Which Will Win Your Logical Mind or Your Emotional Mind?

Fidelity Investments just revealed that during the recent downturn 401(k) participants have been making a record number of calls, over 4 million. Many of those calls involved selling out of their equity based funds. This is further evidence that do it yourselfers do not have the discipline necessary to become successful investors.


As I have said many times in the past there are three simple rules of successful investing. Own equities along with the right amount of high quality short term fixed income for you…globally diversify…rebalance.


The problem with this formula is that most people are not emotionally equipped to deal with market turbulence, both up and down.


There is a study that states 70% of 401(k) plan participants that work with a retirement adviser are on track for a successful retirement. While just 28% of participants that do not work with an adviser are on track.


A good adviser will not allow their client(s) to panic and sell during the inevitable downturns of the equity markets.


Below is a great article that helps provide credibility to the statement that discipline wins.


Although many people will nod their heads after reading the tips in the article. Most will allow their emotions to take over and sell during down markets.


Are you one of the people to panic?


Or do you have an investor coach/fiduciary adviser to help you through the turbulent markets?


CNBC article by Fred Imbert

Investors thinking of selling amid the current market turmoil should resist the urge, Vanguard Group founder Jack Bogle said Wednesday.

“Just stay the course. Don’t do something, just stand there. This is speculation that we’re seeing out there, and you can’t respond to it,” the investing legend told CNBC’s “Power Lunch.”

Bogle made his remarks in the midst of yet another sell-off in global equities.

The Japanese Nikkei 225 tumbled nearly 4 percent and closed in bear market territory. In Europe, the pan-European STOXX 600 index fell more than 3 percent.

U.S. equities inched closer toward bear market territory, with the Dow Jones industrial average falling more than 450 points Wednesday, while the S&P 500 and Nasdaq composite fell about 3 percent.

At the center of the sell-off was U.S. oil, which plunged nearly 8 percent Wednesday, hitting a fresh 2003 low.

“Each bubble, for lack of a better word, is different from the previous bubble. The dotcom bubble back in 1999 into the beginning of 2000 was a whole lot of ridiculously overpriced new companies, only probably 15 percent of which made it,” Bogle said. “The mortgage bubble was because a lot of people had mortgages, and weren’t able to pay for them.”

The recent fall in stocks and commodities, particularly oil, has raised questions as to whether or not the economy is at risk of entering a recession. Bogle said the long-term relation between the economy and the stock market is very tight.

in the short term, however, Bogle said: “Nothing has changed.”

“In the short run, listen to the economy; don’t listen to the stock market,” he said. “These moves in the market are like a tale told by an idiot: full of sound and fury, signalling nothing.”

Is It Logic or Greed?

Every week I discuss the advantages of following the three simple rules of investing:

  • Own equities and high quality short term fixed income.
  • Globally diversify.
  • Rebalance.

Very simple indeed until being globally diversified results in performance less than the U.S. Large cap asset class. Because we see large cap stocks every night on the news we compare our results to the DOW and the S&P 500.

As humans we avoid pain and are drawn to pleasure. It is a natural thing. When we see the U.S. large cap earning a great return while small, international and emerging markets are lagging. We wonder why not invest all my money into U.S. Large Cap.

Keep in mind the financial media focuses on the Dow and S&P 500.

On the flip side when small, international or emerging markets are out performing we think nothing of it because we don’t know. Consider this since 2000 the S&P500 has been the best performing asset class three years. And the worst performing asset class for five years. The rest somewhere in between.

Perhaps another small history lesson will help you realize the value of a globally diversified portfolio.

From 1996-2000 the S&P 500 earned a cumulative 132% while Emerging market small value stocks lost -49%.

Naturally at the end of 2000 investors would want to invest all their money into the S&P500 Large Cap stocks(Pleasure) and avoid emerging market small value(Pain).  The next five years, included the tech bubble bursting. As I mention often no one can consistently predict the future.

Let’s see how that worked out for investors. From 2001-2005 the S&P 500 earned a cumulative 3% while Emerging market small value stocks earned cumulative 162%. That didn’t work out well at all.

Naturally, I cannot predict that this will happen again because past performance is no indication of future results.

The point is no one can predict which asset class will outperform and for how long. When someone does make an accurate prediction it is a matter of luck and not skill. When you consider all the analysts on Wall Street all making their own predictions. In any given year someone will be right. The problem is we never know which one is right in advance.

On another point I find it fascinating that investors see crashes of the past as buying opportunities and current or future crashes as risk. It is interesting how the human mind works. OK now I’m rambling.

It is times like these that investors really need an investor coach the most. A coach will help you control your emotions. Right now the emotion is greed. Even though allocating all your investments to U.S. large cap might sound logical it is not.

Your coach along with your investment policy statement should guide you through all market conditions.

Don’t empower the Wall Street bullies and hire an investor coach/fiduciary adviser.

As always I welcome any questions or comments.

Too Much Company Stock Can Be Hazardous to a 401(k) Account

Remember no matter strong your company is the unexpected can happen at any time. If you have a majority of your retiremeint savings in your company stock, if something does happen you lose both your job and your savings. The most prudent strategy is to globally diversify and rebalance.

NEW YORK - NOVEMBER 16:  A trader works on the...
NEW YORK – NOVEMBER 16: A trader works on the floor of the New York Stock Exchange on November 16, 2010 in New York City. Following continued worries over the economic outlook for Europe, China and the United States, the Dow Jones industrial average (INDU) was down 178 points in a preliminary tally. (Image credit: Getty Images via @daylife)

“Companies that look great today may not look great tomorrow,” Weeks says. “It is better for participants not to be overexposed in their retirement plans to company stock.”The 2001 Enron collapse showed how retirement assets can disappear virtually overnight. The energy giant matched employee contributions in stock and barred employees from divesting until turning 50. When the Houston company’s unethical accounting practices were revealed, Enron shareholders—many of whom were workers with retirement accounts—lost billions of dollars.

As a result, Congress made changes to federal law. Now it’s easier for participants to sell company stock and to be more diversified. A 2006 law requires plan sponsors to notify participants holding 20 percent or more of one asset that their retirement plan my not have enough of a mix to manage investment risk.

While the law also allows plan sponsors to limit the amount of company stock employees can hold in their 401(k) accounts, many in the industry would like to see these shares gone altogether.

“You should never have undiversified risk in your portfolio. Holding any single security is way too risky,” says Robyn Credico, defined contribution practice leader at Towers Watson & Co. in Arlington, Virginia. “And in putting a cap [on company shares] doesn’t get rid of the risk, it only limits the extent of the liability.”

Steve Clark, treasurer for South Jersey Industries Inc. agrees, but has had a hard time moving participants out of the Folsom, New Jersey-based utility company shares. The company’s 401(k) plan was originally a thrift plan in which participants invested in company shares and treasury bonds. Today, there are 18 investment options, but few workers who started with the thrift plan have moved out of company stock. Nearly 77 percent of the net assets of the $139 million plan are in company shares, BrightScope 2010 data show.

South Jersey Industries’ match is in cash—not company stock—and participants are required to attend financial education seminars. Those with three or fewer investments are given additional education, focusing on managing risk by improving asset allocation.

“The concentration [of company stock] is a topic of every trust meeting we have,” Clark says. “We don’t think it’s appropriate to force investment decisions, but it is very, very important to continually educate participants.”

The stock itself is giving participants very little reason to sell. South Jersey Industries’ stock has outperformed the Dow Jones Industrial Average and Standard & Poor’s 500 stock index for 10-year and five-year returns. It has mostly outperformed three- and one-year averages as well. For this year, the stock price is up 9.61 percent as of Aug. 7.

Although loyalty to your company is admirable it is also very dangerous.

Please comment or call to discuss.

Posted via email from Curated 401k Plan Content

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Who Can Consistently Beat The Market?

Understanding Financial Leverage
Understanding Financial Leverage (Photo credit: Wikipedia)

There have been countless times when someone has pointed out to me a great investment strategy or stock pick. Someone they know picked a stock that doubled or tripled or even more.  They contend that if only they could repeat this their money troubles would be over. Most may or may not realize that is is a matter of luck and not skill. Eventually the ‘lucky’ investment manager runs out of luck. Remember there is NO correlation between a stock pickers success in the past and their ability to repeat.

The truth is someone will always beat the market but it probably won’t be you.  Given a 20 – year period, only a small percentage of potential money managers ever beat the market. Unfortunately, no one knows in advance who it will be. Chances are you will be the 95% who lose to the market.

Many of you may remember Peter Lynch, who managed the Fidelity Magellan Fund from 1977 to 1990. He averaged a 29% return during that time. Unfortunately, investors did not know this until it was over. Mr. Lynch stated that most investors lost money in his fund because they bought during high periods and sold during low periods. No one knew he was going to be so successful until he retired.

Another example is the great Warren Buffet, few can argue with his success. However, many could not deal with his volatility. In 1999 during the peak of the tech bubble, tech stock funds earned 100% and sometimes 200%. During this same year Mr. Buffet’s fund lost 15%. Would you stay with him? Now be honest. Or in 2008 the S&P 500 lost 38% Mr. Buffet’s fund lost 48%. The main reason for Warren’ long term success is he had one process, the process he believed in and remained disciplined to that process throughout.

The independent research firm DalBar studies investor behavior with accounts at least $100,000. Their study for a twenty year period dending December 31, 2011 found the S&P 500 averaged 7.81% while the average investor, with or without an adviser, averaged 3.49%.

The lesson is, there only a very small number of managers that beat the market. And even then we do not recognize it until it is over,

You can be a successful investor by developing a prudent portfolio matched to YOUR risk tolerances and remain disciplined. This will reduce your anxiety and you will stop fretting about the short term market movements.

To succeed with investing own equities…..globally diversify….rebalance.

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No One Can Predict The Future…..No One!!

On June 21, 2012 the financial markets sold off partially because of the Goldman Sachs sell recommendation on the S&P 500. The timeline below is further evidence that no one can predict the future, especially not the Wall Street bullies.

Image representing Goldman Sachs as depicted i...
Image via CrunchBase
  • Published: Wednesday March 21, 2012
    Goldman Sachs, in a sweeping report to clients  Wednesday, said it is an once-in-a-lifetime opportunity to buy stocks, which the firm said are undervalued after 20 years of relative underperformance against bonds.

    Just three months later…


  • Published Thursday June 21, 2012
    “We recommend a short position in the S&P 500 (^GSPC) index with a target of 1285 (roughly 5% below current levels) and a stop on a close above 1390.  This morning, the Philly Fed print of -16.6 down sequentially and worse than expected, provides further evidence that weakness has extended into June.”
    via John Borger


On March 21, 2012 the S&P 500 closed at 1393….May 1, close 1406 a 0.93% increase….June 21 close 1326, so in summary from the strong buy in March to the strong sell recommendation in June the market dropped -4.8%.

What will happen next? Is this a once-in-a-lifetime buying opportunity or a time to sell or even sell short? Goldman Sachs doesn’t care as long as the public keeps trading. This is a typical brokerage firm tactic, to keep the public trading.

This is further evidence that following the recommendations of prestigious firms such as Goldman Sachs will be disastrous to your financial health. The Wall Street bullies, including banks and insurance firms, do not have the interest of the consumer in mind. Their only goal is to make as much profit as possible.

Please do not empower the Wall Street bullies.

The best strategy for investors is to develop a prudent strategy with the help of an investment coach. You must understand the risks you are taking and remain disciplined to your strategy. You are investing for the long term, NOT speculating or gambling.

Remember to succeed in investing for the long term you must own equities…..globally diversify…..rebalance and repeat.

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Can You Beat The Market?….NO!!

When dealing with investors I have heard a number of questions.  The most frequently asked is; what will the market do next?

Investor-Relations-auf-FacebookEvery one of them believes someone knows what will happen next. Investors are in constant search of the ‘expert’ that will give them the answers and ‘beat’ the market. Unfortunately, there are no answers to the question; what will happen next? While investors are searching for the right answer they lose money unnecessarily.

This is evidenced by the Dalbar research study which looks at individual investor performance over a 20 year period. The latest study revealed that the 20 years ending December 31, 2010 average annual performance S&P500 earned 8.20% while the individual investor earned 4.34%.

Why the difference? It can partially be explained by the investors search for the ‘best’ manager. This is called track record investing and it doesn’t work.

The invisible hand of the market sets prices more efficiently than any other process known to man.  Is it perfect?  Indeed, No.  There is no perfect price; only what a willing buyer and seller negotiate.  The market instantly incorporates the collective mind of every market participants.  Markets work.  Unfortunately, most investors never tap their real power.

Stop trying to beat the market and let the market forces work for you. This will be accomplished by owning equities….globally diversify….rebalance.  These 3 simple rules will lead to a successful investing experience.

  • Why Investors Lag the Market (money.usnews.com)
  • The True Enemy of Every Investor. (401kplanadvisors.com)
  • Diverisification Is Your Buddy (401kplanadvisors.com)
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Younger Investors Not Shy About Stocks in 401(k)s

English: Risk and Return for Investors
Image via Wikipedia

This is a great indicator of the importance equities have in the overall health of any economy and young Americans recognize it. Most baby boom and earlier investors have an all in mentality when dealing with equities. Their thought process must become controlling risk and know what their expected return and expected volatility are. This will reduce their anxiety with stocks.

About 21 percent of savers in their sixties had more than 80 percent of their accounts invested in stocks last year compared with about 40 percent of investors in 2000, Holden said. “We see a tempering of the allocation to stock The process must include our older participants,” she said.

No Equities

Separate studies by ICI have shown that U.S. households are less willing to take on financial risk in the wake of the financial crisis in 2008, said Holden. Concern that younger individuals may be timid about buying stocks hasn’t been borne out by the data on 401(k) participants, she said.

The Standard & Poor’s 500 Index (SPX) gained about 826 percent over the 30-year-period from Dec. 31, 1980, to the end of 2010.

The number of younger workers without equities in their 401(k) accounts also decreased at year-end 2010 to 9.4 percent from 14.6 percent in 2000, said Jack VanDerhei, research director at EBRI.

“A lot of that may not necessarily be due to employees themselves actively making that choice as much as it’s them being automatically enrolled, being put in target-date funds,” VanDerhei said.

The ‘Great Recession‘ may have changed the younger generation into investors rather than speculators like the baby boomers. By following three simple rules, own equities, globally diversify and rebalance investors will succeed in reaching their long term financial goals.

Please comment or call to discuss how this will affect your company retirement plan.

  • Why Gen Y Still Invests In Stocks (huffingtonpost.com)
  • Younger investors save more for retirement (401kplanadvisors.com)
  • Study: Boomers Making More 401(k) Investing Mistakes Than Younger Folks (401kplanadvisors.com)
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Paying More in Fees Can Get You Less in Returns

S&P 500 with trend lines from 1950 to 2008
Image via Wikipedia

Expenses in mutual funds and insurance products can prove very costly to your long term financial goals. Remember the larger the organization the larger the paypoints involved. There is a cast for marketing, executives, managers….

The expense ratios of S&P 500 index funds range from very low to extremely high. For an egregious example of an indefensibly high expense ratio, consider the State Farm S&P 500 Index B (SNPBX). It has an expense ratio of 1.49%, and a deferred load of 5.00%. This fund has assets of $547 million.A small difference in expense ratios can have a dramatic effect on returns. Let’s assume an S&P 500 index fund and Vanguard’s both return 8% annually, before costs and you invest $10,000. A savings of only 1% annually on expenses would mean the lower cost fund would yield an additional $63,000 over forty years ($201,000 versus $138,000). That’s a big difference.

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The Free 401(k) and the Prohibited Transaction

Parallel graphs of the S&P index and price-to-...
Image via Wikipedia

Regulation 408(b)2 regarding fee disclosure will end the free 401(k) for plan sponsors. Employees will be informed of what fees thet are paying and to whom. What questions will they ask when they realize their employer is paying anything for this benefit?

For many plans it is very common for the adviser to work one-on-one with participants and provide advice recommendations.  Let’s say that the adviser recommended an actively managed fund that pays revenue sharing, over an S&P 500 Index fund that does not.  While we all know there may be very valid reasons to do so, but ERISA is very clear that fiduciaries must act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them.

By recommending a fund that pays revenue sharing over a fund that does not, that adviser (acting in a fiduciary capacity) has just influenced their own compensation, or their firms, thus creating a prohibited transaction.  Therefore, what started out as a qualified financial professional providing assistance to a plan participant, ended up in creating a prohibited transaction for the plan.

In my experience, most plan sponsors do not realize the risk they are putting themselves and their plan in by entering into such arrangements.   This is where you can help them understand the inner-workings of the plan services and fee arrangements to help them from inadvertently creating a prohibited transaction.

Many plan sponsors are unexpectedly allowing the adviser to their plan to commit a prohibited transaction. This can and should be avoided, not only to protect the plan sponsor but also to protect the participant.

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

  • Brokerages may have to change business practices: DOL (401kplanadvisors.com)
  • ERISA §3(38) Fiduciaries and the Flavor of the Month (401kplanadvisors.com)
  • The New 401(k) Advice Rule and the Road to a New Fiduciary Standard (401kplanadvisors.com)
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Why Most People Pick the Wrong Funds for Their 401(k) and What You Can Do About It

Burning taxpayer & shareholder money -- "...
Image by Stargazer95050 via Flickr
Investors are looking for answers and they receive bad advice from most brokers. They would be better served with a managed portfolio via passive investments.

Well, as we’ve learned the hard way, what goes up must eventually come down (remember technology stocks in the late 90s and more recently, real estate in the early to mid-2000s). So what did you do when that mutual fund with the stellar track record first started losing steam? Think back to 2008. Some folks checked it every day on their computer while others didn’t even bother opening their monthly statements to avoid the pain. One way or another, most people waited and hoped it would come back soon.When things got really bad, many panicked and sold out. (You won’t believe the number of  people who told me that they will never invest in stocks again.) Unfortunately, they missed the chance to recover most of their losses in 2009 and 2010.  When stocks eventually reach new highs and there are stories everywhere of how much money people are making, what do you think all those who said they would “never invest in stocks again” will do? And so the “greed, hope, and fear” cycle repeats itself…

The result of all this is that investors end up buying funds when they’re priced relatively high and selling when they’re priced relatively low, the opposite of what we want to do.  According to the most recent Dalbar study, the S&P 500 Index returned an average of over 9% a year over the last 20 years while the average stock investor earned less than 4%. That could mean earning less than half as much for your retirement.

Investors repeat this cycle over and over primarily due to financial institutions feeding on our fear and greed. These institutions make money when money moves. This movement hurts investors and makes the brokers rich.

Please comment or call to discuss.

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