Nervous when the market drops 200+ points?

Are you asking: " Why didn't I sell yesterday?"

Are you saying: 'I'm going to sell tomorrow!"

Then you probably speculating, not investing.

Speculators buy or own stocks they think, or should I say, hope will go up. When they don't, they question their decision to buy or own them.

Investors buy stocks because they are a good value. Based on a company's current and future earnings, investors conservatively estimate the company's intrinsic value to determine if the stock is priced appropriately.

Most stocks are priced appropriately most of the time. But momentum results in stocks, or the market, reaching levels of over- or under-valuation.

When the market becomes over-valued, speculators jump in "not wanting to miss the money making opportunities." When the market reverses and becomes under-valued, speculators sell fearing a loss of their investments.

The stock market provides the investor with the opportunity to take advantage of fear by buying at cheap prices, or greed by selling at high prices.

I like the way Warren Buffett puts it: "it's only when the tide goes out that you can tell who is swimming naked."

What you need to know about Morningstar Fund Star Ratings

Morningstar clearly influences individual investors in their selection of mutual funds. Studies have shown that more than 90% of all money flowing into mutual funds goes into funds with 4 or 5 star ratings.

Morningstar has said from the very beginning that its star ratings are not predictive. In fact, it's fairly easy to find Morningstar analysts who suggest buying funds with low ratings or selling funds that get higher marks, but that hasn't stopped investors and financial advisers from wishing on their stars.

The consequences of large inflows of money into 4 and 5 Star funds include:

  • Style change because the Manager takes on more risk often causing lower returns or star ratings changes because the fund moves to another style category
  • Lower returns because the larger the amount of funds the Manager has to invest, the smaller the universe of potential investments
  • Higher capital gains distributions and associated taxes as the portfolio's turnover increases and the money flows from the fund causing redemtions.

If you need help selecting funds that will maintain their 4 and 5 star ratings, tax efficiency and beat 90% of the other funds, or for a free portfolio review, contact Visible Investment Advisors

Pension Protection Act of 2006

401(k) plans have become the primary source of retirement income for many people. The Pension Protection Act of 2006 makes it easier for employers to offer automatic enrollment, which helps with universal participation.

Many of the Pension Protection Act's changes were the result of behavioral finance research, including default investment options and enabling employers to provide investment advice. Policymakers recognized that many plan participants lacked the time, expertise, or desire to get the investment education they need on their own.

Although the Pension Protection Act of 2006 represents a great step forward in improving retirement security, much is left to the individual investor to make the program work:

  • Asset allocation
  • Diversification
  • Fees and expenses
  • Risk
  • Timing
  • Rebalancing
  • Time horizon
  • Emotions
Visible Investment Advisors offers a one-hour employee seminar that provides independent advice on these topics and more. Contact us to learn more.

Ockham's Razor

"All things being equal, the simplest solution tends to be the best one."

In other words, when multiple competing theories are equal in other respects, the principle recommends selecting the theory that introduces the fewest assumptions and postulates the fewest hypothetical entities.

Ockham's razor is a principle attributed to the 14th-century English logician and Franciscan friar William of Ockham. The principle states that the explanation of any phenomenon should make as few assumptions as possible, eliminating, or "shaving off," those that make no difference in the observable predictions of the explanatory hypothesis or theory.

Ockham's razor is an intelligent investor's best friend.

Why do smart people make big investment mistakes?

"Success in investing doesn't correlate with I.Q. once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing." Warren Buffett

Investor mistakes can greatly reduce your returns. Below are some of the most common ones. Add additional ones through your comments.

  • Selling a security to protect your gain only to see it make a huge advance afterward.
  • Holding on to losing positions waiting for them to return to your purchase price so you don't have to realize a loss and admit that you made a mistake.
  • Resist buying a hot stock, market sector (like oil), or mutual fund, until it reaches heights you never thought possible and then you buy in—just in time for an immediate reversal down.
  • Losing money in the market and swear you'll never go back in.
  • Falling in love and buying at any price.
  • Hating a stock and not buying in at any price.
  • Selling early and watching the price continue to go up and not buying in again.
  • Feeling the stocks you know (local companies or large companies whose products you buy) are less risky?
  • Overly confident in your ability to outperform the market.
  • No calculating your returns or comparing them to appropriate benchmarks?
  • Not taking into account the cost of trading or taxes.
  • Delaying participating in your 401(k) or other retirement plan?
  • Acting on stock tips.
  • Believing that media and industry commentators give you information with your well being in mind.
  • Staying out of the stock market becuase it is too risky.
  • Keeping too much money in savings banks and CD's.

Please add your investment mistakes through the comments dialog below.