All Things Financial Planning Blog


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Is this Wall Street or Las Vegas Blvd?


$400 on Big Red – am I buying a share of Apple or placing an all or nothing craps bet? The past couple months have felt like a rough night at the craps table – win lose win lose – makes you want to pull out and hit the bar! I bought my first stock and placed my first craps bet at 19. I have suffered through numerous bear markets and cold tables. Ironically, the bear markets are feeling worse thanks to our 24/7 media fear-mongers while a bad night at the craps table has gotten less painful thanks to some discipline. What do you do when a random walk down Wall Street feels more like a stagger down Las Vegas Blvd?

Get some discipline! Craps can be intimidating. People are throwing chips all over the table screaming out their bets, dice are flying, and there is a dude with a stick! And what do you bet anyway– pass, don’t pass, come, high low, hard ways, field, the numbers and what on earth is big red?

Let me walk you through my craps discipline: Before I walk into the casino, I decide how much I am willing to lose. I get my chips and place my bet on the pass line – I am betting that the shooter will throw a 7 or 11 on the come out or hit the same number twice before 7. The dice are out, shooter throws and the stick dude yells “6 easy 6”. I back my bet for the odds and buy all the other numbers. Every number the shooter rolls pays me a little dividend, and finally s/he  hits the 6 and I am a winner winner chicken dinner! I get paid even money on the pass line and odds on my back bet. I slip a few chips in my purse. S/he throws a 4 and then a 7 craps. The dude with the stick clears the table and all my money. Time to head for the bar! In sum, my discipline is: diversify my bets, get paid a dividend, hold on to some winnings and never lose more than I start with.

Can my craps discipline apply to investing in the stock market? Sure!

  • Diversify: instead of buying 1 stock, buy them all. You don’t have to worry about any one stock not performing the way you expected, instead you reap the benefit of overall market performance plus you don’t have to work as hard on research and stress over timing the market.
  • Dividends: pay you cash and help offset your losses on the bad days.
  • Take profits: in a bull market, reduce your risk and protect your principle.  
  • Limit your losses: before you even start investing, you and your advisor must figure out the best mix between stocks and bonds to match your appetite for risk and achieve your goals.

Seems simple enough, but why is it so hard? When the markets are roaring, everyone wants to get in on the action, like a hot crowded craps table, but when it turns cold everyone is running for the bar. Luckily the stock market is not craps – there is no guy with a stick taking all your money in a bear market – and if you stay the course and weather the storm, the markets will reward you in the long run. The key is to make sure you can tolerate the daily volatility without letting your fears and emotions drive you to make back decisions to sell low instead of buy.

Gelasia Steed, CFP®
Founder
Steed Investments
Ft. Worth, TX


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Dealing With This Crazy Market Volatility: 30 Years of Advice With Just 3 Mantras!


Since April 29 of this year, we’ve been in a downward spiral in the stock market that has caused a lot of investors to ask why in the world they deal with all this crazy volatility? Over the last decade it seems like every time you make some gains in the market, you end up giving them all back. Even though we haven’t officially hit the bear market status (-20%) as of this writing, it again poses the question as to whether you should be buying or selling right now. In my 30 years experience dealing with crazy volatility, there are three things that you need to be aware of. First, it starts with the true diversification of your different investments and how they’re mixed together. Second is to have some sort of mechanism that allows you to decide when to buy and when to sell. Finally it’s about understanding yourself and seeing the type of person you are when it comes to your emotional and intellectual decision-making in life.

If we start with diversification, then it’s key to understand your choices. One of my favorite books is written by a gentleman named Mebane Faber, The Ivy Portfolio. It’s a book that talks about how the Ivy League institutions invest their substantial assets to generate returns that will hopefully last in perpetuity. The five core groups that he does analysis on are stocks, bonds, international stocks, real estate and commodities. Of course, there are literally hundreds of different asset classes that exist today as seen by the recent rise in ETF’s (exchange traded funds) that have become a major component of the volume of the stock exchanges. Not long ago there were less than 20 of these index types of funds that can trade during the day just like stocks do. Now, there’s something close to 2000 exchange traded securities that are being traded in the markets, all driven by a particular type of asset class. You shouldn’t be overwhelmed by the massive number of choices, so come up with some combination of 5 to 10 of these major asset classes and do some homework on which ones you feel are the most critical to your investment objectives. Just promise me you’ll use at least 5 or 10 totally different asset classes.

The essence of Faber’s book is that over long periods of time these asset classes tend to perform similarly. It’s just a matter of doing some rebalancing to make sure that no one asset class gets too big to take down the others. I was recently reading an analysis and a publication entitled the “Horsesmouth” written by Craig L. Israelsen Ph.D. that confirms this same sentiment. It looked at multiple asset classes over the last 41 years using 17 rolling 25 year periods. In essence it shows that the internal rates of return on the seven asset classes that he used (cash, bonds, large US stocks, small US stocks, non-US stocks, real estate investment trusts and commodities) showed higher returns as you use more asset classes. By using too many asset classes, you can end up with what is termed “deworsification.” In some of the research that we’ve done we’ve also found that when we reduce our asset classes to less than 10, the long-term back testing works better. One of the most prominent index mutual fund families in the country, Vanguard, along with its founder John Bogle has been promoting the strategy for many years.

The second way to deal with volatility is to have some discipline mechanism to decide when you want to buy and when you want to sell. The Ivy Portfolio also talks about using 200 day moving averages as a tool to consider using as well if you want to be sensitive to the longer-term trends in the market. The experts call this technical analysis (nothing to do with technology stocks) which is simply looking at the average price of the security over some period of time (i.e. 200 days) and just use the charts to determine your decisions. That’s opposed to what we call fundamental analysis which focuses more of its efforts on the more mainstream aspects of a company like the management, the earnings, the market share or the industry they are in. I’ve mentioned this in the past in my March article when we were starting to deal with some of this volatility earlier in the year at that time our technical indicators were positive. Subsequent to that blog, our indicators moved rapidly down in May of this year and caused us to reduce our exposure to stocks. So the message here is that you can’t read an article on technical analysis and know what to do unless it’s very current. You have to have some up-to-date software or publications that keep you disciplined to monitor your current investments. I believe the world has changed in my 30 years of experience and a buy hold and hope strategy doesn’t work as well as a technical analysis tool that helps get you out of the way in this new internationally interconnected world.

As I mentioned above, the founder of Vanguard, Mr. Bogle, isn’t a fan of trying to time the market. I will admit that I am fond of technical analysis as it helps me manage risk in volatile times. I find it is extremely helpful in protecting client’s assets, especially those who are at or approaching retirement with their need for capital preservation being much higher.

The final and most important component to dealing with the crazy volatility is to know thyself. We all have our own ways of making decisions as nature versus nurture. We don’t know whether the genes are going to make a decision or whether the environment we grew up in will dictate what we do and how we react to the world. It’s hard to figure out whether the left brain or right brain is calling the shots on our decisions. I will say that when times are not volatile then intellect will prevail when times are consistent, solid and expected. When were in the middle of a volatility firestorm like we’ve seen over this past summer, then our nature is to go back to our deepest roots where it’s fight or flight. It’s even harder when the markets are reacting to political rhetoric in the US, companies afraid to hire, consumers afraid to spend, tension in the Middle East, currency wars, Asian countries trying to control inflation as well as sovereign banking irregularities in Europe. There will always be problems in the world and with are more connected media and communications, it becomes more frequent, critical and destructive as we try and use our intellect over our emotions. That means you should subscribe to a diversification model and maybe even some technical analysis to get out of the way when the truck is coming.

My 30 years in the business has shown me three type of people, those who have disciplines and abide by those different disciplines in good and bad times, those who are in denial and simply ignore the situation and wait for it to go away and the majority seem to be looking for some direction and leadership during the tough times. All three of these strategies can work; you just have to know which one of these most closely resembles you. If you’re broadly diversified, then you can wait it out when it comes to volatility. If you use disciplines that allow you to ride the storm and don’t go against your instincts, you’ll be okay. If you’re looking for leadership and direction then find someone that you can trust to help walk you through the rocky times. I just happen to be very lucky because I understand the markets by living through them and seeing emotional mistakes making it harder for people to be successful. It also didn’t hurt that I married a psychologist!

Stock investing involves risk including loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
The fast price swings of commodities will result in significant volatility in an investor’s holdings.
Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors.
An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.
No strategy assures success or protects against loss.

Dave Caruso, CFP®
Certified Financial Planner™
Coastal Capital Group
Danvers, MA


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The Mortgage Payoff Question


Part 1 of 2

In my last post, I discussed that the use of debt can make sense for certain situations in life, but I have never had a debt-free client tell me they regret being debt-free.

Many folks attempt to paint financial situations as completely black and white, largely based on their own personal experiences and biases. Your neighbor provides advice as if you must either do it their way (unquestionably, the right way), or you might as well not even bother, while your brother-in-law has the exact opposite opinion and is every bit as certain. Of course, their advice almost always reflects their current situation, as humans have an incredible ability to justify almost anything. Trust me, even your objective and unbiased adviser has biases!

Decisions surrounding paying off debt or investing the excess really aren’t about making a good decision or a bad one. We are merely talking about varying degrees of good. In fact, the best decision for some folks is neither! They ought to allocate that money elsewhere, such as taking that vacation they have been putting off for the last 3 years, or finally contributing money to that charity they have been wanting to support.

It is notable that throughout the remainder of this article and the next, we are merely discussing varying degrees of good. Make no mistake about it, making a commitment to pay down debt is a good financial decision. Deciding to allocate excess resources toward credit card debt rather than extra mortgage payments may be a better decision, but it doesn’t make the latter choice bad. In the current interest rate environment, however, making the decision to accelerate the payoff of your mortgage is not so simple.

In both the media and the financial planning communities, there is a tendency for columnists and financial professionals to fall into one of two camps. The first argues that all debt is bad, and no matter what the cost, you ought to try to pay it off as quickly as possible. The second argues that when appropriate, debt can provide a great source of leverage to grow wealth more rapidly over time.

Starting with the leverage side, let’s assume that you have $100,000 in savings and a $100,000 mortgage. For the sake of simplicity, let’s assume you therefore only have two options:

  1. Pay off the mortgage
  2. Keep the mortgage and invest the savings

From a net worth standpoint, either choice immediately produces the same result. However, in projecting forward, the leverage camp would argue that you may effectively have an arbitrage opportunity. In other words, if you could create an investment portfolio with an annualized expected return of 8% and the interest you would owe on the mortgage is only 5%, you could conceivably earn an additional 3% per year on that money by electing to keep the debt and pay it off over time.

The former camp, however, would make the argument that no investment is a sure thing, so there is no certainty that the 8% expected return would come true. In fact, if the asset you invested in underperformed and only returned 3%, it would have actually cost you more (even though the portfolio did, in fact, make money) to take on the debt than to merely use cash to buy the house in the first place. Furthermore, you can’t put a value on peace of mind. In the event financial Armageddon hits, the dollar and the market crashes, etc., no one can take away what is rightfully and fully yours.

Depending on your money personalities and risk tolerance, either option may be appropriate for you. However, neither option is anywhere near as black and white as they seem.

Without getting too far off subject, risk is often defined in media and academia as volatility (ups and downs) in the market, and therefore, one’s risk tolerance is believed to be their willingness and ability to accept portfolio fluctuation. Volatility may define risk to a trader, but to a person trying to find balance between living for today and securing their future, market volatility is not risk. To paraphrase Warren Buffett, true risk is (a) not truly knowing what you are doing, and (b) permanent impairment of capital.

Any time you add leverage to an asset, you increase the risk. If you add leverage to a low-risk asset, you make it a heck of a lot riskier. In fact, as James Montier recently stated, “(leverage) can never turn a bad investment good, but it can turn a good investment bad. Simply piling leverage onto an investment with a small return doesn’t transform it into a good idea…(it) can limit your staying power and transform a temporary impairment (price volatility) into a permanent impairment of capital.” While Montier is clearly referencing the investment markets, his statements ring true to any asset that experiences fluctuations in price.

As an example, housing in the United States has historically been a very low-risk asset to own. Because of this, banks and investors became extremely willing to allocate their resources (as much as they could possibly get their hands on) into this sector of the economy. With mortgage rates extremely low, it was not overly profitable to invest here. However, by simply borrowing money and allocating it toward a “can’t lose” investment, banks turned 1% – 2% margins into 20% – 40% returns! The problem is, once that equation reverses itself (oops, home prices can drop), your losses are actually more severe! Recall from this previous post that a 40% decline hurts far more than a 40% gain helps…they are not equal.

The resulting stories are endless. People refinanced over and over again due to their home values rising, they completely missed the fact that each time they took out cash, they increased the risk in owning that asset. When prices crashed, they were left holding the bag with debt that exceeds the value of the property. That, my friends, is permanent impairment of capital. That is real risk. Had these people merely continued to pay their mortgage instead of using the home as an ATM, they would have had some equity built up to act as a buffer against a drop in (inflated) prices.

Circling back to the mortgage payoff question, when evaluating the mathematics between a 5% mortgage and whatever you might earn on an investment portfolio, bear in mind the comparison is not as simple as “my portfolio will give me 8% and the mortgage costs me 5%.” In making this decision, you have fundamentally agreed to accept a much higher level of risk to your overall financial life, so make sure that translates appropriately to your investment strategy. If your portfolio would normally be 80% stocks without a mortgage, perhaps you ought to consider shaving that allocation toward stocks down a bit to bring your overall risk profile back in balance. Most folks unsuspectingly (per Buffet, not knowing what they are doing) do not make any adjustments.

To accentuate the importance of the risk factors a bit further, suppose you are a financial planner. Two prospective clients walk into your office for back-to-back meetings. The first walks into your office with $1,200,000 in investment assets, a $400,000 home, a $100,000 mortgage and a modest lifestyle considering their asset base. I suspect that most people would agree that this person is in very good shape financially.

The second prospective client is the exact same age as the first, in similar health and has a similar lifestyle. This person comes to you with $1,000,000 in investment assets, a $400,000 home with no mortgage and again, a modest lifestyle considering their asset base. I suspect that most people would also agree that this person is in very good shape.

When you outline everything on paper, these people have an identical net worth. I suspect that you, as the planner, would naturally engage in some conversation with the first client about whether to pay down the mortgage and spend time calculating the pros and cons of doing so. However, I suspect that very few would engage in a conversation with the second client about the possibility of pulling $100,000 out of the home to invest for greater gain. I submit that people inherently recognize that such a decision would add a great deal of risk to the second client’s life (and therefore ignore the possibility) without fully acknowledging that it would simply put them in the exact same position as the first. We naturally want to keep what is certain if it is already certain, but have an uncanny ability to waver over situations of uncertainty.

Whether to pay off a mortgage or not is a personal decision and is overwhelmingly tied to one’s risk profile. In the next article, we continue to dive deeper into some of the financial implications of this decision such as taxes, investing and asset protection, and wrap up with some of the non-financial implications such as comfort, flexibility and certainty.

Joe PitzlJoe Pitzl, CFP®
Director of Financial Planning
Intelligent Financial Strategies, LLC
Edina, MN


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Investing in the Stock Market…Or Not


I inherited a client who is investing for retirement. Let’s call her Sue. Sue is in her late 60s and is getting fairly close to the time when she wants to cut back on working. Unfortunately, she has not been able to save as much as she needs. As a result, about four years ago Sue invested a large portion of her assets in the stock market. From what I can tell, the idea was to take advantage of the fact that the markets always give the best possible returns. This would allow her to make up for lost time.

Unfortunately, that fact has been shown to be false. Oh sure, over time, for most non-institutional investors – those of us who are not mega-millionaires, having access to investment opportunities that have way too steep an entry price for the average person – global stock markets have a history of treating many investments reasonably well. The key part of that statement is over time, and that’s the problem with Sue.

Sue doesn’t see herself as having an overabundance of time. As a result, she checks the performance of her investments every day. Every day! It makes her very nervous. She gets really happy when her investments have a positive day. She gets pretty upset when her investments have a negative day . . . or don’t grow quite as fast as she wants them to. So she keeps checking every day, and it’s really doing a number on her well-being.

Sue second-guesses just about everything. She also beats herself up pretty regularly for doing what she did. For the record, I think things will turn out pretty well for Sue. However, it’s not going to happen tomorrow, and until it does, I have a suspicion she’s going to stay really familiar with the daily stock market reports.

When You Should Think Twice About Investing in the Stock Markets

There’s a rule of thumb or two about investing. One of those guidelines says that any money you will need within the next two to five years (give or take a year or so) should not be invested. Instead, that money should be saved. What’s the difference? Security. Savings go into money markets, savings accounts, CDs and similar vehicles. None of these offer much in the way of a return on your money. However, they all provide for the return of your money. When you will need access to funds in the short-run, just about the only place to consider putting it is in these types of savings vehicles. You might find some advisers who quibble with the exact number of years, but very few, if any, would disagree with the general principle.

Once you move beyond that shorter-term period, it may be time to consider investing in the stock market. I say may be, because there is something else to consider: your risk tolerance. I call it the, “Can you still sleep at night after putting your valuable dollars into the market?” guideline. This brings us back to Sue. Sue is not sleeping all that well these days. Her risk tolerance – her ability to ride out the inherent ups and downs of the stock market – is relatively low. It’s so low that I’m not altogether sure she should be in the market very much, if at all.

It’s true that most of us stand the greatest chance of getting the best long-term return from the stock market. However, the cost of doing so may be a little too high for people like Sue. For them, alternatives such as bonds, or maybe even some annuities, might make more sense. The returns will almost certainly be lower, but the sleep-at-night factor will probably be a whole lot better.

So how about you? How well are you sleeping these days? Does concern over how to save or invest your money keep you up at night? If so, it may be time to get a check-up. There are tools to help you determine just how much risk and volatility you truly are willing to endure. These risk tolerance tools range from ultra-short (and equally shallow) to quite in-depth. Exploring your risk tolerance in some depth makes sense for just about everyone. If Sue had done that (and been really honest with herself) prior to deciding to put it all in the market, I think she could have saved herself a lot of sleepless nights.

Michael Snowdon Michael Snowdon, CFP®
President
WealthRidge
Greenwood Village, CO


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Austerity


Austerity has become quite the buzzword recently. What does it mean and how does it affect you?

According to Wikipedia, austerity is when a government reduces its spending and/or increases taxes to pay back creditors because its fiscal deficit spending is believed to be unsustainable.

Debt is “out” and frugality is “in” post financial crisis. Your home is no longer an ATM. Your credit card limit has been reduced and interest rates increased costing you more each month and making it harder to pay off your balance. You are trying to spend less and save more. Governments around the world are facing similar problems. Tax revenues are down due to the recession. Debt costs more due to their weaker financial state. After massive spending programs to stimulate the economy during the recession, some governments are now implementing austerity plans to cut spending and raise taxes in order to avoid defaulting on their debts.

But, is austerity wise given our weak global economy? On the one hand, deficit spending cannot be sustained at these levels and if they do not cut spending and raise taxes they might default on their debts causing a domino effect around the world as their bondholders are forced to write off the defaulted bonds and lose income they relied on to pay their bills/debts. On the other hand, spending cuts and higher taxes take money out of the economy and could cause a double dip recession making current debt woes much worse as tax revenues contract further due to another recession.

Sounds like governments are “too big to fail”. Well, forgive the political sidebar, but Margaret Thatcher said it best “The problem with socialism is that eventually you run out of other people’s money.”

This is quite a predicament which explains why the market has been negatively impacted and so volatile over the past couple months. Personally, I believe cutting spending and lowering taxes (particularly corporate and investor taxes to encourage business investment and spur job growth) along with continued loose monetary policy would be an effective way to handle this problem. Strong economic recovery will generate more tax revenues as businesses and individuals earn more. As for your portfolios, I continue to look for ways to be defensive and protect your principal. Over the long term the stock market will rise, but short term volatility can be a bit nauseating.

Gelasia Steed, CFP®
Founder
Steed Investments
Ft. Worth, TX


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Room for Optimism


As a watcher of many business pages, I’ve noticed over the past several years that today’s news carries a more negative tone than ever. The title of every story seems at times to shout at us, “Are you afraid of the next crisis, well, you should be!”

What do we fear next? Inflation, or deflation? Domestic or international investing? Missing out on a boom, or investing just before a bust?

Too often I speak with individuals who have formed financial opinions based on a snapshot from the media. And with all of the negativity, what impact does what we read / watch / hear have on our success as investors?

As an advisor and observer, it can be amazing the impact that a few seconds of a pessimistic ‘expert’ opinion can have on us. Many times I meet with state a fear of an economic collapse. Pressing further, the concern is a hyperinflation which would wreck the purchasing power of the dollar.

And while the concerns are real, the actions we want to take very often do not fit the concern. The instincts of many who state the above concern is often to dump their stocks and place their savings in fixed investments; not realizing by doing so they are guaranteeing to be hurt the most by inflation, and lose out on the chance of their assets increasing with inflation.

It’s interesting to witness that while humans are hardwired for cyclical thinking, we tend in the short-run to focus on extremes, believing the end result is the continuation to an severe degree of whatever the concern may be.

Despite the news today of countries defaulting, the market correction, and fears of a double-dip, there is plenty of room for optimism:

  • Many of our client portfolios have fully recovered from the 2008 crash due to saving and the market rebound in 2009.
  • Like Joe Pitzl’s recent post points out, we have choices for discretionary spending. We don’t have to upgrade to the 50-inch plasma.
  • Assets that have dropped like real estate are more accessible today to more buyers. Prices of these assets won’t drop to zero as more buyers enter the market.
  • The pace of technology has made our personal and work lives more productive.
  • The markets are not ‘going to zero’. Even if a major company collapses, opportunities for others exist, and there will be growth for entrepreneurs who capitalize on them. I see it in my own industry, and work with many who see things developing all over the economy.
  • Volatility is scary, but market volatility has worked in long-term investors favor as they buy stocks at a discount.

At a distance, with more information, the news is rarely as bad as seems in the moment. To avoid the trap of making constant changes to your plan based on negative news and emotion, try this exercise.

Keep track of your current opinions and concerns about the economy, and the actual outcomes. Answer the following, and repeat the exercise next year:

  1. My three biggest economic concerns are?
  2. I am concerned about the economic picture of _______ (country).
  3. Over the next year the stock market will (rise / fall) ___percent.
  4. Interest rates over the next few years will (rise / fall) ___ percent.
  5. My instinct today is to (sell / buy) stocks.

Looking back, I am sure most of our short-term concerns in the long run do not carry the extreme consequences we fear. There is plenty of room for optimism today — and maybe it can best be found by not upgrading your news to view on a 50-inch plasma!

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Northern Financial Advisors, Inc
Franklin, MI


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Can You Handle the Four Fat Financial Fears?


Part 1 of 4

Working with people over the last three decades I have answered and asked thousands of questions about what they do and don’t want in their financial lives. Of course every single person has a slightly different set of priorities and expectations. Yet, they all have their own way of trying to execute their respective financial plans. I realize it is an advisor’s job to get people to talk about their biggest fears, risks and apprehensions. Of those mentioned most often there are four biggies:  First and big time lately is how to deal with market volatility; second is outliving their income; third is getting organized; and fourth is having the right amount of information to make comfortable decisions. You know how people are worried about the wild moves in the market and the fact that they don’t know if they can afford to retire in the lifestyle they want. It is my job to put together risk management techniques that will allow consumers to live the life they want by getting them organized and explain things in the way they understand and feel comfortable. I think we call that trust! Over the next four months I’ll address each one of these fears specifically and how best to deal with them.

Volatility is certainly the big issue right now. We’ve recently seen 1,000 point Dow swings due to computer glitches, not to mention the almost 60 percent drop from November 2007 through March of 2009. Since then we’ve seen a 70-percent-plus ride up from those March lows. Put that on top of the worst decade for stocks in history and you’ve got to be concerned about this stuff! So do you continue to buy, hold and hope? My answer is no, there has to be some strategies that can help you gauge the risk and help you get in and out of the markets with some sort of discipline. A time tested strategy is to look at a chart that shows the 200 day moving average of your stock, index fund, exchange-traded fund or mutual fund. Technicians have been using this tool for more than 100 years and it’s not that difficult to figure out. You buy and hold onto your investment when the price is above the moving average and sell it when it breaks below the average (see the chart of the S&P 500 for the last 10 years to see how well it worked). An alternative is proper diversification. We’ve been using this approach for at least the last 60 years and it’s called MPT or Modern Portfolio Theory. The problem was that it didn’t work in this last bear market. Of course diversification will  probably still work out just fine over 10, 20 or 30 year periods but in today’s interconnected world of finance and instant information, I’m not sure most people have the time horizon or patience to continue to do this anymore. I feel you need a tool to be more nimble with your investments, the 200 day moving average is a start. However, no strategy can assure success or guarantee against a loss.

I want to stress one big distinction and that is the crazy market gyrations are volatility, not risk. The biggest risks in life are not the ups and down of the market, but with not accomplishing the things you want in life. Unfortunately, you either need to time the market well or invest in more volatile investments in order to get a rate of return better than inflation after taxes. The ultimate risk question folks are asking themselves is whether they took too much risk in life, or too little?

Next month we will discuss how to plan so you do not outlive your income.

Dave Caruso, CFP®
Certified Financial Planner™
Coastal Capital Group
Danvers, MA