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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Should You Rely on Stock Pickers or Market Timers?

The Wall Street bullies are continuously promoting stock picking, market timing and trading. We have all seen the commercials about the baby, using the brokers’ tools, picking stocks and making great returns. These commercials make us believe that it is an easy task to predict market movement.

The New York Stock Exchange, the world's large...
The New York Stock Exchange, the world’s largest stock exchange by market capitalization (Photo credit: Wikipedia)

The bullies know we are looking for a get rich scheme to make our lives easy.

Hit it right, they contend, and you will be on easy street.

When you bet on a long shot in gambling or assume excessive risk by trying to pick the “big winner”, your brain releases Dopamine. This chemical produces an euphoric feeling and is closely related to the high that cocaine and morphine produce.

For stock pickers, even thinking about placing an order for a stock they hope will bring them huge returns can produce this chemical.

All the while stock pickers ignore the real risks and likely losses in the speculative venture.

There will always be investors who get lucky and make unbelievable returns. We must realize that this is a matter of ‘luck’ and not ‘skill. These lucky investors will very seldom repeat in the future.

Successful investors have a long term plan when allocating their assets. They know there is an academic and scientific method available when building a prudent portfolio. Their strategy includes understanding the expected return and expected volatility of their portfolio.

Many investors believe that looking at past performance is a good indicator of future results.

This is exactly what the Wall Street bullies want you to believe.

As investors we must realize that if something happened in the past does not mean it will repeat in the future. The variables must be exactly the same for these situations to repeat.

During a meeting in Chicago I met with an active trader and his quote has stuck with me.

“Trading strategies work until they don’t.”

The problem for us investors we will never know when these strategies will stop work. Develop a prudent strategy and remain disciplined.

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

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