Stole that headline from Twitter. Originated with someone named Allen Kuhn. I don’t know Allen but that is a catchy snippet. One hundred and forty characters doesn’t tell much of a story so I will just guess what Allen was thinking. These were all on Yahoo finance today. This could send gold tumbling below $1,000 again, Citi says – Citi doesn’t know which way gold will trade next, but they know you are scared. Hedge funds dumped Apple, and bought this stock instead – Hmm Apple was a great investment for a long time and now these guys have found a replacement for Apple in my portfolio! Holy iWatch, Batman! Jump on it! Top 3 American Century Investments Asset Allocation Mutual Funds (TWSAX, TWSMX) – Wait, what? You said three, this is only two and they both have above average fees. A brutal remark from a high-speed trader tells you everything you need to know about where Wall Street is headed – and my crystal ball says they are all wet. Too many times I see folks counting on the appreciation of the home to help with their retirement goals. A big part of the problem with the real estate bubble of 2007-08 is that people used their homes like a piggy bank with HELOC loans they could not afford when real estate prices headed south. When you retire you should aim to have your home paid for. No mortgage = peace of mind and less stress on the investment assets you do have. In extreme situations, like when someone has done a poor job of saving and investing for retirement, a reverse mortgage can help make ends meet, but it should not be a part of your plan. Think of your home as a nice place to live! I do not like gold as an investment. I think it is just speculation. But if you are bitten by the gold bug and can’t be cured, please at least buy your gold coins directly from the US Mint. You won’t pay outrageous spreads when you purchase the coins, you won’t be called and pressured into buying more, and you won’t be sold “collectables” of dubious value. And since many folks are convinced to own gold coins in their IRAs, a word of caution. While it is okay for your IRA to invest in gold coins like the American Eagle, collectables are a prohibited transaction which could lead to your IRA being considered void and immediately 100% taxable. How many opportunities are lost as we wait for the perfect time to start? You do know there is no perfect time, or perfect place, or perfect way. You do the best you can with what you have now. Don’t wait for the perfect stock, or the lowest price, or the perfect job, or the perfect house. They do not exist. Just start. Today. Wow! Can you believe it? What in the world is going on now? No one understands this, it just makes no sense. Has the world gone mad? All of these sentences could be uttered every week if you have a conversation about the stock market. It never seems to change, there is always something nutty happening. If it’s not the Fed, it’s congress. If it’s not interest rates, it’s PE ratios. If it’s not earnings, it’s IPOs. All of this reminds me of an old Saturday Night Live skit that featured Gilda Radner as Roseanne Roseannadanna. After going off on a rambling rant loosely related to some topic, Rosanna would be interrupted by the news anchor played by Jane Curtin and then Roseanna would end the segment with the line, “Well, Jane, it just goes to show you, it's always something — if it ain't one thing, it's another." And that’s the problem and opportunity with the stock market! Where do you draw the line for ethical behavior and corporate greed? This weekend I saw an online article about expense ratios and index funds that claimed there were funds that do nothing more than track the S&P 500 Index, yet charge investors fees greater than 1% to do so. I have a license for the Morningstar database so I checked for myself today. I was amazed. A scan for S&P tracking funds returned 160 funds, now Morningstar counts each share class as a separate fund so the real number is a bit less, but the spread of gross prospectus expense ratios was eye opening. The expense ratios ranged from a low of .01% (that is one basis point) for the Vanguard 500 Index Institutional Select to a high of 2.35% for the Rydex S&P 500 Class C share. Now you should know that managing an index fund is a no brainer. The stocks you own should be the same stock in the same weightings as the index that is published by Standard and Poor. It should be easy enough for a computer program to handle without much human input. And other than expenses all these funds are the same. It is a commodity and one index fund should logically be a perfect replacement for any other index fund, just as one bushel of wheat should be a perfect replacement for any other bushel of wheat. So how can Rydex justify those charges? And although Rydex is the most expensive I see Nuveen Equity Index C at 1.46% State Farm S&P 500 Index B at 1.44%, Wells Fargo Index B at 1.38%. This is nuts. If you own any of these funds you should fire your broker. The SPY SPDR S&P 500 Exchange Traded Fund is available for all brokerage firms to purchase and has a gross expense ratio of just 0.11% (11 basis points). How can anyone justify paying 10 times that for what should be an identical product? But where do you draw the line? Or is there no line because no one is looking? “If Johnny jumped off a bridge would you jump too?”, said every mother ever. Just shows how pervasive the herding or follow the crowd instinct is. Like bison on the prairie we seem to move as a herd. While there is safety in numbers, sometimes the herd mentality is detrimental to us and our finances. Native Americans took advantage of the herd mentality by starting a stampede among the herd of bison and driving them off a cliff as the herd panicked. So it goes with stock market investors sometimes. We all get spooked and run for the exit at the same time and some of us invariably end up at the bottom of a precipice. Or, just as dangerously, we all sense the opportunity to make a fortune and pile into the same stocks at the same time until, the last fool climbs on board. Then when there are no more fools to jump into the boat it sinks from the weight of the herd. Cognitive biases are mental shortcuts that helped our ancestors survive in a hostile environment. In the modern world these deeply ingrained shortcuts can be dangerous to our financial wellbeing. Although it is impossible to purge your psyche of these biases, if you are aware they exist you have a better chance of overcoming the urges they bring and making more rational and profitable decisions. If you haven’t heard of Bill Ackman before then good for you! You’re out living your life and are not too plugged into CNBC. Bill Ackman is a hedge fund manager, he is a really smart guy and made a lot of money for his investors…until recently. His big bet on pharmaceutical company Valeant has become an epic fail, with the stock price cratering from a high of $261 in August of 2015 to around $34 per share less than a year later. That is shedding over 85% of the company’s value. So how can such a smart guy turn so wrong so fast? And, what can individual investors learn from Mr. Ackman’s fail? 1) Don’t own enough of any one thing that you can make a killing or be killed by it. Diversification is the investor’s best friend. You do not have to be a stock picking genius like Bill Ackman to grow your wealth, you just need to have a properly diversified portfolio that you can stick with through thick and thin. The magic of compound interest and the inexorable march of the stock market will do the rest. 2) Don’t announce to the world that you own stock in a company that you see as a big winner. Bill Ackman was often in the financial media, talking up the positives of Valeant. Maybe it started by Ackman being a little greedy and talking up a holding, but over time it seems to have morphed into a story he believed. If you publicly say XYZ is the best thing since sliced bread, you will paint yourself into a corner of having to admit you were wrong if things don’t work out, and people hate to admit they were wrong about anything! So Bill sees that Valiant stock is cratering, but rather than admit to being wrong he stubbornly refused to sell until most of his money has disappeared. From here it will take a gain of over 600% for him to get back to a valuation equal to the August of 2015 level. How many years of stellar returns does it take to gain over 600%? Not even Bill Ackman is that good. 3) Don’t invest in companies that are built on shady dealings. Like the banks that derive too much of their profit from the fees they charge their small customers, Valeant Pharmaceuticals didn’t have a legitimate economic model. They bought companies and drug rights with the sole intent of price gouging their customers. If they would do that are you really surprised they would cook their books too? Companies that understand they are also citizens of the places they do business tend to build the best business model for the long run. Companies that are shady like the Pharma Bro i.e. Enron, Lehman Brothers, Arthur Anderson, eventually are rewarded appropriately for their behavior. There are too many good companies available to choose one built on cheating. Sorry, Bill Ackman. We are only human. With Easter being Sunday, it's a good time to reiterate the age old saying of "Don't put all your eggs in one basket". This applies to many things in life, but it is especially paramount in the world of finance and the creation of a comfortable retirement strategy. Diversification should be the foundation of your financial goals. It represents mathematically the highest probability of reaching your financial hopes and dreams, and something I hope you're hearing over and over in the world of financial planning. If you haven't heard much about it you must be hiding under a rock, much like some Easter eggs this Sunday. You have heard of the importance of owning a diversified portfolio. For those who do not manage money professionally, the mantra to diversify by investment class is pounded into their heads by the consumer finance media and is rarely questioned. The reason bonds are included in a balanced portfolio is usually to reduce the overall risk characteristics of a portfolio. For example, if an investor would be panicked by a short term 20% drop in the value of their holdings as reflected in their monthly statement, then we can add maybe 40% to the bond side, making it likely that a 20% drop in stock prices will only result in a 12% drop for that investors statement (.6 allocation to stocks X .2 short term drop in value). It is not that bonds offer superior returns, it is that bonds sometimes provide better returns than stocks with less volatility. The same reduction in risk can be achieved by holding cash and money market funds, but historically bonds have outperformed cash. Yet when markets enter periods of extreme turmoil like 2008 and 2009 the usual correlations of investment returns fly out the window and bonds can tank at the same time stocks tank. And when interest rates rise bond prices will fall. So my question to you is: Why do you own bonds? Are you afraid of the temporary drops in stock prices or are you just following the mantra of the popular press? With interest rates poised to rise would you be better off using cash as a buffer? |
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