Advisor Risks

You have probably know about the risks you face when investing: market risk, inflation risk, timing risk, concentratin risk, investment risk, sector risk, company risk, currency risk, event risk, political risks, etc.


One that you may not be as familiar with is Advisor or Manager risk. In this case we are talking about people who manage other peoples money (mutual fund managers), analysts (like S&P, Moody's, TV commentators, or newsletter writters), hedge funds, money managers, and personal advisors (investment advisors, financial planners, etc.).


Managers and Advisors are also risk-averse, just as they are with their own money and you are with your own. But they're averse to a different kind of risk - the risk of looking bad to the person who's paying you the fee. When they provide their investors their (daily, wekly, monthy or annual) reports, they don't waqnt to be holding investments that have recently done bad or not holding ones that have recently done well. That is not what you are paying them for.

This risk can incline them to buy high and sell low. Avisors then buy what has just gone up and sell after investments have gone down becasue it will make them look better. The problem is that over time, it will not maximize the wealth of their clients.
 

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

analysts frequently head in the wrong direction

From a Bloomberg article


10 years of data...suggests that the stocks analysts love the most usually do poorly.


From 1998 through 2007, the four stocks rated highest by brokerage-house analysts at the beginning of the year dropped 1.7 percent, on average, in the ensuing 12 months. The four stocks they rated lowest gained 2.2 percent. Neither group beat the Standard & Poor’s 500 Index, which had an average annual gain of 7.2 percent.
The pattern doesn’t hold true every year, but it is more than coincidence. The problem... is that analysts are drawn to companies with strong and improving operating results. Generally, they aren’t fussy about how expensive a stock is when they recommend it.

Stocks advance when a company exceeds prevailing expectations. The higher the expectations, the more difficult they are to exceed. No wonder that stocks favored by hoards of analysts do badly.

How to you deal with your emotions?

One of the important services that an investment advisor performs is helping clients deal with their emotional ups and downs as a result of market movements and news.

Columnist Jason Zweig has been looking at this important issue and in the video below, has found that man's makeup (DNA) is partially to blame. Although the impulse react to your emotions can be controlled, it takes a strong will and lots of discipline.

What you can learn from Warren Buffett?

Warren Buffett can no better tell you his secrets then Tiger Woods or Albert Einstein can tell your theirs.


It's not they are hiding anything. His intelliect, and the way he processes info is different then the rest of us- he sees a ‘3D color movie’ while others see a ‘B&W text.’ He has conviction to act in the face of uncertainly with great commitment.

The advantage that the average investor has is to buy BRK and find other similar managers with whom you can participate.

Buffett also points out in is Graham and Doddsville talk that the superinvestors use multiple strategies (they all didn't buy the same things). This is another advantage for the individual investor - invest with super investors with different specialties reducing volatility and increasing returms thru diversification.

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

The growth illusion

When investors pick the countries they want to back, they tend to be guided by economic growth prospects. The faster an economy grows, they reason, the faster corporate profits will grow in the country concerned, and thus the higher the returns investors will achieve.

Alas, this is not the case.

• going back to 1900, there was actually a negative correlation between investment returns and growth in GDP per capita
• no statistical link between one year's GDP growth rate and the next year's investment returns

Why might this be?

• growth countries are like growth stocks; their potential is recognized and the price of their equities is bid up to stratospheric levels.
• a stock market does not precisely represent a country's economy - it excludes unquoted companies and includes the foreign subsidiaries of domestic businesses.
• growth is siphoned off by insiders - executives and the like - at the expense of shareholders.

What does work?

• Over the long run (but not the short), it is valuation.

As we always point out, the past is not an indicator of the future, but these facts do support the Visible Investing principle that you must get a good value for anything you buy - stock, bond, home, TV, or anything else.

Visible Investment Advisors feel it is important for most investors to have international assets in their portfolio, but taking the route most discussed by the gurus on TV and newspapers will (like it always does), be hazardous to your wealth.

Read the entire Economist article

Are investors too optimistic?

Ever since the financial meltdown, and throughout this recession, people keep asking us if we're optimistic about the future.

Conversations reveal that people are less optimistic then they had been, but want to be more optimistic and are looking for some outside reinforcement.

A lot of research has been done about optimism and the impact it can have on people's lives (read Dan Ariely & The Curious Paradox Of `Optimism Bias’).

Researchers have found that when people judge their chances of experiencing a good outcome–getting a great job, having a successful marriage, or financial security–they estimate their odds to be higher than average. And when they contemplate the probability that something bad will befall them (a heart attack, a divorce, a parking ticket), they estimate their odds to be lower than those of other people.

We usually ask when doing a 401(k) seminar the following questions:

1. How many people feel they will accumulate the nest egg they need to support their desired retirement lifestyle? – usually more 50% feel they can.
2. How many people know how much money they will need at retirement or know where they stand today in relation to their goal? – of course, most do not know, and when pressed to guess how they stand today, they acknowledge they're probably behind and will have to work longer then they anticipated.

This can be a huge problem:

• chances of hitting your target nest egg when you don't know what that amount is, is extremely low
• not knowing where you stand in relation to wealth accumulation, can cause errors in the investment decisions you make

Both have the consequence of hurting your chances for the retirement at a time and in a manner of your choosing.

Oh, and are we optimistic about the future–extemely. Lot's of money has been lost (and lots of money has not been gained) by betting against (or not investing in) America.

For this reason, we've created an extremely low cost investment advisory service – the 401(k) Optimizer program to help you know how much you will need and how you should monitor and invest your 401(k) to reach the retirement security you've earned. Contact us if you need some information.

Do you want a 3rd party rating of your company's 401(k) plan?

BrightScope is a nice new website that quantitatively rates 401k plans and gives plan sponsors, advisors, and participants tools to make their plans better.

• Get a single number score that reveals the quality of your plan
• Find out which companies offer great 401k plans
• Learn what you can do to improve your plan

I found some of the info to be out of date, but they even provide you the opportunity to update the info.

http://www.brightscope.com/

The risk in your risk profile

Every investment website (and even some investment advisors) use questionnaires to help uncover the amount of risk you can take.

We all know:

• the way a question is worded has a lot to do with the way you answer it,
• your answers are heavily influenced by your current state of mind and circumstances,
• it is virtually impossible to measure something as dynamic, transitional, and fleeting as the emotions involving risk.

If you've taken used a questionnaire that asked how you would react to a 50% decline (and most did not because it was unimaginable before it happened), think about how you felt and reacted this year when it actually happened.

For those that are interested there's a nice article on the subject at moneytwatch.

If you need to measure, understand or position your portfolio for risk, contact us or visit our website.

Can "butter in Bangladesh" predict the market?

How about the superbowl indicator, seasonality, back-testing strategies (this is hot now with the online trading brokers). You may have a fovorite of your own, but does knowing what happened in the past help you predict the future?

One of VIA's favorite writters, Jason Zweig, wrote a great article in the WSJ (the outcome of which you undoubtably know if it is a post by VIA) and video on this subject that I highlight below:

"The stock market generates such vast quantities of information that, if you plow through enough of it for long enough, you can always find some relationship that appears to generate spectacular returns -- by coincidence alone. This sham is known as "data mining."

Every year, billions of dollars pour into data-mined investing strategies. No one knows if these techniques will work in the real world. Their results are hypothetical -- based on "back-testing," or a simulation of what would have happened if the manager had actually used these techniques in the past, typically without incurring any fees, trading costs or taxes.

Those assumptions are completely unrealistic, of course. But data-mined numbers can be so irresistible that, "they are one of the leading causes of the evaporation of money, especially in quantitative strategies."

Over history, humans have become the ultimate "pattern recognition machines" which served us well when we had to hunt for our food in the wild, but doesn't work in the financial markets.

We have added Nerds on Wall Street: Math, Machines and Wired Markets to our reading list. Light reading. Enjoy.

Do fast growing economies provide better investor returns?

The Emerging Markets index has gained 45% so far this year, versus 9% for the U.S., and investors have noticed, pouring $10.6 billion into emerging-markets mutual funds so far this year, more than 34 times the total they added to U.S. stock funds.

Based on decades of data from 53 countries, studies have found that the economies with the highest growth produce the lowest stock returns, by an immense margin.

Stocks in countries with the highest economic growth have earned an annual average return of 6%; those in the slowest-growing nations have gained an average of 12% annually.

If you think about this, it's not surpiring after all. In stock markets, value depends on both quality and price. Economic growth is high, but stock valuations are even higher, eve though they should be much cheaper than U.S. stocks, because they are far riskier.

High growth draws out new companies that absorb capital, bid up the cost of labor and drive down the prices of goods and services. That is good news for local workers and global consumers, but it is ultimately bad news for investors.

The role of emerging markets is to provide diversification, not to add to returns. Like all performance chasing, this latest investing binge is doomed to disappoint the people who don't understand what they are doing.

Note: history should not be used to predict future returns.

The unemotional investor

It is sometimes said "be an intelligent investor, you must be unemotional." That isn't true - you should be inversely emotional - see the enthusiasm of others as a yellow caution light, and their misery as a sign of hope.


The true investor would be pleased, rather than discouraged, when the market is down allowing for the investment of new savings on very satisfactory terms. During the accumulation period (your working life) investors would be "fortunate" to benefit from the "advantages" of a long bear market.


Does dollar-cost averaging ensure long-term success? This policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions. For that to be true, the dollar-cost averaging investor must be a different sort of person from the rest of us, not subject to the emotions of exhilaration and deep gloom that have accompanied the gyrations of the stock market.


This doesn't mean that you can't resist being swept up in the gyrating emotions of the crowd (or the pressures of your spouse) - it means that few people can. To be an intelligent investor, you must have confidence that can only comes from a deep understanding of the value of what you are invested in.


Don't let the crowd lead you to buying and selling and the wrong time. Contact us to help you balance your risk tolerance and return objectives.

Tame Inflation Before It Strikes

You may feel you don't need any insurance against a rise in the cost of living. Inflation, as measured by the Consumer Price Index, is running at negative-1.3% over the past 12 months; with oil and real estate down drastically, there are few signs of rising prices in daily life.

But the cost of living might not fall for much longer. So it is a good time to look at inflation insurance, in the form of U.S. Treasury Inflation-Protected Securities, or TIPS. The principal value of TIPS increases or decreases with the cost of living. Unlike normal bonds, TIPS don't get hammered when inflation rises.

A TIPS fund should be something you invest in for insurance, not for income.

TIPS offer baseline insurance against a rise in all the costs of living. However, TIPS aren't customizable. The official inflation basket consists of

• housing costs (43%),
• food (16%),
• transportation (15%),
• health care (6% ),
• and recreation (6% ),
• apparel (4%)
• education, communication and "other" (3% each).

If the basket of goods and services that you pay for is significantly different from the CPI, then TIPS won't fully insure you.

So think about what makes up your personal inflation mix. If you don't want inflation to ravage your retirement plans, contact us a call to discuss an investment protection plan for your portfolio.

Read the entire article by JASON ZWEIG in the WSJ

Why it's hard to make a good decision

Recently The Wall Street Journal ran an article entitled, “Training the Brain to Choose More Wisely.” It opened with the sentence, “The human brain is wired with biases that keep people from acting in their best interest.” In the last forty years a field of inquiry has emerged called behavioral finance that has shed new light on how we make investment choices.

Adults tend to think of ourselves as sound decision makers; we make hundreds of decisions each day. Yet we are busy people in a complex world and cannot possibly give in-depth consideration to every choice.

The current financial mess affords no shortage of examples of poor decision-making. Didn't we learn anything from our mistakes in the dot-com era? Many people believed real estate values would keep going up as they had for many years; they were convinced that real estate was still a good investment. This belief, based on a prior set of conditions which turned out not to be sustainable, constituted a biased assessment of risk.

Many investors wanted to buy more property because it appeared that everyone else was making money at it. They were motivated in part by a bias to follow the herd. Now, investors may have a hard time selling investments that have declined in value, even though lower prices may also present better opportunities for buying. Investors in this case may have loss aversion.

A biased assessment of risk occurs when the brain takes a shortcut in evaluating a risky situation.

People do like to go along with the crowd. Yale professor Robert Shiller talks about social contagion. Most people come to think the optimistic view is correct just because everyone else seems to accept it as true.

When it comes to investment decisions, others often influence us, even when following in their footsteps is not necessarily rational or in our best interest. Upon seeing others do something, we tend to ask whether the same might be good for us. We hear that our neighbor got out of the market last November and think maybe we should do the same.

It should come as no great surprise that people hate losses. Loss aversion, however, can elicit unproductive and irrational behavior. People have an extremely hard time selling a stock or fund that has sustained a loss. Recognizing a loss is equivalent to acknowledging having made a mistake. This leads to the crafting of excuses. We cling to the fond hope that the investment will return to its previous value. If it could just get back to where it was when we bought it, then we would sell. We hope the market will validate the original purchase.

People tend to make poor decisions because they fear losing or giving up something, even though change is very much in their best interest.

Knowing oneself is a vital aspect of successful investing. Investing entails risk. Knowing our own temperament for risk (and that of our spouses) will lead to knowing the returns you will get.

Don't Count on TIPS

Treasury inflation-protected securities may rank as today's most over-hyped investment product. To hear their proponents talk, TIPS will shelter you from the ravages of inflation, which does seem likely to worsen. But they forget to mention that TIPS are Treasury bonds, which are almost certain to fall in value as inflation heats up.

TIPS protect you from inflation with one hand, but they punish you with interest-rate hikes with the other.

If you buy TIPS directly from the Treasury and hold them to maturity, you'll receive the full CPI increase. If you invest through a regular mutual fund or an exchange-traded fund, you're at the mercy of the market's expectations for the CPI.

TIPS probably won't lose money when inflation heats up, but they're unlikely to make much, either. It's pure fantasy to think that putting 10% or 20% of your assets in TIPS will insulate your portfolio against inflation.

Read more on Kiplinger

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

Paralysis of Analysis

By Dr. Robert Cialdini

"Usually, a communicator’s purpose is to develop and send a message that alters the attitudes, decisions, or behaviors of recipients. The critical question, of course, is how best to arrange it... the best indication of how much change a communication will produce lies not in what it says but, rather, in what the recipient says to him-or herself as a result of receiving the message.

Because people frequently disengage their critical thinking/counterarguing powers and defer to expert advice, communicators who can lay claim to relevant expertise would be fools to fail to make that expertise clear early in the messaging process.

besides projecting our expert standing into the consciousness of an audience, it is as important to protect that status by conveying our background, experience, and skills honestly without exaggeration or fabrication."