The Surprising Reason You Shouldn’t Buy the Best Mutual Funds

It seems like common sense to buy a product that is popular or seems to be doing well.  For example, a few of my friends will be buying the new I Phone X, largely because Apple has a proven track record of making successful and innovative phones.  As consumers, that is what we look for when buying things.

On a similar note, many investors think it is common sense to invest their money with a mutual fund manager that has proven to be the best by their performance, or track record.  It almost seems like that should be the only reasons to pick a mutual fund manager, is based on their track record.  But I am here to spoil that “common sense” belief when it comes to investing.

There has been recent research on this topic, which confirms decades of academic findings, suggesting you should avoid top-rated mutual funds.

“According to a new study by Baird Wealth Management Research, not only do mutual fund ratings not predict future performance, they may be reliable red lights that should warn you against buying a fund.  Baird analyst Aaron Reynolds asked the question “do fund ratings predict future performance?” Here’s what he found:”

“For US stock funds, the research found that ratings were negatively predictive of future performance, e.g. a high rated fund will perform worse than a low rated fund.”  How do you explain these results? Often, when a stock fund manager has a good year, it’s due to chance. ” 1

Further Proof

This is one of the myths of investing that Mark Matson talks about all of the time.  5 star mutual funds are the funds that have a great track record over the past few years and that seem to get everything right.  But check out this simple chart that further proves that Track Record Investing gives you below market returns.  2.

Average Annual Return       2007-2011            2012-2016

Top 30 Rated US Stock Funds from 2007-2011           5.07%                     4.35%

All US Stock Funds                                                   -0.12%                     12.04%

So the “top 30” funds from 2007 to 2011 beat the market as a whole by about 5%.   So lets say you read a magazine, saw a headline, or worse yet your investment advisor says to invest in one of these funds that “continually beats the market”.   You decide to buy in at the end of 2011.  2012 through 2016 come, and your fund gets beat by the market by 8% annually for 5 years.  That’s almost 40% total growth that you missed out on.  Plus you missed out on the 5 years that it beat the market because you got in based on the track record.

The Alternative Method for Deciding on Mutual Funds?

If looking at Track Record isn’t the best way to determine what funds to invest in, then what is?  How about academic studies?  Studies done by Nobel Prize winners show that investing in a globally diversified fund, that doesn’t try to beat the market, but just focuses on getting market returns and rebalancing is the best way to invest long term. 3.  You should not try to find a mutual fund that is going to beat the market, you need one that is going to get market returns and charge lower total fees.  Stock market returns over long periods of time are surprisingly high.  To get good long term returns, you don’t need to gamble or speculate.  Fund managers that try to beat the market not only often fail in their quest, but they incur much more costs to you the investor.

Track Record Investing could be detrimental to your long term retirement portfolio.   Don’t fall for the hot mutual fund headlines.

by Jimmy Hancock

References

1. Wasik, John. “Why You Shouldn’t Buy a Highly-Rated Mutual Fund.” Forbes. Forbes Magazine, 24 Mar. 2014. Web. 26 Mar. 2014. <http://www.forbes.com/sites/johnwasik/2014/03/24/why-you-shouldnt-buy-a-highly-rated-mutual-fund/>.

2. Matson Money. Separating Myths From Truths, The Story of Investing. N.p.: n.p., n.d. PDF. https://www.matsonmoney.com/

3. Matson, Mark. Main Street Money. Mason: Mcgriff Video Productions, 2013. Print.

What Those Gold Advertisements Aren’t Telling You

We have all heard the advertisements on the radio and headlines that keep telling us that investors need to flee to safety and buy gold.  They will tell us that the stock market is going to crash worse than last time, and that investors need a hedge to inflation with gold.  They will say it with charisma and inflict fear upon us as investors.  Even I have found myself a little fearful at times.

I have put in the research, and gold as an investment does not make sense for most investors, especially long term investors.  Gold as an investment may give some assurance to the leery, older investor, but the numbers just don’t add up like you might think they do.

Show me the Data

The reason gold is not good as a long term investment is because the growth of the price is extremely low compared with stocks.   Check out this paragraph from article I found.

“Because of inflation, a dollar acquired in 1802 would have been worth just 5.2 cents at the end of 2011. A dollar put into Treasury bills at the same time would have grown to $282, or to $1,632 had it gone into long-term bonds. Held in gold, it would have grown to $4.50. True, that’s a gain even with inflation taken into account. But the same dollar put into a basket of stocks reflecting the broad market would have grown to an astounding $706,199.” 1

1 single dollar grows to almost a million dollars in stocks, but in gold it grows to $4.50.   That stat alone teaches us not only the weak gold price growth, but the extreme growth potential in stocks.

So what about more recently?  Let’s look at Gold’s return over the last 25  years

Over the last 25 years the real return(inflation adjusted) of gold was a measly 1.5%, and 4.1% before inflation adjustment.  2. Stocks as indicated by the S&P 500 over the last 25 years had a return of 9.62%. 3.  That is over 5.5% per year increase compared to gold.  Yes, that includes 2008 stock market crash.  If you understand the value of compounding, you know you can’t afford Gold’s return in a long term portfolio.

The current price of an ounce of Gold is $1281.80.  This is a far cry from where it was just a few years ago when it reached its peak above $1900 in 2011. 4.  If you jumped on that bandwagon, you have hopefully learned a valuable lesson.

Gold as a hedge against inflation

A lot of people that invest in Gold do it knowing about the low long term returns.  The reason they give is it is a hedge against inflation.   I understand this side and its merits, but have 2 minor push backs to that.  First of all, how can you compare the inflation rate, a very constant thing year after year, to the price of gold, which bounces around on extremes year to year.   Second of all, how are stocks not a better hedge against inflation?  If the CPI goes up due to inflation, stock prices also increase.  We saw that with the huge growth rate of stocks back in the 80’s when inflation was very high.

One Case for Gold

The only reason I would ever advise someone to buy gold, is if they believe that a catastrophic, life altering event is coming in the very near future.  If you think we are going to go back to hunters and gatherers and that capitalism will disappear, then I suggest you buy gold.

Final Say

Past performance is no guarantee of future results, but in my opinion gold is not a good hedge against inflation, and it is not a good long term investment.  Investing in Gold is better than keeping all of your money under your mattress, but this is a good, better, best argument. If you are scared of stocks it is most likely because you or someone you know has gone about investing in stocks completely wrong in the past.   To win financially for retirement, invest in a globally diversified portfolio filled with stocks and short term fixed income.

-By Jimmy Hancock



References

1. “Investing in Gold: Does It Stack Up? – Knowledge@Wharton.” KnowledgeWharton Investing in Gold Does It Stack Up Comments. Wharton School of the University of Pennsylvania, 22 May 2013. Web. 15 Apr. 2014. <https://knowledge.wharton.upenn.edu/article/investing-in-gold-does-it-stack-up/>.

2. Carlson, Ben. “A History of Gold Returns – A Wealth of Common Sense.” A Wealth of Common Sense. N.p., 21 July 2015. Web. 18 Aug. 2015. <http://awealthofcommonsense.com/a-history-of-gold-returns/>.

3. “S&P 500.” Wikipedia. Wikimedia Foundation, n.d. Web. 18 Aug. 2015. <https://en.wikipedia.org/wiki/S%26P_500>.

4. “Yahoo Finance – Business Finance, Stock Market, Quotes, News.” Yahoo Finance. N.p., 5 Jun. 2017. Web. 5 Jun. 2017. <http://finance.yahoo.com/>.

2016 Stock Market Recap

Many people look at 2016 from different angles, but the stock market was an obvious positive to finish the year.  In 2016 the Matson Money US Equity Fund (Diversified US Stocks) was up over 21%, and the Matson Money International Equity Fund (Diversified Intl. Stocks) was up over 8%.  The following is an insight article from the Matson Money client statements about what we can learn from what happened with the election and the stock market.

“The 4th quarter of 2016 was a memorable one in the United States for many reasons. We  experienced the most partisan and unique election season in recent memory, culminating in an election result that few expected. The news of a potential Donald Trump presidency  brought forth many pundits clamoring to give their opinion on how it may affect the stock  market and the economy as a whole.

 
Prior to the election, on Fortune.com, Katie Reilly reported that Citigroup predicted that a Trump win would have a negative effect on the stock market, believing the S&P 500 index would fall 3% to 5% if Trump was elected. Evelyn Cheng reported on CNBC the day before the election that JP Morgan, Barclays, Citi, and BMO all expected a Trump victory would have a negative impact on the stock market, with Barclays being as bold as saying the S&P 500 could potentially fall 11 to 13 percent.

 
Some went even further with their market predictions. Simon Johnson of MarketWatch wrote:
“The election of Donald Trump…would likely cause the stock market to crash and plunge the world into recession.”

 
In an interview with Neil Cavuto, noted billionaire Mark Cuban stated:
“In the event Donald wins, I have no doubt in my mind the market tanks,” Cuban said. “If the polls look like there’s a decent chance that Donald could win, I’ll put a huge hedge on that’s over 100% of my equity positions… that protects me just in case he wins.”

In addition to many analysts predicting a drop, the stock market itself seemed to be indicating the same thing. When FBI director James Comey  announced on October 28th, that he had reopened an investigation into Hillary Clinton’s email server, the betting markets reacted favorably to Trump winning, but the stock market reacted negatively, with the S&P 500 sharply reversing gains and dropping almost 1% intraday. Even more starkly, on election night itself, as results started pouring in showing key states falling to Trump, DOW futures fell as much as 750 points.

Given this information, many investors may have had the inclination to feel uneasy about the performance of the equity markets following the election. Those that reacted to this emotion may have sold stocks and moved their money to cash or bonds. Unfortunately for those that made this decision, the prevailing market predictions of downward volatility proved to be unfounded; in fact just the opposite occurred. From November 1st through the end of the year, equity markets had a substantial growth period, with the S&P rising 5.75%. However, while this is most certainly a fine return over 2 months, investors who diversified their portfolio beyond just U.S. large stocks may have seen even greater returns. Small cap stocks as represented by the Russell 2000 rose 14.27%. But not to be outdone, the Russell 2000 Value, an index of small value stocks, increased 17.95%.

Hopefully investors will remember this period of time not just because of the election result, but as a great lesson that trying to predict the short term move of the stock market – even when it may seem so evidently clear that it will move a certain way – can be folly and cost you  dearly.

 
In the end, choosing a wise financial strategy – and sticking to it – can have tremendous impact on an investor’s long term financial health. Chasing performance through buying and selling is a risky game. Historically speaking, it will only reduce an investor’s real return. Relying on unbiased, non-emotional advice from a trusted investor coach to make good decisions can help an investor bridge that gap between what the average investor makes and the return of the market.”

By Jimmy Hancock

References

  1. Matson Money. “Account Statement.” Letter to James Hancock. 16 Jan. 2017. MS. N.p.
  2. The Financial Markets Have Accepted a Trump Presidency. Digital image. Au.anygator.com. N.p., n.d. Web. 16 Jan. 2017.

“Billionaires Bet Big on Market Crash”

I go online to check Yahoo Finance everyday to see how the stock market and other markets are doing.  I try to stick to the numbers and real information, and avoid the headlines and articles most of the time.  But, a few weeks ago this was the headline that couldn’t be missed.

Billionaires Bet Big on Market Crash (The Reason Why Is Shocking)

I was in the mood to be “shocked” so I clicked on the link and it took me to the article.   This is where it gets comical.

This is the first paragraph…

“Investment titans are making massive billion-dollar bets that the stock market is approaching an imminent crash…Multibillionaire Carl Icahn, for example, recently increased his short positions by 600% … betting as much as $4,321,000,000 that the stock market will plummet sharply and suddenly!  Mysteriously, just about every major financial whale is taking specific steps against the market … all at the same time.” 2.

The amount of money Carl Icahn is betting just so happens to be numbers counting down to 0, which i thought was a funny (on purpose) coincidence.  But obviously what is happening is they are trying to get me to think that stock market genius’s all see this great crash ahead, so it must be happening.

It Gets Better…

“The glaring question is … what’s coming that has them so sure? The best answer we found is linked back to a little-known, controversial calendar.  Devised by a group of Wall Street analysts in 1905 and kept closely by insiders, this little-known calendar has accurately predicted every boom and bust for the last 111 years, and what it says for the rest of 2016 is alarming.  “It simply labels each year with a corresponding letter. For example, 2008 was a ‘K’ year, meaning ‘low stock prices.’ Hence, I was forewarned of the crash.”  In the video, one can see that 2016 ends as a “D” year … once again meaning “low stock prices.”2.

Wow, this kind of reminds me of the Mayan calendar that predicted the end of the world in 2012.  I am pretty sure the stock market is more complex than a single letter label can define for any given year.  How in the world, would some guys in 1905 know anything about the stock market in 2016.  So the weird thing is, I am pretty sure this article was written at the beginning of 2016, but by the time I saw it 2016 was almost over.  Now it is 2017 and we know for sure that nothing alarming happened in the stock market in 2016.  In fact, just the opposite, lot’s of positive returns.    It was at this point of the article that i started thinking, why would anyone write this article and put so much fear into investors.  Then I read this.

With this kind of information at hand, it’s easy to see why those in the know are making big bets that a stock market crash is imminent. But what’s even more exciting for investors is what 2017 and 2018 hold. Yastine believes that if one has the help of his updated and advanced version of the calendar, they could add an extra $1.2 million to their retirement.  Click here to see the calendar in JL’s new video exposé. 2. 

Wow, that is a great sales pitch.   They are in the business of making money off of peoples fear and greed.  The more fear they can put into the investors, the more money and fame they will get.

I advise you to stay away from the fortune tellers of Wall Street.  Nobody has a crystal ball.  Don’t fall for the headlines that are only there to sell you on emotion of fear.  Fear is a powerful emotion that can take over an investors mind.  Don’t let it.

By Jimmy Hancock

References

1. Mayan Calendar. Digital image. Creatingdigitalhistory.wikidot.com. N.p., n.d. Web. 4 Jan. 2017.

2. Smith, Jocelynn. “Billionaires Bet Big on Market Crash (The Reason Why Is Shocking).” The Sovereign Investor. The Sovereign Society, 8 Dec. 2016. Web. 8 Dec. 2016.

Elections Impact on the Stock Market

trump-hillaryIt seems to be all anyone can talk about for the last few months.  This is a very strange election year with crazy headlines and stories to go along with it.  So we have gotten the question “How will the presidential election effect the market?” just about every day.   For questions like this I am glad I have my crystal ball with me at all times so I can tell my clients exactly what is going to happen.  O wait, I don’t have a crystal ball.

Historic Returns

Looking back at election years since 1928, the S&P 500 (Large US Stocks) has had a positive return 21 times, and a negative return 3 times (1).  I think most people would find that hard to believe.   From another source I found this interesting data.

“Since 1833, the Dow Jones industrial average has gained an average of 10.4% in the year before a presidential election, and nearly 6%, on average, in the election year. By contrast, the first and second years of a president’s term see average gains of 2.5% and 4.2%, respectively. A notable recent exception to decent election-year returns: 2008, when the Dow sank nearly 34%. (Returns are based on price only and exclude dividends.)  But no one needs to tell you that the current cycle is anything but average. The Dow racked up an impressive 27% in the first year of President Obama’s second term, and 7.5% in year two. Last year, which was supposed to be the strongest of the cycle, saw the Dow Industrials drop 2%.” (2)

Republican vs Democrat

This is another interesting topic that divides people throughout the country, but is there any stock market effect based on which party gets into power?  Looking at the numbers, since 1900 Democrat presidents have been slightly better for stocks than Republican presidents.  The Dow (US Large Stocks) return when a Democrat President was in office was about 9%, vs the nearly 6% when a Republican was running things.   But normal variations in annual stock market returns dwarf that difference, says Russ Koesterich, chief investment strategist at BlackRock.  (2)

False Patterns

The worst thing an investor can do is get caught up in trying to find and take advantage to patterns in the stock market.  It seems like a good idea, but trust me, it is not in your best interest.   For example, there is a super bowl stock market predictor, which states that if the team that wins the Superbowl is a team that had its roots in the original National Football League, then the stock market will decline.   There is another pattern showing that every mid decade year ending in 5 (1905, 1915, 1925 etc.) since 1905, has been an up year for stocks. (1)  These patterns are just random facts that people try to turn into something that seems important.

In Conclusion

So the best and most honest answer to the question “How will the presidential election effect the market?”, is “I don’t know, but over the long term, stocks have made between 9 and 12% per year on average.”

By Jimmy Hancock

References

1.Anspach, Dana. “How Does the Stock Market Perform During Election Years?” The Balance. About Inc., 16 Oct. 2016. Web. 01 Nov. 2016.

2. Smith, Anne Kates. “How the Presidential Election Will Affect the Stock Market.” Www.kiplinger.com. The Kiplinger Washington Editors, Feb. 2016. Web. 01 Nov. 2016.

3. Donald Trump and Hillary Clinton Together. Digital image. Fabiusmaximus.com. N.p., n.d. Web. 1 Nov. 2016.





The Peter Lynch’s of the Investing World

peter-lynchBack in the glory days of the 90’s when every investment guru or guru wannabe had, as Andy Warhol duly noted, their 15 minutes of fame, we had our share of these gentlemen and ladies. Lately I’ve been reminded of some of these 15 minute wonders and I thought that a reminder of them might prove useful to investors of today who either have never heard of them or whose memories of them has faded.

So, whatever happened to…?

One in particular that I remember was Peter Lynch, the legendary(?) manager of the Fidelity Magellan fund. A question that I always seemed to be asked in those days was: “how do you explain Peter Lynch.” The esteemed Mr. Lynch it seems had managed with his fund to have surpassed the S&P 500 in ten of the preceding eleven years. A very nice record indeed. I had a very simple reply: “he was lucky.” Now that’s not sour grapes. The record is what it is and it speaks for itself. However, when one looks at the landscape of mutual funds in those days, statistically there should have been three funds that were able to deliver that record. In other words, given the number of funds out there at the beginning of the measured period, one would have expected three to have achieved this result. Moreover, if it were really skill that was involved, then Lynch, after he left Magellan should have been able to continue delivering superior results (his best timing move ever because he left at the top and subsequent managers using the same strategy were never able to deliver similar results thereafter). The historical reality was that he left the fund and became an editor of Worth Magazine where he provided his monthly stock picks — none of which were ever able to perform as his picks had in the past. Fleeting fame and glory!

Moreover, chasing his performance proved to be a futile endeavor. The reality was that at the start of his run (wouldn’t you liked to have been there for the full ride?) there were only a little over 7,000 investors. When he left, they numbered in the hundreds of thousands. Very few — particularly those who remained after he left — actually earned the record returns he had made. A not uncommon phenomenon among investors.

Another shooting star — one that I remember from a PBS news program about what was going on during the dot com/technology bubble — while it was going on so that it actually helped to promote the expansion of the bubble — was one Garret Von Waggoner. This gentleman was the true guru of the technology boom. My goodness, he grew 291% in 1999. Who wouldn’t have wanted to hitch their wagon to his star? A $10,000 investment in 1997 would have grown to $45,000 by March of 2000. Of course, very few were there at the start and most came on board later during his run. So how did investors do?

They lost 21% in 2000; almost 60% in 2001 and 65% in 2002. That $45,000 amassed by 2000 would have dwindled to $3,300 by the end of September 2002. By 2010, his fund, was now named the Embarcadaro Absolute Return Fund and any investor who had the stomach to hang on for the full thirteen year ride would be sitting with just $1,900 to show for both their patience and his supposed skill! Yet, he was touted as the second coming of Peter Lynch at the time.

Another “Legendary Investor” that comes to mind is Bill Miller. He gained, as the press described it, “rock star status” running his fund for Legg-Mason. The fund beat the S&P for fifteen consecutive years from 1991 (take that Peter Lynch). Morningstar named him not only a manager of the year, but manager of the decade.

Subsequently, in later years and in particular 2007 – 2008, his fund fell 55% when the S&P fell 37%. He had bought into housing stocks and financials at exactly the wrong time! He then stepped down from the fund. Subsequently he made a comeback with a different Legg-Mason fund in 2012 & 2013. The fund’s performance has suffered since then. Morningstar’s “manager of the decade” was now the recipient of only one star (their lowest rating). This year, so far, the fund is down 8.5% versus a gain of 7.88% for the S&P 500. A spokesperson now advises: “The fund had a significant struggle this year… The market got concerned about economic weakness and we saw a massive selloff in cyclical stocks.” Well, duh, what happened to the revered prescience of this “rock star?” Miller, of course, providing the reason for the article, has stepped down.

What can one glean from all of this? Beware of shooting stars — they often flame out with negative consequences for those who hitch their wagons to them. Beware of hubris whether belonging to one of these “stars” or in your own character. The stars and events eventually will line up against them and you and they and you will learn humility — likely in a most financially painful way!

References

  1. Taylor, Fred. “Commentary, September 6, 2016: Shooting Stars and How Fleeting Is Fame.” Message to the author. 6 Sept. 2016. E-mail.
  2. Peter Lynch. Digital image. Gurusblog.com. N.p., n.d. Web. 20 Sept. 2016.

Market Timing: Winners and Losers

Idaho Falls roth IRA Wall Street wins and investors lose every time market timing is done.  So what is market timing and are you losing returns because your money manager is doing it?  Or even worse, have you been caught doing it all on your own?

According to Investopedia, market timing is “The act of attempting to predict the future direction of the market, typically through the use of technical indicators or economic data. ” 1.

If you have ever watched any of the financial channels on TV, or been on a financial website like Yahoo Finance, they are constantly promoting Market Timing.   Every day I check Yahoo Finance there is some new trend that somebody has predicted in the market.  One day they say, this bull market is just getting started.   Then the next day they say, indicators say that market is in for a huge downturn.   Which one should we believe, or would our retirement portfolio be better off if we just avoided the market timers opinion?

Academics and Research

Listen to what Investopedia has to say further about market timing…

“Some investors, especially academics, believe it is impossible to time the market. Other investors, notably active traders, believe strongly in market timing. Thus, whether market timing is possible is really a matter of opinion. ” 1. 

I am going to go with the academics on this one.   I have the data to prove that market timing does not work.

CATEGORY 1986-2015 Annualized Return
S&P 500 Index 10.35%
Average Investor – Stock Fund 3.66%
CPI (representing Inflation) 2.60%

*2.

As we see here in this little chart, if an investor would have just been invested in the S&P 500 for the last 30 years they would have gotten over an 10% return.   But what did the average stock fund investor get?   3.66%.  That is just over inflation.

Why?

So why did the average equity investor lose almost 7% annual growth in their portfolio?  A part of that is due to costs, but the vast majority is because of market timing.  Investors seem to almost always be wrong when it comes to deciding when to be in the market and when to take their money out.

Lets take 2008-2009 as an example.   The end of 2008 the market is taking a nose dive and what does everyone tell you to do.  Get out of the market.  So you take your money out because of the fear that it will never come back.  Ultimately you are selling low.  Then on March 9, 2009 the bottom finally hits and the market begins to take huge jumps upwards.  But you are not invested so you get none of that growth.  When you decided to get back in you were buying high.  The market today is reaching new highs and is way past where it was before the crash in 2008.

The most simple thing to say in investing is buy low and sell high.  Obviously it is not that simple to actually do.  Market timing is detrimental to your long term retirement goals.

– By Jimmy Hancock
References

1.”Market Timing Definition | Investopedia.” Investopedia. Investopedia US, n.d. Web. 16 June 2014. <http://www.investopedia.com/terms/m/markettiming.asp>.

2. Matson Money. Separating Myths From Truths, The Story of Investing. N.p.: n.p., n.d. PPT.

3. Ticking Time Bomb. Digital image. Ipkitten.blogspot.com. N.p., n.d. Web. 29 Aug. 2016.

 

Do You Have the Investor Instinct?

choose instinctsMany investors and young potential investors are still scared out of their minds because of what happened to a lot of innocent investors in 2008.  I have heard a few horror stories of people who supposedly lost all of their retirement money because of the crash.  Many young professionals are scared of the stock market because of the stories they have heard from their parents and grandparents.  But is the stock market really the issue, or is bad decision making also involved?

The Horror Story known as 2008

This is what happened to the average investor in 2008, instincts kicked in.  What I mean by that is that the average investor thinks that when the stock market is headed downward, it is going to keep going downward in a never ending spiral until the world ends.  That is just our instinct as human beings.  So as an investor, the obvious thing to do if you believe that, is to take your money out of stocks and put it in bonds, a bank account, or even under your mattress.  But the term that I use for that is selling low.  By the time most investors could get their money out of the stock market in 2008-2009,  it was already down 20 maybe even 40%.    Let’s take a look at the numbers.

Pain and Pleasure

On your statement at the end of 2008 you see that your small US stocks were down 38.67%.  You lost almost half of your hard earned money!  You also notice on the news that long term bonds were up 25.8% during 2008.  What does instinct tell you to do?  It tells you to leave the pain that stocks are inflicting upon you and go to the pleasure of bonds.   But is that really the best decision?

Regardless of what we know happened after the crash, it is ALWAYS a bad decision to sell low, and buy high.  But in the moment it doesn’t seem like that is what you are doing.  So let’s say you sold out of stocks and bought into bonds at the beginning of 2009.  Then at the end of 2009 you get this horrifying statement.  Long term bonds are down 14.09%.  What?  How could this happen?  You then search online and see that small US stocks were up 47.54%!   You managed to lose half of your money while those stock investors who didn’t do anything during this time did twice as good and made their money back.

I personally know people who did this, and their families are now forever afraid of the stock market.   These people blame the stock market when it was really their own emotions and fear that was the problem.   The stock market is way higher than it was before the crash in 2008 and continues to reach new highs as usual.

The Success Story known as 2008

Those investors who saw the largely negative numbers and heard the panic throughout the world, yet stayed disciplined made out like a bandit.   The best investors did exactly the opposite of what instincts told them to do, that is they bought more into stocks when the crash was happening and the prices were discounted, and sold some bonds while they were high.  Those people especially have been rewarded for their discipline.

The Next Crash

We all know crashes are a part of the stock market and are a regular thing.  The stock market has always come back lightning fast after a crash.  So are you going to go with your instinct and panic, or are you going to stay disciplined.

By Jimmy Hancock

References

1. Matson Money. Mind Over Money Powerpoint. Mason, OH: Matson Money, 2 Aug. 2016. PPT.

2. Graphic Design Schools. Digital image. Practicalpedal.com. N.p., n.d. Web. 2 Aug. 2016.

 





Post Brexit Positivity?

Ever wonder if there is anything on the news media that wasn’t focused on negativity, fear, and panic?  Lucky for us when Mark Matson, CEO of Matson Money, goes on the news media he takes a very different approach.  He focuses on real long term investing principles rather than what investors should do based on the big fear of the moment.

So the Brexit vote happened, and there has been a lot of discussion about the downward spiral it would send the world into.  This video clip is via Fox Business and is Mark Matson’s take on the stock market and world after the Brexit vote.

Instead of a regular blog this week, I want you to watch this quick 3 minute video that teaches quite a few good investing principles.

http://markmatson.tv/brexit-on-fox-business/

(note: you have to click on the link to view the video, not the picture)

 

mark fox business brexit

By Jimmy Hancock

References

Brexit on Fox Business. Perf. Mark Matson. N.p., 1 July 2016. Web. 1 July 2016.

 





Picking Winning Stocks

buy sellYou think you can pick winning stocks consistently, and I’m here to tell you that you can’t.   But even if I cannot convince you that you can’t pick stocks, I hope to at least convince you that it is not in your best interest to try.   We look at examples like Warren Buffet and see how much success he had “stock picking”. But the funny thing is that Warren Buffet believes that the best strategy for most investors is to buy low-cost index funds.

Bad Advice

The most dangerous advice in investing is often that which seems most practical, which is why the worst investing advice you will likely ever receive is that you should try to pick “good” stocks and sell “bad” ones. Yes it seems very sensible and almost too obvious that you should try to do this.  You will get this advice like this from innumerable sources, including a lot of investment advisers, friends, work associates, and most especially Wall Street/investment media. But…You should ignore it.

If you pursue a stock-picking strategy, you are almost certain to lag the market.

Stock pickers always underestimate the number of variables that are involved in the pricing of stocks.  There are literally trillions of variables that could occur on any given day that could change the price of a stock instantly.  Stock prices are based on every single investor which all have different feelings about companies, reasons for investing, and regional bias.

The big problem for investors is that even though stock-picking usually hurts returns, it’s extremely interesting and a makes for a great conversation. If you are wanting to wean yourself of this bad habit,  the first step is to understand why it’s so rarely successful. The quick answer is that the overall market provides most investment returns, not particular stock picks, so stock pickers get credit for gains that came merely from being invested in stocks generally.

Although it is relatively easy to pick stocks that beat the market before costs (just like a monkey you have a 50% chance), it is much harder to do so after costs are added in. So lets say you happen to pick stocks well enough to boost your return by a couple of points, the expenses you rack up along the way (ie. research, trading, taxes) will usually more than offset your gain.

Most stock pickers believe that they are among the 1% of investors who happen to beat the market after costs, and, for inspiration and encouragement, they point to legends such as Warren Buffett and Benjamin Graham. But as I mentioned before, such investors often don’t know that even Buffett has said that the best strategy for most investors is to buy low-cost index funds and that the great Benjamin Graham eventually changed his mind to advocate a passive approach to investing.

Stock picking is not only a dangerous activity for you to be involved in as an individual investor, but it is also dangerous to invest in mutual funds that employ stock picking strategies.  These stock picking strategies are used in most of the mutual funds out there, also known as active investing.  These mutual fund managers think they have a crystal ball and can predict the best stocks and drop the worst ones.

The Opposite of Stock Picking

Instead of stock picking, invest in a globally diversified portfolio managed by a low fee investment coach that will help to educate you on the investing process.  Instead of constantly turning the portfolio over by stock picking and active trading, buy and rebalance when necessary.  Long term you will see the fruits of your decision.

By Jimmy Hancock

References

1.Blodget, Henry. “Why the World’s Greatest Stock Picker Stopped Picking Stocks.” Slate Magazine. N.p., 22 Jan. 2007. Web. 28 Jun. 2016. http://www.slate.com/articles/arts/bad_advice/2007/01/stop_picking_stocksimmediately.html.

2.Stock Market People. Digital image. Opinion-forum.com. N.p., Aug. 2012. Web. 28 June 2016. <http://opinion-forum.com/index/wp-content/uploads/2012/08/stock_market.jpg>.