Avoid Buy And Hold, Sell Your Big Loser!

I’m not a big fan of losing 70% of my money by riding down a stock that I should have dumped.  That’s the problem with buy and hold, it prevents you from selling investments.  You always risk having the big loser.  And that big loser can wreak havoc on a portfolio.

I read a story of a successful investor who, when on straight-to-the-point novice asked what this man’s secret of investment success was, replied simply, “Don’t lose.”

Take a stock that plummets from $100 to $20 per share.  That’s a decline of 80 percent.  But, for that stock to return to $100 per share, that price would have to rise 400 percent!

Now, take a portfolio that declines 50% (and many portfolios have declined 50% or more over the last few years).  The math here is quite simple.  In order to recoup your loss, the portfolio must increase 100 percent.

If you think about that in terms of time, the number of years required to recoup the loss (based on the stock market’s historical annual return of approximately 11 percent) is nearly seven.  In other words, based on historical market returns, a 50% decline in your portfolio shaves roughly seven years off your investment program.

Now, while nobody wants to lose seven years off an investment program, you can afford to play catch-up if you have an investment time horizon of at least 20 to 30 years, especially if you are willing to invest more money when stocks are down.

However, if you are someone in his or her fifties or sixties, the cost of losing big is even steeper.  You just don’t have enough time to make up the lost years as a result of one big hit.

Bottom line:  To everything there is a reason, including selling.  Volatile markets put an even greater premium on selling, as violent market moves can reduce capital gains in a surprisingly short period of time.

Stop Swinging For The Fences!

You don’t have to have your homerun hitters at bat every time to create wealth in the stock market.  A reasonable annual return and time will do the trick.  Swinging for the fences, whether it be concentrating your portfolio in just one or two high-flying technology stocks or buying penny stocks, also increases your chances for that killer loss that will take years to recover.

Indeed, investors who swung for the fences in recent years now wish they had choked up on the bat and slapped some singles.

Remember: The secret of investment success is to continue to set aside money to invest over time, and to generate a reasonable rate of return each and every year while avoiding the big loss. 

That alone is more than enough to make you achieve your financial dreams.

Can Money Managers Add Value To Your Portfolio?

Based on a dismal record of money managers to outperform benchmarks, we have to take the argument that markets are efficient very seriously.  Recent statistics shows that 0.002% of Hedge Fund managers outperform the S&P 500 over a period of 5 years time!

When we go about building our investment strategy, benchmark, style, or passive and active investing, we must consider the overall average performance of each investment class over a period of at least five years.  Doing so, ensures your money has staying power.

In our own practice, we use only institutional-class index funds.  Today it is possible to index almost the entire world.  I think that approach gives us the highest probability of a successful outcome with the lowest risk.  To the extent possible, I want to see predictable results.  I hate underperforming the benchmark more than I would enjoy overperforming.  That makes me pretty much like my clients: risk averse. 

On a side note:

A special thanks to Dr. Karl W. Einolf, Ph.D. of Mount St. Mary’s University for allowing me the opportunity to lecture his Corporate Finance classes yesterday.  It’s truly an honor and I hope I was able to impart some practical knowledge for the students as they go on to graduation and beyond! 

How to Strengthen a Team

I was studying the importance of team work in the Financial Services industry the other day and I realized that too many people are trying to do all the work themselves alone.  At the end of the day, they wonder why they have yet to see any changes in their bottom line. 

Being in a team environment significantly improves your chances of success but once you join or form a team, you need to strengthen it.  There have been many books written about building teamwork, but there are basic elements I have seen that make the most difference.

Align Values

Sharing similar values will strengthen a team.  Examples of values include work ethic, shared vision and goals, compensation of support staff, communication, and investment philosophy. 

Promote Commitment

The best teams are those whose members are committed to the growth of the team, with each member being willing to commit a lot of energy to the team’s success.

Promote Good Communication

Good communication is essential to a team’s success.  As in any relationship, good communication overcomes most problems.  The team should encourage communication by all team members and provide opportunities for team members to share their opinions on how to make the team better.  One of the greatest benefits of a team is the ideas and creativity that can result when the team members are all motivated to improve the team.  All team members should have the opportunity to review and give input regarding all aspect of the team’s activities.

Build In Measurement and Accountability

Every team member should be held accountable for her responsibilities, and team meetings should be held to review accountability.  These meetings motivate all the members to excel, so that they can proudly share their results at team meetings. 

In the long run, working toward parity is best.  If the split is not even, there should be an incentive for all team members to get an equal share as the team’s business grows.

What is Quantitative Easing?

If you follow Financial news, you no doubt have heard of the Fed decision to inject another 600 Billion Dollars into the system by purchasing Treasury Bonds and to “maintain low interest rates” in a strategy dubbed “Quantitative Easing.”

Quantitative Easing (QE) is an extreme monetary policy used by some central banks to increase the supply of money by increasing the excess reserves of the banking system.  In short, it is printing money.   

QE can trigger higher inflation or even hyperinflation if too much money is created.  It can fail if banks are still reluctant to lend money to small businesses and households in order to spur demands. 

To put it simply, people who have saved money will find it is devalued by inflation; however those who have debt will see the value of that debt decline.  Those who own homes will see the value of the increase as more devalued dollars are needed to purchase the home.  The value of the debt on that home will decrease as the number of dollars needed to settle the mortgage will remain constant and can be paid with future devalued dollars. 

Before the Fed decided to force this policy on us, maybe they should have taken a popular vote.  Oh wait, voting is a right in democracies not, dictatorships.

GOP Takes House, Democrats Keep Senate

The Republican Party took control of the House of Representatives in Tuesday’s election, dealing a withering blow to President Barack Obama, but Democrats narrowly clung to a majority in the Senate.

Republicans were projected to nab 60 seats in the House, Fox News said, easily exceeding the 39 needed to capture control of the chamber from the Democrats for the first time since 2006.

Rep. John Boehner, the Ohio Republican who is likely to become Speaker of the House, said that Tuesday’s results were a repudiation of big government and sent a message to Obama.

“That message is: Change course,” Boehner said.

Senate Majority Leader Harry Reid, meanwhile, won re-election after a fierce fight with Sharron Angle, one of Election 2010’s most visible tea-party candidates. Republicans were projected to gain at least six seats in the Senate.

“Today, Nevada chose hope over fear. Nevada chose to go forward, not backwards,” Reid told supporters in his victory speech. The embattled lawmaker vowed to press on for jobs, later adding: “The bell that rang wasn’t the end of the fight, but the start of the next round.”

The re-election of Reid sets up a faceoff against Boehner, as he still will oversee the Democratic-controlled Senate — but one with a few more Republicans than in the current session of Congress.

The size of the Republican wave was evident early on. Democrats lost bellwether House contests in Virginia and Indiana, with Reps. Tom Perriello and Baron Hill falling to their Republican opponents in closely watched races. Rep. John Spratt, who chairs the House Budget Committee, fell to Republican Mick Mulvaney in South Carolina after jousting over health-care reform and Obama’s stimulus bill.

Rep. Barney Frank, the chairman of the House Financial Services Committee, won re-election from Massachusetts. Meanwhile, 26-year Democratic House veteran Paul Kanjorski, who wrote major parts of the Wall Street reform bill, lost to Republican Lou Barletta in Pennsylvania.

Before the election, polls showed a majority of Americans were dissatisfied with the economy, with unemployment near 10% and the deficit at a near-record $1.3 trillion at the end of fiscal 2010.

But anger about the economy wasn’t widespread enough to return the Republicans to the majority in the upper chamber. An early win by Democrat Joe Manchin in West Virginia meant that the Senate was on track to stay in Democrats’ hands.

And the Republican tidal wave steered clear of California, as voters were returning Jerry Brown to the governor’s office and fellow Democrat Barbara Boxer was barely keeping her Senate seat, early returns showed.

The two Democrats took on two former tech titans from Silicon Valley and prevailed. Brown defeated one-time eBay Inc. CEO Meg Whitman in his race, overcoming Whitman’s massive $173 million campaign war chest, $141 million of that coming from her personal fortune. Meanwhile, Boxer edged out ex-Hewlett-Packard Co. Chief Executive Carly Fiorina for her seat.

Americans worried about the economy and jobs voted in all 50 states Tuesday for all 435 House seats and in 37 Senate races, as well as for 37 governorships.

Rand Paul, an eye doctor and son of Rep. Ron Paul of Texas, became the anti-spending tea-party movement’s first senator, and kept a Kentucky Senate seat in the Republican Party. Dan Coats’s victory in Indiana gave Republicans their first pickup of the night; he took the seat of retiring Democratic Sen. Evan Bayh.

This is a repost from: Marketwatch

Keep Investing, Even During Bear Markets

Too many people allow their investing habits to be influenced by whether the market is a “bear" market” or a “bull market.”  During “bear markets,” when stock prices are undergoing a general decline (the typical bear market since 1899 has lasted about fifteen months), many investors refuse to invest.  Admittedly, it’s difficult to invest when stock prices fall almost daily.  Nevertheless, the only way you make a long term investment strategy works is to maintain your investing plan during bear markets.  That’s how you build positions to take advantage of bull markets. 

Smart investors buy during bull and bear markets.  When millionaire investors were asked if their investment style differed from bull markets to bear markets, 70% said that they invested no differently.  In other words, to these investors, bull or bear markets are just labels for the same thing; a place to invest and grow your money over time.