attempt to alter or change the mix of assets in a portfolio based on a prediction or forecast about the future.

When investors ask these questions what they are really asking for is a prediction about how our investments will do in the future.

All studies done on the success of these strategies have indicated that they do not work.

You cannot predict the future because the markets are random and unpredictable.

Rather than trying to predict what the markets will do next investors would be better served by developing a prudent portfolio and remain disciplined.

The questions we should ask are something like:

  • What is your portfolio’s expected return?
  • What is your portfolio’s expected volatility?
  • Have you defined your investment philosophy?
  • How do you measure diversification in your portfolio?

Click 20 Questions for a full list.

With the help of an investor coach you will be able to answer all these questions with a ‘yes’.  At that point you will be ‘Bully-Proof’ and you will be able to invest anxiety free even during severe downturns in the market.

Remember you are investing to reach a long term financial goal. This goal cannot be achieved if you continuously change strategies. Or try to get in and out of the market at the right time. These tactics very seldom lead to success in the short term. Over the long term you will not reach your financial goals because they rely on ‘luck’ and not ‘skill’.

The fundamentals of successful long term investing involve:

  • Own equities
  • Globally diversify
  • Rebalance

It is more about controlling your emotions during both down AND up markets. Controlling your emotions cannot not be done alone.

  • What is Your Risk Appetite?
  • Watch for these 8 signs of speculation
  • 2012: Another Dismal Year for Active Managers and Market Predictors
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Predictions Are Killing Your Returns

The wall Street bullies have a vested interest in keeping you trading. It does not matter to the bullies if you make money or not. Their only concern is that they make money on every trade. If you want to succeed long term with your investments you need a prudent portfolio and discipline. Hire an investor coach to help you with both.

English: Fidelity Investments Branch on Boylst...
English: Fidelity Investments Branch on Boylston Street in Boston. (Photo credit: Wikipedia)

If you choose to consider the forecasting skill of “experts”, you should read an excellent white paper prepared by Vanguard, entitled: “Forecasting stock returns: What signals matter, and what do they say now?”The authors reviewed a number of indicators typically used to forecast U.S. stock returns. They concluded that forecasting stock returns is “essentially impossible in the short term.” Even over the long term, commonly used predictors “…have had little or no power in explaining the long-run equity return over inflation.”

The ramifications of this well-researched analysis are profound. Much of the securities industry is premised on giving advice about the direction of the markets. Relying on this advice has very negative consequences. It distracts you from determining your capacity for risk, diversifying your portfolio, low fees and taxes. Of course, if you focused on these factors, you would quickly conclude that your interest is not served by using brokers or advisers who purport to be able to “beat the markets”, using their predictive powers.

My prediction for 2013 is that, if you reach this conclusion and fundamentally change the way you invest, you will be investing responsibly and intelligently. You will also avoid becoming a victim of the securities industry.

The first question you must ask yourself is are you an investor or a gambler? If you are a gambler you should look for all the predictions you can. However, if you are an investor you should develop a prudent portfolio and remain disciplined.

Please comment or call to discuss.

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Dissimilar Price Movement is Your Key Portfolio Protection

Investors are always looking for the best asset category to invest their portfolio. If only someonecould tell them when to buy stocks or bonds or real estate or Cds or annuities or even gold and then tell them when to sell.

Asset Allocation on Wikibook
Asset Allocation on Wikibook (Photo credit: Wikipedia)

The Wall Street bullies want you to believe that this someone exists.

Remember these bullies make money whenever you trade, buy or sell. It doesn’t matter to the bullies whether you make money or not, they just don’t care.

All that matters to the bullies is that you keep on trading.

A number of advisors reportedly predicted the 2008 crash and got their clients out of the market. Unfortunately, for investors, these advisors ability is a matter of luck and NOT skill. Their ability to repeat this impressive feat is virtually zero.

There is no correlation between an advisors’ ability to time the market in the past and their ability to do so in the future.

What these bullies are really telling you is that they can predict the future. They want you to believe they can get you out of the market and buy back in at the right time.

Unfortunately, when you look at their long term results you will realize that they do not beat or even match a prudently diversified portfolio.

Your portfolio is diversified when you own asset categories with price movements that do not mimic each other. Two or more asset categories may both have high-expected returns but perform very differently in the short term. This difference can be measured and used to build a diverse portfolio.

Said another way there is a mathematic and scientific method to develop a diversified portfolio. This in no way involves accurately predicting the future.

This portfolio will be built with your specific risk preference which will help you reach your long term financial goals.

A Portfolio MRI would determine your level of diversification.

One very important lesson here is that NO ONE can predict the future. Remember the ‘talking heads’ on television have one goal and that is to sell more advertising. Their goal is NOT to help you prudently invest.

In order to succeed in reaching your long term investing goals you must own equities…..globally diversify……rebalance.

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Managed Portfolios and Your 401(k)

For the 401(k) plan to succeed as the sole source of retirement for most Americans it must become more pension fund like. People are ill prepared to manage their own portfolios. They tend to make emotional decsions, based on what they hear and see in the media. To succeed in managing a retirement portfolio requires a prudent strategy and discipline. A successful poretfolio will own equities, globally diversify and rebalance.

Retirement (Photo credit: Wikipedia)

A good managed portfolio 401(k) plan must:

  • Have well-managed underlying investments. It requires good mutual funds that have performed well through market ups and downs relative to their peers in the same asset class, and a fund manager has been with the fund through these ups and downs and has managed the fund in accordance with the parameters of its prospectus.
  • Only offer portfolios that are diversified across several asset classes. Retirement investors need to protect their nest eggs with investments that span multiple asset classes so that, when one class experiences volatility, the retirement portfolio can glean stability from the other asset classes.
  • Offer several portfolios in order to provide appropriate options for all employees.
  • Help employees to select the appropriate managed portfolio based on the individual investor’s risk tolerance, timeline to retirement, retirement goals and personal preferences. This shouldn’t be a guessing situation. Your employer or the financial services company providing the portfolios should provide a questionnaire that helps you pinpoint the appropriate portfolio for your current needs.
  • Not add significant expenses because another layer of management is being used. You can expect to pay for an additional service like managed portfolios or advice, but costs should be reasonable.

Managed portfolios are not strictly a set-it-and-forget it option. There’s no such thing, and you should be leery of anyone who tells you otherwise. Investors’ goals and timelines change. Your tolerance for risk could even change. It stands to reason that investors in a 401(k) plan with managed portfolios could need to move through several portfolios over the course of a working career.

Your work doesn’t end there. Now and always, regardless of industry developments, employees should periodically check in on their 401(k) plan ratings—try Brightscope.com. Keep tabs to ensure your employer is providing a good plan. If managed portfolios are a trend that continues to grow, some lower quality options could pop up. Employers need to be vigilant in ensuring they offer managed portfolios that are well managed and appropriate. Due diligence will continue to be important so employers fulfill fiduciary duties.

This one change will allow more of your employees successfully retire. The 401(k) plan was designed as a supplement to a pension plan, it has become the sole source of retirement for most Americans. Plan sponsors should treat their plan more like a pension plan.

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

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Retirement (Photo credit: Wikipedia)

Creating a financial plan that produces income throughout retirement is one of 12 steps in CFP Board’s year-long “12 for ’12 Approach to Financial Confidence. Blayney suggests that prospective retirees consider these six pieces of advice when creating their retirement plans.

  • Time your retirement carefully. The point in time when a retiree starts taking income from his or her retirement accounts can make a huge difference. Withdrawals from a portfolio during a bad investment market may diminish the sustainability of those savings by several years. In cases of bear markets, those able to delay retirement, and continue earning income rather than consuming assets, are in a much better position to avoid running out of money during their lifetimes.
  • Don’t over rely on safe, income-producing investments. For most retirees, a healthy allocation to investments that will grow over time, rather than those that promise regular income, is warranted. It’s too simplistic to think that investments that pay interest or dividends are safe, whereas growth stocks are not. Bonds, for example, can provide predictable income. But bond issuers do sometimes default, companies cut their payouts to shareholders, inflation can reduce the purchasing power of those regular payments and in today’s low interest rate economy, it can be difficult to find yields on fixed income investments sufficient to maintain a retiree’s lifestyle. Unfortunately, this drives many retirees in search of higher yields, which carry unacceptable risk.


  • Adjust your withdrawal rate to your needs. Generally speaking, there is a consensus that a 4 percent annual withdrawal rate – defined as the highest yearly payout from an investment portfolio that will not deplete the portfolio over a given period – is a reasonable payout over the life expectancy of most retirees. However, retirees should adjust this rate in certain situations. When an investment portfolio is doing well, or when there are large expenses, perhaps for medical costs, a higher rate may be warranted or necessary. An annual consultation with a CFP® professional can help retirees reevaluate their withdrawals in a way that fits the unique circumstances of their life.


  • Don’t be afraid to spend capital from a retirement portfolio. Traditional IRAs, 401(k)s, 403(b)s, and self-employed plans are structured, under the tax laws, to be depleted over our lifetimes. Retirees are penalized if they fail to take principal from these accounts at a certain age. Many retirees find the prospect of spending down these accounts very upsetting, when, in fact, doing so under the guidance of a CFP® professional can result in a far more comfortable and secure retirement.


  • Understand your tax obligations. Tax rates help determine acceptable savings withdrawals, and utilizing both taxable and tax-deferred accounts appropriately can help control the amount of taxes owed in any given year. Withdrawing from these two types of accounts can be critical to sustaining a retirement portfolio.


  • Spending matters more than investments. Many retirees believe if they could just get their portfolio allocation and security selection “right,” they will have enough for their retirement. It may surprise them, however, to realize that in the studies done on sustainable withdrawal rates, the allocation of the portfolio providing the withdrawals was not very important to the results. In other words, the amount of fixed income in the portfolio could vary from approximately 35 to 65 percent without significantly changing sustainable withdrawal rates. This suggests retirees should focus primarily on expense management in retirement as the most effective way to ensure that their resources will last.
via cfp.net

Excellent advice for everyone who wants to retire.

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

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Actively Trade to Nowhere.

Through many discussions with investors I have learned that when things go against them they want to take control.

Stock pickers and day-traders who are actively trading their investments have perceived control over their portfolio. Similarly, people who jump in or out of the market during up or down swings also mistake their activity for control.

English: Wall Street sign on Wall Street
English: Wall Street sign on Wall Street (Photo credit: Wikipedia)

In reality, the more activity and trading you generate in a portfolio, the more out of control the portfolio becomes. When an investor trades in their portfolio trying to time the market or find the “best” investment they are doing nothing but add costs and decrease return.

Actively trading your account by picking individual stocks or market timing or picking funds based on past performance is exactly what the Wall Street bullies want you to do.

Stop empowering Wall Street.

 Remember, no one can predict the future, no matter how convincing someone is in the media they are only guessing.  In most cases the predictions are never broadcast by the same ‘experts’.

The “best” strategy is to have a prudent process and discipline in place   Stop trying to study the market to find bargains, statistics prove that it cannot be consistently done. You might get lucky in the short term but long term your results will suffer.

With the case of market timing, getting in and out of the market at the right time requires being right when you get out of the market AND be right when you re-enter the market. This again will result in lower returns.

To succeed long term and reach your financial goals you should
own equities…globally diversify …rebalance.

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The Big Lie Is a Cruel Hoax

The Wall Street bullies have lead us to believe that there is someone out there who can predict the future. This belief is the main cause for poor performance by investors. Your financial future is at stake. Granted some will get lucky but the vast majority will suffer.

M42 at dusk
M42 at dusk (Photo credit: Highways Agency)

The perpetuation of the myth that you can pick outperforming actively managed funds through “research” is a cruel hoax. It makes ordinary investors feel inadequate when their efforts fail. Most don’t realize that extraordinary resources by researchers with advanced degrees in finance have been devoted to finding the magic bullet that would “beat the markets.” None have succeeded.The fruitless search for predictive factors of outperforming funds is harmful to your financial health. In a recent blog on Forbes, Richard Ferri calculated the probability of selecting a winning actively managed fund for different categories of stocks and bonds ranged from a low of 22 percent to a high of 32 percent.

Most investors hold a portfolio of mutual funds, and not just a single fund. Ferri reached some startling conclusions about the probability of a portfolio of all actively managed funds beating a comparable portfolio of all index funds. This statistic stood out: An actively managed portfolio consisting of five funds held for 20 years had only a 2 percent chance of beating a comparable portfolio of index funds. Ferri concludes that “[T]he evidence in favor of all index funds, all of the time, is irrefutable, overwhelming and important to all investors.”

Don’t be misled by statements indicating there is some way you can identify actively managed funds that will outperform their benchmarks prospectively. As one commentator noted, relying on past performance and hoping it will persist is “like driving forward while looking through the rear view mirror.”

Trying to pick active managers that ‘beat’ the market is gambling and speculating with your money. Don’t do it.

Please comment or call to discuss how to improve your portfolio.

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‘Puffery’ Can Blow Away Your Retirement Goals

The Goldman Sachs Tower. New Jersey
The Goldman Sachs Tower. New Jersey (Photo credit: luismontanez)

Wall Street bullies are everywhere. Since people are constantly on the look for a prediction of the future because of course no one like uncertainty. The Wall Street bullies are constantly supplying predictions and ignoring the fact that these predictions are very seldom correct. Investors would be much better off developing a prudent investment strategy and remain disciplined to that strategy.

Judge Crotty characterized Goldman’s legal position as “Orwellian.” In a particularly scathing note, he observed “[I]f Goldman’s claim of “honesty” and “integrity” are simply puffery, the world of finance may be in more trouble than we recognize.”That is precisely the issue.

Investors need to understand they are in “more trouble” than they realize. Many brokers and advisors show little constraint in making statements they cannot possibly support. The daily grist of these “financial experts” is that they can help you secure your retirement by finding fund managers with investment skill who can “beat the markets.” They don’t disclose the compelling, peer-reviewed data indicating that evidence of this “skill” is exceedingly rare. In those few who appear to have it, after management fees and trading costs, even they are unlikely to beat their benchmark. The nail in the coffin is that this elusive skill does not persist, and relatively few top performing fund managers are able to repeat their outperformance in the following year, much less over the long term.

The Wall Street bullies do not have their customers interest as their top priority. Investors need to recognize that these firms have gnerating fees as their top priority.

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

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You Probably Are Not as Risk Tolerant as You Think You Are….

NEW YORK, NY - DECEMBER 17:  Irving Picard, Se...
NEW YORK, NY - DECEMBER 17: Irving Picard, Securities Investor Protection Act Trustee, speaks as Preet Bharara, U.S. Attorney for the Southern District of New York, looks on at a news conference announcing the recovery of $7.2 billion in the Bernard Madoff Ponzi scheme December 17, 2010 in New York City. The widow of Florida philanthropist Jeffry Picower agreed to return the entire $7.2 billion Picower received from investing with Madoff. The funds will be distributed to the victims of the fraud. (Image credit: Getty Images via @daylife)

Many times, particularly prior to 2008, investors would look at the performance numbers of a more aggressive portfolio and choose it. Apparently their focus is on the positive performance and neglected the potential loss. I call this performance bias. Investors only envision the positive performance happening to them.  They can retire early, save less, become rich.

When asked if they could stand a 25% drop in their portfolios enthusiastically answer, “Yes, absolutely!”  When they actually lose this amount and see real dollars melt away in their portfolios, they are gripped with fear and panic. Inevitably, this leads to the inappropriate behavior of selling at market lows. Beware of false bravado. Recognize your tolerance for losing real money when building your portfolio.

Dalbar Inc. is an independent research firm that studies investor behavior. Each year they look back 20 years to determine how well investors are doing. On criteria is the investor must have at least $100,000 invested. This years’ study ending December 31, 2011 resulted in the following

  • S & P 500                               7.83%
  • Average Equity Investor       3.49%

This poor performance is primarily caused by the investor selling in a panic when the market goes down. It could be the European crisis or the Tsunami in Japan, or Bernie Madoff and on and on. No one can predict, including myself, when the European crisis will end, but it will end. No one can predict when the next crisis will occur.

Successful investors will use down markets as an opportunity to rebalance their portfolio. Sell the better performing components and buying the buying the poorer performers. Buy low, sell high. What a concept.  This requires working with a fiduciary advisor or investor coach if you will.

If your current advisor/broker/agent allows you to sell in a panic, watch out. These are called facilitators or simply salespeople. They make money when you move from one product to another. They at times will feed your fear.

A true advisor will help you determine your goals and develop a portfolio with the proper risk level.  You should be properly educated to understand that risk happens. If you develop a prudent portfolio and remain disciplined to that strategy you will succeed over the long term.

You should own equities….globally diversify….rebalance.

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

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A Great Way To Improve Your Company Sponsored 401(k) Plan

Reduce the number of investment options.

This is possibly the best way to improve the performance and participation in your plan.  Many plan sponsors and their service providers believe that if they include a large amount of investment options in their plan, employees save more.  They also are mistaken in believing that they reduce their fiduciary risk by including a large amount of fund options.  This is far from the truth. The truth is that the more options available the more confused the participant becomes.  This confusion results in paralysis and nothing is done. Even worse the participant looks at all the options choosing the best performing funds over the short term.  This lack of diversification will hurt performance and the ability of participants to successfully retire.

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

A better approach would be to offer risk adjusted globally diversified model portfolios.  Your plan would then resemble a pension fund like plan. This takes the investment choices and allocation out of the participant hands and into the hands of an investment professional. Most plan participants either never review their portfolio mix or rebalance to the proper allocation or they will over trade.  Neither path will result in favorable outcomes.  In fact over trading is the most detrimental to a portfolio.  There is an old saying ‘your portfolio is like a bar of soap the more you touch it the smaller it gets’.

Ideally plan sponsors should consider hiring an ERISA 3(38) Investment Manager.  This arrangement must be in writing.  It will transfer the responsibility and fiduciary risk for investment choices to the ERISA 3(38).

The investment manager will build the model portfolios and be accountable for the proper investment.  The implementation of the plan would involve automatically investing in a model portfolio based on the employee’s age.  Once this is complete the employee has three options:


I.        Remain in the assigned portfolio


II.        Complete a risk assessment to determine the proper portfolio


III.        Opt out of the model portfolios and choose their own fund mix


Studies have revealed that most participants will remain in the assigned portfolio and will save more with less anxiety.

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