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.

 





Do Hedge Funds Beat the Market?

gurusAre 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 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/>.



The Weakness of Index Funds

weaknessYou have probably heard of an Index fund, but you might not have heard of an Institutional fund.  Index funds seem to be getting more and more popular as a means for investing with minimal fees, but institutional funds have been outperforming index funds, and I will show you how.

Index Funds

These type of mutual funds are not actively traded, and the only purpose of the fund is to keep the stocks in their fund that are listed in specific index.  For example, the S&P 500 is an index made up of the 500 largest publicly traded companies in America.  Thus a S&P 500 Index fund would hold those 500 stocks, and that is all.  When the list of 500 companies changes, they sell the companies that exited the list, and buy the companies that jumped into the list.

Institutional Funds

Institutional funds are similar to index funds, but go 1 step further.  These type of mutual funds dont worry about what is listed in indexes, but have specific criteria for evaluating each stock.  They put each of the publicly traded stocks throughout the entire world into different categories based on size, country, and other factors.  They then take those categories and weight them based on nobel prize winning studies like the 3 factor model and modern portfolio theory.   They then can be specifically weighted in a investors portfolio based on each investors risk preference, which is decided by the investor and the advisor together.

The Proof is in the Pudding

Lets compare index funds to the institutional funds offered through us, aka Matson Money.  We will look at real annual returns over the last 15 years from 2000 through 2014 for a few different sectors of the market.   Note, all of the numbers shown are after subtracting of all mutual fund management fees.

Large Cap Value Sector:  

Retail Index Fund*- 5.56%

Institutional Fund Used by Matson Money- 8.44%

Small Cap Sector:

Retail Index Fund* – 8.32%

Institutional Fund Used by Matson Money- 9.46%

International Small Cap Sector:

Retail Index Fund* – 6.48%

Institutional Fund Used by Matson Money- 8.55%       1. 

Doing this type of comparison doesn’t even point out another other obvious advantage to institutional funds.  Institutional funds allow for everyday investors to get into sectors that you cannot get into with Index funds, like micro cap (very small companies), Emerging markets Small and Value (Countries that are less established).  Returns in those categories have been huge going back 15 years as well.

To get slightly more technical, I have included a few more important weaknesses of index funds as written by Dan Solin in a recent article.

1. Flexibility When to Buy and Sell Stocks

An index fund buys and sells stocks when they enter and leave the index. An institutional fund has the ability to reduce turnover and increase tax efficiency by establishing a range that permits it to hold a stock even if it drops out of the index.   2. 

2. Flexibility in Stock Selection

An institutional fund can establish a screen to exclude categories of stocks with historically poor returns, like initial public offering stocks. An index fund manager does not have this flexibility.  2. 

3. Use of Block Trading Techniques

There are sophisticated trading techniques a small cap, institutional fund manager can use that are not options for index fund managers. Because the market for these stocks is relatively small, and dumping a large block can affect the stock price, an institutional fund may be able to buy these stocks at a favorable price from a seller who has an urgent need to liquidate holdings. 2. 

By Jimmy Hancock

*Retail Index Fund numbers come from Vanguard Index Funds

References

1. Matson Money.  Investor Jeopardy Powerpoint. Mason, OH: Matson Money, 3 Aug. 2015. PPT.

2. Solin, Dan. “Solving the Mystery of Passive Asset Class Investing.” The Huffington Post. TheHuffingtonPost.com, 21 Jan. 2014. Web. 23 Jan. 2014. <http://www.huffingtonpost.com/dan-solin/solving-the-mystery-of-passive-asset_b_4627737.html>.

 

Second Quarter Market Recap

newsThe second quarter saw continued small increases in the stock market almost across the board.  The only real loser is the owner of long term fixed income, as rates increased bringing prices down rapidly.  The S&P 500 Index (Large Cap Stocks) rose 0.28% in the quarter, extending its streak to ten consecutive quarters of positive gains. However, for this quarter once again, international equities outpaced U.S. stocks, with the MSCI EAFE Index (International Large Stocks) increasing 0.84% and the MSCI EAFE Small Cap Index (International Small Stocks) rose 5.88%.  1.

The Free Market (Matson Money)  Funds:  Year to Date Returns   1.

US Equity Fund: 2.20%

International Equity Fund: 7.23%

Fixed Income Fund:  0.39%

What can we learn?

The following is education from Matson Money on what we can learn from the recent market trends.

“The market performance over the last several quarters can serve as an educational opportunity for investors. In 2014, the market saw U.S. large cap stocks performing well compared to small cap stocks and international stocks, which could have driven investors to become overly focused on S&P 500 companies. In the most recent quarters however, tides have turned. In 2015, international equities and U.S. small cap stocks have both significantly outperformed U.S. large cap stocks, and investors who became too myopically focused and had forsaken  diversification by neglecting these asset classes would have missed out on the returns.”  1.

“Those investors who are not educated and disciplined with the help of an adviser can easily fall prey to the next trend or news story that will seemingly impact the financial markets. The current occurrence of this is the headlines of the impending Greece default and potential exit from the Eurozone. Those listening to news anchors or reading financial news may be tempted to think that this global economic uncertainty will throw the EU into a tailspin and have a ripple effect across the global stock market. In reality, there have been 47 country defaults since 1975, and the global equity markets have continued to thrive and create wealth for investors over the long-term despite these defaults. “This time is different” is often championed by those in the media, but it is commonly an overused sentiment; the situation in Greece is no different. Prudent investors know that current economic conditions should not change the strategies chosen to accomplish one’s long-term goals.”  1.

By Jimmy Hancock

References

1. Matson Money. “Account Statement.” Letter to James Hancock. 1 Apr. 2015. MS. N.p.

2. Newspaper Clip Art. Digital image. N.p., n.d. Web. 16 July 2015. <http://4.bp.blogspot.com/_apRR_RXoSFE/TEbR89f4k8I/AAAAAAAADp8/s3dFXg2WYUg/s1600/newspaper_bw.jpg>.

First Quarter Market Recap

stock marketThe first quarter of 2015 saw continued gains in most areas.  The S&P 500 (U.S Large) Index rose 0.95% for the quarter, posting its 9th quarter in a row of gains.  A broader defined U.S. stock market fund which includes small and value stocks returned 1.61%. (Matson Money U.S Equity Fund)

Fixed income was in a similar boat as the Free Market Fixed Income Fund was up 0.78%

International Comes Back

These returns were trumped by the much hated international sector of the market.  If you can recall last year almost every international sector was a negative for the year.  But this quarter was obviously a different story with the Free Market International Equity Fund (International Large and Small) boasting a 3.72% return, more than tripling the S&P year to date.

Market Timing

All of those investors that ditched international after its poor year last year are already starting to see their mistake.  U.S stocks have seen the biggest outflow of money since the memorable month of October 2008.   Too bad they already missed a huge buying opportunity when international was low, and missed the run up as well.

The following is a direct quote from Matson Money in their first quarter statement.

“A couple of years or even months of gains or losses often turn investors who have planned on a thirty-year investment time horizon into investors with only a yearly/monthly time horizon.  When investors see losses, they want out; when they see gains, they want in.  The tendency of investors to extrapolate recent trends in stock prices is well documented.  A 1998 study by Clark and Statman found that investment newsletter writers become optimistic after increases in stock prices and pessimistic after decreases.  This inclination to make decisions based only upon recent stock movements is a natural, human emotion-based error.  However, these types of emotional reactions to the market force investors to break from the proven rules of prudent investing: buy low/sell high.  Resisting the temptation to take action because of an emotional reaction is an aspect for which an investor’s self-control is an important first line of defense.  The experience and knowledge of an investment adviser combined with an upfront agreement between adviser and investor can provide a necessary second line of defense when self-control isn’t enough.  ”

by Jimmy Hancock

 

References

1. Matson Money. “Account Statement.” Letter to James Hancock. 1 Apr. 2015. MS. N.p.

Why you Need to Read “Main Street Money”

If you have not read the bomain street moneyok Main Street Money yet, here is a brief into explaining why Mark Matson wrote this book and how it can help you to receive investing peace of mind.  The following is a direct quote from the introduction to the book, “Main Street Money”.1.

“Chances are you’re one of the 95 percent of Americans who are destined to retire broke. It’s not really your fault. Goodness knows it’s confusing out there for the average American trying to secure their financial future. Contradictory advice and information, misleading promises, portfolio-gutting investment strategies – and that’s just from my fellow Wall Street investment professionals. Maybe that’s why the finance industry’s leading lights can be counted on to say one thing one year and the opposite the next. Market timing? It will never work. Oh wait, yes it can. Asset allocation? A big winner – until a real bear market comes around. Buy and hold? The best thing since sliced bread. That is, until the market tanks and the buy and hold model is tossed onto the scrap heap by so-called market experts.

It’s almost like financial professionals want to confuse the investing public. Where is the continuity? Where is the unvarnished truth about investing strategies? Why won’t anyone step up to the podium and admit that nobody can predict the future? After all, people scoff at astrologers and tarot card readers. But some guy in a suit and hang a “stockbroker is in” sign on his door and people can’t wait to see what he has to say during a bull market or during the latest market crash. There is no shortage of talking heads who pretend they have the forecast about the future that will magically allow you to own all of the best stocks and get into and out of the market at the perfect time.

These prognosticators prey on the psychology of Main Street investors. Often causing them to take risks they don’t understand and lose more money than they could possibly imagine. I call these posers Bullies because they take advantage of investors to line their own pockets with your hard-earned money. The money you will need for your retirement and most important life dreams. But it doesn’t have to be that way. I can teach you how to outwit, outsmart, and out invest the biggest Wall Street Bullies and icons. And help you create true peace of mind in your investing experience. And the good news is that it is not that hard. Once you are armed with the basic knowledge you need, you can adopt an investment philosophy and strategy beats the vast majority of all the blow-hards on Wall Street. You will soon see that your problems are their profits – the trick to getting their hands out of your pockets once and for all. Make no mistake, Wall Street does not want you to read this book and they don’t want you to take the actions outlined in this book.”  

If you would like a copy of this book, get in touch with us and we can get one for you at no charge to you.  We give out copies at our monthly coaching classes.  It is our job to educate investors about the wall street bullies.

References

Matson, Mark. “Changing the Status Quo.” Introduction. Mason, OH: Mcgriff Video Productions, 2013. IX-X. Print.

Mark Matson Appearance on Fox Business

Today for the blog we are changing things up.  Instead of written information, we want to share a video of Mark Matson, Founder of Matson Money, from his appearance on Fox Business this past week.

In this clip he talks about recent actions of the Fed, and how the Fed does not control the stock market.  He also mentions how to prudently invest long term in stocks.  He also brings up the risk of being in long term bonds right now.

Check out the short but very informative 2 minute video of Mark Matson.

http://markmatson.tv/can-the-fed-move-the-market/ 

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

mark matson video

 

References

1.Can the Fed Move the Market? Dir. Mark Matson. Perf. Mark Matson. Can the Fed Move the Market? Fox Business, 20 Mar. 2015. Web. 24 Mar. 2015. <https://youtu.be/w5EXD7EmgpQ>.

Main Street Money Quotes

IMain Street money book cover hate to get personal on the investing blog, but things have been crazy around our office.  My wife just had our first baby a week ago, and we have a business trip to Scottsdale all week.  For the blog, I have decided to keep it short and post some quotes from Mark Matson, Founder of Matson Money.  They are from his very eye opening book called Main Street Money.  We have given this book out to most of our clients.

Mark Matson On Useless Knowledge
“Knowledge really is power, but to be effective, it has to be targeted knowledge. The vast majority of investing information is useless drivel. No, it is even worse than useless; it is dangerous financial pornography. But if you know the right things, you don’t need to know everything.”

Mark Matson On Investment Flexibility

“Choices are the enemy of discipline. The hardest thing for any investor is to stay disciplined and “sit on his hands.””

Mark Matson On Extrapolation
“Try not to give too much weight to recent experience. Remember, nothing in life moves in a perfectly straight line. Up markets will eventually fade and down markets will turn around even if it feel like they never will.”

We can get you a free copy of the book if you are interested.

By Jimmy Hancock

References

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

2014 Returns: The Market is Up and I am Not

Statements are out and there is a lot of confusion about why account values are flat for the year when it seems the market was up.  Matson Money sends out a market update with each quarterly statement and there is some great explanation of this in it.

Matson Quarterly Report

“In 2014 investors have been dealing with some deviation of the statement “The market is up and I am not.”  Strangely enough it is commonly being positioned as exactly that, a statement of fact as opposed to a question of “why,”

In light of the simple statement above, it seems now is one of those times.  This is due almost entirely to the fact that the S&P 500 was both flirting with and periodically achieving new highs, and simultaneously achieving abnormally high returns for the year.

The S&P 500 is 500 companies/stocks.  That’s it.  This is hardly indicative of “the market.”  The market includes domestic and international equities.  It consists of large cap, small cap, micro cap; value and growth; emerging markets, emerging small, and emerging value.  Additionally, let us not forget about fixed income.

Matson Money portfolios hold 19 distinct asset classes.  More specifically, asset classes that have some historically validated and intentionally designed dissimilar price movement, i.e. low correlation.  They are engineered so as to not be dependent on any specific asset class – Globally Diversified.

This perception of underperformance or not seeing portfolio gains like the rest of the herd  inevitably leads investors to feel the need to react and make changes to their portfolio.  Unfortunately, this strategy is exactly the wrong approach.

It is worth remembering that there will always be an asset class that is out performing all of the others (as well as one underperforming).  When it is the S&P though, everyone notices.  They notice due to media spotlight, and because it makes up a disproportionate percentage allocation of many poorly diversified portfolios, thus making the news sadly relevant.

Discipline is not for the weak, but success is the long term reward for its maintenance.  Focus and action resulting from the current year will be at the expense of an investor’s next twenty.  Specific to Matson clients, no matter the current state of the S&P, know that investors are in a portfolio that is designed to dial into academically proven dimensions of return.

In the end, choosing a wise financial strategy – and sticking to it – will 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 n investor’s real return.  Relying on unbiased, non-emotional advice from a trusted investor coach to make good decisions will help an investor bridge that gap between what the average investor makes and the return of the market. ” 1.

 

References

1. Matson Money. “Account Statement.” Letter to James Hancock. 1 Jan. 2015. MS. N.p.