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The Right Investment Advice

While we only have a little more than two months under our proverbial belt, there’s no denying that it’s been a good run thus far in 2013.  Since January 2^nd the S&P 500 Index has returned 9%.

In addition, all of the major indexes, the DJIA, the S&P 500 Index and the NASDAQ, have more than doubled since the low of March 9, 2009. This is a great reminder why you shouldn’t abandon your well-designed plan just because others are panicking.

On the flip side, any day now we can expect to see articles about why this is a good time to buy stocks.  Why few people were saying that in the depths of 2009 is a good question you might ask.

When the news was bad and markets were tanking, I advised staying the course and adhering to your investment plan.  Now I advise not getting too optimistic, thinking the “coast is clear.”

While we can all enjoy the recent successes, I certainly cannot take any credit for predicting the stock market rally.  The truth is that rallies come along quite randomly, as do stock market routs.  And as I’ve said on numerous occasions, no one can predict short-term stock market returns.  Just a reminder, stocks can go down as well as up.  Of course, you know that, but you also know that the long-term trend has been up.

So let’s bring up a subject I feel is critical to safeguarding your long-term investment experience: In good times and bad, there is an art to making quality decisions, and it may not be what you think.

Among the many roles of your financial advisor, one is to remind you (repeatedly) that the quality of your financial decisions contributes as much or more to your investment success as do the fleeting outcomes of hot or cold markets. In Carl Richards’ book, Behavior Gap, we are reminded of an important related insight: 

“The outcomes of our decisions may vary. In fact, you can make a good decision and have a bad outcome. But sensible, reality-based choices are our best shot at reaching our goals.”

To illustrate, you could take your life savings toLas Vegas, bet it all on a single very lucky spin and strike it outrageously rich. That would be a great, albeit improbable, outcome … to a very horrendous decision. In contrast, you can maintain a low-cost, globally diversified portfolio that reflects your personal goals as well as the latest academic evidence on capturing market returns. Fantastic decision, even when market conditions deliver disappointing results.

This is where your financial advisor comes in especially handy. Whenever you may be tempted off-course by undesirable outcomes — or, on the flip side, by random bursts of success — you need to objectively assess what, if any, adjustments might be warranted within your plans and your investments.

As Larry Swedroe points out:

“If you have done a good job developing your plan, and it has anticipated the risks you are likely to face, you should ignore the noise of the market, not getting caught up in either the hype or the fear that bull and bear markets can cause. Just stick to your plan.”

Making confident, quality decisions toward achieving your long-term goals regardless of past-tense outcomes — that is good advice any time of year.

Health and Wealth Resolutions for 2013

If weight loss is one of your New Year’s resolutions (and it almost always is for quite a few of us after the triple whammy of the Thanksgiving, Christmas and New Year’s holidays), here’s a handy tip: A team of international scientists, analyzing recent health data from more than 25,600 U.S. survey participants, concluded that people who read food labels weigh less than those who don’t (this is especially true of women participants, who averaged nearly 9 pounds less).

I would argue that you need to know what to look for on a food label.  “Natural” “healthy” “cholesterol-free” are, in my opinion, meaningless.  Depending on your goals and specific diet, “wheat-free”  “soy-free” and “dairy-free” may be important.  And once again in my opinion, the amount of sugar (and the carbohydrates which convert to sugar in the body) in any food is extremely important. 

You’re probably asking yourself what has food got to do with finance?  The answer is all about information and interpretation.

What you need: Your investment experience is greatly improved by a sound philosophy and consistent exposure to meaningful facts. For example, in 2012 despite continued global economic uncertainty and political gridlock, stocks quietly rewarded patient investors with double-digit gains. Not too shabby after all for a stay-the-course investor, an approach we have consistently advocated.  Investors who believed the negative headlines and pulled their money out of equities into safer havens suffered accordingly.

What you get: Slick advertising showcases a product’s most appealing features. If they’re there at all, the blemishes and boring but very important details for the long-term investor are buried in the fine print.  Just as understanding metabolism is important for weight control, knowledge of how markets and investments work is key to a successful investing strategy.

What counts: There is a reason the Securities and Exchange Commission makes sellers of investments say that “Past performance is not a guarantee of future results.”  Why?  Because it is true.  Why then do so many investors pay attention to the Morningstar ratings of mutual funds?  Those much ballyhooed Morningstar Star ratings are based on past performance. 

What you must know: There’s no law in our free market system against promoting what’s popular, irrespective of how bad it might be for you. It’s up to you, not the product provider, to make informed choices that are in your best interests.  Understanding fee structures and tax implications are up to you (or your objective investment advisor).

How we help: We live in a world of up-and-down markets in which useful financial disclosures are often opaque to non-existent; and the next upset — the next fiscal cliff or its economy-busting equivalent — seems to forever threaten our best-laid plans. Our greatest role is to provide you with solid, steady, evidence-based advice. Like an objective nutritionist for your wealth, it is our privilege to champion your best financial interests alongside you, help you read wisely between the promotional lines, and chart out a healthy, happy lifestyle that suits your personal tastes.

We look forward to remaining at your side throughout 2013.

What’s Your Investment Philosophy?

“The important thing about an investment philosophy is that you have one.” - David Booth

Regardless of whether or not you are a fan of Capital One credit cards, you have to admit “What’s in your wallet?” is pretty catchy. Maybe that’s because it gets to the heart of the matter so quickly. At the heart of solid investing is a similar key question: “What’s your investment philosophy?” Let’s explore why that’s so important.

Step One: You Think, Therefore You Are

First, at the very least, you should have one.  As recommended by Dimensional Fund Advisors chairman and co-CEO David Booth, having any sort of investment philosophy is a critical first step in grounding you, and directing your decision-making toward your desired ends.

You’d think that would be a given, but many investors would be sorely put to articulate an overarching plan behind their individual trades.  In the absence of an “all-weather” philosophy to guide your way, you’ll struggle to make sense of the economic news you hear. You’ll react emotionally to short-term market fluctuations and the crises du jour proclaimed by the media.  You’ll spend too much money on unnecessary trades or lack the confidence to act boldly when it’s in your best interests.

Step Two: Make It a Good One

Even better than having any old investment philosophy is to have a good one. It should fit well with your personal goals and risk tolerances.  It also should be based on the wealth of academic evidence on how markets are expected to reward patient investors.

Read our evidence-based Investment Philosophy and see if it makes sense to you.   Contrast it with questions I hear from those who have not yet crafted their best-laid investment philosophy: (1) Is the stock market being manipulated to benefit one political party? (2) If Governor Romney is elected president, will the stock market go up? (3) When will Facebook’s stock go back up to its issue price?

Our answers are, in order, probably not, maybe (maybe not), and who knows? These brilliantly non-committal answers reflect that they are the wrong questions to begin with.

If long-term market growth trends upward — and all evidence to date indicates that it does — why not focus on that instead? Wall Street often profits on flimflam, pretending that you need guru prognosticators to predict impending individual winners and losers, but the evidence indicates that you’re best off ignoring these theatrics and adopting a sound investment philosophy to carry you through.

We elaborate on this theme in our Key Insights quarterly newsletters

For example our April Key Insights newsletter recommended focusing on what you can actually control:

• Forget about trying to forecast near-term moves in the market.
• Form a sensible investment plan that aligns your personal goals with the market’s long-term risks and expected rewards.
• Implement a well-structured portfolio to reflect your plan.
• Stick with it.

If you’ve ever read the book or seen the movie Moneyball, you know that one of the practices of Oakland Athletics’ general manager Billy Beane is to avoid watching his team’s baseball games live.  Why would a manager do that?  Because he knows he might succumb to irrational decisions based on the heat of the moment.  Instead, he stays focused on his evidence-based philosophy on how the game is best played.

Similarly, you can fret about your investments play by play, or you can follow a sensible long-term approach based on the evidence of what will bring you the most “wins” for the least cost.  The choice is yours.