at an inflexion point in subprime crisis? Perhaps

Hat tip to Fintag on this one.

A couple of rather powerful thoughts: "...investors should be canny and careful, and take little for granted. My own strategy is to invest in sound assets and simply hold onto them. That’s because the other relevant phenomenon about crises, is the system ultimately recovers. If you have the staying power, you will probably do fine." This is how investing, real investing, is done. You establish an appropriate asset allocation for you, in full consideration of your own time horizon and ability to bear market risk. You stick to it. If you do not understand how to do this, you should study some, or you gird up your loins and go find yourself a trustworthy, competent adviser. He can.

A trustworthy adviser has an investment approach consistent with objective academic investment research, not Wall Street's age-old refrain: "We're sooo smart, we can out-research and out-invest and out-trade everyone else for you! It must be so. Just look at my nice watch and expensive office!"



Bruner: We are at an inflexion point in subprime crisis - General News - FinanceAsia.com - The network for financial decision makers

What to Do if You Can't Reach the Broker -- WSJ Free article

What follows is not investment or trading advice. It's just common sense. If you're worried sick about a market drop, you are most likely too aggressively invested. You can use asset allocation to limit your overall portfolio volatility by diversifying. And you should. When you see on TV or hear on the radio that the market is having a really bad day, that is probably not a good basis to freak out and go and start selling stuff willy-nilly. Because probably tomorrow it will go back up. And you'll not be in there for the bounce-back. You'll be worse off than if you had stayed the course. Do this a lot and it will devastate your returns. Staying in and not selling is a viable choice, presuming you have reasonably good diversification. If you don't know whether you are diversified or not, you should attend to that. Are your stocks all US large-cap growth or tech stocks? Are you heavily into China or Russia or emerging markets? Are you (I hope not,) heavily into junk bonds? If you are an investor, you should learn what real diversification is. Here's a start: Investopedia on "diversification"

The article should have risen above fostering knee-jerk selling.

WSJ: What to do if you Can't Reach your broker

What do You Think of the Dow Theory? What do the Researchers Think?

For those who are into the Dow Theory version of technical analysis, Mark Hulbert at MarketWatch has a bit of a review, which I've linked to below, including the interesting note that the three Dow Theory newsletters do not agree on what it says about the present state of the market and the outlook. two are bullish, and the third is bearish. Now stop and think on that for a moment.

Hmmm. Academic researchers pretty much "busted" the Dow Theory decades and decades ago. Mark does refer to one Journal of Finance article all the way back in 1998 which argues for its validity. I don't know if anyone other than the authors was convinced! The Dow theory, like technical analysis generally, has pretty much been in the academic dumper for a generation now. When you test it, it consistently fails to succeed any more often than dart-throwing at the Wall Street Journal.

So, why do people cling to ideas after they are tried in the crucible of research and found to fail? Is it a matter of human nature? Of needing something on which to base decisions? Two things are definitely true. First, the folks who sell newsletters have a conflict of interest. They make a lot of money selling those newsletters. Second, Wall Street's brokerages like clients who trade a lot, be they big hedge funds or little guys investing on their own with newsletter in hand. They have a conflict also. Trading is money, commissions and/or spreads (discounts or premiums, technically,) on crossing transactions to them. Applying a technical analysis-based approach requires a lot of trading, generally. Being as gentle about this as possible, they are self-interested, and the consequences of conceding the failure of technical analysis would be somewhat difficult, particularly for the newsletter writers.

Also, what do you base investment decisions on, if this old, once-popular approach is not really any good? I have advocated in this blog a globally-diversified, multiple asset class approach, using indexed vehicles at least as the default choice. This approach has excellent research support. Well, you may ask, it this idea is so good, why isn't everybody doing it?

Mr. Roger Gibson wrote one of the most remarkable books on investing, primarily for financial advisors, Asset Allocation - Balancing Financial Risk. (3rd. ed., Mcgraw-Hill, 2000.) He writes of what he calls a "quadrant 4 worldview of investing", where the investor, after reviewing what is known about the realities of investing, concludes that neither market timing nor active security selection (stock-picking, for us,) will succeed over time in beating the market. The quadrant 4 worldview is in good accord with the consensus of a mountain of objective financial research. So he writes on the implications of a quadrant 4 view:

"First, a quadrant 4 worldview undercuts to a large degree the reason for the existence of the money management profession." It means that the billions and billions of dollars in fees and expenses investors pay to keep up the lifestyles of the cast of thousands employed in attempts to beat the market are largely wasted. Worse than wasted actually, as what you get for trying to beat the market these ways is that usually you do worse than the market, when all the costs are counted. So, who at your local wirehouse brokerage or online broker is going to tell you that!

They don't even typically talk about that to each other. What newsletter writer is going to want to face that, much less tell you?

The beauty of the "quadrant 4 worldview" is that it lets you, knowing the score, knowing the reality of risk, use market forces rather than fight them. it lets you invest in hope based on what is real! Market returns over time have been good enough to be really worth going after. And wouldn't you, when you think about it expect it to be that way when all is said and done?





What the Dow Theory has to say about current stock market - MarketWatch

Are Federal Employees Investing too Conservatively?

Yes, Uncle Sam's employees have a pretty good deal, overall. But the study of the TSP referenced in the WP article below gives the numbers: about 29 percent are investing with a "no risk/low risk" approach; about 59 percent "moderate or balanced", and about 11 percent investing with more risk. The conventional rap on government workers is that they work for the government for career stability. I think that is probably partly correct, but if more than 11 percent of federal workers are relatively young, when you need, need, need to be getting your investing off to a good start, then they are potentially unnecessarily courting the risk of underfunded retirement. And the rest still need to be investing in a way with an age-appropriate allocation to equities, to make that money grow. The TSP is a fine plan, and there are some pretty good things to work with in it.


Stephen Barr - Careful Retirement Investing - washingtonpost.com

Marketwatch: John Prestbo's Commentary: Investors with diversified portfolios are market's real winners

Yes, yes. Mr. Prestbo gets it. He's talking controlling your overall portfolio volatility by blending asset classes, which implies patience. For every article on how to speculate on somebody's hot stocks of the month, or week, or day, or morning, there should be one like this on real investing.



Investors with diversified portfolios are market's real winners - MarketWatch

powered by performancing firefox

Importance of Wise Choices of Mutual Funds

One choice, 35 years, two outcomes.

Can you look at the chart above and get it? Can you see the cost to you of a lifetime of underperforming investments? What you see in the chart is two outcomes, one of which is much, much better.

This is not intended to kick Fidelity Contrafund around. Contrafund is certainly better than many other funds that are out there. But you have a strong interest in getting it right. Getting it right with excellence.

How not to get it right: If you watch TV to learn how to invest, all you will hear is some character yelling and jumping up and down making simian sounds telling you how to trade too much in going after short-term gains. And I am not referring to the commercials! Or you may see some less-diverting version of the same thing. A few exceptional programs exist. If you get lucky and make some short-term gains, then Speaker of the House Rep. Nancy Pelosi will want to tax them away from you. (Sorry, Madam Speaker!) That isn't investing, it is speculating on the stock price. Investing is a bigger, better thing, that even regular people can do well. So, what is real investing? Rummage around in the old posts here. Subscribe to the RSS feed. Come back for more. Bring a friend. We'll get there.

Parting thought: The really stunning thing isn't on the chart. The evidence is in and the research has been done. There is something even more important than what fund you choose. It is which and how many asset classes your portfolio holdings include and how you allocate your money among them. Then, you flesh out the portfolio with excellent holdings. That's getting into investing. But some things come even before those. [mostly involving the customization for each client's needs, and they can't all be dealt with in one blog post.]

Post edited 1/21/07 to correct Ms. Pelosi's title. My mistake. And to add the last few bracketed words.

Listen to the Lady! Townhall.com: "Advisers make worse choices than independent investors, study says"

Townhall.com::Advisers make worse choices than independent investors, study says::By Lynn O'Shaughnessy

Rebut this article? Be offended? Me, the Unknown Advisor? Heck, she's right! In my opinion the study's right!

Fair warning, the writer's opinions are reflected in what follows; I believe them to be reasonable.

The twin focii of her article and arguably the study are higher expenses and inferior returns in association with poor asset allocation. All I will say is that a sales-oriented, higher-fee advisor is likely not worth the money, any more than the kind of broker the study analyzes is worth his load fees, 12b-1 fees, wrap fees, or whatever other pricey ideas he is pushing. She and the study could do a better job of using precise, defined language however.

I will try to. But please bear in mind that the discussion is still on a rather simplified and general basis, and that long chapters of material have been written on these subjects.

Brokers, registered reps, "account executives", "financial consultants/planners/advisors, etc.", holders of series 7 securities licenses, do not have to learn anything very special at all about asset allocation to pass the test. They learn the basics, the very, very basics about asset allocation. Their advice is considered to be "incidental" in nature, by the regulators, compared to what you legally are paying them for, the trading, the buying and selling to invest your money. The primary standard they have to meet to be on the right side of the regulatory apparatus is one of "suitability", which has little really to do specifically with whether their stock picks as a whole constitute a portfolio which will achieve your investment objectives. They just have to be "suitable", which is a horse of a different color. What is "suitable"? It is any of the multitudinous things not already ruled "unsuitable" by the NASD. Got it? No? It is often stated as "know your client, know your product". If the client is an elderly widow living off her investments, who has no way to make up large losses and the product gleaming in the broker's eye is some illiquid, non-marketable security with a lovely thirty or forty percent off the top commission/sales charge, it could be unsuitable. (Don't laugh, such things exist, and they're nothing to laugh about.) There are supervisory people who oversee suitability and other compliance issues. Lest I be too hard on the brokers, many of them are good people, and really want to do well for their clients, and struggle to keep their clients' interests and their own, and their employers', in balance. My concern is that I just think their industry's business model is problematical, and rewards the wrong behavior and the wrong people too much of the time. Then those wrong people show up in the newspaper.

"Investment Advisors", as in holders of series 65 or 66 securities licenses, must meet what is known as a "fiduciary" standard. That has been defined various ways but is concerned with placing the client's interests first, even when it hurts. It is a higher standard of responsibility, and if you deal with an advisor, find one who is earnestly serious about high fiducuary standards. If he is so, he is trying hard to do his work the right way. It ain't sexy, but a good advisor who is a good fiduciary will quit the business before he will take advantage of a client. How serious a particular advisor is about this varies. There have been advisors out there with language in their advisory agreements which substantially weakens their fiduciary responsibilities. CFPs have high disclosure standards, and advisors who are members of NAPFA have very high ethical codes to work by. Compliance shortcomings of advisors show up in the newspaper too.

My only rebuttal to the article, if it really is such , is that a low-fee advisor with high fiduciary standards and a better-than-average grasp of asset allocation and the things which have really been shown to work in investing offers pretty good value for his or her fee. The clincher is that that advisor will try hard to stop you from making frankly horrible mistakes with your money, like panicking and selling around the bottom, when the chips are really down.

A final thought: If an advisor promises to get you out of the market before it gets bad, I would steer clear. Financial advisors can't foretell the future. If they'll promise the impossible to get your business, that does not 'augur well'!