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As your trusted professional advisor, I'd like to email you every few months with updated information on the markets as well as related financial and tax topics. Let me know if you have any questions or if there is anything that I can do to serve you better. |
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WANT TO BE A GOOD INVESTOR?
Stop making these five mistakes. |
Most investors could dramatically improve their returns by eliminating five common mistakes from their portfolio management toolboxes.
One of these common mistakes is so deadly it could wipe you out, while the others can cost you big time.
Diversify, Diversify
The most dangerous mistake you can make is betting everything on one investment. This is akin to putting all of your chips on one number at roulette. You might win big but the odds are much greater that you will lose everything.
A look at market history should convince an investor that no security is immune. Total loss is not limited to small stocks. Blue chips that appear invulnerable one day can disappear the next. Remember what happened in recent years to Enron, WorldCom, and Countrywide Financial.
Investors were nearly wiped out by Bear Stearns. A thousand bucks invested in Citibank a year ago was recently worth only $409.
By diversifying as widely as possible you can reduce the risk of loss due to a decline in one security or one market sector.
Buy Low
If your grocer put your favorite cereal on a two-for-one sale, you'd stock up, right? Conversely, you would buy only a box at a time if the price was at a premium level.
It stands to reason that any investor would jump at the chance to pump money into the stock market when it is down. The more it is down from recent highs, the more eager they should be to buy.
Yet the average investor often holds back when the market is falling, afraid to commit more money just to see if prices fall further.
The problem with that strategy is that no one can accurately predict the market's bottom: it often turns up at a point when the news is blackest and investors aren't convinced that a turnaround has begun. They will continue to hold money back and then miss out on the best part of the recovery.
Why Buy High?
Conversely, wouldn't it be better to hold back a little on investing when stocks are expensive? Yet this is not what many investors do. They get swept up in a mania to make money in the stock market well after it has soared. The famous cover of Money magazine in the late 1990s that said "Everyone is getting rich but me!" exemplifies the mindset that sends investors chasing returns that are no longer available.
Holding Onto a Loser
This applies to an individual stock or other security that has fallen sharply from its high. Many investors hang on, reasoning that they "want to see it come back" before selling it.
Unfortunately, a past price is not a good predictor of a future price: just because a stock hit $60 a share last year and has fallen since does not mean it ever has to hit $60 again. Again, consider Countrywide or Bear Stearns. Neither recovered to their former highs. They kept falling until the companies were merged into other companies at extremely low prices.
Letting Things Slide
Investors should set a portfolio mix appropriate to their needs and risk propensities and stick with it. When the markets push it out of whack, they should rebalance by selling investments that have gone up and buying those that have dropped, an exercise that forces them to buy low and sell high. |
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MARKET TIMING MAY MEAN MISSING BIG GAINS
Why it's a bad idea to get out of the market in a downturn. |
Doesn't it seem reasonable that when the stock market is dropping month after month you should get out, avoid more losses, and wait for the upturn?
Unfortunately, this is just what many investors do. Once they are out of the market, they often don't begin investing until well after a recovery has occurred and it looks very apparent that the market decline is over.
Bogle's Warning
Such a strategy is very hazardous to your wealth, says John Bogle, founder and former chairman of The Vanguard Group, one of the largest U.S. mutual fund companies.
That's because the market tends to rack up most of its gains on just a handful of trading days. If you miss those days, your profits are diminished considerably.
In a speech Bogle gave to the Risk Management Association in Florida last year, he noted that the Standard & Poor's 500 Stock Index increased from 17 in 1950 to 1,540 as of his speech in October (it recently stood at 1,270).
"But deduct the returns achieved on the 40 days in which it had its highest percentage gains-only 40 out of 14,528 days! - and it would drop by some 70 percent, to 276," Bogle said.
Any investor who chose to sit out part of the year ran a real risk of missing some of those 40 days that accounted for 70 percent of the market's gains.
Missing Big Gains
Other studies have shown that if the best five days for the stock market each year are excluded, an investor from 1966 to 2001 would have had a loss rather than an eleven-fold gain.
The managers of Tweedy, Browne Co., which operates three value-oriented mutual funds, recently warned against jumping out of the market during downturns. Not only do such moves create capital gains taxes for non-retirement accounts, most market gains come in quick bursts that are not at all predictable.
"We believe that if you are not invested during these rather brief upswings, your long-term compounded return can suffer dramatically," they said.
This means that during market declines investors should hunker down and wait for the inevitable upswings. |
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Our objective is to design portfolios using passive asset class funds that maximize investors' returns within their tolerance for risk. Here is what sets us apart:
- Fee-only investment management
- A disciplined investment strategy
- Access to institutional no-load passive asset class funds
- An academic Nobel Prize winning investment approach
- Continued access to academic research
- A tax-efficient focus with valuable tax and estate planning ideas
- Risk tolerance assessment
- Periodic portfolio rebalancing
- Regular communications and state of the art reporting
- No front-end loads, no back-end loads, no surrender fees, not locked in
- Most important...A TRUSTED ADVISOR RELATIONSHIP
We thank you for your trust. Please don't keep us a secret with your family and friends. Introductions and referrals are always appreciated. Wealth Management, LLC, a Registered Investment Advisor, is affiliated with Breneman & Company, PC and offers wealth management and investment advisory services. Wealth Management, LLC is a Nebraska limited liability company.
Sincerely,
Corey D. Breneman, CPA/PFS
Investment Advisor Representative
Wealth Management, LLC |
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Want to know how the smart people invest their money? I mean really smart... Nobel Prize winning smart. Call or email me. I'll explain to you how investing is academic science, not gambling.
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| IS IT DIFFERENT THIS TIME? |
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The headline story is grim: the stock market got off to a bad start at the beginning of the year, a sure sign that the rest of the year will be bad. Floyd Norris of The New York Times worries that the fact that "no peaceful resolution is possible in the Mideast" may drive down stock prices throughout the year. Oil prices are rising due to Mideast tensions and other factors. European and Asian markets are also falling. Noted stock analyst Laszlo Birinyi says the market is presenting "the worst combination" of factors for traders. Sound like the beginning of this year? Although it does, this story appeared in The Times on Jan. 9, 1991 as the United States prepared to invade Iraq in response to Iraq's invasion of Kuwait. Not only were the predictions of a down year wrong, they were very wrong: the Standard & Poor's 500 Index gained 30.5 percent.
The predictions made early in 1991 illustrate the problems with getting caught up in day-to-day trends. Anxious investors may have used the forecasts as an excuse to get out of the market temporarily, meaning they lost the returns from one of the best years to invest since World War II.
The current economic crisis is causing lots of stress to investors and the public at large. News reports have labeled this as unprecedented since the great depression. In fact, this is the 10th bear market in US stocks over the past 50 years. Here are the cover stories of Time magazine throughout recent history. June 1970, "unrelenting pressure of the worst bear market since the 1930s". September 1974, "the stock market has scarcely been so shaky since 1929...Gallup poll found that 46% of adults feared a depression similar to the 1930s". November 1987, "after a wild week on Wall Street, the world is different". October 1990, "High Anxiety, looming recession, govt paralysis, and the threat of war...I want to say we're in a recession, but that's not a strong enough word. In some regions, it's a depression. The construction industry has creaked to a virtual halt after a decade of overbuilding".
These are just quotes from Time. Add Newsweek, Fortune, Business Week, etc and the list could go on and on. These could just as easily be quotes from current news sources. According to senator Barrack Obama during a recent presidential debate, this is the worst economic crisis since the great depression. I don't quote these sources to say they are exaggerating or wrong. In each case, there has been a real crisis and a reason for people to be concerned. Similarly, we are experiencing hurt in the form of economic and personal stress as well as reduced portfolio balances.
Current events might have you question the wisdom of maintaining any long run strategic exposure to stocks. Nothing could be further from the truth. Diversification and a consistent portfolio strategy is the best way to deal with uncertainty. Investing is never a sure thing, but when we eliminate unnecessary risks through diversification, when we eliminate unnecessary costs, and when we access the worlds capital markets to put ingenuity and resourcefulness across thousands of companies to develop new ideas, technologies and products; we harness powerful forces to work on investors' behalf and put the odds of success in your favor.
In each of the past 10 bear markets over the last 50 years, the one consistency has been market resiliency. In another 10 years, I'm sure I'll be able to use the quotes from 2008 to illustrate a similar point. By that time our concerns today about the Mideast, oil prices, home deflation and the like may seem unimportant given the tremendous growth in markets that later occurred. There may also be new "unprecedented" challenges.
If you have any concerns, please don't hesitate to express them or ask any questions. |
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This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The articles and opinions in this publication are for general information only and are not intended to serve as specific financial, accounting, or tax advise. |
| Free Review |
Do you want to know your portfolio's current risk and asset allocation? Present this coupon in the months of October or November 2008 for an independent review of your current portfolio. You will receive a printed analysis showing your portfolio's current asset allocation, historical returns, risk indicators, internal fees, market segments, and more. We'll also compare your portfolio to a benchmark. There's no obligation. Want to give a friend a gift of appreciation? Pass this coupon on to them. |
| Offer Expires: November 30, 2008 |
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