Asset Allocation

Use the Premortem and Prevent A Big Investing Mistake

Use the Premortem and Prevent A Big Investing Mistake

By in Asset Allocation, Economics, Investing, Money Management | 0 comments

Do a Premortem to Avoid the ‘Buy High – Sell Low’ Problem We’ve all heard the old adage: Buy low – sell high But how many investors actually follow this ‘best investing practice’? Are you guilty of this big investing mistake? Turns out, there are reams of data about how investors consistently make this big investing mistake; buy high and sell low. You’ll learn about how this happens, and how to counteract this expensive wealth-reducing investing strategy.  Over decades of investing, I’ve seen this same big investing mistake replayed over and over again. Specifically, the market dives-investors panic and sell. Then, the market rebounds, but investors are still scared by the prior drop so they wait to buy back in. After a major price advance, investors gain their courage, and reinvest in the markets – only to watch a cyclical market decline soon after they got back into the market. Have you make this big investing mistake? Is Buy and Hold Finished? Read What Hulbert Says About this Market Timing>>>   Notice this chart of SPY ETF, a proxy for the S&P 500. From August 1995 through mid-August, 2015, there have been several market dives and peaks. There’s nothing unusual about this pattern. You’ll find normal economic and stock market volatility throughout history. The great stock market declines are called, systematic or market risk. Events such as the bursting of the tech boom in 2001 – 2002 or the mortgage market melt down and U.S. debt crisis in 2008-2009 cause systematic drops in the major U.S. stock markets.  The Big Investing Mistake “Many investors—both individuals and institutions—are moved to action by the performance of the broad stock market, increasing stock exposure during bull markets and reducing it during bear markets. Such “buy high, sell low” behavior is evident in mutual fund cash flows that mirror what appears to be an emotional response—fear or greed—rather than a rational one. For example, from 1993 to the market peak in March 2000, investors’ allocation to stock funds nearly doubled, and in the two years preceding that peak, as the market climbed 41%, investors poured nearly $400 billion into stock funds. Unfortunately, the stock market then reversed rather dramatically and returned –23% over the next...

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Oblivious Investor-Mike Piper

Oblivious Investor-Mike Piper

By in Asset Allocation, Investing, Personal Finance Luminaries, Retirement | 8 comments

Personal Finance Luminary-Interview with Mike Piper Welcome to an interview with Mike Piper, of the Oblivious Investor Website. This fourth interview for the Personal Finance Luminaries series continues with the mission to highlight and learn from outstanding personal finance educators. Mike follows Luke of Consummerism Commentary, Dr. Charles Richards, author of The Psychology of Wealth, and Kyle of The Penny Hoarder. Mike Piper has been a favorite blogger of mine for several years. In addition to his CPA designation, he is the author more than nine money related books including the newest Microeconomics Made Simple, and publisher of the well regarded Oblivious Investor Website. I admire Mike’s brevity and disciplined message. Piper is faithful to his message, “This blog is dedicated to spreading the idea that investment success is based upon stubbornly following a few (very simple) principles.” His recipe for success is simple, continue reading and learn more about author and website publisher Mike Piper! 1. What led you to transition from working for Edward Jones to writing books and publishing a website? There was a stage after working as a financial advisor and prior to writing books during which I worked as a tax accountant. Each tax season, I was flooded with tax questions from friends and former classmates. Eventually I decided to answer all the most common questions in a short book so I could simply refer them to that rather than answering the same questions over and over. As it turned out, complete strangers ended up buying the book on Amazon and giving it pretty good reviews. I was quite surprised that it ended up being a lucrative endeavor. 2. What is a typical day like for you? Most days, I spend about half my working hours answering emails from readers. The rest of the time is spent writing articles and doing research for articles. 3. How transferable is your work situation to others who might like to work from home and support themselves online? I think the business model could very easily be applied to other fields — any topic that people are looking to learn about. Write a book about the topic, then write a blog with short articles about related topics. Market...

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MBA Class; Use Net Present Value to Make Investment Decisions

MBA Class; Use Net Present Value to Make Investment Decisions

By in Advanced Investing, Asset Allocation, Investing, Mutual Funds, Retirement | 15 comments

Investing Solutions (part 3) Welcome to Investing Solutions Week at Barbara Friedberg Personal Finance. Don’t miss parts 1 and 2. Investing Solutions (Part 1); Why You Must Start Saving Now Investing Solutions (part 2); Six Investing Solutions Six Dangerous Investing Myths I’m in the midst of teaching a Corporate Finance class for MBA students at a local university. Some of the concepts, although rather complicated, have important real world applicability. an extremely important concept is, how to use net present value (NPV). It is a method to put a dollar amount on future cash payments. It’s great if you win the lottery and want to determine whether to choose the lump sum payment or monthly option. Or what if you or your folks want to determine the present value of their monthly social security or annuity checks.    When reading one of my favorite blogs, Consumerism Commentary, Luke had to decide whether to take a lump sum payment of his retirement account or monthly payments for the rest of his life. After reading the article, I was curious about which choice would lead to a greater present value for Luke. Here’s how to use net present value to decide whether a lump sum or annuity payment would be worth more. Here was Lukes’s situation: He could receive a lump sum payment of $18,000 or $65 per month for the rest of his life. Before I tell you which one he chose as well as the alternative most of his readers recommended, I’m going to introduce you to a systematic way to decide whether to take a lump sum payment or an annuity. Read more: Should I Invest in an Annuity?>>> How to Calculate and Understand Net Present Value You need to make an assumption before figuring out which alternative is better. The assumption is this; what percent return do you think you can get on your investment? I chose 7% because historically, an investment portfolio containing about 65% stocks and 35% bonds approximates a 7% return.  To calculate how much a regular payment which continues indefinitely is worth today, all you need is this perpetuity formula: Annual cash flow/Interest rate = Present Value If Luke were to receive $65 per month, then he gets $65 x 12 or $780 per...

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Is Buy and Hold Finished? Read What Hulbert Says About Market Timing

By in Advanced Investing, Asset Allocation, Automatic Saving, Bond, Investing, Mutual Funds | 15 comments

Market Timing versus Buy and Hold Investing; The Gloves are Off Is it wrong to delight in “proof” that my investing practice and writings are correct? Mark Hulbert, long time author of the Hulbert Financial Digest and Wall Street Journal (WSJ) columnist asked, “Can Market Timers Beat the Index?” in the July 20, 2013 week end edition of the Journal. He answered this frequently attempted practice with raw data! Who is Mark Hulbert? First, some background on Mark Hulbert. He empiricallly evaluates the trades recommended by 200 prominent newsletter authors. You know who they are, the investment scions who purport to know what holdings to buy and sell and when, in order to beat the market. These investment gurus sell investors their recommendations in published newsletters. Hulbert evaluates their recommendations with back testing and reports who offers the best advice during each period. In the above referenced WSJ article, Hulbert calls out Bob Brinker’s Market Timer. Brinker successfully counseled his readers when to sell their stock holdings in January, 2000. Those who followed his advice about when to exit and next when to get back in (October, 2002) missed the bear market at the beginning of the century. So you think, this must be the man to watch. Unfortunately, Brinker completely missed predicting the 2007-2009 bear market. You already see where this is going. It’s not easy to consistently time the market. Click here for Free micro book-How to Invest and Outperform + Wealth Tips Newsletter If you are still interested in market timing and want to know which newsletter will bring you riches, ask Mark Hulbert, or better yet, subscribe to the Hulbert Financial Digest. What is Investment Market Timing? Market timing is an investment strategy which advocates buying and selling securities based on external signals in an attempt to attain market beating returns. The factors to observe could include technical signals such as the 30 or 90 day moving average of a stock. Fundamental metrics, such as the price earnings ratio (PE) could also be used in market timing. For example, when the PE ratio or Shiller PE surpasses its historical average a market timer might believe that his stock investments are becoming overvalued and decide to...

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What’s the Impact of the Greek Debt Crisis On My Investments?

What’s the Impact of the Greek Debt Crisis On My Investments?

By in Asset Allocation, Bond, Budget, Debt, Economics, Investing | 0 comments

Current Investing Analysis Will the Greece Situation Hurt My Investments? As investors, we tend to get nervous when there’s economic upheaval. It’s well known that investment markets are skittish. Markets can drop in a minute after negative economic news. The Greek Debt Crisis is all over the news. But what are the implications of this global crisis for the average investor?  Click here if you want to solve your investing problems.  Greek Debt Crisis Overview Let’s get a quick drill down into the Greek Debt Crisis. Then we can look at potential impacts for our investments and finally, what should you, the investor do. Greek is in debt to Germany, France, The European Central Bank and the International Monetary Fund (IMF). Athens owes approximately 320 billion euros. During the first week of July, Greece missed a 1.5 billion euro payment to the IMF, according to a recent NYtimes.com article, “The Debt Crisis: What Greece Wants and What  It’s Offering” by Jeffrey Marcus here’s a break down of the situation. Greece can’t make the payments because it’s almost out of money and Europe won’t lend them any more. When Greece runs out of money and can’t borrow any more then it won’t be able to pay it’s debts including pensions. Greece might be kicked out of the European Union. Then the country would have to start printing it’s own money. >>> Positive and Negative Impacts of Globalization; Financial and Other Implications>>> Greece is begging for a three-year loan remediation program. After the three years, they want additional market financing going forward. They previously wanted debt relief, which was not acceptable to the major players in the crisis. Include international investments in your portfolio to benefit from growing international economies. Click here to get a successful approach to make more money with investing. Europe requests that Greece cut its spending or ‘no deal’. This week Greece and it’s Eurozone partners announced an agreement in an attempt to resolve the crisis. According to the WSJ.com article, “Greece Approves Austerity Measures” by Stamouli, Bouras, and Stenhauser the Greek Parliament passed the stringent changes required by the Greeks to gain a new bailout. This act led to great conflict among the Greek legislative members.  This ongoing...

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Investing Rule 1: Know Thyself

Investing Rule 1: Know Thyself

By in Asset Allocation, Investing | 11 comments

First Investing Rule-Know Thyself I was fascinated by an article by Mike at Oblivious Investor entitled,  “Why I Don’t Overweight Small Cap or Value Stocks”. His argument was based on the first investing rule-know thyself. Mike is one of the most disciplined guys I know. He sticks to what is right for him. He knows himself, and lives accordingly. Mike cogently laid out the research that over time, value and small cap stocks have outperformed a broad based index fund. This is widely accepted information from Modern Portfolio Theory and is considered one of the market anomalies of the efficient market hypothesis. A Bit of Investing 101 Theory The efficient market theory purports that over time the stock market is generally efficient and that prices reflect all available information and revert to their fair value. This Efficient Market theory is the basis of the indexing approach to investing and states it is very difficult to beat the overall market returns. Click here to get Invest and Beat the Pros-Create and Manage a Successful Investment Portfolio. Perfect if you’re interested in building wealth with investing. Yet, the anomaly rebuffs the efficient market theory and shows that small cap stocks and value stocks, over decades, tend to outperform the overall stock market. Although this is so, there are long periods of under-performance of these asset classes as well. In spite of his awareness of this research, Mike decides not to act on the over-performance of value and small cap stocks. How the Small Cap and Value Stock Out-performance Impacts My Investing Personally, after studying this research in my MBA program, I added an extra bent towards value and small cap ETF’s to my portfolio. I decided to add those asset classes to our asset allocation and purchased two low cost index ETF’s; one specializing in value stocks and the other in small cap stocks. I was well aware that although small and value stocks outperformed in the long term there were also long periods of under-performance. That doesn’t bother me, as I’m quite disciplined and don’t change my well thought out investing strategy easily. What About Mike? In his own words, “If, however, you’re somebody who would start to doubt your choice–and potentially back out on it at...

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