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>.





What is a Wall Street Bully?




wall street bullyWall Street Bullies are not just found in New York City, they are found in investment brokerages throughout the country.  In fact, your investment guy, might just be a wall street bully.

I explain a Wall Street Bully as an individual or institution that uses fear, greed, intimidation, and misleading information to get an investor to act in a certain way.

The core issue behind all of this is that people that work on wall street make money every time there is a trade made on stock or other security.   Acting like any salesman, it is in their best interest to get people to buy and sell every week, every day, every hour.  But the problem is, actively trading by buying and selling on impulse is not in the best interest of the long term investor.

Wall Street Bullies try to take advantage of under educated and uninformed investors by instilling fear in them and getting them to become short term focused even when they are long term investors.  They create the illusion that they are genius’s that can outsmart the market with little to no risk if you just trust them.  There are 3 main types of Wall Street Bullies as stated by Mark Matson in his book “Main Street Money”.

The 3 types of Wall Street Bullies

The Conman

This is the easiest one to identify, at least after they have been convicted.  Think of Bernie Madoff.  These people gain your trust with a great reputation and promise you great returns with no risk or downside.  If it seems to good to be true, it probably is.  Often times these con men send out false statements showing growth when in reality they are stealing your money.

The way to protect yourself from a con man is to never allow someone to manage your money that does not use a third party custodian to hold the money.  Without a third party custodian, the fox is guarding the hen house.   There were a lot of so called “sophisticated” investors who got caught up in the Bernie Madoff scheme and lost millions of dollars.

The Prognosticator

There is no shortage of self proclaimed genius fortune tellers who will convincingly claim that they know exactly what is going to happen in the stock market in the short term future.  They pull out charts, graphs, economic theories and data galore.  Investing in the stock market would be a whole lot easier if these “experts” really could predict the short term future.  Ultimately they are trying to sell newsletters or get media attention for their hedge fund or alternative strategy they are selling.

If your portfolio needs a prediction about the future to be successful, it is already broken.  If anyone tells you they know what the market is going to do in the next few days, or next few months, don’t walk, run away.

The Guru

These are the sharply dressed people you see on the front cover of any investment magazine.  They are the ones have beaten the market in the past and think they can continue to do it forever.  They are reported to have amazing insights into which stocks are undervalued and which stocks to stay away from.  But the issue here is, there is ZERO correlation between a Guru’s market beating performance in the past and his ability to do it in the future.

Guru’s are the most common form of Wall Street Bully.  Many investment advisor’s, Brokers, and money managers claim to be guru’s who study and pick the best stocks that will beat the market as a whole.  Staying away from them can be hard, but instead, you should work with a investment coach who educates you on why stock picking is not necessary to have a successful long term portfolio.

What should you do?

At Preferred Retirement Options, we call it Bully Proofing Your Portfolio.  Not all investment professionals are Wall Street Bullies.  We help our investors follow the simple rules of investing, which are own equities, diversify, rebalance.  No crystal ball is necessary.

By Jimmy Hancock

References

  1. Wall Street Wolf Cast. Digital image. N.p., n.d. Web. 20 Nov. 2016. <http://tse1.mm.bing.net/th?&id=OIP.M1ee62057658b9c97e8d311a77a7a7d78o0&w=300&h=204&c=0&pid=1.9&rs=0&p=0&r=0>.
  2. Matson, Mark E. “1.” Main Street Money: How to Outwit, Outsmart & out Invest the Wall Street Bullies. Cincinnati, OH: McGriff Pub., 2012. 3-5. Print.



3 Simple Rules

With our Myths of Investing presentation coming up in Idaho Falls today I would like to go over a part of the presentation discussing the 3 simple rules of investing.  Investing can be very complicated and confusing, but it also can be very simple.  Today I am going to try to simplify investing with these 3 rules.

1. Own Equities

Equities is just another word for stocks.  Why is this the first and most important rule?  Stocks have historically out performed fixed income (Bonds/Money Market/Savings Accounts) over the long term, and that is including the few crashes we have had.  In fact, that battle is not even close, especially now that fixed income has stayed so low the past few years.  Check out this chart which compares the annual return from 1926-2013 of the S&P 500 (Stocks) with Treasury Bills (Fixed Income).

stocks vs bonds

You can see Stocks have outperformed Fixed income by over 6% per year over the long term.  It is obvious to see the long term advantage of owning stocks in your retirement portfolio.

2. Diversify

Diversification, if done correctly, can increase return and decrease volatility (Risk).  Diversification in your investment portfolio is measured in part by the number of stocks you are invested in, as well as the different categories and countries those stocks are located in.   For example, if you invest in the S&P 500 Index, you are investing in 500 very large US companies.  You are not really diversified if you only invest in the S&P 500.

There are many different categories of stocks to invest in.  There is Micro cap (very small companies), Small Cap, Value, Growth, International.  Matson Money specifically invests our clients in over 12,000 stocks in all of those categories throughout the world.

The benefit of diversification is to lessen the risk that any one stock or group of stocks will crash, go bankrupt etc.   The standard deviation (volatility) of your portfolio can also be managed through proper diversification.

3. Rebalance

Rebalancing at a simple level is just buying low and selling high.  If your portfolio is 50% in Stocks and 50% in fixed, rebalancing would keep it that way through many different market swings.  If stocks go up faster than fixed, then you need to sell stocks (high) and buy fixed (low), and the other way around if the opposite happens.

Rebalancing most importantly keeps your portfolio at the risk preference that you choose, and especially helps to reduce risk in down markets.   It can also give your return a slight boost over the long term as well.

Now that you know the 3 rules of investing, you need an investment coach that understands and implements these rules as well.  If you can keep these 3 rules then your retirement portfolio will be in good shape over the long run.

By Jimmy Hancock

Reference

Matson Money. The Market Factor. Digital image. Matsonmoney.com. N.p., 23 July 2014. Web. 4 Nov. 2014. <https://www.matsonmoney.com/>.



When is it Safe to Get In the Market?

riskPerhaps one of the biggest challenges that investors face is determining if “right now” is a safe time to invest (meaning not just the present, but any time). What makes it difficult for investors is a twofold issue: first, is a lack of historical knowledge and perspective, and second, their own emotions. Actually, if one looks back on an historical basis, it would have appeared that there was no safe period in which to invest. Investors are really funny in this regard (actually most advisors are really no better). In 2009 investors were in shell shock coming out of the 2008 financial debacle. By 2013 it was really too good and couldn’t last. Last year the market had been going up for five years and that was just too good to be true and something had to come crashing down soon. And this year, there has been volatility and fear mongers from day 1.  What investors are looking for is something that does not exist—ever—a “Goldilocks” market!

I’m going to take some historical facts and figures to provide some historical context that may enable my clients to feel more comfortable when faced with the ongoing question of “is it safe.”
The first issue that investors must confront is that there is no such thing as a “safe” investment and this applies whether funds are invested in equities, bonds, government fixed income, gold, real estate, your mattress or in a coffee can in the back yard. Your money is always subject to one form of risk or another. For a more complete discussion on this subject read Main Street Money by Mark Matson. If you don’t have a copy let me know and I will get you one.
In this blog, I’ll confine myself to discussing equities and fixed income contained within a diversified portfolio that is periodically rebalanced, with dividends and capital gains reinvested, because that is what we do with our client’s money. Let’s take a decade by decade look at all the challenges investors have faced.

1920’s
• 1917-23 Russian Civil War
• 1922 Mussolini takes control of Italy (eliminates private ownership, total government control!! Hmm!)
• 1923 Hyperinflation in Germany
• 1926+27 Chinese Civil War
• 1929 Wall Street Crash
• 1929-39 Great Depression
A horrible period to be invested in the market—manic market followed by the 1929 crash. Yet a fully diversified portfolio had $100,000 growing to $135,000 at the end of the decade.

1930’s
• 1932-33 Holodomor Starvation
• 1933 The Nazi Party come into power
• 1933-45 The Jewish Holocaust
• 1935 US Presidential Candidate Assassinated (Huey Long)
• 1935-1936 Italian/Abyssinian War
• 1936-38 Stalin Purges (including Gulag Death Camps)
• 1936-39 Spanish Civil War
• 1937 The Hindenburg Airship Explodes
• 1939-45 World War II
Talk about a horrific period to begin investing? Probably the worst ten year period, economically we have ever experienced. Yet, $100,000 invested at the beginning of the decade grew to $152,000.

1940’s
• 1933-45 The Jewish Holocaust continued
• 1939-45 World War II continued
• 1945 President Roosevelt dies before the war ends
• 1945 Eastern Europe is dominated by Communist USSR
• 1949-1993 The Cold War
What could be a worse time to begin investing as Word War II was starting, followed by the beginning of the Cold War. Let me interject an investment factoid here. The renown international investor, Sir John Templeton made his initial reputation by borrowing $10,000 and buying 100 shares of every stock on the New Your Stock Exchange selling for less than $1 at the start of the war.
If you had controlled your anxiety, like Sir John, and invested $100,000 at the start of the decade, you would have been amply rewarded by seeing that investment grow to $336,000!

1950’s
• 1949-93 The Cold War continues
• 1950-53 The Korean War
• 1951 Mao Zedong takes power in China
• 1956 Suez Canal Crisis
• 1956 Russian quashing of the Hungarian Revolution
• 1959 The Cuban Revolution
• 1959-75 The Vietnam War
This was supposedly the boring decade under President Eisenhower. However, international events didn’t take a holiday and they continued to swirl about us creating many excuses for avoiding the assumption of any investment risk.
Nevertheless, investors who ignored events and invested $100,000 at the start of the decade had $393,000 in their portfolios at the end of the decade.

1960’s
• 1949-93 The Cold War continues
• 1959-75 The Vietnam War continues
• 1961 The Berlin Wall built
• 1962 The Cuban Missile Crisis
• 1963 JFK Assassinated
• 1964 China explodes its first nuclear bomb
• 1967 Six Day Israeli/Egypt War
• 1968 MLK and RFK assassinated—rioting in major cities
• 1969 Libyan Revolution—Khaddafi comes to power
This was the decade where we got to watch both national and international occurrences in almost “real time” thanks to the expansion of television and global communications. An event filled decade both home and abroad. Plenty of excused could be found as to why it was not safe to invest. Yet again, $100,000 invested at the start of the decade produced a portfolio worth $259,000 by the end of the decade.

1970’s
• 1949-93 The Cold War continues
• 1959-75 The Vietnam War continues
• 1970 The beginning of Terrorism in the world
• 1972 Kidnap and murder of Israeli Athletes at Olympics Games
• 1972 President Nixon resigns
• 1975-79 Khmer Rued in Cambodia (Genocide)
• 1979 Saddam Hussein comes to power
• 1979-1981 Iranian kidnapping of U.S. Embassy and diplomats
This decade begins with Vietnam, followed by the Nixon resignation, then the Iranian Embassy kidnapping, and ends with President Carter’s “malaise.” Gas lines, international problems, national embarrassment and a Russian bear looking more ominous.
Yet somehow if one was courageous enough to invest $100,000 at the beginning of the decade, it would have grown to $271,000.

I could go on with the history lesson, but suffice it to say that the 80’s decade rewarded $100,000 by growing to $453,000. In the 90’s it grew to$338,000.
This last decade, which was sort of known as the “lost decade” because of the dot.com/tech bubble, the real estate bubble. This resulted in two severe bear markets. Still investors were rewarded by having their portfolio vastly outperform the underlying cost of living and inflation.
So the lesson for all is that if one pays attention to events, you can always find a reason why it is not a good time to invest—and historically, you would have always been wrong!! I will not say anything about the world we find ourselves in today because we have always found ourselves in difficult times both domestically and globally—there have always been challenges and there always will—it is just the nature of the species.
As to the basic question: Is it safe? I’ll let you draw your own conclusions!

By Jim Hancock

References

Source of returns figures for the various asset classes utilized in the hypothetical portfolio: DFA Returns Software 2.0, Feb. 2011. Past performance is no guarantee of future results. Performance included reinvestment of all dividend and capital gains.

1.Taylor, Fred. “Commentary: Is It Safe?” Message to the author. 6 Aug. 2014. E-mail.

2. Matson Money. But This Time it Really is Different. N.p.: n.p., n.d. PDF. https://www.matsonmoney.com/

Should You Be Investing Based on Track Record?

track recordIt 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 6S, 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 Return    2005-2009               2010-2014

Top 30 Rated US Stock Funds from 05-09                   6.10%                       1.65%

All US Stock Funds                                                   0.80%                     13.24%

So the “top 30” funds from 2005 to 2009 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 do it.  2010 through 2014 come, and your fund gets beat by the market by 12% annually for 5 years.  That’s almost 60% total growth that you missed out on.  Plus you missed out on the 4 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 don’t need 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.  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.

Considering Buying Gold? Read This First

gold2We have all seen the advertisements 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 dont 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 $1,115.60.  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.  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., 18 Aug. 2015. Web. 18 Aug. 2015. <http://finance.yahoo.com/>.

The Worst Investment Advice Ever

bad adviceI 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, about a week ago this was the headline that couldn’t be missed.

Economist Predicts: “The Greatest Stock Market Collapse since the Great Depression”.

Talk about a bold prediction.  And the picture associated with the headline was the most intriguing part for me.  It was the one and only Harry Dent.  Although his name and actions are similar, don’t get him mixed up with Harvey Dent, the 2 face villain in “The Dark Knight”.   Obviously this caught my eye, so laughing I clicked on the link and it took me to the article.   This is where it gets comical.

This is the first paragraph…

“The man who called nearly every major economic trend over the past 30 years…including the 1991 recession, Japan’s lost decade, the 2001 tech crash, the bull market and housing boom of the last decade and, most recently, the credit and housing bubble has issued a startling new prediction.” 2.

The man they are talking about, Harry Dent, is the same man who in 1999 wrote the book “The Roaring 2000’s, which predicted the greatest boom in  the US stock market history.   Just so you know, from 2000-2009, the annual return of the US Large Stocks was -0.95% per year.  Nice try Harry! 1.

Then in 2009 (yes, after the crash of 2008) wrote a book entitled, “The Great Depression Ahead”…   Speaking of which, the US market has bounced back in an incredible way and has yet to have even a down year since the book came out.

The filth continues…

“In fact, Dent says, “We’ll see a historic drop to 6,000… and when the dust settles – it’ll plummet to 3,300. Along the way, we’ll see another real estate collapse.  Gold will sink to $750 an ounce and unemployment will skyrocket… It’s going to get ugly…  This is not fear-mongering. This is today’s economic reality” 2.

If this is not fear mongering I don’t know what is.  Any investor who reads this junk has fear and panic running through their blood.  This is so detrimental to the investor.  We all know that diversified portfolios that are prudently invested in multiple asset categories will get you great returns over the long term.  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.

“He says those who position themselves accordingly beforehand could have the opportunity to earn millions through specific “decline-related” investments year after year, over the next decade as well as maximize the next long-term “boom cycle,” which he predicts will begin between early 2020 and late 2022.  The controversial video, initially released to a private audience, has gone viral as hundreds of thousands are seeing new evidence for a looming economic crisis, and are heeding Harry Dent’s advice to survive and prosper.” 2. 

Wow, that is the worst investment advice ever given.   Harry Dent is in the business of making money off of peoples fear and greed.  The more fear he can put into the investors, the more money and fame he will get.

I advise you to stay away from the fortune tellers of Wall Street.  Nobody, especially Harry Dent, 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. Matson Money. MOM Powerpoint. Mason, OH: Matson Money, 9 Jun. 2015. PPT.

2. Economy & Markets Daily. “Economist Predicts: “The Greatest Stock Market Collapse since the Great Depression”.” Economist Predicts: “The Greatest Stock Market Collapse since the Great Depression”.Economy & Markets Daily, 8 June 2015. Web. 09 June 2015.