The gambler, stopped clock and casino owner

We spend a lot of energy anticipating bear markets and crashes and recessions and depressions but the reality is that the vast majority of the time the market is growing - what's your strategy then? 

I've already discussed what not to do with your money so what is the alternative.  If you look at the chart below there are three personalities represented.  In my view there is a gambler, a stopped clock and a casino owner; more on that later. 

What you're actually looking at are the cumulative returns for "bull" and "bear" markets in Canada from the 50's to present day.  Clearly the data supports my thesis that markets support long term growth on average and invested funds, left alone, in good times and in bad will experience growth periods about 75% of the time and negative growth periods 25% of the time, resulting in positive long term growth.  That's not news.

It may help a bit to personify the chart a bit to help makes sense of it all. 

The gambler:

The history of our industry is founded upon the principle of "beating the game".  Most brokers implicitly suggest they can help you predict the future or provide the knowledge and inside analysis that will be sure to give you the upper edge and advantage in the market.  Much like a gambler would enter a casino with a "proven system" or lucky hand and try to beat the roulette wheel.  In the investment world that might mean your broker has promised to "get you out" when markets are heading down, or provide guidance as to when you should “get back in".  The truth: that can't be done with any amount of reliable consistency. 

The stopped clock:

Ever hear of some analysts always predicting doom and gloom?  It is a failsafe system to always be right.  If someone was predicting a market meltdown leading to a worldwide global recession throughout the 90's and into 2000's they would have been able to finally say "I told you so" in 2008.  "See I was right, the market crashed".  it's the old saying, "even a stopped clock is right twice a day".  But at what cost, the opportunity lost by staying out of the market would far outweigh any benefit added by missing the 9 months of the 2008 bear market.  Predicting doom is a booming industry but adds no value when planning for your future retirement or in managing your wealth. 

The Casino Owner:

There is one sure way to make money from the message in the chart below and that is taking on the persona of the casino owner.  Unlike the gambler who tries to beat the game, the casino owner has decided to own it.  And that person knows full well that there will be times when someone walks through the doors and wins big and the casino loses that day, but the numbers are in the casino owners favour, and if he just keeps the doors open, day in day out, enough people will be walking out a little lighter in the wallet to make the business of the casino profitable.  That is my approach.  The data is clear that if we stay invested (keep the "casino"doors open) the overwhelming majority of the time we will be in positive territory and certainly there will be times of loss but they will always be temporary.  We can say short term market movements are absolutely unknowable but the long term trend is inevitable. 

This is the only sure fire way to build your wealth and it is the only responsible way to plan for your future. 

Market timers under the microscope!

http://oldprof.typepad.com/a_dash_of_insight/2012/03/the-seduction-of-market-timing.html

Let's shed some light on dishonest brokers - finally!!!

The link below highlights what I have long suggested to clients are absolutely unscrupulous compensation schemes on the part of brokers in Canada.  If you're not discussing fees with your broker in an open and fully disclosed environment you need to ask yourself what information your missing and how that might be impacting your investment. 

Newsflash - "there's no free lunch!"   

http://thewealthsteward.com/2012/02/the-flaws-in-canadas-financial-adviser-system/

Turn off the Noise - Part 3 of 4 on Market Timing

Noise and non-sense

First off, what do we mean when we say “noise”?  How about the daily and monthly movement of stock prices, or the latest headlines and the endless forecasting of the talking heads on TV and radio?   In our attempts to make responsible investment decisions we logically seek out as much info as possible to inform them.  But much of what we find is of no real value when making long term investment plans.

The challenge we have with data is that our ancient brains process them in ways that are not conducive to good decision making.  It stems from our inherent fear of loss.  And leads to what behaviourists call MYOPIC LOSS AVERSION.

Myopic Loss Aversion –is the combination of a greater sensitivity to losses than to gains and a tendency to evaluate outcomes frequently. The more frequently clients review their portfolio, the more risk averse they become due to the greater frequency that they observe losses occurring. 

In English:  The more frequently you visit an investment value the greater the likelihood of observing a negative result.  Negative results have larger impacts on our emotions, and lead to increased anxiety levels and false conclusions.

For example:

The chart* shows a hypothetical stock portfolio with an average return of 10%, and a standard deviation of 20% (approximate historical stock market returns).  Over shorter periods of time losses appear more frequently.  Real life experience approximates these results.

The tables on this page are from a paper “Risk Aversion or Myopia” by Benartzi and Thaler.  The table of 1-year returns (taken from 10,000 random drawings of US stock and bond returns between 1926-1997) was presented to one group of subjects while a second group was presented with the 30-year annualized return numbers.  Each group was then asked how much they would be willing to allocate to stocks.  The first group (1-year) median allocation to stocks was 40% whereas the second group’s (30-year) median allocation was 90%!

Explanation was that the first group was fooled (by seeing lots of one year losses) into believing the long-term risk of equities was greater than it truly is.   

The evidence is firm, an increase in the global exchange of information via 24 hour TV, internet, newspaper and business news radio hasn’t helped investors attain their goals.   The chart below demonstrates this disparity well:  average stock funds in the US actually return fairly well, but the investors in those same funds do not  - a difference of over half of the return on the fund.  This difference between the two values can be largely explained by our over confidence in our ability to get in and out of those funds at right times.  Beware the noise, it taps into that survival instinct in your brain that screams "run!"; it narrows the vision, and limits your ability to remain calm in the storm.   

Do your retirement a favour and learn to avoid the noise.   It takes a while to be able to discern between valuable financial education and plain old business news entertainment, but it’s worth the effort. 

Inflation charts your broker forgot to mention...

I've probably done over 100 financial plans in my career and it always amazes me when we start to adjust for inflation - brings everything down to earth.  Going to post a couple of items to show its impact as well as make a case for managed money in an age of fear. 

No 1 is courtesy Norman Rothery:

http://www.theglobeandmail.com/globe-investor/investment-ideas/behind-the-numbers/the-stock-market-chart-your-broker-wont-show-you/article2302406/