When Stock Markets Go Down Investors Should Be Happy….WHAT????

Did I read that right? When Stock markets go down investors should be happy.  Tony you must be going crazy. Why would I be happy if my investments go down? I panicked during the 2008-9 crash. The experts said this was the end of the capital markets. Stocks are too volatile. I cannot afford to take any losses in my portfolio. I worked too hard to earn it. What about real estate or gold or commodities or cash or annuities………???

These are all good questions, statements and concerns. However you cannot

Stock Market
Stock Market (Photo credit: Tax Credits)

earn the superior return of the stock markets without taking on risk.  As I mentioned in past messages the Standard & Poors 500 earned 9.75% from 1926 to 2012. I also mentioned that there were 22,040 trading days during this time and only 52% or 11,461 days were up days. This means that there were 10,579 down days.

In order to earn this return you needed to stay in the market. Just a few of the crisis periods include the 1929 stock market crash and subsequent depression in the U.S., World War 2, the Cold War, The Korean War, the Vietnam War, the Cuban missile crisis, the 1987 crash, the Gulf War, the technology bubble and the housing bubble. This of course does not cover all the events which shook the markets around the globe but represents a good sample.

The reason we earn a superior return within the stock markets is we assume some risk that the markets reward us for. In other words if there were no down markets there would be no ‘good’ returns realized.

Please keep in mind that I mention the S&P500 only for illustration purposes. I am not suggesting that you buy the S&P500 and just wait out the down turns.

Diversification is vital to your investing success. This requires an in depth knowledge of the dimensions of returns.

Recently I was told that real estate offers better return with less risk. The real reason many believe this is because they cannot look up the value of their real estate every day. In fact, they cannot look up the value of their real estate minute by minute on their cell phones like stocks.  A hypothetical question might be how much could you have sold your real estate, any real estate during the market low March 2009? One can only guess however I recall one example of a 60% discount from the 2007 high. Of course, you would not sell at that time, unless you absolutely had to. You would hold on until the prices recovered. Why then would you sell your stocks at their low? Why not wait until prices recovered which they did.

Like real estate there are examples of picking the right stocks for high returns. Unfortunately like real estate there is no correlation between past successes in stock picking and future results. This is exactly what the Wall Street bullies are hoping for. The bullies are hoping you will continue to gamble and speculate with your money. You are gambling and speculating if you are:

  • Stock picking
  • Market timing
  • Track record investing

Everything that I have discussed requires investors, whether real estate or stocks, to control their emotions. Not only during down markets but also when certain market sectors are charging ahead.

For most if not all it will requires the guidance of an investor coach.

Your investor coach will help you develop a prudent portfolio, provide the necessary knowledge and keep you focused on the long term.

Part of that knowledge is the following three simple rules

  • Own equities and fixed income
  • Globally diversify
  • Rebalance

So the next time the stock market crashes, be happy.  Because you know in the long term this will result in superior returns you need to realize your financial goals.

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OMG What Should I Do With My Investments?

OMG what should I do with my investments? This is the typical reaction to a short term down swing in the market. Many of us forget to keep ourselves focused on the long term. We forget that the stock market does go down. It is the price we must pay for the great returns we realize, long term.

Federal Reserve Bank of NY, 33 Liberty Street
Federal Reserve Bank of NY, 33 Liberty Street (Photo credit: Wikipedia)

Please remember a fact from Frederick C Taylor.  From 1926 thru 2012 the Standard & Poors 500 has earned a 9.75% average annual return. There have been 22,040 trading days during this time. Only 52% of those days were up days or 11,461 days. That means there were 10,579 down days. The down days are admittedly more painful, but necessary to earn the great market return.

It is also important to remember that

There ain’t no such thing as a free lunch

 (alternatively, “There’s no such thing as a free lunch” or other variants) is a popular adage communicating the idea that it is impossible to get something for nothing.

We read or listen to the financial media telling us why our recent downturn is occurring. Could it be because the Federal Reserve has suggested it will slow down its bond buying? Or could it be that China has shown signs of an economic slowdown?  I’m not sure what the answer really is. Perhaps, it’s just the market looking for a reason to correct.  Again I do not know the answer.

I do know that downturns are inevitable. They happen.

Dealing with these downturns is part of the reason the long term returns are so attractive.

For long term investors these downturns mean nothing. Anyone who tells you they can predict the market turns are gambling and speculating with your money not investing. In fact you are gambling and speculating with your money if you:

  • Pick stocks
  • Market time
  • Track record invest.

During a downturn in the markets if you become overwhelming uncomfortable. You should talk with your investor coach about reducing the level of risk in your portfolio. If the both of you decide a reduction in risk would be right for you then do it. However, do not expect to increase the risk level when market conditions improve. This would be market timing and therefore imprudent.

Those of you that are already clients know that you are globally diversified with the right amount of risk for YOU. Each of you know the three simple rules of investing:

  • Own equities and fixed income.
  • Globally diversify
  • Rebalance

Keep in mind no one can predict the future with any degree of consistency.

My suggestion to all of you is to relax and enjoy the summer weather. Stop watching all the ‘bad’ news. Do not allow the Wall Street bullies to make you do something you will regret long term.

As I have said in the past “Short term gain ….Long term pain’. Stay focused on the long term and with the help of an investor coach your financial goals are attainable.

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Are You Investing or Speculating?

When I respond to the question, What do you do? with financial or fiduciary adviser. The follow up question is typically What investment looks good now? or I heard gold is the thing to buy. or What do you think of (fill in an individual stock or industry or country) ? or isn’t the market too risky right now?

The image of American economist Merton Howard ...
The image of American economist Merton Howard Miller (1923-2000) (Photo credit: Wikipedia)

These are all questions gleaned  from watching shows like CNBC. The talking heads on these shows continually extol the next great investment, such as, gold, annuities, commodities, a hot industry or a cold industry. These heads may explain why the market is going up or down. It all ends up with a prediction of the future.  Since the markets are more efficient than not this is a useless exercise.

The markets are random and unpredictable.

Investing is not ‘get rich quick’ that is speculating.  This confusion leads many people to fear the stock markets. When a certain stock or industry ‘crashes’ investors are frightened and sell all their stocks. Vowing never to return. Events like the 2008-9 crash are not the norm.

This should not keep you out of the equity market.

You must maintain a long term focus on the markets. If there were no risk in the equity market the returns would not be there for you to enjoy.

Remember, the stock market is the greatest wealth creating tool in the world, IF properly used.

Your goal, as an investor, is to accumulate sufficient wealth to reach your financial goals. This goal must include investing to more than keep up with the real inflation rate. This is why stocks and/or equities must be included in your investment plan.

One of the best tools to accomplish this is develop AND follow an investment policy statement. This investment policy statement acts as your guide during the inevitable ups and downs of the market.

Patience and discipline are your most important attributes to accomplish any goal. Yet, when investing,  they are the most difficult to follow during economic and market extremes.

Accomplish your long term financial goals by doing the following:

  • Own equities
  • Globally diversify
  • Rebalance

Markets have 101 ways to remind us of Nobel laureate Merton Miller’s observation:

Diversification is the investor’s best friend.

Rather than attempting to ‘beat’ the market, focus on improving your career or improving your personal relationships. The rewards will be much greater with far less anxiety.

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Should You Get Out of the Equity Markets?

During conversations with investors I continue to hear apprehension when the subject of stocks is discussed. This apprehension or fear is completely understandable. We hear nothing but bad news from the media, the continuing battle in Washington, the Eurozone debt crisis, the liberal tone of the current administration like it or not, our own budget deficit and ballooning debt, the list goes on and on.

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

Through all this bad news the equity markets posted solid returns in 2012. Will there be down markets in the future? Absolutely, there is no doubt. However, no one can tell you when and which countries and/or sectors will be involved.

The equity markets around the world are random and unpredictable.

This is undeniable. However, the equity markets remain the greatest wealth creator in the world, if properly used. This does NOT mean picking the right stocks or market timing, getting in and out of the market at the right time. Neither of these activities promoted by the Wall Street bullies are in your best interest. These activities benefit the Wall Street bullies and will not improve your returns.

The market returns are there for the taking, they are waiting for you to take advantage.

Listening and taking the advice of the Wall Street bullies is not in your best interest.  These bullies include shows like Hannity or Limbaugh or OReilly who tell you how horrible everything is and try to instill fear.

Your time can be much better spent than worrying about the direction of the equity markets. If you have developed a prudent portfolio and remain disciplined you will succeed long term. This will require the help of an investor coach who will keep you from letting your emotions take control.

Remember the Equity Markets are forward looking:

  • Expectations about the future are in today’s price.
  • Market returns are not strongly correlated with macroeconomic variables such as GDP
  • Markets can provide positive returns even during periods of poor economic performance.
  • Timing markets is difficult.

A study was done looking a past recessions and stock returns. The conclusion there is no correlation between recessions and stock returns.

To succeed in reaching your long term financial goals you need to own equities, as scary as this may seem, globally diversify, no one can tell you which countries and/or sectors will outperform and rebalance, buy low sell high.

If you these simple rules you will stop gambling and speculating with your investments and improve your results with less anxiety about the future. If you are younger growth must be your goal, a retiree your goal is to keep pace with inflation. Owning equities in your portfolio is a great solution to accomplish both.

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2012 Concerns That Did NOT Happen.

During 2012 we were worried about several things that would have a negative impact on the financial markets. The financial media made sure you were fully aware of these ‘events’. After all, the media’s strategy is, if it bleeds it leads.

market 1
market 1 (Photo credit: tim caynes)

Below is a list of the things that did not happen in 2012.

  • We did not fall off the fiscal cliff.
  • The euro zone did not fall apart.
  • China’s economy and stock market did not crash.
  • The bond market did not implode.
  • The re-election of President Obama did not derail the U.S. market.
  • Doomsday did not arrive on December 21, as the Mayan calendar may have suggested.

Given these possible events the stocks around the world had a solid year in 2012.

Many of the people I talk with remain pessimistic about the future. What if this happens or that happens? They ask. I’m not sure what will happen either short or long term. What I do know is that things will change. The only thing that doesn’t change is that things change.

Rather than trying to predict the future, which no one can consistently do, I follow my investment philosophy, which is that markets are efficient.  In that all the knowable information is in the current price of securities. Any predictions made are a guess. The markets going forward are random.

I believe that free markets work. I believe that economies around the world will continue to grow. What I do not know is what sectors or industries or products will grow.

Therefore we must remain diversified and disciplined.

There will always be short term volatility. My role as an investor coach is to keep investors focused on the long term. Trying to time the markets or pick the right stocks will lead to poor results, long term.

Your goal as an investor is to reach your long term goal. This is not done by earning the highest return possible. Earning the highest possible return can be accomplished in the short term, however it cannot be accomplished long term.

UNLESS, you believe that earning the market rate of return is the highest possible return.

The markets may not be perfectly efficient at all times, however they are far too efficient to take advantage of and improve returns.

Let’s reduce your anxiety and improve returns, long term.

To succeed long term you must own equities..globally diversify..rebalance.

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Fiscal Cliff…What’s Next For Investors?

The ‘fiscal cliff’ crisis has been averted, for now. Not surprisingly, the stock market is rallying, due to the ‘good’ news. Numerous times over the Christmas holiday investors asked me if they should sell their stocks because of the crisis on Capitol Hill. As with this and all other ‘crisis’ events I said no, you should remain disciplined to your investment policy statement and rebalance.

Stock market of Brussels
Stock market of Brussels (Photo credit: Wikipedia)

This crisis has been averted however there will be other events both good and bad that will send shock waves, both up and down, into the stock markets.

Keep in mind that in order to realize the superior long term returns of the equity markets we must control our emotions in both up and down markets. Warren Buffet has a saying I find helpful.

“Be greedy when others are fearful and fearful when others are greedy”.

In other words control your emotions there is no get quick rich scheme. If the ‘experts’ actually could predict the future why would they tell you? Fund managers, hedge funds managers, stock pickers, market timers all need investors to believe that someone can and does beat the stock market. This is all part of their marketing strategy. When a manager does beat the market, luck will allow some to win the marketing department goes to work.

Unfortunately for investors there is no evidence that past performance correlates into future success.

Shows like Jim Cramer’s are based on their entertainment value and not on their value to investors. Investing is not a game as they make it appear. To succeed in investing for the long term you should own equities…..globally diversify….rebalance.

Any time or money you spend trying to beat the market is time wasted. Time which you could be spent improving your job skills or developing new job skills or spending time with family and friends.

So turn 2013 into the year you become an investor and not a speculator. Hire an investor coach and reduce your investing anxiety and improve your results.

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Death of Equities Part 2…Really???

While talking with many investors, both current and potential clients, I have repeatedly heard that stocks are no longer a good investment. The current volatility will remain, perhaps permanently, making stock ownership far too uncomfortable.

Stock Market
Stock Market (Photo credit: Tax Credits)

Many of the financial publications are predicting poor returns going forward. Perhaps, they say, this may lead to the ‘death of equities’.

Each time these publications have a solution for your investment dollars.

Perhaps, it is gold or treasury bills or private equity or hedge funds or real estate or cash or the next great money manager or a trading strategy or on and on.

After some research I found an article in BusinessWeek from August 1979 titled the “Death of Equities”. Below are a few excerpts from this article. This article seems eerily similar to the current financial media.

BusinessWeek, 1979:
“This ‘death of equity’ can no longer be seen as something a stock market rally—however strong—will check. It has persisted for more than ten years through market rallies, business cycles, recession, recoveries, and booms.”

“Individuals who are not gobbling up hard assets are flocking to money market funds to nail down high rates, or into municipal bonds to escape heavy taxes on inflated incomes.”

“Few corporations can find buyers for their stocks, forcing them to add debt to a point where balance sheets seem permanently out of whack.”

We have entered a new financial age. The old rules no longer apply.” —Quotation attributed to Alan B. Coleman, dean of business school, Southern Methodist University

“Today, the old attitude of buying solid stocks as a cornerstone for one’s life savings and retirement has simply disappeared.”

Many investors might look at this article and determine that stock investing was no longer for them. Keep in mind, 1982 marked the beginning of the greatest bull market in U.S. history.

Will this be repeated? I have no idea. However, I do know that NO ONE can consistently predict the future.

The financial media continually makes new predictions, hoping the readers have short memories.

I believe that if you develop a globally diversified portfolio and remain disciplined to this strategy for the long term you will succeed.

Those that profess their ability to time the market or pick the right stocks are fooling you and themselves. Keep in mind that there are two groups regarding predicting market/stock movements, those who don’t know where the market is going and those who don’t know they don’t know where the market is going.

To succeed in investing for the long term you need to own equities….globally diversify….rebalance.

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What You Can Learn From Investors in Pakistan

The Wall Street bullies want to convince you that you need to continue trading in order to successfully invest. There is nothing further from the truth. Remember your portfolio is like a bar of soap, the more you touch it the smaller it gets. Successful investors build a globally diversifed portfolio and rebalane. Trying to stock pick or time the market will only lead to very disappointing results. You need a coach to protect your future self from your current self.

CNBC Pakistan HQ in Karachi, Sindh
CNBC Pakistan HQ in Karachi, Sindh (Photo credit: Wikipedia)

The economy of Pakistan is equally troubled. According to the Heritage Foundation, its economy has been plagued by “political instability and violence.” Much needed economic reform has been stalled by bureaucratic delays and lack of political will. Property rights in Pakistan are “compromised.” The rule of law is “fragile.” Taxation is “poorly administered.” Its public debt is over 50 percent of total domestic output. Foreign investment is declining. Its overall ranking on economic freedom is below the world and even regional averages, placing it in the category of “mostly unfree” economies. To put this in perspective, there is more economic freedom in Yemen, Senegal and Nigeria than in Pakistan. Its unemployment rate is a staggering 15 percent. Its inflation rate is 11.7 percent.Does this country seem like a good place to invest to you?

Now for the shocker: Year-to-date returns for the stock market of Pakistan were 46.73 percent. That’s not a typo. Year-to-date returns for the U.S. during the same period were 11.90 percent.

Here are some other interesting facts. The stock markets in Nigeria and Kenya
were 27.26 percent and 26.56 percent, respectively. What about the returns in fast-growing economies like Brazil and China? Brazil was an anemic 1.43 percent. China was a loss of 10.20 percent.

If you are a typical investor, you believe paying attention to the financial news is important to your investing success. You read the financial media. You watch CNBC and pay special attention to the fund managers who “explain” the stock markets to you and encourage you to follow their advice (often by investing with their firms). Maybe you follow the stock picks served up by Jim Cramer, who appears to have an encyclopedic knowledge of all things financial.

Let me ask you this question. Did any source of financial news advise you to invest in the stock markets of Pakistan, Nigeria or Kenya? Or Turkey, which topped the list with returns of 47.31 percent? How about your broker or financial adviser? They make it appear they have special insight into the financial markets. Did they advise you to invest in any of the countries reporting returns higher than the U.S.?

The average returns of the 77 countries is a positive return of 8.47 percent. In 2011, the average was a negative 14.15 percent and the list of top performers was markedly different, with Venezuela, Jamaica and Botswana turning in stellar results, along with Pakistan which came in second.

Trying to predict which country will perform best in 2013 is a crapshoot. So is trying to pick stocks that are mispriced, or betting on which asset class will outperform. Yet the securities industry continues to thrive by persuading you to pay its members fat fees for dispensing precisely this kind of “advice.”

The next time your broker peers into his crystal ball and makes a recommendation, ask this question: Did you predict stellar returns in Pakistan, Nigeria or Kenya for 2012?

This bears repeating NO ONE can predict the future. The ‘talking heads’ on television have one goal. to sell more advertising. If you take investment advice from these heads you will lose.

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

Posted via email from Curated 401k Plan Content

  • Pakistan, 10 others to surpass EU by 2030: US govt report
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Markets are Random—–Get Over It!

When investors are looking for the best place to invest their money, they attempt to avoid the pain, the pain of down markets. Given the high volatility of the stock market many investors are avoiding placing their money in equities. They are looking for guarantees, ie, annuities, cash, CDs, bonds, etc.

Market Street
Market Street (Photo credit: glennharper)

Many others are seeking ‘experts’ to tell them when to get in and out of the market, which is market timing. Others are looking for the next hot stock or hot asset class. Still others are looking for the hottest fund manager or track record investing.

What all these people are looking for is someone to predict the future.

All this is the result of us looking to avoid risk or loss of principle. All these efforts are sadly wasted because all markets are random and unpredictable.

There are different risks in all assets classes whether it’s stocks or annuities or CDs or cash or bonds or even gold. No matter where you put your money there is risk involved.

If you invest in the stock market, no one can “save” you from the down periods—NO ONE. If markets were not random and unpredictable, they wouldn’t offer higher expected returns. Markets randomly and unpredictably go up and down.

If there were no down markets, equities would not produce good returns long term.

The cost of capital results in good returns, over time. The stock market is efficient enough that no one can predict the future. By efficient I mean all the knowable information is already in the price of the security. Only new and unknowable information change prices in the future.

Anyone who tells you what will happen in the future is trying to fool you and perhaps fool themselves. The media Is full of financial pornography trying to sell you their product. Each season there is a new prediction. As an investor you must avoid the temptation to believe these hawkers.

To succeed long term you must develop a prudent strategy with the appropriate risk level and remain disciplined.

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

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Two Silly Predictions You Should Ignore

The Wall Street bullies want you to gamble and speculate with your money, this is how they make money. Not by trading but by commissions. This is true of stock brokers, they make money on commissions not by trading stocks. So, when you see a stockbroker in a luxury car living an extravagent lifestyle, this is from your commissions not from stock trading expertise. Do not empower Wall Street.

English: Photograph shows stock brokers workin...
English: Photograph shows stock brokers working at the (Photo credit: Wikipedia)

Investors suffer from the perfect storm of collective amnesia and cognitive dissonance when it comes to evaluating the predictions of self-styled stock market gurus. It’s disturbing that these predictions are so casually made by people who know they will have a negative impact on many who follow them. They engage in this charade to keep their names in the news in an attempt to burnish their fortune-telling credentials and generate assets.The CXO Advisory Group performs a great service to investors by keeping track of the accuracy of stock market predictions. You can find their analysis here. They conclude these experts are right around 50 percent of the time, which is just about what you could expect by flipping a coin. There is no peer-reviewed data indicating that anyone has demonstrable skill (as opposed to luck) in predicting the direction of the markets.

The financial services industry is never at a shortage of ‘experts’ to predict where the market is going. Unfortunately for investors the track record of these ‘experts’ is no better than a flip of a coin.

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

Posted via email from Curated 401k Plan Content

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