Tuesday, August 30, 2011

The HOKEY POKEY is NOT an investment strategy

You put your money in,
You take your money out,
You put your money in,
And the market shakes you out.
If you do the hokey pokey,
In the long-run you’ll lose out,
That’s what this blog's about!

Wall Street is a bipolar market that veers from despair to euphoria with each passing news headline.  Don't give in to temptation to "get out" of the market with the notion that you will "get back in" once things “settle down."  Ignore every "expert" (yet, invariably underperforming) stock fund manager on CNBC that claims this is a "traders market."  Man up and rebalance your portfolio - which means sell some bond index funds that have risen in value and add to your stock index funds that have fallen in value. Don't become one of the following statistics.

For the 17th time in as many years, Boston-based research firm DALBAR found that the 20-year returns realized by mutual fund investors lagged the markets thanks to ill-timed buys and sells driven by psychology. 

"At no point in time have average investors remained invested for a sufficiently long enough period to derive the benefits of a long-term investment strategy,"

DALBAR wrote in its 2011 investor behavior analysis.  DALBAR went on to say, 

“Investors who hold on to their investments are more successful than those that time the market.”

Don’t be foolish and think you, or anyone else, can successfully “time the market.”

Saturday, August 27, 2011


Most of the world’s investment managers are highly educated individuals with MBA (Masters of Business Administration) degrees.  Yet, most of these educated, talented, and hard working folks still fail to beat simple passive indexing strategies.  Standard and Poor’s released a study that shows that the vast majority of mutual funds lost to the S&P indices over the past five years:

  1. 61% of large cap managers failed to beat the S&P 500 (large cap index)
  2. 79% of mid cap managers failed to beat the S&P 400 (mid cap index)
  3. 61% of small cap managers failed to beat the S&P 600 (small cap index)

What’s more, the study did not point out that the minority of managers that did beat their respective benchmark indices (cough, LUCKY!) will most likely not do it again over the next five years.  But, numerous studies, some by Vanguard, show this also to be true.  Thus, don’t be fooled into thinking that you can pay an advisor, likely another MBA, who can pick the best mutual funds that will beat their benchmark indices.

I can tell you that this duMBAss invests his serious money only in index funds (and I suggest everyone else do the same).

Friday, August 26, 2011


The Financial Times reports that certain British banks have finally found a place to unload their most toxic and least marketable investments left over from the financial crisis. Several banks have chosen to sell these bad assets to their own employee’s pension funds! Gee, I wonder if they were able to negotiate a good price with themselves? I’m sure US bank executives are slapping their heads and asking, “why didn’t we think of that?”

Monday, August 22, 2011


It seems bubbles just move around every couple of years - everyone rushed to get rich with dot com companies with no sales or earnings, and when that bubble burst everyone rushed to see who could flip the most houses at one time and now we have the gold rush of 2011.  

If I hear one more “buy gold now” commercial I might scream a different four letter word!  You can’t watch CNBC or Bloomberg or listen to their satellite radio broadcasts for even 10 minutes without hearing one of these ridiculous ads.  With the invention of gold ETFs like GLD and UGL, it is now easier than ever to “invest” in gold. (If you don’t know what an ETF is, you can learn from my book, The ETF Cookbook. But, please do not buy GLD or UGL).

Buying gold is a speculation and NOT an investment.  I define an investment as buying something that will produce future cash flows. Buying stocks in companies that produce and sell a good or service and turn a profit fits this definition.  Buying bonds that make interest payments to you, whether issued by a government or corporation fits this definition.  Gold does not fit this definition. 

Buying gold is nothing more than a simple Ponzi scheme!  Buying gold relies simply on the “greater fools” game.  Gold produces no earnings.  Gold makes no interest payments. The only way you can make money by purchasing gold, is if you can find a greater fool than you to pay you more than you paid for it.  Gold has very little functional or economic value. When there are no more fools to buy gold, the price will come crashing down.  I hope one of those “buy gold now” commercials lets me know when it is time to “sell gold now.” It seems my crystal ball is on the fritz.

Friday, August 19, 2011

Rebalance your portfolio annually

Over the past few weeks I’ve had numerous friends express concern about the economy and financial markets and have asked for my thoughts.  My thoughts follow…

The way I look at it, everyone has to make a choice between two possibilities and plan accordingly:

(1) Anarchy will reign - stockpile guns, ammo, barbwire around your farm and bomb shelter etc.
(2) We'll get through this like we have for 200 years - rebalance your portfolio and buy stocks when they are down.

I can respect folks who choose either of these options, but anything in between is pointless.
Being 100% cash won't work in either scenario. If the financial system collapses, they won't be able to get their cash out of whatever bank it is in.  Even if they could get it, cash will be worthless during true anarchy. Not many folks would sell their last loaf of bread for any amount of gold either.  

In 2008 we truly were standing at the edge of anarchy - that was scary.
That was the scariest time in our economic history... Oh wait, maybe World War I was scarier,
and WWII. Oh yeah, 9/11 when stock market was closed for a week - now that was scary!  Don’t forget the turmoil caused by the Korean and Vietnam wars.  Then there were the race riots in the 60-70s. Can you imagine riots? I can't but it was going on when we were kids. Assassination of JFK, Reagan shot, Nixon's Watergate, Clinton's Lewinskigate. How about nuclear missiles a couple hundred miles off the shores of Florida? Now that must have been really scary.

I'm forgetting a dozen catastrophes I'm sure. Yet, the stock market averaged
about +10% annualized return throughout all this. To be sure, the stock market is never up in a straight line.
What is beautiful is the crookedness of the returns. Each and every instance I listed
above was a BUYING opportunity.  

Folks that are 100% liquid now may well look like geniuses.
Greece could default and implode the entire European Union. Moody's could agree with S&P and downgrade the US credit rating a meaningless notch. Politicians might shut down the federal government, again (yeah, that's right, it's happened before and in our lifetime too).

But, even if those "liquid" folks are right and the market dives another -20%, they'll never have the foresight or fortitude to buy back in at the bottom when everything looks it's worst. Thus, they can be right ONCE and cost themselves a ton of money when the market snaps back. The folks that are liquid now,
are likely liquid because they sold out before the bottom in the market in March 2009.  They likely watched the Dow fall from 14,000 to 8,000 and finally decided to sell all their stock funds. They realized they were geniuses as the Dow continued it's descent to 6,500. But, in the end they would have been better off doing nothing as the Dow is now back up to 11,000 (even after the recent decline) and MUCH higher than where they likely sold. Better yet, instead if selling at 8,000 they would have done well to BUY at 8,000 even while that was not the bottom and the market fell further.

That is another great point; one does not have to pick the exact bottom in the stock market to make a lot of money. The folks that bought stocks at Dow 8000 surely felt more pain as they watched it continue to fall to 6500. But, with the Dow currently at 11,000 they certainly are happier now than the folks that sold at 8000.

We should almost be grateful for each of these "opportunities" that the "sky is falling" alarmists provide us.
Embrace the volatility. The easiest way to do that? Own a mixture of stock and bond index funds and....

Buy monthly with your paycheck and rebalance annually on your birthday.

Buy and rebalance, buy and rebalance - year after year after year. 
Over the course of a lifetime, you will have bought low and sold high over and over and over again.
Rebalancing is easy to do in “normal” years. In fact, it’s almost unnecessary most of the time.
When rebalancing is crucial is in times like these – when you have to buy when everyone else is selling.
But, history has shown time and time again, the time to buy is when everyone else is selling.

Rebalance annually and mechanically, don't "think" about it.
Turn off CNBC. Be oblivious. Be happy. Be wealthy.


P.S. You can find more information in one of my 4 books on Amazon at the link below.