Mutual funds are run by highly experienced and hard-working professionals who buy and sell stocks to achieve the best possible results for their clients. Nevertheless, the evidence from more than 50 years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. At least two out of every three mutual funds underperform the overall market in any given year.
Nope those aren’t my words, though it sounds like something I could have written in this space.
Those are the words of Daniel Kahneman, who is emeritus professor of psychology and of public affairs at Princeton University and a winner of the 2002 Nobel Prize in Economics.
Writing in The New York Times, Kahneman discusses the issue of “overconfidence” in investing, and the negative impact it has on portfolio returns.
Why is this important to you?
There is a lot of “over”confidence when it comes to owning common stocks, and investing in the stock market.
Sometimes this overconfidence (I prefer to call it ignorance) spills over into misconceptions about what investing is all about.
I’ll share more about this topic in the coming week.
Treat others as you expect to be treated yourself.
That is a childhood lesson we learned at home long ago.
As an adult and a consumer, I realize how important this is and why some adults still struggle with this simple lesson.
Recently, 800,000 consumers who cancelled their Netflix subscriptions sent a strong message to corporate headquarters that they were poorly treated.
This was due primarily to a substantial and unexpected increase in fees. Unfortunately, Reed Hastings, CEO of Netflix has not apologized, but rather remains focused on moving the industry to a more streaming video focus. Unfortunately, not knowing the customer’s expectations has proven to be an expensive lesson.
And now Bank of America reports they will stop the $5/month fee for debit cards. Why the abrupt changes in direction? Seems like Bank of America didn’t want to repeat the mistakes of Netflix, as they started losing accounts as well. Bank of America listened to customers and decided to end the additional fees.
It is nice to see that in our free market, sometimes we can exercise our free will when companies don’t treat us the way we expect to be treated. Life lessons we can all appreciate.
Somewhere in one of the many articles I have read about Vanguard founder John Bogle, I seem to recall he was quoted as saying “I am a master at stating the obvious,” or something like that.
I was drawn to that quote in part because it was the same feeling I had when I originally started working on The Coffeehouse Investor back in 1993.
I felt an enormous opportunity existed to “state the obvious” – to reveal to investors that by trying to beat the market, you are virtually guaranteed to dramatically underperform it.
Today I want to state another obvious.
As a society of investors, we obsess over short term swings of an asset class that is meant to be long term in nature.
To put it bluntly, if you are worried about losing money in the stock market over the next five years because it will negatively impact your lifestyle, you shouldn’t invest that money in the stock market.
(Furthermore, if you keep it in CDs paying .1%, you will never keep up with inflation, and likely to invest it back in the market when the market is 3,000 points higher than today.)
That is where your financial plan comes in to the picture.
Your financial plan should reveal that you “don’t” need to draw from your stock market investments over the next five to eight years.
What I am talking about today is serious stuff, especially in light of market activity the past two months.
If you were sitting there, watching your stock market investments drop like a rock, and then come rebounding back with a vengeance, you need to stop watching.
This type of volatility is here to stay. It isn’t going away.
If it isn’t the U.S. debt crisis, it is the European banking crisis.
If it isn’t the European banking crisis, it is the U.S. Super committee crisis.
For instance, here are this morning’s headlines. . . . See what I mean?
The Next Big Market Events: Fed, Jobs & the Super Committee– After an extraordinary October rally –that’s sent the S&P 500 up over 13% month-to-date– it’s time to drop the debate over its validity and sustainability and start looking ahead to the market events in November that will impact your investment dollars.
If it isn’t one thing, it will always be another.
It isn’t going away.
It will drive you bananas if you keep watching it.
So stop watching it, and get on with your life.
You need to have a little heart-to-heart talk with yourself.
Trust your financial plan.
Start looking at your financial plan twice as often as you look at your account statements.
If it is properly constructed, it will remind you that during the next bear market, you will be OK.
Oh, by the way, how often do you watch your accounts?
I guess you could say I work in the trenches.
No, I am not a ditch digger, though I have spent many a hot summer days (and rainy autumn days) digging ditches while growing up on a wheat farm in the Southeastern Washington.
(That is a different story for a different time, and had a profound impact on my Coffeehouse journey.)
I work in the trenches of the financial world.
No, I don’t have a doctorate in economics from Windy City U.
I don’t have papers published on the theoretical maximum utilization point of the CAPM.
I don’t think much of the Trinity Study and the perfect portfolio withdrawal rate.
I don’t need a Dalbar Study to tell me something I already know.
I work in the trenches of the financial world.
I help people get from point A to point B.
With as much confidence as possible on their part, and as little worry as possible.
Every day I engage with clients and prospective clients from around the world while working at Soundmark Wealth Management.
I talk to them about their hopes.
I take calls all day long when the market is having one of its worst months ever – September, 2011.
I take calls all day long when the market is having one of its best months ever – October, 2011.
In the evenings I respond to e mails received from you at The Coffeehouse Investor.
In the 28 years I have been working with people in this role, the past 11 as a financial advisor, it is amazing to see the results.
Amid the bull markets and horrible bear markets,
people are getting from point A to point B.
It is not just how much the United States spends on health care that is important, it is also how fast that amount is growing. For more than 30 years, health care costs have been growing 2 percent faster than the general economy. That means every year we spend ever more on health care and therefore have to spend less on other things — or borrow money to pay for the extra health care.
If we continue this rate of growth, health care will be roughly one-third of the entire economy by 2035 — one of every three dollars will go to health care — and nearly half by 2080.
Rarely do OP-ED writers from The New York Times and The Wall Street Journal agree on anything.
One topic they do: Our country’s future financial woes are largely centered around one issue:
Out of control health care costs (primarily for the elderly).
The above passage is from a thought provoking column written by Ezekiel J. Emanuel that appeared in today’s Times.
I don’t know what the answers are, but the first step is to articulate the problem in a concise manner so that enough people can actually admit there is a problem. Emanuel does a great job of accomplishing this in a way that even I can understand.
This is the first in a series of articles he will write on the escalating costs of health care.