How the Mighty Have Fallen

This year has not been kind to mutual fund managers - at least the ones who try to predict the future. First, Bill Gross of Pimco warned everyone that they should cash out of Treasuries or “get cooked like frogs in an increasingly hot pot of water.” Gross manages the largest bond mutual fund and sold completely out of Treasuries earlier in 2011, only to have the performance of his Pimco Total Return Fund fall to the bottom 20% of bond funds for the past year. As Treasury yields continued to fall, prices went up and his investors suffered. In the past two months he’s increased his Treasury holdings to 16%, higher than it’s been since late last year. Looks like he’s the one feeling the heat!

This spring, Bruce Berkowitz, manager of the Fairholme Fund, dropped from leading 99% of his peers in performance for the last decade, to trailing 99% of the large company value fund managers in the last twelve months. In the past, holding only a handful of stocks and bonds in the fund paid off, but big bets in American International Group, Bank of America, Morgan Stanley, Goldman Sachs and Citigroup have backfired. The best performer in that group (Citigroup) is down 29.67% over the past twelve months vs. the S&P 500’s return of 5.64%.

On September 14th, one of the most well-known funds around, Fidelity Magellan, fired its manager, Harry Lange, after six years of subpar performance. He may have been a little premature when he told the Wall Street Journal in April of this year that “six months from now, I’ll look like I’m a star.” It’s hard to believe that a fund that once touted $110 billion in assets is down to $17 billion due to redemptions coupled with dismal returns. Hopefully the new fund manager, Jeffrey Feingold, who currently runs the Fidelity Trend Fund, can repeat his one year performance of that fund and will beat Magellan’s benchmark by 1.8%. I just wouldn’t want to bet any money I will actually need.

These are a few of the many stories of once heroic mutual fund managers falling from grace. We choose to invest our clients in the Dimensional Fund Advisors (DFA) funds because they are not depending on a “superstar” fund manager to continually outperform his/her peers. Their funds are not based on speculation, which often proves to be not only futile, but costly as well. DFA’s fund managers remain invested, capturing the returns of the markets, while keeping costs to a minimum. And because cost is the biggest predictor of the future performance of a fund, more often than not, they end up outperforming their peers.

Christine L. Carleton, CFP®
clcarleton@taaginc.com
http://www.taaginc.com/

What Apple & Indonesia Can Teach You Abou Investing

(from Dan Solin's Huffington Post blog, 8/30/2011 - click here for the original post)

You wouldn't think Apple and Indonesia have much in common. On the surface, they don't, but they can still teach you a lot about investing. Let's start with Apple.

Apple made the news recently with two major events. It is locked in a battle with Exxon over which is the most valuable company by market capitalization -- a remarkable turnaround. Apple has a market value of over $344 billion. Then Steve Jobs announced his resignation at Chief Operating Officer for health related reasons.

According to a thoughtful blog by Weston Wellington of Dimensional Fund Advisors (not available online), it was not so long ago that the financial media was trashing Apple. In February 14, 2005, Robert Barker, in an article in BusinessWeek stated "...Apple doesn't tempt me..." I wonder what did. Maybe Lehman or Bear Stearns!

Steven Gandel weighed in with an article in Money on March 24, 2004. He quoted Transamerica portfolio manager Chris Bonavico who opined that Apple stock is "...crap from an investor standpoint."

Many analysts credit the remarkable sales of its Apples Stores as the key to Apple's success. In a quote attributed to David Goldstein, Channel Marketing Corp, which appeared in an article in BusinessWeek on May 21, 2001, Mr. Goldstein gave Apple "two years before they're turning out the lights on a very painful and expensive mistake."

What can you learn from these comments about Apple stock? Read the financial media if you find it entertaining. It's useless (and potentially harmful) as a source of reliable financial advice.

What about Indonesia?

The financial media was preoccupied with the downgrade by Standard & Poor's of the credit rating of the U.S, which lowered its rating from AAA status to AA plus. The new rating places the U.S. below the United Kingdom, Canada and even the Isle of Man.

Many investors viewed the lower rating with alarm and considered it a precursor of low stock returns for decades to come. The data tells a much different story, and may indicate there is no better time to invest in U.S. stocks and bonds.

In another blog, Wellington notes that Standard & Poor's rated the credit of Indonesia a "B" in July, 2001, which placed it in the "junk" category. Over the past decade, its credit rating has never risen to investment grade.

Investors in the Jakarta Composite have earned a total return of a whopping 29% per year over the last decade, ending June 30, 2011. According to Wellington, "If the Dow Jones Average had kept pace with Indonesian stocks over the past decade, it would be over 104,000 today."

Here's the lesson to be learned from Indonesia: A low (or reduced) credit rating on sovereign debt does not necessarily correlate to lower stock market returns. This is the opposite of what many investors and financial talking heads believe.

Most investors get their financial information from the financial media or brokers. As Dr. Phil would say: How is that working for you?
 Dan Solin is a Senior Vice President of Index Funds Advisors (ifa.com). He is the author of the New York Times best sellers The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, and The Smartest Retirement Book You'll Ever Read. His new book, The Smartest Portfolio You'll Ever Own, will be released in September, 2011. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

Resolutions - Part II

In January, we blogged the “10 important investment resolutions for 2011” as listed by Brad Steinman, Director of the Canadian arm of Dimensional Fund Advisors. Brad’s goal was to warn investors away from “ill-advised practices that are detrimental to their wealth” and hopes that “a set of New Year’s Investment resolutions, along with an advisor capable of helping investors adhere to them, will lead to a more prosperous future.”

As we mentioned in that post, we’ll visit these resolutions periodically throughout the year and provide some commentary on each.

Resolution #3: I will not invest based on a forecast—whether it is mine or anyone else's. I will recognize that the urge to form an opinion will never go away, but I won't act on it because no one can repeatedly predict the future. It is, by definition, uncertain.

TAAG Thoughts: We’ve covered this topic in a variety of ways in this blog, but it’s always a good time to refresh. Uncertainty can have a significant impact on the market and we’re desperate to gain any information we can in advance of others, hoping to gain an edge in our investment portfolio. Many have made fortunes selling their purported ability to forecast uncertainty ahead of others, but to no avail. The truth of the matter remains that the unknown is the unknown. We are all at its mercy. The best defense against the unknown when it comes to investing continues to be a low cost, broadly diversified portfolio which can lessen the blow of uncertainty’s impact in any one area of the market.

Resolution #4: I will keep a long-term perspective and appropriately consider my investment horizon (i.e., how long my portfolio is to be invested) when determining my performance horizon (i.e., the time frame I use to evaluate results).

TAAG Thoughts: This is an important one that’s very intuitive, but easy to forget. Often when we meet with clients, especially early on in the relationship, questions surround current political, economic and other issues of the day that are concerning for one reason or another. We’re happy to talk about these issues and they’re often concerning for good reason, but they’re never cause for modifying investment strategy. Average life expectancies continue to climb and, for the majority of our clients, investment horizons can be expected to last 20-30 years or more. Over those many, many years we will have ups and downs of all varieties caused by any number of events.

It is crucial to understand the role of short-term, high quality fixed income investments as a buffer from those short term events and the role of equities to provide that continued growth over the long run. Both work in concert, allocated properly to your risk tolerance and long term goals, to provide a plan that will ensure that your money outlives you and not the other way around.

The consistent theme in many of these resolutions is our behavior surrounding events that might cause us to veer from our financial plan. It’s ok to have these emotions, but we need to recognize that they’re often fleeting and no cause to act. As investment author Nick Murray recently said, “you can act your way to investment success, but you can’t react your way.”

We’ll continue to visit these topics throughout the year, touching on these basic, but crucial pillars of our investment philosophy.

Chip Workman, CFP®
cworkman@taaginc.com
http://www.taaginc.com/

The Current Market Aftershock

David Booth, Chairman & Co-CEO of Dimensional Fund Advisors, released a timely video this month about shocks and aftershocks in the market.  He walks viewers through a timeline of US stock market performance in several periods since World War II.  The conclusion is that prevailing market sentiment is often wrong and investors should continue to focus on keeping to their disciplined plan to achieve their long term goals.  Click "Watch Now" below to view.



The Asset Advisory Group
http://www.taaginc.com/

These videos contain the opinions of the participants but not necessarily Dimensional Fund Advisors or DFA Securities LLC, and do not represent a recommendation of any particular security, strategy or investment product. The participants' opinions are subject to change without notice. Information discussed in the videos has been obtained from sources believed to be reliable, but is not guaranteed. These videos are made available for educational purposes only and should not be considered investment advice or an offer of any security for sale. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund Advisors collect at (512) 306-7400 or at www.dimensional.com.

Mutual funds distributed by DFA Securities LLC

Why DFA?

For those of you who’ve been clients of The Asset Advisory Group since our beginning in 1988, you know we have always followed an investment philosophy of diversification and rebalancing, but the investments we’ve used to implement your plan have changed over time. As an independent company, we can work with anyone, but we believe the best investment solution for meeting your financial goals is Dimensional Fund Advisors, or DFA.

DFA has been very successful, but quiet, since its funds became available to approved registered investment advisory firms in the early 90’s. As of December 31, 2010 they manage $207 billion in assets. Lately, due to the additional attention focused on the company since the publication of The Investment Answer, people are more curious about the company. Here’s a brief summary of why we use them to implement our clients’ investment plans:

1. They use academic research vs. forecasting. No DFA fund holdings are based on an individual or committee’s opinion of what will “outperform” in the coming year. Instead, specific criteria determine what can be held in each fund based on research developed over long periods of time. If you are invested in DFA’s Large Company Fund, you don’t have to worry that your fund manager will someday move everything into oil stocks just because he feels good about that part of the market.
   
2. They don’t blindly follow indexes. DFA is sometimes characterized as an index company, but they really create their own standards for what can be included in each of their funds. These “buy” lists are created using measures such as company size and geographic location, and then screened to exclude companies with issues such as bankruptcy, limited ownership, or other problems.
   
3. They take risk where you CAN be rewarded. Active managers try to obtain gains for their shareholders by concentrating their holdings in a few stocks (and praying those few do well) or shifting in and out of the markets at the “right” time. Ongoing research and internet sites such as CXO Advisors show that those tactics do not work consistently. DFA’s research shows that investors are rewarded for holding stocks, and even more so for holding higher risk stocks characterized as value and small cap. They have designed funds to capture these returns.
   
4. They are low cost. DFA funds have no sales loads, commissions, or trailing fees paid to advisors or custodians. They are pure, no-load funds. They are one of the largest mutual fund managers in the world, but you won’t see them sponsoring a golf tournament or paying $3 million for a 30 second Super Bowl commercial. Instead, they look for ways to reduce their investors’ management expenses. For example, many mutual funds lend out securities to other funds and receive payments to boost their company profits. DFA gives this interest income back to the funds that hold the securities, lowering the annual management expense for the fund’s shareholders vs. keeping it for themselves.
   
5. Their independence keeps them client-focused. The Asset Advisory Group is independent and can focus on client needs vs. selling a product a corporate parent wants us to push. As an independent investment company, DFA is under no quarter-to-quarter pressure to meet earnings per share targets that Wall Street might expect. As a result, they can make decisions that are better for the long-term success of their mutual fund shareholders. Examples include absorbing management fees on new funds and investing in research to determine how they can further improve returns.
   
6. They use trading to their advantage. If you have ever bought or sold a home, you know the person under no time pressure is the one with the bargaining power. If you are in no hurry to buy or sell, you can wait for your price. DFA uses this same strategy to obtain better prices for their funds. Index fund managers must sell when the index they follow changes. DFA can wait.
   
7. They have brain power. Roger Ibbotson of Yale, Robert Merton of MIT, Myron Scholes of Stanford, Eugene Fama of University of Chicago and Kenneth French of Dartmouth are all academic leaders involved in the management of the company, and lend their expertise to its improvement.
   
8. They are “wholesale” vs. retail. DFA funds are not available to the retail public. This protects you in several ways. First, when the media has investors scared and they begin the stampede to the exits of their mutual funds, you will not be trampled. Your DFA manager will not be forced to sell stocks to meet liquidity requirements when prices are down. Alternatively, DFA is not forced to digest hordes of cash when everyone decides that emerging markets is the hot investment for the year. They do not need to spend money attracting investors with full page newspaper ads and commercials. See #4 above.
   
9. They focus on constant improvement. DFA is constantly examining what they do and how they can improve it, using a feedback loop between the academics that sit on their board, investment advisors who use their funds, and the clients of those advisors. This continuous sharing of information has brought about many changes to the company over the years. For example, beginning in June 2010, the DFA Micro Cap now excludes the extreme small cap growth stocks that fall into lowest 25% book to market and earnings to price ratios, because academic research has shown that this segment lowers returns.
   
10. They provide access to education. We work to make sure that we stay up-to-date on tax, financial planning and investment issues by attending conferences and continuing education programs within our industry. DFA provides excellent educational opportunities for us by hosting conferences attended by some of the brain power mentioned earlier. We have to pay all of our own expenses to attend (see #4 again!) but we are more than happy to do so, because the education we receive makes us better advisors for you.
    

If you are interested in learning more, first hand, you are welcome to attend a seminar we are hosting at the Double Tree Suites from 11:30am to 1:00pm on March 11th. Joel Hefner, CFA and Vice President of Dimensional Fund Advisors will offer his take on “Redefining Investment Advice.” Please contact Mary Herrmann if you would like to attend.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

Clueless

(from Dan Solin's Huffington Post blog, 2/8/2011 - click here for the original post)

I'm sure Pat Dorsey is highly intelligent and very competent. He is the director of equity research for Morningstar, which is a big job that gives him access to vast resources about the stock and bond markets. As he noted in an article published January 17, 2010 in Money Magazine's Investor's Guide 2010 entitled "10 stocks that can keep running," the analysts he works with at Morningstar cover 2000 stocks. Wow.

With such an impressive background and extensive resources, I am sure many investors paid close attention to Mr. Dorsey's 2010 predictions about stock market trends.

His primary observation was that we were in the "first phase of a bull market" where "smaller and junkier stocks tend to lead the way." However, he confidently predicted that "...speculative frenzy eventually gives way to the fundamentals, and that should bring your focus back to high-quality blue-chip stocks this year."

He was very negative on "lower-quality small stocks" noting they could "get killed if reality falls short of high expectations."

Many investors no doubt dumped their small stocks and focused on blue chips. After all, Mr.
Dorsey is the director of equity research at Morningstar. Presumably he can accurately predict whether large or small stocks will outperform in a given year.

Not exactly.

In a thoughtful analysis not available to the investing public, Weston J. Wellington, vice president of Dimensional Fund Advisors noted that US small stocks had their best year since 2003. The S&P Small Cap 600 index was up 26.31%, compared to an increase of 15.06% in the S&P 500.

It gets worse.

Wellington did an analysis of the ten blue chip stocks recommended by Mr. Dorsey and found they had an average return of 6.3% , significantly under-performing the S&P 500 index.

Let' see if I got this right.

Mr. Dorsey was dead wrong in his prediction that blue-chips would outperform small stocks in 2010. His selection of blue-chips did not come close to the returns that were yours for the taking by investing in the comparable index.

Yet investors continue to rely on the financial media which features pundits of all stripes, confidently predicting the direction of the markets and advising you to buy this or that stock.

It's all errant nonsense, akin to voodoo, designed to separate you from your money and to continue the transfer of wealth from you to those who "manage" your money.

Mr. Dorsey, and his colleagues who pretend to be able to predict random, future events, may be clueless.

You don't have to be.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

The Trouble with Talking Performance

One of the first things we’re often asked in meeting with prospective clients is for performance data. We fully expect the question and often know it is coming. The marketing efforts of the traditional brokerage model and the financial media have conditioned us to think it’s the only thing that matters. The only problem is, they’re wrong.

We often reject the initial request for performance data as we don’t want it to cloud the decision making process for the prospective client in selecting a partner to help them plan their financial future. If someone goes into a financial planning relationship using portfolio performance as their only or even primary scorecard, it likely doesn’t make sense to even begin the conversation. We’re insistent that clients consider their comfort level with the investment philosophy, planning expectations, and overall personality fit long before secondary issues such as performance.

We don’t deny that performance is important, we just know that we have no control over it nor does anyone else. Let me rephrase that, the only control we have over a portfolio is to make sure it’s as globally diverse and low cost as possible and that it is properly allocated for a client’s needs and risk tolerance. Beyond that, seeking higher performance or constantly tweaking our investment philosophy based on market gurus, economic prediction or other forecasting is simply a waste of time and money.

This doesn’t mean we’re not proud of how our philosophy performs. As many know, our portfolios utilize funds from Dimensional Fund Advisors, one of the top-performing fund companies in the country, currently managing more than $202 billion. Some thoughts worth passing along were found in Jessica Toonkel’s December 20, 2010 Investment News article,

“Of the 39 DFA funds with 10-year histories, 33 were in the top half of performance in their categories for that period as of Nov. 18, according to Morningstar. More than half (30) of the 51 funds with five-year histories outperformed their categories for that period - not a small feat, given the market downturn of 2008. In fact, 34 of 58 DFA funds were in the top half of their category just in 2008. And the firm has some of the lowest fees in the industry – with fund expenses ranging from 0.16% to 0.9%.”

The truth of the matter is, in any time frame, about half the people “win” and half the people “lose”. Picking who those people will be in advance is impossible. The middle of that road is the average market return, but the term "average" is a bit of a misnomer. Average return does not an average investor make. The average investor, over the long run in most any time period, earns well below average market returns. If you can earn close to what the market earns at the lowest possible cost and have the discipline to stay invested through thick and thin, you will likely enjoy a very successful investment experience over a 30-40 year retirement horizon.

We don’t really earn our money by providing our client’s with excellent performance. We earn our money by keeping the focus on what they can control; staying invested, being accountable to a sensible spending plan and helping address all the other financial questions that come up on life’s path. If we can do that, our clients will continue to meet their goals.

Chip Workman, CFP®
cworkman@taaginc.com
http://taaginc.com

The Tipping Point?

Why does it seem like it takes someone’s death for the world to realize the value of their message? Michael Jackson’s Thriller is on track to be the first album in U.S. history to go triple diamond, selling more than 30 million copies. The estates of Marilyn Monroe and Elvis Presley have made millions more in the year’s since these stars have died. Although The Investment Answer was released last summer, it was only after author Gordon Murray’s passing in January that the media has been buzzing about his book. The Investment Answer, co-authored by DFA (Dimensional Fund Advisors) advisor Daniel Goldie and his client Mr. Murray, a Wall Street veteran, is now #2 on the New York Times Hardcover and Advice List. The hour it will take you to read this book is worth every minute.

When I began my career over 20 years ago, stock picking was the name of the game and the public didn’t want to hear that gurus with crystal balls didn’t exist. Now that index funds are mainstream and many gurus have been exposed for having no more accuracy than the flip of a coin, America is finally ready to hear the message that The Investment Answer conveys; there five key decisions that will help increase the odds of investing success.

- Should I invest on my own or seek help from an investment professional?

- How should I allocate my investments among stocks, bonds, and cash?

- Which specific asset classes within these broad categories should I include in my portfolio?

- Should I take an actively managed approach to investing, or follow a passive alternative?

- When should I sell assets and when should I buy more?

Although we’ve mentioned the book in previous blog posts and monthly letters, I thought it was worth another blog. It’s very exciting for me to see the momentum this book is gaining. On Amazon, you are limited to ordering only three copies of the book and our local Barnes and Noble had only one in stock because they are selling so quickly. In the past few years books like The Big Short or No One Would Listen, which read like fiction, but were written about what went wrong on Wall Street during the financial crisis, have garnered reader’s attention. Finally - a best seller featuring sensible investment advice!

I can only hope that this snowball continues and the general public embraces the message of The Investment Answer, which is that investing success is achievable for everyone and that sophistication does not equal success. It’s just too bad it took Gordon Murray’s illness and passing to get most people to listen.

Christine L. Carleton, CFP®
clcarleton@taaginc.com
http://taaginc.com/

5 Reasons Our Aging Society Doesn't Mean Stock Market Doom

(from Larry Swedroe's Wise Investing blog at CBS's Moneywatch.com, 9/22/2010 - click here to link to the original post)

A significant part of my time at Buckingham Asset Management is spent calming investors down, assuring them that what they’re concerned about is nothing more than noise meant to grab your attention, but has no basis in reality. The following is a recent example.

After reading an article, a client asked: “If 43 percent of Americans working are going to retire in the next decade, what are they going to live on? Are they going to liquidate their holdings in the stock market and, at a minimum, shift more into bonds? Won’t this restrain market growth more than the historical levels?” Here are five reasons why this type of consternation was unwarranted.

Information Isn’t Wisdom
The first thing I pointed out was that the investor should not confuse information with wisdom (information you can use to produce above benchmark returns). It’s only unanticipated events that move markets, not those that are fully anticipated. Think of it this way: If you know something (like a large segment of the population is nearing retirement), it’s a virtual certainty that other investors also have this knowledge and have acted on it. Thus, the expected impact of equity sales by retirees should already be reflected in today’s prices. It’s only if the level of equity sales is greater than expected should there be a negative impact on future equity prices. And, it’s certainly possible that sales will be less than expected or that there will be an unexpected offsetting increase in demand for equities from other sources. If that’s true, all else equal, equity prices would increase.

Conventional Wisdom Is Often Wrong
A second point I raised was that often what one reads (even if it sounds logical and the arguments are persuasive) may still be wrong — as conventional wisdom often is. One of my favorite sayings is “It ain’t what a man doesn’t know that gets him in trouble, but what he knows for sure, but ain’t so.”

The conventional wisdom about the relationship between age and investment allocations is actually wrong. There’s no evidence that investors dramatically reduce equity exposure as they age. As Jim Davis of Dimensional Fund Advisors pointed out in a 2005 article, the evidence actually suggests that investors “accumulate equity positions during their years of greatest earning power and do not dramatically reduce those positions as they enter retirement.”

Will Everyone Retire as Expected?
I also pointed out that it’s certainly possible that people won’t retire as expected. They may decide to continue working. Many people are now working well into what was considered the retirement years. Extending working years reduces the need to draw on portfolio assets.

It’s Not Just About the United States
I next pointed out that the U.S. equity market isn’t solely dependent on U.S. investors. The rapid growth of sovereign wealth funds and rapidly increasing per capita GNP in developing markets could lead to increased demand for U.S. equities from non-U.S. investors. Thus, it’s quite possible that when a U.S. retiree sells, the buyer will be a young software engineer from India or China. Thus, even if U.S. retirees become large net sellers of equities, it doesn’t mean valuations will be negatively impacted. There might be offsetting increases in demand from other sources.

The Savings Rate Has Been Climbing
In the most recent decade, one of the biggest concerns of policy makers was the very low rate of savings in the U.S., as the rate was so low that it was in danger of dropping below zero. The financial crisis has caused investors to reevaluate their savings patterns. Today, the savings rate is around 6 percent. And in the 1980s, the savings rate was around 10 percent. A rising savings rate could translate into an increased demand for equities.

The bottom line is this: Because today’s market valuation is based on all that is knowable about the future, it’s likely that currently unforeseeable events will have a far greater impact on prices than anticipated demographic shifts. And because what we don’t know is by definition unforecastable, the biggest impact on equity markets will likely come from events that few (if any) even have on their radar screens.

Thus, you’re best served by ignoring market forecasts and focusing on what you can actually control:

- Your risk level
- How well you’re diversified (eliminating or minimizing the diversifiable risks
of single companies, sectors and countries)
- Your costs
- Your tax efficiency

And finally, the fact that future returns are likely to be impacted by events that are not forecastable is why investors have historically demanded a large premium for taking the risks of equities. It’s also why equities are risky no matter how long your investment horizon.