Tuesday, December 31, 2013

Investing Made Simple ... Get the Facts

Beating the stock market isn't impossible but it's difficult --- especially for the so-called stock market experts.

And that's especially true if advisory fees, commissions and taxes are factored into the equation.

So what's the average long term individual investor to do? That's simple: PLAY FOR A TIE.

In short, keep the long term in mind and ignore the short term gyrations and inevitable volatility of the market.

And never confuse volatility or short term uncertainty with the right way to achieve long term investing success and financial security during our later years.

In other words, get the facts early and then decide how to best play the game.

But first, know how to play the game.

What's really wrong with investors and advisers captures the essence of the investing game when it says:

"The financial advisory business isn't exactly basking in glory at the present time. One reason is that it employs more scoundrels than absolutely necessary.

A risk-free investment is unlikely to yield an after-tax return greater than the rate of inflation. . . . 

The "Whatiffers" bore me. Each day contains enough uncertainty to give the fainthearted investor an excuse for avoiding equities. There is no such thing as the foreseeable future and uncertainty (what's left over after you think you've thought of everything) is our constant companion.                                        

The uncertainty inherent in investing is one reason why those who make economic and market predictions find such a large audience—even though, deep down inside, we know that most of them are just blowing self-promoting smoke.

I am a proponent of passive investing—a buy, hold and rebalance strategy using index funds. Yet only about 20% of the money that individual investors have in stock funds is indexed. The remaining 80% is actively managed—attempting to beat the market. So, it should come as no surprise that the majority of financial advisers that I meet promote active management. Most readily admit that only about one third of actively managed funds outperform a comparable index fund in any given year.

But here's the strange part. They all insist that their clients are owners of the charmed one third. It reminds me of Garrison Keillor's fictional hometown of Lake Wobegon, Minnesota—a place where all the women are strong, all the men are good-looking and all the financial advisers are above average.

In the 20 years ending in December 2012, the return for the average domestic stock fund investor was less than half of the return of the stock market. This performance differential is often referred to as the behavioral gap because it is caused by poorly timed, emotional investment decisions. After the market rises, investors become optimistic stock buyers. After the market declines, they turn into pessimistic stock sellers. This behavioral gap is often cited as evidence that investors need professional guidance. But in Morningstar Advisor it was reported that 83% of mutual fund-purchases are done under the guidance of financial advisers. The elephant in the room (standing next to the king with no clothes) is that bad advice offered by performance-chasing, market-timing advisers is a big part of investors' underperformance.

To invest successfully for retirement, you don't need to be skilled at stock picking or market timing.

You need a prudent long-term investment strategy that keeps an appropriate percentage of your assets permanently invested in equities so that you'll be invested during those unpredictable, short time periods that make stock investing profitable in the long run. Diversify broadly using low cost, tax efficient index funds, rebalance annually and let time take care of the rest.

Your portfolio is Superman. Market timing is kryptonite. Any questions?

If conversations with your financial adviser center on predictions, past performance and market beating ideas instead of a strategy to capture the market's long term return, you're playing a game of the blind leading the blind."                                        

Summing Up

Join the real pros and invest like a real expert.

Buy low cost index stock funds (like the S&P 500 from either Fidelity or Vanguard) and then resolve to stay the course.

And save as much as you can, beginning as early as you can.

That's because time flies, and time in the market is very much on the side of the long term individual investor.

That's the way to 'win the game' of securing a long and successful financially secure retirement.

Thanks. Bob.

1 comment:

  1. So it won't be a bird or a plane flying through the air. But there are a ton of options to consider, and you can learn more about all of them at I've been really looking into mutual funds to just get started and then expanding in a little while. But I'm just one person and there are a lot of ways to go. Find your own way!