Lessons learned or lost?

In 2007, Americans saved a total of $57.4 billion. That same year, we spent $92.3 billion on legalized gambling.


Gambling, after all, is about putting up a small amount of money in the hopes of winning a large amount of money. (We grant you that there's also an entertainment value to it.) It's a high-risk, high-reward game. Sounds a little bit like Wall Street ... and how Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) carried 25:1 leverage in 2007.


As the savings stats suggest, Main Street Americans took on too much debt without enough cash in the bank back during those heady housing boom years. We compounded the problem by taking unhealthy risks. We all know how that's turned out.


NOW
Sketchy "get rich quick!" infomercials are back in full force, data from online brokerages have shown that day traders are back in the market, and there's a new scheme that individual investors are trying out: currency trading.


...currency trading has big-time appeal to small-time investors. As the Journal noted recently: "Investors are typically attracted to currency trading because of the vast leverage available -- as much as 500 to 1. That allows an investor to put up just a few hundred dollars of capital to make a bet of tens or hundreds of thousands of dollars."

While [there] is some serious upside, consider this: The vast majority of currency trades are made by hedge funds, large corporations, and central banks. In other words, your counterparty in a currency trade is likely to be someone who is -- and this is important --vastly more qualified to make currency trades than you are. 


Your broker, however, will not tell you this. (Shocker.) The Journal notes that Citigroup(NYSE: C) and Deutsche Bank, among others, now have products to entice retail investors.


VIA: 
1. If you are concerned about the value of the dollar, there are positions 'investors' can take to diversify their dollar holdings (everything you own that is denominated in US dollars). Even 401(k) plans often have low cost options for this diversification.


2. If you are tempted to use currencies (and their leverage) to take advantage of the current trends, or you want to use the leverage they provide, don't. The risks of short term loss as a result of fluctuations of highly leveraged assets can be hazardous to your wealth.


3. VIA has no recommendation to buy, sell or trade currencies, as our view it is a hedge for companies that do business internationally, and a speculation not an investment for individual investors.


Contact us if you want to develop a strategy to deal with markets these volatile markets. We are especially well qualfied to help if you are within 10 years of retirement or in retirement.


Read the entire article on fool.com

Housing surprises

THE sudden rise in home prices suggests that the psychology of the market has shifted substantially. 


This year’s [home-buyer] survey coincides nicely with the upturn in home prices, the sharpest change in direction [the survey has] ever seen. The suddenness of this shift surprised [Robert Shiller]..."the new data are startling."


Given the abnormality of the economic environment, the sudden turn in the housing market probably reflects a new home-buyer emphasis on market timing. For years, people have been bulls for the long term. The change has been in their short-term thinking. The latest answers suggest that people think the price slide is over, so there is no longer such a good reason to wait to buy. And so they cause an upward blip in prices.


The sudden turn could signal a new housing boom, but is more likely just a sign of a period of higher short-run price volatility.


VIA Comments: 

1. We share this article not to agree or disagree with the survey's findings, but to illustrate what we have always believed that the future is unpredictable.
2. Nothing in this article and survey should be used to guide your investment decisions in housing, stocks or anything else.
3. Assets have increased in value at a very rapid rate in the last 7 plus months. If you did note benefit from this increase, you need the help of a qualified investment advisor.

NY Tines article by By ROBERT J. SHILLER

Outsmart your emotions, cut your fees, keep it simple -- and reap higher returns.

The Hulbert Financial Digest estimates that mutual fund investors lost $42 billion more than they should have during the 12-month period that ended last May.


How could this have happened? The simple answer is that emotion, not logic, usually rules our investing habits. In many ways we're predisposed not just to buy high and sell low, but to cling to losing investments we should sell, ignore threats to our wealth and follow the investing herd off a cliff again and again.

But just recognizing our mental kinks won't help us undo them, experts say. "I don't believe it's possible to change behavior that's really hard-wired into our biology," says Andrew Lo, director of the Massachusetts Institute of Technology Laboratory for Financial Engineering. But "Homo sapiens can do what we've always done: adapt. We don't have wings, but we can fly. So we develop tools to protect ourselves from these emotional shortcomings."

The silver lining to the recent bear market is that painful experiences remain in our memories for a long time and provide lessons for the future. So let's review the past few years through the eyes of experts in investor psychology and behavioral finance, studying events not as a financial roller coaster, but rather as an emotional one.

As a result of the recency effect, says Davies, "what's most recent in our minds stands out." For instance, "if investments have been going up for a while, I start seeing them as less risky. I start thinking, Well, my budget for risky investments isn't full -- I can put more in there."

For many people, plunging portfolio values became too much to bear, and they just wanted the pain to end. So they sold. According to the Investment Company Institute, the greatest net monthly outflow from stock funds in the past two years -- $25 billion -- came in February 2009. The timing couldn't have been much worse for those who sold then. As it turned out, stocks bottomed on March 9 and surged about 50% over the ensuing six months.

So, if you recognize yourself in some of the actions (or lack thereof) we've just described, now's the time to take steps to make sure you don't suffer the same mental miscues in the future. You may not be able to change your behavior in trying times, but you can change your investing strategy to neutralize negative impulses.

One bold idea: If you handle your own investments and you find that emotions are tripping you up, hire an adviser. A good adviser should help you avoid those impulses-which typically stem from short-term fluctuations in the value of your investments-and keep you focused on meeting long-term goals. The extra cost could be worth the money.

Read the article at Kiplinger's

More than one-third of Vanguard's 401(k) investors didn't lose money in 2008

For workers who are young, newly hired or lower-paid, falling market values are counteracted by the new cash pumped in with each payroll contribution. More than one-third of Vanguard's 401(k) investors didn't lose money in 2008, while 10% or less. These people were barely scathed by the stock-market crash.

In a UCLA study, a large sample of investors who filled out a risk-tolerance questionnaire for a major 401(k) provider. Only 7% described themselves as aggressive; yet 33% invest as if they are, putting 80% to 100% of their 401(k) into stocks.

• Among the more than three million 401(k) participants served by Vanguard Group, 17% were 100% in stocks in 2007; at year-end 2008, 16% still were
• Of the 11.2 million participants served by Fidelity Investments, 15% still have every penny in their 401(k) invested in stocks, including 14% of those between the ages of 60 and 64.
• The share of U.S. households that own stocks in any account has fallen from 53% in 2001 to around 45% in 2008
• Since 2007, 401(k) investors at both Fidelity and Vanguard have lowered the rate of new contributions they are putting into stocks.

"We had the most drastic market decline since the Depression, we nearly had a total collapse of the global financial system, and all that caused most people not to do much at all."

If you were one of the unfortunate few that sold low, if you relieved that the market has come back but question how to move forward from here, or if you just want a second opinion, the 401(k) Optimzer is for you.

Read the WSJ article

Investors Are Getting Killed In ETFs

A new analysis by Vanguard Group founder John Bogle indicates that investors are generally making poor decisions when buying and selling exchange-traded funds.

Bogle compared the returns of 79 ETFs in a variety of major asset categories over the past five years to the returns of the average dollar invested in those ETFs over the same time period. It’s a common statistical practice in mutual fund analysis, allowing investors to see whether they’re buying at the bottom and selling at the top, or vice versa.

While investor returns typically trail fund returns by some margin, Bogle expressed surprise at the degree to which investor returns suffered in ETFs.

“These numbers … are unbelievably consistent,” said Bogle. “Out of 79 ETFs we covered, 68 had investor returns that were … short of the returns earned by the funds themselves. “

And by no small margin. The degree of investor-lag ranged from 0.4% per year for large-cap value funds to -17.9% per year for financials ETFs. Investors seemed to do the worst in high-profile and volatile sectors like emerging markets, financials and REITS.

“So we have evidence—strong evidence—that exchange-traded funds, because of the timing that goes on in them, are not acting in the best interest of investors. Or, that investors are not acting in their own best interests, which may be a better way to put it.”

Click here to view a full replay of the Bogle webinar.

Read more Journal of Indexes and IndexUniverse.com

Jim Cramer DOW 6500 Bottom Call Myth

On June 1, 2009 Jim Cramer gave a summary on his show of what he saw to call a bottom on the stock market at DOW 6500 by saying "the worst is over, the downside was over and the time was ripe to buy."

Don Harrold says Cramer is "perpetuating the myth". This is an excellent video by Don Harrold showing how bearish Jim Cramer was at the bottom of the bear market.

Did you buy high and sell low?

Buying high and selling low is a formula for awful returns. 

Many investors thought they could take risk before they had experienced the pain of the recent losses. Panicked investors then rushed to safety.

• "I thought: I can't afford to lose it all so, I recently reduced the 40% of my portfolio that was in stocks, to just 10% - the rest is in cash, bonds and federally insured certificates of deposit."
  
• "I cashed out of my individual retirement account in early March to help pay the $1,200-a-month maintenance costs on my unsold home."
• "When the $100,000 turned into $60,000 late last year, I worried we would lose our children's college money if we didn't get out of the market."
• "But, we had to get out emotionally - math and the mind don't always add up."
  
• "My folks need income, they need to know they can pay their bills....There was no waiting time for things to come back around."
• "What if the DOW was selling at 3000 now? Selling at 6500 would have been brilliant. And you don't know that at the time of the decision."
  

"Their timing was almost perfectly bad!"

They were not alone. Professionals and newsletter writers were equally wrong:

Bob Brinker's advice (one of the most highly rated market timers that called the 2000 bubble and 2003 advance) made the following calls since January 2008: 

• Mid 1400 on the S&P 500, he called it a "gift horse buying opportunity"
• Market rallies back to 1400's in 2008 and he bashes the "Cassandras" (people predicting the market crash)
• Market bottoms in 2009 at 676 and he has no buy or advice to dollar cost average in his newsletter just days before.
• Market rallies significantly and he is a buyer on "weakness"

Most investors take more risks than they need to take, can afford to take or can stand to take.

Visible Investing is about seeing and understanding the risks you are taking and the returns you are seeking to achieve. 

Contact an advisor for a complimentary discussion of your current situation.

Recoup losses sooner than you think...

From the NY Times article by Mark Hulbert is editor of The Hulbert Financial Digest



"Historical stock charts seem to show that it took more than 25 years for the market to recover from the 1929 crash — a dismal statistic that has been brought to investors’ attention many times in the current downturn."

"But a careful analysis of the record shows that the picture is more complex and, ultimately, far less daunting: An investor who invested a lump sum in the average stock at the market’s 1929 high would have been back to a break-even by late 1936 — less than four and a half years after the mid-1932 market low."

"Three factors have obscured this truth from investors: deflation, dividends and the distinction between the Dow Jones industrial average and the overall stock market."

Deflation
"The Great Depression was a deflationary period. And because the Consumer Price Index in late 1936 was more than 18 percent lower than it was in the fall of 1929, stating market returns without accounting for deflation exaggerates the decline."

Dividends
"When the Dow hit a low of 41.22 on July 8, 1932, for example, the dividend yield of the overall stock market was close to 14 percent, according to data compiled by Robert J. Shiller, the Yale economics professor."

The Dow vs. the Market
"Many researchers consider the overall market — defined as the combined value of all publicly traded stocks — as the best gauge of a typical investor’s experience. The Dow is made up of just 30 stocks, which are weighted in the index according to their price rather than their relative market capitalization."

"So when did the overall stock market really make it back to its pre-crash peak? Just four years and five months after its mid-1932 low, according to data provided to Sunday Business by Ibbotson Associates, a division of Morningstar."

"That seems remarkably fast, given that the stock market lost more than 80 percent of its value from its 1929 high to its mid-1932 low. But the quick recovery of the 1930s is consistent with the typical experience after other bear markets in the United States."

"...according to a Hulbert Financial Digest study of down markets since 1900, the average recovery time is just over two years, when factors like inflation and dividends are taken into account. The longest was the recovery from the December 1974 low; it took more than eight years for the market to return to its previous peak, which was reached in late 1972.

None of this, of course, guarantees that stocks will have a quick recovery from the market decline that began in October 2007. But it suggests that the historical record isn’t as bleak as it looks."

Visible investing principals show that by reinvesting dividends and continuing to dollar cost average during market downturns further decreases the time it takes to recoup your losses.
Contact us if you would like to see how you can shorten the time it takes to recoup your losses.

Buffett's metric says it's time to buy

According to investing guru Warren Buffett, U.S. stocks are a logical investment when their total market value equals 70% to 80% of Gross National Product.

In late January, stocks the ratio was 75%.

FORTUNE MAGAZINE

"We try to price, rather than time, purchases." Warren Buffett

"... it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable.

Why scrap an informed decision because of an uninformed guess? ...

We have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist."

From 1994 Berkshire Hathaway Shareholder Letter