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Buy Low and Sell High is Easy for You to Say

Are you frustrated with the market downturn we’ve seen in the past few weeks? If so, you might need to make some adjustments to your portfolio, i.e. 401(k), 403(b), etc. William Bernstein, author of The Intelligent Asset Allocator said, “The essence of effective portfolio construction is the use of a large number of poorly correlated assets.”

What does he mean by “poorly correlated?” I’ll get to that in a minute. First, I want to quote another master of investment strategy. Roger G. Ibbotson is emeritus professor of the practice of finance at Yale School of Management. He said, “On average, 94 percent of the variability of returns and 100 percent of the absolute level of return is explained by asset allocation.”

Now let’s summarize these two statements. A viable portfolio that is poised to make decent returns has two characteristics: 1. It is diversified 2. The assets don’t behave identically. In other words, asset A doesn’t move in the same direction as asset B when the stock market goes up and down.

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4 Ways to Improve Your Investment Returns

We have met the enemy and he is us,” said a wise opossum named Pogo (not to be confused with POGO, the Project on Government Oversight, which is featured in my next book Train Wreck) in a 1970 newspaper cartoon written by Walt Kelly. Cicero put it in a more general context: “Man is his own worst enemy,” sometime around 50 B.C. It has been modified to say you are your own worst enemy. Ok. I think you get the idea.

No one will ever accomplish their investment goals, if they don’t first master their own emotions.

Let me just say at the forefront of this article; if you think you can be profitable in the stock market, without addressing your emotional makeup first, well, allow me to use another quote, “A fool and his money are soon parted.” I have seen the well-educated, the housewife, the retiree, the CEO, the business owner, and many others from all walks of life, forfeit their chance to make very good money. All were brought down by an overlooked nemesis known as emotions. I don’t care how great of an investment plan you, and your adviser have hatched. If you don’t learn how to identify, and corral your feelings, you will never be a successful investor. You will be doomed to walk in the land of meager returns, where CDs and savings accounts dwell. If you think these are “safe” investments, consider this: On average, the cost of goods double every 18 years, due to inflation. So, what costs $100 today, will cost $200 in 18 years.

Dalbar, a premier market research company, with one focus being in the field of investor emotions. How an investor behaves is more important to investing than you might imagine. I would venture to say it is the single greatest issue that determines investment success or failure. No one will ever accomplish their investment goals, if they don’t first master their own emotions. You can be the smartest or luckiest investor ever to walk the face of this planet, but one single emotion can completely annihilate any chance of making money from your investments. But we aren’t dealing with just one emotion; we must contend with two: fear and greed.

annualized_returnsA twenty-year study conducted by Dalbar, revealed the number one factor directly affecting the amount of money an investor makes, is the investor’s emotional responses to the movements of the market. Consider this.

During the two decades spanning 1987 to 2006, the average investor achieved an annual return of 4.3% from his equity investments. In contrast, the unmanaged S&P 500 index achieved a return of 11.8% per year. That is a cumulative return of 236%! Remarkable! If a person had simply purchased an index fund, and held it for 20 years, she would have acquired double-digit returns on her money. Unfortunately, the average investor only realized a 4.3% gain, over the same time period. Are you beginning to get the picture?

Fear and greed are no laughing matter. If you cannot consistently defeat these two evil twins, your returns will suffer. Here is a breakdown of the disparaging gap between disciplined investors, and the herd. While there is no simple answer to this dilemma, there are some steps you can take to help move you from the red column to the blue one. Here are five to consider.

 

1. Know Your History.

know_your_historyWilliam O’Neil, founder of Investor’s Business Daily said, “The American Stock Market has been growing since 1790. So, in my opinion, faith and confidence in America’s long-term future is a very shrewd and intelligent position to take and stick with for as long as you live.” The stock market makes more than it loses. Otherwise, the DOW would be at zero. There has never been a time in history, where the stock market did not recover from a downturn. When you recognize that markets move in cycles, and that history is on your side, you will make significant gains on controlling your emotions.

2. Consider the Source.

Ever since TV showed up at the 1939 World’s Fair, we have been indoctrinated with so-called expert advice on how to invest. There is a 24/7 stream of investment noise available to every American. Rutherford D. Rogers said “We’re drowning in information and starving for knowledge.” Louis Engel said, “The cheapest commodity in the world is investment advice from people not qualified to give it.” There is no scientific evidence which proves short-term price fluctuations are consistently predictable. Therefore, I encourage you to adopt a long-term view of investing. The Dalbar studies spanned 20 years, not 20 minutes.

3. Overcome Negative Experiences.

Samuel Case said: “Most investors try various markets, lose money, and finally acquire some knowledge through bitter experience. This is roughly analogous to learning how to drive by having a series of accidents.” A salty sea captain was asked by his first mate how he knew where all the shoals and reefs were in the bay. The captain replied, “by hitting them all!” That’s not what we would call a good investment strategy. If you have been a victim of your own behavior in the past, make a new resolution to approach your investment strategy, without letting your emotions control your behavior.

4. Find a Coach.

No one has the self fortitude to overcome fear and greed all the time. It only takes one moment of weakness to ruin everything. This is where a consultant can bring value to your investment strategy. Unlike brokers, who get paid a commission regardless of the outcome, an investment consultant makes more money when you do, and less when you do, since their income is tied to a percentage of your portfolio value. Find one who is a strong advocate of client education. Understanding why the market behaves the way it does, is empowering for the investor. You can make better gains if you will learn how to overcome your fears, and harness the destructive power of greed.

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Secrets of Investing for Beginners Part III

Secret Three: Investing is not for daycare candidates

The children from Mizzou college in Missouri are trying to start a trend of so-called “safe zones,” where feelings are protected from hateful speech. If you are that prickly, you might want to get rich by striking oil, since the market can be a brutal place for the emotionally delicate. Emotions, namely fear and greed, will be your two worst enemies that stand between you and profits. Countless investors have failed to reach their financial goals because of these twin sisters of failure. The ability to remain invested in volatile markets takes both a long-term investment philosophy (Secret Two), and an understanding of the cyclical nature of the markets. Case in point: from 1987 to 2006, the S&P 500 averaged annual returns of 11.8%. Over that same period the average investor gained only 4.3%. Why? Fear and greed. Neither will help you make a dime.

What you need is a coach-minded advisor, not a salesman. I have seen two terrible recessions in my years as an investment consultant. I have seen people destroy their nest egg with emotions, and I have seen people stay the course, and reap the financial benefits. While I can’t say 100%, I can say that many of those who failed, tried to invest on their own, while the majority of those who succeeded, had an experienced advisor keeping them calm.

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Secrets of Investing for Beginners Part II

In stock market the most important element in Investing for Beginners is time. If anyone wants to start investing money in the stock market he or she must have to take time.

Secret Two: It’s time in the market, not timing the market

If I were to build a house for you, the first thing I would do is pour a solid, durable foundation. Everything, and I mean everything that I build for you from that point relies on that foundation. If you try to cut costs here you will pay handsomely for it. The 2011 Joplin tornado was a catastrophic EF5 multiple-vortex tornado that struck Joplin, Missouri, late in the afternoon of Sunday, May 22. It caused $2.8 billion in damages. It left a swath of destruction almost a mile wide. The massive EF5 twister destroyed many homes, yet in spite of its massive power, it was unable to demolish even one foundation.

A necessary ingredient to making money in the stock market is time. It is the foundation on which your portfolio grows. Before you put any money into a company via their stock or bond, you should have a long-term plan for staying there. There is only one way I know to get rich quick-TAKE YOUR TIME, because the swift outcome is usually the evaporation of your money.