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January-31-17

Trump’s Policies Are Irrelevant to Investors

The financial media is in overdrive with hyped up stories about the impact of the Trump presidency on your portfolio. There’s endless speculation about how the stock market will perform “in the Trump administration.”

It’s all nonsense. You should ignore it.

Predictions are unreliable

I’m sure “trading legend” Art Cashin feels great when he muses, “the fade over the past few weeks portends a rocky near-term future for the market.”

Actually, it “portends” nothing at all.

According to statistician Salil Mehta, who studied stock market forecasts for years, “...these supposedly ‘expert’ predictions [are] less accurate than random guessing.”

One of my favorite financial journalists, Jonathan Clements, had this to say about those who predict the direction of the market:

“We all know that the pundits can’t predict short-term market movements. Yet there they are, desperately trying to sound intelligent when they really haven’t got a clue.”

Larry Swedroe, Director of research for The BAM Alliance, correctly observed: “I have learned that there are only three types of market forecasters: those who don’t know where the market is going (count me among them); those who don’t know that they don’t know; and those who know that they don’t know, but get paid a lot of money to pretend they do.”

A bigger problem

Given the dismal track record of market predictions, it’s irresponsible for the financial media to give those who engage in this misleading exercise a platform. By doing so, they perpetuate the false belief that someone has the expertise to reliably peer into their crystal ball and tell investors what the future holds for the market.

Short-term data is irrelevant

The focus on how Trump’s policies might impact the market is both misplaced and irrelevant to intelligent investors.

The stock market is for long-term investors only. It’s far too volatile for short-term investors. The annualized returns of a moderate portfolio consisting of 60% stocks and 40% bonds from 1995-2014, ranged from a high of 18.5% in 1995 to a loss of 24.1% in 2008. But the annualized return during that entire period was 9.9%.

If you’re seriously concerned about the direction of the stock market in the next 3-5 years, you should have little or no exposure to stocks. Your investments should be concentrated in Treasury Bills, insured Certificates of Deposit and high quality money market funds.

The bottom line

The best way to resist the temptation to “do something” with your portfolio, is to ignore the financial media, ignore all predictions about the direction of the market, focus on your asset allocation, and invest in a globally diversified portfolio of low management fee index funds.

If you are looking for a real “legend” whose advice is grounded in sound academic principles, you are unlikely to find one in the daily grist you see on TV. Instead, you can find sound advice by heeding the wise counsel of John C. Bogle, the founder of Vanguard. His book, The Little Book of Common Sense Investing, should be required reading for all investors.

To paraphrase the famous debate quote from Lloyd Bentsen: I know Jack Bogle. Jack Bogle is a friend of mind. Art Cashin: You’re no Jack Bogle.

Trump’s Policies Are Irrelevant to Investors blog was originally posted on The Huffington Post website.

 

2014-04-01-Hiresfrontbookcover.jpgDan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read and his latest, The Smartest Sales Book You’ll Ever Read. He is a wealth advisor with Buckingham and Director of Investor Advocacy for The BAM ALLIANCE.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

 

 

By: Dan Solin | 0 comments
January-24-17

The Most Disastrous Investment Decision You Can Make

I recently had a sad experience that caused me to refocus my attention.

A widow asked for my advice. Her husband had died suddenly in his mid-sixties. He had no life insurance. The couple lived “within their means”, but had little in savings. She had one overriding question: Could she stay in the family home?

I told her I didn’t see how she could afford to do so. In fact, it was likely she would have to return to work.

Massive underinsurance

According to a survey conducted by Nationwide Financial, the average U.S. life insurance policy covers only about 16% of the lifetime earnings of the insured. Only 2% of those surveyed had sufficient life insurance.

Reasons for underinsurance

There are many reasons for this insurance gap. Here are the big ones:

Cost: Obtaining sufficient life insurance may cost less than you believe. According to Nationwide, a $99 monthly payment over 20 years would give a healthy 35-year old $2.3 million of life insurance.

Denial: Few want to confront their own mortality. Yet, it’s irrefutable that we’re all going to die. The data indicates women are four times more likely than men to be widowed. Have you really thought about what would happen to your spouse when you die?

Hypocrisy: I hear couples affirming their love for each other. It’s touching, but it can also be hypocritical. If you really love your spouse, you’ll consider the impact of your death and act in a fiscally responsible way to insure the quality of life of the surviving spouse. Life insurance is a critical component of your financial planning. Ignoring it is both hypocritical and irresponsible.

Bad advice: If you are using a broker or an advisor who charges a fee based on assets under management, be aware that recommending life insurance reduces those assets. Consciously or otherwise, it may not be at the top of the list of financial planning suggestions. Registered Investment Advisors have a fiduciary obligation to always act in your best interest. They should be sure you have adequate life insurance as part of the holistic planning process. If they don’t, raise this issue with them.

Confusion: Unfortunately, life insurance is one of the most confusing products available. Some throw up their hands and simply ignore the need. This is a huge mistake, with potentially disastrous consequences. For many, an inexpensive term policy is the best option. A reliable source of information from a highly rated company is TIAA-CREF. You can deal with them online or on the phone. My understanding is they are not commission based. I have no association with this firm or with any other insurance or advisory entity.

Distraction: When is the last time CNBC did a feature story on the need for life insurance? The big money in the wealth management business is generating fees or commissions derived from managing your assets. The reality is that most Americans are terrible investors, earning returns that don’t even keep up with the rate of inflation.

Americans also are not great savers. By some estimates, the average American saves less than 5% of disposable income.

The combination of low savings, poor investment returns, massive advertising by the securities industry and the failure to confront our mortality, is the perfect storm for spouses. No wonder becoming a widow is “an important risk factor for transition into poverty,” according to a report on the web page of the Social Security Office of Policy.

It’s time to step up and do the right thing. Check your life insurance coverage. If there’s a gap, fill it. Procrastination is not a viable plan.

The Most Disastrous Investment Decision You Can Make blog was originally posted on The Huffington Post website.

 

2014-04-01-Hiresfrontbookcover.jpgDan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read and his latest, The Smartest Sales Book You’ll Ever Read. He is a wealth advisor with Buckingham and Director of Investor Advocacy for The BAM ALLIANCE.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

 

 

By: Dan Solin | 0 comments
January-17-17

The ‘Average Returns’ Myth

The mutual fund industry is bordering on panic. Check out these developments.

A summit meeting

According to The Wall Street Journal, 60 mutual fund executives held a summit meeting in early November. It was called: “The Seismic Shift Senior Leadership Forum.” Its purpose was to brainstorm about how to stop the hemorrhaging withdrawals from actively managed funds to index funds.

I don’t like their chances. Their business model is premised on the continued ignorance of investors who don’t know that trying to “beat the market” is a zero sum game. The number of those investors is dwindling at a rapid rate.

The numbers are devastating

Actively managed fund managers have legitimate cause for concern.

Exchange-traded funds (which track an index) have accumulated almost $2.4 trillion in assets. In stark contrast, actively managed stock funds have seen outflows of $150 billion in 2016.

Hedge funds have seen net outflows of $77 billion.

This trend shows no sign of abating.

The reason is simple. Poor performance. Actively managed funds continue to underperform their benchmark index. For the past five years, an almost unbelievable 91.91 percent of large-cap managers lagged their respective benchmarks.

Hedge funds have fared even worse. As of November 18, 2016, the S&P 500 was up 9 percent for the year. The average return of all hedge funds was a meager 4 percent.

Investors aren’t stupid. They are tired of paying high fees for underperformance.

A desperate lie

The securities industry is desperate. It can’t dispute the numbers, which clearly indicate you would likely be better off investing in low management fee index funds, so it has concocted this big lie: Investing in index funds means you will be settling for “average returns.”

The data tells a very different story.

Morningstar compiled percentile rankings for the 10 and 15-year periods ending December 24, 2013. Unfortunately, the rankings don’t take into account the funds that went out of business during this time period or merged into other funds. This failure serious understates these findings.

Nevertheless, Vanguard’s index funds, on average, beat 61 percent of actively managed funds over the ten-year period and 44 percent of those funds over the 15-year period. If the analysis had included funds that failed during this period, the record of Vanguard would have been much better.

Passively managed funds from Dimensional Fund Advisors did much better. On average, its funds outperformed 76 percent of actively managed funds over 10 years and 80 percent over 15 years.

These returns are far from “average.”

Make your move

The financial media continues to act as a cheerleader for actively managed funds. Led by Jim Cramer, there’s a steady parade of self-interested pundits telling you how to do your own research and pick stock “winners”. Don’t believe them. Do you really believe you have greater resources (including powerful computers) than hedge funds? With all their analytical muscle, their average returns were less than 50% of what you would have obtained by investing in a low cost S&P 500 index fund.

Actively managed funds are a sophisticated wealth transfer scheme. They prey on fear, ignorance and greed.

Don’t remain a victim.

The ‘Average Returns’ Myth blog was originally posted on The Huffington Post website.

 

2014-04-01-Hiresfrontbookcover.jpgDan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read and his latest, The Smartest Sales Book You’ll Ever Read. He is a wealth advisor with Buckingham and Director of Investor Advocacy for The BAM ALLIANCE.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

 

 

By: Dan Solin | 0 comments
January-10-17

Mindless

Recently, Art Cashin, the UBS Director of floor operations, told CNBC that “...the market can’t make up its mind whether it wants to make one more try” for the DJIA to reach 20,000. I’m no fan of Mr. Cashin and his fellow pundits featured on CNBC. I find their “observations” meaningless musings, of no value to investors, and with the potential to cause significant harm to those who rely on them.

An opaque track record

On November 8, 2016, Cashin peered into his crystal ball and “warned” that a Trump victory and a Republican sweep of Congress “would be a slight negative” for the market. According to Yahoo Finance, on that date, the DJIA closed at 18,332. On January 6, 2017, it closed at 19,963. “Massive increase” would be more accurate than “slight negative.”

Undeterred and unapologetic, Cashin continues to speculate about the future of the market. There’s one question he won’t answer: What’s the track record of your predictions?

A devious strategy

The strategy of the financial media is to give pundits like Cashin a platform to make guesses about the future of the market, even though there’s no evidence he or anyone else has this expertise. Doing so encourages gullible investors to trade, which enriches the brokerage firms that provide CNBC with a steady stream of revenue.

Giving the market a “mind” is a subtle but effective psychological gambit to encourage viewers to rely on those who appear to have the ability to decipher what “the mind” is thinking. Few investors do their homework and check out the accuracy of past predictions. If they did, they would justifiably ask this question: If you couldn’t predict what would happen to stocks if Trump was elected, why should I rely on your predictions of how the market will respond to a Trump presidency?

A new twist on “mindless”

A report in BloombergMarkets put another twist on the use of “mind” to explain market behavior. Crispin Odey is a billionaire who runs an $8 billion European hedge fund. Apparently, he bet big that U.K stocks would suffer as a consequence of the Brexit vote. He was dead wrong.

His main hedge fund slumped an astounding 49.5% in 2016. Who was at fault? Not the fund managers, of course. Odey complained that “mindless” passive investing was “driving out” active fund managers.

The poor performance of Odey’s fund was not an isolated case. Hedge fund closures outpaced openings in 2016, due largely to poor performance.

A better way

“Mindless” investors who opted for a simple, all-in-one LifeStrategy Fund from Vanguard had a vastly different experience. Vanguard’s LifeStrategy Growth Fund (VASGX), which provides a broadly diversified portfolio in a single fund, with an allocation of 80% stocks and 20% bonds, returned 8.33% in 2016. Since inception on September 30, 1994, it has an average annual performance of 7.81%.

You could invest in the LifeStrategy Fund suitable for you at a very low management fee of 0.15%. Alternatively, you could pay 2% of assets under management, plus 20% of profits to a hedge fund manager, or listen to more nonsense from Cashin, Cramer and other pundits.

But that would be really “mindless.”

Mindless blog was originally posted on The Huffington Post website.

 

2014-04-01-Hiresfrontbookcover.jpgDan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read and his latest, The Smartest Sales Book You’ll Ever Read. He is a wealth advisor with Buckingham and Director of Investor Advocacy for The BAM ALLIANCE.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

 

 

By: Dan Solin | 0 comments
January-09-17

Resolve to Abolish Terrible Investment Advice

This is the time of year when you will likely compile a list of goals for 2017. Here’s one I hope you will put at the top of your list: Don’t be a sucker for terrible, conflicted investment advice. Unlike many other New Year’s resolutions, this one is very easy to implement. Here’s a proposed game plan:

Avoid market-beating brokers

I can’t think of a single, valid reason to use a broker and many compelling reasons why you should avoid them. The most striking one is they don’t have to place your interest above their own. They can — and often do — sell you investment products that generate the highest fees for themselves and their firm, when less expensive options are available, with higher expected returns. They don’t even have to disclose this conflict of interest. You can find more information about this low standard of care brokers are legally obligated to provide here.

They also give lousy advice. Over the long term, the average investor has realized returns of about 3.7 percent, which is below the actual returns of almost every asset class.

Brokers win. Investors lose. There has to be a better way. Fortunately, there is.

No advice may be an option

The securities industry has done a great job persuading you investing is too complicated for you to manage on your own. For many investors, this is simply not true. You may be able to satisfy all your investing needs by buying just one fund. Vanguard offers its LifeStrategy Funds, at different risk levels, ranging from very conservative to aggressive. These funds invest in Vanguard’s broadest index funds, providing ample diversification of the U.S. and international stock markets. They have a very low average expense ratio of only 0.16 percent.

Vanguard’s LifeStrategy Moderate Growth Fund (VGMGX) holds 60 percent stocks and 40 percent bonds. If this is a suitable asset allocation for you, compare the returns of this one fund to your portfolio. Since inception on September 30, 1994, it had average annual returns of 7.48 percent. The minimum investment is only $3000.

Sound, intelligent and responsible investing doesn’t have to be complicated. Don’t expect your broker to tell you about these funds.

Focus on fees

You’re in luck if you need an advisor. There are many new options available to you that will provide sound investment advice, access to a credentialed advisor and provide you with a comprehensive financial plan. The cost of these services is a fraction of what traditional advisors currently charge (although I suspect their fees will start to come down). Here are two suggestions:

1. Vanguard Personal Advisor Services: Vanguard’s new service builds a portfolio with its low-cost index funds, acts as an investing coach and minimizes your taxes. The cost of this service is only 0.30 percent of your assets under management annually, which is less than one-third of the industry average of 1.02 percent.

2. Schwab Intelligent Advisory: In a major development, Schwab announced it will launch a service similar to Vanguard’s sometime in the first half of 2017. It will offer comprehensive financial planning, ongoing guidance from financial planning consultants, and fully automated, diversified, low cost portfolios. The cost is only 0.28 percent of assets managed, with a $900 quarterly fee maximum.

Other low-cost options include robo-advisors. You can find a useful list of some of the leading ones here. All of them provide sound, academically based investing advice, for a very low fee.

Higher net worth investors, and those with complex financial issues, will continue to benefit from the services of traditional advisors. Be sure the advisor you select is a Registered Investment Advisor (RIA). All RIA’s are required to place your interest ahead of their own and to disclose all actual and potential conflicts of interest. Advisors authorized to place client assets in funds managed by Dimensional Fund Advisors are an especially good choice. These advisors rely on sound, academically based principles of investing. You can find a list of these advisors here.

If you want to change your investing experience, 2017 is your opportunity to do so. You have never had so many great alternatives to choose from.

Resolve to Abolish Terrible Investment Advice blog was originally posted on The Huffington Post website.

 

2014-04-01-Hiresfrontbookcover.jpgDan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read and his latest, The Smartest Sales Book You’ll Ever Read. He is a wealth advisor with Buckingham and Director of Investor Advocacy for The BAM ALLIANCE.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

 

 

By: Dan Solin | 0 comments