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/

The Role of Bonds in your Portfolio

Today we are going to discuss the basics of bonds and how they can help you achieve success in your retirement portfolio. 

Bond- “A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate.” 1

Short term quality Bonds should make up a percentage of your total retirement portfolio.  What percentage of bonds you have compared to stocks is up to you and should be planned according to your age and risk preference.

The Benefit of Bonds

Bonds are much less risky than stocks generally speaking, especially short term Triple A quality bonds.  A bond will give you a set rate of return each year.   Putting bonds in your portfolio helps to lower the overall standard deviation, thus helping to smooth out the performance.

Another advantage of having bonds in your portfolio is that they are not correlated with the price of stocks.  Often times bond rates and stock prices move in opposite directions although not always.  This means that bonds can give you big downside protection in case there is a big down turn in stocks.

The Risk of Bonds

Bonds come in many different types.  Some bonds, like long term (10 to 30 years) junk bonds can be extremely risky and lose their value quickly.  Long term junk bonds can give you a slightly higher rate, but have a much bigger chance of being defaulted and you losing your money.   Investing in long term bonds can also be dangerous especially in a time like now.  The current rate for a 30 year bond is about 2.32%. 2   That is extremely low and most people expect that to increase dramatically in the future.  If you get stuck in a 30 year bond at that rate, and the rate jumps to 4%, then your bond value has dropped by an extreme amount.  You can either sell the bond at a big loss, or suffer the consequence of receiving 2% per year while everyone else is getting 4%.  

Bonds Vs. Stocks

To finish off, I will explain why bonds should not be used as your main source of portfolio growth.  The historical return for Bonds are minimal compared to a diversified group of stocks.  Check out the chart below. 3

  • Hypothetical US Stock Mix
  • S&P 500
  • Long Term Bonds

bond trap
This chart shows 30 year rolling returns of these 3 asset categories from 1927 though 2013.  You can see that bonds have never had a better 30 year return than a diversified stock mix.  Bonds will lose to stocks over the long term every time.  This is important to know as you decide the percentage of bonds you want in your retirement mix.

Short term quality bonds should be a part of your portfolio, but make sure you work with an investment coach to decide exactly how much.

By Jimmy Hancock

 

References

1. Investopedia. “Bond Definition | Investopedia.” Investopedia. Investopedia, LLC, 23 Nov. 2003. Web. 28 Jan. 2015.

2. Yahoo! “Bonds Center.” – Bond Quotes, News, Screeners and Education Information. Yahoo!, 29 Jan. 2015. Web. 28 Jan. 2015.

3. Matson Money. The Long Bond Trap Presentation. N.p.: n.p., n.d. PPT.

3 Signs you are Gambling and Speculating with your Investments

Investing in Stocks can seem very speculative and dangerous to people that don’t understand how it works.  If you have an investment coach that helps you to invest in a globally diversified portfolio, then you have avoided the 3 big mistakes in investing.   The 3 signs you are gambling and speculating with your investments are stock picking, market timing, and track record investing.  I will go over the detriment of each one briefly.

1. Stock Picking

Stock Picking is when you, or your advisor, think that you know exactly which company stocks are going to go up, and which ones are going to go down.  You think you know who the next Google is going to be.  First of all, let me tell you why this is not possible.

There are so many bullies on Wall Street and investors throughout the world that are buying and selling stocks each day for different reasons.  There is no way for you to predict the way every investor will feel about a company stock.  There are also random events and economic news that can effect individual stocks in a big way.  Unless you have a crystal ball and can predict the future, you cannot pick winning stocks continuously.

Now let me tell you why stock picking is so detrimental to your portfolio.  Every time you buy and sell a stock, there is a cost associated with that.  Also, if you are stock picking, you are most definitely not diversified, and are increasing your risk astronomically.

2. Market Timing

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?

Market timing has shown to be a huge detriment to your investments.  In a study done by Dalbar, the average investor over the last 30 years has gotten beat by the S&P 500 by over 7% per year.  The reason for that is because these investors got in when the market was doing well, and got out when the market was going down.

To better explain why market timing can kill your portfolio performance check out this chart explaining the growth of wealth for the last 20 years, if you stayed invested vs if you timed the market. 2.

market timing

You can see from the chart that if you stayed invested for the last 20 years, your money would have grown close to 5x.  If you pulled your money out for even 5 of the best days during that time, your return would be about $15,000 less according to this depiction.  And then if you look all the way to the right, if you missed the 30 best days, you lose any return at all.

3. Track Record Investing

Track record investing is thinking that because a mutual fund manager was able to beat the market in the past, he will be able to do it again in the future.   If you are looking for a mutual fund, doesn’t it seem right to find one that has beaten the market for the past few years?  That is why this form of speculation can be the hardest to avoid.

Studies show that mutual funds that have done well in the past, are very likely to under perform in the future.  Track record investing is basically just believing that a mutual fund manager can beat the market through methods such as stock picking and market timing.  If you believe in one, you are lured into the other 3 big mistakes.

If you can avoid doing these 3 things, you have taken out a big portion of the risks involved in stock investments.  The key is to stay disciplined and work with an investment coach that educates you and gives you peace of mind.

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.

 

What is Modern Portfolio Theory?

You may have heard the phrase Modern Portfolio Theory but what is it and how can it help your portfolio?

Modern Portfolio Theory-  An idea originated by Harry Markowitz in 1952 explaining the benefits of diversification, and the correlation of risk and return in an investment portfolio.

Harry Markowitz eventually won the Nobel Prize in Economics for his research on this topic.  He stated that as you add to the number of holdings in your investment portfolio, your risk should in turn go down.

Two kinds of risk

“Modern portfolio theory states that the risk for individual stock returns has two components:

Systematic Risk These are market risks that cannot be diversified away. Interest rates, recessions and wars are examples of systematic risks.

Unsystematic Risk– Also known as “specific risk”, this risk is specific to individual stocks and can be diversified away as you increase the number of stocks in your portfolio.” 1.

Modern Portfolio theory states that diversification helps to take away the unsystematic risk that comes along with any stock or even category of stocks.

The Efficient Frontier

Below is a chart created by Matson Money using the principles that Harry Markowitz found and taught.  The chart explains that for whatever amount of risk you are willing to take, there is an optimal return that you can get for that risk level.  The level of risk or volatility is measured by standard deviation.

MPT EMT

2.

There are 5 points on the chart that I would like to explain.  The first 4 are Matson Money portfolios.   The conservative portfolio is made up of 25% stocks and 75% fixed.  Moderate is 50/50, Growth is 75% stocks and 25% fixed, with Aggressive being 95% stocks and 5% Fixed.   Those 4 portfolio types fall on the efficient frontier.  This means that they are diversified to the point of efficiency and reach the highest expected return for the specific risk that you are taking.   Any point that is above that line is impractical in the long term, and anything below the line is inefficient.  Notice the S&P 500 is well below the efficiency line.  This means that for the amount of risk that is inherent in that group of stocks, the return is not optimal.   This is because it does not include small companies with higher expected returns, nor does it include any fixed income to keep the standard deviation down.  Keep in mind this chart and data is based on past performance, and past performance is no guarantee of future results.

If you any questions about this topic or others feel free to leave a comment.

By Jimmy Hancock

 

References

1.“Modern Portfolio Theory: Why It’s Still Hip.” Investopedia. Investopedia US, n.d. Web. 13 Oct. 2014. <http://www.investopedia.com/articles/06/mpt.asp>.

2.Matson Money. TheEfficientFrontierPowerpoint. N.p.: Matson Money Inc., 6 May 2014. PPT.

 

Why Should you Rebalance your Portfolio?

Today we are going to discuss the topic of Rebalancing your portfolio and why it is so important.  I will explain to you how a continuously rebalanced portfolio is one that is constantly buying low and selling high.  

 “Rebalancing -The process of realigning the weightings of one’s portfolio of assets. Rebalancing involves periodically buying or selling assets in your portfolio to maintain your original desired level of asset allocation.”

Say What?

Rebalancing can be very complex and confusing, but I will give a simple example to explain some of the benefits.

For example, lets say you have a retirement portfolio with $50,000 invested in stocks, and $50,000 invested in bonds and money market accounts, aka fixed.  This is the 50/50 portfolio which is pretty safe and best for those closer to retirement.  So you let it go 1 year and lets say it was like 2013 stocks had a great year.   After 1 year you now have $65,000 in stocks and $51,000 in the fixed portion.  You are no longer invested like you wanted to be, and are opening yourself up to way more risk than you originally planned on.   Rebalancing is then needed to sell off what is high, which stocks, and buy into what is low, fixed.  There is never a time when rebalancing forces you to buy high, or sell low.

Rebalancing never seems like the right thing to do at the time.  For example in 2008 when stocks were plummeting, rebalancing would have been selling safety to buy stocks.  If you think about it though, you are buying low and selling high.  During these times you need an investment coach to keep you off the ledge.

So by rebalancing a portfolio, what you are really doing is lowering the risk and keeping to your individual risk preferences.  That is really the main goal of rebalancing, but an added benefit is being able to consistently buy low and sell high.  This can help over the long term to increase your return as well.  Take a look at this chart by Forbes which visually explains all of this.

 

Rebalancing chart forbes

 

You can see from the chart that rebalancing really does its work when the downturns in the market come.  The chart shows that the rebalanced portfolio made more than the portfolio that was left alone, and with much lower risk.

Make sure that your portfolio is being rebalanced at least annually by your advisor.

By Jimmy Hancock

References

1.”Rebalancing Definition | Investopedia.” Investopedia. Investopedia US, n.d. Web. 17 Sept. 2014. <http://www.investopedia.com/terms/r/rebalancing.asp>.

2. Brown, Janet. The Impact of Rebalancing. Digital image. Forbes.com. Forbes, 16 Nov. 2011. Web. 17 Sept. 2014. <http://www.forbes.com/sites/investor/2011/11/16/does-portfolio-rebalancing-work/>.

Is it Safe?

danger thin icePerhaps 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 2012 it was really too good and couldn’t last. Last year the market had been going up for four years and that was just too good to be true and something had to come crashing down soon. And this year, with all the election year rhetoric and world events swirling around us, the stock market now appears to be getting more volatile…? 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 I “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

 
The blog came from two sources: Matson Money Investor Coaching Series—“But this Time it Really is Different” and Fred Taylor—Matson Coach, Atlanta, GA
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.

Second Quarter Market Returns

market dataThere have actually been complaints in the media and news about how “boring” the stock market has been so far this year.  Boring is bad in sports, but in the stock market it is usually a good thing.  There has been slow but steady growth in every single sector and sub sector of the market year to date.   Matson Money sends quarterly reports to all of our clients and to us.  This is what they have to say about the market after quarter Two.

Quarterly Report: Matson Money

“From stocks to bonds, and developed markets to emerging markets, world financial markets have rallied in unison during the first half of 2014.  The Dow Jones Industrial Average was up over 1.5%, its fourth-straight first half-year rise.  In addition, the MSCI World Index of developed-world equities rose 6.52% and the MSCI Emerging Markets Index was also up 6.32% in the first six months of 2014.  The rallies reflect continued market resilience amid world political and economic unrest.

Following last year’s stellar returns and decent first six-months this year, many undisciplined investors may be swaying in their investment strategy.  A couple of years of gains or losses often turn investors, who have planned on a thirty-year investment time horizon, into investors with only a one or two year time horizon.  When investors see losses, they want out; when they see gains, they want in.  Investors’ tendency to extrapolate recent trends in stock prices is well documented.  There are several different studies over the last few years which provide a good amount of evidence that investors’ risk tolerance increases when equity markets are high (when investors should be rebalancing and shifting money out of equities).  And that individuals are most risk averse when equity markets are low (when investors should be buying more equities).  A 2007 study done by Geoffrey Friesen and Travis Sapp found that investors lose on average 1.56% annually in return, because they tend to pull money out of equity mutual funds following a market decline when it is more favorable to buy more equities (buy low).  Conversely investors increase equity allocations following market increases when you should rebalance out of equities (Sell high).” 1

They go on to list the some of the returns of other sectors of the market.

S&P 500 Index- 7.14%

MSCI World Index (Excluding US) – 5.76%

Index: Barclays Cap. U.S Govt./Credit – 2.25%    1.

Verdict?

As you can see, the stock market is in a peaceful positive state as of right now.  We know it will not always be that way.  We don’t and can’t know when the next big drop in the market is, but we can stay disciplined now and when that time does come.   Stay diversified, rebalanced, and focused on the long term and you will make it through any crash.

by Jimmy Hancock

 

References

1. Matson Money. “Account Statement.” Letter to James Hancock. 1 Apr. 2014. MS. N.p.

What is a Hedge Fund?

investment guruAre you missing out on the supposedly huge amount of profits to be made by investing with a “Guru” in his Hedge Fund?

Hedge funds are like mutual funds, but they are managed by self titled experts who charge an enormous fee to try and beat the market.  Hedge funds and Investing Guru’s are built on the premise that a smarter guy with a faster computer can make miracles possible by uncovering inefficiencies in the market or predicting the future.  They are attractive to so called sophistocated investor who wouldn’t be caught dead investing in “boring” index funds.

Do Hedge Funds Beat the Market?

“According to a report by Goldman Sachs released in May, hedge fund performance lagged the Standard & Poor’s 500-stock index by approximately 10 percentage points this year, although most fund managers still charged enormous fees in exchange for access to their brilliance. As of the end of June, hedge funds had gained just 1.4 percent for 2013 and have fallen behind the MSCI All Country World Index for five of the past seven years, according to data compiled by Bloomberg. This comes as the SEC passed a rule that will allow hedge funds to advertise to the public for the first time in 80 years.” 1

Studies continue to come in showing real data of the horrible returns of hedge funds vs. the whole market.

“Harken back to a decade ago. Your broker recommends an investment in a hedge fund. Your registered investment adviser disagrees. She recommends you invest in an index fund composed of 60 percent stocks and 40 percent bonds. You go with the broker’s recommendation. You don’t want “average” returns. You want your money managed by the best minds in finance.

Fast forward to today. According to a Harvard Business Review blog, a composite index of more than 2,000 hedge funds returned 72 percent over the past decade. The index fund, which took significantly less risk, had a return of about 100 percent, while charging much lower fees.

You would think these dismal returns would have dealt a crippling blow to the hedge fund industry. Not so. Hedge funds remain the darling of many pension plans. According to the same blog, hedge funds that go long and short on stocks and invest in equity derivatives managed a mere $865 billion a decade ago. Having demonstrated their lack of investment skill, these fund managers now manage more than $2.4 trillion. Go figure.” 2

Takeaway

Hedge funds are flashy and somehow popular, but if you want long term growth in your retirement accounts you should stay as far away from them as possible.   Instead, invest in a diversified portfolio,  and find an investment coach who will educate you especially in down markets.

by Jimmy Hancock

References

1. Kolhatkar, Sheelah. “Hedge Funds Are for Suckers.” Bloomberg Business Week. Bloomberg, 11 July 2013. Web. 14 July 2014. <http://www.businessweek.com/articles/2013-07-11/why-hedge-funds-glory-days-may-be-gone-for-good>

2. Solin, Dan. “The Fleecing of Investors Continues.” The Huffington Post. TheHuffingtonPost.com, 17 June 2014. Web. 17 July 2014. <http://www.huffingtonpost.com/dan-solin/the-fleecing-of-investors_1_b_5487788.html>.

3 Questions on Diversification

Why is Diversification so important in your investment portfolio?  Before we get to that question there are other more simple questions we need to tackle.  What is Diversification?  How do I know if I am fully diversified?

What is Diversification?

Diversification is “A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.” 1

How do I know if I am fully diversified?

This question will bring different answers from different advisors.  Some people would tell you that you need between 5 and 10 individual stocks to be properly diversified.  If you have 10 stocks you are taking on extreme risk that is not necessary for you to have.   Odds are those 10 stocks are all in a similar place in the market.  Thus all 10 of them will be moving in a similar direction when a correction in the market comes.

Diversification is more than just the number of stocks that you are invested in, although that is very important.   We invest our clients in close to 12,000 individual stocks.  The most important part about that is that we are invested in every sub category of the market in every free country in the world.  Large companies, small companies, international companies, distressed companies, growth companies etc.  We are investing in different economies and different technology.   It would take an extinction level event for all of those stocks to lose their value.

Why is Diversification so important in your investment portfolio?

Take a look at this chart created by Matson Money. 2

 

matson diversification

 

This is a pretty technical chart so let me explain.  This is real data from 1970-2013.   If you were to invest in the S&p 500 you would have gotten a  10.4% return with standard deviation of 16.94.   Sounds great right.  But if you add bonds/fixed income, international stocks, small stocks and value stocks, you end up with a 10.99% return and a standard deviation of 11.07.   That is a higher return with less risk and less volatility.   That is what diversification can do for your portfolio.

By Jimmy Hancock

References

1. “Diversification Definition | Investopedia.” Investopedia. Investopedia US, n.d. Web. 25 June 2014. <http://www.investopedia.com/terms/d/diversification.asp>.

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

Retirement Planning Basics: Investment Accounts

retirePlanning your investments to build a retirement fund can be a dizzying prospect. The various questions and options and details and accounts and amounts are enough to make anyone’s head spin. Wouldn’t it be nice if there was a generic recipe for success? A nice neat list of step by step instructions on how to make the best decisions on where, when and how much when it comes to investing for your retirement. Unfortunately, this list of steps is incredibly dependent upon each individual and their current situation and future plans, so a sure fire success route doesn’t exist.

But before you stop reading, there are a few broad steps that most financial professionals agree will most likely lead you down the right path. By investing your money in retirement accounts by the priority of which will give you the most return, you can take advantage of what each has to offer. Here’s the order that is suggested for the majority of people in terms of retirement accounts.

1. Fulfill Your Company’s Match Program: The exact amount of this will differ for each individual depending on the company that they work with, but whether you have a 401K or a 403b, the best place for your money is in those accounts reaping the assistance of your employer. Match programs offer a two for one that is too valuable to turn down. Before you invest anywhere else, make sure you are investing enough in your 401k or 403b to get your full match.

2. IRA to the Max: There has been a long standing battle between the Traditional IRA’s and the Roth IRA’s. When it comes to your retirement planning, your Roth IRA should win this battle. There are a few different reasons why you should make this move. Investing in a Roth allows you to pay taxes on your income now, and avoid the higher tax rate as it grows in your retirement. Also, investing in an IRA gives you more choices and flexibility than is offered in many 401k plans. You can decide where you want to open your account based on your personal preference or individual situation. This step of maxing out a Roth IRA can change based on the individual though, as some people cannot open a Roth IRA because of their income level.

3. 401k or 403b to the Max: After you have reached your company’s matching level and have maxed out your Roth IRA, turn your funds back to the 401k or 403b until they are maxed out as well. Having both your Roth IRA and your 401k/403b maxed out gives you some variety in your portfolio in terms of how the investments are taxed. This variety gives you something of a safety net in terms of how taxes and other investments change over time and the affect they will have on your funds. As a side note, when you plan to max out your 401k or 403b, keep your eye on the ever changing contribution limits which vary each year.

4. Open Taxable (Non-Qualified) Accounts: If you have filled in the previous three steps, you will find yourself at the final, and most open ended step of the journey. If you are married this could be a joint account, and for the singles it is a personal account. You can use this account as an emergency fund since there are no age requirements to when you can take the money out without penalty.
This plan is not something to jump into without doing your homework. Like mentioned before, there is a reason that no one has created a perfect plan that fits everyone. Depending on your personal income, you might not be eligible for certain funds, like a Roth IRA, or you might be eligible for some accounts that could take higher priority, such as a SEP IRA. But, for most people, looking for a general order of priority for their retirement investments, these four steps are a great place to start.

Authored by Financial Social Media (financialsocialmedia.com) and Jimmy Hancock