Managing money is not a science, but a social science. People are involved—and that makes matters messy.
MY OLD INVESTING self was like the guy in the meme who twists around to ogle a woman in a red dress, while his girlfriend looks ready to break his neck.
Just as jumping from one relationship to another introduces new risks, the same holds true for jumping in and out of different investments. For me—and for most people, I’d wager—investing in individual stocks and narrowly focused funds involves a certain amount of trading, and we know such trading is an exercise in futility. Even the vast majority of professional fund managers can’t consistently beat the market averages. If your reaction to that is, “Yeah, but maybe I can, I’ve got a good handle on the way the world works,” you may need professional help with your portfolio.
Despite ample evidence that most investors trail the market averages, we all tend to “feel lucky,” like the ill-fated villain staring down Clint Eastwood in Dirty Harry. Why? A key reason: Stock market averages get a big boost each year from a minority of stocks that post big gains, and those huge winners make beating the market look easy. So how about buying those big winners? Unfortunately, yesterday’s winners aren’t necessarily tomorrow’s top dogs.
In fact, past performance has no predictive power. It may seem obvious today that we should have bought Facebook, Apple, Netflix, Microsoft, Amazon, Tesla and Google’s parent company Alphabet. But these “obvious” winners only seem that way in hindsight.
On top of our unjustified confidence in our own stock-picking abilities, we have a host of other behavioral faults, including impatience, a desire for quick gratification and the feeling that the grass is always greener somewhere else. Result? In our efforts to beat the market, we flit back and forth among different investments, as our latest stock picks lose their luster.
After taking fliers over the years on gold and energy funds, biotech and telecom stocks, and emerging markets specialty funds that focus on consumer companies, I’ve learned three key lessons:
I came by these lessons the hard way. I would make a new investment and be excited, thinking I’d made a good bet. I’d anticipate my potential gains and the validation that I’d outsmarted the market. I would tell myself I understood the potential downside, but really, I was practically counting my winnings.
But the thrill would soon fade, along with my original investment rationale. Perhaps the idea had come from some legendary portfolio manager or from something I read. But when my new holdings struggled, I lacked a frame of reference by which to decide whether to sell or hold.
A star manager might have said a drug company’s clinical trials were going well or that certain companies were going to gain market share. But then these things didn’t happen, and the stocks underperformed. Was this bad news now fully priced in? It’s nobody’s job on Wall Street to answer that, least of all the managers who touted the investments in the first place, and they probably wouldn’t know anyway.
Another example: About six years ago, I read a series of articles that convinced me that the next big trend was emerging markets consumer spending growth. That prompted me to buy some high-cost niche exchange-traded funds. But the two funds I bought consistently underperformed. One has continued to do so since I sold, while the other folded last May. Again, no one can tell you when or if such performance will turn around. Wall Street gets paid to sell you high-expense funds and keep you in them. Those high fees pay for a lot of research, writing and marketing, which in turn filters its way into the financial press, which then encourages you to buy.
There are two sources of investment risk: systematic risk, which is the danger that the broad market will fall, and unsystematic risk, which is the danger that your particular investments will lag behind the market.
Investors in individual stocks and sector funds face both risks. By contrast, owners of broad stock market index funds face only systematic risk. Indexing lacks the allure of sexy strangers and the prospect of quick investment scores, but the strategy’s risks are also far lower.
Success in broad market-cap-weighted index funds hinges on fewer variables. You just need aggregate share prices—driven ultimately by corporate profit and dividend growth—to rise at well above the rate of inflation, as they have for more than a century in the global stock market, despite two world wars, hyperinflation, stagflation, market crashes, panics and depressions. In other words, with broad stock market index funds, you’re making just one bet—and it’s a pretty good one for globally diversified investors with long time horizons.
William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart and check out his earlier articles.
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NO. 36: WE SHOULD consider working at least part-time into our late 60s and possibly beyond. That’ll not only help financially, but also it can bring a sense of purpose to our retirement.
ROUND UP the mortgage check. If you’re paying $1,512 a month, send the mortgage company $1,600 instead. It’s a painless way to increase savings, the extra $88 a month could allow you to pay off your mortgage years earlier and you’ll earn a pretax return equal to your mortgage’s interest rate. That return could be higher than you can get with high-quality bonds.
NO. 69: WE'RE typically happier when we have regular contact with others. Eating at a restaurant or going to a concert is more fun with a companion. Those who are married tend to say they’re happier, while widowhood can devastate happiness. Indeed, a robust social network is associated not only with greater life satisfaction, but also greater longevity.
NO. 6: SAVE WHEN you’re young—and you’ll enjoy big cost savings later. If you salt away money in your 20s and quickly amass a modest nest egg, you won’t just clock decades of investment gains. You can also cut your cost of living by, say, raising your insurance deductibles, borrowing less, and avoiding bank fees for low account balances and bouncing checks.
NO. 36: WE SHOULD consider working at least part-time into our late 60s and possibly beyond. That’ll not only help financially, but also it can bring a sense of purpose to our retirement.
YOU LOVE THEM LIKE family. You want them to have the best care possible. You have insurance for yourself, your family, your home, your car and your upcoming vacation. Why not for your pet?
One of our friends recently opted for pet insurance—after multiple trips to the vet, with more than 20 medications prescribed. Intrigued by the idea of pet insurance? Here are eight choices and what they offer:
Pets Best covers everything, including medications,
I JUST LEARNED a hard lesson about insurance companies: They have the upper hand.
Water leaked into my ground-floor condo’s bathroom and laundry room from a unit two floors above. The unit owner offered to report the damage to his insurance company, but I decided I should call mine for advice. A rep told me that I could file claims with my insurer and it would then seek compensation from the other unit’s insurance through subrogation,
TERM INSURANCE is typically the best bet for people who need life insurance, while permanent policies are appropriate for relatively few folks. Yet I keep getting the same question from parents: What about children? Does it make sense to purchase a whole-life policy for a young child?
No doubt influenced by Gerber Life Insurance’s relentless marketing, these parents want to know whether it’s worth locking in insurance pricing early on and whether this is a good way to help their children start saving for retirement.
OVER THE PAST TWO years, we’ve seen everything from tornadoes to devastating fires to hurricanes, often at unusual times and in unexpected places. That got my husband and me thinking about how to prepare for what may come our way—and how we could document what we might lose.
We decided to make a home movie. Our new phones are perfect for taking videos. What better proof of what we have? You’ve probably seen the suggestion that you do this,
I am sure that we have all been following the current tragedy going on in Los Angeles with the large fires burning there. One of my friends in the insurance industry told me that he had heard from someone in the reinsurance business that the total insured losses from these fires will be more than Twenty Billion Dollars.
So, I have been thinking about how a catastrophe of this magnitude could be financed. In insurance,
So reads a Wall Street Journal headline.
This begs the question, how do Americans want to pay for their health care?
They don’t want to spend their money- even for relatively minor expenses like a co-pay
They want someone else to take the risk, but not make any money
They want quality care, but with little idea how to define that other than more of it at high prices
They don’t want high premiums or taxes
They don’t want to wait for care
They don’t want restrictions on accessing care or selecting a provider
They don’t want anyone approving care or denying to pay for it.
Retirement in America is not a pretty picture…and not getting better.
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- Interest from bonds is reinvested into stocks every 6 months, dollar cost averaging while maintaining the $500k in bonds as a “bedrock” for the portfolio.
- Dividends are reinvested into stocks.
- The portfolio is allowed to deviate from 50:50 to a maximum of 70:30, to allow the stocks to run during bull markets while maintaining the initial $500k in bonds.
- The 70:30 tether requires stocks to be sold to buy 20 year US treasuries at prevailing rates (reviewed quarterly).
- Bonds are capped at $1m.
- When stocks fall in value 10% from high water mark the lowest yielding bonds are sold to bring stock levels back up. If there is a further 10% drop rinse and repeat for every 10%. This cannot happen if $500k bond threshold is met.
Net result of all these gyrations, portfolio grows to $6.88m in the 20 year back test, with bond portion reaching $1m. This is much closer to Scenario 2 the 100% S&P 500 portfolio. This scenario would have required on average 3.15 trades per year with a peak of 6 in 2014, 2016, 2019. Scenario 18 is the same as 17 except for the stock portion I used a 4 fund portfolio (equally split between large cap blend (S&P 500), large cap value, small cap blend and small cap value, which matches equity positions in my portfolio) and this portfolio grows to $10.96m in the 20 year back test with bond portion reaching $1m. This is significantly larger than Scenario 2 the 100% S&P 500 portfolio. This scenario would have required a lot more maintenance, on average 6.5 trades per year with the peak year in 2022 requiring 20 trades. For scenarios 17 and 18 the increase in frequency of trades happens when the 70:30 tether is met after 7 years or so. The four fund portfolio has more trades because there are 4 funds vs 1 in the S&P 500 version, but in reality the maintenance required is very similar performing trades on a quarterly basis. This version of back testing shows that having a rebalancing strategy could potentially be effective matching or beating 100% S&P 500 performance with a 50:50 portfolio over a 20 year period. The added potential benefit for those who are about to retire or in early retirement and concerned about sequence of return risk, the severity of drawdowns during the first 6-7 years in these back tests were significantly mitigated by the bond holding. For what it's worth! Adding to the conversation."Medicaid Asset Protection Trusts (MAPTs)
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MY OLD INVESTING self was like the guy in the meme who twists around to ogle a woman in a red dress, while his girlfriend looks ready to break his neck.
Just as jumping from one relationship to another introduces new risks, the same holds true for jumping in and out of different investments. For me—and for most people, I’d wager—investing in individual stocks and narrowly focused funds involves a certain amount of trading, and we know such trading is an exercise in futility. Even the vast majority of professional fund managers can’t consistently beat the market averages. If your reaction to that is, “Yeah, but maybe I can, I’ve got a good handle on the way the world works,” you may need professional help with your portfolio.
Despite ample evidence that most investors trail the market averages, we all tend to “feel lucky,” like the ill-fated villain staring down Clint Eastwood in Dirty Harry. Why? A key reason: Stock market averages get a big boost each year from a minority of stocks that post big gains, and those huge winners make beating the market look easy. So how about buying those big winners? Unfortunately, yesterday’s winners aren’t necessarily tomorrow’s top dogs.
In fact, past performance has no predictive power. It may seem obvious today that we should have bought Facebook, Apple, Netflix, Microsoft, Amazon, Tesla and Google’s parent company Alphabet. But these “obvious” winners only seem that way in hindsight.
On top of our unjustified confidence in our own stock-picking abilities, we have a host of other behavioral faults, including impatience, a desire for quick gratification and the feeling that the grass is always greener somewhere else. Result? In our efforts to beat the market, we flit back and forth among different investments, as our latest stock picks lose their luster.
After taking fliers over the years on gold and energy funds, biotech and telecom stocks, and emerging markets specialty funds that focus on consumer companies, I’ve learned three key lessons:
I came by these lessons the hard way. I would make a new investment and be excited, thinking I’d made a good bet. I’d anticipate my potential gains and the validation that I’d outsmarted the market. I would tell myself I understood the potential downside, but really, I was practically counting my winnings.
But the thrill would soon fade, along with my original investment rationale. Perhaps the idea had come from some legendary portfolio manager or from something I read. But when my new holdings struggled, I lacked a frame of reference by which to decide whether to sell or hold.
A star manager might have said a drug company’s clinical trials were going well or that certain companies were going to gain market share. But then these things didn’t happen, and the stocks underperformed. Was this bad news now fully priced in? It’s nobody’s job on Wall Street to answer that, least of all the managers who touted the investments in the first place, and they probably wouldn’t know anyway.
Another example: About six years ago, I read a series of articles that convinced me that the next big trend was emerging markets consumer spending growth. That prompted me to buy some high-cost niche exchange-traded funds. But the two funds I bought consistently underperformed. One has continued to do so since I sold, while the other folded last May. Again, no one can tell you when or if such performance will turn around. Wall Street gets paid to sell you high-expense funds and keep you in them. Those high fees pay for a lot of research, writing and marketing, which in turn filters its way into the financial press, which then encourages you to buy.
There are two sources of investment risk: systematic risk, which is the danger that the broad market will fall, and unsystematic risk, which is the danger that your particular investments will lag behind the market.
Investors in individual stocks and sector funds face both risks. By contrast, owners of broad stock market index funds face only systematic risk. Indexing lacks the allure of sexy strangers and the prospect of quick investment scores, but the strategy’s risks are also far lower.
Success in broad market-cap-weighted index funds hinges on fewer variables. You just need aggregate share prices—driven ultimately by corporate profit and dividend growth—to rise at well above the rate of inflation, as they have for more than a century in the global stock market, despite two world wars, hyperinflation, stagflation, market crashes, panics and depressions. In other words, with broad stock market index funds, you’re making just one bet—and it’s a pretty good one for globally diversified investors with long time horizons.
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