Sage Advice For The Apprenticed Investor

[VJW]

APPRENTICED INVESTOR: KNOW THYSELF

“Statistical evidence suggests a high probability that you underperformed the broader market last year, and most investors will likely underperform again this year. But it's not just retail investors. The pros are barely any better. In fact, four out of five investors will do worse than the S&P 500 this year.

The problem, it seems, is a design flaw.

Indeed, many classic investor errors -- overtrading, groupthink, panic selling, marrying positions (i.e., refusing to sell), chasing stocks, rationalizing, freezing up -- are mostly due to our genetic makeup. Humans have evolved to survive in a harsh, competitive landscape. To do well in the capital markets, on the other hand, requires a skill set that is very often the antithesis of those innate survival instincts.

Why is that? The problems lay primarily in our large mammalian brains. It is actually better at some things than you may realize, but (unfortunately) much worse at many others you are unaware of. Most people are unaware they even have these (for lack of a better word) ‘defects’. The fact is, when it comes to investing, humans just ain't built for it.”

MORE HERE

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[jmjj215]

VJW, you might be interested in this article about passive investing I thought it was a great read.

[VJW]

Yes, it’s been quite well documented that for other than special or specific situations, the bulk of one’s investment that is to be in the stock market, should be in index funds, for all the detailed reasons.

However, there still remains the matter of whether one should be in the stock market or not, and WHEN, which statistically have MUCH larger ramifications.

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[CRFSaver]

research tends to show that the majority of investment returns come in relatively short time periods so it is not a good idea to try and market time. Over time the numbers have shown that value investors outperform growth investors. Of course those numbers have diverged during the 90's. I have always used index and balanced funds and done quite well. While I might underperform the market the market doesnt have to pay commisions, systems to track holdings and people to take those phone calls. Either way on average 8% is still much better then the 3% I get in my savings accounts.

I have a select few bond funds that I like cause I know the people running them are on top of their game plus no 12b-1 fees and no loads (why anyone ever pays a load on a fund is beyond me). Then there is the 15% discount I get on company stock, I can live with a 15% guaranteed return.

[jmjj215]

However, there still remains the matter of whether one should be in the stock market or not, and WHEN, which statistically have MUCH larger ramifications.

That's the golden egg right there. My plan: When: EARLY - How long: LONG

Have you seen the new mutual funds that change their asset diversification based on your target retiremement? I find those pretty intriguing, since huge mistakes are made by investors when it comes to spreading their risk appropriately (to begin with) and adjusting it as they move towards retirement.

why anyone ever pays a load on a fund is beyond me

I wouldn't be so quick to discount all load funds. There are some load funds that more than make up for the fee by having an outstanding fund manager. I look first at track record, and if I find two that are comparable, then I look at fees. Of course, some people just can't stand paying the load - so in that case - don't do them

[VJW]

Originally Posted by CRFSaver

research tends to show that the majority of investment returns come in relatively short time periods so it is not a good idea to try and market time.

This has already been refuted in post #32 in this thread:

More Millionaires

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[VJW]

Originally Posted by jmjj215

That's the golden egg right there. My plan: When: EARLY - How long: LONG

That’s just it. “Buy & Hold” no longer works. Even Wall Street has admitted this now.

For example, if you had hit retirement age in 2000, and then suffered 40% -50% or more losses, as many did, you would still be unable to retire today.

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[CRFSaver]

The trick is you can still find those managers without paying a load. For example, PIMCO Total return that has a load on it. As a substitute, Fremont bond fund that has as its "sub-adviser" Bill Gross of Pimco. No load and no 12b-1 fees. Now why would I pay a 5% load when I can get the same manager for no load. I would never pay a load but then again, I would never use a full service broker as they provide no value to me. Others they might provide value.

[jmjj215]

That’s just it. “Buy & Hold” no longer works. Even Wall Street has admitted this now.

For example, if you had hit retirement age in 2000, and then suffered 40% -50% or more losses, as many did, you would still be unable to retire today.

Well that all depends. By hold I don't mean you hold the same asset class the entire time. As an investor moves toward retirement, they would change their portfolio holdings to reflect that, move from growth, into more income funds, hold more bonds, less stock, lessen their international/aggressive funds a bit..

I don't think an investor who was at a 50/50 stock/bond portfolio would've fared all that bad in 2000. Bonds were quite something from 00-03. That's why I mentioned those Target Retirement Funds (I know vanguard offers them, sure the others do too), those are a great way to diversify away the unsystematic risk of the market. No?

[jmjj215]

Originally Posted by CRFSaver

The trick is you can still find those managers without paying a load. For example, PIMCO Total return that has a load on it. As a substitute, Fremont bond fund that has as its "sub-adviser" Bill Gross of Pimco. No load and no 12b-1 fees. Now why would I pay a 5% load when I can get the same manager for no load. I would never pay a load but then again, I would never use a full service broker as they provide no value to me. Others they might provide value.

Point well taken. Wasn't there an article a bit back about just this thing? Same manager who "advises" another much cheaper fund. Point very well taken. I guess I just wanted to point out that just b/c it's a load, doesn't necessarily, every time, mean it's crap

[VJW]

Originally Posted by jmjj215

Well that all depends. By hold I don't mean you hold the same asset class the entire time.

I understood that.

As an investor moves toward retirement, they would change their portfolio holdings to reflect that, move from growth, into more income funds, hold more bonds, less stock, lessen their international/aggressive funds a bit..

That used to be the 'conventional wisdom'.

I don't think an investor who was at a 50/50 stock/bond portfolio would've fared all that bad in 2000. Bonds were quite something from 00-03.

The average government bond fund, one of the most widely held of bond funds, rose 6.2% in 2001. But the Standard & Poor's 500 stock index fell 13% in 2001.

That's why I mentioned those Target Retirement Funds (I know vanguard offers them, sure the others do too), those are a great way to diversify away the unsystematic risk of the market. No?

Target Maturity bond funds are good for receiving a definitive amount of your principal returned to you at a set date in the future, particularly if you require a certain amount of money for a specific purpose. They can be market timed, but require a level of sophistication.



BTW, I had forgotten about another interesting article that makes for good reading. It’s by Malcolm Gladwell (of ‘Tipping Point’ and ‘Blink’):


BLOWING UP (Department of Finance)

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[jmjj215]

The average government bond fund, one of the most widely held of bond funds, rose 6.2% in 2001. But the Standard & Poor's 500 stock index fell 13% in 2001.

So, if an investor had been changing their allocation approaching retirement, and let's say they wanted to retire end of 2001, they would've probably held something like the vanguard 2005 retirement fund: bonds 66.6%, stock 32.6%, and cash .8%

Their portfolio return would've been: -.1% (before applicable fees) - not something to worry too much about.

For example, if you had hit retirement age in 2000, and then suffered 40% -50% or more losses, as many did, you would still be unable to retire today.

This happened to people, but I don't think they were properly diversified across different asset classes, supposing they were targeting 2000 as their retirement year, if their losses were that enormous.

This subject is very interesting to me, since I would like make the correct investment decisions for my own retirement.

VJW, how does one prepare, save, and invest for retirement if sound investing requires "a level of sophistication" that I imagine the average investor is not aware or capable of?

I printed off the referenced article so I can read it hard-copy. Thanks.

I'm not talking about target maturity bond funds, I'm talking about a fund that holds other funds. For instance, my target retirement might be 2035, so I would invest in the Vangaurd Target Retirement Fund 2035. The holdings include:

• Vanguard total stock market index fund
• Vanguard total bond market index fund
• Vanguard european stock index fund
• Vanguard pacific stock index fund

You can read about this particular fund here.

[JBinKC]

Yeah the environment is tough now and unfortunately, I see it probably is going to get tougher going forward. It appears obvious the days of cheap energy are over for good
which I feel will be the biggest deterrent for meaningful future growth in the economy. I don't think the solution to your investments will be simple like switching over to energy stocks mainly because these companies aren't truly growth stocks as they will ultimately produce less product every year. If you note the return from crude oil surpassed the performance of most integrated oil stocks over the last 5 year period.


My suggestion for most people who don't spend 40 hrs a week researching and tracking potential investments if you are not debt free the best investment advice is to pay down your debt starting with your highest rate first.

If you do have the time my suggestion is to find microcaps with a small public float that has explosive earnings momentum and spot them before the crowd rushes in. Usually stocks that are on the bulletin board to the NASDAQ are good ones to choose.

[VJW]

That was my earlier suggestion as well, but in the form of a Microcap Index fund. However, I would only commit monies to this kind of investment that one can afford to LOSE. If you held ten of these stocks, five may well go bankrupt, two may do mediocre, one may do very well, and one may take off as if it were atop a Saturn 5 rocket, that could potentially make you spectacularly wealthy.

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[VJW]

Originally Posted by jmjj215

So, if an investor had been changing their allocation approaching retirement, and let's say they wanted to retire end of 2001, they would've probably held something like the vanguard 2005 retirement fund: bonds 66.6%, stock 32.6%, and cash .8%

Their portfolio return would've been: -.1% (before applicable fees) - not something to worry too much about.

Ah, but you had suggested a “50/50 stock/bond portfolio”. Not to mention that even a 66/33 split delivered about a zero return, which in it’s fifth year would be amassing significant losses in inflation adjusted dollars.

This happened to people, but I don't think they were properly diversified across different asset classes, supposing they were targeting 2000 as their retirement year, if their losses were that enormous.

It doesn’t really matter what the configuration of broad stock holdings one held, as some $9 TRILLION has been lost in the stock market since 2000.

This subject is very interesting to me, since I would like make the correct investment decisions for my own retirement.

VJW, how does one prepare, save, and invest for retirement if sound investing requires "a level of sophistication" that I imagine the average investor is not aware or capable of?

A darn fine question, which is the question I have been raising, in the form of a devil’s advocate, in these forums.

I'm not talking about target maturity bond funds, I'm talking about a fund that holds other funds.

OK. Gotcha.

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[jmjj215]

Ah, but you had suggested a “50/50 stock/bond portfolio”. Not to mention that even a 66/33 split delivered about a zero return, which in it’s fifth year would be amassing significant losses in inflation adjusted dollars.

True, but then I readjusted it based on what a "retiring" portfolio should look like. Even at 50/50 your loss that year would've been -3.1%, not too scary for one year.

It doesn’t really matter what the configuration of broad stock holdings one held, as some $9 TRILLION has been lost in the stock market since 2000.

Is that realized or unrealized loss for the investors? Not everyone is worried b/c not everyone was retiring in 2000. Along with a "$9 TRILLION" loss, the future gains in the next decade could (might, maybe, we hope) offset those losses. I don't think you can pick even a five-year window in the stock market and start to get too worried about it.

A darn fine question, which is the question I have been raising, in the form of a devil’s advocate, in these forums.

Alright, turn off the Devil's advocate switch and come up with some suggestions

That’s just it. “Buy & Hold” no longer works. Even Wall Street has admitted this now.

Would you mind pointing me to some (or just one) places where Wall street has admitted this? Thanks.

Edit: I just took a look at the "Millionaire" thread you referenced above. Feel free to disregard my last two responses to your quotes (wall street admission, and your suggestions). I kind of picked them up there.

[VJW]

Originally Posted by jmjj215

True, but then I readjusted it based on what a "retiring" portfolio should look like. Even at 50/50 your loss that year would've been -3.1%, not too scary for one year.

Add in the inflation rate (about 3%) and that’s a loss of more than 6% in one year. After five years, you’re looking at MAJOR losses.

Is that realized or unrealized loss for the investors?

Both.

Not everyone is worried b/c not everyone was retiring in 2000.

But it’s not just December 31st, 2000, it’s everyone who retired since, as the market has stayed down.

Along with a "$9 TRILLION" loss, the future gains in the next decade could (might, maybe, we hope) offset those losses.

Perhaps, but that’s what Wall Street has been forecasting every year of the last five calendar years.

I don't think you can pick even a five-year window in the stock market and start to get too worried about it.

But it’s the 30+ year windows you have to worry about. There haven’t been any 30 year windows of great gains in the market since 1900.

Alright, turn off the Devil's advocate switch and come up with some suggestions

Yes, I would have directed you to that prior posting.

Would you mind pointing me to some (or just one) places where Wall street has admitted this? Thanks.

I regularly watch NBR and WSW and numerous advisors have presented the view that “Buy & Hold” is over and that stance has even been adopted by various brokerage firms.

BTW, I see now that Wall Street is selling non-volatility as an investing technique instead:

“Here's what scares - one thing that scares me as a contrarian, something that's happened since the last time I was on. Wall Street has now discovered that you can market no volatility to investors. There has been close over $6 billion in closed end funds sold this year that do nothing but buy stock and sell calls against that stock, the old buy right, covered writing approaching and it scares me. Once it gets to that Wall Street marketing phase, that people get attracted because you can make money when volatility is low and people don't expect volatility to increase. That kind of scares me as a contrarian and maybe that is an indication that we might finally be moving out of that low volatility period.”

Bernie Schaeffer – Schaeffer's Investment Research

http://www.nightlybusiness.org/trans...ipt052705.html

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