The Wall Street Bullies Are At It Again!

The Wall Street bullies are relentless is their pursuit of convincing investors that they can predict the future and help you ‘beat’ the market. After each failed attempt investors continue to seek out the next ‘hot’ stock or asset class or strategy. They continue to seek the ‘answer’ to their investment problems. They continue to seek out the formula to earn stock market returns with Treasury bill risk.

English: The corner of Wall Street and Broadwa...
English: The corner of Wall Street and Broadway, showing the limestone facade of One Wall Street in the background. (Photo credit: Wikipedia)

What they end up with is Treasury bill return, if they are lucky, with stock market risk.

Right now investors are seeking an increase in rate of return. Since the interest rates continue to remain low investors must look elsewhere. And the Wall Street bullies again have an answer. Buy high dividend paying (value) stocks and receive the dividend AND an increase in share prices. Seems like the perfect answer to all investors’ problems.

Remember GM paid a dividend until the day they went bankrupt.

This is another example of buying the ‘hot’ asset class. Remember in the mid to late 90’s when large cap growth stocks were surging year after year, especially if the stock had a .com attached? Everyone wanted to own all large cap growth with mostly .com stocks.

Then the inevitable, the tech bubble devastated this asset class.

A great comparison is that of Warren Buffet who is really a value stock investor. In 1999 when the large cap growth .com stocks were earning double digit returns some as high as 100% Warren Buffet suffered a 15% loss. Some said he was washed up but when the tech bubble burst Mr. Buffet and his ‘value’ stocks flourished. It turns out Mr. Buffet was far from washed up.

Many may ask why not just own Warren Buffet’s Berkshire Hathaway fund? That would be great except for the fact that this fund is more volatile than the Standard & Poors 500 itself.

Most investors are unwilling to experience this kind of volatility.

What is the ‘answer’ then? Unfortunately there is no answer to earning a high return with low risk. Our best alternative, in my opinion, is to:

  • Own equities and fixed income
  • Globally DIVERSIFY
  • Rebalance

Earning market returns is actually a superior return.

Since no one can tell you when to buy and when to sell there is no need for:

  • Stock picking
  • Market timing (getting in and out of the market at the right time)
  • Track record investing

We all get frustrated when markets go down. No one enjoys watching their investments decline. Our emotions may get the better of us when we hear the financial media predict the end of the capital markets. Many of us panic and sell during these downturns. Downturns are a component of risk.

Without risk there will be no return.

To succeed in investing seek the help of an investor coach. You do not have to know everything about investing but you do need to know the right things.

Your investor coach will be your guide.

Your investor coach will provide the process and the discipline to guide you on your long term successful financial journey.

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

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Is There a Science to Investing?

The majority of my recent commentaries have dealt with developing a prudent process and discipline. In addition, we discussed the importance of including equities in your savings plan. We talk about the influence of the Wall Street bullies on your investments decisions. How these bullies use your emotions against you and the need for an investor coach.

Bottom of Wall Street from FDR
Bottom of Wall Street from FDR (Photo credit: SheepGuardingLlama)

It may be time to discuss how science can help you invest with confidence and peace of mind.

The Wall Street bullies need us to believe that they can predict the future and put us into the ‘right’ investments.

What these bullies do not want us to know is that prudent investing relies on science and not ‘art’.  By relying our investment decisions based on science rather than our emotions we will reduce our anxiety and improve long term results.

Two of the top academics have proven an answer to the question

“Where do returns come from?”

through extensive scientific research. The Three Factor Model was developed by Eugene Fama of the University of Chicago and Kenneth French of Yale.

If this theory along with other components were implemented by the Main Street investor there would be a revolution by the Wall Street bullies.

The first factor is the equity premium. Through extensive research of data from 1927 to 2010 there is a 7.82% premium in owning equities over risk free investments.

The second factor deals with the size or small premium, looking at this same data there is a 3.24% premium in holding small stocks in your portfolio. In other words since small stocks realize more risk than large stocks, investors require a premium to hold them.

The third factor proves that ‘value’ or distressed stocks realize a premium of 4.82% over growth stocks. Value companies are those with large

When you consider the equity premium, small premium and value premium you explain an extremely high level of confidence of understanding where the rate of return in your portfolio comes from.

Please keep in mind that this is a very brief explanation of the Three Factor Model, however it shows the advantage of including scientific and academic research when making investment decisions.

This research proves that the Wall Street bullies have been misleading investors into believing that stock picking, market timing and track record investing work.

Of course we need to understand that past performance is no indication of future results. However, given this extensive research we can confidently make our investing decisions. If we keep a long term focus to our investments we will succeed in reaching our long term financial goals.

The Three factor Model is one component is developing a scientific prudent portfolio. This combined with other academic theories give us the tools to build a secure financial future.

I believe when you understand that there is a scientific reason for making your investment decisions you can move forward with confidence. Confidence that in the long term you will succeed.

The Wall Street bullies will try to convince you that they can

  • Time the market (Get in and out at the right time)
  • Know the best time to be in small, growth or value stocks, bonds, cash, annuities………
  • Pick the stocks which will out perform

Extensive academic research proves that this cannot be done long term.

So, yes there is a science to investing, however remember all these theories are tools. Because you are human you will allow your emotions to change your direction during market down turns, as well as, strong up markets.

In most cases you will require the assistance of an investor coach. to keep your emotions in check.

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Dirty Tricks Brokers Use to Get Your Business

There really is no great secret on successful investing for long

The New York Stock Exchange, the world's large...
Image via Wikipedia

term goals. You do not have to know everything about investing to succeed, but you do need to know the right things. There is an academic method to developing a diversified portfolio, custom fit to each individuals situation. This goes against the Wall Street model that strives to keep investors in fear that they need Wall Street to guide them in ever changing directions.

Misleading tiltThere is significant research supporting the value of tilting the stock portion of a portfolio towards small and value stocks. Tilting towards these riskier asset classes can increase expected returns, albeit with increased risk. However, there are periods of time when large and growth stocks outperform small and value. For example, in 2011, large cap stocks outperformed small cap stocks.

By tilting the stock portion of a portfolio towards the asset class that outperformed in the past year or two, advisers can make it appear they have the ability to increase returns in the future. Don’t be fooled. If your adviser is recommending a tilt towards any asset class, ask to see long term data supporting this recommendation.

Using long term and lower quality bonds

By using long term (maturity dates more than 5 years) bonds, and bonds with ratings below investment grade, brokers and advisers can make it appear they are generating higher returns. Many investors don’t understand these returns come with higher risk. Historically, according to research done by Dimensional Fund Advisors, long term bonds are more volatile than shorter term bonds, but have not provided consistently greater returns. The same research indicated that bonds lower in credit quality have earned higher returns, but there is a greater risk of default.

You would be better advised to limit your bond holdings to maturities of five years or less and to insist that all of these holdings be rated investment grade or higher. You can increase your expected return (and your risk) by allocating a greater portion of your portfolio to stocks, assuming that would be suitable for you.

Using short term returns

Short term data can be extremely misleading. Some brokers and advisers cherry pick funds for inclusion in a recommended portfolio that have impressive three year returns. The implied message is that these funds are likely to outperform in the future. You can find a discussion of the benefit of longer term data here.

You should insist on seeing at least a 10-year history of returns and preferably longer.

There’s an old Chinese Proverb that says: “If you must play, decide upon three things at the start: the rules of the game, the stakes, and the quitting time.”

You now know some of the rules of the game.

This is how most brokers compete and it does not involve the truth.

Please comment or call to discuss.

  • Their Confidence Is Killing Your Returns II (
  • Diverisification Is Your Buddy (
  • Asset Allocation Basics (
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Their Confidence Is Killing Your Returns

English: Eugene Fama receiving the inaugural M...
Image via Wikipedia

There is a scientific method of building a risk adjusted gloablly diversified portfolio. Trying to find the next hot asset class or stock or fund manager is a futile exercise. To succeed in reaching your long term financial goals you must remain disciplined to a prudent strategy.

At the request of a prospective client, I proposed a risk adjusted portfolio, consisting of low management fee, passively managed stock and bond funds. I tilted the portfolio towards small and value stocks, consistent with the research of Eugene Fama and Kenneth French. Their research explained the relationship between risk and return for stocks. It is known as the Fama-French three-factor model. Distilled to its essence, the Fama-French three-factor model holds that a portfolio tilted toward small and value stocks (which increases risk) has a higher expected return than a portfolio without this tilt, over the long term. You can read more about the Fama-French three factor model here. In my recent book, The Smartest Portfolio You’ll Ever Own, I recommended portfolios of index and exchange traded fundsat different risk levels that investors could implement themselves. These portfolios are based on the research of Fama and French.My prospective client showed my recommendations to a friend who is a well-known financial advisor. He derided them as “possibly” suitable for those who wanted to preserve wealth, but not to grow it. In order to grow wealth, he advised retaining his firm because of its ability to time the markets and “customize an individually tailored portfolio of stocks and bonds.”

The research supporting my recommended portfolio is extensive and is summarized in the bibliography to my book. His advisor friend provided no research validating his approach to investing, but he made up for the lack of data with his air of infallibility and aura of expertise.

We all want to know what will happen next. Who will be the best ‘stock picker’? There is a scientific method to developing you portfolio for superior long term results.

Your comments are welcome or as well as your calls.

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