The Only Question that Matters for Investors

(from Dan Solin's Huffington Post blog, 3/15/2011 - click here for the original post)

The financial media is whipped into a frenzy. There is so much uncertainty. Here's a summary of recent developments:

• Bill Gross eliminated U.S. government debt from the Pimco's Total Return Fund.
• Nouriel Roubini ("Dr. Doom") predicts $100 billion in municipal bond defaults over five years.
• Ireland, Greece, Portugal and Spain remain in tenuous financial condition.
• The devastating earthquake in Japan has broad economic ramifications.
• Unrest in Libya and in the rest of the Middle East threatens oil prices.

What does it all mean for investors? How fortunate we are to have so many "experts" who can make sense of these disturbing developments.

Money manager Laszlo Birinyi advises"[]These kinds of strong beginnings lead to long and durable bull markets. Hedge fund manager Barton Biggs agrees.

Over at The Wall Street Journal, they're not so sure. Brett Arends listed ten reasons why investors should be worried. His sources are interesting. He relies on an unnamed "European hedge fund manager" who is "worried about China." The source is not buying aggressively, and Arends find that significant. It's quite remarkable what passes for responsible financial journalism at The Wall Street Journal these days.

I get asked for my opinion on many of these issues by readers of my books and blogs, advisory clients and prospective clients. Many can't hide their disappointment when I tell them I have no clue how these events will affect the markets. What's more, neither does anyone else, including those who are so confident of their predictions and who dispense their advice so freely. What's more, I don't care and I don't believe intelligent investors should either. Here's why.

Many studies confirm the relationship between loss of money and suicide. Ask most men what they fear most and they will tell you it is the loss of their money and homelessness. You would think their investing decisions would seek to minimize this possibility. Instead, they are more often focused on the short term consequences of current events. This makes no sense.

The average sixty-year-old will live another twenty years or so. Here's the only question she (and all other investors) should be asking her financial advisor:

Can you financially engineer a portfolio for me, using long term (at least 50 years) data, that will maximize my returns for the amount of risk I will be taking, for the rest of my life, and will minimize the possibility that I will be destitute in my old age?

The good news is that it is very easy to accomplish this goal. We have all the tools and data necessary to do so. The analysis can be based on sound academic, peer-reviewed research, used by savvy pension and trust fund administrators and high net worth individuals. Of course, it's not predictive, but it's far more reliable than relying on financial astrologers. I have rarely met an investor who had such a plan, or who understood that he could get one.

You have a choice. You can listen to the musings of people who believe they can predict the future, or you can plan intelligently for your own future.

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.

Time for a Reality Check

(from Dan Solin's Huffington Post blog, 10/28/2010 - click here for the original post)

As year-end approaches, this seems like a good time for a reality check.

On October 9, 2007, the Dow Jones Industrial Average closed at its all time high of 14,164. At that level, it had gained 94% over the preceding five years. The euphoria of the bulls was palpable.

On March 9, 2009, the index reached a new twelve-year low, closing at 6,547. The bears became the talk of Wall Street. Doom was in the air.

How you dealt with your investments during this period is indicative of everything that is wrong with the securities industry and why you need to fundamentally change the way you invest.

Few brokers predicted the greatest financial crisis since the Great Depression. Almost no one predicted both the meltdown and rapid recovery of the markets. Yet more than 90% of individual investors maintain brokerage accounts and rely on the flawed advice of their "investment professionals."

What if you didn't panic and did nothing from October 9, 2007 to date? I call it the Seinfeld approach to investing. You were in a globally diversified portfolio of low cost index or passively managed funds in an asset allocation (the division of your portfolio between stocks and bonds) appropriate for your tolerance for risk and investment objectives.

As of September 30, 2010, if your allocation to stocks was 50%, your portfolio has fully recovered. Investors with with an allocation of less than 50% to stocks have positive returns. If you were among the small percent of investors for whom an allocation of 100% stocks was appropriate, your total return is down almost 20%.

Check your portfolio returns. How do those results compare? Most likely, not well if you were listening to the financial pundits and "fled to safety" when the market crashed.

Almost all clients of brokers invest in actively managed funds, where the fund manager attempts to "beat the market." The use of these funds is another reason why investors typically underperform the market. If there is one compelling reason for terminating your relationship with your broker, it's the fact that recommendations of actively managed mutual funds are the way brokers make a living.

In a recent blog, Eugene Fama and Kenneth French, two of the most distinguished Professors of Finance in the country, explained the folly of investing in actively managed funds. They concluded that, when you factor luck into the equation, they expect 97% of actively managed funds to underperform a passive alternative.

Their conclusion is consistent with other studies that have shown over 99% of active fund managers have no genuine stock picking ability.

If your personal reality check persuades you to enter the New Year with a new investing approach, don't necessarily assume you can do it yourself. Studies over a 30 year period show that even those who pursue an indexing strategy on their own fail to capture 100% of market returns. They still do far better than investors in actively managed funds, but their failure to rebalance their portfolios and the lack of discipline to stay the course when times get rough, take a heavy toll.

A competent passive advisor, who focuses on your asset allocation and recommends investments only in index funds, passively managed funds or Exchange Traded Funds, can be a wise investment.